Korea Electric Power Corp (KEP) 2010 Q2 法說會逐字稿

Good morning and good evening. First of all, thank you all for joining this conference call and now we'll begin the conference of the fiscal year 2010 second quarter earnings results by KEPCO. This conference will start with a presentation followed by a divisional Q&A session. (Operator Instructions).

Now we shall commence the presentation on the fiscal year 2010 second quarter earnings results by KEPCO.

Hello, everyone. This is Chang-Keun Shin, Vice President and Treasurer of KEPCO. We would like to take this opportunity to announce our earnings result for the first half of the year of 2010, and on behalf of KEPCO I would like to say thanks to all for participating in our conference call today.

This call will begin with our brief presentation on the earnings results followed by a Q&A session. Please note that the financial information to be disclosed today is on a preliminary and non-consolidated basis, meaning without consolidating our subsidiaries. Therefore, some of the financial information could change during the course of the audit.

Please also note that during the conference today, during the call today, certain forward-looking statements including in respect of business strategy and plans and anticipated financial numbers may be made based on our current plans and expectations. Accordingly, it should be noted that such statements involve risks and uncertainties.

For your reference, on the last year, we had publicly disclosed the preliminary summary of income statement for the parent KEPCO and our six wholly owned generation subsidiaries on a combined basis for purpose of convenience to investors. Such a summary was on an estimation, which was not reviewed by auditors and from time to time we found there to be material difference between such preliminary information and the actual financial result, after consolidating all of KEPCO's subsidiaries.

In order to enhance the accuracy and the completeness of our public disclosure and avoid the risk from providing combined earnings estimates involving six GENCOs only, rather than a fully consolidated set of numbers, from this year onward, we will disclose the non-consolidated figures for KEPCO for the quarterly preliminary earnings release.

However, we will provide investors with supplementary data to help them understand KEPCO as a whole. Please kindly understand any inconvenience resulting from such changes in providing financial information. Please also note that from next year, consolidated financial results in accordance with IFRS will be filed publicly on quarterly basis.

Now Ms. Cecilia Oh, Senior Manager of our IR team will give a presentation on the earnings results.

Hello, everyone. I am Cecilia Oh, Senior Manager of the IR team. Let us briefly run through the financial results, starting with the operating income.

In the first half of 2010, we recorded net operating loss of KRW2.3 trillion, which increased by KRW811.7b, compared to net operating loss of KRW1.5 trillion in the first half of 2009. This was primarily because of the increased power purchase costs, reflecting mainly an increase in the volume of LNG-based electricity generation, notwithstanding an increase in sales of electricity due to growth in electricity consumption as well as last year's tariff increase.

Looking more closely, the operating revenues went up 14.1% to KRW17.9 trillion. The sales of electricity, the principal component of our operating revenues, increased 13.5% to KRW17.6 trillion. Such increase was mainly attributable to an overall average tariff increase of 3.9% in June of 2009 as well as a 11.1% growth in the volume of power sold, mainly due to a substantial demand growth for heating in early this year, an improvement of consumer sentiment and an increased demand from the industrial sector as a result of economic recovery.

Operating expenses grew 17.5% to KRW20.3 trillion, of which power purchase costs increased 18.6% to KRW17.3 trillion due to a 10.7% increase in the volume of power purchased and 7.1% increase in unit costs of power purchased mainly due to the increased LNG generation and the increased adjusted coefficient as well.

Next, let me explain the non-operating income side. Net non-operating income was KRW1.1 trillion this year, up by 50.2% compared to the previous year. This was mainly impacted by increased income from affiliates such as six GENCOs and KOGAS among others.

Income from our six generation subsidiaries increased 49.2% to KRW1.4 trillion primarily attributable to an increase in our nuclear GENCO's income, which resulted from the increased adjusted coefficient.

Net FX related loss was KRW39.9b in the first half of this year, compared to the loss of KRW22.6b in the previous year, resulting from a depreciation of the won against the US dollar.

Interest costs increased 9.1% to KRW553.8b, mainly attributable to an increased debt amount from KRW22.2 trillion in June of 2009 to KRW25.3 trillion in June 2010.

As a result of the foregoing we again recorded net loss of KRW896.9b in the first half of 2010, compared to a net loss of KRW642.5b in the same period of last year.

This concludes our presentation on earnings results for the first half of 2010.

Next we will have a Q&A session, which will be hosted by our Vice President and Treasurer, Mr. Chang-Keun Shin.

This is Chang-Keun Shin again. I'm also with our IR Committee members in charge of the major IR issues such as finance, tariff, overseas business, etc. [Let's begin this call]. Now we are open to your questions. Please go ahead with the questions.

Now Q&A session will begin. (Operator Instructions). Currently one participant is waiting with his question.

The first question will be given by Mr. Geoff from CLSA. Please go ahead, sir.

Okay, great. Thanks. Thanks very much for your time. I just wanted to ask quickly about the second half guidance. Would you have -- as an analyst it's a bit more difficult to look at your Company, because we're not getting the consolidated numbers, which are so important in terms of the cost structure. First of all, would you have any idea of the first half consolidated fuel cost or some of those line items? And if not, maybe you can talk just a little bit about the guidance for the second half in terms of profit or any sorts of guidance you can give?

Hello, Geoff. Have you received my email?

You mean the one with the Excel file?

Yes, yes.

Yes. No, I have some items. Obviously I have the revenue and some of the fuel cost items. But in terms of the consolidated operating profit, that's an interesting one that you used to give out last year. I know I heard you at the start saying that there have been some discrepancies or something in the past. So I'm just wondering can you give out guidance on profit for the second half or anything like that?

Actually, Geoff, I'm sorry for the inconvenience but the information is not ready yet. But probably it's going to be available in the couple of days. So if you directly phone me, I can give you some guidelines. But not on this call, sorry about that.

Okay. And then maybe, I know somebody is going to ask about this, so I may as well get it off. In terms of the tariff hikes, where do we sit with that in terms of timeframe, and what's your best guess? I know it's probably a little bit uncertain. But what is the best guess right now?

(Interpreted). Yes, currently we are going through discussions with the government, regarding the issue. And as you have rightly expected, it is difficult for us to give you any specific timeline as of yet, because it has not yet been confirmed. KEPCO's plans or our wishes is that we would be able to implement a tariff hike within the third quarter. But that is not confirmed yet.

Okay. And then just the other question I had is next year you're supposed to have the tariff fuel cost mechanism go live. And my understanding is that February to April will be the trial period for the fuel cost and then in the second half of the year we'll be seeing it essentially going active. Now is that the correct timeframe or has that been changed at all?

(Interpreted). Actually the linkage mechanism between the tariff and the fuel cost will be introduced from July 1, 2011 and that has been decided already by the relative law that was adopted in February of this year.

And for the trial implementation or operation of this new system, we are actually already conducting that from the first half of this year because we have established and implemented the related system. So it is currently already going through the trial implementation. And at the end of this year, we will have the relative data and information necessary to establish the plan for implementation next year.

Okay. But that fuel cost is going to be benchmarked to the February to April average fuel cost expense? That's my understanding for next year, because you have to start with some sort of a benchmark. In other words if it goes up from there then you increase your tariff to pass on the raw material cost. So the question is what is that benchmark and my understanding is that February to April the average fuel cost will be used. Is that correct?

(Interpreted). You mean February to April of this year or next?

No, of next year 2011.

(Interpreted). The benchmark fuel costs that you are referring to, we describe that with the term the standard fuel cost. And that actually means we do not have a specific date figured as to what we are going to use as that benchmark ratio.

However, if we're going to implement from July 1 this new system, then what we take as a reference is the three months fuel cost prior to that. That is to say, given that we are going to implement from July 1, we will be looking into the fuel costs of April, May and June, those three months -- that three month period and then taking an average as our standard.

Okay, that's perfect. And just one other quick question. I noticed that the generation, I noticed that it was quite low on coal. It was down 11% Q-on-Q in terms of the coal generation. And I'm just wondering -- I'm assuming that's due to maintenance work at the coal plants. So would that be continuing in the fourth quarter or is that over and done with? What sort of maintenance expectations do you have for the rest of this year?

Geoff, why don't I explain this way, in terms of the total generation this year, the proportion of nuclear side is expected to account for 34.5% and coal for this year 45.5%, LNG 16.6%, oil 2.4%, hydro 1.0%.

Okay, that's perfect. I'll leave it there. Thank you very much.

Thank you. Next question please.

Currently there are no participants with questions. (Operator Instructions). Currently two participants are waiting with their questions.

The following question will be given by [Mr. Bahr] from Standard Chartered Bank. Please go ahead, sir.

Hi, thanks for the call. I had a couple of questions. First is, can you throw some light on the capital expenditure and the overall investments that you undertook in the first half and what are the plans for the second half of this year?

(Interpreted). Yes, let me give you information on the overall investment figures for the first half. KEPCO and the six GENCOs combined together we have the investment level of KRW6.88 trillion.

And for this year as a total, the yearly figure for KEPCO and the six GENCOs combined is KRW12.62 trillion.

Okay. Then a related question is what about your debt issuance plans in the next six months. Would you be looking at the local markets or would you be looking at the international dollar market to raise debt?

(Interpreted). Yes, allow me to answer that question. For the second half of this year, our financing-related plans for issuance is as follows; in Korean won we have the target of KRW3.9 trillion and for foreign currency KRW1.2 trillion. So the ratio would be 76.5% for the domestic market and 23.5% in the overseas international market.

However, I would like to note the fact that this is really based upon our budget and therefore, any issuance will be made according to the market situation and environment.

Yes, I understand that. This is on a consolidated basis right, including all the GENCOs.

Right.

Okay. One final question is there has been some talk about reconsolidations of the GENCOs back into KEPCO. Can you throw some light on what's the current status on that and how soon a decision would be taken on that particular issue?

(Interpreted). Actually related to that issue, already there has been an external study that has been done by the KDI for eight months. And KDI has already announced the results of their own study, and there are several scenarios that have been proposed after that study had taken place.

However, the final decision will be made upon by the Korean government and the Korean government will probably announce its decision and plans before the regular sessions of the National Assembly, at the -- nearing the end of the year.

Okay. So the decision would probably be taken before the end of this year.

Yes, I think so.

Okay. Thanks a lot.

Pleasure. Next question please.

The following question is by [Diksha] from Nomura Securities. Please go ahead, madam.

Hello, sir. Thank you for the presentation. Just some clarification on the total debt on consolidated basis on your balance sheet currently.

And if possible could you give me an idea of the debt at the Korea Hydro and Nuclear Corporation level, for the subsidiary level because I don't have any other source to get to that one. And also the CapEx for that subsidiary in particular.

(Interpreted). Let me give you the figures. For the first half of 2010, the total consolidated was KRW37.39 trillion. Among that, KEPCO took up KRW25.3 trillion and the remaining KRW12.9 trillion was taken up by the six GENCOs. And the Korea Nuclear and Hydro actually took up KRW4 trillion, out of that figure.

And let me give you the CapEx figure. Out of the total CapEx of KRW12.6 trillion for the full year, KHNP's capital expenditure amounts to KRW4.9 trillion, which is 52% of the total.

KRW4.9 trillion for Korea Hydro you mean.

Yes.

And how much of that has been incurred so far?

For the first half of this year, KRW2.5 trillion has been spent.

Okay. And ma'am, can I also please get the EBITDA targets for the year for both Korea Electric on a consolidated basis and for Korea Hydro?

You asked about target EBITDA?

Yes.

Or actual EBITDA?

Target EBITDA and actually even actual EBITDA number would be good. Thank you.

Okay. For the first half of this year, KHNP's -- let me give you this figure. The operating income of KHNP was KRW994b and its depreciation cost was KRW655b.

KRW994b, did I hear that?

That's the operating income.

Okay.

And the depreciation cost for KHNP was KRW655b.

Okay.

In the first half.

Okay.

And I don't have the projection number for the full year.

Okay. And how about KEPCO? Consolidated basis I mean.

One second please.

Sure.

Actually the consolidated figures are not available at the moment. So could you please phone me separately?

Yes, I'll do that. Thanks, Cecilia.

Any more questions?

Currently one participant is waiting with his question. The following question is by Rajesh from CLSA. Please go ahead, sir.

The following question will be given by Mr. Rajesh from CLSA. Please go ahead, sir.

The current questioner Mr. Rajesh is not answering. So let me move on to the next questioner.

Yes please.

Currently there are no participants with questions. (Operator Instructions). Currently two participants are waiting with their question.

The following question will be given by Mr. [Mark Sunic] from Fidelity Securities. Please go ahead, sir.

Hi, thanks. I just have a question. Did I hear correctly before when you said the tariff hike you expect in the first quarter? Did you mean first quarter this year or do you mean that you expect the next tariff hike first quarter next year?

Hello, this is the interpreter speaking. I'm sorry. I think that you misheard my third quarter and understood it as first quarter.

Okay, thank you. And the second question follows on from that. If the tariff hike doesn't come in, in the third quarter, does the new fuel cost pass-through system introduction happen on schedule next year?

(Interpreted). Our basic discussion direction with the government currently is that prior to introducing the fuel cost pass-through system, we will identify the appropriate level of tariff that is required.

And in order to make certain that the tariffs are near to the appropriate level of tariffs that are needed for the fuel cost pass-through system, we have two periods in mind for any possible tariff hikes. That is second half of this year, which we referred to previously as the third quarter time period and we also have the first half of next year, where we can also have additional tariff adjustments if necessary. Which is to say that, if in the third quarter of this year, we do not have any tariff adjustments implemented, then we still have the first half of next year to adopt such measures.

However, I would like to point out the fact that regardless of tariff hikes, the fuel cost pass-through system will be introduced and adopted from July 1 of next year.

Does that answer your question?

Yes, thank you.

The following question will be given by Mr. Joseph Lam from Morgan Stanley. Please go ahead, sir.

Thank you very much. Thank you, management. For the power demand growth, I notice that from first half 2010, that there's a very strong power demand growth. So what is your expectation for the power demand growth in the second half of 2010 and for the whole year and also for 2011? Thank you.

(Interpreted). Yes, allow me to elaborate about 2010 first of all. We have the assumption of GDP growth of 5.8%. And with that assumption, compared to 2009, we believe that 2010 we will have a sales growth of 8.6%.

If you look at the details of the actual sales growth, residential amounts to 4.5% growth, commercial 7.3%, industrial 10.6% growth. So all in all, in terms of the sales revenue growth compared to the previous year, we expect it to be 10.2%.

And you also asked at the end of your question about 2011 forecast. However, at this moment in time it is difficult for us to give you that information. We believe that we will be able to provide you that information as we near the end of this year.

And for your reference, we have actually the figures that we can make reference to, which is provided by the government. This data is about two years old and the data looks at the electricity supply and demand plan. And there it is expected that we will have a growth of about 2% to 3%. But in actual terms, we believe that the growth rate may be higher. And we would be able to give you the more recent data and figures as I mentioned earlier as we near the latter portion of the year.

Okay, thank you.

Currently there are no participants with questions. (Operator Instructions).

The following question is by Mr. Bahr from Standard Chartered Bank. Please go ahead, sir.

Yes, one more question from me. You mentioned about 10.2% revenue growth target for 2010. Now I'm wondering what is the assumption behind that, in terms of tariff increase that you assumed for this. Are you taking into consideration any tariff increase which is possible in the second half? Or is this based on current tariffs?

(Interpreted). The figure that I mentioned earlier does not take into account the possible tariff hike in the second half of this year. So it does not reflect the tariff hike.

Okay. Thanks.

Currently no participant is waiting. (Operator Instructions).

Any more questions?

Currently no questions at all.

Okay. If we have no further questions, we will conclude the conference call. If you have any additional questions or need any other help please contact our IR staff at any time.

Once again, thank you again for your interest in KEPCO and thank you for joining our conference call today. Thank you again.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.