Korea Electric Power Corp (KEP) 2010 Q3 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 will begin the conference of the fiscal year 2010 third quarter earnings result 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 third 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 results for the third quarter of year 2010. And on behalf of KEPCO I would like to thank you all for participating in our conference call today.

Today's call will begin with our brief presentation on the earnings results followed by a Q&A session. Please note that the finance information to be disclosed today is on the preliminary and non-consolidated basis. Therefore, some of this financial information could change during the course of the audit.

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

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

Hello, everyone. I'm Cecilia Oh, Senior Manager of the IR team. Let me briefly run through the financial results starting with the operating income. In the third quarter of 2010 we recorded net operating profit of KRW462b, which decreased by KRW1.14 trillion compared to net operating profit of KRW1.61 trillion in the same period of the previous year.

This was primarily due to the increased power purchase cost, reflecting mainly an increase in the volume of LNG-based electricity generation, notwithstanding an increase in electricity revenues due to the increase of sales volume as well as the tariff increase of last August.

Looking more closely, the operating revenues went up 17.3% to KRW10.95 trillion and the sales of electricity - the principal component of our operating revenues - increased 13.6% to KRW10.5 trillion.

Such increase was mainly attributable to an average tariff increase of 3.5%, expected August 2010 as well as the 9.8% growth in the volume of power sold to the end users, mainly due to increased demand from the industrial sector, substantial demand growth for air conditioning, and an improvement of consumer sentiment.

Operating expenses grew 35.8% to KRW10.5 trillion. Power purchase costs, accounting for 83% of the total operating expenses, went up 39.2% to KRW8.7 trillion due to a 9% increase in the volume of power purchased and a 27.6% increase in unit cost of power purchased, mainly due to the increased LNG generation.

Next let me explain the non-operating income side. Net non-operating income stood at KRW597b this year which went up substantially as compared to the previous year's non-operating loss of KRW385b.

This was mainly impacted by increased income from affiliates such as six gencos due to the increased sale of electricity. The income from affiliates was recorded at KRW759b which was up sharply compared to the previous year's income of KRW142b.

In addition, net FX-related profit was KRW152b this year due to the won appreciation against the US dollar, while we recorded the FX-related loss of KRW321b in the same period of last year.

Interest cost increased 20.2% to KRW304b mainly attributable to an increased debt. As a result of the foregoing we recorded net profit of KRW846b in the third quarter of 2010.

This concludes our presentation on the earnings result for the third quarter of 2010. Next we will have a Q&A session which will be hosted by Vice President and Treasurer of KEPCO, Mr. Chang-Keun Shin.

Yes, Chang-Keun Shin again. I am also with our IR (technical difficulty) members in charge of major areas such as finance, tariffs (inaudible), etc. participating in this call. Now we are open to all your questions. Please go ahead with your questions.

Now the Q&A session will begin. (Operator Instructions). Currently three participants are waiting with their questions. The first question will be given by Pierre Lau from Citigroup.

Hi, hello.

Hi.

Hi. Thank you for doing the presentation with us. I am Pierre Lau from Citigroup. I have three questions, the first question is when I look at your third quarter results in the operating revenue the other business category have sharp increase to KRW349b. And also under operating expenses other business increased to [KRW664b].

Was the increase due to the business of your nuclear power project in UAE? And if the answer is yes, how much contribution from the UAE project are for your other business in operating revenue and other -- and operating expenses? So that's question number one.

Question number two, when I look at your LNG unit cost in the third quarter for power generation it was KRW139 per kilowatt hour. It increased KRW125 per kilowatt hour in the second quarter. So it's up 12% quarter on quarter. But I see the LNG cost seems to be quite stable in third quarter compared to second quarter, so I don't know why the unit cost per unit of generation increased by [this] 12%.

And the third question regarding your investment income from subsidiaries and affiliates, the amount from KHNP in the first nine months was KRW991b. Could you give us some guidance what would be the number for the full year, and also 2011? Because this item has sharp increased for the first nine months this year compared to last -- the first nine months last year. So that's the three questions, thank you.

Thank you.

(Interpreted). For the first question concerning the other businesses, yes, it is true that this is attributed to the UAE nuclear power plant business. And in the future as the construction continues we expect an increase in both operating expenses and operating revenue.

So how much from UAE for the revenue and operating expenses and other business for the first nine months?

(Interpreted). That is around KRW410b.

Okay, so that's the revenue and how about the operating expenses?

(Interpreted). It's at similar level.

Okay. Do you know what's the amount for the full year in 2010 and 2011?

For the same UAE you mean?

Yes, yes.

(Interpreted). It's hard for us currently to give you any forecast or predictions about the full year.

Okay. Okay, can we -- shall we move to question two?

(Interpreted). To answer your second question concerning the unit costs of generation using LNG fuel, as you mentioned in your question it is true that throughout the year 2010 that cost has been maintained at relatively stable level.

However, the situation in 2009, if I may explain in the third quarter of 2009, we actually had a reimbursement of KRW250b at 2009 third quarter related to the fuel cost adjusted system regarding LNG which took place last year. And so that is why relatively speaking, last year we had a lower unit cost of LNG respected.

I know the situation last year, my question is when I compare third quarter this year, the unit cost was KRW139 per kilowatt hour and this KRW139 was higher than second quarter KRW125 per kilowatt hour. So that's the question. Because when I look at the LNG cost in second quarter and third quarter this year it seems to be similar, but the unit cost of generation differ a lot in these two quarters.

(Interpreted). Concerning your question about the difference in the generation unit cost between second quarter and third quarter there are two major reasons behind that. The first one is the SMP that is to say the portion of the margin that we get back from the generators due to the reflection of the system marginal price. That has been reduced somewhat in this quarter.

The second reason is that even if we have the same LNG price, during the summer period when the reserve levels are relatively low, if in the case of using generation facilities that have lesser levels of efficiency, in those cases we have a higher level of costing incurred. And that is probably another reason behind this fact.

Okay. Would you mind repeating the first reason?

(Interpreted). I talked to you about the two different reasons behind the higher generation unit cost; the first one being the issue of SMP coefficient that was where the adjustment took place in, actually August.

However, although I gave you the two major reasons, the first one the SMP coefficient actually did not have that much of a big impact compared to that the second reason that is to say the generation facility that had lesser levels of efficiency, that contributed more to this rise in cost.

Okay. Shall we move to the third question?

One moment please.

(Interpreted). This year all around in general terms, compared to last year we actually had higher levels of sales first of all due to rising demand in air conditioning during the summer months as well as the recovery of the economy bringing on a rise in demand for electricity.

Because the way that the unit price is decided, it's actually looking at the peak trading hours and looking at the price that is provided by the generation there and comparing it to the base load, because the SMP coefficient has risen that is the basic reason why we have had increase of revenue for the (technical difficulty) piece, for the nuclear part (inaudible) piece.

Okay. So how much profit do you expect for the full year compared to [2009] in the first nine months, and what about the full year next year?

(Interpreted). Next year in broad terms we believe that the sales will increase, but as the SMP coefficient will be decreased somewhat, we expect that the next year's profit will be similar to what we saw this year.

Yes. So the first nine months of this year around [KRW1 trillion], so full year can I say it would be something like around KRW1.3 trillion?

(Interpreted). Yes.

Okay, thank you very much. Sorry for spending too much time, thank you.

Thank you. The next question please.

The following question is by Henry from Nevsky. Please go ahead sir.

Hi there, thanks very much for the call. My question was on the coal consumption rates. Just looking at the amount of coal you've burned relative to the energy you've produced it seems like you are burning a lot more coal than -- for per gigawatt hour than you were for last year. Could you comment on that please?

(Interpreted). The major reason behind the increase usage of coal is that in 2009 we had some performance improvement type of work done to Unit 1 and Unit 2 of Poryong. And also for Unit 8 of Hadong we finished the construction and it went into normal operation. And therefore we were using more coal versus last year.

But more coal -- I'm not talking about the absolute volume of coal, I'm talking about the coal consumption per gigawatt hour, because that -- you seem to -- the intensity of consumption seems much higher.

(Interpreted). So overall the -- the overall volume of consumption of coal is increasing. And as you have mentioned in your question the consumption per hour is also increasing and that is mostly due to the fact that the proportion that the low calorie coal types are taking up is increasing. And that in general is enhancing the usage level, or the consumption level of bituminous coal.

Okay, thank you. And also a follow up question just on -- terms of tariff expectations. Are you hoping for one more tariff increase ahead of the July 1 new system or are you hoping that you'd have a tariff increase possibly first in January and in July as well?

(Interpreted). As for the tariff increase we will go through some calculations after January or early February when we have the full-year results come out. And at that point in time we will go into discussions with the Government, and our hope is to go ahead with tariff increase as soon as it is possible.

But is the idea that you have one round of increase before the July 1, because the July 1 -- what I'm trying to work out is that there will be two tariff changes next year, one for the retroactive for 2010 and the second based on the new methodology.

(Interpreted). According to our current plans our goal is to introduce the tariff hike before the new system is introduced in July.

Okay. But then the new system will also amend the base tariff, it won't just be introducing the fuel costs to pass through it will also be introducing the new base the new rate of return is that right?

(Interpreted). Basically there will be adjustments, however, there is no fixed linkage between the introduction of the new fuel cost adjusted system and a tariff increase.

I see, okay. And also would you be able to run through what eliminations there were for understanding the difference between the KEPCO and the genco businesses for the P&L on the cost side?

(Interpreted). Concerning your question about elimination we are still going through internal discussions and we are coming out with a big picture, but we don't have the fully finalized details just yet. So if you can give us a separate request for information at the appropriate time then we would provide you with the guidelines at that point in time.

Okay. And lastly just on the -- sorry, next year would you be reporting KEPCO on a consolidated basis or will it always be -- is this the way you're going to be reporting it from now on, just with the purchased power, one single purchased power expense? When do you start reporting on a consolidated basis?

(Interpreted). For this year up to 2010 because we are disclosing this on Korea GAAP system it is difficult for us to give you a consolidated result at the time we provide the IR related information. We have to wait until the overall consolidated results come out and then we'll be able to deliver that to you. However, from 2011 we will be introducing IFRS in full. And so from next year we would be able to provide you with consolidated results on a quarterly basis.

And presumably you'll only report quarterly is that right? You won't report any other kind of versions? Would you keep the current format as well?

(Interpreted). Because we are a listed company, according to the IFRS we are -- we have to mandatorily disclose by a quarterly basis on a consolidated results basis.

Okay. Okay, thank you very much indeed.

Okay. Thank you. Next question please.

The following question is by [Tian Doh] from [GIN]. Please go ahead, sir.

Hi, good afternoon, thanks very much for the call. I just had two questions but the first is could you talk a bit about the fuel cost trends that you're seeing for the rest of the year and for 2011? Where would you hope to sign your contract coal for 2011?

And the second question is just a follow up to Henry's question, the use of more low calorie coal in your fuel mix, why is that? You're finding a cost advantage at the lower calorie end or you feel you're being squeezed out the market for the higher calorific coal? Why is there the difference now? Thank you.

(Interpreted). For 2010 fuel costs we expect a rise of 19.6%. For bituminous coal we expect not just the fluctuation of the price of bituminous coal itself but also foreign currency exchange rates to have an impact, and for that portion we expect a decrease of 1.4%. For LNG because of the overall rise in the volume of usage as well as the cost related issues we expect a rise of 51.8%.

As for oil we expect the consumption of oil to decrease, however, the unit cost of oil we expect it to be increased due to the current price trends as well as the movements that we see regarding the recovery of the economy. So there we see a 17.1% increase, an increase of 17.1% for oil.

For 2011 we expect the fuel cost to be similar to that of 2010. So as I explained, in 2010 we expect the fuel cost related information to be similar to that of 2010. As for bituminous coal prices it's at a very strong level as of end of 2010. We expect the price for bituminous coal to be maintained at around the mid $90 level.

For your second question concerning the increasing proportion of low-calorific coal being used it is, as you mentioned, mostly due to cost advantages. Compared to high-calorific coal the low-calorific coal is much more advantageous in terms of cost. And therefore we believe that this will bring about benefits for our unit costs.

Okay. And just a follow up on the first answer, so you're expecting overall fuel costs to be the same next year but presumably you are expecting some volume growth. So overall on a per unit basis your fuel cost will decline, and that is because of LNG and oil prices expected to decline?

(Interpreted). For LNG we expect the factors of exchange rate as well as stable prices of LNG to contribute to the same levels of prices next year compared to this year. So similar levels of prices next year we expect.

As for oil, because of the global economic recovery expectation we believe that the high oil prices will continue, which means the unit costs, in terms of oil as a fuel, will rise. And due to that we believe that the usage rate from our side for oil consumption as fuel will decrease accordingly.

So your expectation of fuel costs being about the same is that just due to a change in the mix of generation i.e. a greater proportion of nuclear and coal being used versus LNG and oil?

(Interpreted). It will all depend on the demand that we see for next year. But since we have one new unit of nuclear power plant which will go into operation next year, we expect that if the rise in demand in the market next year equals to the level of generation that we can get from the new NPP unit then that will be okay, but if it exceeds the -- if the demand for next year actually is increased further then we would have to make more use of LNG and oil additionally.

All right, thank you.

Okay, thank you. And next question please.

The following question is by (technical difficulty) from Morgan Stanley. Please go ahead, sir.

Hello, I would like to ask about the investment income from affiliates, the investment income from affiliates increased by about KRW600b in the third quarter, what is the reason behind?

(Interpreted). The reason behind that is that the six gencos including KSNP all experienced an increase of sales and also the SMP price was increased and therefore this contributed to the revenue rise of the gencos and this will explain the rise in the income from affiliates.

I see. The second question is that what is the expected power consumption growth in fourth quarter 2010 and 2011?

(Interpreted). Yes, I'd like to answer that question. We are forecasting for the fourth quarter of this year a growth of about 6%. And for 2011, since the GDP growth rate is expected to be about 4.5%, we believe that similar levels of sales growth will be seen for us as well.

I see. Thank you very much. That's all for my questions.

Okay, thank you. Next question please.

There are no participants with questions.

No more questions?

No, there are no participants with questions.

Okay. If there are no further questions we'd like to conclude the conference call. If you have additional questions or need any help please contact our IR at any time. Once again thank you 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.