Korea Electric Power Corp (KEP) 2011 Q1 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 2011 first 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 2011 first quarter earnings result by KEPCO.

Hello, everyone. This is Chang-Keun Shin, Vice President and Treasurer of KEPCO. We'd like to take this opportunity to announce our earnings result for the first quarter of 2011. And on behalf of KEPCO, I would like to thank you all for participating in our conference call today. This call will be in the way of a brief presentation on the earnings result, followed by Q&A session.

Please note that the financial information to be disclosed today is on a [preliminary] and consolidated basis.

Now, Mr. Seung Bum Kim, Senior Manager of our IR team will give a presentation on the earnings result.

Hello, everyone. I'm Seung Bum Kim, Senior Manager of the IR team. Let us briefly run through the financial results, starting with the operating income.

In the first quarter of 2011, we recorded net operating loss of KRW501 billion, which is KRW715 million decrease, compared to a net operating profit of KRW214 billion in the first quarter of 2010.

Despite increase in power sales revenue, impacted by a tariff hike in August 2010, and increased power surge volume, such net operating loss was primarily due to increased fuel cost, and power purchased cost, which went up 22.2%, and 48.8% respectively, compared to the first quarter of 2010.

Looking more closely, operating revenues went up 13.3%, to KRW10.8 trillion. Power sales revenue, the principal component of our operating revenues, increased 11.9% to KRW10.3 trillion. Such increase was mainly affected by an overall average tariff increase of 3.5% in August 2010; as well as 7.4% growth in power sales volume, mainly due to a substantial demand growth for electric heating, and increased demand from the industrial sector.

Operating expenses grew 21.6% in the first quarter of 2011, compared to the same period last year, and marked KRW11.5 trillion.

[Other] operating expenses [power] costs increased 22.2% year on year, to KRW6 trillion in the first quarter of 2011. Main reasons for such rise include 4.3% increase in power generation, due to increased power demand; and 17.1% increase in unit cost of fuel, such as coal and LNG.

Next, let me explain our financial income and expenses side. KEPCO's net financial loss for the first quarter of 2011 was KRW252 billion, which was 44.3% improvement, compared to the KRW452 billion lost in the first quarter of 2010. Major reasons for this improvement include decrease in FX-related loss, due to a drop in FX rates.

Equity income of the rates recorded KRW144 billion, which increased KRW52 billion from KRW93 billion in the first quarter of 2010. This was mainly due to a significant increase in income from overseas affiliates, which increased from KRW1.7 billion in the first quarter of 2010, to KRW44.8 billion in the first quarter of 2011.

As a result of foregoing, we recorded net loss of KRW550 billion in the first quarter of 2011, as compared to net loss of KRW252 billion in the same period of 2010.

This concludes our presentation on earnings results for the first quarter of 2011.

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

Yes, I mention again, I'm also with our IR committee members in charge of major IR issues, such as finance, tariffs, overseas business, etc., pertaining this call. Now, we are open to your questions; please go ahead with your questions.

(Operator Instructions). Pierre Lau, Citibank.

I have three questions regarding your results. The first one is, in the first quarter, our sales volume increased by 8.1% year on year. So given the high volume growth in the first quarter, what is your full-year target?

The second question is do you mind to give us some guidance, regarding the unit sale cost in second -- for the full year, or in the second quarter, for your coal -- in particular, for coal and LNG? For coal, let's say, how many percent of your coal to be consumed in this year has been signed, the contract, and what is your average contract size?

And the last question is, what is your expectation regarding a tariff hike? And also, the new tariff calculation mechanisms to be implemented in mid of the year, whether there's any update on that regard? Thank you.

(interpreted) Yes, I would like to answer the first and second question that you asked. And for the third question, I would like have to ask our team in charge of the tariff system to respond later.

As for the first question, I think you asked about the forecast for electricity demand for this year, and it is expected that based upon Korea's economic growth rate, forecasted to be 5.4% for the year of 2011, the electricity usage or demand will increase this year by 5.5%.

As for your second question regarding the unit price as well as the amount acquired of coal already, looking at the whole year's usage, for 2011, it is forecasted that our -- the amount of coal that we will need is 77.5 million tonnes. And among that, 68% has already been acquired, and the unit price for the purchase of that coal was $106.69.

This means that the amount of coal that has not yet been acquired is 32% of our total demand for this year, and the unit price for purchasing the remaining 32% is expected to be $115. So, on average, the unit price for coal for this year is expected to be $109 approximately.

And you mentioned also about LNG, this year, compared to last year, we expect a 2.7% increase in the amount of LNG used, so we expect the whole amount to be 10.5 million tonnes.

So I mentioned about the amount of LNG that will be required for this year. As for the unit price involved in purchasing that LNG, we expect that to be lower by 0.8% this year compared to last year. And the unit price in terms of the sum would be per tonne -- KRW772,600 per tonne, and this purchase price is expected to be 1.9% higher than that of last year, which would be KRW8.1 trillion.

And now I'd like to hand it over for the third question.

(interpreted) First of all, I would like to mention that regarding the issue of tariff hike, the related regulatory bodies and administrations are under discussion right now. And the detailed contents of what we are discussing with the authorities is actually quite sensitive at this point in time, so I'm afraid that I am not able to reveal or completely disclose that information.

As for the new system of the fuel cost adjusted tariff system, as you're well aware, the related laws and regulations have already been established. So currently, we are under active preparation for the possible implementation of this new system that will be implemented -- that is expected to be implemented from July. So we are doing the related training work, PR-related and education-related efforts, as well as our preparation work for establishing the related systems in place.

That is all.

That's the end of your questions?

Yes. Thank you very much for your reply. I have one follow-up question regarding you mentioned about the LNG cost, because you said that for the full year, you expect the LNG consumption amount increase by only 2.7%, and the unit cost down 0.8% year on year, so that the total cost will only increase by 1.9% year on year. But in the first quarter, the LNG costs increased by 28% year on year, and for the rest of the year, we only have around 2% to 3% new capacity additions. So I don't know why we are expecting such low growth of the LNG costs this year.

(interpreted) First of all, to respond to that question, you have to remember that LNG cost reflects the seasonal characteristics, especially for the period such as the first quarter, which represents the winter season. What happens is that the supply-related cost for LNG itself is quite high, and fixed costs related to storage of LNG is also high.

Meanwhile, during the summer period, the price will be quite different because the LNG supply price itself will be lower, and the fixed cost related to storage is also much more cheaper; maybe 50% or more cheaper.

And also, after confirming with KOGAS, we were able to confirm the fact that due to our long-term contract that we have with them for the year of 2011, the LNG cost is relatively low. And so the LNG costs related for the total year of 2011 will be expected to remain at the level that we mentioned previously.

Okay. Thank you very much.

Okay. Then next question, please.

(Operator Instructions). Mr. Geoff Boyd, CLSA.

Just quickly; you mentioned $109 coal price for this year on average. Can you just remind us what that is for 2010? That's my first question.

And then my second question is, it sounds like you're giving out some numbers on LNG, of KRW8.1 trillion as being your guidance for this year in terms of the expense. But are you able to give us what you think fuel costs will be and the total power purchase cost? In other words, can you give some of your cost breakdown?

And then I have a few other questions actually, just looking at the -- probably, because of the IFRS reporting. One thing that is a little bit confusing to me is that when I look at my first quarter Korean GAAP numbers from last year, it doesn't match up perfectly with the re-stated first quarter numbers. It seems like sales of electricity power is now KRW9.2 trillion for last year versus KRW9.5 trillion when you reported a year ago. And I'm just wondering how the revenue line declines under IFRS. I wasn't too sure about that.

And then -- because likewise in your report, you have the -- it shows the electricity revenue, but you're saying that it's non-consolidated, but then it doesn't match up exactly with the consolidated numbers. So maybe you could explain that a little bit.

And then just my last question is on -- when I look at the growth rates of some of these cost items, maintenance expense is up 19% year on year and I'm just wondering if that's considered normal. It seems a little bit high in terms of the growth rate for maintenance expense.

And then I guess the final question I had was just on the other business. I assume that relates to your business in Abu Dhabi with the nuclear side. It shows that you have KRW317 billion in revenue for other business and KRW554 billion in expenses. So does that mean that you're making losses right now on that nuclear business? Or am I missing something there?

(interpreted) Yes. We would like to take just a couple of questions first. So, your first question regarded the coal unit price for last year. Last year, the average price for coal purchased was $98.90.

Okay. Thanks.

(interpreted) And I would like to go on to answering actually the third question that you asked about the difference that we see concerning last year's electricity sales, depending on whether it was reported on the K-GAAP basis or the IFRS basis.

(interpreted) Good afternoon, ladies and gentlemen. My name is [Kim] and I'm from the IFRS team.

Due to the introduction of the IFRS, actually the criteria or the basis of reporting for the revenue has been changed from 2010 to 2011. Simply put, when we reported last year based on the K-GAAP, the profits and the revenues were recognized based on the metering days, whereas for 2011 by the standards of IFRS, our revenue and profits are recognized by the actual usage date. So this means that due to the seasonal differentiation of unit cost, the first quarter figure seems a little bit lower.

So if we assume that electricity sales will go on in the same manner as what we had seen last year, then based upon IFRS, I think the revenue that we will be reporting for this year as a total will be slightly higher.

Okay.

(interpreted) For this year -- this is regarding your second questions about the cost breakdown by fuel type. Well this year's total cost is expected to be KRW19.9 trillion and coal will take up 44% of that, marking KRW8.6 trillion. And LNG is expected to take up 41% recording KRW8.1 trillion. And oil is expected to take up 8%, recording KRW1.5 trillion and nuclear is expected to take up 5%, recording approximately KRW1 trillion.

For your reference, last year's figure for the total of fuel costs was KRW19 trillion and coal took up 42% of that last year; LNG 41%; oil 9%; and 5% was taken up by nuclear.

And what about power purchased?

(interpreted) As for the power purchased, last year it was KRW35 trillion and it is expected to be increased to KRW38 trillion this year.

Do you mean KRW3.8 trillion?

(interpreted) I'm sorry, let me correct that. For this year, the power purchase is expected to be KRW7 trillion to KRW8 trillion.

Right. And then last year, it was how much?

(interpreted) Last year, it was KRW5 trillion.

KRW5 trillion, okay.

And does that answer all your questions or you will ask --?

Well, it sounds like you guys are being more detailed than you've been in the past, so I guess I may as well just ask you. What are you projecting for your profit and loss right now, because you lost KRW500 billion in the first quarter, so are you projecting it'll be losses for the full year then?

(interpreted) Actually, it is not easy to provide you with a full-year forecast as of yet. As you know, we have recorded losses for three years and, of course our target is to turn that around this year. But as of the current moment, it is difficult to provide an exact forecast for the full year for our losses.

Of course, we have our figures internally, however, given the fact that the Government is expected to introduce its roadmap for electricity tariffs in the month of June, I don't think that the time is appropriate for us to make any announcements yet.

Okay. Thanks. So, thank you very much for all those answers.

Welcome. My pleasure. Next question please.

Currently, there is no participant waiting with a question. (Operator Instructions).

No more questions?

[Winston Chang], Morgan Stanley.

I missed your answer for the last question about the other business. Is the foreign business loss making, because the other business revenue is smaller than the other business expense in your P&L?

(interpreted) Could you please wait while we go over the data?

Okay.

(interpreted) Allow me to respond to that question. For our overseas business, the UAE business actually takes up the majority. And the total profit coming in from the overseas business is KRW214.6 billion. And among that UAE business takes up KRW126.4 billion.

However, for the other business expense side, that does not include only the overseas business, because in the other expense side, there are areas such as depreciation or tangible assets related, losses that occurred, and all of that type of additional information is included in the other expenses. So it does not only mean overseas business. So for the overseas business side, purely, or on a net basis, is actually profit recording and not loss recording.

Thank you very much.

Okay, and next question please.

Pierre Lau, Citi.

Some follow-up questions. So for the overseas business, [I missed] the revenue; it's booked under the other businesses, amount of operating revenue. Is it correct?

(interpreted) Yes, it is.

Okay. And the second question is regarding the purchase amount for IPP, what do you expect the purchase amount for this year, in your budget?

(interpreted) I think we responded to that question earlier, for the IPP purchase amount, it will be KRW7 trillion to KRW8 trillion this year, and last year the figure was KRW5 trillion.

You have replied the amount, but I would like to know the volume.

(interpreted) Actually, for the volume-based data, we don't have that with us right now. So if you would permit, we would like to get back to you via email, with that information.

Just in case, let me know your email address. We have it. Yes, we have it; don't worry about that. Okay, we have it.

Okay. And the last question is I don't know whether you have done any sensitivity calculation regarding, say, a 1% Korean won appreciation against US dollar. So what would be the potential benefit on your net profit number?

(interpreted) According to the current data that we have, if we have an appreciation of the Korean won by KRW10 versus the US dollar, then we expect the impact to be about KRW200 billion.

Okay. And also regarding your depreciations, depreciation this year, in the first quarter this year, was down 2% year on year compared to last year. Do you know why the amount has become lower, given that your capacity is growing, [and because] the amount should be growing?

(interpreted) As for the depreciation, in general, the number of assets covered within the depreciation-related items was actually expanded.

One thing to note, however, is that last year two power plants that are included in the East West GENCO went through a period where its life expectancy was reaching its limit and, therefore, two of them were depreciated in total last year, which makes, comparatively speaking, this year the depreciation rate was lower.

Okay. And also in the first quarter result, the average interest cost was down 22 basis points year on year. Do you know why average interest rate has become lower?

(interpreted) As for your question regarding the interest rates, recently the interest rate that is more used from our Company is actually the floating interest rate. And the floating interest rate has been lower recently. And also, the interest rate-related costs of the GENCO has also been decreased.

For example, the South East GENCO has gone through a repayment of its borrowings and, therefore, the total borrowing volume for that GENCO has been decreased. And for the KHNP, KHNP regarding the construction of its Singori nuclear power plant has actually transferred its finance related costs into assets, and that is why we see a lowering there.

Okay. And the last question is the equity income of affiliates increased by 56% year on year. What was the reason?

(interpreted) To answer that question. First of all, the domestic subsidiaries did not have lot of changes in that area. However, there were some notable changes for the overseas subsidiaries. For example, in the case of our subsidiary in China, the loss of income coming from the negative goodwill was generated and that was one of the factors behind it.

Have you calculated how much profit did you make from overseas in the first quarter this year, including profits from subsidiaries, other business as well as affiliates? How much profits from overseas for the first quarter?

(interpreted) For this year the equity income that we had from the overseas subsidiaries recorded KRW44.8 billion, which is very much higher than last year's figure of KRW1.7 billion.

Okay. Thank you very much.

My pleasure.

Any more questions?

Andrew Moulder, CreditSights.

I'm sorry, I'm relatively new to covering your Company, and I just wanted to be clear on the tariff. What exactly are you expecting in terms of tariff revisions, and when are you expecting that to happen?

And my second question; there was a story last week on Bloomberg that you were planning to issue a $500 million bond, and I just wonder whether you've done that now, or are you planning to do that, and when are you planning to do that? Thank you.

(interpreted) There has been a lot of attention and interest regarding the tariff hike that will take place this year, and there have been many media reports covering that issue. But it is not yet time for us to make any official announcements, because it is expect that in June, the government will make its announcement about its plans for tariff increases regarding electricity.

Regarding your second question about the Bloomberg story about $500 million worth of bond issuance from KEPCO, well, actually, I don't think that is KEPCO, the story that we read.

For your information, KEPCO does have plans to make some bond issuance in the second half of this year, but as for the exact amount and the timing related to this, we have no definite plans as of yet.

Is that planned to be bonds in US dollars, or in Korean won?

(interpreted) It's not decided yet.

Thank you.

My pleasure.

Any more questions? One more question if you have.

[Tommy Ong], Goldman Sachs.

I just have a quick question on your ForEx gain and losses. It seems that last year's consolidated GAAP basis and this year's IFRS 1Q number look slightly different, so -- and could you give us why; and also, your general policy on your ForEx derivatives for this year? Thank you.

(interpreted) First of all, for the gain side, or the income side, there is a difference between the K-GAAP system and the IFRS system.

As mentioned earlier briefly, because the system has been changed to IFRS, the income coming from electricity sales has been increased based upon the IFRS by about KRW100 billion of revenue increase, due to the fact that the criteria have changed from metering date to usage date.

For the expense side, the depreciation element has been the main cause for the change. Due to the re-evaluation of assets, the overall depreciation cost may have been increased, but the method of calculating depreciation costs has also been changed, so the impact is not that big. However, the overall depreciation related costs have been increased due to the adoption of the new system and transfer to the lease accounts.

So on the whole, in general, compared to the K-GAAP, the IFRS adoption has resulted in increasing the loss side.

Okay. That's an answer for your question?

Yes. And the next question -- another question was your policy for this year on FX, especially FX gains and losses. What do you expect for this year, given the ForEx -- the Korean won will strengthen throughout this year?

(interpreted) Basically, our Company's policy regarding FX is that we follow the government policy related to FX, so we hedge regarding FX losses and gains. However, we have to take into consideration the fact that FX fluctuation can, at any time, occur. So we have a very dynamic and fluid approach to adapting to those situations.

Okay, we'll conclude the conference call here. If you have any additional questions, or need any help, please contact our IR staff at any time.

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

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.