Korea Electric Power Corp (KEP) 2011 Q2 法說會逐字稿

Good afternoon, everyone, my name is Changyoung Ji, General Manger of KEPCO's IR team. It's a pleasure to have this opportunity to announce KEPCO's earnings results for the [first half] of 2011.

On behalf of KEPCO I'd like to thank you all for participating in this conference call today. (inaudible) will begin with our brief presentation on our earnings results, after which an opportunity for Q&A session.

Please note that the financial information further disclosed today is on a preliminary and consolidated basis. At this time, Jong-hyun Park, Assistant Manager of KEPCO's IR team will provide you with an overview of our earnings results.

Hello everyone, my name is Jong-hyun Park and I'm going to briefly run through first half financial results, starting with the operating income.

In the first half of 2011 KEPCO recorded a net operating loss of KRW1.3 trillion, or a year-on-year increase of KRW1.1 trillion compared to the net operating loss of [KRW178 billion] recorded in the same period last year.

Despite the increase in power sales revenue, brought on by a [triple hike] in August 2010 as well as an increase in the volume of power sales, KEPCO's net operating loss for the first half of 2011 was primarily due to increased fuel costs and power purchased costs, which went up 18.5% and 44.8% respectively compared to the first half of 2010.

Taking a closer look. Operating revenues was 12% to KRW19.9 trillion. Power sales revenue, the (inaudible) components of our operating revenues went up by 10.1% following KRW18.8 trillion. These increase is attributed mainly to the over (inaudible) increase of [30.5%] in August 2010. As well as 6.7% growth in power sales volume which was caused by a substantial growth in demand for electric heating and increased demand from the industrial segment.

Operating expenses [witnessed a] 17.9% while the first half of 2011 compared to the same period last year, recording [KRW21.6 trillion].

On (inaudible) total operating expenses, [fuel] costs increased 18.5% year on year to TRW10.8 trillion in the first half of 2011. The rise in fuel costs can be attributed to a 3.3% increase in power generation due to rising power demand and a 14.8% jump in unit cost of fuel, such as coal and LNG.

At this time, I will explain KEPCO's financial income and expenses. The Company's net financial loss for the first half of 2011 was KRW757 billion, a decrease of [25.4%] compared to the KRW1 trillion net loss in the first half of 2010. The major reason for this improvement is a stronger one.

Net equity income of KEPCO affiliates totaled KRW166 billion, an increase of KRW78 billion over the KRW88 billion recorded in the first half of 2010.

This was primarily attributable to a significant rise in net income from our overseas affiliates, which recovered from a [KRW15 billion] net loss in the first half of 2010 to record a KRW39 billion in net income in the first half of 2011.

(inaudible) explained our overall net loss of [KRW1.2 trillion] for the first half of 2011 which compared to a net loss of KRW1.1 trillion for the first half of last year.

This concludes my overview of KEPCO's earnings release for the first half of 2011.

The question-and-answer part of today's call will be handled by Jung-in Kim, General Manager of KEPCO's IR team.

Today I am joined by KEPCO's IR committee members in charge of finance, (inaudible) and overseas business. At this time we are prepared to take any questions that you may have. Please go ahead.

(Operator Instructions). Currently there are no participants with questions. (Operator Instructions). Kathy Cheung, Citigroup.

I have a few questions wanting to know more from you. The first question is about the overseas business. What was the revenue for [capital] in the first half 2011 which is generated from the overseas business? And of the overseas business revenue, what is the amount generated from the UAE Project?

(interpreted) The revenue coming from the overseas business for the first half of 2011 is KRW602.7 billion. And among that, the UAE Project took up KRW413.3 billion.

Okay, thanks for that. My second question is could you explain more about the fuel costs pass through mechanism which has been implemented from July 1, 2011. For example, what is the expected impact of the mechanism for this year or coming years? And also, can you explain more about, for example, the [center field] price being applied in different mechanisms or is the frequency to be reviewed by the Government for this mechanism. Thank you.

I'm sorry, could you repeat the second half of your question once again? We had some very weak audio coming through.

Okay. The second half of my question is actually I just wanted to know more about the fuel cost mechanism, for example what is the benchmark unit cost being applied, the center field price being applied? And how frequent will the government review the mechanism?

(interpreted) Currently for the year of 2011 we do not believe that there will be a lot of short-term impacts that will be visible coming from the new system of the fuel cost tax rules system. Because, although it has come into effect from July 1, the actual application will be seen from August, and that only gives us about five months within this year where we may see any impact that arises.

But, additionally, at the current status the government is actually suspending the system due to management of the inflation at the consumer price index right now. So we do not believe that there will be any short-term visible results or impact from this new system.

However, on the long term, once again I would need to remind you that the system in place has been adopted in order to cover for fluctuation that may arise for the fuel costs and any losses that can be due to that and, therefore, we do not believe that there will be any big impact in the long term either.

And for your question regarding what benchmark was applied, we have actually adopted the case of Japan which has a relatively similar supply and demand status for electricity as well as fuel. And we have also taken into consideration as a benchmark the fuel cost pass through since then which have been applied for the gas area.

And the standard fuel costs that have been applied for this new system is coal, LNG. The import price which is actually the standard for LNG and coal has been applied for this system.

As for the government review of the system, the government will review the system depending on any different situations that may arise in the future. So if the situation of conditions change drastically then the government will review the system. As for the approval of the system to be implemented, that takes place every month, so there will be monthly decisions made by the government.

Thank you. I have two more questions that I would like to ask the management. The first one is in the previous time the Company has announced a cost reduction plan of KRW1.1 trillion in 2011. I would like to know what is the status now because based on the first half we saw I could see the operating -- other operating expense have a slight increment of 2% this year. So I would like to know what is the status of the cost reduction plan now?

(interpreted) Yes, allow me to answer your question regarding the cost reduction, because -- among the cost items that have been budgeted, outside of those items that are relatively difficult for us to control directly, such as fuel cost and depreciation-related costs, outside of those areas the other items have been included in our plan to reduce cost. And that cost reduction is what I think you have been referring to.

So the 2011 target was KRW500 billion of reduction from KEPCO side and KRW600 billion of reduction from the GENCOs, so that is the KRW1.1 trillion plan that we have put in place that you have made reference to in your question. And we have -- we are pursuing that objective and that target.

Okay thank you. And my last question is that, what is the expected fuel cost for full year 2011? I know our management have given an estimate on the expected fuel cost in first quarter conference call, I just want to see if there is any changes from the management estimates up to now? Thank you.

(interpreted) Yes, indeed the fuel cost forecast has been adjusted compared to what we announced back in the fourth quarter conference call because of the fact that the coal cost and LNG cost has been increased, we have adjusted the incremental portions to our forecast. So if I may give you the comparison of the new forecast versus what we announced at the first quarter conference call is as follows.

The first quarter -- at the first quarter we announced that the fuel cost forecast for the total year of 2011 would be KRW19.96 trillion, however the adjusted forecast that we have for the -- after the first half is KRW21.78 trillion.

And in the first quarter what we announced as a forecast was an increase of 4.9% of fuel cost compared to the previous year, but after the first half we have adjusted that to 14.7% increase, versus last year.

Okay, thanks a lot.

Geoffrey Boyd, CLSA Limited.

Actually, I think the last part of the last question was answering mine, I just wanted to hear what the fuel cost guidance was.

But since you answered that one, maybe I could just ask about the purchased fuel cost because you've been purchasing a lot more volumes this year from the IPP, so I'm just wondering what do you think your full year cost will be for purchased fuel cost?

(interpreted) Yes, I'd like to answer your question regarding the power purchased from the IPPs and the forecast regarding that portion. Yes indeed that portion is increasing due to a rise in demand for electricity and accordingly the volume that has been purchased from the IPPs has increased. It is also s reflection to the increase that we see in the Americas facilities that have been increased by the IPPs as well. So for the total year 2011 we expect to be KRW6.7 trillion, that is to say the power purchased cost is expected to be KRW6.7 trillion.

And what sort of demand growth does that assume for the full year?

(interpreted) Based upon the GDP growth forecast of 4.5%, we expect the demand increase to be [5.4%].

Okay. And just -- I guess my last question is just on the maintenance cost, it's a lot lower under IFRS than it was previously under the old system, it seems to be around KRW350 billion per quarter. I remember under the old system [of creating GAAP] it seemed to be closer to KRW500 billion a quarter. Are we going to see an increase in the fourth quarter like the asset price or are they going to stay at their current levels in the second half?

Before we go into that question I'd like to make a correction, this is the interpreter. For the last answer the demand increase expected is 5.2% and not 5.4% as formerly mentioned, so I'd like to make that correction first.

(interpreted) For KEPCO non-consolidated, usually the maintenance-related activities are more executed in the second half of the year after the summer peak season is over.

So usually, in the fourth quarter, we see much more maintenance-related budgeting executed and after (inaudible) been conducted. So our expected amount for maintenance for the total year is at around KRW850 billion.

KRW850 billion?

(interpreted) Yes.

That doesn't -- that sounds too low. You mean for the consolidated basis or is that --?

(interpreted) Non-consolidated.

Well can we get the consolidated forecast?

(interpreted) For consolidated, we expect it to be around KRW1.2 trillion.

Okay. Thank you very much.

Currently, there are no participants with questions. (Operator Instructions). Currently, two participants are waiting with your question. Vincent Chow, Morgan Stanley.

I wanted to ask about a [trending] shipment for the fuel cost pass through mechanism. It seems that government right now suspended actual implementation and delay it. Will KEPCO recognize the revenue for this and, of course, book the account receivable or just wait until the government really raise the tariff?

(interpreted) For the -- from the government's side, they will actually make a monthly decision as to whether they will suspend for that month the fuel cost pass through system or apply and implement the system.

So, based upon that decision, every month we will accordingly make the decision as to whether we are going to put it into the accounts receivable side, which will be offset by the actual payments that are due and that's how we will be implementing the system.

I see. So if the government delay the tariff hike, KEPCO will not recognize any revenue in August from the tariff hike pass through mechanism -- fuel cost pass through mechanism?

(interpreted) To answer your question, when we have an increase in fuel cost, although the government has suspended the fuel cost pass through system temporarily, that portion will be recorded as revenue on our accounts receivable and the next month, when the government applies the fuel cost pass through system, then that portion will be added on to the tariff that we will get from the customers.

I see. Thank you very much.

Kathy Cheung, Citigroup.

I have one more follow-up question on the fuel cost. For the new estimate of KRW21.8 trillion fuel cost for 2011, would that be possible to provide a break down into coal, LNG, oil and nuclear? Thank you.

(interpreted) Because the increase in fuel costs is mostly attributable to coal and LNG, let me give you the figures for these two.

For coal, we expect a usage volume to be increased by 2.7% and the unit cost to be increased by 14.1% and that is the basis for our fuel cost increase estimate of 17.2%. So 17.2% increase expected for coal.

For LNG, volume increase is estimated to be 7.8%. Unit cost to be increased by 8%, that is our estimate. So the overall fuel cost increase for LNG is expected to be 16.4%.

Did that answer your question?

Yes. It's okay. Thank you.

Currently, there are no participants with questions. (Operator Instructions). Sean Oh, Merrill Lynch.

Three quick questions. When will the fuel costs pass through system be reinstated?

And number two, I understand that the Korean Government is pressured to keep inflation in check. But for the record, can you please state how much electricity accounts in the CPI index? And also, what happens to CPI index if electricity tariffs were to rise by 10%?

And number three, the total debt of KEPCO increased from KRW22 trillion at the end of 2007 to KRW42 trillion as of the second quarter of 2011. This high level of debt is wiping out most of KEPCO's operating income.

What's the government's outlook or plan regarding the deleveraging of KEPCO, so that they can make adequate money to at least [clear] down some of your debt going forward? Thank you.

(interpreted). Let me answer the first question first. As for the reinstatement of the fuel cost pass-through system, as far as we know, we expect the government to keep a close eye on checking the [CPI] fluctuation, and by the end of the year, I believe that they will have some discussion with the related bodies in order to come up with a decision.

The second question regarding the impact of electricity price on the Consumer Price Index, if we had a 10% increase in electricity cost, we expect that to have a CPI increase impact of 0.19 percentage points; so 0.19 percentage point impact; which means that the ratio applied is 19 over 1,000.

As for debt reduction, from KEPCO side, of course, it is most urgent that the electricity tariffs become more realistic. That would be the most visible way of allowing for debt to be reduced for KEPCO.

However, at the same time, KEPCO is doing what it can in other areas such as reducing the costs, as we mentioned earlier, there were several cost items where we can try to reduce as much as possible; and also by sales of some affiliate companies such as KEPCO E&C we expect to have about a KRW1 trillion cash inflow be generated from those efforts as well.

So the efforts that we can take on cost reduction side and sales of assets, we are continuing to do that from KEPCO, but additionally, we hope to have a more realistic electricity tariff put into place at the same time.

Okay. Just one follow-up question. Given that the Bank of Korea held their interest rates flat, we're expecting I guess the inflation to increase going forward. So does that mean the fuel cost pass through system being reestablished any time soon it is very difficult to achieve going forward. And if so, how much of unbilled receivables or revenues are you expecting to book for the entire 2011? Thank you.

(interpreted) As for the reinstatement of the fuel cost pass through system, I don't think that we can give you a definite answer regarding that question because it will all depend on the government's decision. However, from our end we at KEPCO are doing our most in order to make certain that our operations are as healthy as can be given the situation.

For the second half of this year, your question about how much accounts receivable we expect to bring on to the book, well, since for the second half the fuel cost-related fluctuations we don't believe that there will be a lot of fluctuation. So that will -- we will witness in the second half, we don't expect it to be an enormous amount.

Okay, thank you.

(Operator Instructions).

Right then, if you have no further questions we will conclude our conference call today. If you have additional questions or require any assistance please feel free to contact our IR at any time.

Once again thank you for your interest and for sharing in this conference call today.

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.