Korea South-East Power Co., Ltd. Annual Ratings Review

Transcription

1 Korea South-East Power Co., Ltd. Annual Ratings Review October 2010

2 Table of Contents 1. Company Overview 2. Regulatory Environment & Industry Overview 3. Operating Results 4. Financial Performances 5. Financial Forecasts 1

3 Company Overview Section 1

4 Key Highlights Stable Industry Outlook Stable and supportive regulatory environment provides a predictable market, and KOSEP is well prepared for the anticipated changes. Government announced its new plan to restructure electricity industry while maintaining present mechanism. Strong Financial Performance KOSEP s profit margins sit above the average ones of gencos. 1H10 s operating income margin was 12.5% and net income margin 8.4%. KOSEP has produced the electricity power at the lowest unit cost, among the thermal gencos, for nine consecutive years. 1H10 s unit cost was KRW/kWh, much lower than the average cost of KRW/kWh. Cost -Effective Operation With a power generation capacity of 12.1% (8,974MW) out of total capacity, KOSEP generated 14.2% of the domestic power market. Solid Market Position 3

5 Company History KOSEP was spun off from KEPCO as a part of the government s reorganization plan. Key Milestone of the Industry and KOSEP Key Performance Indicators 2001 Korea South-East Power Co., Ltd. was established in April. Declared corporate vision and ethical guidelines Selected as the first to be privatized Obtained the highest domestic credit ratings of AAA Inception Date April 2, Stopped the attempt to sell its controlling stake, and instead proceeded to initial public offering (IPO) of its shares Received A3 from Moody s Issued Euro bond of $150 million 2005 Moody s upgraded its ratings to A Postponed IPO Completed Yonghung Plant #1, 2 Obtained the lowest unit cost for four consecutive years 2006 Moody s upgraded its ratings to A1 Issued $300 million global bond Capacity Power Generation Power Sales 8,974 MW in operation 30.2 billion kwh 28.8 billion kwh 2007 Completed 250kW Bundang Hydrogenfuel cell power generation system First ignition of Yonghung Thermal Power Plant # Got Government s permission to build Yonghung plant #5, 6 Moody s downgraded its rating to A2 Acquired 0.3% of PT Adaro Indonesia Completed Yonghung Plant #3, 4 Officially stopped the IPO plan First sale of CERs (certified Emission Reductions) 0.11 million tons for 5 year S&P upgraded its rating to A 2010 The government declared new plan to restructure the electricity industry. Moody s upgraded its rating to A1. Total Revenue Credit Rating KRW 2,114 billion A1 from Moody s A from S&P Employees 1,987 Source: KOSEP. As of 1H10 (Rate: KRW1,273.9/$). 4

6 Government s Revised Restructuring Plan On 24 August 2010, Korean government announced its revised restructuring plan of domestic electricity industry. Transfer of 5 Gencos water-pumped storage power plants to Korea Hydro Nuclear Power According to the revised plan, KOSEP has to transfer its water-pumped storage power plants (Muju and Yeochon) to Korea Hydro Nuclear Power within Those two power plants will be divided from KOSEP, and merged into KHNP. The book value of two power plants is roughly 673 billion KRW as of June Those amount consists of 12.5% of total asset billion KRW of Muju and 550 billion KRW of Yeochon (under construction) In exchange of asset, we will transfer the same percentage of debts and equities to KHNP billion KRW of debt and 287 billion KRW of equity The specific details will be determined soon. The operating status of Muju water-pumped storage power plant as of Dec (KRW in billion, ratio of company status) Capacity Power Generation Revenue Operating Income Net Margin 600MW (300MW 2 units) (6.7%) 399 GWh (7.0%) 64 (1.6%) 10 (2.8%) 71 (3.3%) 5

7 Company Structure CEO & President Auditor Office of Audit Support Division Technology Division Planning General Administration Innovation & New Biz. Power Generation Construction Samchonpo Division Yonghung Division Youngdong TPP Yosu TPP Bundang CCPP Muju PSPP Yeichun PSPP(Con) 6

8 Power Generation Portfolio KOSEP has the largest base load capacity and attractive site locations amongst the thermal gencos. Location of Power Plants Generation Portfolio as of 1H10 Metropolitan area Major industrial/ chemical complex 7

9 Renewable and New Business Renewable Present: 18MW Type Photo Voltaic Small Hydro Fuel Cell Wind Capacity 2.09MW 8.14MW 0.25MW 7.5MW We have been developing innovative and environment-friendly renewable energy since Especially, oceanic small hydro facilities, installed at Samchonpo and Yonghung, are the world-first renewable energy using thermal plant s cooling-out water. Wind power facilities have been established at Yonghung in May,2010. New Business Domestic: Yosu co-generation power plant Partner: Hyundai Construction, Yeochon TPL Capacity: 48.4MW Share: 34.18% Completion: June 2012 Near Future up to 2012: 267.3MW Type Photo Voltaic Small Hydro Wind Fuel Cell RDF Capacity 9.3MW 13.7MW 194MW 30.3MW 20MW We have built up strategic partnership with renewable energy facility producers like Rolls-Royce, CX-Solar. By 2012, we have a target to generate electricity from renewable energy source at 2% of total power generation. We are also studying to develop renewable energy using ocean power and tidal current. RDF : Refuse Derived Fuel, the fuel derived from the trash Abroad Coal Development Type Projects Others Moolraben (Australia) Adaro (Indonesia) 1% 0.3% Energy Development Biomass (Thailand) F/S O&M or Consulting Mundra (India) Al Dur (Bahrain) With the independent coal development target ratio of 30% by 2013, we have secured 3.6million ton/year by acquiring shares of coal mines. 8

10 One of the leading power companies KOSEP holds an advantage of the lowest fuel cost and operating efficiency over other Gencos. Kosep s Advantages Highest base load portion among Gencos Base load occupies 77.2% with market average 50.6% Superior operating efficiency and market position Domestic market share is 14.2% with the facility share of 12.1% High utilization rate of 77.62% Strong cost advantage Lowest fuel cost among Gencos for 9 consecutive years Enhanced facility maintenance Unplanned stoppage ratio has dropped significantly Fuel Cost of Gencos (KRW/kWh) Operation Highlights in 1H10 (KRW in 100 Millions) Source: Company data (As of June 30, 2010). 9

11 Regulatory Environments and Industry Overview Section 2

12 Stable Market Environment Ongoing stability in electricity sector along with government support provides KOSEP and other Gencos with a predictable operating environment. Korean government sets up its role and market functions to ensure sustainable electricity policy even in highly competitive markets. In order to successfully carry out the government s policy on Sustainable Development, the government has set up guidelines for efficient usage of energy and development of new power generation technology. To effectively prepare for the growing electricity needs in Korea, the government reviews proposals submitted by Gencos to construct additional generation units. Upon reviewing, the government provides guidelines on appropriate capacity and approves plans in accordance to MKE (Ministry of Knowledge Economy) s Long-term Electricity Supply and Demand Plan. Government analyses and provides solutions in the electricity market to ensure stability in electricity price, environmental protection, introduction of new technology and energy security. Government support is one of the key factors for Korean Gencos to successfully operate and serve the needs of the public. 11

13 Robust Demand Growth in the Future Korea s power sector is expected to enjoy robust demand growth. Continuous economic growth will be a primary driver of power demand growth. Power demand is expected to grow at a rate of 2.1% per annum during 2010 and Electricity Demand Projections ( ) Total Utility Capacity Projections ( ) GWh % 4.5 % MW ,891MW ,135MW % Household Public and Service Industrial Demand Growth Rate Source: The fourth Basic Plan of Long Term Electricity Supply and Demand, December 2008, by MKE. (Base case scenario). 12

14 View on KRW-USD and its Impact KRW-USD Exchange Rate Trend The value of KRW has risen up to 3.7%, compared with that of the beginning of this year. - KRW is expected to be appreciated further to around 1,100 against USD. Normally, the appreciation of KRW has positive effects on KOSEP s profits. - The company s fuel cost will be decreased over 0.6% with the fall of every KRW However, revenues are expected to decrease accordingly under the current electricity pricing mechanism. In terms of foreign currency debts, the fluctuations in exchange rates will not affect the company s profits as the Company s foreigncurrency denominated debts are all hedged through currency swaps. 13

15 Electricity Pricing Mechanism With the favorable pricing system for coal-fired power plant, KOSEP has continued to generate more stable profit and cash flow. Concept of Electricity Pricing Mechanism Expenses incurred due to fuel and fixed costs at generation plants are reflected in Energy Price ( EP ) and Capacity Payment ( CP ), respectively. Energy Price ( EP ) consists of two pricing structures, namely, Coefficient-Adjusted System Marginal Price ( asmp ) and System Marginal Price ( SMP ). asmp applies to thermal Gencos power plants and nuclear plants while IPP s power plants are compensated on SMP. Coefficient-Adjusted SMP (May 2008 Current) Coefficient-Adjusted SMP was introduced to secure gencos proper profit dwindled by coal price rises and encourage to build up base load power plants by fixing the unbalance between RMP and SMP in which gencos with LNG/oil power plants get much higher profit than those with coal-fired ones. Coefficient-Adjusted SMP (asmp) calculation formula is Variable cost + (SMP - Variable cost) coefficients. Generator Coefficients As of August 2010 Bituminous Coal General (Oil, LNG, P/S) Domestic Coal Nuclear Coefficients is determined once in each year, but can be determined by quarter, if necessary. 14

16 Operations Results Section 3

17 Operations Highlights Our efforts to effectively utilize the company s resources along with ongoing stability in Electricity Sector provide a competitive advantage to KOSEP. Generation Capacity Power Generation Utilization Rate Thermal Efficiency (In MW) (In GWh) (In %) (In %) 32, % 30, % 30, % 39.10% 39.05% 30,000 9,000 8,944 8, % 39.00% 28, % 26, % 38.90% 24, % 65.0% 38.80% 22, % 8,000 20, % 38.70% 1H09 1H10 1H09 1H10 1H09 1H % 1H % 1H10 Sales Amount Revenue Number of Forced Outage (In GWh) 32,000 29,000 28,867 28,775 (KRW in Billions) 2,500 2,186 2,200 1,900 2, Total: 10 1H10 Total: 3 26,000 23,000 1,600 1, ,000 1, H09 1H10 1H09 1H10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Company data. 16

18 Sales and Revenues by Sources Due to major overhauls of Yonghung, 1H10 s revenue decreased slightly, compared with that of 1H09. Revenue Trends by Power Plant Sales Trends by Power Plant (KRW in Billions) Power Plant H09 1H10 Samchonpo 1, Yonghung Yongdong Yosu Bundang Muju (GWh) Power Plant H09 1H10 Samchonpo 24,375 24,181 12,020 12,826 Yonghung 11,104 17,989 12,742 11,188 Yongdong 1,528 1,917 1,083 1,198 Yosu 1, ,064 1,034 Bundang 3,743 3,750 1,761 2,366 Muju Due to the decrease of sales volume and price, KOSEP's revenue decreased by KRW 72 billion (3.3%). Sales volume decreased by 90GWh (0.31%). Sales price decreased by KRW0.87/kWh (1.22%). The largest portion of base load capacity has been benefiting us by maximizing the utilization ratio. However utilization ratio of base load in 1H10 was 88.43%, lower than 91.12% of the same period of last year, due to the major overhaul of Younghung. With the benefit of the comparatively lower price of LNG price to oil, Bundang s sales increased by 605 GWh (34.4%). 17

19 Expenses by Factors (KRW in Billions) Factors 1H10 1H09 Changes Changes(%) Operation Fuel Expenses 1,434 1,503 (69) (4.6) Labor Expenses Depreciation and Amortization (21) (9.3) Maintenance Expenses (16) (26.7) S&A Expenses Other Expenses (14) (56.0) Non- Interest Expenses (17) (25.0) Operation Other Expenses (15) (20.0) Income Taxes (9) (14.8) Total 1,942 2,092 (150) (7.2) Due to downward trends of coal and oil price, along with the decrease of coal consumption of Yonghung, fuel expenses decreased by 4.6%, compared to the same period of Under the declining balance method of depreciation and amortization in which the expenses decrease as time goes by, depreciation and amortization expense decreased by 9.3%. With the capitalization of some maintenance expenses, on reporting method change, maintenance expenses decreased by 26.7%. Interest expenses decreased by 25.0% due to decrease of financial debt up to KRW 370 billion and increase of low-interest short-term foreign currency borrowings. 18

20 Fuel Purchase and Consumption Trends of Bituminous Coal Purchasing Price (KRW /Ton) 140, , , ,000 80,000 86,955 99, ,737 91,360 87,222 88,057 86,552 95,046 60,000 72,038 40,000 48,791 54,081 20,000 0 '06 '07 '08 1Q 2Q 3Q 4Q '09 1Q 2Q 3Q 4Q '10 1Q 2Q (KRW in billions, Unit Price: KRW/ton or thousand kl [Oil], Volume: Thousand ton or thousand kl [Oil]) Fuel Purchasing Price 1H10 1H09 Changes (%) Fuel Type Volume Unit Price Amount Volume Unit Price Amount Volume Unit Price Amount Bituminous Coal 10,340 90, , , Anthracite , , Oil , , LNG , , Total 1,393 1,

21 Expansion Plan We are prudently expanding our business to keep the sustainable growth as well as to meet the environmental regulations to maintain low-carbon industry. Expansion Plan (KRW in Billions) Expansion Plan Details (Unit: KRW billions) Yonghung #5,6 Yechon #1,2 Yosu Life Extention Renewable + New Biz. Capacity Breakdown 1H Peak Load 922MW Intermediate Load 200MW Yonghung No.5, 6 Yechon No.1, 2 Yosu Life Extension Renewable + New Biz. Construction Period 2010~ ~ ~ ~2014 Capacity 870MW * 2 400MW * 2 340MW Investment Amount 2, , Intermediate Load 529MW Peak Load 1,522MW Base Load 6,905MW (77.2%) Base Load 8,974MW (88.9%) 20

22 Financial Performances Section 4

23 Financial Profile as of 1H10 We anticipate the financial stability and profitability of FY2010 will be improved significantly, compared with those of FY Financial Profile (KRW in Millions) Cash Flow Statement Source: Company data. (1) Capitalization = Net Debt + Total Shareholders Equity. EBITDA = EBIT + Depreciation and Amortization. Net Debt: Short-term financial debt + Long-term financial debt Short-term financial instruments are included in Cash and cash equivalent H09 1H10 Funds from Operations 459, ,846 (117,353) 761, , ,632 Dividends 26,217 8,318-63,483 Capital Expenditure 739, , , , , ,625 Income Statement Revenue 2,069,802 2,230,287 3,043,377 3,834,440 2,124,717 2,114,352 EBITDA 479, , , , , ,303 Net Income 77,763 83,429 (139,489) 211, , ,025 Balance Sheet Total Assets 3,990,032 4,993,028 5,472,277 5,167,213 5,301,575 5,386,600 Cash and Cash Equivalents 34,102 55,408 6,803 14,441 47,250 76,434 Short-term Financial Debt 240, , , , , ,957 Long-term Financial Debt 1,376,457 1,633,133 2,046,988 1,580,179 1,916,343 1,603,480 Net Debt 1,616,499 1,955,893 2,566,273 2,119,705 2,327,218 2,162,437 Total Shareholders Equity 2,033,526 2,089,672 1,982,429 2,178,581 2,124,005 2,297,420 Total Capitalization (1) 3,650,025 4,045,565 4,548,702 4,298,286 4,451,223 4,459,857 22

24 Key Ratios of 1H10 EBITDA Margin Debt/EBITDA 30.00% 25.00% 23.20% 21.90% 24.80% 22.30% 12.00x 10.00x 10.39x Total Debt/EBITDA Net Debt/EBITDA 20.00% 15.00% 10.00% 5.00% 11.04% 8.00x 6.00x 4.00x 2.00x 5.95x 4.08x 3.37x 4.01x 7.64x 6.03x 6.55x 4.42x 4.59x 0.00% H09 1H x H09 1H10 Note: EBITDA = Operating + Depreciation + Amortization EBITDA Margin = EBITDA / Revenue Net Debt/Capitalization Note: Net Debt = Short-term financial Debt + Long-term financial Debt CFO*/Total Debt 60.00% 50.00% 40.00% 30.00% 44.30% 48.30% 56.40% 52.30% 48.50% 35.00% 30.00% 25.00% 20.00% 15.00% 28.44% 21.10% 15.40% 24.53% 20.00% 10.00% 10.00% 0.00% H09 1H10 Note: Capitalization = Net Debt + Total Shareholder s Equity 5.00% -3.36% 0.00% -5.00% H09 1H10 Note: CFO = Annualized Cash flow from operating activities 23

25 Debt Profile KOSEP maintains a balanced debt profile despite increased Capex spending. (KRW in Billions) 600 Debt Maturity Profile Short-term vs. Long-term Short Term (KRW 556bn) 27.4% Local vs. Foreign Currency Foreign (KRW 746bn) 36.8% Type of Borrowing Long Term (KRW 1,471bn) 72.6% Local (KRW 1,281bn) 63.2% Type of Interest 200 Local Currency Long Term (KRW 61bn) 3.0% Floating Rate (KRW 61bn) 3.0% After 2014 Foreign Currency Short Term (KRW 152bn) 7.5% Bonds (KRW 1,814bn) 89.5% Fixed Rate (KRW 1,966bn) 97.0% (1) Debt maturity profile in the left is based on the amount in the beginning of each year, and the rest on the right is as of June 30, (2) Total financial debt as of June 30, 2010 is KRW 2,027 billion after currency swap in case of foreign currency bond. 24

26 Cash Flow and Capex Capex and CFO Projection (E) Capex Cash from Operation Activities (E) Plant Facility Building, Land, Communication equipment Capitalized Funding Costs Total Capex (1) Cash from Operating Activities (117.3) Cash from Investing Activities (727.8) (293.4) (382.3) (672.3) Cash from Financing Activities (371.3) (85.5) Internal Funds (8.8) (48.5) 7.7 Cash in the Beginning of the Period Additional Funds Required (1) Total Capex includes expenditures on intangible assets and non-plant facilities. 25

27 Back-up Liquidity Bank Overdraft Facilities (KRW in Billions) Bank Committed Amount Yield NACF 100 3m CD + Spread Trade Financing Facilities (USD in Millions) Korea Exchange Bank 45 3M Libor + Spread ANZ 150 3M Libor + Spread NACF 20 3M Libor + Spread Korea Development Bank 50 3M Libor + Spread Kookmin Bank 100 3M Libor + Spread Citi Bank 50 3M Libor + Spread Hana Bank 30 3M Libor + Spread Woori Bank 20 3M Libor + Spread RBS 80 3M Libor + Spread Industrial 11 3M Libor + Spread Total 556 Total Short-term Borrowings Facilities The Shinhan Bank 100 3m CD + Spread NACF 100 3m CD + Spread Total 200 Note: All data was made as of June 30,

28 Genco s Financial Perofrmance KOSEP s operating income margin is the biggest among non-nuclear Gencos. Total Assets (KRW in Billions) 6,000 5,387 5,638 4,725 4,969 5,000 4,367 4,000 3,000 2,000 1,000 - KOSEP KOMIPO KOWEPO KOSPO EWP Operating Income Margin (%) Revenue (KRW in Billions) 3,000 2,624 2,500 2,335 2,334 2,114 2,238 2,000 1,500 1, KOSEP KOMIPO KOWEPO KOSPO EWP Net Income Margin (%) KOSEP KOMIPO KOWEPO KOSPO EWP KOSEP KOMIPO KOWEPO KOSPO EWP Source: KOSEP as of June 30, 2010 Note: Operating Income Margin = Operating Income/Revenue. Note: Net Income Margin = Net Income/Revenue. 27

29 Financial Forecasts Section 5

30 Assumption for Forecasts Macroeconomic Assumptions Demand Growth 3.20% 2.50% 2.00% 1.70% KRW / US$ 1,000 1,000 1,000 1,000 Korean Won Interest Rate 5.00% 5.00% 5.00% 5.00% Coal Price (FOB, US$ / Ton) Operating Assumptions Fuel Cost (KRW billions) 3,144 3,254 3,115 3,415 Maintenance Cost (KRW billions) Labor Cost Increase 2.0% 2.0% 2.0% 2.0% Generation Assumptions Installed Capacity (MW) 8,974 8,974 8,974 10,096 Generation Volume (GWh) 56,595 57,495 58,437 60,047 Revenue (KRW Billions) 4,026 4,128 4,236 4,558 Source: KOSEP, Oil Price US$80/Barrel (Dubai). 29

31 Financial Forecasts Balance Sheet (Unit: KRW Million) F 2011F 2012F 2013F 2014F Assets Current Assets 588, , , , , ,653 Non-Current Assets 4,578,431 5,023,184 5,414,495 5,377,752 6,674,397 6,869,047 Total Assets 5,167,213 5,685,000 6,087,000 6,058,276 7,365,000 7,569,700 Liabilities Current Liabilities 821,000 1,000, , , , ,887 Non-Current Liabilities 2,167,632 2,230,300 2,515,977 3,304,734 3,633,426 3,712,513 Total Liabilities 2,988,632 3,230,300 3,476,700 4,168,900 4,492,400 4,549,400 Stockholders Equity Capital Stock 332, , , , , ,700 Capital Surplus 898, , , , , ,503 Retained Earnings 947,377 1,223,497 1,379,097 1,503,897 1,641,397 1,789,397 Total Stockholders Equity 2,178,580 2,454,700 2,610,300 2,735,100 2,872,600 3,020,600 Total Liabilities and Stockholders Equity 5,167,212 5,685,000 6,087,000 6,904,000 7,365,000 7,570,000 30

32 Financial Forecasts Income Statement (Unit: KRW Million) F 2011F 2012F 2013F 2014F Operating Revenues 3,834,440 4,217,600 4,026,300 4,128,294 4,236,430 4,558,400 Sales of Electric Power 3,734,242 4,103,842 3,909,152 4,015,770 4,120,665 4,427,900 Other Operating Revenue 100, , , , , ,500 Cost of Sales 3,443,709 3,742,030 3,647,548 3,727,849 3,825,497 4,112,262 Gross Profit 390, , , , , ,138 SG&A 32,468 34,870 54,552 67,165 58,575 68,215 Operating Income 358, , , , , ,923 Non-Operating Income 154, ,509 17,669 30,700 22,900 24,500 Non-Operating Expense 242, , , , , ,700 Ordinary Income 270, , , , , ,723 Income Taxes 58,852 90,605 42,495 35,188 38,795 39,723 Net Income 211, , , , , ,000 31

33 Financial Forecasts Cash Flow Statement (Unit: KRW Million) F 2011F 2012F 2013F 2014F Cash flows from Operating Activities Net Income 211, , , , , ,000 Non-cash Expenses 535, , , , , ,400 Depreciation and Amortization 461, , , , , ,200 Provision for Severance Indemnities 9,482 15,466 10,400 10,500 11,400 12,200 Other, net (Trade payables, Etc.) 64,915 69,762 60,000 60,000 60,000 60,000 Non-cash Incomes (81,875) (50,965) (60,000) (60,000) (60,000) (60,000) Changes in Assets and Liabilities 96,045 7,897 66,739 79,679 28,624 56,235 Net Cash Provided by Operating Activities 761, , , , , ,635 Cashflows from Investing Activities Plant Construction Expenditure (398,278) (569,100) (946,400) (893,341) (1,483,200) (1,079,200) Other, Net 15,952 (103,200) (117,800) (136,700) (83,400) (74,800) Net Cash Used in Investing Activities (382,326) (672,300) (1,064,200) (1,030,041) (1,566,600) (1,154,000) Cashflows from Financing Activities Proceed from Financial Borrowings 148, , , ,412 1,298, ,365 Repayment of Financial Debts (519,320) (310,646) (506,531) (296,708) (424,659) (400,000) Net Cash Used in Financing Activities (371,318) (85,500) 349, , , ,365 Cash and Cash Equiv. at End of Period 14,440 14,440 14,440 14,440 14,440 14,440 32