Business Context and Reporting Period
Korea Electric Power Corporation (KEPCO) filed its Form 20-F on April 30, 2019, covering the fiscal year ended December 31, 2018. The filing presents consolidated IFRS financial statements for KEPCO and its subsidiaries. KEPCO is Korea’s principal integrated electric utility, transmitting and distributing substantially all electricity in Korea and generating power through six wholly owned subsidiaries. The filing is annual and does not provide a separate fourth-quarter-only income statement.
KEPCO sold 526,149 GWh of electricity in 2018, while it and its generation subsidiaries owned approximately 68.3% of Korea’s generation capacity. The Korean government and Korea Development Bank collectively owned 51.1% of KEPCO’s shares at the February 7, 2019 shareholder-record date.
Financial Metrics
| Metric | 2017 | 2018 | Change |
|---|---|---|---|
| Sales | ₩59,336 billion | ₩60,033 billion | +1.2% |
| Cost of sales | ₩52,099 billion | ₩58,208 billion | +11.7% |
| Gross profit | ₩7,237 billion | ₩1,825 billion | -74.8% |
| Gross margin | 12.2% | 3.0% | -9.2 percentage points |
| Operating profit/(loss) | ₩5,320 billion | (₩685 billion) | Turned to loss |
| Operating margin | 9.0% | (1.1%) | -10.1 percentage points |
| Profit/(loss) for the period | ₩1,441 billion | (₩1,175 billion) | Turned to loss |
| Loss attributable to owners | Profit of ₩1,299 billion | Loss of ₩1,315 billion | Turned to loss |
| Basic loss per share | ₩2,023 earnings | ₩2,048 loss | Turned negative |
| Net cash from operating activities | ₩11,250 billion | ₩6,680 billion | -40.6% |
| Capital expenditures | ₩13,711 billion | ₩13,695 billion | -0.1% |
| Cash and cash equivalents | ₩2,370 billion | ₩1,358 billion | -42.7% |
| Total borrowings and debt securities | ₩54,747 billion | ₩61,035 billion | +11.5% |
| Total equity | ₩72,965 billion | ₩71,093 billion | -2.6% |
| Working capital deficit | ₩4,283 billion | ₩2,096 billion | Deficit narrowed |
Fuel costs rose to ₩20,093 billion and represented 34.5% of cost of sales and 33.5% of sales, compared with 31.7% and 27.8%, respectively, in 2017. Power purchases increased 28.3% to ₩18,307 billion, while raw-material costs increased 22.7% to ₩19,538 billion. Net finance expense increased to ₩1,674 billion from ₩1,597 billion.
Net cash used in investing activities was ₩13,014 billion, and net cash from financing activities was ₩5,302 billion, primarily reflecting increased long-term borrowings and debt-security issuance. Approximately 17.7% of long-term debt, including the current portion and before swap effects, was denominated in foreign currencies.
Material Changes Versus the Prior Comparable Period
- Electricity sales volume increased 3.6% to 526,149 GWh, but the average unit sales price declined 0.7% to ₩108.75 per kWh, partly due to summer residential tariff discounts.
- Sales increased only modestly because higher electricity sales were partly offset by a 45.8% decline in construction-services revenue as UAE nuclear construction projects progressed.
- Cost inflation substantially exceeded revenue growth, driven by higher international fuel prices, increased independent power purchases, higher raw-material costs and depreciation from new facilities.
- Net other losses increased to ₩621 billion from net other gains of ₩157 billion, primarily due to property, plant and equipment impairment charges related to Wolsong Unit 1 and Shin-Hanul Units 3 and 4.
- Wolsong Unit 1 was designated for early retirement. Impairment loss was ₩570.4 billion and the decommissioning provision increased by ₩28.2 billion. Impairment related to Chunji Units 1 and 2 and Daejin Units 1 and 2 was ₩38.9 billion, while impairment related to Shin-Hanul Units 3 and 4 was ₩132.7 billion.
- Nuclear utilization declined as units underwent more frequent safety and maintenance inspections. KHNP reported a 65.9% average nuclear capacity factor in 2018, compared with a total generation-fleet capacity factor of 58.7%.
- KEPCO paid no dividend for fiscal 2018, compared with ₩790 per share for fiscal 2017 and ₩1,980 per share for fiscal 2016.
- KEPCO adopted IFRS 9 and IFRS 15 in 2018. Comparative periods were not restated; the initial IFRS 9 transition adjustment reduced equity by approximately ₩4.9 billion, while IFRS 15 had no significant initial impact.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management’s strategy emphasizes clean energy, renewable generation, digital transformation, smart grids, energy storage, customized tariffs, overseas projects and financial efficiency. The filing does not provide quantitative earnings guidance. Budgeted capital expenditures were ₩16,831 billion for 2019, ₩19,138 billion for 2020 and ₩18,804 billion for 2021, totaling ₩54,773 billion.
The Eighth Basic Plan for Electricity Supply and Demand calls for lower reliance on nuclear and coal, expanded renewable generation, accelerated retirement of older coal plants, conversion of certain coal units to LNG and greater environmental consideration in power planning. These policies may increase capital, operating and compliance costs and could reduce utilization of existing assets.
- Tariff regulation: Government approval limits KEPCO’s ability to pass fuel, environmental and other cost increases to customers. Management estimates that a 1% increase in electricity rates would increase 2019 pretax income by approximately ₩568 billion.
- Fuel and currency exposure: A 1% increase in coal, oil, LNG and other generation-fuel prices would reduce estimated pretax income by approximately ₩201 billion. A 10% weakening of the Won against foreign currencies would increase estimated unrealized foreign-exchange losses by approximately ₩888 billion.
- Liquidity and refinancing: Scheduled interest-paying debt maturities for 2019–2023 total approximately ₩38.4 trillion, with additional maturities thereafter. KEPCO maintained available credit facilities of ₩4,424 billion and US$383 million and medium-term note capacity with approximately US$9 billion available for future drawdown.
- Environmental obligations: Carbon-emissions trading, stricter particulate and emissions standards, renewable portfolio requirements and IMO 2020 shipping rules may increase fuel, freight, retrofit and compliance costs.
- Nuclear and operational risks: Nuclear shutdowns, decommissioning, spent-fuel management, construction cancellations, accidents and safety-related regulatory action could reduce generation and increase replacement-power costs.
- Legal and contingent matters: At December 31, 2018, KEPCO and its subsidiaries were defendants in 570 lawsuits with claimed damages of ₩673.9 billion and plaintiffs in 174 lawsuits claiming ₩793.5 billion. Provisions for legal claims were approximately ₩77.8 billion.
- Operational incidents: Three Taean thermal units remained suspended after a December 2018 subcontractor fatality, with no restart date determined at the filing date. An April 2019 forest fire investigation was also ongoing and could create liability and reputational exposure.
- Major provisions: Nuclear-plant decommissioning provisions totaled ₩13.4 trillion, spent-fuel provisions ₩1.3 trillion and radioactive-waste provisions approximately ₩1.7 trillion at year-end 2018.
Investor Verification Points
- Verify whether tariff adjustments and fuel-cost pass-through mechanisms are sufficient to restore positive operating margins.
- Reconcile reported cash generation with the ₩54.8 trillion three-year capital-investment budget and the increase in debt.
- Review the timing and refinancing plans for the ₩7.6 trillion of scheduled 2019 debt maturities and subsequent maturities.
- Assess the recoverability of nuclear and coal assets under Korea’s energy-transition policies, including potential further impairments.
- Monitor nuclear utilization, plant retirements, construction cancellations and the status of Shin-Hanul Units 3 and 4.
- Evaluate the financial impact of environmental compliance, carbon allowances, renewable portfolio obligations and coal-to-LNG conversions.
- Review the outcomes and reserves for ordinary-wage lawsuits, construction arbitrations, nuclear-related litigation and the Taean and Goseong incidents.
- Confirm future dividend policy following the absence of a fiscal 2018 dividend.
- Consider foreign-exchange sensitivity given foreign-currency fuel purchases and debt, and verify the effectiveness and scope of hedging arrangements.