KOREA ELECTRIC POWER CORP annual report, Q4 FY2021

KEPCO Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2021; filed April 29, 2022. The filing is an annual Form 20-F, not a standalone fourth-quarter report. Financial statements are consolidated and prepared under IFRS. Amounts below are in billions of Korean won unless otherwise stated.

Business context

Korea Electric Power Corporation is a government-controlled, integrated electric utility. It transmits and distributes substantially all electricity in Korea and purchases power primarily from its six wholly owned generation subsidiaries and independent power producers. The Korean government and Korea Development Bank collectively owned 51.1% of KEPCO at year-end 2021.

Electricity sold increased 4.7% to 533,431 GWh.
KEPCO and its generation subsidiaries owned approximately 61.5% of Korean generation capacity.
Independent power producers supplied 30.6% of total Korean generation in 2021.

Financial performance and key metrics

Metric	2020	2021	Change
Sales	57,926	59,914	+3.4%
Cost of sales	51,805	63,559	+22.7%
Gross profit (loss)	6,121	(3,646)	Downturn
Gross margin	10.6%	(6.1)%	Down 16.7 points
Operating profit (loss)	4,097	(5,737)	Downturn
Operating margin	7.1%	(9.6)%	Down 16.7 points
Profit (loss) for the year	2,092	(5,229)	Downturn
Loss attributable to controlling shareholders	—	(5,315)	Filing reports 2020 profit of 1,991
Net cash from operating activities	13,208	4,473	Down 66.1%
Net cash used in investing activities	(14,832)	(12,354)	Lower outflow
Net cash from financing activities	1,881	8,435	Higher inflow

Power purchase costs increased 37.6% to 21,632, primarily because of higher fuel costs and greater purchased volumes. Raw-material costs increased 37.1%, and depreciation increased 3.6%. Fuel costs were 30.5% of cost of sales and 32.4% of sales in 2021. Greenhouse gas allowance costs increased to 518 from 310 in 2020.

Debt, liquidity and capital resources

Total long-term debt, including current maturities and excluding original issue discounts and premiums, was 77,781 at year-end 2021, including 12,786 denominated in foreign currencies.
Consolidated borrowings and debt securities were 80,530 at year-end 2021, up from 69,725 in 2020.
Short-term borrowings increased to 2,921 from 1,437.
Total equity declined to 65,312 from 70,667, and the debt-to-equity ratio increased to 119.27% from 95.79%.
Cash and cash equivalents were 2,635 at year-end 2021.
Net working capital remained negative at (9,681), compared with (5,319) in 2020.
Available credit facilities totaled 4,926 plus US$1,645 million; global medium-term note programs totaled US$13 billion, with approximately US$7 billion available for future drawdown.
Debt maturities, including interest and other contractual amounts, were concentrated in the near term: 24,459 due within one year and 34,016 due in two to five years under the broader contractual-obligation table.

Material changes versus the prior comparable period

Sales grew modestly as electricity volumes recovered, but cost inflation substantially exceeded revenue growth.
Higher LNG, coal and other fuel prices, increased power purchases and higher emissions costs drove the shift from a 2020 operating profit of 4,097 to a 2021 operating loss of 5,737.
Finance expenses increased to 1,843 on a net basis, primarily reflecting foreign-currency translation losses on financial liabilities.
Operating cash flow fell by 8,735, while financing cash inflow rose by 6,554, reflecting increased long-term borrowings and debt securities.
KEPCO paid dividends of 1,216 per share for fiscal 2020, but the filing indicates no dividend for fiscal 2021 because the parent company reported a separate-company deficit.

Guidance, outlook, commentary and unusual items

The cost-pass-through tariff system introduced January 1, 2021 was intended to link customer rates more closely to fuel and environmental costs. However, government discretion and tariff adjustment caps limited recovery of rapidly rising costs.
KEPCO announced planned usage-charge increases of 4.9 won per kWh on April 1 and October 1, 2022, for a total planned increase of 9.8 won per kWh. The first increase became effective April 1, 2022. The climate/environment charge was also raised from 5.3 to 7.3 won per kWh effective April 1, 2022.
Capital expenditures were 13,964 in 2021. Budgeted capital expenditures were 15,360 for 2022, 16,172 for 2023 and 16,133 for 2024.
Management’s strategy emphasizes grid investment, renewable and clean energy, demand response, digitalization, electric-vehicle infrastructure, carbon-neutral technologies and a lower-carbon overseas portfolio. KEPCO stated that it would not pursue new overseas coal-fired projects.
The Ninth Basic Plan targets retirement of 30 coal plants and 11 nuclear plants by 2034, conversion of 24 coal plants to LNG and substantial renewable-energy expansion. These plans may increase capital requirements and compliance costs.
Ukraine-Russia developments were disclosed as a non-adjusting subsequent event. KEPCO purchased 11.5% of its bituminous coal from Russia in 2021 and also sourced uranium services and LNG from Russian suppliers; management stated that the future financial impact could not be reasonably estimated.
The filing identifies a critical audit matter concerning impairment testing of the electricity transmission and distribution cash-generating unit. No impairment charge was recognized in 2021, but recoverability depended on assumptions about future sales volumes, tariffs, purchased-power costs and discount rates.

Principal risks and contingencies

Fuel-price increases may not be passed through promptly or fully because tariffs are government regulated.
Foreign-exchange exposure is material: a 10% weakening of the won against foreign currencies was estimated to reduce 2022 pre-tax income by approximately 1,439.
A 1% increase in fuel prices was estimated to reduce 2022 pre-tax income by approximately 190, while a 1% electricity-rate increase was estimated to increase it by approximately 572.
Environmental, carbon-neutrality and renewable-portfolio requirements may raise operating costs, capital needs and emissions-credit expenses.
Nuclear safety, license extensions, decommissioning, spent-fuel storage and potential operating restrictions remain significant long-term risks. Nuclear decommissioning and spent-fuel-related provisions were substantial, including 19,461 for nuclear-plant dismantling.
KEPCO and its subsidiaries were defendants in 683 lawsuits with aggregate claims of 689; provisions totaled 115 at year-end. Twelve ordinary-wage lawsuits against subsidiaries had aggregate claims of 38, with reserves of 3.2.
KEPCO settled and paid 62.7 in connection with the 2019 Goseong forest fire and estimated additional settlements of approximately 6.1.
Guarantees and commitments to associates, joint ventures and other parties are extensive. The consolidated contractual-obligation total was 110,337, including borrowings, leases, payables and financial guarantees.
Liquidity, refinancing and rising interest-rate risk are heightened by negative working capital, increasing debt and significant near-term maturities.

Investor verification checklist

Verify 2022 tariff increases and the extent to which subsequent tariff decisions recover fuel, power-purchase and environmental costs.
Track quarterly fuel prices, purchased-power costs, emissions-credit costs and operating cash flow.
Review debt issuance, refinancing activity, maturities and available credit facilities against the capital-expenditure plan.
Assess sensitivity of the transmission and distribution impairment model to lower tariffs, higher fuel costs, weaker demand and higher discount rates.
Monitor Russia-related fuel procurement, sanctions exposure and replacement-supply costs.
Review nuclear operating-license decisions, construction schedules, decommissioning provisions and spent-fuel storage requirements.
Confirm the status and ultimate exposure of litigation, guarantees, ordinary-wage claims, the Goseong fire settlements and overseas project commitments.