Business Context and Reporting Period
Company: Korea Electric Power Corporation (KEPCO)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2002
Business Overview: KEPCO is the primary electricity generator, transmitter, and distributor in the Republic of Korea. The company is currently undergoing a government-mandated restructuring plan that involves spinning off generation assets into six wholly-owned subsidiaries (including Korea Hydro & Nuclear Power Co., Ltd.) and preparing for the eventual privatization of non-nuclear generation assets. KEPCO retains a monopoly on transmission and distribution.
Key Financial Metrics (Year Ended Dec 31, 2002)
| Metric | Korean GAAP (KRW Billion) | U.S. GAAP (KRW Billion) | U.S. GAAP (US$ Million) |
|---|---|---|---|
| Operating Revenues | 21,366 | 21,366 | 18,011 |
| Operating Income | 5,047 | 5,047 | 4,254 |
| Net Income | 3,048 | 3,573 | 3,012 |
| Diluted EPS | KRW 4,770 | KRW 5,591 | $4.71 |
| Total Assets | 70,512 | 68,622 (Est.)* | 59,439 |
| Long-Term Debt | 17,671 | 17,671 | 14,896 |
| Stockholders' Equity | 35,562 | 27,291 | 23,005 |
| Net Cash from Operating Activities | 8,757 | 8,757 | 7,382 |
| Capital Expenditures | 6,653 | 6,653 | 5,608 |
*U.S. GAAP Total Assets derived from reconciliation adjustments to Korean GAAP figures.
Material Changes vs. Prior Period (2001)
- Revenue Growth: Operating revenues increased 8.2% to KRW 21.4 trillion, driven by an 8.0% increase in electricity sales volume across industrial, commercial, and residential sectors.
- Profit Surge: Net income under Korean GAAP jumped 86.4% to KRW 3.05 trillion. This was primarily due to a significant improvement in non-operating results, including a KRW 512 billion gain on foreign currency transactions (due to Won appreciation against the USD) and a KRW 433 billion gain on the disposal of investments (Powercomm Corporation).
- Expense Management: Operating expenses remained relatively flat (+0.5%), with power generation costs decreasing 2.1% due to lower unit fuel costs and depreciation, offset by a 23.4% increase in purchased power costs.
- Debt Reduction: Long-term debt decreased significantly from KRW 22.1 trillion in 2001 to KRW 17.7 trillion in 2002, reflecting successful debt restructuring and refinancing efforts.
Guidance, Outlook, and Risks
Outlook and Restructuring: KEPCO is in Phase II of a multi-phase restructuring plan. The company plans to privatize its five non-nuclear generation subsidiaries, though the sale of the first subsidiary (KOSEPCO) was suspended in March 2003 due to unfavorable market conditions. The company intends to retain 100% ownership of its nuclear and hydroelectric subsidiary (KHNP). Future capital expenditures are projected to increase, with total budgeted spending of KRW 49.2 trillion planned for 2003–2007.
Key Risks:
- Restructuring Uncertainty: Changes in government policy regarding the privatization timeline and the potential for dissenting shareholder rights could impact financial stability.
- Labor Unrest: Labor unions have historically opposed privatization, leading to strikes (e.g., a six-week strike in 2002). Future strikes could disrupt power supply.
- Foreign Exchange Exposure: Approximately 36.5% of long-term debt is denominated in foreign currencies (primarily USD). A depreciation of the Won would significantly increase debt service costs and fuel expenses, as most fuel is imported.
- Fuel Price Volatility: Fuel costs constitute a major portion of operating expenses. Sensitivity analysis indicates a 10% rise in fuel prices could decrease pre-tax income by approximately KRW 521 billion in 2003.
- North Korea Tensions: Geopolitical instability on the Korean Peninsula poses a risk to operations and security.
Investor Verification Checklist
- Accounting Differences: Verify the significant difference between Korean GAAP and U.S. GAAP net income (KRW 3.05T vs. KRW 3.57T) and equity (KRW 35.6T vs. KRW 27.3T), primarily driven by asset revaluation and regulatory accounting treatments.
- Privatization Progress: Monitor the status of the privatization of non-nuclear generation subsidiaries, specifically the resumption of the KOSEPCO sale and the timeline for subsequent divestitures.
- Debt Maturity Profile: Review the scheduled maturities of long-term debt, with KRW 5.7 trillion due in 2003 and KRW 6.9 trillion in 2004, to assess refinancing risks.
- Foreign Currency Hedging: Assess the company's strategy for managing the 36.5% foreign currency debt exposure given the volatility of the Won.
- Decommissioning Liabilities: Note the KRW 4.4 trillion reserve for nuclear decommissioning costs and the potential impact of adopting SFAS No. 143 (Asset Retirement Obligations) on future financial statements.