Business context and reporting period
Korea Electric Power Corporation (KEPCO) filed its Form 20-F on April 28, 2023, covering the fiscal year ended December 31, 2022. The filing presents consolidated IFRS results for KEPCO and its subsidiaries. KEPCO operates Korea’s transmission and distribution network and purchases electricity principally from its six wholly owned generation subsidiaries and independent power producers. The Government and Korea Development Bank together owned 51.1% of KEPCO’s common shares.
KEPCO sold 547,933 GWh of electricity in 2022, up 2.7% from 2021. Industrial customers accounted for 54.0% of consumption, commercial customers 23.2%, and residential customers 14.8%.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Sales | KRW 70,546 billion | KRW 60,012 billion | Up 17.6% |
| Cost of sales | KRW 100,904 billion | KRW 63,644 billion | Up 58.5% |
| Gross profit/(loss) | KRW (30,358) billion | KRW (3,632) billion | Loss widened |
| Operating profit/(loss) | KRW (32,241) billion | KRW (5,723) billion | Loss widened |
| Net profit/(loss) | KRW (24,429) billion | KRW (5,216) billion | Loss widened |
| Gross margin | (43.0)% | (6.1)% | Down 36.9 points |
| Operating margin | (45.7)% | (9.5)% | Down 36.2 points |
| Net margin | (34.6)% | (8.7)% | Down 25.9 points |
| Operating cash flow | KRW (23,478) billion | KRW 4,491 billion | Turned negative |
| Total equity | KRW 42,000 billion | KRW 65,327 billion | Down 35.7% |
| Total borrowings and debt securities | KRW 120,605 billion | KRW 80,530 billion | Up 49.8% |
| Cash and cash equivalents | KRW 3,235 billion | KRW 2,635 billion | Up 22.8% |
Power-purchase costs rose 94.2% to KRW 41,985 billion, while raw materials used rose 86.7% to KRW 34,833 billion. Fuel costs were 34.4% of cost of sales and 49.1% of sales. Average electricity selling price increased 11.5% to KRW 120.51 per kWh, but this was insufficient to offset higher fuel and purchased-power costs.
Net cash used in investing activities was KRW 14,954 billion, including KRW 12,347 billion of property, plant and equipment acquisitions. Net cash provided by financing activities was KRW 38,998 billion, primarily reflecting increased borrowings and debt securities issuance.
At year-end, the company had a working-capital deficit of KRW 14,768 billion, compared with KRW 9,681 billion in 2021. Current financial liabilities were KRW 22,704 billion and current trade and other payables were KRW 11,984 billion. Available credit facilities totaled KRW 7,184 billion and US$1,385 million.
Material changes versus the prior comparable period
- Revenue growth was driven by higher electricity volumes and tariff increases, including a 2.7% increase in electricity sold and higher commercial and industrial rates.
- Cost inflation substantially exceeded revenue growth. Fuel prices, system marginal power prices, purchased electricity, and the weaker Korean won were the principal pressures.
- Operating loss increased more than fivefold, and net loss increased from KRW 5,216 billion to KRW 24,429 billion.
- Operating cash flow deteriorated from a KRW 4,491 billion inflow to a KRW 23,478 billion outflow.
- Debt increased sharply to fund working-capital needs and losses. The debt-to-equity ratio rose from 119.2% to 279.5%.
- Equity declined by KRW 23,326 billion, principally due to the 2022 comprehensive loss.
- Interest expense increased to KRW 2,819 billion from KRW 1,914 billion, while the weighted average interest rate on long-term debt and related swaps rose to 3.09% from 2.35%.
- KEPCO recognized a KRW 9,415 billion income-tax benefit, primarily because of increased losses and deferred tax effects; this benefit did not represent operating cash generation.
Guidance, outlook, management commentary, risks and unusual items
The Government stated that it intends to normalize electricity tariffs in stages and resolve KEPCO’s cumulative deficit by 2026, but the filing cautions that implementation, timing, and sufficiency of future tariff increases are uncertain. The fuel-cost adjustment remains capped, and the Government retains discretion to defer or limit tariff increases.
Capital expenditures were KRW 13,886 billion in 2022. Budgeted capital expenditures are KRW 16,927 billion for 2023, KRW 16,306 billion for 2024, and KRW 17,908 billion for 2025. Planned investment includes generation, transmission and distribution, nuclear projects, LNG conversion, renewables, grid infrastructure, and new-energy projects.
The January 2023 Tenth Basic Plan calls for nuclear capacity to increase, coal capacity to decline, LNG capacity to expand, and renewable capacity to reach 108.3 GW by 2036. Construction of Shin-Hanul Units 3 and 4 is expected to resume. The plan also contemplates hydrogen- and ammonia-blended generation, but implementation, required investment, and tariff recovery remain uncertain.
- Major risks include fuel-price volatility, imported-fuel availability, foreign-exchange movements, interest rates, tariff regulation, higher leverage, refinancing needs, and possible erosion of market share by independent power producers and direct power-purchase agreements.
- KEPCO had material exposure to Russia-related fuel purchases, including Russian coal, uranium services, and LNG. Sanctions could disrupt supply or increase replacement costs.
- Environmental compliance, greenhouse-gas allowances, renewable portfolio requirements, coal retirements, and nuclear safety requirements may increase operating and capital costs.
- As of December 31, 2022, defendants KEPCO and its subsidiaries faced 653 lawsuits with claimed damages of KRW 981.9 billion and had recorded litigation provisions of approximately KRW 181 billion. Ordinary-wage claims and litigation related to the Goseong forest fire remain notable exposures.
- KEPCO had recognized KRW 23,035 billion of provisions for nuclear-plant decommissioning, KRW 1,427 billion for spent fuel, and KRW 1,990 billion for radioactive waste at year-end.
- A critical audit matter involved impairment testing of the transmission and distribution cash-generating unit. No impairment charge was recognized, but recoverability depends on assumptions regarding future sales volumes, tariffs, power-purchase costs, and discount rates.
- Subsequent to year-end, KEPCO and subsidiaries issued substantial additional corporate bonds. A fire at a subsidiary’s Taean IGCC gas-refining plant in January 2023 caused a production suspension; damages and insurance coverage were still under investigation.
Most important facts for investors to verify
- Whether future tariff increases will cover fuel, purchased-power, environmental, and financing costs sufficiently to restore positive margins.
- The pace and terms of additional debt issuance, refinancing, and compliance with KEPCO’s statutory debt ceiling.
- Liquidity after considering the KRW 38,272 billion of contractual obligations due within one year and the KRW 26,158 billion of borrowings and debt securities scheduled within one year, including interest.
- Sensitivity of earnings and equity to fuel prices, tariffs, foreign exchange, and interest rates; the filing estimates that a 1% fuel-price increase would reduce 2023 pretax income by approximately KRW 343 billion, while a 1% tariff increase would increase it by approximately KRW 662 billion.
- Progress and cost recovery for nuclear construction, coal-to-LNG conversions, renewable projects, hydrogen procurement, and the 2023–2025 capital program.
- Potential cash outflows from litigation, guarantees, ordinary-wage claims, nuclear decommissioning, spent-fuel management, and overseas project commitments.
- Whether the filing’s transmission and distribution impairment assumptions remain supportable under continued losses, tariff delays, and elevated borrowing costs.