Korea Electric Power Corporation: FY2019 Form 20-F Summary
Business context and reporting period
KEPCO filed its annual Form 20-F on April 29, 2020, covering the fiscal year ended December 31, 2019. The consolidated financial statements are prepared under IFRS as issued by the IASB and are presented in Korean won. KEPCO operates substantially all of Korea’s electricity transmission and distribution network and, through six wholly owned generation subsidiaries, owns approximately 66.8% of Korea’s generation capacity.
Key financial and operating metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales | ₩58,568 billion | ₩60,033 billion | Down 2.4% |
| Gross profit | ₩788 billion | ₩1,825 billion | Down 56.8% |
| Gross margin | 1.3% | 3.0% | Down 1.7 percentage points |
| Operating loss | ₩1,708 billion | ₩685 billion | Loss widened |
| Operating margin | (2.9%) | (1.1%) | Down 1.8 percentage points |
| Net loss | ₩2,264 billion | ₩1,175 billion | Loss widened 92.7% |
| Loss attributable to owners | ₩2,346 billion | ₩1,315 billion | Loss widened |
| Basic loss per share | ₩3,654 | ₩2,048 | Loss increased |
| Operating cash flow | ₩8,213 billion | ₩6,680 billion | Up 22.9% |
| Capital expenditures for generation, transmission and distribution | ₩15,795 billion | ₩13,695 billion | Up 15.3% |
| Cash and cash equivalents | ₩1,810 billion | ₩1,358 billion | Up 33.3% |
| Total borrowings and debt securities | ₩67,877 billion | ₩61,035 billion | Up 11.2% |
| Shareholders’ equity | ₩68,890 billion | ₩71,093 billion | Down 3.1% |
| Working capital | Deficit of ₩4,749 billion | Deficit of ₩2,096 billion | Deficit widened |
Electricity sold declined 1.1% to 520,499 GWh, while electricity demand in Korea also decreased 1.1%. Nuclear generation increased to 145,910 GWh from 133,505 GWh, while coal generation declined to 211,785 GWh from 222,818 GWh. Independent power producers accounted for 27.3% of Korea’s 2019 generation.
Material changes versus the prior comparable period
- Sales declined primarily because of lower electricity volumes, a lower average unit sales price and a 27.4% decline in construction-services revenue as UAE nuclear construction projects progressed.
- Cost of sales decreased only 0.7%, leaving limited operating leverage. Raw-material costs declined 12.6% and power-purchase costs declined 0.2%, but depreciation increased 10.8% and other cost of sales increased 20.4%.
- Greenhouse-gas allowance costs increased materially to approximately ₩710 billion from ₩53 billion, contributing to margin deterioration.
- Net finance expense increased 5.9% to ₩1,772 billion because of higher borrowings and bond issuances.
- Operating cash flow improved despite the larger net loss, mainly due to higher depreciation and provisions.
- Debt increased while equity declined, raising the reported debt-to-equity ratio from 83.9% to 95.9%.
- KEPCO adopted IFRS 16 on January 1, 2019, recognizing approximately ₩4,944 billion of additional lease-related assets and liabilities at transition.
- KEPCO paid no dividend for fiscal 2019, compared with ₩790 per share paid for fiscal 2017; no dividend was paid for fiscal 2018.
Guidance, outlook, management commentary, risks and unusual items
- Management planned to propose a more sustainable tariff system in the first half of 2020, including adjustments to residential discounts and possible time-of-use pricing. No firm tariff outcome was provided.
- Current capital-expenditure budgets are approximately ₩16,211 billion for 2020, ₩17,529 billion for 2021 and ₩17,002 billion for 2022, totaling ₩50,595 billion.
- Management expects environmental compliance costs, including emissions allowances, renewable-energy requirements and coal-plant retrofits, to continue increasing.
- The company expects energy-policy changes to reduce reliance on nuclear and coal while expanding LNG and renewable generation. The Ninth Basic Plan was expected in 2020, but its final effects were uncertain.
- Key risks include regulated tariffs that may not promptly recover fuel and environmental costs, imported fuel and foreign-exchange exposure, interest-rate risk, substantial refinancing needs, and possible further debt increases.
- COVID-19 was identified as a material uncertainty that could reduce electricity demand, disrupt operations and lead to tariff-payment deferrals or additional customer relief.
- KEPCO recognized impairment-related items associated with Wolsong Unit 1, nuclear construction projects and Australian mining interests. The filing states that reasonable expenditures related to nuclear phase-out may be reimbursed by the Korean government, but timing and amount were not assured.
- At December 31, 2019, KEPCO and its subsidiaries were defendants in 586 lawsuits with aggregate claims of approximately ₩698 billion and plaintiffs in 199 lawsuits with claims of approximately ₩707 billion. Provisions for legal claims were approximately ₩88 billion.
- Decommissioning and radioactive-waste provisions were substantial: the nuclear-plant dismantling provision was approximately ₩15,994 billion and total non-current provisions were approximately ₩19,066 billion.
- KEPCO’s auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Ernst & Young Han Young replaced KPMG as principal auditor for 2019.
Most important facts an investor should verify
- Whether future tariff reforms will allow KEPCO to recover fuel, emissions, labor and decommissioning costs.
- The sustainability of positive operating cash flow given recurring net losses, negative working capital and capital spending above operating cash flow.
- Refinancing capacity and maturity concentration, including approximately ₩8,488 billion of interest-paying debt scheduled to mature in 2020 and ₩8,994 billion in 2021.
- The sensitivity of earnings to fuel prices, tariffs and currency movements; management estimated that a 1% tariff increase would raise 2020 pretax income by approximately ₩559 billion, while a 1% fuel-price increase would reduce it by approximately ₩178 billion.
- The status and recoverability of nuclear assets, including Wolsong Unit 1 and Shin-Hanul Units 3 and 4, and the legal basis and timing of any government reimbursement.
- The financial exposure from guarantees, joint ventures, long-term fuel commitments and other contractual obligations, including total contractual obligations of approximately ₩86,156 billion.
- The effect of COVID-19, energy-transition policy, emissions-allowance prices and coal-plant operating restrictions on 2020 results.