Korea Electric Power Corporation (KEPCO) — FY2017 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2017; filed April 30, 2018. The filing is an annual Form 20-F and does not provide a separate Q4-only income statement. Consolidated financial statements are prepared under IFRS as issued by the IASB and reported primarily in Korean won.
Business context
KEPCO is Korea’s integrated electric utility, with substantially all domestic transmission and distribution operations and six wholly owned generation subsidiaries. The Korean Government directly and indirectly owned 51.1% of KEPCO as of March 15, 2018 and regulates electricity tariffs. KEPCO and its subsidiaries owned approximately 70.1% of Korea’s generation capacity at December 31, 2017 and sold 507,746 GWh of electricity during the year.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Sales | ₩59,336 billion | ₩59,763 billion | Down 0.7% |
| Gross profit | ₩7,237 billion | ₩14,213 billion | Down 49.1% |
| Gross margin | 12.2% | 23.8% | Down 11.6 percentage points |
| Operating profit | ₩5,320 billion | ₩12,296 billion | Down 56.7% |
| Operating margin | 9.0% | 20.6% | Down 11.6 percentage points |
| Profit for the period | ₩1,441 billion | ₩7,148 billion | Down 79.8% |
| Net margin | 2.4% | 12.0% | Down 9.6 percentage points |
| Profit attributable to owners | ₩1,299 billion | ₩7,049 billion | Down 81.6% |
| Basic EPS | ₩2,023 | ₩10,980 | Down 81.6% |
| Net cash from operating activities | ₩11,250 billion | ₩16,521 billion | Down 31.9% |
| Cash and cash equivalents | ₩2,370 billion | ₩3,051 billion | Down 22.3% |
| Total assets | ₩181,789 billion | ₩177,837 billion | Up 2.2% |
| Total equity | ₩72,965 billion | ₩73,051 billion | Down 0.1% |
- Electricity sales increased 0.7% to ₩55,773 billion, while electricity volume sold increased 2.2% to 507,746 GWh. The average unit sales price declined 1.5% to ₩109.53/kWh, primarily after residential tariff restructuring effective January 1, 2017.
- Cost of sales increased 14.4% to ₩52,099 billion. Power purchases rose 32.6% to ₩14,264 billion, raw materials used rose 18.2% to ₩15,925 billion, and depreciation increased 8.7% to approximately ₩8,393 billion excluding nuclear-fuel amortization.
- Fuel costs were ₩16,524 billion, representing 31.7% of cost of sales and 27.8% of sales. Coal, uranium, LNG and oil represented approximately 53.3%, 34.8%, 8.7% and 1.2% of fuel requirements, respectively, based on electricity generated by KEPCO’s subsidiaries.
- Finance expense was ₩3,128 billion and finance income was ₩1,531 billion. Net finance expense increased to approximately ₩1,597 billion from ₩1,646 billion in 2016, based on management’s presentation.
- Total borrowings and debt securities increased to ₩54,747 billion from ₩53,639 billion. Net borrowings and debt securities were ₩52,378 billion, and the debt-to-equity ratio was 71.78%, compared with 69.25% in 2016.
- Current liabilities exceeded current assets, producing a working capital deficit of approximately ₩4,283 billion at year-end, improved from ₩5,031 billion in 2016.
- Capital expenditures for generation, transmission and distribution facilities were ₩13,711 billion. Budgeted capital expenditures were ₩15,816 billion for 2018, ₩17,180 billion for 2019 and ₩17,580 billion for 2020.
- Available liquidity included aggregate credit facilities of ₩3,831 billion and US$1,911 million, reportedly fully available at December 31, 2017. Global medium-term note programs totaled US$13.0 billion, with approximately US$8.9 billion available for future drawdown.
- The company paid a fiscal 2017 dividend of ₩790 per share on April 20, 2018, compared with ₩1,980 per share for fiscal 2016.
Material changes versus the prior comparable period
- Profitability deteriorated sharply as cost inflation substantially exceeded revenue growth. Higher international fuel prices, higher purchased-power costs, increased depreciation and lower average tariffs compressed margins.
- Construction-service revenue declined 20.2% to ₩3,212 billion as the UAE nuclear construction projects progressed, partially offsetting growth in electricity sales.
- Operating cash flow fell ₩5,271 billion, while investing cash usage increased to ₩12,607 billion, primarily reflecting financial-asset acquisitions and continued capital investment.
- Financing cash flow changed from a ₩7,637 billion use in 2016 to a ₩746 billion source in 2017, largely because proceeds from long-term borrowings and debt securities increased.
- Nuclear generation declined to 148,426 GWh from 161,995 GWh, and the nuclear fleet’s average capacity factor was 71.2%. More frequent safety and maintenance inspections contributed to lower utilization.
- Kori Unit 1 was permanently shut down in June 2017. The company also recorded a significant increase in nuclear decommissioning provisions; total decommissioning-related liabilities were approximately ₩15,985 billion at year-end.
- The Won appreciated against the U.S. dollar during 2017, reducing the Won cost of foreign-currency fuel and debt service, while foreign-currency translation effects and derivative valuation remained material.
Outlook, management commentary, risks and unusual items
- The Eighth Basic Plan for Electricity Supply and Demand, announced in December 2017, targets reduced reliance on nuclear and coal, increased LNG and renewable generation, retirement or conversion of certain coal units, and expansion of domestic renewable capacity. Six planned nuclear units were canceled and ten aging nuclear units were not expected to receive life extensions under the plan.
- Management expects substantial continued capital spending and additional borrowing to fund generation, transmission, distribution, renewable-energy and new-energy projects, as well as debt refinancing.
- Fuel-price and tariff risk is central: fuel is largely imported, while electricity rates are government regulated and may not adjust promptly or sufficiently to offset cost increases. Management estimated that a 1% increase in fuel prices would reduce 2018 pre-tax income by approximately ₩165 billion, while a 1% tariff increase would increase it by approximately ₩546 billion.
- Foreign-exchange exposure is significant. Approximately 19.4% of long-term debt, before considering swaps, was denominated in foreign currencies. Management estimated that a 10% Won depreciation against the U.S. dollar and other foreign currencies would increase 2018 unrealized foreign-exchange losses by approximately ₩844 billion.
- Environmental and climate policies are expected to increase compliance costs, including carbon-emissions trading, stricter particulate-matter standards, coal taxation, renewable portfolio requirements and coal-to-LNG conversions. The company’s 2017 RPS compliance was still under evaluation at filing.
- Material contingencies included 565 lawsuits as defendant with aggregate claims of ₩478 billion and 185 lawsuits as plaintiff with claims of ₩691 billion. Recorded provisions for legal claims were ₩74 billion. Separately, 49 ordinary-wage lawsuits against subsidiaries involved aggregate claims of ₩170 billion, against which ₩56 billion was reserved.
- Wolsong Unit 1 continued to face litigation and policy uncertainty. Its year-end property, plant and equipment book value was approximately ₩608 billion and its decommissioning provision was approximately ₩642 billion. An adverse decision could accelerate cash outflows and require additional provisions.
- Construction of Shin-Kori Units 5 and 6 was suspended for three months during a public debate; the company recorded a ₩77 billion provision related to likely suspension costs. Construction design for Shin-Hanul Units 3 and 4 was suspended, with carrying value of approximately ₩159 billion.
- The filing identifies cyberattacks, nuclear safety, environmental liabilities, labor costs, regulatory restructuring, private-sector competition, sanctions exposure related to Iran and Russia, and geopolitical tensions on the Korean Peninsula as material risks.
- KEPCO received an unqualified audit opinion on its consolidated financial statements and an unqualified opinion on internal control over financial reporting as of December 31, 2017.
Most important facts for investors to verify
- Whether fuel-price increases and the government’s tariff policy permit margin recovery in 2018 and later periods.
- The timing, scope and financing of the Eighth Basic Plan, including nuclear retirements, coal conversions, LNG reliance and renewable-capacity additions.
- The refinancing profile for approximately ₩10,748 billion of borrowings and debt securities due within one year under the filing’s maturity analysis.
- The adequacy of liquidity facilities and medium-term note capacity relative to planned capital expenditures and debt maturities.
- Final outcomes and reserve adequacy for ordinary-wage litigation, nuclear-related claims, construction disputes and other contingencies.
- The economic impact of Wolsong Unit 1’s potential shutdown and the suspended or canceled nuclear construction projects.
- Changes in decommissioning, spent-fuel, environmental, RPS and greenhouse-gas provisions and the related cash-flow timing.
- The effect of IFRS 9 and IFRS 15 adoption beginning January 1, 2018; the filing indicates no significant expected revenue impact but anticipates a ₩6.8 billion increase in loss allowances under IFRS 9.