[In the News: Companies] The '35 Trillion' Bomb About to Explode... Korea Electric Power Corporation (KEPCO) on the Brink

KEPCO's Corporate Bond Issuance Surpasses 25 Trillion Won This Year
Government Receives Proposal for Additional Electricity Rate Hike in Q4
Analysis Suggests Household Bills Must Increase by 80,000 Won
Debt Expected to Rise to 45 Trillion Won Over Next 5 Years

Korea Electric Power Corporation Seoul Headquarters located in Jung-gu, Seoul. [Image source=Yonhap News]

[Asia Economy Sejong=Reporter Lee Jun-hyung] Sales of 31.9921 trillion KRW, operating loss of 13.3033 trillion KRW, and net loss of 10.7617 trillion KRW in the first half of 2022. This is the financial situation of Korea Electric Power Corporation (KEPCO), the largest energy public enterprise in South Korea, which has a peculiar structure where losses accumulate as sales increase.

KEPCO, which recorded its largest deficit since its establishment in the first half of this year, is heading toward a worsening financial structure. This is the result of a ‘reverse margin’ structure where electricity rates fail to keep up with rising fuel costs, causing sales at a loss. The securities industry even predicts that KEPCO could post an annual deficit of up to 35 trillion KRW if this trend continues. This is more than 8 trillion KRW higher than the deficit of 26.6009 trillion KRW reported by KEPCO in its '2022-2026 Mid-to-Long-Term Financial Management Plan' submitted to the Ministry of Economy and Finance at the end of last month. There are even forecasts that by the end of the year, ‘rolling over debt’ through corporate bond issuance may become impossible.

How did KEPCO, once regarded as a blue-chip stock in the stock market, fall into an unprecedented crisis? The core cause of the insolvency is clear. Although the electricity market price (SMP) is soaring due to the sharp rise in international energy prices triggered by the Russia-Ukraine war, electricity rates have not been raised in time. When electricity rates remain the same, KEPCO’s performance worsens as SMP rises. According to the Korea Power Exchange on the 21st, SMP was recorded at 247.47 KRW per kWh as of the previous day (20th), up about 27.08% from 194.74 KRW in the same period last month. SMP has been hitting record highs every day this month. Also, the average SMP last month was 197.74 KRW per kWh, more than double compared to a year ago.

The reverse margin structure of selling electricity at a loss inevitably leads to ‘record-level’ deficits. In the second quarter alone, KEPCO posted a loss of 6.5164 trillion KRW, exceeding last year’s full-year operating loss of 5.8601 trillion KRW. This also surpassed the securities industry’s initial forecast of a 5.3712 trillion KRW deficit for KEPCO in the second quarter.

Since KEPCO is unable to generate proper profits from electricity sales, it has no choice but to increase debt to raise operating funds. As of the 20th of this month, KEPCO’s new corporate bond issuance this year totaled 25.3266 trillion KRW. This is 2.5 times the amount issued last year (about 10.43 trillion KRW). Earlier this year, KEPCO issued 19.32 trillion KRW in new corporate bonds up to last month. This means that over 6 trillion KRW in corporate bonds were newly issued in the past 20 days. At this rate, KEPCO’s new corporate bond issuance is expected to reach around 30 trillion KRW within one to two months.

"Electricity bills must increase by 80,000 KRW per household"

Accordingly, KEPCO has reported to the government that electricity rates must be significantly raised in the fourth quarter. KEPCO recently submitted a proposal to the Ministry of Trade, Industry and Energy to increase the fuel cost adjustment unit price, a component of electricity rates, by 50 KRW per kWh in the fourth quarter. This means that electricity rates must be raised by an additional 50 KRW per kWh for KEPCO to sell electricity without incurring losses in the fourth quarter of this year.

There is also an analysis that electricity bills must increase by 80,000 KRW per household to escape KEPCO’s reverse margin structure. According to data KEPCO submitted to Assemblyman Kim Hoe-jae of the Democratic Party, KEPCO reported that electricity rates must be raised by 261 KRW per kWh next month to eliminate this year’s deficit. This figure was calculated based on Hana Securities’ forecast that KEPCO will post a deficit of 35.4 trillion KRW this year. Typically, if electricity rates rise by 261 KRW per kWh, the electricity bill for a four-person household using an average of 307 kWh per month will increase by more than 80,000 KRW.

However, the Ministry of Trade, Industry and Energy postponed the decision to raise electricity rates in the fourth quarter, which was scheduled to be announced on the 21st. The reason was that consultations with related ministries, including the Ministry of Economy and Finance, had not been completed. It is interpreted that the government is struggling because it is difficult to significantly raise electricity rates amid high inflation. It is reported that inflation authorities such as the Ministry of Economy and Finance oppose KEPCO’s proposal to further increase the fuel cost adjustment unit price.

‘Rolling over debt’ also has limits

The Ministry of Trade, Industry and Energy is also pursuing a plan to increase KEPCO’s corporate bond issuance limit through legal amendments. This is because if electricity rates cannot be raised due to opposition from inflation authorities, KEPCO’s ‘rolling over debt’ may reach its limit. According to the Korea Electric Power Corporation Act, KEPCO’s corporate bond issuance amount cannot exceed twice the sum of its capital and reserves (about 45.9 trillion KRW). Although KEPCO’s corporate bond issuance balance was 58.2784 trillion KRW as of the 20th, which seems to have room, it must be considered that reserves decrease by the amount of net loss. If KEPCO posts a deficit of 35 trillion KRW as forecasted by Hana Securities this year, the corporate bond issuance balance may be blocked starting early next year.

KEPCO has also prepared high-intensity self-rescue measures in case electricity rates are not raised in time. It plans to secure liquidity worth 14.2 trillion KRW over the next five years through real estate sales and management efficiency. KEPCO has already begun the process of selling shares of its subsidiary KEPCO Engineering & Construction, and is also considering splitting and selling the KEPCO Art Center in Seocho-gu, Seoul.

However, the prevailing view is that both the amendment to the Korea Electric Power Corporation Act being pursued by the Ministry of Trade, Industry and Energy and KEPCO’s self-rescue measures are merely desperate measures. The fundamental solution to KEPCO’s distorted financial structure is essentially an increase in electricity rates.

Meanwhile, KEPCO’s debt is expected to increase by about 45 trillion KRW over the next five years. In the '2022-2026 Mid-to-Long-Term Financial Management Plan' submitted to the Ministry of Economy and Finance at the end of last month, KEPCO forecasted that its consolidated debt would rise from 145.797 trillion KRW last year to 190.869 trillion KRW in 2026, an increase of 45.072 trillion KRW. During the same period, KEPCO’s annual interest expenses are expected to increase from 1.9145 trillion KRW to 3.5192 trillion KRW. KEPCO expects to post an operating profit of 5.5233 trillion KRW in 2026, but more than half of that will have to be spent on interest expenses.