KEPCO and Gas Corporation Face Growing 'Debt Bomb' Due to Delayed Rate Hikes

As the energy price hike for the second quarter of this year is delayed by more than a month, the accumulated deficits of Korea Electric Power Corporation (KEPCO) and Korea Gas Corporation (KOGAS) are growing larger. This is due to continuing operations through corporate bond issuance amid difficulties in securing cash. The scale of these increased corporate bonds has already reached tens of trillions of won, resulting in a monthly interest burden amounting to hundreds of millions of won. Experts point out that a minimum price increase must be urgently decided to prevent the deficit status of energy public enterprises from expanding further.

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KEPCO’s Accumulated Corporate Bonds Reach 77 Trillion Won...Concerns Over Exceeding Limit

According to the energy industry on the 3rd, KEPCO’s accumulated corporate bond scale as of last month totaled 77.153 trillion won. This includes 69.37 trillion won in long-term won-denominated bonds, 2.89 trillion won in short-term won-denominated bonds, and 4.893 trillion won in foreign currency bonds. This represents 73.7% of KEPCO’s corporate bond issuance limit (104.6 trillion won). This was possible thanks to the amendment of the KEPCO Act at the end of last year, which expanded the bond issuance limit (sum of reserves and capital) from twice to five times. With the delay in price normalization, KEPCO has newly issued 9.55 trillion won in corporate bonds from the beginning of this year until last month. The annual corporate bond issuance scale rose from 3.52 trillion won in 2020 to 11.77 trillion won in 2021, and surged to 31.8 trillion won last year due to rising energy prices.

The problem is that if this trend continues, the KEPCO Act will need to be amended again within a year to expand the issuance limit. If the deficit continues until the end of this year, the net loss will increase, causing the issuance limit to shrink further. KEPCO’s possible new bond issuance this year is 27.5 trillion won. If all of this is used, KEPCO will exceed the current bond issuance limit under the law by March next year.

The accumulated corporate bonds also increase the interest burden. KEPCO incurred 1.4 trillion won in interest last year from bond issuance. This year, interest is expected to expand to around 3 trillion won. This is because KEPCO’s negative margin structure continues, where the more electricity it sells, the larger the deficit becomes. According to the Monthly Electricity Statistics Report, in February, the electricity purchase price was 167.2 won per kWh (kilowatt-hour), while the selling price was 152.7 won per kWh, resulting in a deficit of 14.5 won per kWh. Without the electricity wholesale price (SMP) cap system implemented last month, the deficit would have been even larger.

Following the heating cost bomb, concerns about a 'cooling cost' bomb this summer are also negative factors. KEPCO’s burden increases further in the summer, when electricity demand is highest, in a situation where the more it sells, the larger the deficit becomes. In fact, KEPCO issued 6.23 trillion won in corporate bonds over three months from June to August last year to continue deficit management. A KEPCO official said, "If electricity demand increases in summer without a price hike, the deficit will grow larger, and we will have to increase bond issuance to maintain management. Issuance of foreign currency bonds is also being considered depending on the situation." The accumulated deficit is worsening the management structure as well. According to financial information provider FnGuide, KEPCO’s debt ratio is estimated to expand from 459.06% last year to 608.86% this year.

Gas Prices More Urgent Than Electricity Rates…KOGAS Bond Issuance Tripled Compared to Last Year

The rapid pace of corporate bond issuance by KOGAS is also a cause for concern. According to the Korea Securities Depository’s Securities Information Portal, KOGAS has issued a cumulative 1.47 trillion won in corporate bonds (special bonds) over four months this year. This is 2.8 times the amount issued during the same period last year (510 billion won).

KOGAS’s bond issuance limit this year is 39.9 trillion won, which is five times the sum of its capital and reserves. It was set at twice in 1986, increased to four times by a legal amendment in 1998, and raised to five times by another amendment at the end of last year. Despite ongoing deficits, KOGAS had no choice but to continue purchasing gas, leading to the increase in the limit for the first time in 24 years. According to the Korea Securities Depository’s Securities Information Portal SaveRO, as of last month, KOGAS’s total accumulated issued bonds are estimated at about 28 trillion won, which is 70.6% of the issuance limit. Moreover, the industry expects that if gas prices are not raised, unpaid receivables, which approached 9 trillion won last year, could increase to 12.9 trillion won by the end of this year.

Fortunately, the domestic liquefied natural gas (LNG) import price, which recorded the highest level since the Korea Customs Service started compiling export-import statistics in 2000 at $1,470.43 per ton in September last year, has fallen to $916.15 (-37.7%) in March this year, showing signs of stabilization. The problem is that external uncertainties, such as the production cut decision by the Organization of the Petroleum Exporting Countries Plus (OPEC+), still remain, meaning prices could rise at any time. Considering that LNG is entirely imported, experts worry that KOGAS’s management condition could be more precarious than KEPCO’s.

Professor Yoo Seung-hoon of the Department of Future Energy Convergence at Seoul National University of Science and Technology said, "Electricity can be supplied over 60% through relatively cheap nuclear and coal-fired power plants, but gas inevitably follows international oil prices." He diagnosed, "KOGAS may reach its corporate bond issuance limit before KEPCO." Although KEPCO’s deficit last year was 32.6 trillion won and KOGAS’s unpaid receivables were 9 trillion won, making KEPCO’s situation appear more problematic in absolute terms, considering actual sales and bond issuance limits comprehensively, KOGAS’s situation is more serious.

KOGAS, however, maintains that there is still room within its bond issuance limit. A company official said, "International oil prices and exchange rates are lower than last year, so total bond issuance is likely to decrease compared to last year." However, they agreed that financial structure normalization is urgent to prepare for potential variables such as rising international oil prices due to the prolonged Ukraine-Russia war. There are concerns that if price normalization is delayed, the heating cost bomb could recur this winter.

Meanwhile, the energy industry expects that the scope of electricity and gas price hikes will be decided as early as next week. On the 1st, Lee Chang-yang, Minister of Trade, Industry and Energy, said, "We plan to finalize adjustments soon, based on the self-help efforts of KEPCO and KOGAS." The government and ruling party are also reportedly in final coordination on the scale of the price hike, having recently agreed on the need for energy price increases.

This content was produced with the assistance of AI translation services.