KEPCO Surpasses 80% Return on Overseas Investments...Emerges as Exit Strategy from Deficit Management

Korea Electric Power Corporation (KEPCO), which is recording the largest deficit in history due to delays in electricity rate hikes, has begun seeking an exit strategy through overseas power generation projects. The plan is to accelerate the improvement of its financial structure by increasing the investment recovery rate of major overseas projects while selling high-profit business rights. However, there are concerns that early sales of prime projects could weaken KEPCO's long-term management portfolio, calling for a more cautious approach to business management.

According to the "KEPCO Overseas Business Investment and Recovery Status" obtained by Asia Economy on the 25th through the office of Lee Ju-hwan, a member of the People Power Party, as of February this year, the total cumulative investment in 15 overseas power generation projects KEPCO is pursuing amounted to 2.1482 trillion KRW, of which 1.7237 trillion KRW has been recovered. The recovery rate compared to investment was 80.2%, showing generally favorable conditions; however, five projects recorded a recovery rate below 50%, indicating that profitability varied depending on the region and power generation environment.

Image source Yonhap News

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KEPCO's first overseas power generation project was the Malaya Heavy Oil Power Plant performance restoration and operation project in the Philippines in 1995. The Malaya Power Plant, located 70 km southeast of Manila, is a 650MW (megawatt) heavy oil power plant that served as a major power supply source for Luzon Island in the Philippines. Following the Malaya project, which lit up the southeastern Philippine archipelago, KEPCO officially established a special purpose company (SPC) in the Philippines in 2006 and began diesel power generation projects. This project, located in the Visayas Islands with a capacity of 129MW, had invested a total of 22.7 billion KRW and recovered 109.9 billion KRW as of February this year. The recovery rate compared to total investment was 484%, making it the most profitable overseas power generation project for KEPCO. The coal power plant built in Cebu, Philippines, in 2011 is also a prime project, having invested 188.9 billion KRW and accumulated 432.1 billion KRW (recovery rate 229%). From just these two Philippine power projects, KEPCO invested a total of 211.6 billion KRW and earned 542 billion KRW (256%), establishing them as representative overseas success stories.

Other major overseas cash cow projects for KEPCO with investment recovery rates exceeding 100% include the Saudi Rabigh heavy oil project (128%) in 2013, Mexico Norte 2 combined cycle gas project (118%), Jordan Amman combined cycle gas project (124%) in 2014, and Japan Chitose solar power project (127%) in 2017. Although the expected returns (9-10%) of the Saudi (Rabigh) and Jordan (Amman) projects are lower than those of the two Philippine power projects (16.6%-20%), they have longer remaining project periods of 10-16 years and relatively lower maintenance costs.

Additionally, the Jordan Al Qatrana combined cycle gas project (95%) and the United Arab Emirates (UAE) Shuweihat S3 project (91%), with investments of 111.6 billion KRW, also have recovery rates exceeding 90%, and stable investment recovery is expected until the end of the projects. The recovery rates for the Vietnam Nghi Son 2 coal power project (12%), Guam Mangilao solar power project (17%), and California solar power project (8%) remain around 10%, but considering that these projects started between 2018 and 2022, there is still time to improve profitability. However, KEPCO explained that the California solar power project, which began in March 2018, experienced a 5.6 billion KRW loss in its first year due to abnormal weather and a drop in electricity sales prices, delaying profitability.

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The problem lies in the poor performance of KEPCO's largest overseas investment region, the Shanxi coal-fired power plant in China. The China Shanxi project, which started in 2007, has invested a total of 455.3 billion KRW but has only recovered 90.6 billion KRW as of February this year. The recovery rate is about 20%, the lowest among overseas projects before 2010. The Shanxi coal-fired power plant is located in the largest coal-producing area in China, holding one-third of the country's coal reserves, with a capacity of 8,350MW and an annual coal production capability of 60 million tons. KEPCO is the second-largest shareholder with a 34% stake after China Gemeng International Energy Co., Ltd. KEPCO stated that "the recovery rate was low due to large-scale deficits caused by a nearly twofold increase in coal prices in 2021 and soaring fuel costs." In fact, the Shanxi power plant recorded an operating loss of approximately 459 billion KRW in the 2021 fiscal year. It is also reported that maintenance costs alone amounted to 229 million USD (about 306 billion KRW) last year, increasing the management burden.

The poor profitability of the China Shanxi power plant is considered a negative factor that inevitably causes setbacks in KEPCO's overseas business sales. KEPCO announced a high-intensity financial soundness plan in May last year to reduce the record deficit and decided to sell all its shares in the Shanxi coal-fired power plant, but the sale has been temporarily suspended due to poor project profitability. KEPCO's strategy is to first achieve profitability in the project and then maximize share value through listing on the Chinese stock market. The expected listing time is 2026, but no concrete business improvement scenario has yet been presented.

There are also concerns that the early sale of the Cebu coal power plant in the Philippines could rapidly weaken KEPCO's overseas business competitiveness. KEPCO holds a 76% stake in Cebu Power, which recorded cumulative sales of 1.2931 trillion KRW and net profits of 388.2 billion KRW as of February this year, making it a prime project. The sale of Cebu Power is currently in the final stages, with the selection of the preferred bidder underway. If KEPCO sells Cebu Power, the cumulative recovery amount from overseas projects will decrease by about 25%. An energy industry official said, "While pursuing overseas business sales as part of KEPCO's financial structure improvement, it is necessary to carefully consider the portfolio of core projects and proceed with timing and price negotiations."

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