Credit Risks Loom for Korean Utility Hooked on Coal, Study Says

(Bloomberg) -- Korea Electric Power Corp., a state utility hammered by record operating losses, is facing growing credit risks as heavy dependence on fossil fuels exacerbates its woes, according to a research group. 

Locally known as Kepco, South Korea’s monopoly power distributor has insufficient cash to cover maturing debts and is at risk of default in the absence of government intervention, according to the Institute for Energy Economics and Financial Analysis. Kepco sold a record amount of won bonds this year even as it grapples with losses that are set to exceed 26 trillion won ($18 billion) for 2022.

Yields on Kepco’s top-rated local-currency bonds surged to a 14-year high last month, reflecting investor concerns over excess issuances and deteriorating finances. Kepco needs to accelerate its transition to clean power and cut dependence on fossil fuels that have made the utility vulnerable to high and volatile coal and gas prices, IEEFA said. 

“For many years at Kepco, coal has been deemed as a reliable earnings generator,” Christina Ng and Hazel Ilango wrote in the report. “It failed to anticipate surging coal purchase price, despite its impact on Kepco’s earnings and overall market trends. This has led Kepco to take its time with renewable buildout, even as renewable power generation costs dropped significantly over the last decade.”

Despite soaring fuel costs, Kepco has largely refrained from increasing electricity rates in a bid to shield consumers, weighing on profitability. That has prompted it to raise even more funds and sell assets to improve finances. 

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With fossil fuels accounting for about 65% of electricity generation, Kepco has faced mounting pressure from activist investors and climate groups to overhaul its energy mix, but it has struggled to lay down a clear path. South Korea has vowed to reach carbon neutrality by mid-century, yet renewables account for less than 8% of the nation’s power generation.

Still, Kepco has been a regular issuer of green bonds, selling a total of $1.6 billion of green US dollar notes so far this year despite owning a heavy share of dirty fuel assets both at home and abroad.

The yield on AAA-rated Kepco’s three-year won-denominated notes rose to 5.5% late last month, the highest since 2008, according to data from Korea Financial Investment Association. They yielded 5.492% on Tuesday, 5 basis points higher than the average yield on AA- rated non-state company notes.

“Kepco has benefited from the sovereign ratings’ umbrella and received a final rating six to eight notches higher than its baseline credit assessment, thus enabling it to go from a speculative investment to high investment grade,” Ilango said. 

The government plans to lift the debt-sale caps for Kepco and Korea Gas Corp.’s to prevent them from slipping into a liquidity crisis, the finance ministry said in a statement last month. Kepco is currently allowed to issue as much as twice the combined amount of its capital and reserves. 

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