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Korea Electric Power Corporation -- Moody's: KEPCO's large loss in 2021 highlights challenges with lack of timely cost pass-throughs, a credit negative

Announcement: Moody's: KEPCO's large loss in 2021 highlights challenges with lack of timely cost pass-throughs, a credit negativeGlobal Credit Research - 28 Feb 2022Hong Kong, February 28, 2022 -- Moody's Investors Service says that the announcement on 24th February by Korea Electric Power Corporation (KEPCO, Aa2 stable) of a preliminary consolidated operating loss of KRW5.9 trillion in 2021, which is significantly lower than the operating profit of KRW4.1 trillion in 2020, is credit negative."The deterioration of operating profit indicates that KEPCO's financial metrics will come under strain over the next 12-18 months without tariff increases offsetting higher fuel costs, along with a drop in the costs or a sharp reduction in expansionary capital spending, or both," says Mic Kang, a Moody's Vice President and Senior Credit Officer.The loss was mainly the result of a lack of timely cost pass-throughs amid a rise in costs needed to generate power through its generation subsidiaries, to purchase power generated from independent power producers, and to satisfy environmental compliance.We expect KEPCO's funds from operations (FFO)/adjusted debt to weaken significantly to 6%-10% in 2021-2022, from 18.6% in 2020, as a result of the operating loss and KEPCO's greater reliance on debt to fund capital spending for expansion of transmission and distribution networks, power generation plants and development of renewable sources. KEPCO's reported debt (excluding capital leases) increased to around KRW80.5 trillion at the end of 2021 from KRW69.7 trillion at the end of 2020.KEPCO's financial metrics are likely to recover to a range between 10%-13% in 2023-2024 mainly because of the announced tariff increases in 2022 -- 4.9 won/kilowatt-hour (kWh) each in April and October to compensate for higher input costs and 2.0 won/kWh in April for environmental compliance costs. Additionally, two nuclear reactors with an aggregate capacity of 2.8 gigawatts (GW), whose power generation costs are much cheaper than coal and gas power, are scheduled to start commercial operations in 2022-23.Nonetheless, the expected financial metrics in 2023-2024 will remain marginal for KEPCO's baa2 Baseline Credit Assessment (BCA), which is a component of its rating.Any delays or cancellation of the announced tariff increases will have an adverse impact on KEPCO's financial metrics. In such a scenario, we expect KEPCO's FFO/adjusted debt in 2022 to further decline amid increasing fuel costs. The metrics in 2023-24 will likely then be similar to or below the projected level in 2021. KEPCO's BCA will come under pressure if these levels are sustained.Still, KEPCO's rating will remain resilient against any weakening of its BCA because of a very high likelihood of extraordinary government support.The lack of consistent and timely cost pass-throughs will remain a fundamental credit weakness for KEPCO because of inherently volatile fuel costs; its continuing funding needs to expand power utility facilities and develop renewable sources; and increasing environmental compliance costs.In December 2020, the Ministry of Trade, Industry and Energy of Korea announced a revised tariff system, which allows KEPCO to pass cost movements onto its retail customers within a range of plus or minus 1.0 won to 3.0 won/kWh compared with the retail tariff charged in the previous quarter and a yearly cap of plus or minus 5.0 won/kWh, effective January 2021. KEPCO increased its retail tariff by 3 won/kWh on 1 October 2021, given higher input costs. But KEPCO has been unable to pass the full magnitude of cost increases onto end users, as allowed in the tariff system, mainly because of inflationary concerns.This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. Mic Kang VP - Senior Credit Officer Project & Infrastructure Finance Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Yian Ning Loh Associate Managing Director Project & Infrastructure Finance JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) 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