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KEP Korea Electric Power

Table of Contents

As filed with the Securities and Exchange Commission on April 29, 2020

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form20-F

 

 

(Mark One)

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from            to            

Commission File Number:001-13372

 

 

KOREA ELECTRIC POWER CORPORATION

(Exact name of registrant as specified in its charter)

 

N/A The Republic of Korea
(Translation of registrant’s name into English) (Jurisdiction of incorporation or organization)

 

 

55Jeollyeok-ro,Naju-si,Jeollanam-do, 58322, Korea

(Address of principal executive offices)

 

 

Sihyung Park, +82 61 345 4213, sihyung.park@kepco.co.kr, +82 61 345 4299

55Jeollyeok-ro,Naju-si,Jeollanam-do, 58322, Korea

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Trading Symbol(s):

 

Name of each exchange on which registered:

Common stock, par value Won 5,000 per share KEP New York Stock Exchange*

American depositary shares, each representing

one-half of share of common stock

 

KEP

 New York Stock Exchange  

 

*

Not for trading, but only in connection with the listing of American depositary shares on the New York Stock Exchange, pursuant to the requirements of the Securities and Exchange Commission.

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

One Hundred Year 7.95%Zero-to-Full Debentures, due April 1, 2096

6% Debentures due December 1, 2026

7% Debentures due February 1, 2027

634% Debentures due August 1, 2027

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period

covered by the annual report:

641,964,077 shares of common stock, par value of Won 5,000 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☑    No  ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☑

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:    Yes  ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):    Yes  ☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, and “emerging growth company” in Rule12b-2 of the Exchange Act.

Large accelerated filer ☑                    Accelerated filer ☐                    Non-accelerated filer ☐                     Emerging Growth Company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☑

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  ☐                International Financial Reporting Standards as issued by the International Accounting Standards Board  ☑            Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐    No  ☑

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ☐    No  ☐

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page 

PART I

   2 

ITEM 1.

 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   2 

ITEM 2.

 OFFER STATISTICS AND EXPECTED TIMETABLE   2 

ITEM 3.

 KEY INFORMATION   2 
 Item 3.A.  Selected Financial Data   2 
 Item 3.B.  Capitalization and Indebtedness   4 
 Item 3.C.  Reasons for the Offer and Use of Proceeds   4 
 Item 3.D.  Risk Factors   4 

ITEM 4.

 INFORMATION ON THE COMPANY   29 
 Item 4.A.  History and Development of the Company   29 
 Item 4.B.  Business Overview   30 
 Item 4.C.  Organizational Structure   79 
 Item 4.D.  Property, Plant and Equipment   83 

ITEM 4A.

 UNRESOLVED STAFF COMMENTS   84 

ITEM 5.

 OPERATING AND FINANCIAL REVIEW AND PROSPECTS   84 
 Item 5.A.  Operating Results   84 
 Item 5.B.  Liquidity and Capital Resources   101 
 Item 5.C.  Research and Development, Patents and Licenses, etc.   106 
 Item 5.D.  Trend Information   107 
 Item 5.E.  Off-Balance Sheet Arrangements   107 
 Item 5.F.  Tabular Disclosure of Contractual Obligations   107 

ITEM 6.

 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   117 
 Item 6.A.  Directors and Senior Management   117 
 Item 6.B.  Compensation   120 
 Item 6.C.  Board Practices   120 
 Item 6.D.  Employees   121 
 Item 6.E.  Share Ownership   122 

ITEM 7.

 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   122 
 Item 7.A.  Major Shareholders   122 
 Item 7.B.  Related Party Transactions   122 
 Item 7.C.  Interests of Experts and Counsel   123 

ITEM 8.

 FINANCIAL INFORMATION   123 
 Item 8.A.  Consolidated Statements and Other Financial Information   123 
 Item 8.B.  Significant Changes   126 

ITEM 9.

 THE OFFER AND LISTING   126 
 Item 9.A.  Offer and Listing Details   126 
 Item 9.B.  Plan of Distribution   128 
 Item 9.C.  Markets   128 
 Item 9.D.  Selling Shareholders   131 
 Item 9.E.  Dilution   131 
 Item 9.F.  Expenses of the Issue   131 

ITEM 10.

 ADDITIONAL INFORMATION   132 
 Item 10.A.  Share Capital   132 
 Item 10.B.  Memorandum and Articles of Incorporation   132 
 Item 10.C.  Material Contracts   139 
 Item 10.D.  Exchange Controls   139 
 Item 10.E.  Taxation   144 
 Item 10.F.  Dividends and Paying Agents   155 
 Item 10.G.  Statements by Experts   155 

 

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     Page 
 Item 10.H.  Documents on Display   155 
 Item 10.I.  Subsidiary Information   156 

ITEM 11.

 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   156 

ITEM 12.

 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   161 
 Item 12.A.  Debt Securities   161 
 Item 12.B.  Warrants and Rights   161 
 Item 12.C.  Other Securities   162 
 Item 12.D.  American Depositary Shares   162 

PART II

   164 

ITEM 13.

 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   164 

ITEM 14.

 

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

   164 

ITEM 15.

 CONTROLS AND PROCEDURES   164 

ITEM 16.

 [RESERVED]   165 

ITEM 16.A.

 AUDIT COMMITTEE FINANCIAL EXPERT   165 

ITEM 16.B.

 CODE OF ETHICS   165 

ITEM 16.C.

 PRINCIPAL AUDITOR FEES AND SERVICES   165 

ITEM 16.D.

 EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE   166 

ITEM 16.E.

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

   166 

ITEM 16.F.

 CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT   166 

ITEM 16.G.

 CORPORATE GOVERNANCE   167 

ITEM 16.H.

 MINE SAFETY DISCLOSURE   174 

PART III

   175 

ITEM 17.

 FINANCIAL STATEMENTS   175 

ITEM 18.

 FINANCIAL STATEMENTS   175 

ITEM 19.

 EXHIBITS   175 

 

 

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CERTAIN DEFINED TERMS AND CONVENTIONS

All references to “Korea” or the “Republic” in this annual report on Form20-F, or this annual report, are references to the Republic of Korea. All references to the “Government” in this annual report are references to the government of the Republic. All references to “we,” “us,” “our,” “ours,” the “Company” or “KEPCO” in this annual report are references to Korea Electric Power Corporation and, as the context may require, its subsidiaries, and the possessive thereof, as applicable. All references to “the Ministry of Trade, Industry and Energy” and “the Ministry of Economy and Finance” include the respective predecessors thereof. All references to “tons” are to metric tons, equal to 1,000 kilograms, or 2,204.6 pounds. Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding. All references to “IFRS” in this annual report are references to the International Financial Reporting Standards as issued by the International Accounting Standard Board. Unless otherwise stated, all of our financial information presented in this annual report has been prepared on a consolidated basis and in accordance with IFRS.

In addition, in this annual report, all references to:

 

  

“EWP” are to Korea East-West Power Co., Ltd.,

 

  

“KHNP” are to Korea Hydro & Nuclear Power Co., Ltd.,

 

  

“KOMIPO” are to Korea Midland Power Co., Ltd.,

 

  

“KOSEP” are to Korea South-East Power Co., Ltd.,

 

  

“KOSPO” are to Korea Southern Power Co., Ltd., and

 

  

“KOWEPO” are to Korea Western Power Co., Ltd.,

each of which is our wholly-owned generation subsidiary.

FORWARD-LOOKING STATEMENTS

This annual report includes “forward-looking statements” (as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934), including statements regarding our expectations and projections for future operating performance and business prospects. The words “believe,” “expect,” “anticipate,” “estimate,” “project” and similar words used in connection with any discussion of our future operation or financial performance identify forward-looking statements. In addition, all statements other than statements of historical facts included in this annual report are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this annual report.

This annual report discloses, under the caption Item 3.D. “Risk Factors” and elsewhere, important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”). All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements.

 

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PART I

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3.

KEY INFORMATION

Item 3.A. Selected Financial Data

The selected consolidated financial data set forth below as of and for the years ended December 31, 2015, 2016, 2017, 2018 and 2019 have been derived from our audited consolidated financial statements which have been prepared in accordance with IFRS.

You should read the following data with the more detailed information contained in Item 5. “Operating and Financial Review and Prospects” and our consolidated financial statements included in Item 18. “Financial Statements.” Historical results do not necessarily predict future results.

Consolidated Statement of Comprehensive Income (Loss) Data

 

   2015  2016  2017  2018  2019  2019 
   (in billions of Won and millions of US$, except per share data)(1) 

Sales

  58,582  59,763  59,336  60,033  58,568  $50,686 

Cost of sales

   45,458   45,550   52,099   58,208   57,780   50,004 

Gross profit

   13,124   14,213   7,237   1,825   788   682 

Selling and administrative expenses

   2,153   2,639   2,763   2,628   2,670   2,311 

Other income, net

   699   652   689   739   756   654 

Other gains (losses), net

   8,611   70   157   (621  (582  (503

Operating profit (loss)

   20,281   12,296   5,320   (685  (1,708  (1,478

Finance expense, net

   (1,832  (1,646  (1,596  (1,674  (1,772  (1,534

Income (loss) before income taxes

   18,656   10,513   3,614   (2,001  (3,266  (2,826

Income tax (expense) benefit

   (5,239  (3,365  (2,173  826   1,002   867 

Profit (loss) for the period

   13,416   7,148   1,441   (1,175  (2,264  (1,959

Other comprehensive income (loss)

   34   (2  (95  (107  135   117 

Total comprehensive income (loss)

   13,450   7,146   1,346   (1,282  (2,128  (1,842

Profit (loss) attributable to:

       

Owners of the Company

   13,289   7,048   1,299   (1,315  (2,346  (2,030

Non-controlling interests

   127   100   142   140   82   71 

Total comprehensive income (loss) attributable to:

       

Owners of the Company

   13,308   7,042   1,230   (1,426  (2,239  (1,938

Non-controlling interests

   142   104   116   144   111   96 

Earnings (loss) per share

       

Basic(2)

   20,701   10,980   2,023   (2,048  (3,654  (3.16

Earnings (loss) per ADS

       

Basic(2)

   10,351   5,490   1,012   (1,024  (1,827  (1.58

Dividends per share

   3,100   1,980   790   —     —     —   

 

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Consolidated Statements of Financial Position Data

 

  As of December 31, 
  2015  2016  2017  2018  2019  2019 
  (in billions of Won and millions of US$, except share and per share data)(1) 

Net working capital deficit(3)

 (686 (5,031 (4,283 (2,096 (4,749 $(4,110) 

Property, plant and equipment, net

  141,361   145,743   150,882   152,743   164,702   142,537 

Total assets

  175,257   177,837   181,789   185,249   197,598   171,006 

Total shareholders’ equity

  67,942   73,051   72,965   71,093   68,889   59,618 

Equity attributable to owners of the Company

  66,634   71,724   71,682   69,744   67,496   58,412 

Non-controlling interests

  1,308   1,327   1,283   1,349   1,393   1,206 

Share capital

  3,210   3,210   3,210   3,210   3,210   2,778 

Number of common shares as adjusted to reflect any changes in capital stock

  641,964,077   641,964,077   641,964,077   641,964,077   641,964,077   641,964,077 

Long-term debt (excluding current portion)(4)

  50,907   44,700   45,624   53,073   59,019   51,077 

Other long term liabilities(5)

  33,697   35,347   39,776   39,242   45,457   39,340 

 

Notes:

 

(1)

The financial information denominated in Won as of and for the year ended December 31, 2019 has been translated into U.S. dollars at the exchange rate of Won 1,155.5 to US$1.00, which was the Noon Buying Rate as of December 31, 2019.

(2)

Basic earnings (loss) per share are calculated by dividing net income available to holders of our common shares by the weighted average number of common shares issued and outstanding for the relevant period. Basic earnings (loss) per ADS have been computed as if all of our issued and outstanding common shares are represented by ADSs during each of the years presented. Each ADS representsone-half of our common share. Dilutive earnings (loss) per share were the same as basic earnings (loss) per share for the years ended December 31, 2015 through 2019 since there were no potential dilutive instruments.

(3)

Net working capital is defined as current assets minus current liabilities. For the periods indicated, current liabilities exceeded current assets, which resulted in working capital deficit for such periods.

(4)

Long-term debt, net consists of long-term borrowings and debt securities (excluding the current portions but including issue discounts and premiums) without taking into consideration of swap transactions.

(5)

Other long-term liabilities consist of total non-current liabilities of our consolidated financial statements included in this annual report minus long-term debt (excluding current portion) of this table.

Currency Translations and Exchange Rates

In this annual report, unless otherwise indicated, all references to “Won,” “KRW” or “₩” are to the currency of Korea, all references to “U.S. dollars,” “Dollars,” “USD”, “$” or “US$” are to the currency of the United States of America; all references to “Euro” or “€” are references to the currency of the European Union; all references to “Yen” or “¥” are references to the currency of Japan; all references to “A$” are to the currency of Australia; and all references to “RMB” are to the currency of the People’s Republic of China. Unless otherwise indicated, all translations from Won to U.S. dollars were made at Won 1,155.5 to US$1.00, which was the noon buying rate of the Federal Reserve Board (the “Noon Buying Rate”) in effect as of December 31, 2019, which rates are available on the H.10 statistical release of the Federal Reserve Board. On April 17, 2020, the Noon Buying Rate was Won 1,217.8 to US$1.00. The exchange rate between the U.S. dollar and Korean Won may be highly volatile from time to time and no representation is made that the Won or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Won, as the case may be, at any particular rate or at all.

 

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The following table sets forth, for the periods and dates indicated, certain information concerning the Noon Buying Rate in Won per US$1.00.

 

Year Ended December 31,

  At End
of
Period
   Average(1)   High   Low 
   (Won per US$1.00) 

2015

   1,169.3    1,133.7    1,196.4    1,063.0 

2016

   1,203.7    1,160.5    1,242.6    1,090.0 

2017

   1,067.4    1,141.6    1,207.2    1,067.4 

2018

   1,112.9    1,099.3    1,141.7    1,054.6 

2019

   1,155.5    1,165.8    1,220.7    1,111.8 

October

   1,169.1    1,183.4    1,205.5    1,163.0 

November

   1,181.3    1,167.3    1,181.3    1,154.4 

December

   1,155.5    1,174.7    1,194.5    1,155.5 

2020 (through April 17)

   1,217.8    1,198.9    1,267.3    1,156.3 

January

   1,191.3    1,167.5    1,192.0    1,156.3 

February

   1,214.9    1,195.3    1,218.5    1,179.0 

March

   1,218.9    1,218.2    1,267.3    1,181.1 

April (through April 17)

   1,217.8    1,222.5    1,230.6    1,211.7 

 

Source: Federal Reserve Board

Note:

 

(1)

The average rates for annual and interim periods were calculated by taking the simple average of the Noon Buying Rates on the last day of each month during the relevant period. The average rates for the monthly periods (or a portion thereof) were calculated by taking the simple average of the daily Noon Buying Rates during the relevant month (or a portion thereof).

Item 3.B. Capitalization and Indebtedness

Not Applicable

Item 3.C. Reasons for the Offer and Use of Proceeds

Not Applicable

Item 3.D. Risk Factors

Our business and operations are subject to various risks, many of which are beyond our control. If any of the risks described below actually occurs, our business, financial condition or results of operations could be seriously harmed.

Risks Relating to KEPCO

Increases in fuel prices will adversely affect our results of operations and profitability as we may not be able to pass on the increased cost to customers at a sufficient level or on a timely basis.

In 2019, fuel costs constituted 31.6% of our cost of sales, and the ratio of fuel costs to our sales was 31.2%. Our generation subsidiaries purchase substantially all of the fuel that they use (except for anthracite coal) from suppliers outside Korea at prices determined in part by prevailing market prices in currencies other than Won. For example, most of the bituminous coal requirements (which accounted for approximately 51.1% of our fuel requirements in 2019 in terms of electricity output) are imported principally from Indonesia, Australia, Russia and, to a lesser extent, South Africaand others, which accounted for approximately 29%, 37%, 15%, 5% and

 

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14%, respectively, of the annual bituminous coal requirements of our generation subsidiaries in 2019. Approximately 81% of the bituminous coal requirements of our generation subsidiaries in 2019 were purchased under long-term contracts and the remaining 19% from the spot market. Pursuant to the terms of our long-term supply contracts, prices are adjusted periodically based on prevailing market conditions. In addition, our generation subsidiaries purchase a significant portion of their fuel requirements under contracts with limited duration. See Item 4.B. “Business Overview—Fuel.”

The prices of our main fuel types, namely, bituminous coal, oil and liquefied natural gas, or LNG, fluctuate, sometimes significantly, in tandem with their international market prices. For example, the average weekly spot price of “free on board” Newcastle coal 6000 GAR published by Bloomberg (Bloomberg Ticker: COASNE60) decreased from US$107.53 per ton in 2018 to US$77.49 per ton in 2019 and to US$69.48 per ton as of March 30, 2020. The prices of oil and LNG are substantially dependent on the price of crude oil, and according to Bloomberg (Bloomberg Ticker: PGCRDUBA), the average daily spot price of Dubai crude oil decreased from US$69.30 per barrel in 2018 to US$63.22 per barrel in 2019 and to US$22.51 per barrel as of March 30, 2020. Furthermore, because the prices of LNG are dependent on the price of crude oil, an increase in such fuel prices can result in an increase in the prices of LNG, which, in turn, affect the cost of purchasing electricity from independent power producers. We cannot assure you that fuel prices will remain stable or will not significantly increase in the remainder of 2020 or thereafter. In addition, effective from January 1, 2020, the International Maritime Organization regulation referred to as IMO 2020 mandated, among other requirements, a reduction in the fuel sulfur content cap from 3.5% to 0.5%. While the effects of new environmental regulations, such as IMO 2020, are difficult to predict, such regulations may significantly increase the operating cost of the shipping lines, in which the increased costs are expected to pass on these additional costs onto customers like us via higher freight rates. If fuel prices increase substantially in the future within a short span of time, our generation subsidiaries may be unable to secure adequate fuel supplies at prices commercially acceptable to them. In addition, any significant interruption or delay in the supply of fuel, bituminous coal in particular, from any of their suppliers may cause our generation subsidiaries to purchase fuel on the spot market at prices higher than the prices available under existing supply contracts, which would result in an increase in fuel costs.

Because the Government regulates the rates we charge for the electricity we sell to our customers (see Item 4.B. “Business Overview—Sales and Customers—Electricity Rates”), our ability to pass on fuel and other cost increases to our customers is limited. If fuel prices increase rapidly and substantially and the Government, out of concern for inflation or for other reasons, maintains the current level of electricity tariff or does not increase it to a level to sufficiently offset the impact of high fuel prices, the fuel price increases will negatively affect our profit margins or even cause us to suffer operating and/or net losses, and our business, financial condition, results of operations and cash flows would suffer.

The Government may also set or adjust electricity tariff rates that may not be necessarily responsive to fuel price movements. For example, effective on January 1, 2017, the Government made several adjustments to the existing rate structure in order to ease the burden of electricity tariff on residential consumers. The progressive rate structure applicable to the residential sector, which applies a gradient of increasing tariff rates for heavier electricity usage, was changed from asix-tiered structure with the highest rate being no more than 11.7 times the lowest rate (which gradient system has been in place since 2005) into a three-tiered structure with the highest rate being no more than three times the lowest rate, in order to reflect the changes in the pattern of electricity consumption and reduce the electricity charges payable by consumers. Additionally, a new tariff structure was implemented to encourage energy saving by offering rate discounts to residential consumers that voluntarily reduce electricity consumption while charging special high rates to residential consumers with heavy electricity consumption during peak usage periods in the summer and the winter. Further, during July and August 2018, the Government reduced residential electricity charges by temporarily relaxing the application of the current tariff structure and offering higher rate discounts to economically or otherwise disadvantaged customers to ease the burden on households that have significantly increased their use of air conditioners during a heatwave. Subsequently, a joint task force team, consisting of industry experts, scholars and government officials, was formed, which announced a proposal for amending the current tariff structure aimed to lower electricity

 

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rates for households during the summer. As a result, in July 2019, the residential electricity tariff rate system was amended to expand the usage ceiling for the first two tiers of rates (from 200 kilowatts to 300 kilowatts for the first tier and from 400 kilowatts to 450 kilowatts for the second tier) applied during July and August each year. Although the rate discounts offered to residential consumers who voluntarily reduced electricity consumption and those offered to traditional wet markets were abolished the rate discount for electric vehicles will be gradually terminated in phases by June 2022, there can be no assurance that other potential future adjustments in electricity tariff rates and rate discount will not have an adverse impact on our business, results of operations, financial condition and profitability.

In addition, partly because the Government may have to undergo a lengthy deliberation process to approve an increase in electricity tariff, which represents a key component of the consumer price index, the electricity tariff may not be adjusted to a level sufficient to ensure a fair rate of return to us in a timely manner or at all, and we cannot assure that any future tariff increase by the Government will be sufficient to fully offset the adverse impact on our results of operations from current or potential rises in fuel costs. For example, the net losses between 2018 and first half of 2019, were largely due to sustained rises in fuel costs that were neither timely nor sufficiently offset by a corresponding rise in electricity tariff rates. If fuel costs increase and the Government maintains the current level of electricity tariff and does not increase it to a level to sufficiently offset the impact of rising fuel costs, our operating results, profit margins, business, financial condition and cash flows may be adversely affected. On the other hand, if fuel prices decrease, the public may demand a corresponding decrease in electricity tariff rates, and as a result the Government may decrease electricity tariff rates; however, we cannot assure you that the resulting tariff rate reduction will not be excessive and thus have a detrimental effect on our profit margins, results of operations or cash flows or that, if the fuel prices were to rise again subsequent to the tariff reduction, the tariff rates would be further adjusted upwards in a timely manner, in sufficient amounts or at all so as to fully offset the adverse impact from the increase in fuel prices.

We plan to prepare a proposition for a sustainable tariff system designed to mitigate the financial burden on us. Though the timeline is subject to change, we are tentatively aiming to prepare the proposition by the first half of 2020, which will include (1) a reasonable adjustment of the rate discount applicable to the residential customers with low electricity usage and (2) an introduction of the tariff system to the residential sector where the rates change depending on the demand in a given season or time (namely, the “time-of-use tariff”). However, it is difficult to predict when and whether the Government will increase tariff rates, and, if the adjustment occurs, by how much and which classes of customers will be affected, as various factors are considered in making such adjustments, including operating costs for supplying electricity, fuel prices, foreign exchange rates, the effect of electricity tariff on inflation, efficiency of national energy consumption and consumer welfare.

The Government may adopt policy measures to substantially restructure the Korean electric power industry or our operational structure, which may have a material adverse effect on our business, operations and profitability.

From time to time, the Government considers various policy initiatives to foster efficiency in the Korean electric power industry, and at times have adopted policy measures that have substantially modified our business and operations. For example, in January 1999, with the aim of introducing greater competition in the Korean electric power industry and thereby improving its efficiency, the Government announced a restructuring plan for the Korean electric power industry, or the Restructuring Plan. For a detailed description of the Restructuring Plan, see Item 4.B. “Business Overview—Restructuring of the Electric Power Industry in Korea.” As part of this initiative, in April 2001 the Government established the Korea Power Exchange to enable the sale and purchase of electricity through a competitive bidding process, established the Korea Electricity Commission to ensure fair competition in the Korean electric power industry, and, in order to promote competition in electricity generation, split off our electricity generation business to form one nuclear generation company and fivenon-nuclear generation companies, in each case, to be wholly owned by us. In 2002, the Government introduced a plan to privatize one of our fivenon-nuclear generation subsidiaries, but this plan was suspended indefinitely in 2004 due to prevailing market conditions and other policy considerations.

 

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In August 2010, the Ministry of Trade, Industry and Energy announced the Proposal for the Improvement in the Structure of the Electric Power Industry, which was designed to promote responsible management by and improve operational efficiency of government-affiliated electricity companies by fostering competition among them. Pursuant to this proposal, while our six generation subsidiaries continued to be our wholly-owned subsidiaries, in January 2011 the six generation subsidiaries were officially designated as “market-oriented public enterprises” (same as us) under the Act on the Management of Public Institutions, whereupon the President of Korea appoints the president and the standing director who is to become a member of the audit committee of each such subsidiary; the selection ofnon-standing directors of each such subsidiary is subject to approval by the minister of the Ministry of Economy and Finance; the president of each such subsidiary is required to enter into a management contract directly with the minister of the Ministry of Trade, Industry and Energy; and the Public Agencies Operating Committee (which is comprised largely of Government officials and those recommended by Government officials) conducts performance evaluation of such subsidiaries. Previously, our president appointed the president and the statutory auditor of each such subsidiary; the selection ofnon-standing directors of each such subsidiary was subject to approval by our president; the president of each such subsidiary entered into a management contract with our president; and our evaluation committee conducted performance evaluation of such subsidiaries. As a result of these changes, our six generation subsidiaries took on additional operational responsibilities and management autonomy with respect to construction and management of generation units and procurement of fuel, while we as the parent company continued to oversee and coordinate, among others, finances, corporate governance, overseas businesses, including nuclear export technology and overseas resource development, that jointly affect us and our generation subsidiaries. See also Item 16G. “Corporate Governance—The Act on the Management of Public Institutions—Applications of the Act on Our Generation Subsidiaries,”

In June 2016, the Government announced the Proposal for Adjustment of Functions of Public Institutions (Energy Sector) for the purpose of streamlining the operations of government-affiliated energy companies by discouraging them from engaging in overlapping or similar businesses with each other, reducingnon-core assets and activities and improving management and operational efficiency. The initiatives contemplated in this proposal that would affect us and our generation subsidiaries include the following: (i) the generation companies should take on greater responsibilities in overseas resource exploration and production projects as these involve procurement of fuels necessary for electricity generation while fostering cooperation among each other through closer coordination, (ii) KHNP should take a greater role in export of nuclear technology, and (iii) the current system of retail sale of electricity toend-users should be liberalized to encourage more competition. In accordance therewith, we transferred a substantial portion of our assets and liabilities in our overseas resource business to our generation subsidiaries as of December 31, 2016. In addition, pursuant to this Proposal, we considered a sale in the public market of a minority of our shares in our fivenon-nuclear generation subsidiaries, KEPCO KDN and KHNP. However, the planned sales have been put on hold, primarily due to prevailing market conditions. In any event, we plan to maintain a controlling stake in each of these subsidiaries.

Other than as set forth above, we are not aware of any specific plans by the Government to resume the implementation of the Restructuring Plan or otherwise change the current structure of the electric power industry or the operations of us or our generation subsidiaries materially in the near future. However, for reasons relating to changes in policy considerations, socio-political, economic and market conditions and/or other factors, the Government may resume the implementation of the Restructuring Plan or initiate other steps that may change the structure of the Korean electric power industry or the operations of us or our generation subsidiaries materially. Any such measures may have a negative effect on our business, results of operations and financial condition. In addition, the Government, which beneficially owns a majority of our shares and exercises significant control over our business and operations, may from time to time pursue policy initiatives that could directly or indirectly impact our business and operations, and such initiatives may vary from the interest and objectives of our other shareholders.

 

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Our capacity expansion plans, which are principally based on projections on long-term supply and demand of electricity in Korea, may prove to be inadequate.

We and our generation subsidiaries make plans for expanding or upgrading our generation capacity and transmission infrastructure based on the Basic Plan Relating to the Long-Term Supply and Demand of Electricity, or the Basic Plan, which is generally revised and announced every two years by the Government. In December 2017, the Government announced the Eighth Basic Plan to revise the Seventh Basic Plan, for the former to be effective for the period from 2017 to 2031. The Eighth Basic Plan focuses on, among other things, (i) decreasing the reliance on nuclear and coal-based supply sources, (ii) increasing utilization of renewable energy sources and (iii) balancing the existing cost-based pool system of purchase of electricity with an environmentally-focused pool system. Furthermore, the Eighth Basic Plan includes the following implementing measures: (i) six new nuclear generation units in a planning stage would not be constructed, (ii) extension of life of 10 decrepit nuclear generation units would not be granted, (iii) Wolsong #1 unit is not counted as part of domestic energy generation capacity, (iv) seven decrepit coal-fired generation plants will be retired by 2022, (v) six other coal-fired generation plants shall be converted to LNG fuel use and (vi) domestic renewable energy generation capacity shall be expanded to 58.5 gigawatts by 2030. Currently, the Government is in the process of establishing the Ninth Basic Plan, which is expected to be released in 2020, to expand the electric power facilities based on the demand outlook from 2020 to 2034.

In June 2019, the Ministry of Trade, Industry and Energy adopted the Third Basic National Energy Plan following consultations with representatives from civic groups, the energy industry and academia. The Third Basic National Energy Plan, which is a comprehensive plan that covers the entire spectrum of energy industries in Korea, covers the period from 2019 to 2040. The Third Basic National Energy Plan is consistent with the First and the Second Basic National Energy Plans in terms of the general policy direction and aims to promote sustainable growth and improvement of people’s quality of life by converting to new and renewable energy. Specifically, it establishes the following five key tasks: (i) strengthening management of energy demand from various sectors, such as commerce and transportation, and promoting a rational electricity tariff system to improve the national energy consumption efficiency by 38% and reduce the energy demand by 18.6% by 2040; (ii) converting to clean and safe energy through gradual reduction of nuclear power generation and decisive reduction of coal power generation by prohibiting construction of new coal-fired power plants and increasing the portion of renewable energy sources to approximately 35% by 2040; (iii) expanding the power distribution in areas near those with demands for renewable energy and fuel cells and strengthening the roles and responsibilities of local governments; (iv) fostering the growth of the future energy industries (including renewable energy, hydrogen fuel and other efficient sources of energy limited to technology), promoting thevalue-add for traditional energy industries and maintaining a core energy ecosystem for nuclear power plants; and (v) improving the energy, gas and heat market systems to facilitate the national energy conversion and building platforms based on big data to foster creation of new energy industries.

We cannot assure that the Eighth Basic Plan, the Ninth Basic Plan, the Third Basic National Energy Plan, or their respective successor plans will successfully achieve their intended goals, the foremost of which is to ensure, through carefully calibrated capacity expansion and other means, balanced overall electricity supply and demand in Korea to end users while promoting efficiency and environmental friendliness in the consumption and production of electricity. If there is significant variance between the projected electricity supply and demand considered in planning our capacity expansions and the actual electricity supply and demand, or if these plans otherwise fail to meet their intended goals or have other unintended consequences, this may result in inefficient use of our working capital, and undue financing costs on the part of us and our generation subsidiaries, among others, which may have a material adverse effect on our results of operations, financial condition and cash flows.

From time to time, we may experience temporary power shortages or circumstances bordering on power shortages due to factors beyond our control, such as extreme weather conditions. Such circumstances may lead to increasedend-user complaints and greater public scrutiny, which may in turn require us to modify our capacity expansion plans, and if we were to substantially modify our capacity plans, this might result in additional capital

 

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expenditures and, as a result, have a material adverse effect on our results of operations, financial condition and cash flows.

Although the Government makes significant efforts to encourage conservation of electricity, including through public education campaigns, there is no assurance that such efforts will have the desired effect of substantially reducing the demand for electricity or improving efficient use thereof.

We are subject to various environmental regulations and related government initiatives, including in relation to climate change, which could cause significant compliance costs and operational liabilities.

We are subject to national, local and overseas environmental laws and regulations, including increasing pressure to reduce emission of carbon dioxide from our electricity generation activities as well as our natural resource development endeavors overseas. Our operations could expose us to the risk of substantial liability relating to environmental, health and safety issues, such as those resulting from the discharge of pollutants and carbon dioxide into the environment and the handling, storage and disposal of hazardous materials. We may be responsible for the investigation and remediation of environmental conditions at current or former operational sites. We may also be subject to related liabilities (including liabilities for environmental damage, third party property damage or personal injury) resulting from lawsuits brought by governments or private litigants. In the course of our operations, hazardous wastes may be generated, disposed of or treated at third party-owned or -operated sites. If those sites become contaminated, we could also be held responsible for the cost of investigation and remediation of such sites for any related liabilities, as well as for civil or criminal fines or penalties.

We intend to fully comply with our environmental obligations. However, our environmental measures, including the use of, or replacement with, environmentally friendly but more expensive parts and equipment and budgeting capital expenditures for the installation or modification of such facilities, may result in increased operating costs and liquidity requirement. The actual cost of installation, replacement, modification and/or operation of such equipment and related liquidity requirement may depend on a variety of factors that are beyond our control. There is no assurance that we will continue to be in material compliance with legal or regulatory requirements or satisfy social norms and expectations in the future in relation to the environment, including in respect of climate change.

In recent years, partly driven by growing public awareness and sensitivity toward climate change and other environmental issues as well as in an effort to capture the economic and social potential associated with renewable energy and “new energy”-related industries (such as smart grids, energy storage systems and electrical vehicles, among others), the Government has introduced and implemented a number of new measures designed to reduce greenhouse gas emission, minimize environmental damage and spur related business opportunities. Some key examples of such Government initiatives pertinent to our and our generation subsidiaries’ operations are as follows:

 

  

Greenhouse Gas Emission Trading System, Related Emission Reduction Targets and the Greenhouse Gas Reduction Roadmap.

 

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In accordance with the Act on Allocation and Trading of Greenhouse Gas Emission Allowances, enacted in March 2013, the Government is currently in the process of implementing a greenhouse gas emission trading system under which the Government will allocate the amount of permitted greenhouse gas emission to companies by industry and a company whose business emits more carbon than the permitted amount is required to purchase the right to emit more carbon through the Korea Stock Exchange. The categories of allowances traded include the Korean Allowance Unit (KAU), which is the emissions allowance allocated to applicable companies by the Government; Korean Credit Unit (KCU), which is a tradable unit converted from external carbon offset certifications including the Korean Offset Credit; and Korean Offset Credit (KOC), which is the verified carbon offset credit obtained by companies for reducing carbon emissions through absorption or otherwise. The greenhouse gas emission trading system is expected to be

 

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implemented in three stages. During the first phase (2015 to 2017), the Government set up and conducted a test run of the trading system to ensure its smooth operation, allocating the greenhouse gas emission allowances free of charge. In July 2018, the Government released the allocation plan for the second phase (2018 to 2020), during which 97% of the greenhouse gas emission allowances may be allocated free of charge, with 3% allocated through an auction. During the third phase (2021 to 2025), the Government plans to expand the scale of the system with aggressive greenhouse gas emission reduction targets and allocating 10% of the greenhouse gas emission allowances through an auction.

 

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In December 2016, the Government announced the Climate Change Response Initiatives and the 2030 National Greenhouse Gas Reduction Roadmap, which set forth the greenhouse gas emission trading system as one of the primary means to reach the emission and greenhouse gas reduction targets of the policies. The Second Climate Change Response Initiative was adopted in October 2019, which sets forth a national target of greenhouse gas level as 536 million tons in the aggregate, representing a 37% reduction from the base case projection of greenhouse gas in 2030 and a 24.4% reduction as compared to the emission amount in 2017. In the electricity conversion sector, greenhouse gas reduction of 24 million tons (with a potential additional reduction of 34 million tons) from the base case projection of greenhouse gas level in 2030 is requested by 2030, and our business is classified as part of this sector. The additional potential reduction amount will be confirmed prior to the finalization of the Government’s 2020 Nationally Determined Contributions (NDCs). Adhering to such emission and greenhouse gas reduction requirement may result in significant additional compliance costs. For example, the daily market price of the KAUs traded through the Korea Exchange was Won 8,640 per ton in early 2015, and the price has increased continuously thereafter, reaching its peak price at Won 40,900 per ton on December 23, 2019. We cannot predict how the price of the KAUs will fluctuate over time, and such volatility may adversely affect our results of operation, financial condition and cash flows.

 

  

Regulation of Coal-Fired Generation Units. As a measure to address the high level of particulate matter pollution, the Government temporarily suspended the operations of eight coal-fired generation units that are 30 years or older throughout the month of June 2017. Subsequently, in July 2017, two of these units were shut down completely and one unit switched fuel from coal to wood pallets. One of these units stopped its operation in January 2019 for switching fuel to wood pallets. As part of the Comprehensive Measures against Particulate Matter and the Eighth Basic Plan, announced by the Government in September 2017 and December 2017, respectively, the Government set forth the following policy directions relating to coal-fired generation units: (i) two coal-fired generation units scheduled for construction and four existing coal-fired generation units shall convert to LNG fuel use, (ii) in principle, construction of new coal-fired generation units shall not be planned, (iii) seven of the coal-fired generation units that are 30 years or older will be shut down on an accelerated schedule, (iv) beginning in 2018, coal-fired generation units that are 30 years or older shall temporarily cease operations from March through June of each year, (v) coal-fired generation units shall be put through comprehensive functional and environmental upgrades and (vi) coal-fired generation units shall be subject to emission standards that came into effect in January 2019 that are twice as more rigorous than the previous standards. In October 2018, the Government introduced a pilot regulation to lower the output of 35 coal-fired generation units to approximately 80% of their capacity that emit more than a certain amount of particulate matter. The regulation was formally implemented in January 2019, targeting 40 coal-fired power plants with high emissions of particulate matter. From March to June 2019, the scope expanded to cover 60 units in total. In addition, coal-fired generation units originally scheduled for preventive maintenance during the second half of 2019 were required to undertake such maintenance earlier in the spring of 2019. In November 2019, the Government pursued a reduction of coal-fired generation units in order to implement the Special Measures to Respond to the High Concentration Period (December to February) of Particulate Matter. During this period, 8 to 15 coal-fired generation units that require preventive maintenance or are otherwise older units were first shut down, with a maximum of 49 coal-fired generation units subject to a cap of 80% on the output within

 

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the remaining reserve capacity range. As a result, the particulate matter emission was reduced by 2,503 tons, approximately 39% decrease compared to the same period during the previous year. We plan to continue to participate in the effort to reduce the particulate matter emissions from coal-fired generation units, not only during the winter but also during the spring. For example, in March 2020, we suspended the operations of between 21 and 28 coal power generation plants and imposed a cap of 80% on the output of up to 37 coal-fired generation units. Additionally, the Government adjusted the schedule to close down two decrepit coal-fired generation units (Boryeong #1 and #2), which will shut down around December 2020. Additionally, other coal-fired generation units, Samchunpo #1 and #2, will shut down around April 2020 and Honam #1 and #2 units by January 2021. While such measures may be subject to change, we expect to incur significant costs of complying with such measures, including in connection with more stringent particulate matter pollution regulations, retrofitting and overall replacement of environmental facilities.

 

  

Coal and LNG Consumption Taxes. In January 2014, largely based on policy considerations of tax equity among different fuel types as well as environmental concerns, the Ministry of Economy and Finance announced that, effective July 1, 2014, consumption tax will apply to bituminous coal, which previously was not subject to consumption tax unlike other fuel types such as LNG or bunker oil. Pursuant to the amended Individual Consumption Tax Act effective as of April 1, 2019, which involved an increase of the unit tax rate for coal by Won 10 per kilogram across the board, the base tax rate (which is subject to certain adjustments) is Won 46 per kilogram for bituminous coal; however, due to concerns on the potential adverse effect on industrial activities, the applicable tax rate is applied differently based on the net heat generation amount. The currently applicable tax rate for bituminous coal is Won 43 per kilogram for net heat generation of less than 5,000 kilocalories, Won 46 per kilogram for net heat generation of 5,000 to 5,500 kilocalories and Won 49 per kilogram for net heat generation of 5,500 kilocalories or more. In contrast, the consumption tax and surcharge on importation of LNG decreased by Won 48 and Won 20.4 per kilogram, respectively, which came into effect in April 2019. The currently applicable consumption tax rate and surcharge on importation of LNG are Won 12 and Won 3.8 per kilogram, respectively. We expect an increase in our overall fuel costs, as bituminous coal currently represents the largest fuel type for our electricity generation, while the decrease in consumption tax and surcharge on importation of LNG will result in a decrease of our power purchase cost.

 

  

Renewable Portfolio Standard. Under this program, each of our generation subsidiaries is required to generate a specified percentage of total electricity to be generated by such generation subsidiary in a given year in the form of renewable energy or, in case of a shortfall, purchase a corresponding amount of a Renewable Energy Certificate (a form of renewable energy credit) from other generation companies whose renewable energy generation surpass such percentage. The target percentage was 3.5% in 2016, 4.0% in 2017, 5.0% in 2018, 6.0% in 2019, 7.0% in 2020 and will incrementally increase to 10.0% by 2023. Fines are to be levied on any subsidiary that fails to do so in the prescribed timeline. In 2018, all six of our generation subsidiaries met the target through renewable energy generation and/or the purchase of a Renewable Energy Certificate. Compliance by our generation subsidiaries of the 2019 target is currently under evaluation, and if any generation subsidiary is found to have failed to meet the target for 2019 or for subsequent years, such generation subsidiary may become subject to fines. Additionally, as the target percentage is subject to change, changes to the target percentage may result in additional expenses for our generation subsidiaries.

 

  

Renewable Energy 3020 Plan. In December 2017, the Ministry of Trade, Industry and Energy announced the Renewable Energy 3020 Plan, an initiative to increase the generation and use of renewable energy on a nationwide basis. The Government plans to increase the required percentage of total electricity to be generated from renewable energy sources from 7% in 2016 to 10.5% and 20% by 2022 and 2030, respectively. Moreover, the Government plans to increase the domestic renewable energy generation capacity to 63.8 gigawatts by 2030 through the expansion of solar and wind power generation capacities to 36.5 gigawatts and 17.7 gigawatts, respectively, by 2030.

 

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New Energy Industry Fund. In January 2016, the Ministry of Trade, Industry and Energy announced an initiative to promote the new energy industry by creating the New Energy Industry Fund, which is made up of funds sponsored by government-affiliated energy companies. We contributed Won 500 billion to the funds in 2016. The purpose of these funds is to invest in substantially all frontiers of the new energy industry, including renewable energy, energy storage systems, electric vehicles,small-sized self-sustaining electricity generation grids known as “micro-grids”, among others, as well as invest instart-up companies, ventures, small- tomedium-sized enterprise and project businesses that engage in these businesses but have not previously attracted sufficient capital from the private sector.

 

  

Environmental and safety considerations in electricity supply and demand planning. In March 2017, the Electric Utility Act was amended to the effect that starting in June 2017, future national planning for electricity supply and demand in Korea should consider the environmental and safety impacts of such planning. Accordingly, the costs related to environmental and safety impacts, such as the desulfurization costs, have been reflected in our variable cost of generating electricity since August 2019. In December 2019, the Regulation on the Operation of the Electricity Market was revised, under which the specific plans of the Cost Evaluation Committee (defined below) to reflect the cost of greenhouse gas emission allowances will be finalized within two years of such revision.

Complying with these Government initiatives and operating programs in furtherance thereof has involved and will likely continue to involve significant costs and resources on our part, which may adversely affect our results of operation, financial condition and cash flows. For example, we have spent approximately Won 710 billion for the greenhouse gas emission allowances in 2019, compared to Won 53 billion in 2018, and we anticipate that such cost will continue to increase in 2020 and thereafter. Further, as we are required to supply increasing amount of renewable energy, we expect that the environmental-related risks will continue to increase. We may not be able to pass on the increased cost to customers at a sufficient level or on a timely basis. Further, we and our generation subsidiaries could also become subject to substantial fines and other forms of penalties fornon-compliance. There is no assurance that, particularly given the wide-ranging policy priorities for the Government, it will in fact raise the electricity tariff to a level sufficient to fully cover additional costs associated with implementing and operating these programs and otherwise complying with these programs, do so on a timely basis or at all. If the Government does not do so or provide us and our generation subsidiaries with other forms of assistance to offset the costs involved, our results of operation, financial condition and cash flows may be materially and adversely affected.

See Item 4.B. “Business Overview—Environmental Programs.”

We may require a substantial amount of additional indebtedness to refinance existing debt and for future capital expenditures.

We anticipate that a substantial amount of additional indebtedness will be required in the coming years in order to refinance existing debt, make capital expenditures for construction of generation plants and other facilities and/or make acquisitions, invest in renewable energy and the “new energy industry” projects and fund our overseas businesses. In 2017, 2018 and 2019, our capital expenditures in relation to the foregoing amounted to Won 13,711 billion, Won 13,695 billion and Won 15,795 billion, respectively, and our budgeted capital expenditures for 2020, 2021 and 2022 amount to Won 16,211 billion, Won 17,529 billion and Won 17,002 billion, respectively.

While we currently do not expect to face any material difficulties in procuring short-term borrowings to meet our liquidity and short-term capital requirements, there is no assurance that we will be able to do so. We expect that a portion of our long-term debt will need to be paid or refinanced through foreign currency-denominated borrowings and capital raising in international capital markets. Such financing may not be available on terms commercially acceptable to us or at all, especially if the global financial markets experience significant turbulence or a substantial reduction in liquidity or due to other factors beyond our control. If we are unable to

 

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obtain financing on commercially acceptable terms on a timely basis, or at all, we may be unable to meet our funding requirements for capital expenditures or debt repayment obligations, which could have a material adverse impact on our business, results of operations and financial condition.

We and our generation subsidiaries have undertaken various programs to reduce debt and improve the overall financial health. For further information, see Item 4.B. “Business Overview—Debt Reduction Program and Related Activities.” Despite our best efforts, however, for reasons beyond our control, including macroeconomic environments, government regulations and market forces (such as international market prices for our fuels), we cannot assure whether we or our generation subsidiaries will be able to successfully reduce debt burdens or otherwise improve our financial health to a level that would be optimal for our capital structure. If we or our generation subsidiaries fail to do so or the measures taken by us or our generation subsidiaries to reduce debt levels or improve financial health have unintended adverse consequences, such developments may have an adverse effect on our business, results of operations and financial condition.

The movement of Won against the U.S. dollar and other currencies may have a material adverse effect on us.

The Won has fluctuated significantly against major currencies from time to time. Even slight depreciation of Won against U.S. dollar and other foreign currencies may result in a material increase in the cost of fuel and equipment purchased by us from overseas since the prices for substantially all of the fuel materials and a significant portion of the equipment we purchase are denominated in currencies other than Won, generally in U.S. dollars. Changes in foreign exchange rates may also impact the cost of servicing our foreign currency-denominated debt. As of December 31, 2019, 17.5% of our long-term debt (including the current portion but excluding issue discounts and premium) without taking into consideration of swap transactions, was denominated in foreign currencies, principally U.S. dollars. In addition, even if we make payments in Won for certain fuel materials and equipment, some of these fuel materials may originate from other countries and their prices may be affected accordingly by the exchange rates between the Won and foreign currencies, especially the U.S. dollar. Since the substantial majority of our revenues are denominated in Won, we must generally obtain foreign currencies through foreign currency-denominated financings or from foreign currency exchange markets to make such purchases or service such debt. As a result, any significant depreciation of Won against the U.S. dollar or other major foreign currencies will have a material adverse effect on our profitability and results of operations.

We may not be successful in implementing new business strategies.

As part of our overall business strategy, we plan to (i) expand clean energy and stabilize electricity supply and demand, (ii) enhance sales profitability and competitiveness, (iii) explore convergence-based new businesses and markets, (iv) secure future strategic technologies and establish infrastructure for digital transformation, and (v) strengthen management efficiency and embody social value.

Due to their inherent uncertainties, such new and expanded strategic initiatives expose us to a number of risks and challenges, including the following:

 

  

new and expanded business activities may require unanticipated capital expenditures and involve additional compliance requirements;

 

  

new and expanded business activities may result in less growth or profit than we currently anticipate, and there can be no assurance that such business activities will become profitable at the level we desire or at all;

 

  

certain of our new and expanded businesses, particularly in the areas of renewable energy, require substantial government subsidies to become profitable, and such subsidies may be substantially reduced or entirely discontinued;

 

  

we may fail to identify and enter into new business opportunities in a timely fashion, putting us at a disadvantagevis-à-vis competitors, particularly in overseas markets; and

 

  

we may need to hire or retrain personnel to supervise and conduct the relevant business activities.

As part of our business strategy, we may also seek, evaluate or engage in potential acquisitions, joint ventures, strategic alliances, restructurings, combinations, rationalizations, divestments or other similar

 

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opportunities. The prospects of these initiatives are uncertain, and there can be no assurance that we will be able to successfully implement or grow new ventures, and these ventures may prove more difficult or costly than what we originally anticipated. In addition, we regularly review the profitability and growth potential of our existing and new businesses. As a result of such review, we may decide to exit from or to reduce the resources that we allocate to new or existing ventures in the future. There is a risk that these ventures may not achieve profitability or operational efficiencies to the extent originally anticipated, and we may fail to recover investments or expenditures that we have already made. Any of the foregoing may have a material adverse effect on our reputation, business, results of operations, financial condition and cash flows.

We plan to pursue overseas expansion opportunities that may subject us to different or greater risks than those associated with our domestic operations.

While our operations have,to-date, been primarily based in Korea, we and our generation subsidiaries may expand, on a selective and opportunistic basis, overseas operations in the future. In particular, we and our generation subsidiaries may further expand our project portfolio to include the construction and operation of conventional thermal generation units, nuclear generation units and renewable energy power plants, transmission and distribution and (primarily through our generation subsidiaries) mining and development of fuel sources.

Overseas operations often involve risks that are different from those we face in our domestic operations, including the following:

 

  

challenges of complying with multiple foreign laws and regulatory requirements, including tax laws and laws regulating our operations and investments;

 

  

volatility of overseas economic conditions, including fluctuations in foreign currency exchange rates;

 

  

difficulties in enforcing creditors’ rights in foreign jurisdictions;

 

  

risk of expropriation and exercise of sovereign immunity where the counterparty is a foreign government;

 

  

difficulties in establishing, staffing and managing foreign operations;

 

  

differing labor regulations;

 

  

political and economic instability, natural calamities, war and terrorism;

 

  

lack of familiarity with local markets and competitive conditions;

 

  

changes in applicable laws and regulations in Korea that affect foreign operations; and

 

  

obstacles to the repatriation of earnings and cash.

Any failure by us to recognize or respond to these differences may adversely affect the success of our operations in those markets, which in turn could materially and adversely affect our business and results of operations.

Furthermore, while we seek to enter into overseas business opportunities in a prudent manner, some of our new international business ventures carry inherent risks that are different from our traditional business of electricity power generation, transmission and distribution. While the overseas businesses in the aggregate currently do not comprise a material portion of our overall business, as we are relatively inexperienced in these new types of overseas businesses, the actual revenues and profitability from, and investments and expenditures into, such ventures may be substantially different from what we plan or anticipate and may have a material adverse impact on our overall business, results of operations, financial condition and cash flows.

An increase in electricity generated by and/or sourced from independent power producers may erode our market position and hurt our business, growth prospects, revenues and profitability.

As of December 31, 2019, we and our generation subsidiaries owned approximately 66.8% of the total electricity generation capacity in Korea (excluding plants generating electricity for private or emergency use). New entrants to the electricity business will erode our market share and create significant competition, which could have a material adverse impact on our financial condition and results of operations.

 

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In particular, we compete with independent power producers with respect to electricity generation. The independent power producers accounted for 27.3% of total power generation in 2019 and 33.2% of total generation capacity as of December 31, 2019. As of December 31, 2019, there were 20 independent power producers in Korea, excluding renewable energy producers. Private enterprises became permitted to own and operate coal-fired power plants in Korea only after the Ministry of Trade, Industry and Energy approved plans for independent power producers to construct coal-fired power plants under the Sixth Basic Plan announced in February 2013. Under the Eighth Basic Plan announced in December 2017, (i) six coal-fired units under construction with aggregate generation capacity of 6,260 megawatts are scheduled to be completed between 2021 and 2022, and (ii) two coal-fired units scheduled for construction shall be converted to LNG fuel use. Currently there are no additional plans for construction of coal-fired power plants by independent power producers beyond 2024, as the construction schedule of such generation units is being adjusted. While it remains to be seen whether construction of these generation units will be completed as scheduled, if these units were to be completed as scheduled and/or independent power producers are permitted to build additional generation capacity (whether coal-fired or not), our market share in Korea may decrease, which may have a material adverse effect on our results of operations and financial condition.

In addition, under the Community Energy System adopted by the Government in 2004, a minimal amount of electricity is supplied directly to consumers on a localized basis by independent power producers outside the cost-based pool system. Such system is used by our generation subsidiaries and most independent power producers to distribute electricity nationwide. The purpose of this system is to geographically decentralize electricity supply and thereby reduce transmission losses and improve the efficiency of energy use. These entities do not supply electricity on a national level but are licensed to supply electricity on a limited basis to their respective districts under the Community Energy System. As of March 31, 2020, the aggregate generation capacity of suppliers participating in the Community Energy System amounted to less than 1% of that of our generation subsidiaries in the aggregate. We currently do not expect the Community Energy System to be widely adopted, especially in light of the significant level of capital expenditure required for such direct supply. However, if the Community Energy System is widely adopted, it may erode our currently dominant market position in the generation and distribution of electricity in Korea and may have a material adverse effect on our business, results of operations and financial condition.

While we are currently the dominant market player in the electricity distribution in Korea, we cannot assure you that our market dominance will not face potential erosion in the future. For example, in June 2016, the Government announced the Proposal for Adjustment of Functions of Public Institutions (Energy Sector), which contemplated a gradual opening of the electricity trading market to the private sector. Although the proposal was withdrawn after a year of deliberation, a number of economists and civic groups are continuing to demand for the liberalization of the electricity trading market. It is difficult to predict whether and in what direction the liberalization of the electricity trading market will happen in the future, and such event may result in substantial reduction of our market share in electricity distribution in Korea, which would have a material adverse effect on our business, results of operation and cash flows.

See also Item 4.B. “Business Overview—Competition.”

Labor unrest or increases in labor cost may adversely affect our operations.

We and each of our generation subsidiaries have separate labor unions. As of December 31, 2019, approximately 72.9% of our and our generation subsidiaries’employees in the aggregate were members of these labor unions. Since asix-week labor strike in 2002 by union members of our generation subsidiaries in response to a proposed privatization of one of our generation subsidiaries, there has been no material labor dispute. However, we cannot assure you that there will not be a major labor strike or other material disruptions of operations by the labor unions of us and our generation subsidiaries if the Government resumes privatization or other restructuring initiatives or for other reasons, which may adversely affect our business and results of operations.

 

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Furthermore, the Government, as part of a response to low fertility amidst an aging population in Korea and to make the lives of workers more stable, has pledged to reduce the number ofnon-permanent workers and increase the employment of permanent workers, in part by transitioning fromnon-permanent to permanent positions in the public sector. In accordance with guidelines announced by the Government in July 2017, we have completed transitioning temporary workers to permanent positions as of December 31, 2018. In addition, we have finalized the measure with the subcontracted workers who provide meter-reading facility management and inbound call services to convert them to permanent employees by establishing subsidiaries and hiring the subcontracted workers through such subsidiaries, as of the end of 2019. Our generation subsidiaries have partially completed transitioning ofnon-permanent workers to permanent positions by hiring them for an indefinite period or establishing subsidiaries and hiring them through such subsidiaries. Our thermal generation subsidiaries plan to form a labor-management consultative body to transition thein-house subcontracted workers for the fuel and environmental facilities to permanent positions. Although the Government guidelines suggest that we transition thenon-permanent workers to permanent positions within our existing budget for the related business, we cannot assure you that this will not result in increased costs for us or our generation subsidiaries and have an adverse impact on us or our generation subsidiaries’ financial condition and results of operations.

Additionally, domestic and international policy changes may affect our relationship with our employees, such as the Government’s potential ratification of four of the eight essential conventions of International Labor Organization and potential reformation of the public employee wage structure. We cannot assure you that such policy changes will not negatively affect our relationship with our employees, which may in turn adversely affect our business and results of operations.

Operation of nuclear power generation facilities inherently involves numerous hazards and risks, any of which could result in a material loss of revenues or increased expenses.

Through KHNP, we currently operate 24 nuclear-fuel generation units. Operation of nuclear power plants is subject to certain hazards, including environmental hazards such as leaks, ruptures and discharge of toxic and radioactive substances and materials. These hazards can cause personal injuries or loss of life, severe damage to or destruction of property and natural resources, pollution or other environmental damage,clean-up responsibilities, regulatory investigation and penalties and suspension of operations. Nuclear power has a stable and relatively inexpensive cost structure (which is least costly among the fuel types used by our generation subsidiaries) and is the second largest source of Korea’s electricity supply, accounting for 25.9% of electricity generated in Korea in 2019. Due to significantly lower unit fuel costs compared to those for thermal power plants, our nuclear power plants are generally operated at full capacity with only routine shutdowns for fuel replacement and maintenance, with limited exceptions.

From time to time, our nuclear generation units may experience unexpected shutdowns or maintenance-related stoppage. For example, following an earthquake in the vicinity in September 2016, four nuclear generation units at the Wolsong site were shut down for approximately three months as part of a preventive and safety assurance program although these units were not directly affected by the earthquake. Any prolonged or substantial breakdown, failure or suspension of operation of a nuclear unit could result in a material loss of revenues, an increase in fuel costs related to the use of alternative power sources, additional repair and maintenance costs, greater risk of litigation and increased social and political hostility to the use of nuclear power, any of which could have a material adverse impact on our financial condition and results of operations.

In addition, heightened concerns regarding the safety of operating nuclear generation units could impede with our ability to operating them for an extended period of time or at all. For example, the nuclear power plant at Wolsong #1 unit began operations in 1982 and ended its operations in 2012 pursuant to its30-year operating license. In February 2015, the Nuclear Safety and Security Commission (“NSSC”) evaluated the safety of operating Wolsong #1 unit and approved its extended operation until November 2022. However, a civic group filed a lawsuit to annul such decision, and in February 2017, the Seoul Administrative Court ruled against the NSSC. The NSSC appealed this decision, and the civic group filed an injunction to suspend the operation of the Wolsong #1 unit. The civic group’s injunction was denied in July 2017. KHNP, which operated the unit pursuant to the NSSC’s initial decision, has joined this lawsuit. On June 15, 2018, the board of directors of KHNP decided to (i) retire Wolsong #1 unit earlier than planned due to its economic inefficiency and (ii) discontinue the construction of Chunji #1 and #2 as well

 

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as Daejin #1 and #2 units. On December 24, 2019, the NSSC approved the permanent shutdown of Wolsong #1, and the Board of Audit and Inspection of Korea is currently carrying out an investigation into whether the board of directors of KHNP has made a reasonable assessment in making the decision to shut down Wolsong #1. As of December 31, 2019, impairment loss in connection with the property, plant and equipment of Wolsong #1 unit accrued to Won 572,216 million and reversal of impairment loss was Won 16,693 million. As of December 31, 2019, impairment loss in connection with the property, plant and equipment of Chunji #1 and #2 as well as Daejin #1 and #2 units amounted to Won 38,886 million. Although the board of directors did not make any decisions regarding Shin-Hanul #3 and #4 units, which are new nuclear plants under construction, we cannot assure you that the construction of these units will not be discontinued. As of December 31, 2019, impairment loss in connection with the property, plant and equipment of Shin-Hanul #3 and #4 units accrued to Won 134,736 million. The Government currently has preliminary plans to refund us for reasonable expenditures incurred in relation to thephase-out of nuclear power plants in accordance with the Government’s energy transition policy.

There are ten other nuclear generation units whose life under their initial operating license will expire in the next ten years, or by 2030, and we may find it more difficult to have the life of other nuclear units extended as well. The failure to extend the life of these units would result in a loss of revenues from such units and the increase in our overall fuel costs (as nuclear fuel is the cheapest compared to coal, LNG or oil), which could adversely affect our results of operation and financial condition. Furthermore, in September 2016,Greenpeace and 559 Korean nationals brought a lawsuit against the NSSC to revoke the permit the NSSC granted to KHNP in relation to the construction of Shin-Kori #5 and #6 nuclear generation units. The lower court ruled on this case in February 2019, both parties appealed, and the case is currently pending in the Seoul High Court. Additionally, in May 2019, a group of 729 Korean nationals brought a lawsuit against the NSSC, challenging its decision to suspend the operation of Shin-Kori #4. In July 2019, we have applied to participate in the lawsuit as a stakeholder. The case is currently pending in the Seoul High Court. We cannot assure you that there will not be new challenges to prohibit the construction of these new nuclear units in the future, whereby we may experience a loss of revenues and an increase in fuel costs (as nuclear fuel is the cheapest compared to coal, LNG or oil) as a result of such prohibition, which could adversely affect our results of operation and financial condition.

In order to prevent damages to the nuclear facilities such as a result of the tsunami and earthquake in March 2011 in Japan, KHNP prepared a comprehensive safety improvement plan including, but are not limited to, installing additional automatic shut-down systems for earthquakes, extending coastal barriers for seismic waves, procuring mobile power generators and storage batteries, installing passive hydrogen removers at nuclear facilities and improving the radiology emergency medical system. Allfollow-up measures will be finalized in December 2024 due to changes in the plan. KHNP also developed 10 additional supplementary safety measures by analysis of overseas plants and its current operations and implemented eight of such measures in 2017, with the two remaining measures to be implemented by 2022. However, there is no assurance that a similar or worse natural disaster may require the adoption and implementation of additional safety measures, which may be costly and have a material adverse impact on our financial condition and results of operations.

Subsequently, the Government unveiled its roadmap to shift in energy sources in October 2017 and announced the Eighth Basic Plan to implement such roadmap in December 2017. The Eighth Basic Plan focuses on, among other things, (i) decreasing the reliance on nuclear and coal-based supply sources, (ii) increasing utilization of renewable energy sources and (iii) balancing the existing cost-based pool system of purchase of electricity with an environmentally-focused pool system. Accordingly, six new nuclear generation units in a planning stage (Shin-Hanul #3 and #4, Chunji #1 and #2 and Daejin #1 and #2) would not be constructed, while new nuclear plants under construction, including Shin-Kori #5, #6, Shin-Hanul #1 and #2, shall begin operation by 2024 upon completion of the construction. Future extensions of life of decrepit nuclear generation units would not be granted and the proportion of renewable energy sources would be increased. We cannot assure you that these policies will not have an adverse impact on our or our generation subsidiaries’ financial condition and results of operations.

The construction and operation of our generation, transmission and distribution facilities involve difficulties, such as opposition from civic groups, which may have an adverse effect on us.

From time to time, we encounter social and political opposition against construction and operation of our generation facilities (particularly nuclear units) and, to a lesser extent, our transmission and distribution facilities.

 

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For example, we recently faced intense opposition from local residents and civic groups to the construction of transmission lines in the Milyang area, which we resolved through various compensatory and other support programs. Such opposition delayed the schedule for completion of this project. Although we and the Government have undertaken various community programs to address concerns of residents in areas near our facilities, civic and community opposition could result in delayed construction or relocation of our planned facilities, which could have a material adverse impact on our business and results of operations.

Our risk management policies and procedures may not be fully effective at all times.

In the course of our operations, we must manage a number of risks, such as regulatory risks, market risks and operational risks. Although we devote significant resources to developing and improving our risk management policies and procedures and expect to continue to do so in the future, our risk management practices may not be fully effective at all times in eliminating or mitigating risk exposures in all market environments or against all types of risk, including risks that are unidentified or unanticipated, such as natural disasters or employee misconduct. For example, in May 2013, the NSSC discovered that certain parts used in several of our then-operating nuclear generation units had been supplied based on falsified certificates. This discovery led to full internal investigation and investigation by the Prosecutor’s Office, which in turn led to prosecutions and convictions of several current and former employees of KHNP on related and separate bribery charges, as well as termination of the then-president of KHNP as part of a broad disciplinary action. The incident also led to suspended operation of the related nuclear generation units for several months pending safety inspection. A similar incident involving falsified certificates and bribery occurred also in November 2012. We and KHNP have fully cooperated with the authorities in terms of investigations as well as remedial and preventive measures, including enhanced internal compliance policies and procedures. In November 2019, prosecutors indicted six of KHNP’s employees for, among others, failing to immediately shut down Hanbit #1 reactor when its thermal output exceeded the threshold specified by the nuclear safety technical operations manual and filing false reports to the NSSC. KHNP is also indicted for secondary liability from its employees’ alleged wrongdoings. The case stemmed from the NSSC’s investigations into the manual shutdown of Hanbit #1 reactor during a diagnostic test in May 2019. The case is currently pending, and we cannot assure you that the outcomes of the ongoing case will not have any material adverse effect on us, our reputation and our operating results. To prevent similar incidents from occurring again, KHNP is working to improve its risk monitoring and management system. For additional information, see Item 4.B. “Business Overview—Nuclear Safety.”

In April 2019, a forest fire broke out in Goseong in Gangwon Province, about 210 kilometers from Seoul, causing damages to nearby towns, covering approximately 700 hectares. The National Forensic Service has investigated the cause of the fire and has determined that the fire seems to have started by an electrical arc from our utility pole’s wire, which broke as a result of a strong wind. Based on this finding, the Police Department of Goseong conducted follow-up investigations and issued a recommendation to prosecute seven employees of KEPCO in connection with the fire. The prosecutors have taken over the case, and the investigations are still ongoing, the results of which may have a material adverse effect on us, our reputation and our operating results. In December 2019, we have agreed to pay 60% of the losses caused by the fire as determined by the Korea Claim Adjuster Association, a government organization, based on the fire victims’ official claims and verification thereof. However, the amount we need to pay may increase depending on the results of the ongoing investigations or any litigations relating to the fire. In addition, we are compensating the fire victims by providing a number of services, such as free supply of electricity, and implementing measures to prevent future fires that may result from an electrical arc, including a special maintenance program during the dry season between March and May. Despite our efforts, however, similar incidents such as the above may occur again, and we cannot assure you that such incidents will not have any material adverse effect on us, our reputation and our operating results.

Further, our operational activities like the generation of electricity involve inherent operating risks that may result in accidents involving serious injury or loss of life, environmental damage or property damage. In December 2018, an employee of KOWEPO’s subcontractor died in an accident at a Taean thermal power unit, leading to a public scrutiny and review by the Ministry of Employment and Labor. As a result, KOWEPO was required to halt the operations of three Taean thermal power units (Taean #9 and #10 units as well as Taean Integrated Gasification Combined Cycle (IGCC)) between December 2018 and May 2019. In response to the

 

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accident, during the first half of 2019, we have mitigated 1,440on-site risk factors by cooperating with the Government to conduct safety assessments.

We believe we and our subsidiaries are in compliance in all material respects with internal compliance policies and procedures and all other additional safety measures initiated internally or required by regulatory and governmental agencies. However, we cannot assure you that, despite all precautionary and preventative measures undertaken by us, these measures will prove to be fully effective at all times against all the risks we face or that an incident that could cause harm to our reputation and operation will not happen in the future, including due to factors beyond our control.

Our risk management procedures may not prevent losses in debt and foreign currency positions.

We manage interest rate exposure for our debt instruments by limiting our variable rate debt exposure as a percentage of our total debt and closely monitoring the movements in market interest rates. We also actively manage currency exchange rate exposure for our foreign currency-denominated liabilities by measuring the potential loss therefrom using risk analysis software and entering into derivative contracts to hedge such exposure when the possible loss reaches a certain risk limit. To the extent we have unhedged positions or our hedging and other risk management procedures do not work as planned, our results of operations and financial condition may be adversely affected.

The amount and scope of coverage of our insurance are limited.

Substantial liability may result from the operations of our nuclear generation units, the use and handling of nuclear fuel and possible radioactive emissions associated with such nuclear fuel. KHNP carries insurance for its generation units and nuclear fuel transportation, and we believe that the level of insurance is generally adequate and is in compliance with relevant laws and regulations. In addition, KHNP is the beneficiary of Government indemnity that covers damages which the insurance cannot cover. However, such insurance is limited in terms of amount and scope of coverage and does not cover all types or amounts of losses which could arise in connection with the ownership and operation of nuclear plants. Accordingly, material adverse financial consequences could result from a serious accident or a natural disaster to the extent it is neither insured nor covered by the government indemnity.

In addition, ournon-nuclear generation subsidiaries carry insurance covering certain risks, including fire, in respect of their key assets, including buildings and equipment located at their respective power plants,construction-in-progress and imported fuel and procurement in transit. Such insurance and indemnity, however, cover only a portion of the assets that these generation subsidiaries own and operate and do not cover all types or amounts of loss that could arise in connection with the ownership and operation of these power plants. In addition, our generation subsidiaries are not permitted to self-insure, and accordingly have not self-insured, against risks of their uninsured assets or business. Accordingly, material adverse financial consequences could result from a serious accident to the extent it is uninsured.

In addition, because neither we nor ournon-nuclear generation subsidiaries carry any insurance against terrorist attacks, an act of terrorism would result in significant financial losses. See Item 4.B. “Business Overview—Insurance.”

We may not be able to raise equity capital in the future without the participation of the Government.

Under applicable laws, the Government is required to directly or indirectly own at least 51% of our issued capital stock. As of December 31, 2019, the last day on which our shareholders’ registry was closed, the Government, directly and through Korea Development Bank (a statutory banking institution wholly owned by the Government), owned 51.1% of our issued capital stock. Accordingly, without changes in the existing Korean law, it may be difficult or impossible for us to undertake, without the participation of the Government, any equity financing in the future.

 

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We may be exposed to potential claims made by current or previous employees for unpaid wages for the past three years under the expanded scope of ordinary wages and become subject to additional labor costs arising from the broader interpretation of ordinary wages under such decision.

Under the Labor Standards Act, an employee is legally entitled to “ordinary wages.” Under the guidelines previously issued by the Ministry of Employment and Labor, ordinary wages include base salary and certain fixed monthly allowances for work performed overtime during night shifts and holidays. Prior to the Supreme Court decision described below, many companies in Korea had typically interpreted these guidelines as excluding from the scope of ordinary wages fixed bonuses that are paid other than on a monthly basis, namely on abi-monthly, quarterly or semi-annual basis, although such interpretation had been a subject of controversy and had been overruled in a few court cases.

In December 2013, the Supreme Court of Korea ruled that regular bonuses fall under the category of ordinary wages on the condition that those bonuses are paid regularly and uniformly, and that any agreement which excludes such regular bonuses from ordinary wage is invalid. One of the key rulings provides that bonuses that are given to employees (i) on a regular and continuous basis and (ii) calculated according to the actual number of days worked (iii) that are not incentive-based must be included in the calculation of “ordinary wages.” The Supreme Court further ruled that in spite of invalidity of such agreements, employees shall not retroactively claim additional wages incurred due to such court decision, in case that such claims bring to employees unexpected benefits which substantially exceeds the wage level agreed by employers and employees and cause an unpredicted increase in expenditures for their company, which would lead the company to material managerial difficulty or would be a threat to the existence of the company. In that case, the claim is not acceptable since it is unjust and is in breach of the principle of good faith.

As a result of such ruling by the Supreme Court of Korea, we and our subsidiaries became subject to a number of lawsuits filed by various industry-wide and company-specific labor unions based on claims that ordinary wage had been paid without including certain items that should have been included as ordinary wage. In July 2016, the court ruled against us, and in accordance with the court’s ruling, in August 2016 we paid Won 55.1 billion to the employees for three years of back pay plus interest. As of December 31, 2019, 25 lawsuits were pending against our subsidiaries for an aggregate claim amount of Won 61 billion, for which our subsidiaries set aside an aggregate amount of Won 29 billion to cover any potential future payments of additional ordinary wage in relation to the related lawsuits. We cannot presently assure you that the court will not rule against our subsidiaries in these lawsuits, or that the foregoing reserve amount will be sufficient to cover the amounts payable under the court rulings.

Additionally, since the issue of determining which labor costs should be additionally included as part of ordinary wages has not been fully resolved by the courts reviewing the lawsuits to which our subsidiaries are a party and other ordinary wage lawsuits filed against other companies, we cannot presently assure you that there will not be additional lawsuits in relation to ordinary wages and that we or our subsidiaries may not become liable for greater amount of damages as a result of these lawsuits. Furthermore, court decisions or labor legislations expanding the definition of ordinary wages may prospectively increase the labor costs of us and our subsidiaries. As a result, there can be no assurance that the above-described lawsuits and circumstances will not have a material adverse effect on our results of operations. See Item 8.A. Consolidated Statements and Other Financial Information – Legal Proceedings.

We are subject to cyber security risk.

Recently, our activities have been subject to an increasing risk of cyber-attacks and information leakages, the nature of which is continually evolving. For example, in December 2014, KHNP became subject to a cyber terror incident. Hackers hacked into the computer network of former KHNP employees and threatened to shut down certain of KHNP’s nuclear plants. The hacking incident did not jeopardize our nuclear operation in any material respect and none of the stolen information was material to our nuclear operation or the national nuclear

 

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policy. In response to such incident, we and our subsidiaries have further bolstered anti-hacking and other preventive and remedial measures in relation to potential cyber terror. We are also continuing to strengthen our security management system by maintaining the international standard security standard, ISO2700, and the Korean standard, Personal Information Management System certification. In September 2019, the cyber security organization, physical protection, and technical information management organization were reorganized into an integrated security management organization for maximal effectiveness.Further, KHNP has established an organization dedicated to nuclear control security in accordance with the Government’s strengthened information security regulation. However, there is no assurance that a similar or more serious hacking or other forms of cyber terror will not happen with respect to us and our generation subsidiaries, which could have a material adverse impact on our business, financial condition and results of operations.

We previously engaged in limited activities relating to Iran and may become subject to sanctions under relevant laws and regulations of the United States and other jurisdictions as a result of such activities, which may adversely affect our business and reputation.

The U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, administers and enforces certain laws and regulations (which we refer to as the OFAC sanctions) that impose restrictions upon activities or transactions within U.S. jurisdiction with certain countries, governments, entities and individuals that are the subject of OFAC sanctions, including Iran. Even thoughnon-U.S. persons generally are not directly bound by OFAC sanctions, in recent years OFAC has asserted that suchnon-U.S. persons can be held liable on various legal theories if they engage in transactions completed in part in the United States or by U.S. persons (such as, for example, wiring an international payment that clears through a bank branch in New York). The European Union also enforces certain laws and regulations that impose restrictions upon nationals and entities of, and business conducted in, member states with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of such laws and regulations, including Iran. The United Nations Security Council and other governmental entities also impose similar sanctions.

In addition to the OFAC sanctions described above, the United States also maintains indirect sanctions under authority of, among others, the Iran Sanctions Act, the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010, or CISADA, the National Defense Authorization Act for Fiscal Year 2012, or the NDAA, the Iran Threat Reduction and Syria Human Rights Act of 2012, or ITRA, various Executive Orders, the Iran Freedom and Counter-Proliferation Act of 2012, or IFCA, and the Countering America’s Adversaries Through Sanctions Act, or CAATSA. These indirect sanctions, which we refer to collectively as U.S. secondary sanctions, provide authority for the imposition of U.S. sanctions on foreign parties that provide services in support of certain Iran-related activities.

On July 14, 2015, theso-called “P5+1” powers (consisting of the United States, the United Kingdom, Germany, France, Russia, and China) and the European Union, or the EU, entered into an agreement with Iran known as the Joint Comprehensive Plan of Action Regarding the Islamic Republic of Iran’s Nuclear Program, or the JCPOA. The JCPOA was intended to significantly restrict Iran’s ability to develop and produce nuclear weapons. Upon implementation of the JCPOA on January 16, 2016 the United States, the EU, and the UN suspended certain nuclear-related sanctions against Iran following an announcement by the International Atomic Energy Agency that Iran had fulfilled its initial obligations under the JCPOA. Most U.S. secondary sanctions concerning Iran were suspended following January 16, 2016.

However, on May 8, 2018, the U.S. Government announced that it was ending its participation in the JCPOA and that it would take steps tore-impose secondary sanctions targeting Iran. Sanctions that had been lifted pursuant to the JCPOA werere-imposed after two wind down periods; one ending on August 6, 2018 and one ending on November 4, 2018. Since November 4, 2018, sanctions that have been lifted pursuant to the JCPOA have beenre-imposed. Consequently, dealings with Iran may now subject foreign parties to U.S. secondary sanctions.

 

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Violations of OFAC sanctions via transactions with a U.S. jurisdictional nexus can result in substantial civil or criminal penalties. A range of sanctions may be imposed on companies that engage in sanctionable activities within the scope of U.S. secondary sanctions, including, among other things, the blocking of any property subject to U.S. jurisdiction in which the sanctioned company has an interest, which could include a prohibition on transactions or dealings involving securities of the sanctioned company or the sanctioned company effectively losing access to the U.S. financial system.

We previously engaged in limited activities relating to Iran, but all of such activities have been terminated upon the withdrawal of the United States from the JCPOA.

Certain institutional investors, including state and municipal governments in the United States and universities, as well as financial institutions, have proposed or adopted initiatives regarding investments in companies that do business with countries that are the target of OFAC sanctions, including Iran. Accordingly, as a result of our historical activities related to Iran, certain investors may not wish to invest in our shares or ADSs or do business with us. In September 2016, the New Jersey Department of the Treasury’s Division of Investment notified of its preliminary determination of divestment pursuant to the New Jersey divestment laws. Such preliminary determination was reversed in February 2017 after we explained such determination was based on incorrect information about our business in Iran. As of October 2019, we were listed on the Texas Comptroller of Public Accounts’ list of Scrutinized Companies with ties to Iran. As of February 2020, we were listed on the Iowa Public Employees’ Retirement System’s (IPERS) Iran Prohibited Companies List. Such divestment initiatives and the decision not to invest in, or to divest from our shares or ADSs may have a material negative impact our reputation and the value of our shares or ADSs.

Violations of sanctions can result in penalties or other consequences adverse to us. Certain of our counterparties may be subjected to sanctions. If we violate sanctions, we may ourselves be subjected to sanctions or penalties. Our business and results of operations may be adversely affected or we may suffer reputational damage. In addition, such sanctions may prevent us from consummating or continuing any of the projects we are currently pursuing in Iran, which could adversely affect our results of operations. Also, at any time, certain investors may divest their interests in our shares if we are found to have violated or are suspected of violating applicable sanctions law arising from our operation in a sanctioned country such as Iran.

We purchase goods and services from Russia and those activities may be adversely impacted in a material manner by economic sanctions concerning Russia imposed by the United States and other jurisdictions.

The United States and the European Union have imposed economic sanctions concerning Russia. OFAC sanctions concerning Russia,inter alia, block the property of certain designated individuals and entities, target certain sectors of the Russian economy and prohibit certain transactions with certain targeted persons in targeted sectors of the Russian economy, and restrict investment in and trade with the Crimea region of Ukraine. Additionally,non-U.S. persons that engage in certain prohibited transactions concerning Russia or with certain sanctioned Russian persons or entities may be subject to secondary sanctions. In August 2017, the United States Congress passed CAATSA, which introduced a host of new U.S. secondary sanctions concerning Russia including,inter alia, for certain dealings with the Russian energy sector, support for Russia’s energy export pipelines and engaging in a “significant transaction” with a person that is part of, or operates for or on behalf of, Russia’s defense or intelligence sectors. Additionally, anon-U.S. person that knowingly facilitates a “significant transaction” or transactions for or on behalf of any person subject to sanctions imposed by the U.S. with respect to the Russian Federation or any child, spouse, parent, or sibling of such a sanctioned person may also be subject to secondary sanctions.

In 2019, we purchased 15.3% of our bituminous coal requirements from Russia. Additionally, we also purchase uranium and uranium separation services from a Russian supplier. In 2019, the total value of all goods and services purchased from Russia was approximately US$ 1.2 billion.

 

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The extent to which the recent coronavirus(COVID-19) outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.

The rapid and diffuse spread of the recent coronavirus(COVID-19) and global health concerns relating to this outbreak have had severe negative impact on, among other things, financial markets, liquidity, economic conditions and trade and could continue to do so or could worsen for an unknown period of time, which could in turn have a material adverse impact on our business, results of operations and financial condition. A number of governments and organizations have revised GDP growth forecasts for 2020 downward in response to the economic slowdown caused by the spread ofCOVID-19, and it is possible that theCOVID-19 outbreak will cause a prolonged global economic crisis or recession. The extent to which theCOVID-19 outbreak impacts our business, results of operations and financial condition will depend on future developments, including the timeliness and effectiveness of actions taken or not taken to contain and mitigate the effects ofCOVID-19 both in Korea and internationally by governments, central banks, healthcare providers, health system participants, other businesses and individuals, which are highly uncertain and cannot be predicted. In particular, the continued spread of the coronavirus could adversely impact our business by (i) disrupting our employees’ and contractors’ ability to provide ongoing services to us, (ii) reducing customer demand for electricity, (iii) reducing the supply of electricity, or (iv) prompting the Government to enact emergency measures such as electricity tariff adjustments to ease the burden on the economically disadvantaged customers, each of which could have an adverse impact on our financial condition, results of operations, and cash flows. For example, as part of the broader measures to alleviate the economic burden due to the COVID-19, the Government has recently decided to defer by three months the electricity tariff payments for the months of April to June. This relief is available to small businesses and economically disadvantaged customers already receiving rate discounts from us. Additionally, the Government plans to support the small businesses in Daegu and certain parts of the Gyeongbook region (designated as the special disaster zone impacted by the COVID-19) by deducting 50% of the electricity payments due for the months of April to September. The Government has prepared a supplementary budget for this measure, but there is no guarantee that the amount reserved for this measure will be used to its fullest according to such budget. Each of and any combination of these factors could have an adverse impact on our financial conditions, results of operations and cash flows.

Risks Relating to Korea and the Global Economy

Unfavorable financial and economic conditions in Korea and globally may have a material adverse impact on us.

We are incorporated in Korea, where most of our assets are located and most of our income is generated. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea, and our business, results of operations and financial condition are substantially dependent on the Korean consumers’ demand for electricity, which are in turn largely dependent on developments relating to the Korean economy.

The Korean economy is closely integrated with, and is significantly affected by, developments in the global economy and financial markets. In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices and the general weakness of the global economy have contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy, which in turn could adversely affect our business, financial condition and results of operations. As the Korean economy is highly dependent on the health and direction of the global economy, the prices of our securities may be adversely affected by investors’ reactions to developments in other countries. In addition, due to the ongoing volatility in the global financial markets, the value of the Won relative to the U.S. dollar has also fluctuated significantly in recent years, which in turn also may adversely affect our financial condition and results of operations.

Factors that determine economic and business cycles in the Korean or global economy are for the most part beyond our control and inherently uncertain. In light of the high level of interdependence of the global economy, any of the foregoing developments could have a material adverse effect on the Korean economy and financial markets, and in turn on our business and profitability.

 

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More specifically, factors that could have an adverse impact on Korea’s economy in the future include, among others:

 

  

increases in inflation levels, volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (particularly against the U.S. dollar), interest rates, stock market prices and inflows and outflows of foreign capital, either directly, into the stock markets, through derivatives or otherwise, including as a result of increased uncertainty in the wake of the United Kingdom’s formal exit from the European Union on January 31, 2020, commonly known as “Brexit”;

 

  

difficulties in the financial sectors in Europe, China and elsewhere and increased sovereign default risks in certain countries and the resulting adverse effects on the global financial markets;

 

  

adverse developments in the economies of countries and regions to which Korea exports goods and services (such as the United States, Europe, China and Japan), or in emerging market economies in Asia or elsewhere that could result in a loss of confidence in the Korean economy, including potentially as a result of the Brexit;

 

  

potential escalation of the ongoing trade war between the U.S. and China as each country introduces tariffs on goods traded with the other;

 

  

social and labor unrest or declining consumer confidence or spending resulting fromlay-offs, increasing unemployment and lower levels of income;

 

  

uncertainty and volatility and further decreases in the market prices of Korean real estate;

 

  

a decrease in tax revenues and a substantial increase in the Government’s expenditures for unemployment compensation and other social programs that together could lead to an increased Government budget deficit;

 

  

political uncertainty, including as a result of increasing strife among or within political parties in Korea, and political gridlock within the government or in the legislature, which prevents or disrupts timely and effective policy making to the detriment of Korean economy, as well as the impeachment and indictment of the former president following a series of scandals and social unrest, which also involved the investigation of several leading Korean conglomerates and arrest of their leaders on charges of bribery and other possible misconduct;

 

  

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy, including as a result of any potential renegotiation of free trade agreements, or the ongoing tension between Korean and China in relation to the decision to allow deployment by the United States of the Terminal High Altitude Defense system known as “THAAD” in Korea;

 

  

increases in social expenditures to support the aging population in Korea or decreases in economic productivity due to the declining population size in Korea;

 

  

any other development that has a material adverse effect in the global economy, such as an act of war, the spread of terrorism or a breakout of an epidemic such as SARS, avian flu, swine flu, Middle East Respiratory Syndrome, Ebola or Zika virus, novel coronavirus(COVID-19), or natural disasters, earthquakes and tsunamis and the related disruptions in the relevant economies with global repercussions;

 

  

hostilities involvingoil-producing countries in the Middle East and elsewhere and any material disruption in the supply of oil or a material increase in the price of oil resulting from such hostilities; and

 

  

an increase in the level of tensions or an outbreak of hostilities in the Korean peninsula or between North Korea and the United States.

Any future deterioration of the Korean economy could have an adverse effect on our business, financial condition and results of operations.

 

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Tensions with North Korea could have an adverse effect on us and the market value of our shares.

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. In particular, there continues to be uncertainty regarding the long-term stability of North Korea’s political leadership since the succession of KimJong-un to power following the death of his father in December 2011, which has raised concerns with respect to the political and economic future of the region. In February 2017, KimJong-un’s half-brother, KimJong-nam, was reported to have been assassinated in an international airport in Malaysia.

In addition, there continues to be heightened security tension in the region stemming from North Korea’s hostile military and diplomatic actions, including in respect of its nuclear weapons and long-range missile programs. Some examples from recent years include the following:

 

  

In November 2017, North Korea conducted a test launch of another intercontinental ballistic missile, which, due to its improved size, power and range of distance, may potentially enable North Korea to target the United States mainland.

 

  

Recently, on September 3, 2017, North Korea conducted its sixth nuclear test, claiming it had tested a hydrogen bomb that could be mounted on an intercontinental ballistic missile. In response, on September 12, 2017, the United Nations Security Council unanimously adopted a resolution imposing additional sanctions on North Korea including new limits on gas, petrol and oil imports, a ban on textile exports and measures to limit North Korean laborers from working abroad.

 

  

On August 29, 2017, North Korea tested an intermediate-range ballistic missile which flew directly over northern Japan before landing in the Pacific Ocean. In response, the United Nations Security Council unanimously adopted a statement condemning such launch, reiterating demands that North Korea halt its ballistic missile and nuclear weapons programs.

 

  

On July 4, 2017, North Korea tested its first intercontinental ballistic missile. In response, the U.S. government and the Government both issued statements condemning North Korea and conducted a joint military exercise on July 5, 2017. On July 28, 2017, North Korea tested a second intercontinental ballistic missile which landed in the Sea of Japan, inside Japan’s Economic Exclusion Zone. In response, on August 5, 2017, the United Nations Security Council unanimously adopted a resolution that strengthened sanctions on North Korea. The resolution includes a total ban on all exports of coal, iron, iron ore, lead, lead ore and seafood, which is expected to reduce North Korea’s export revenue by a third each year.

 

  

In March 2017, North Korea launched fourmid-range missiles, which landed off the east coast of the Korean peninsula.

 

  

On September 9, 2016, North Korea conducted its fifth nuclear test, which has been the largest in scale among North Korea’s nuclear tests thus far. According to North Korean announcements, the test was successful in detonating a nuclear missile. The test created a sizable earthquake in South Korea. In response, in February 2017 the U.N. Security Council adopted Resolution 2321 (2016) against North Korea, the purpose of which is to strengthen its sanctions regime against North Korea and to condemn North Korea’s September 9, 2016 nuclear test in the strongest terms.

 

  

On February 10, 2016, in retaliation of North Korea’s recent launch of a long-range rocket, South Korea announced that it would halt its operations of the Kaesong Industrial Complex to impede North Korea’s utilization of funds from the industrial complex to finance its nuclear and missile programs. In response, North Korea announced on February 11, 2016 that it would expel all South Korean employees from the industrial complex and freeze all South Korean assets there.

 

  

On February 7, 2016, North Korea launched a rocket, claimed by them to be carrying a satellite intended for scientific observation. The launch was widely suspected by the international community to be a cover for testing a long-range missile capable of carrying a nuclear warhead. On February 18, 2016, the President of the United States signed into law mandatory sanctions on North Korea to punish it for its recent nuclear and missile tests, human rights violations and cybercrimes. The bill, which

 

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marks the first measure by the United States to exclusively target North Korea, is intended to seize the assets of anyone engaging in business related to North Korea’s weapons program, and authorizes US$50 million over five years to transmit radio broadcasts into the country and support humanitarian assistance projects. On March 2, 2016, the United Nations Security Council voted unanimously to adopt a resolution to impose sanctions against North Korea, which include inspection of all cargo going to and from North Korea, a ban on all weapons trade and the expulsion of North Korean diplomats who engage in “illicit activities.” Also, on March 4, 2016, the European Union announced that it would expand its sanctions on North Korea, adding additional companies and individuals to its list of sanction targets. On April 1, 2016, North Korea fired a short-rangesurface-to-air missile in apparent protest of these sanctions adopted by the United States and the United Nations Security Council.

 

  

On January 6, 2016, North Korea announced that it had successfully conducted its first hydrogen bomb test, hours after international monitors detected a 5.1 magnitude earthquake near a known nuclear testing site in the country. The claims have not been verified independently. The alleged test followed a statement made in the previous month by KimJong-un, who claimed that North Korea had developed a hydrogen bomb.

 

  

In August 2015, two Korean soldiers were injured in a landmine explosion near the South Korean demilitarized zone. Claiming the landmines were set by North Koreans, the South Korean armyre-initiated its propaganda program toward North Korea utilizing loudspeakers near the demilitarized zone. In retaliation, the North Korean army fired artillery rounds on the loudspeakers, resulting in the highest level of military readiness for both Koreas. High-ranking officials from North and South Korea subsequently met for discussions and entered into an agreement on August 25, 2015 intending to deflate military tensions.

 

  

From time to time, North Korea has fired short- to medium-range missiles from the coast of the Korean peninsula into the sea. In March 2015, North Korea fired sevensurface-to-air missiles into waters off its east coast in apparent protest of annual joint military exercises being held by Korea and the United States.

 

  

North Korea renounced its obligations under the NuclearNon-Proliferation Treaty in January 2003 and conducted three rounds of nuclear tests between October 2006 to February 2013, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council unanimously passed resolutions that condemned North Korea for the nuclear tests and expanded sanctions against North Korea.

North Korea’s economy also faces severe challenges, including severe inflation and food shortages, which may further aggravate social and political tensions within North Korea. In addition, reunification of Korea and North Korea could occur in the future, which would entail significant economic commitment and expenditure by Korea that may outweigh any resulting economic benefits of reunification. On April 27, 2018, May 26, 2018 and September 18, 2018, President MoonJae-in met KimJong-un in a summit to discuss, among other matters, denuclearization of the Korean Peninsula. On June 12, 2018, President Donald Trump and KimJong-un in turn had an official summit in Singapore and on February 27, 2019, the parties held the second official summit in Hanoi, Vietnam. However, in March 2019, announcement was made that no agreement was reached in the second bilateral summit meeting between the United States and North Korea. On June 30 2019, for the first time, President MoonJae-in, President Donald Trump and KimJong-un met in Panmunjom, a symbolic place of division in Korea, and the parties agreed to resume the United States and North Korea working-level negotiations, and on October 4, 2019, such working-level negotiations took place in Stockholm, Sweden. However, the negotiations did not result in any definitive agreement or anyfollow-up plans.

There can be no assurance that the level of tension on the Korean peninsula will not escalate in the future or that the political regime in North Korea may not suddenly collapse. Any further increase in tension or uncertainty relating to the military, political or economic stability in the Korean peninsula, including a breakdown of diplomatic negotiations over the North Korean nuclear program, occurrence of military hostilities, heightened concerns about the stability of North Korea’s political leadership or its actual collapse, a leadership crisis, a breakdown of high-level contacts or accelerated reunification could have a material adverse effect on our

 

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business, financial condition and results of operations, as well as the price of our common shares and our American depositary shares.

We are generally subject to Korean corporate governance and disclosure standards, which differ in significant respects from those in other countries.

Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies which differ in many respects from standards applicable in other countries, including the United States. As a reporting company registered with the Securities and Exchange Commission and listed on the New York Stock Exchange, we are, and will continue to be, subject to certain corporate governance standards as mandated by the Sarbanes-Oxley Act of 2002, as amended. However, foreign private issuers, including us, are exempt from certain corporate governance standards required under the Sarbanes-Oxley Act or the rules of the New York Stock Exchange. We and our generation subsidiaries are also subject to a number of special laws and regulations to Government-controlled entities, including the Act on the Management of Public Institutions. For a description of significant differences in corporate governance standards, see Item 16G. “Corporate Governance.” There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public ornon-public companies in other countries. Such differences in corporate governance standards and less public information could result in less than satisfactory corporate governance practices or disclosure to investors in certain countries.

You may not be able to enforce a judgment of a foreign court against us.

We are a corporation with limited liability organized under the laws of Korea. Substantially all of our directors and officers and other persons named in this annual report reside in Korea, and all or a significant portion of the assets of our directors and officers and other persons named in this annual report and substantially all of our assets are located in Korea. As a result, it may not be possible for holders of the American depository shares to affect service of process within the United States, or to enforce against them or us in the United States judgments obtained in United States courts based on the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Korea, either in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated on the United States federal securities laws.

Risks Relating to Our American Depositary Shares (ADSs)

There are restrictions on withdrawal and deposit of common shares under the depositary facility.

Under the deposit agreement, holders of shares of our common stock may deposit those shares with the depositary bank’s custodian in Korea and obtain American depositary shares, and holders of American depositary shares may surrender American depositary shares to the depositary bank and receive shares of our common stock. However, under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (i) the aggregate number of shares deposited by us for the issuance of American depositary shares (including deposits in connection with the initial and all subsequent offerings of American depositary shares and stock dividends or other distributions related to these American depositary shares) and (ii) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We have consented to the deposit of outstanding shares of common stock as long as the number of American depositary shares outstanding at any time does not exceed 80,153,810 shares.As a result, if you surrender American depositary shares and withdraw shares of common stock, you may not be able to deposit the shares again to obtain American depositary shares.

Ownership of our shares is restricted under Korean law.

Under the Financial Investment Services and Capital Markets Act, with certain exceptions, a foreign investor may acquire shares of a Korean company without being subject to any single or aggregate foreign

 

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investment ceiling. As one such exception, certain designated public corporations, such as us, are subject to a 40% ceiling on acquisitions of shares by foreigners in the aggregate. The Financial Services Commission may impose other restrictions as it deems necessary for the protection of investors and the stabilization of the Korean securities and derivatives market.

In addition to the aggregate foreign investment ceiling, the Financial Investment Services and Capital Markets Act and our Articles of Incorporation set a 3% ceiling on acquisition by a single investor (whether domestic or foreign) of the shares of our common stock. Any person (with certain exceptions) who holds our issued and outstanding shares in excess of such 3% ceiling cannot exercise voting rights with respect to our shares exceeding such limit.

The ceiling on aggregate investment by foreign investors applicable to us may be exceeded in certain limited circumstances, including as a result of acquisition of:

 

  

shares by a depositary issuing depositary receipts representing such shares (whether newly issued shares or outstanding shares);

 

  

shares by exercise of warrant, conversion right under convertible bonds, exchange right under exchangeable bonds or withdrawal right under depositary receipts issued outside of Korea;

 

  

shares from the exercise of shareholders’ rights; or

 

  

shares by gift, inheritance or bequest.

A foreign investor who has acquired our shares in excess of any ceiling described above may not exercise his voting rights with respect to our shares exceeding such limit and the Financial Services Commission may take necessary corrective action against him.

Holders of our ADSs will not have preemptive rights in certain circumstances.

The Korean Commercial Act and our Articles of Incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the depositary bank, after consultation with us, may make the rights available to you or use reasonable efforts to dispose of the rights on your behalf and make the net proceeds available to you. The depositary bank, however, is not required to make available to you any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:

 

  

a registration statement filed by us under the U.S. Securities Act of 1933, as amended, is in effect with respect to those shares; or

 

  

the offering and sale of those shares is exempt from or is not subject to the registration requirements of the U.S. Securities Act.

We are under no obligation to file any registration statement with the U.S. Securities and Exchange Commission in relation to the registration rights. If a registration statement is required for you to exercise preemptive rights but is not filed by us, you will not be able to exercise your preemptive rights for additional shares and you will suffer dilution of your equity interest in us.

The market value of your investment in our ADSs may fluctuate due to the volatility of the Korean securities market.

Our common stock is listed on the KRX KOSPI Division of the Korea Exchange, which has a smaller market capitalization and is more volatile than the securities markets in the United States and many European countries. The market value of ADSs may fluctuate in response to the fluctuation of the trading price of shares of

 

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our common stock on the Stock Market Division of the Korea Exchange. The Stock Market Division of the Korea Exchange has experienced substantial fluctuations in the prices and volumes of sales of listed securities and the Stock Market Division of the Korea Exchange has prescribed a fixed range in which share prices are permitted to move on a daily basis. Like other securities markets, including those in developed markets, the Korean securities market has experienced problems including market manipulation, insider trading and settlement failures. The recurrence of these or similar problems could have a material adverse effect on the market price and liquidity of the securities of Korean companies, including our common stock and ADSs, in both the domestic and the international markets.

The Korean government has the ability to exert substantial influence over many aspects of the private sector business community, and in the past has exerted that influence from time to time. For example, the Korean government has promoted mergers to reduce what it considers excess capacity in a particular industry and has also encouraged private companies to publicly offer their securities. Similar actions in the future could have the effect of depressing or boosting the Korean securities market, whether or not intended to do so. Accordingly, actual or perceived actions or inactions by the Korean government may cause sudden movements in the market prices of the securities of Korean companies in the future, which may affect the market price and liquidity of our common stock and ADSs.

Your dividend payments and the amount you may realize in connection with a sale of your ADSs will be affected by fluctuations in the exchange rate between the U.S. dollar and the Won.

Investors who purchase the American depositary shares will be required to pay for them in U.S. dollars. Our outstanding shares are listed on the Korea Exchange and are quoted and traded in Won. Cash dividends, if any, in respect of the shares represented by the American depositary shares will be paid to the depositary bank in Won and then converted by the depositary bank into U.S. dollars, subject to certain conditions. Accordingly, fluctuations in the exchange rate between the Won and the U.S. dollar will affect, among other things, the amounts a registered holder or beneficial owner of the American depositary shares will receive from the depositary bank in respect of dividends, the U.S. dollar value of the proceeds which a holder or owner would receive upon sale in Korea of the shares obtained upon surrender of American depositary shares and the secondary market price of the American depositary shares.

If the Government deems that certain emergency circumstances are likely to occur, it may restrict the depositary bank from converting and remitting dividends in U.S. dollars.

If the Government deems that certain emergency circumstances are likely to occur, it may impose restrictions such as requiring foreign investors to obtain prior Government approval for the acquisition of Korean securities or for the repatriation of interest or dividends arising from Korean securities or sales proceeds from disposition of such securities. These emergency circumstances include any or all of the following:

 

  

sudden fluctuations in interest rates or exchange rates;

 

  

extreme difficulty in stabilizing the balance of payments; and

 

  

a substantial disturbance in the Korean financial and capital markets.

The depositary bank may not be able to secure such prior approval from the Government for the payment of dividends to foreign investors when the Government deems that there are emergency circumstances in the Korean financial markets.

 

ITEM 4.

INFORMATION ON THE COMPANY

Item 4.A. History and Development of the Company

General Information

Our legal and corporate name is Korea Electric Power Corporation. We were established by the Government on December 31, 1981 as a statutory juridical corporation in Korea under the Korea Electric Power Corporation

 

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(“KEPCO”) Act as the successor to Korea Electric Company. Our registered office is located at 55Jeollyeok-ro,Naju-si,Jeollanam-do, 58322, Korea, and our telephone number is82-61-345-4213. Our website address iswww.kepco.co.kr.

Our agent in the United States is Korea Electric Power Corporation, North America Office, located at 7th Floor, Parker Plaza, 400 Kelby Street, Fort Lee, NJ 07024.

The Korean electric utility industry traces its origin to the establishment of the first electric utility company in Korea in 1898. On July 1, 1961, the industry was reorganized by the merger of Korea Electric Power Company, Seoul Electric Company and South Korea Electric Company, which resulted in the formation of Korea Electric Company. From 1976 to 1981, the Government acquired the private minority shareholdings in Korea Electric Company. After the Government acquired all the remaining shares of Korea Electric Company, Korea Electric Company was dissolved, and we were incorporated in 1981 and assumed the assets and liabilities of Korea Electric Company. We ceased to be wholly owned by the Government in 1989 when the Government sold 21% of our common stock. As of December 31, 2019, the last day on which our shareholders registry was closed, the Government maintained 51.1% ownership in aggregate of our common shares by direct holdings by the Government and indirect holdings through Korea Development Bank, a statutory banking institution wholly owned by the Government.

Under relevant laws of Korea, the Government is required to own, directly or indirectly, at least 51% of our capital. Direct or indirect ownership of more than 50% of our outstanding common stock enables the Government to control the approval of certain corporate matters relating to us that require a shareholders’ resolution, including approval of dividends. The rights of the Government and Korea Development Bank as holders of our common stock are exercised by the Ministry of Trade, Industry and Energy, based on the Government’s ownership of our common stock and a proxy received from Korea Development Bank, in consultation with the Ministry of Economy and Finance.

We operate under the general supervision of the Ministry of Trade, Industry and Energy. The Ministry of Trade, Industry and Energy, in consultation with the Ministry of Economy and Finance, is responsible for approving, subject to review by the Korea Electricity Commission, the electricity rates we charge our customers. See Item 4.B. “Business Overview—Sales and Customers—Electricity Rates.” We furnish reports to officials of the Ministry of Trade, Industry and Energy, the Ministry of Economy and Finance and other Government agencies and regularly consult with such officials on matters relating to our business and affairs. See Item 4.B. “Business Overview—Regulation.” Ournon-standing directors, who comprise a majority of our board of directors, must be appointed by the Ministry of Economy and Finance following the review and resolution of the Public Agencies Operating Committee (which is established by law and chaired by the minister of the Ministry of Economy and Finance and whose members consist of Government officials and others appointed by the President of the Republic based on recommendation by the minister of the Ministry of Economy and Finance) from a pool of candidates recommended by the director nomination committee. Our president and standing directors who concurrently serve as members of our audit committee must be appointed by the President of the Republic upon the motion of the minister of the Ministry of Trade, Industry and Energy (in the case of our president) and the minister of the Ministry of Economy and Finance (in the case of our standing director who concurrently serves as a member of the audit committee) and following the nomination by our director nomination committee, the review and resolution of the Public Agencies Operating Committee and an approval at the general meeting of shareholders. See Item 6.A. “Directors and Senior Management—Board of Directors” and Item 16G. “Corporate Governance—The Act on the Management of Public Institutions”).

Item 4.B. Business Overview

Introduction

We are an integrated electric utility company engaged in the transmission and distribution of substantially all of the electricity in Korea. Through our six wholly-owned generation subsidiaries, we also generate the substantial majority of electricity produced in Korea. As of December 31, 2019, we and our generation

 

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subsidiaries owned approximately 66.8% of the total electricity generation capacity in Korea (excluding plants generating electricity primarily for private or emergency use). In 2019, we sold to our customers 520,499 gigawatt-hours of electricity. We purchase electricity principally from our generation subsidiaries and, to a lesser extent, from independent power producers. Of the 529,075 gigawatt-hours of electricity we purchased in 2019, 27.0% was generated by KHNP, our wholly-owned nuclear and hydroelectric power generation subsidiary, 46.2% was generated by our wholly-owned fivenon-nuclear generation subsidiaries and 26.8% was generated by independent power producers that trade electricity to us through the cost-based pool system of power trading (excluding independent power producers that supply electricity under power purchase agreements with us). Our fivenon-nuclear generation subsidiaries are KOSEP, KOMIPO, KOWEPO, KOSPO and EWP, each of which is wholly owned by us and is incorporated in Korea. We derive substantially all of our revenues and profit from Korea, and substantially all of our assets are located in Korea.

In 2019, we had sales of Won 58,568 billion and net loss of Won 2,264 billion, compared to sales of Won 60,033 billion and net loss of Won 1,175 billion in 2018.

Our revenues are closely tied to demand for electricity in Korea. Demand for electricity in Korea increased at a compounded average growth rate of 1.8% per annum from 2015 to 2019, compared to the real gross domestic product, or GDP, which increased at a compounded average growth rate of 2.7% during the same period, according to the Bank of Korea. During 2019, the GDP growth rate was 2.0%, while the demand for electricity in Korea during the same year decreased by 1.1%.

Strategy

As our overall strategy, we seek to become a leading global energy enterprise by actively responding to the market’s demand for a stable supply of clean, safe, affordable and convenient source of energy. To this end, we plan to develop key competencies needed for digital transformation of our operations and energy transition. We also aim to strengthen competitiveness in our core operations and to develop new businesses and markets by focusing onlow-carbon and renewable energy projects. We evaluate and renew ourmid- to long-term strategy every three years, and in 2019 established the “Vision 2030Mid- to Long-Term Strategy.” Under this vision, we will aim for sustainable growth of our operations through the supply of clean energy as well as a balanced new industry initiatives with growth potential.

 

  

Expand clean energy and stabilize electricity supply and demand. We plan to contribute to the Government’s Nationally Determined Contributions (NDCs) by reducing greenhouse gas emissions from our generation subsidiaries and leading large-scale projects to promote the use of renewable energy. In addition, we will focus on ensuring smooth and stable connection for the renewable energy as part of our energy networks. We will also seek to enhance the efficiency of our electricity networks through the use of advanced technology.

 

  

Enhance sales profitability and competitiveness. We will seek to become a market leader through the development of customized tariffs and new services. We will also maintain profitability through the cost-based tariff system and improve the demand-side efficiency to streamline energy use at the national level.

 

  

Explore convergence-based new businesses and markets.We plan to selectively focus on and pursue profitable new businesses throughin-depth market analysis (considering the market environment and our capabilities) to build a business ecosystem. In connection with our overseas business, we plan to explore opportunities to developlow-carbon, renewable energy to expand our market and to diversify our portfolio and provide suitable solutions meeting the different needs of various countries.

 

  

We will focus on R&D and commercialization of technologies essential to achieving our strategy. We will also create a platform for developing new businesses and enhance the efficiency of our operations based on digital technology.

 

  

In order to develop a management system suitable for sustainable growth, we will continue to develop sound corporate governance, financial structure and human resources. In addition, we will continue to

 

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implement the environment, health and safety management system and focus on fostering shared social values and growth with local communities.

Government Ownership and Our Interactions with the Government

The KEPCO Act requires that the Government own at least 51% of our capital stock. Direct or indirect ownership of more than 50% of our outstanding common stock enables the Government to control the approval of certain corporate matters which require a shareholders’ resolution, including approval of dividends. The rights of the Government and Korea Development Bank as holders of our common stock are exercised by the Ministry of Trade, Industry and Energy in consultation with the Ministry of Economy and Finance. We are currently not aware of any plans of the Government to cease to own, directly or indirectly, at least 51% of our outstanding common stock.

We play an important role in the implementation of the Government’s national energy policy, which is established in consultation with us, among other parties. As an entity formed to serve public policy goals of the Government, we seek to maintain a fair level of profitability and strengthen our capital base in order to support the growth of our business in the long term.

The Government, through its various policy initiatives for the Korean energy industry as well as direct and indirect supervision of us and our industry, plays an important role in our business and operations. Most importantly, the electricity tariff rates we charge to our customers are regulated by the Government taking into account, among others, our needs to recover the costs of operations, make capital investments and recoup a fair return on capital invested by us, as well as the Government’s overall policy considerations, such as inflation. See Item 4.B. “Business Overview—Sales and Customers—Electricity Rates.”

In addition, pursuant to the Basic Plan determined by the Government, we and our generation subsidiaries have made, and plan to make, substantial expenditures for the construction of generation plants and other facilities to meet demand for electric power. See Item 5.B. “Liquidity and Capital Resources—Capital Requirements.”

Restructuring of the Electric Power Industry in Korea

On January 21, 1999, the Ministry of Trade, Industry and Energy published the Restructuring Plan. The overall objectives of the Restructuring Plan consisted of: (i) introducing competition and thereby increasing efficiency in the Korean electric power industry, (ii) ensuring a long-term, inexpensive and stable electricity supply, and (iii) promoting consumer convenience through the expansion of consumer choice.

The following provides further details relating to the Restructuring Plan.

Phase I

During Phase I, which served as a preparatory stage for Phase II and lasted from the announcement of the Restructuring Plan in January 1999 until April 2001, we undertook steps to split our generation business units off into one wholly-owned nuclear generation subsidiary (namely, KHNP) and five wholly-ownednon-nuclear generation subsidiaries (namely, KOSEP, KOMIPO, KOWEPO, KOSPO and EWP), each with its own management structure, assets and liabilities. These steps were completed upon approval at our shareholders’ meeting in April 2001.

The Government’s principal objectives in thesplit-off of the generation units into separate subsidiaries were to: (i) introduce competition and thereby increase efficiency in the electricity generation industry in Korea, and (ii) ensure a stable supply of electricity in Korea.

Following the implementation of Phase I, we have substantial monopoly with respect to the transmission and distribution of electricity in Korea.

 

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While our ownership percentage of our generation subsidiaries will depend on further adjustments to the Restructuring Plan to be adopted by the Government, we plan to retain 100% ownership of our transmission and distribution business.

Phase II

At the outset of Phase II in April 2001, the Government introduced a cost-based competitive bidding pool system under which we purchase power from our generation subsidiaries and other independent power producers for transmission and distribution to customers. For a further description of this system, see “—Purchase of Electricity—Cost-based Pool System” below.

Pursuant to the Electric Utility Act amended in December 2000, the Government established the Korea Power Exchange in April 2001. The primary function of the Korea Power Exchange is to deal with the sale of electricity and implement regulations governing the electricity market to allow for electricity distribution through a competitive bidding process. The Government also established the Korea Electricity Commission in April 2001 to regulate the Korean electric power industry and ensure fair competition among industry participants. To facilitate this goal, the Korea Power Exchange established the Electricity Market Rules relating to the operation of the bidding pool system. To amend the Electricity Market Rules, the Korea Power Exchange must have the proposed amendment reviewed by the Korea Electricity Commission and then obtain the approval of the Ministry of Trade, Industry and Energy.

The Korea Electricity Commission’s main functions include implementation of standards and measures necessary for electricity market operation and review of matters relating to licensing participants in the Korean electric power industry. The Korea Electricity Commission also acts as an arbitrator in tariff-related disputes among participants in the Korean electric power industry and investigates illegal or deceptive activities of the industry participants.

Privatization of Generation Subsidiaries

In April 2002, the Ministry of Trade, Industry and Energy released the basic privatization plan for five of our generation subsidiaries other than KHNP. Pursuant to this plan, we commenced the process of selling our equity interest in KOSEP in 2002. According to the original plan, this process was, in principle, to take the form of a sale of management control, potentially supplemented by an initial public offering as a way of broadening the investor base. In November 2003, KOSEP submitted its application to the Korea Exchange for a preliminary screening review, which was approved in December 2003. However, in June 2004, KOSEP made a request to the Korea Exchange to delay its stock listing due to unfavorable stock market conditions at that time.

In accordance with the Proposal for Adjustment of Functions of Public Institutions (Energy Sector) announced by the Government in June 2016, we considered a sale in the public market of a minority of our shares in our fivenon-nuclear generation subsidiaries, KEPCO KDN and KHNP gradually. However, the planned sales have been put on hold, primarily due to prevailing market conditions. In any event, we plan to maintain a controlling stake in each of these subsidiaries.

Suspension of the Plan to Form and Privatize Distribution Subsidiaries

In 2003, the Government established a Tripartite Commission consisting of representatives of the Government, leading businesses and labor unions in Korea to deliberate on ways to introduce competition in electricity distribution, such as by forming and privatizing new distribution subsidiaries. In 2004, the Tripartite Commission recommended not pursuing such privatization initiatives but instead creating independent business divisions within us to improve operational efficiency through internal competition. Following the adoption of such recommendation by the Government in 2004 and further studies by Korea Development Institute, in 2006 we created nine “strategic business units” (which, together with our other business units, were subsequently restructured into 14 such units in February 2012) that have a greater degree of autonomy with respect to management, financial accounting and performance evaluation while having a common focus on increasing profitability.

 

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Initiatives to Improve the Structure of Electricity Generation

In August 2010, the Ministry of Trade, Industry and Energy announced the Proposal for Improvement in the Structure of the Electric Power Industry in order to resolve uncertainty related to restructuring plans for the electric power industry and maintain competitiveness of the electric power industry. Key initiatives of the proposal included the following: (i) maintain the current structure of having six generation subsidiaries and designate the six generation subsidiaries as market-oriented public enterprises under the Act on the Management of Public Institutions in order to foster competition among the generation subsidiaries and promote efficiency in their operations, (ii) clarify the scope of the business of us and the six generation subsidiaries (namely, that we shall manage the financial structure and governance of the six generation subsidiaries and nuclear power plant and overseas resources development projects, while the six generation subsidiaries will have greater autonomy with respect to construction and management of generation units and procurement of fuel), (iii) create a nuclear power export business unit to systematically enhance our capabilities to win projects involving the construction and operation of nuclear power plants overseas, (iv) further rationalize the electricity tariff by adopting a fuel-cost based tariff system in 2011 and a voltage-based tariff system in a subsequent year, and (v) create separate accounting systems for electricity generation, transmission, distribution and sales with the aim of introducing competition in electricity sales in the intermediate future.

In January 2011, the Ministry of Economy and Finance created a “joint cooperation unit” consisting of officers and employees selected from the five thermal power generation subsidiaries in order to reduce inefficiencies in areas such as fuel transportation, inventories, materials and equipment and construction, etc. and allow the thermal power generation subsidiaries to continue utilizing the benefits of economy of scale after split off of our generation business units into separate subsidiaries. The purpose of the joint cooperation unit was to give greater autonomy to the generation subsidiaries with regard to power plant construction and management and fuel procurements, and thereby enhance efficiency in operating power plants. The main functions of the joint cooperation unit are as follows: (i) maintain inventories of bituminous coal through volume exchanges and joint purchases, (ii) reduce shipping and demurrage expenses through joint operation and distribution of dedicated vessels, (iii) reduce costs by sharing information on generation material inventories and (iv) sharing human resources among the five thermal power generation subsidiaries for construction projects, among other things.

Furthermore, in January 2011 the six generation subsidiaries were officially designated as “market-oriented public enterprises,” whereupon the President of Korea appoints the president and the statutory auditor of each such subsidiary; the selection ofnon-standing directors of each such subsidiary is subject to approval by the minister of the Ministry of Economy and Finance; the president of each such subsidiary is required to enter into a management contract directly with the minister of the Ministry of Trade, Industry and Energy; and the Public Enterprise Management Evaluation Team which is established by the Public Agencies Operating Committee conducts performance evaluation of such subsidiaries. Previously, our president appointed the president and the statutory auditor of each such subsidiary; the selection ofnon-standing directors of each such subsidiary was subject to approval by our president; the president of each such subsidiary entered into a management contract with our president; and our evaluation committee conducted performance evaluation of such subsidiaries. For further details of the impact of the designation of our generation subsidiaries as “market-oriented public enterprises,” see Item 16G.—Corporate Governance—The Act on the Management of Public Institutions.

Proposal for Adjustment of Functions of Public Institutions (Energy Sector)

In June 2016, the Government announced the Proposal for Adjustment of Functions of Public Institutions (Energy Sector) for the purpose of streamlining the operations of government-affiliated energy companies by discouraging them from engaging in overlapping or similar businesses with each other, reducingnon-core assets and activities and improving management and operational efficiency. The initiatives contemplated in this proposal that would affect us and our generation subsidiaries include the following: (i) the generation companies should take on greater responsibilities in overseas resource exploration and production projects as these involve procurement of fuels necessary for electricity generation while fostering cooperation among each other through closer coordination, (ii) KHNP should take a greater role in export of nuclear technology, and (iii) the current system of retail sale of electricity toend-users should be liberalized to encourage more competition. In accordance therewith, we transferred a substantial portion of our assets and liabilities in our overseas resource business to our generation subsidiaries as of December 31, 2016. In addition, this Proposal contemplated selling a minority stake in our generation subsidiaries and KEPCO KDN, butthe planned sales have been put on hold, as discussed above in “—Privatization of Generation Subsidiaries.”

 

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Purchase of Electricity

Cost-based Pool System

Since April 2001, the purchase and sale of electricity in Korea is required to be made through the Korea Power Exchange, which is a statutorynot-for-profit organization established under the Electric Utility Act with responsibilities for setting the price of electricity, handling the trading and collecting relevant data for the electricity market in Korea. The suppliers of electricity in Korea consist of our six generation subsidiaries, which weresplit-off from us in April 2001, and independent power producers, which numbered 20 (excluding renewable energy producers) as of December 31, 2019. We distribute electricity purchased through the Korea Power Exchange to end users.

Our Relationship with the Korea Power Exchange

The key features of our relationships with the Korea Power Exchange include the following: (i) we and our six generation subsidiaries are member corporations of the Korea Power Exchange and collectively own 100% of its share capital, (ii) three of the 11 members of the board of directors of the Korea Power Exchange are currently our or our subsidiaries’ employees, and (iii) one of our employees is currently a member in three of the key committees of the Korea Power Exchange that are responsible for evaluating the costs of producing electricity, making rules for the Korea Power Exchange and gathering and disclosing information relating to the Korean electricity market.

Notwithstanding the foregoing relationships, however, we do not have control over the Korea Power Exchange or its policies since, among others, (i) the Korea Power Exchange, its personnel, policies, operations and finances are closely supervised and controlled by the Government, namely through the Ministry of Trade, Industry and Energy, and are subject to a host of laws and regulations, including, among others, the Electric Utility Act and the Act on the Management of Public Institutions, as well as the Articles of Incorporation of the Korea Power Exchange, (ii) we are entitled to elect no more thanone-third of the Korea Power Exchange directors and our representatives represent only a minority of its board of directors and committees (with the other members being comprised of representatives of the Ministry of Trade, Industry and Energy, employees of the Korea Power Exchange, businesspersons and/or scholars), and (iii) the role of our representatives in the policy making process for the Korea Power Exchange is primarily advisory based on their technical expertise derived from their employment at us or our generation subsidiaries. Consistent with this view, the Finance Supervisory Service issued a ruling in 2005 that stated that we are not deemed to have significant influence or control over the decision-making process of the Korea Power Exchange relating to its business or financial affairs.

Pricing Factors

The price of electricity in the Korean electricity market is determined principally based on the cost of generating electricity using a system known as the “cost-based pool” system. Under the cost-based pool system, the price of electricity has two principal components, namely the marginal price (representing the variable cost of generating electricity) and the capacity price (representing the fixed cost of generating electricity).

Under the merit order system, the electricity purchase allocation, the system marginal price (as described below) and the final allocation adjustment are automatically determined based on an objective formula. The variable cost (including the adjusted coefficient as described below) and the capacity price are determined in advance of trading by the Cost Evaluation Committee, which is comprised of representatives from the Ministry of Trade, Industry and Energy, the Korea Power Exchange, us, generation companies, scholars and researchers (the “Cost Evaluation Committee”). Accordingly, a supplier of electricity cannot exercise control over the merit order system or its operations to such supplier’s strategic advantage.

Marginal Price

The primary purpose of the marginal price is to compensate the generation companies for fuel costs, which represents the principal component of the variable costs of generating electricity. We currently refer such marginal price as the “system marginal price.”

 

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The system marginal price represents, in effect, the marginal price of electricity at a given hour at which the projected demand for electricity and the projected supply of electricity for such hour intersect, as determined by the merit order system, which is a system used by the Korea Power Exchange to allocate which generation units will supply electricity for which hour and at what price. To elaborate, the projected demand for electricity for a given hour is determined by the Korea Power Exchange based on a forecast made one day prior to trading, and such forecast takes into account, among others, historical statistics relating to demand for electricity nationwide by day and by hour, seasonality andon-peak-hour versusoff-peak hour demand analysis. The projected supply of electricity at a given hour is determined as the aggregate of the available capacity of all generation units that have submitted bids to supply electricity for such hour. These bids are submitted to the Korea Power Exchange one day prior to trading.

Under the merit order system, the generation unit with the lowest variable cost of producing electricity among all the generation units that have submitted a bid for a given hour is first awarded a purchase order for electricity up to the available capacity of such unit as indicated in its bid. The generation unit with the next lowest variable cost is then awarded a purchase order up to its available capacity in its bid, and so forth, until the projected demand for electricity for such hour is met. We refer to the variable cost of the generation unit that is the last to receive the purchase order for such hour as the system marginal price, which also represents the highest price at which electricity can be supplied at a given hour based on the demand and supply for such hour. Generation units whose variable costs exceed the system marginal price for a given hour do not receive purchase orders to supply electricity for such hour. The variable cost of each generation unit is determined by the Cost Evaluation Committee on a monthly basis and reflected in the following month based on the fuel costs two months prior to such determination. The purpose of the merit order system is to encourage generation units to reduce its electricity generation costs by making its generation process more efficient, sourcing fuels from most cost-effective sources or adopting other cost savings programs.

The final allocation of electricity supply is further adjusted on the basis of other factors, including the proximity of a generation unit to the geographical area to which power is being supplied, network and fuel constraints and the amount of power loss. This adjustment mechanism is designed to adjust for transmission losses in order to improve overall cost-efficiency in the transmission of electricity toend-users.

The price of electricity at which our generation subsidiaries sell electricity to us is determined using the following formula:

Variable cost + [System marginal price – Variable cost] * Adjusted coefficient

An adjusted coefficient applies in principle to all generation units operated by our generation subsidiaries and the coal-fired generation units operated by independent power producers. The adjusted coefficient applicable to the generation units operated by our generation subsidiaries is determined based on considerations of, among others, electricity tariff rates, the differential generation costs for different fuel types and the relative fair returns on investment in respect of us compared to our generation subsidiaries. The purpose of the adjusted coefficient here is to prevent electricity trading from resulting in undue imbalances as to the relative financial results among generation subsidiaries as well as between us (as the purchaser of electricity) and our generation subsidiaries (as sellers of electricity). Such imbalances may arise from excessive profit taking by base load generators (on account of their inherently cheaper fuel cost structure compared tonon-base load generators) as well as from fluctuations in fuel prices (it being the case that during times of rapid and substantial rises in fuel costs which are not offset by corresponding rises in electricity tariff rates charged by us toend-users, on anon-consolidated basis our profitability will decline compared to that our generation subsidiaries since our generation subsidiaries are entitled to sell electricity to us at cost plus a guaranteed margin). In comparison, the adjusted coefficient applicable to the coal-fired generation units operated by independent power producers is determined to enable such independent power producers to recover the total costs of building and operating such units.

The adjusted coefficient applicable to our generation subsidiaries is currently set at the highest level for the marginal price of electricity generated using nuclear fuel, followed by coal and (depending the prevailing relative market prices) oil and/or LNG. The differentiated adjusted coefficients reflect the Government’s prevailing energy policy objectives and have the effect of setting priorities in the fuel types to be used in electricity generation.

 

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The adjusted coefficient is determined by the Cost Evaluation Committee in principle on an annual basis, although in exceptional cases driven by external or structural factors such as rapid and substantial changes in fuel costs, adjustments to electricity tariff rates or changes in the electricity pricing structure, the adjusted coefficient may be adjusted on a quarterly basis.

Previously, it was contemplated that the vesting contract system, as described below, would gradually replace the application of the adjusted coefficient. However, since the implementation of the vesting contract system has been suspended indefinitely, it is unlikely to impact the application of the adjusted coefficient in the foreseeable future.

Capacity Price

In addition to payment in respect of the variable cost of generating electricity, generation units receive payment in the form of capacity price, the purpose of which is to compensate them for the fixed costs of constructing generation facilities, provide incentives for construction of new generation units and maintain reliability of the nationwide electricity transmission network.

The capacity price is determined by the Cost Evaluation Committee as a function of the following factors: (i) reference capacity price, (ii) reserve capacity factor,(iii) time-of-the-day capacity coefficient and (iv) since October 2016, fuel switching factor. Thetime-of-the-day capacity coefficient are determined annually before the end of December for the subsequent12-months period. The reference capacity price, reserve capacity factor and the fuel switching factor are determined annually before the end of June for the subsequent12-months period.

The reference capacity price refers to the Won amount per kilowatt-hour payable annually for annualized available capacity indicated in the bids submitted the day before trading (provided that such capacity is actually available on the relevant day of trading), and is determined based on the construction costs and maintenance costs of a standard generation unit and related transmission access facilities, and a base rate for loading electricity. Prior to October 2016, the same reference capacity price applied uniformly to all generation units. Since October 2016, the reference capacity price applies differentially to each generation unit depending on the start year of its commercial operation. Accordingly, the reference capacity price currently ranges from Won 9.46 to 10.68 per kilowatt hour.

The reserve capacity factor relates to the requirement to maintain a standard capacity reserve margin in the range of 13% in order to prevent excessive capacitybuild-up as well as induce optimal capacity investment at the regional level. The capacity reserve margin is the ratio of peak demand to the total available capacity. Under this system, generation units in a region where available capacity is insufficient to meet demand for electricity as evidenced by failing to meet the standard capacity reserve margin receive increased capacity price. Conversely, generation units in a region where available capacity exceeds demand for electricity as evidenced by exceeding the standard capacity reserve margin receive reduced capacity price. Since October 2016, the reserve capacity factor also factors in the transmission loss per generation unit in order to favor transmission of electricity from a nearby generation unit.

Thetime-of-the-day capacity coefficient allows hourly and seasonal adjustments in order to incentivize our generation subsidiaries to operate their generation facilities at full capacity during periods of highest demand. For example, the capacity price paid differs depending on whether the relevant hour is an“on-peak” hour, a“mid-peak” hour or an“off-peak” hour (the capacity price being highest for theon-peak hours and lowest for theoff-peak hours) and the capacity price paid is highest during the months of January, July and August when electricity usage is highest due to weather conditions.

The fuel switching factor, which was introduced in October 2016 to promote environmental sensitivities to climate change, seeks to encourage reduced greenhouse gas emission by penalizing generation units (mostly coal-fired units) for excessive greenhouse gas emission.

Other than subject to the aforementioned variations, the same capacity pricing mechanism applies to all generation units regardless of fuel types used.

 

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Vesting Contract System

In May 2014, the Electric Utility Act was amended to introduce a “vesting contract” system in determining the price and quantity of electricity to be sold and purchased between the purchaser of electricity (namely, us) and the sellers of electricity (namely, our generation subsidiaries and independent power producers). Under the vesting contract system, electricity generators using base load fuels (such as nuclear, coal, hydro andby-product gas) at a particular generation unit were to be required to enter into a contract with the purchaser of electricity (namely, us), which specifies, among other things, the quantity of electricity to be generated and sold at a particular generation unit and the price at which such electricity is sold, subject to certain adjustments.

The vesting contract system was introduced principally to prevent excessive profit-taking bylow-cost producers of electricity using base load fuels (such as nuclear, coal, hydro andby-product gas) by replacing the adjusted coefficient as the basis for determining the guaranteed return to generation companies, as well as to enhance the stability of electricity supply by requiring long-term contractual arrangements for the purchase and sale of electricity and promote cost savings, productivity enhancements and operational efficiency by providing incentives and penalties depending on the degree to which the generation companies could supply electricity at costs below the contracted electricity prices.

In order to minimize undue shock to the electricity trading market in Korea, the vesting contract system was to be implemented in phases starting withby-productgas-based electricity in 2015, which accounted for 1.8% of electricity purchased by us during such year. The rollout of the vesting contract system was further studied by a task force consisting of representatives from the Government, the Korea Power Exchange and generation companies.

Following such study, the Government announced in June 2016 that, due to changes in the electricity business environment (including an increase in generation capacity relative to peak usage, reduced fuel costs following a decline in oil prices and greater environmental concerns related to coal-fired electricity generation), it will indefinitely suspend any further rollout of the vesting contract system beyondby-productgas-based electricity, and revert to the adjusted coefficient-based electricity pricing adjustment mechanism.

 

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Power Trading Results

The results of power trading, as effected through the Korea Power Exchange, for our generation subsidiaries and independent power producers in 2019 are as follows:

 

   

Items

 Volume
(Gigawatt
hours)
  Percentage
of Total
Volume
(%)
  Sales to
KEPCO(2) (in
billions of
Won)
  Percentage
of Total
Sales (%)
  Unit Price
(Won/kWh)
 

Generation Companies

  KHNP  142,949   27.0   8,608   18.1   60.22 
  KOSEP  60,361   11.4   5,354   11.2   88.70 
  KOMIPO  43,342   8.2   4,435   9.3   102.33 
  KOWEPO  44,178   8.3   4,354   9.1   98.56 
  KOSPO  48,933   9.2   4,987   10.5   101.91 
  EWP  48,144   9.1   4,658   9.8   96.75 
  Others(1)  141,168   26.8   15,290   32.1   108.31 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  

Total

  529,075   100.0   47,686   100.0   90.13 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Energy Sources

  Nuclear  138,607   26.2   8,094   17.0   58.39 
  Bituminous coal  215,012   40.6   18,808   39.4   87.47 
  Anthracite coal  2,331   0.4   240   0.5   102.85 
  Oil  5,105   1.0   1,149   2.4   225.12 
  LNG/Combined-cycle  138,655   26.2   16,519   34.6   119.13 
  Renewables  23,220   4.4   2,176   4.6   93.72 
  Hydro  2,193   0.4   236   0.5   107.83 
  Pumped storage  3,444   0.7   419   0.9   121.62 
  Others  508   0.1   45   0.1   88.79 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  

Total

  529,075   100.0   47,686   100.0   90.13 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Load

  Base load  355,950   67.3   27,141   56.9   76.25 
  Non-base load  173,125   32.7   20,545   43.1   118.67 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  

Total

  529,075   100.0   47,686   100.0   90.13 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

Notes:

 

(1)

Others represent independent power producers that trade electricity through the cost-based pool system of power trading (excluding independent power producers that supply electricity under power purchase agreements with us).

(2)

Based on the payment made by us through Korea Power Exchange

Power Purchased from Independent Power Producers Under Power Purchase Agreements

In 2019, we purchased an aggregate of 17,446gigawatt hours of electricity generated by independent power producers under existing power purchase agreements. These independent power producers had an aggregate generation capacity of 9,274 megawatts as of December 31, 2019.

Power Generation

As of December 31, 2019, we and our generation subsidiaries had a total of 671 generation units, including nuclear, thermal, hydroelectric and internal combustion units, representing total installed generation capacity of 83,672 megawatts. Our thermal units produce electricity using steam turbine generators fired by coal and oil. Our internal combustion units use oil or diesel-fired gas turbines and our combined-cycle units are primarilyLNG-fired. We also purchase power from several generation plants not owned by our generation subsidiaries.

 

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The table below sets forth as of and for the year ended December 31, 2019 the number of units, installed capacity and the average capacity factor for each type of generating facilities owned by our generation subsidiaries.

 

   Number of
Units
   Installed
Capacity(1)
   Average Capacity
Factor(2)
 
       (Megawatts)   (Percent) 

Nuclear

   24    23,250    70.6 

Thermal:

      

Coal

   59    34,311    70.5 

Oil

   7    2,600    8.1 

Total thermal

   66    36,911    66.1 
  

 

 

   

 

 

   

 

 

 

Internal combustion

   217    341    19.4 

Combined-cycle(3)

   114    16,485    27.0 

Integrated gasification combined cycle(4)

   1    346    34.0 

Hydro

   57    5,352    11.0 

Wind

   14    139    20.2 

Solar

   152    170    12.7 

Fuel cell

   19    165    55.5 

Bio

   6    505    65.4 

Others(5)

   1    10    34.1 
  

 

 

   

 

 

   

 

 

 

Total

   671    83,672    55.8 
  

 

 

   

 

 

   

 

 

 

 

Notes:

 

(1)

Installed capacity represents the level of output that may be sustained continuously without significant risk of damage to plant and equipment.

(2)

Average capacity factor represents the total number of kilowatt hours of electricity generated in the indicated period divided by the total number of kilowatt hours that would have been generated if the generation units were continuously operated at installed capacity, expressed as a percentage.

(3)

Involves generation through gas and oil.

(4)

Involves generation through coal and gasified coal.

(5)

Includeswaste-to-energy.

The expected useful life of a unit, assuming no substantial renovation, is approximately as follows: nuclear, over 40 years; thermal, over 30 years; internal combustion, over 25 years; and hydroelectric, over 55 years. Substantial renovation can extend the useful life of thermal units by up to 20 years.

We seek to achieve efficient use of fuels and diversification of generation capacity by fuel type. In the past, we relied principally uponoil-fired thermal generation units for electricity generation. Since the oil shock in 1974, however, Korea’s power development plans have emphasized the construction of nuclear generation units. While nuclear units are more expensive to construct than thermal generation units of comparable capacity, nuclear fuel is less expensive than fossil fuels in terms of electricity output per unit cost. However, efficient operation of nuclear units requires that such plants be run continuously at relatively constant energy output levels. As it is impractical to store large quantities of electrical energy, we seek to maintain nuclear power production capacity at approximately the level at which demand for electricity is continuously stable. During those times when actual demand exceeds the usual level of electricity supply from nuclear power, we rely on units fired by fossil fuels and hydroelectric units, which can be started and shut down more quickly and efficiently than nuclear units, to meet the excess demand. Bituminous coal is currently the least expensive thermal fuel per kilowatt-hour of electricity produced, and therefore we seek to maximize the use of bituminous coal for generation needs in excess of the stable demand level, except for meeting short-term surges in demand which require rapidstart-up and shutdown. Thermal units fired by LNG, hydroelectric units and internal

 

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combustion units are the most efficient types of units for rapidstart-ups and shutdowns, and therefore we use such units principally to meet short-term surges in demand. Anthracite coal is a less efficient fuel source than bituminous coal in terms of electricity output per unit cost.

Our generation subsidiaries have constructed and operated thermal and internal combustion units in order to help meet power demand. Subject to market conditions, our generation subsidiaries plan to continue to add additional thermal and internal combustion units. These units generally take less time to complete construction than nuclear units.

The high average age of ouroil-fired thermal units is attributable to our reliance onoil-fired thermal units as the primary means of electricity generation untilmid-1970s. Since then, we have diversified our fuel sources and constructed relatively fewoil-fired thermal units compared to units of other fuel types.

The table below sets forth, for the periods indicated, the amount of electricity generated by facilities linked to our grid system and the amount of power used or lost in connection with transmission and distribution.

 

   2015   2016   2017   2018   2019   % of 2019
Gross
Generation(1)
 
   (in gigawatt hours, except percentages) 

Electricity generated by us and our generation subsidiaries:

            

Nuclear

   164,762    161,995    148,426    133,505    145,910    25.9 

Coal

   207,533    207,912    227,186    222,818    211,785    37.6 

Oil

   8,822    13,055    5,242    5,845    1,842    0.3 

LNG

   222    369    220    —      —      —   

Internal combustion

   633    573    496    528    579    0.1 

Combined-cycle

   45,923    46,477    36,957    46,780    39,049    6.9 

Hydro

   4,424    4,835    5,263    5,187    4,477    0.8 

Wind

   181    186    209    195    192    0.03 

Solar, fuel cells and others

   420    908    2,485    3,469    5,236    0.9 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total generation by us and our generation subsidiaries

   432,920    436,310    426,484    418,327    409,070    72.7 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Electricity generated by IPPs:

            

Thermal

   72,316    83,789    103,745    125,830    133,523    23.7 

Hydro and other renewable

   17,106    20,342    23,238    26,490    20,343    3.6 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total generation by IPPs

   89,422    104,131    126,983    152,320    153,866    27.3 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross generation

   522,343    540,441    553,467    570,647    562,936    100 

Auxiliary use(2)

   21,293    21,605    22,279    22,309    21,587    3.8 

Pumped-storage(3)

   4,824    4,716    5,477    5,106    4,588    0.8 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net generation(4)

   496,226    514,120    525,711    543,232    536,761    95.4 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transmission and distribution losses(5)

   18,063    18,475    18,790    19,359    19,000    3.54 

 

IPPs = Independent power producers

Notes:

 

(1)

Unless otherwise indicated, percentages are based on gross generation.

(2)

Auxiliary use represents electricity consumed by generation units in the course of generation.

(3)

Pumped storage represents electricity consumed during low demand periods in order to store water which is utilized to generate hydroelectric power during peak demand periods.

(4)

Total net generation represents gross generation minus auxiliary and pumped-storage use.

 

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(5)

Transmission and distribution losses represents total transmission and distribution losses divided by total net generation.

The table below sets forth our total capacity at the end of, and peak and average loads during, the indicated periods.

 

   2015   2016   2017   2018   2019 
   (Megawatts) 

Total capacity

   94,102    100,180    116,657    117,205    125,338 

Peak load

   78,790    85,183    85,133    92,478    90,314 

Average load

   60,284    61,694    63,188    65,142    64,262 

Korea Hydro & Nuclear Power Co., Ltd

We commenced nuclear power generation activities in 1978 when our first nuclear generation unit, Kori #1, began commercial operation. On April 2, 2001, all of our nuclear and hydroelectric power generation assets and liabilities were transferred to KHNP.

KHNP owns and operates 24 nuclear generation units at four power plant complexes in Korea, located in Kori, Wolsong, Yonggwang (Hanbit) and Ulchin (Hanul), 52 hydroelectric generation units including 16 pumped storage hydro generation units as well as ten solar generation units and one wind generation unit as of December 31, 2019.

The table below sets forth the number of units and installed capacity as of December 31, 2019 and the average capacity factor by types of generation units in 2019.

 

   Number of Units   Installed Capacity(1)   Average Capacity
Factor(2)
 
       (Megawatts)   (Percent) 

Nuclear

   24    23,250    70.6 

Hydroelectric

   52    5,307    9.32 

Solar

   15    26    13.2 

Wind

   1    1    6.1 
  

 

 

   

 

 

   

Total

   92    28,584   
  

 

 

   

 

 

   

 

Notes:

 

(1)

Installed capacity represents the level of output that may be sustained continuously without significant risk of damage to plant and equipment.

(2)

Average capacity factor represents the total number of kilowatt hours of electricity generated in the indicated period divided by the total number of kilowatt hours that would have been generated if the generation units were continuously operated at installed capacity, expressed as a percentage.

KHNP commenced commercial operation of Shin-Kori #3, with a 1,400 megawatt capacity, in December 2016, and Shin-Kori #4 began commercial operations on August 2019. KHNP is currently building four additional nuclear generation units, two at the Shin-Kori and two at Shin-Hanul sites, each with a 1,400 megawatt capacity. KHNP expects to complete these units between 2020 and 2024. In June 2018, the board of directors of KHNP decided to retire Wolsong #1 unit earlier than planned due to the unit’s economic inefficiency. The initial phase of the decommissioning of Kori #1, which primarily involves safety inspections and the removal of spent fuels, has begun after its permanent shutdown in June 2017.

 

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Nuclear

The table below sets forth certain information with respect to the nuclear generation units of KHNP as of December 31, 2019.

 

Unit(5)

 Reactor Type
(1)
  

Reactor Design(2)

 

Turbine and
Generation(3)

 Commencement
of Operations
  Installed
Capacity
  Average
Capacity
Factor(4)
(%)
 
            (Megawatts)    

Kori-2

  PWR  W GEC  1983   650   100.0 

Kori-3

  PWR  W GEC, Hitachi  1985   950   68.0 

Kori-4

  PWR  W GEC, Hitachi  1986   950   51.1 

Shin-Kori-1

  PWR  D, KEPCO E&C, W D, GE  2011   1,000   74.9 

Shin-Kori-2

  PWR  D, KEPCO E&C, W D, GE  2012   1,000   79.4 

Shin-Kori-3

  PWR  D, KEPCO E&C, W D, GE  2016   1,400   88.4 

Shin-Kori-4

  PWR  D, KEPCO E&C, W D, GE  2019   1,400   102.7 

Wolsong-2

  PHWR  AECL, H, K H, GE  1997   700   91.6 

Wolsong-3

  PHWR  AECL, H H, GE  1998   700   59.6 

Wolsong-4

  PHWR  AECL, H H, GE  1999   700   83.4 

Shin-Wolsong-1

  PWR  D, KEPCO E&C, W D, GE  2012   1,000   85.0 

Shin-Wolsong-2

  PWR  D, KEPCO E&C, W D, GE  2015   1,000   75.2 

Hanbit-1

  PWR  W W, D  1986   950   16.6 

Hanbit-2

  PWR  W W, D  1987   950   86.7 

Hanbit-3

  PWR  H, CE, K H, GE  1995   1,000   0.0 

Hanbit-4

  PWR  H, CE, K H, GE  1996   1,000   0.0 

Hanbit-5

  PWR  D, CE, W, KEPCO E&C D, GE  2002   1,000   99.5 

Hanbit-6

  PWR  D, CE, W, KEPCO E&C D, GE  2002   1,000   73.5 

Hanul-1

  PWR  F A  1988   950   83.7 

Hanul-2

  PWR  F A  1989   950   78.3 

Hanul-3

  PWR  H, CE, K H, GE  1998   1,000   76.0 

Hanul-4

  PWR  H, CE, K H, GE  1999   1,000   95.5 

Hanul-5

  PWR  D, KEPCO E&C, W D, GE  2004   1,000   74.3 

Hanul-6

  PWR  D, KEPCO E&C, W D, GE  2005   1,000   77.4 
     

 

 

  

 

 

 

Total nuclear

      23,250   70.6 
     

 

 

  

 

 

 

 

Notes:

 

(1)

“PWR” means pressurized light water reactor; “PHWR” means pressurized heavy water reactor.

(2)

“W” means Westinghouse Electric Company (U.S.A.); “AECL” means Atomic Energy Canada Limited (Canada); “F” means Framatome (France); “H” means Hanjung; “CE” means Combustion Engineering (U.S.A.); “D” means Doosan Heavy Industries; “K” means Korea Atomic Energy Research Institute; “KEPCO E&C” means KEPCO Engineering & Construction.

(3)

“GEC” means General Electric Company (U.K.); “P” means Parsons (Canada and U.K.); “W” means Westinghouse Electric Company (U.S.A.); “A” means Alstom (France); “H” means Hanjung; “GE” means General Electric (U.S.A.); “D” means Doosan Heavy Industries; “Hitachi” means Hitachi Ltd. (Japan).

(4)

The average fuel cost per kilowatt in 2019 for the entire generation units was Won 7.89 per kilowatt.

(5)

Kori-1 was permanently shut down on June 18, 2017.Shin-Kori-4 commenced operations on August 29, 2019. On December 24, 2019, the NSSC approved the permanent shutdown of Wolsong #1.

Under extended-cycle operations, nuclear units can be run continuously for periods longer than the conventional12-month period between scheduled shutdowns for refueling and maintenance. Since 1987, we have adopted the mode of extended-cycle operations for all of our pressurized light water reactor units and plan to use it for our newly constructed units. The duration of shutdown for fuel replacement, maintenance and the evaluation period for approval to start after maintenance was 2,434.7 days in the aggregate in 2019. In addition, KHNP’s nuclear units experienced an average of 0.08 unplanned shutdowns per unit in 2019. In the ordinary course of operations, KHNP’s nuclear units routinely experience damage and wear and tear, which are repaired

 

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during routine shutdown periods or during unplanned temporary suspensions of operations. No significant damage has occurred in any of KHNP’s nuclear reactors, and no significant nuclear exposure or release incidents have occurred at any of KHNP’s nuclear facilities since the first nuclear plant commenced operation in 1978.

Hydroelectric

The table below sets forth certain information relating to KHNP’s pumped-storage and hydroelectric business units, including the installed capacity as of December 31, 2019 and the average capacity factor in 2019.

 

Location of Unit

  Number of Units   

Classification

  Year
Built
   Installed Capacity   Average Capacity
Factor
 
              (Megawatts)   (%) 

Hwacheon

   4   Dam waterway   1944    108.0    12.53 

Chuncheon

   2   Dam   1965    62.3    13.48 

Euiam

   2   Dam   1967    48.0    23.12 

Cheongpyung

   4   Dam   1943    140.1    15.88 

Paldang

   4   Dam   1973    120.0    26.85 

Chilbo (Seomjingang)

   3   Basin deviation   1945    35.4    24.44 

Boseonggang

   2   Basin deviation   1937    4.5    37.58 

Kwoesan

   2   Dam   1957    2.8    27.14 

Anheung(GangLim)

   3   Dam waterway   1978    0.4    15.03 

Kangreung

   2   Basin deviation   1991    82.0    0 

Topyeong

   1   Dam   2011    0.04    7.58 

Muju

   1   Dam   2003    0.4    14.65 

Sancheong

   2   Dam   2001    1.0    29.46 

Yangyang

   2   Dam   2005    1.4    38.91 

Yecheon

   1   Dam   2011    0.9    8.88 

Yecheon (Mini)

   1   Dam   2018    0.025    91.04 

Cheongpeoung

   2   Pumped Storage   1980    400.0    8.16 

Samrangjin

   2   Pumped Storage   1985    600.0    0 

Muju

   2   Pumped Storage   1995    600.0    9.84 

Sancheong

   2   Pumped Storage   2001    700.0    9.45 

Yangyang

   4   Pumped Storage   2006    1,000.0    9.58 

Cheongsong

   2   Pumped Storage   2006    600.0    10.76 

Yecheon

   2   Pumped Storage   2011    800.0    9.55 
  

 

 

       

 

 

   

 

 

 

Total

   52        5,307.3    9.32 
  

 

 

       

 

 

   

 

 

 

 

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Solar/Wind

The table below sets forth certain information, including the installed capacity as of December 31, 2019 and the average capacity factor in 2019, of the solar and wind power units of KHNP.

 

Location of Unit

  

Classification

  Year Built   Installed Capacity   Average Capacity
Factor
 
          (Megawatts)   (Percent) 

Yonggwang

  Solar   2008    13.95    15.8 

Yecheon

  Solar   2012    2.01    15.4 

Kori

  Wind   2008    0.75    3.6 

Kori

  Solar   2017    5.15    16.9 

Gapyeong

  Solar   2017    0.07    15.2 

Hydro Technical Training Center

  Solar   2017    0.09    12.9 

Cheongpyung

  Solar   2018    0.09    14.4 

Cheongsong

  Solar   2018    0.05    12.5 

Kwoesan

  Solar   2018    0.25    15.7 

Boseonggang

  Solar   2018    1.99    14.6 

Samrangjin

  Solar   2019    2.77    15.4 
      

 

 

   

Total

       27.17   
      

 

 

   

Korea Water Resources Corporation, which is a Government-owned entity, assumes full control of multi-purpose dams, while KHNP maintains the dams used for power generation. Existing hydroelectric power units have exploited most of the water resources in Korea available for commercially viable hydroelectric power generation. Consequently, we expect that no new major hydroelectric power plants will be built in the foreseeable future. Due to the ease of itsstart-up and shut-down mechanism, hydroelectric power generation is reserved for peak demand periods.

Korea South-East Power Co., Ltd.

The table below sets forth, by fuel type, the weighted average age and installed capacity as of December 31, 2019 and the average capacity factor and average fuel cost per kilowatt in 2019 based upon the net amount of electricity generated, of KOSEP.

 

   Weighted
Average Age of

Units
   Installed
Capacity
   Average
Capacity
Factor
   Average Fuel
Cost per kWh
 
   (Years)   (Megawatts)   (Percent)   (Won) 

Bituminous:

        

Samcheonpo #1, 2, 3, 4, 5, 6

   28.4    3,240    69.0    81.18 

Yeongheung #1, 2, 3, 4, 5, 6

   10.8    5,080    81.8    78.88 

Yeosu # 2

   6.0    669    75.0    115.30 

Anthracite:

        

Yeongdong #1, 2

   40.4    200    0.0    —   

Combined cycle and internal Combustion:

        

Bundang gas turbine #1,2,3,4,5,6,7,8; steam turbine #1, 2

   26.2    922    28.6    173.88 

Hydro, Solar and other renewable energy

   —      265    —      231.80 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   21.3    10,376    70.4    90.70 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Korea Midland Power Co., Ltd.

The table below sets forth, by fuel type, the weighted average age and installed capacity as of December 31, 2019 and the average capacity factor and average fuel cost per kilowatt in 2019 based upon the net amount of electricity generated, of KOMIPO.

 

  Weighted
Average Age
of Units
  Installed
Capacity
  Average
Capacity
Factor
  Average Fuel
Cost per kWh
 
  (Years)  (Megawatts)  (Percent)  (Won) 

Bituminous:

    

Boryeong #1, 2, 3, 4, 5, 6, 7, 8

  24.91   4,000   65.30   59.16 

Shin Boryeong #1, 2

  1.462   2,038   75.51   52.69 

Anthracite:

    

Seocheon #1, 2(1)

  —     —     —     —   

Oil-fired:

    

Jeju #2, 3

  19.46   150   60.97   170.19 

LNG-fired:

    

Seoul #5(1)

  —     —     —     —   

Combined-cycle and internal combustion:

    

Boryeong gas turbine #1, 2, 3, 4, 5, 6 ; steam turbine #1, 2, 3,

  20.82   1,350.00   6.26   128.19 

Incheon gas turbine #1, 2, 3, 4,5,6 ; steam turbine #1, 2,3

  10.88   1,462.45   24.10   116.81 

Seoul gas turbine #1, 2 ; steam turbine #1, 2

  0.38   738.35   38.41   95.67 

Jeju gas turbine #1, 2 ; steam turbine #1, 2

  1.51   208.09   40.17   234.19 

Sejong gas turbine #1,2 ; steam turbine #1

  6.17   530.44   51.19   112.34 

Jeju Gas Turbine #3

  25.58   55.00   1.55   634.05 

Jeju Internal Combustion Engine#1,2

  12.58   80.00   38.03   134.41 

Wind:

    

Yangyang #1, 2

  13.58   3.00   12.61   7.70 

Sejong Maebongsan Wind

  13.47   8.80   4.74   0.002 

Jeju Sangmyung Wind

  3.5   21.00   18.71   2.69 

Combined heat and power:

    

Wonju#1

  4.67   10.00   73.92   12.90 

Hydroelectric:

    

Boryeong

  10.86   7.50   23.67   0.25 

Shin Boryeong

  3.25   5.00   37.85   0.01 

Photovoltaic (“PV”) power and fuel cell generation:

    

Boryeong (PV) site

  3.19   3.11   13.14   3.11 

Shin Boryeong (PV) site

  3.58   2.90   14.79   0.01 

Seocheon (PV) site

  12.00   1.23   13.97   0.001 

Jeju (PV) site

  6.94   2.34   12.08   0.54 

Seoul (PV) site

  8.42   1.30   14.89   2.56 

Sejong (PV) site

  2.08   0.33   15.17   0.002 

Yeosu (PV) site

  7.83   2.22   15.48   0.001 

Incheon (PV) site

  2.18   1.58   14.75   0.001 

Boryeong (fuel cell) site

  11.33   0   4.67   718.49 

Shin Boryeong (fuel cell) site

  2.17   7.48   90.40   135.89 
 

 

 

  

 

 

  

 

 

  

 

 

 

Total

  14.90   10,690   51.37   71.15 
 

 

 

  

 

 

  

 

 

  

 

 

 

 

Note:

 

(1)

Seocheon #1 and Seocheon #2 were shut down in July 2017 and Seoul #5 was shut down in April 2017.

 

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Korea Western Power Co., Ltd.

The table below sets forth, by fuel type, the weighted average age and installed capacity as of December 31, 2019 and the average capacity factor and average fuel cost per kilowatt in 2019 based upon the net amount of electricity generated, of KOWEPO.

 

   Weighted
Average Age of
Units
   Installed
Capacity
   Average
Capacity
Factor
   Average Fuel
Cost per kWh
 
   (Years)   (Megawatts)   (Percent)   (Won) 

Bituminous:

        

Taean #1, 2, 3, 4, 5, 6, 7, 8, 9, 10

   13.7    6,100    65.8    57.06 

Oil-fired:

        

Pyeongtaek #1, 2, 3, 4

   38.1    1,400    4.9    147.74 

Combined cycle:

        

Pyeongtaek #2

   5.2    868.5    65.7    94.74 

Gunsan

   9.6    718.4    35.5    107.49 

West Incheon

   27.1    1,800    13.9    108.88 

Hydroelectric:

        

Taean

   12.3    2.2    17.2    —   

Solar:

        

Taean

   2.4    17.3    14.0    —   

Pyeongtaek

   2.5    3.9    14.2    —   

West Incheon

   2.5    1.2    14.3    —   

Gunsan

   4.2    1.0    13.2    —   

Samryangjin

   12.1    3.0    13.4    —   

Sejong City

   7.5    5.0    14.3    —   

Gyeonggi-do

   7.0    2.5    14.4    —   

Yeongam

   6.8    13.3    15.5    —   

Fuel Cell:

        

West Incheon 1

   4.8    16.2    53.6    —   

West Incheon 2

   0.9    18.0    69.5    —   

Cheonan Cheongsu

   0.0    5.3    30.3    —   

Wind Power:

         —   

Hwasun

   4.0    16    17.9    —   

Integrated gasification combined cycle:

         —   

Taean

   3.4    346.3    56.1    65.08 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   17.5    11,338    46.8    67.73 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Korea Southern Power Co., Ltd.

The table below sets forth, by fuel type, the weighted average age and installed capacity as of December 31, 2019 and the average capacity factor and average fuel cost per kilowatt in 2019 based upon the net amount of electricity generated, of KOSPO.

 

   Weighted
Average Age
of Units
   Installed
Capacity
   Average
Capacity
Factor
   Average Fuel
Cost per kWh
 
   (Years)   (Megawatts)   (Percent)   (Won) 

Bituminous:

        

Hadong #1, 2, 3, 4, 5, 6, 7, 8

   18.3    4,000    77.2    56.5 

Samcheok #1

   2.8    2,044    63.6    55.8 

Oil-fired:

        

Nam Jeju #3, 4

   13.0    200    59.7    164.4 

Combined cycle:

        

Shin Incheon #1, 2, 3, 4

   23.2    1,800    17.9    105.3 

Busan #1, 2, 3, 4

   16.2    1,800    38.1    101.5 

Yeongwol #1

   9.2    848    4.3    133.5 

Hallim

   23.5    105    33.8    195.0 

Andong #1

   5.8    362    59.2    95.6 

Wind power:

        

Hankyung

   13.2    21    19.0    1.38 

Seongsan

   10.2    20    25.8    1.06 

Solar

   3.5    22    14.5    0.11 

Small Hydropower

   2.4    3    55.1    —   

Fuel Cell

   1.2    59    82.8    127.7 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   14.7    11,284    52.0    69.8 
  

 

 

   

 

 

   

 

 

   

 

 

 

Korea East-West Power Co., Ltd.

The table below sets forth, by fuel type, the weighted average age and installed capacity as of December 31, 2019 and the average capacity factor and average fuel cost per kilowatt in 2019 based upon the net amount of electricity generated, of EWP.

 

  Weighted
Average Age of
Units
  Installed
Capacity
  Average
Capacity
Factor
  Average Fuel
Cost per kWh
 
  (Years)  (Megawatts)  (Percent)  (Won) 

Bituminous:

    

Dangjin #1, 2, 3, 4, 5, 6, 7, 8, 9, 10

  12.0   6,040   67.1   83.65 

Honam #1, 2

  46.7   500   77.2   104.89 

Anthracite:

    

Donghae #1, 2

  20.8   400   74.0   115.97 

Oil-fired:

    

Ulsan #4, 5, 6

  39.4   1,200   11.9   253.94 

Combined cycle:

    

Ulsan gas turbine #1, 2, 3, 4, 5, 6, 7, 8; steam turbine #1, 2, 3, 4

  16.1   2,072   36.2   129.49 

Ilsan gas turbine #1, 2, 3, 4, 5, 6; steam turbine #1, 2

  25.8   900   16.0   208.99 

Mini hydro, Photovoltaic, Fuel Cell, Wind-Power, Biomass:

  —     81   49.2   290.73 
 

 

 

  

 

 

  

 

 

  

 

 

 

Total

  18.7   11,193   54.6   101.36 
 

 

 

  

 

 

  

 

 

  

 

 

 

 

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Power Plant Remodeling and Recommissioning

Our generation subsidiaries supplement power generation capacity through remodeling or recommissioning of thermal units. Recommissioning includes installation of anti-pollution devices, modification of control systems and overall rehabilitation of existing equipment. The following table shows recent remodeling and recommissioning initiatives by our generation subsidiaries.

 

Power Plant

  

Capacity

  

Completed (Year)

  

Extension

  

Company

Taean #1 - 10

  

6,100 MW

(500 MW×8,

1,050 MW×2)

  

EP(1) upgrade (#2, 2016)

EP upgrade (#1, 3, 2017)

EP upgrade (#2, 4, 2018)

SCR(2) upgrade (#2, 4, 7, 2016)

SCR upgrade (#1, 3, 8, 9, 10, 2017)

SCR upgrade (#5, 6, 10, 2018)

FGD(5) upgrade (#1, 3, 2017)

FGD upgrade (#2, 4, 2018)

  Anti-pollution  KOWEPO

Pyeongtaek#1- 4

  

1,400 MW

(350 MW×4)

  Steam turbine upgrade (#2, 3, 2014)  10-year performance-improvement  KOWEPO

Boryeong #1, 2

  

1,000 MW

(500 MW×2)

  FGD upgrade (#1, 2, 2014)  Performance-improvement  KOMIPO

Boryeong #3 - 6

  

2,000 MW

(500 MW×8)

  

Retrofit (#3, 2019)

Retrofit (#5, 6, 2021)

Retrofit (#4, 2023)

FGD, EP, SCR upgrade (#3, 2019)

FGD, EP, SCR upgrade (#5, 6, 2021)

FGD, EP, SCR upgrade (#4, 2023)

  

Lifetime extension & Performance-improvement

Performance-improvement

  KOMIPO

Boryeong #7, 8

  

1,000 MW

(500 MW×2)

  

FGD,EP upgrade (#7, 2025)

FGD,EP upgrade (#8, 2026)

  Performance-improvement  KOMIPO

Seocheon #1, 2

  

400 MW

(200 MW×2)

  SCR(2) (2012)  Anti-pollution  KOMIPO

Yeosu #1, 2

  

668.6MW

(#1:340, #2:328.6MW)

  

Boiler Type Change

(CFBC(3):#1:2016, #2:2011)

  30 years  KOSEP

Samcheonpo #1, 2

  

1,120 MW

(560 MW ×2)

  Boiler, EP, Draft System Upgrade (#1, 2: 2012)  

10 years

Refurbishing-modernization

  KOSEP

Samcheonpo #5, 6

  

1,000 MW

(500 MW ×2)

  

EP Upgrade (2016 ~ 2017),

FGD, SCR, WESP installation

(2019 ~ 2020)

  Anti-pollution  KOSEP

Yeongdong #1

  

125 MW

(125 MW ×1)

  Boiler, Hybrid SCR & EP, Draft System Retrofit (Biomass(4) #1: 2017)  Renewable energy  KOSEP

Yeongdong #2

  

200 MW

(200 MW ×1)

  Boiler, Hybrid SCR & EP, Draft System Retrofit (Biomass #1: 2020)  Renewable energy  KOSEP

Dangjin #1 - 4

  

2,000MW

(500MW×4)

  FGD, EP, SCR upgrade(2022)  Performance-improvement  EWP

Dangjin #5 - 8

  

2,000MW

(500MW×4)

  FGD, EP, SCR upgrade(2024)  Performance-improvement  EWP

Dangjin #9 - 10

  

2,040MW

(1,020MW×2)

  FGD, EP, SCR upgrade(2026)  Performance-improvement  EWP

Donghae #1, 2

  

400 MW

(200 MW×2)

  FGD(2022)  Anti-pollution & modification of control systems  EWP

 

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Power Plant

  

Capacity

  

Completed (Year)

  

Extension

  

Company

Hadong #1-8

  

4,000 MW

(500 MW×8)

  

SCR Upgrade (#5. 2016)

SCR Upgrade (#2,3,5. 2017)

SCR Upgrade (#1,4,6,7. 2018)

SCR Upgrade (#8. 2019)

FGD Upgrade (#6, 2018)

FGD Upgrade (#2, 3, 2019)

FGD Upgrade (#4 2020)

FGD Upgrade (#5 2021)

  Anti-pollution  KOSPO

 

Notes:

 

(1)

“EP” means an electrostatic precipitation system.

(2)

“SCR” means a selective catalytic reduction system.

(3)

“CFBC” means a circulating fluidized bed combustion system.

(4)

“Biomass” means wood pallet powered plant.

(5)

“FGD” meansflue-gas desulfurization designed to remove sulfur oxides.

Transmission and Distribution

We currently transmit and distribute substantially all of the electricity in Korea.

As of December 31, 2019, our transmission system consisted of 34,440 circuit kilometers of lines of 765 kilovolts and others including high-voltage direct current lines, and we had 864 substations with aggregate installed transformer capacity of 326,329 megavolt-amperes

As of December 31, 2019, our distribution system consisted of 125,067 megavolt-amperes of transformer capacity and 9,641,891 units of support with a total line length of 504,402 circuit kilometers.

We make substantial investments in our transmission and distribution systems to minimize power interruptions and improve efficiency. Our current projects principally focus on increasing capabilities of the existing power networks and reducing our transmission and distribution loss, which was 3.54% of our gross generation in 2019. To cope with increasing damages to large-scale transmission and distribution facilities, we plan to reinforce stability of our transmission and distribution facilities through stricter design and material specifications. In addition, we also plan to expand underground transmission and distribution facilities to meet customer demand for more environment-friendly facilities. In order to reduce the interruption time in power distribution, which is an indicator of the quality of electricity transmission, we are also continuing to invest in automation of electricity transmission and development of new transmission technologies, among others.

Some of the facilities we own and use in our distribution system use rights of way and other concessions granted by municipal and local authorities in areas where our facilities are located. These concessions are generally renewed upon expiration.

New Energy Industry Projects

Certain of our new energy industry projects are described below.

Advanced Metering Infrastructure

In July 2012, the Government implemented a master plan to build out a smart grid, which includes the Advanced Metering Infrastructure (“AMI”) roadmap, and revised the plan to focus on building electricity market ecosystem in August 2018. In accordance with such plan, we are in the process of installing “smart meters” and related communication networks and operating systems as part of the “smart grid” initiative in an effort to

 

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enhance efficiency in the power electricity industry and alleviate growing energy shortage concerns. Our goal is to complete such installation for all of the households in Korea. Smart meters refer to digital meters that record, on a real-time basis, electricity consumption within a household so that consumers will have a price-based incentive to enhance efficiency in their electricity usage. As of December 31, 2019, we have installed 8.5 million smart meter units, and plan to install an additional 13.5 million units step by step. The AMI project is expected to cost approximately Won 1.6 trillion in total. Currently, there is no set timetable for the future completion of the installation.

Smart Grids

Smart grids refer to next-generation networks for electricity distribution that integrate information technology into existing power grids with the aim of enablingtwo-way real time exchange of information between electricity suppliers and consumers for optimal efficiency in electricity use. As part of our overall business strategy, we are currently developing and implementing smart grids based on advanced information technology, in order to promote more efficient allocation and use of electricity by consumers. We expect that such technology will improve efficiency and reduce electricity loss over the course of electricity transmission and distribution. We also expect that the smart grid initiative will significantly increase efficient energy consumption by providing real-time data to customers, which would in turn help to reduce greenhouse gas emission and decrease Korea’s reliance on foreign energy sources.

Leveraging our experience gained through high-tech intelligent power transmission and distribution network, or “smart grid” test beds in Jeju Island from 2009 to 2013, we plan to expand our smart grid project. We successfully implemented the KEPCO-Building Energy ManagementSystem(K-BEMS) at our Guri-Namyangju branch and the Smart Grid Deployment Project in 2014. In recognition of our achievement, we were awarded a special prize from the International Smart Grid Action Network in 2018. By the end of 2019, we implemented smart grid technology in 120 of our branches and 76 public sites (11 buildings, 8 campuses, 33 factories and 24 dispersed generation). Based on this experience, we plan to expand implementation of smart grid technology to residential and industrial buildings.

Energy Storage Systems

In October 2013, as part of an endeavor to create new markets for energy demand management applications using information and communication technology, we established a business plan to roll out energy storage systems for frequency regulation nationwide. These systems involve the establishment and operation of batteries and transformers withlarge-sized charge and discharge capabilities adjacent to substations to transmit electricity stably with regulated frequencies and optimize the efficiency of the substation operation. This system allows full conversion of reserve capacity for frequency regulation at existinglow-cost generators into electricity storage and, if operated in sizable scale, offers opportunities for substantial cost savings in purchase of electricity.

In December 2014, we conducted a pilot project for this initiative by installing a 52 megawatts energy storage system at theSeo-Anseong substation and the Shin-Yongin substation. In July 2015, these substations began to commercially operate energy storage systems, and we expanded the energy storage capacity nationwide by an additional 184 megawatts in 2016, an additional 140 megawatts in 2017, with a total capacity of 376 megawatts as of December 31, 2019. In addition, we completed construction of the largest indoor energy storage systems for frequency regulation in Gimje substation with a 48 megawatts capacity.

Electric Vehicle Charging Infrastructure

In order to promote the use of environment-friendly electric vehicles, we began constructing infrastructures for electric vehicles in 2009. Since 2016, we have installed electric vehicle charging stations throughout public space and residential building complexes. In 2017, we created a platform for businesses in the electric vehicle charging industry by charging for the service and making the infrastructures available to the market. We plan to expand such infrastructures and to install 3,000 high speed electric vehicle charging stations by 2022.

 

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In January 2016, the Ministry of Trade, Industry and Energy announced an initiative to promote the new energy industry by creating the New Energy Industry Fund. For further details, see “—Capital Investment Program.”

Fuel Sources and Requirements

Nuclear

Uranium, the principal fuel source for nuclear power, accounted for 34.8%, 31.9% and 35.7% of the fuel requirements for electricity generation by us and our generation subsidiaries in 2017, 2018 and 2019, respectively.

All uranium ore concentrates used by KHNP are imported from, and conversion and enrichment of such concentrates are provided by, sources outside Korea and are paid for with currencies other than Won, primarily U.S. dollars.

In order to ensure a stable supply, KHNP enters into long-term and medium-term contracts with various suppliers and supplements such supplies with purchases in spot markets. In 2019, KHNP purchased approximately 5,000 tons of its uranium concentrate requirement under both long-term and spot supply contracts with suppliers in Canada, France, the United States, the United Kingdom, Switzerland, Niger, Australia, Germany, Japan and Russia. Under the long-term supply contracts, the purchase prices of uranium concentrates are adjusted annually based on base prices and spot market prices prevailing at the time of actual delivery. The conversion and enrichment services of uranium concentrates are provided by suppliers in Canada, France, Germany, Japan, China, Russia, the United Kingdom and Switzerland. A Korean supplier typically provides fabrication of fuel assemblies. Except for certain fixed contract prices, contract prices for processing of uranium are adjusted annually in accordance with the general rate of inflation. KHNP intends to obtain its uranium requirements in the future, in part, through purchases under medium- to long-term contracts and, in part, through spot market purchases.

Coal

Bituminous coal accounted for 52.2%, 52.6% and 51.1% of the fuel requirements for electricity generation by us and our generation subsidiaries in 2017, 2018 and 2019, respectively, and anthracite coal accounted for 1.0%, 0.6% and 0.6% of our fuel requirements for electricity generation in 2017, 2018 and 2019, respectively.

In 2019, our generation subsidiaries purchased approximately 84 million tons of bituminous coal, of which approximately 29%, 37%, 15%, 5% and 14% were imported from Indonesia, Australia, Russia, South Africa and others, respectively. Approximately 81% of the bituminous coal requirements of our generation subsidiaries in 2019 were purchased under long-term contracts with the remaining 19% purchased in the spot market. Some of our long-term contracts relate to specific generating plants and extend through the end of the projected useful lives of such plants, subject in some cases to periodic renewal. Pursuant to the terms of our long-term supply contracts, prices are adjusted periodically based on market conditions. The average cost of bituminous coal per ton purchased under such contracts amounted to Won 98,891, Won 107,233 and Won 101,624 in 2017, 2018 and 2019, respectively.

In 2019, our generation subsidiaries purchased approximately 1 million tons of anthracite coal. The prices for anthracite coal under such contracts are set by the Government. The average cost of anthracite coal per ton purchased under such contracts was Won 124,036, Won 129,976 and Won 136,526 in 2017, 2018 and 2019, respectively.

Oil

Oil accounted for 1.2%, 1.4% and 0.5% of the fuel requirements for electricity generation by us and our generation subsidiaries in 2017, 2018 and 2019, respectively.

 

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In 2019, our generation subsidiaries purchased approximately 6 million barrels of fuel oil, substantial portion of which was purchased from domestic refiners through competitive open bidding. Purchase prices are based on the spot market price in Singapore. The average cost per barrel was Won 77,188, Won 85,116 and Won 100,827 in 2017, 2018 and 2019, respectively.

LNG

LNG accounted for 8.7%, 11.2% and 9.5% of the fuel requirements for electricity generation by us and our generation subsidiaries in 2017, 2018 and 2019, respectively. In 2019, for use in electricity generation we purchased approximately 5 million tons of LNG from Korea Gas Corporation, a Government-controlled entity in which we currently own a 21.57% equity interest (excluding treasury shares). In 2019, we purchased a substantial portion of our LNG requirements for use in power generation from Korea Gas Corporation. Under the terms of the LNG contract with Korea Gas Corporation, all of our fivenon-nuclear generation subsidiaries jointly and severally agreed to purchase a total of 4.9 million tons of LNG in 2019, subject to an automatic price adjustment annually based on apre-determined formula if the actual purchased amount exceeds or falls short of the contracted amount. We believe the quantities of LNG provided under such contract will be adequate to meet the needs of our generation subsidiaries for LNG for the next several years. The LNG supply contracts between our generation subsidiaries and Korea Gas Corporation generally have a term of 20 years and provide for minimum purchase requirements for our generation subsidiaries, the specific terms of which are subject to negotiation between Korea Gas Corporation and our generation subsidiaries and approval by the Government. The average cost per ton of LNG was Won 655,127, Won 763,460 and Won 727,083, in 2017, 2018 and 2019, respectively. In January 2020, Korea Gas Corporation announced that it will implement a new individual tariffs formula, whereby the domestic power plants can negotiate lower prices directly with Korea Gas Corporation. The new formula will apply to domestic power plants whose current contracts with Korea Gas Corporation will expire after January 2022 and also to new power plants commencing operations from January 2022.

Hydroelectric

Hydroelectric power generation accounted for 1.2%, 1.2% and 1.1%, of the fuel requirements for electricity generation by us and our generation subsidiaries in 2017, 2018 and 2019, respectively. The availability of water for hydroelectric power depends on rainfall and competing uses for available water supplies, including residential, commercial, industrial and agricultural consumption. Pumped storage enables us to increase the available supply of water for use during periods of peak electricity demand.

Sales and Customers

Our sales depend principally on the level of demand for electricity in Korea and the rates we charge for the electricity we sell to theend-users.

Demand for electricity in Korea grew at a compounded average rate of 1.8% per annum for the five years ended December 31, 2019. According to the Bank of Korea, the compounded growth rate for GDP was approximately 2.7% for the same period. The GDP growth rate was approximately 3.1%, 2.7% and 2.0% during 2017, 2018 and 2019, respectively.

The table below sets forth, for the periods indicated, the annual rate of growth in Korea’s GDP and the annual rate of growth in electricity demand (measured by total annual electricity consumption) on ayear-on-year basis.

 

   2015  2016  2017  2018  2019 

Growth in GDP

   2.8  2.9  3.1  2.7  2.0

Growth in electricity consumption

   1.3  2.8  2.2  3.6  (1.1%) 

Electricity demand in Korea varies within each year for a variety of reasons other than the general growth in GDP demand. Electricity demand tends to be higher during daylight hours due to heightened commercial and

 

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industrial activities and electronic appliance use. Due to the use of air conditioning during the summer and heating during the winter, electricity demand is higher during these two seasons than the spring or the fall. Variation in weather conditions may also cause significant variation in electricity demand.

We do not use any marketing channels, including any special sales methods, to sell electricity to our customers, other than to install electricity meterson-site and take monthly readings of such meters, based upon which invoices are sent to our customers.

Demand by the Type of Usage

The table below sets forth consumption of electric power, and growth of such consumption on ayear-on-year basis, by the type of usage (in gigawatt hours) for the periods indicated.

 

  2015
(GWh)
  YoY
growth
(%)
  2016
(GWh)
  YoY
growth
(%)
  2017
(GWh)
  YoY
growth
(%)
  2018
(GWh)
  YoY
growth
(%)
  2019
(GWh)
  YoY
growth
(%)
  % of
Total
2019
 

Residential

  65,619   1.8   68,057   3.7   68,544   0.7   72,895   6.3   72,639   (0.4  14.0 

Commercial

  103,679   2.9   108,617   4.8   111,298   2.5   116,934   5.1   116,227   (0.6  22.4 

Educational

  7,691   3.4   8,079   5.1   8,316   2.9   8,678   4.3   8,561   (1.4  1.6 

Industrial

  273,548   0.4   278,828   1.9   285,969   2.6   292,999   2.5   289,240   (1.3  55.6 

Agricultural

  15,702   8.3   16,580   5.6   17,251   4.0   18,504   7.3   18,882   2.0   3.6 

Street lighting

  3,341   3.7   3,462   3.6   3,557   2.7   3,582   0.7   3,571   (0.3  0.7 

Overnight Power

  14,075   (4.0  13,416   (4.7  12,811   (4.5  12,557   (2.0  11,379   (9.4  2.2 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  483,655   1.3   497,039   2.8   507,746   2.2   526,149   3.6   520,499   (1.1  100.0 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The industrial sector represents the largest segment of electricity consumption in Korea. Demand for electricity from the industrial sector was 289,240 gigawatt hours in 2019, representing a 1.3% decrease from 2018, largely due to the changes in the business environment resulting from the U.S.-China trade disputes and the Japanese export restrictions against Korea during 2019. Demand for electricity from the commercial sector depends largely on the level and scope of commercial activities in Korea. Demand for electricity from the commercial sector decreased to 116,227 gigawatt hours in 2019, representing a 0.6% decrease from 2018 largely due to the decrease in the commercial electricity usage for air conditioning and heating as a result of a more temperate weather. Demand for electricity from the residential sector is largely dependent on population growth and use of heaters, air conditioners and other electronic appliances. Demand for electricity from the residential sector decreased to 72,639 gigawatt hours in 2019, representing a 0.4% decrease compared to 2018, largely due to a decrease in household electricity usage for air conditioning and heating as a result of a more temperate weather.

Demand Management

Our ability to provide adequate supply of electricity is principally measured by the facility reserve margin and the supply reserve margin. The facility reserve margin represents the difference between the peak usage during a year and the installed capacity at the time of such peak usage, expressed as a percentage of such installed capacity. The supply reserve margin represents the difference between the peak usage in a year and the average available capacity at the time of such peak usage, expressed as a percentage of such peak usage. The following table sets forth our facility reserve margin and supply reserve margin for the periods indicated.

 

   2015  2016  2017  2018  2019 

Facility reserve margin

   19.4  17.6  37.0  26.7  36.2

Supply reserve margin

   11.6  8.5  12.9  7.7  6.7

While we seek to meet the growing demand for electricity in Korea primarily by continuing to expand our generation capacity, we have also implemented several measures to curtail electricity consumption, especially

 

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during peak periods. We applytime-of-use and seasonality tariff, which are structured so that higher tariffs are charged at the time and months of peak demand to select types of customers, and we also apply a progressive rate structure for the residential use of electricity. We have several demand management programs to control demand and induce power conservation during peak hours and peak seasons such as providing incentives for reducing power consumption during peak hours.

Electricity Rates

The Electric Utility Act and the Price Stabilization Act of 1975, each as amended from time to time, prescribe the procedures for the approval and establishment of rates charged for the electricity we sell. We submit our proposals for revisions of rates or changes in the rate structure to the Ministry of Trade, Industry and Energy. The Ministry of Trade, Industry and Energy then reviews these proposals and, following consultation with the Ministry of Economy and Finance and review by the Korea Electricity Commission, makes the final decision.

Under the Electric Utility Act and the Price Stabilization Act, electricity rates are established at levels that would enable us to recover our operating costs attributable to our basic electricity generation, transmission and distribution operations as well as receive a fair investment return on capital used in those operations.

For the purposes of rate approval, operating costs are defined as the sum of our operating expenses (which principally consists of cost of sales and selling and administrative expenses) and our adjusted income taxes.

Fair investment return represents an amount equal to the rate base multiplied by the rate of return.

The rate base is currently equal to the sum of:

 

  

net utility plant in service (which is equal to utility plant minus accumulated depreciation minus revaluation reserve);

 

  

the portion of working capital which is equal to the appropriate level of operating costs minus depreciation and othernon-cash charges while taking into account the actual time of cost recovery; and

 

  

the portion ofconstruction-in-progress which is charged from our retained earnings.

The amounts used for the variables in the rates are those projected by us for the periods to be covered by the rate approval.

For the purpose of determining the fair rate of return, the rate base is divided into two components in proportion to our total shareholders’ equity and our total debt. The rate of return permitted in relation to the debt component of the rate base is set at a level designed to approximate the weighted average interest cost on all types of borrowing for the periods covered by the rate approval. The rate of return permitted in relation to the equity component of the rate base is set by applying the capital asset pricing model which takes account of the risk-free rate, the return on the Korea Stock Price Index, KOSPI, and the correlation of the stock price of our company with KOSPI. In 2018, the approved rate of return on the debt component of the rate base was 0.82% while the approved rate of return on the equity component of the rate base was 3.03%. As a result of such approved rates of returns, the fair rate of return in 2018 was determined to be 3.85%. The fair rates of return for 2019 have not yet been determined.

The Electric Utility Act and the Price Stabilization Act do not specify a basis for determining the reasonableness of our operating expenses or any other items (other than the level of the fair investment return) for the purposes of the rate calculation. However, the Government exercises substantial control over our budgeting and other financial and operating decisions.

 

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In addition to the calculations described above, a variety of other factors are considered in setting overall tariff levels. These other factors include consumer welfare, our projected capital requirements, the effect of electricity tariff on inflation in Korea and the effect of tariff on demand for electricity.

From time to time, our actual rate of return on invested capital may differ significantly from the fair rate of return on invested capital assumed for the purposes of electricity tariff approvals, for reasons, among others, related to movements in fuel prices, exchange rates and demand for electricity that differ from what is assumed for determining our fair rate of return. For example, between 1987 and 1990, the actual rate of return was above the fair rate of return due to declining fuel costs and rising demand for electricity at a rate not anticipated for purposes of determining our fair rate of return. Similarly, depreciation of the Won against the U.S. dollar accounted for our actual rates of return being lower than the fair rate of return for the period from 1996 to 2000. For the period between 2006 and 2013, our actual rates of return were lower than the fair rate of return largely due to a general increase in fuel costs and additional facility investment costs incurred, the effects of which were not offset by timely increases in our tariff rates. Between 2014 and 2016, however, largely due to a decrease in fuel costs reflective of the drop in oil prices, our actual rate of return has surpassed the fair rate of return; however, substantially all of the resulting excess has been used to fund capital expenditure and repair and maintenance, as well as to offer tariff discounts to economically or otherwise disadvantaged customers, and make investments in renewable energy and other environmental programs.

Partly in response to the variance between our actual rates of return and the fair rates of return, the Government from time to time increases the electricity tariff rates, but there typically is a significant time lag for the tariff increases as such increases requires a series of deliberation processes and administrative procedures and the Government also has to consider other policy considerations, such as the inflationary effect of overall tariff increases and the efficiency of energy use from sector-specific tariff increases.

Prior to November 2013, the Government from time to time effected tariff increases that typically covered all sectors, namely, residential, commercial and industrial, mainly in response to sustained increases in fuel prices. No cross-sector tariff increase has been implemented since November 2013 largely due to a general decline in fuel prices and relatively stable exchange rates.However, effective on January 1, 2017, the Government made several adjustments to the existing rate structure in order to ease the burden of electricity tariff on residential consumers. The progressive rate structure applicable to the residential sector, which applies a gradient of increasing tariff rates for heavier electricity usage, was changed from asix-tiered structure with the highest rate being no more than 11.7 times the lowest rate (which gradient system has been in place since 2005) into a three-tiered structure with the highest rate being no more than three times the lowest rate in order to reflect the changes in the pattern of electricity consumption and reduce the electricity charges payable by consumers. Additionally, a new tariff structure was implemented to encourage energy saving by offering rate discounts to residential consumers that voluntarily reduce electricity consumption while charging special high rates to residential consumers with heavy electricity consumption during peak usage periods in the summer and the winter. Additionally, during July and August 2018, the Government reduced residential electricity charges by temporarily relaxing the application of the current tariff structure and offering higher rate discounts to economically or otherwise disadvantaged customers to ease the burden on households that have significantly increased their use of air conditioners during a heatwave. Subsequently, a joint task force team, consisting of industry experts, scholars and government officials, was formed, which announced a proposal for amending the current tariff structure aimed to lower electricity rates for households during the summer. As a result, in July 2019, the Government amended the residential electricity tariff rate system to expand the usage ceiling for the first two tiers of rates (from 200 kilowatts to 300 kilowatts for the first tier and from 400 kilowatts to 450 kilowatts for the second tier) applied during July and August each year. Although the rate discounts offered to residential consumers who voluntarily reduced electricity consumption and those offered to traditional wet markets were abolished in December 2019 and the rate discount for electric vehicles will be gradually terminated in phases by June 2022, there can be no assurance that other current or potential future adjustments in electricity tariff rates and rate discounts will not have an adverse impact on our business, results of operations, financial condition and profitability.

 

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We plan to prepare a proposition for a sustainable tariff system designed to mitigate the financial burden on us. Though the timeline is subject to change, we are tentatively aiming to prepare the proposition by the first half of 2020, which will include (1) a reasonable adjustment of the rate discount applicable to the residential customers with low electricity usage and (2) an introduction of the tariff system to the residential sector where the rates change depending on the demand in a given season or time (namely, the“time-of-use tariff”). Despite the efforts, however, the downward tariff rate adjustments may change our revenues from the sale of electricity and accordingly have a material adverse effect on our results of operation and cash flows.

The tariff rates we charge for electricity vary among the different classes of consumers, which principally consist of industrial, commercial, residential, educational and agricultural consumers. The tariff also varies depending upon the voltage used, the season, the time of usage, the rate option selected by the user and, in the residential sector, the amount of electricity used per household, as well as other factors. For example, we adjust for seasonal tariff variations by applying higher rates when demand tends to rise such as during the months of June, July and August (when the demand tends to rise due to increased use of air conditioning) and November, December, January and February (when demand tends to rise due to increased use of heating), which reflects the policy of the Korean government to cope with the rise in electricity demand during peak seasons by encouraging a more efficient use of electricity by customers. In addition, we provide discounts on tariff rates to certain users such as low income households.

Our current tariff schedule reflecting the adjustments outlined above, is summarized below by the type of usage:

 

  

Industrial. The monthly basic charge varies from Won 5,550 per kilowatt to Won 9,810 per kilowatt depending on the type of contract, the voltage used and the rate option. The energy usage charge varies from Won 52.8 per kilowatt-hour to Won 196.6 per kilowatt-hour depending on the type of contract, the voltage used, the season, the time of day and the rate option.

 

  

Commercial. The monthly basic charge varies from Won 6,160 per kilowatt to Won 9,810 per kilowatt depending on the type of contract, the voltage used and the rate option. The energy usage charge varies from Won 53.7 per kilowatt-hour to Won 196.6 per kilowatt-hour depending on the type of contract, the voltage used, the season, the time of day and the rate option.

 

  

Residential. The monthly basic charge varies from Won 910 for electricity usage of less than 200 kilowatt hours to Won 7,300 for electricity usage in excess of 400 kilowatt hours. During the months of July and August each year, the usage ceiling for the first two tiers of rates is increased from 200 kilowatts to 300 kilowatts for the first tier and from 400 kilowatts to 450 kilowatts for the second tier. Residential tariff also includes an energy usage charge ranging from Won 93.3 to Won 280.6 per kilowatt-hour for electricity usage depending on the amount of usage and voltage. During the peak usage periods during the summer and the winter, namely the months of July and August and December to February, a higher energy usage charge of Won 709.5 per kilowatt-hour applies to residential consumers whose monthly electricity consumption exceeds 1,000 kilowatts hour.

 

  

Educational. The monthly basic charge varies from Won 5,230 per kilowatt to Won 6,980 per kilowatt depending on the voltage used and the rate option. The energy usage charge varies from Won 43.8 per kilowatt-hour to Won 160.4 per kilowatt-hour depending on the voltage used, the season and the rate option.

 

  

Agricultural. The monthly basic charge varies from Won 360 per kilowatt to Won 1,210 per kilowatt depending on the type of usage. The energy usage charge varies from Won 21.6 per kilowatt-hour to Won 41.9 per kilowatt-hour depending on the type of contract, the voltage used and the season.

 

  

Street-lighting. The monthly basic charge is Won 6,290 per kilowatt and the energy usage charge is Won 85.9 per kilowatt-hour. For electricity capacity of less than 1 kilowatt or for places where the installation of the electricity meter is difficult, a fixed rate of Won 37.5 per watt applies, with the minimum monthly charge of Won 1,220.

 

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In 2001, as part of implementing the Restructuring Plan, the Ministry of Trade, Industry and Energy established the Electric Power Industry Basis Fund to enable the Government to take over certain public services previously performed by us. In 2019, 3.7% of the tariff we collected from our customers was transferred to this fund prior to recognizing our sales revenue.

Power Development Strategy

We and our generation subsidiaries make plans for expanding or upgrading our generation capacity based on the Basic Plan, which is generally revised and announced every two years by the Government. In July 2015, the Government announced the Seventh Basic Plan relating to the future supply and demand of electricity, focusing on stable supply of electricity and increasing the portion of low carbon electricity supply sources, among others. To revise the Seventh Basic Plan, in December 2017, the Government announced the Eighth Basic Plan which are more environmentally focused than the Seventh Basic Plan and to be effective for the period from 2017 to 2031. The Eighth Basic Plan focuses on, among other things, (i) decreasing the reliance on nuclear and coal-based supply sources, (ii) increasing utilization of renewable energy sources and (iii) balancing the existing cost-based pool system of purchase of electricity with an environmentally-focused pool system. Furthermore, the Eighth Basic Plan includes the following implementing measures: (i) six new nuclear generation units in a planning stage would not be constructed, (ii) extension of life of 10 decrepit nuclear generation units would not be granted, (iii) Wolsong #1 unit is not counted as part of domestic energy generation capacity, (iv) seven decrepit coal-fired generation plants will be retired by 2022, (v) six other coal-fired generation plants shall be converted to LNG fuel use and (vi) domestic renewable energy generation capacity shall be expanded to 58.5 gigawatts by 2030. Currently, the Government is in the process of establishing the Ninth Basic Plan, which is expected to be released in 2020, to expand the electric power facilities based on the demand outlook from 2020 to 2034.

In June 2019, the Ministry of Trade, Industry and Energy adopted the Third Basic National Energy Plan following consultations with representatives from civic groups, the energy industry and academia. The Third Basic National Energy Plan, which is a comprehensive plan that covers the entire spectrum of energy industries in Korea, covers the period from 2019 to 2040. The Third Basic National Energy Plan is consistent with the First and the Second Basic National Energy Plans in terms of the general policy direction and aims to promote sustainable growth and improvement of people’s quality of life by converting to new and renewable energy. Specifically, it establishes the following five key tasks: (i) strengthening management of energy demand from various sectors, such as commerce and transportation, and promoting a rational electricity tariff system to improve the national energy consumption efficiency by 38% and reduce the energy demand by 18.6% by 2040; (ii) converting to clean and safe energy through gradual but decisive reduction of nuclear power generation and coal power generation by prohibiting construction of new coal-fired power plants and increasing the proportion of renewable energy sources to approximately 35% by 2040; (iii) expanding the power distribution in areas near those with demands for renewable energy and fuel cells and strengthening the roles and responsibilities of local governments; (iv) fostering the growth of the future energy industries (including renewable energy, hydrogen fuel and other efficient sources of energy linked to technology), promoting thevalue-add for traditional energy industries and maintaining a core energy ecosystem for nuclear power plants; and (v) improving the energy, gas and heat market systems to facilitate the national energy conversion and building platforms based on big data to foster creation of new energy industries.

We cannot assure that the Eighth Basic Plan, the Ninth Basic Plan, the Third Basic National Energy Plan or the respective plans to be subsequently adopted will successfully achieve their intended goals, the foremost of which is to ensure, through carefully calibrated capacity expansion and other means, balanced overall electricity supply and demand in Korea at to end users while promoting efficiency and environmental friendliness in the consumption and production of electricity. If there is significant variance between the projected electricity supply and demand considered in planning our capacity expansions and the actual electricity supply and demand or if these plans otherwise fail to meet their intended goals or have other unintended consequences, this may result in inefficient use of our working capital, mispricing of electricity and undue financing costs on the part of us and

 

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our generation subsidiaries, among others, which may have a material adverse effect on our results of operations, financial condition and cash flows.

Capital Investment Program

The table below sets forth, for each of the years ended December 31, 2017, 2018 and 2019, the amounts of capital expenditures for the construction of generation, transmission and distribution facilities.

 

2017

 2018  2019 
(In billions of Won) 
₩13,711 13,695  15,795 

The table below sets forth the currently estimated installed capacity for new or expanded generation units to be completed by our generation subsidiaries in each year from 2020 to 2022 based on the Eighth Basic Plan, as amended.

 

Year

  Number of Units  Type of Units  Total Installed Capacity 
         (Megawatts) 

2020

  1
  Nuclear power
   
1,400
 
  1  LNG-combined   150 
  25  Renewables   143 

2021

  1
  Nuclear power
   
1,400
 
  1  Coal-fired   1,000 
  25  Renewables   385 

2022

  1
  LNG-combined
   
495
 
  25  Renewables   451 

For the period from 2023 to 2024, our generation subsidiaries currently plan to complete two additional nuclear units with an aggregate installed capacity of 2,800 megawatts.

As part of our capital investment program, we also intend to add new transmission lines and substations, continue to replace overhead lines with underground cables and improve the existing transmission and distribution systems.

The actual number and capacity of generation units and transmission and distribution facilities we construct and the timing of such construction are subject to change depending upon a variety of factors, including, among others, changes in the Basic Plan, demand growth projections, availability and cost of financing, changes in fuel prices and availability of fuel, ability to acquire necessary plant sites, environmental considerations and community opposition.

 

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The table below sets forth, for the period from 2020 to 2022, the budgeted amounts of capital expenditures pursuant to our capital investment program, which primarily consist of budgets for the construction of generation, transmission and distribution facilities and, to a lesser extent, renewable energy generation and new energy industry projects.The budgeted amounts may vary from the actual amounts of capital expenditures for a variety of reasons, including, among others, the implementation of the Eighth Basic Plan currently in place and the Ninth Basic Plan, which is expected to be announced in 2020, changes in the number of units to be constructed, the actual timing of such construction, changes in rates of exchange between the Won and foreign currencies and changes in interest rates.

 

   2020   2021   2022   Total 
   (in billions of Won) 

Generation(1):

        

Nuclear

  3,774   3,268   3,342   10,384 

Thermal

   2,865    3,289    3,443    9,804 

Renewables and others

   847    1,521    884    3,316 
  

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

   7,486    8,078    7,669    23,504 
  

 

 

   

 

 

   

 

 

   

 

 

 

Transmission and Distribution:

        

Transmission

   2,992    3,870    4,011    10,873 

Distribution

   3,449    3,366    3,403    10,218 
  

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

   6,441    7,236    7,414    21,091 
  

 

 

   

 

 

   

 

 

   

 

 

 

Others(2)

   2,284    2,215    1,919    6,000 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  16,211   17,529   17,002   50,595 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

 

(1)

The budgeted amounts for our generation facilities are based on the Eighth Basic Plan, as amended.

(2)

Principally consists of investments in telecommunications and new energy industry projects, among others.

In January 2016, the Ministry of Trade, Industry and Energy announced an initiative to promote the new energy industry by creating the New Energy Industry Fund, which is made up of funds sponsored by government-affiliated energy companies. We contributed Won 500 billion to the funds in 2016. The purpose of these funds is to invest in substantially all frontiers of the new energy industry, including renewable energy, energy storage systems, electric vehicles,small-sized self-sustaining electricity generation grids known as “micro-grids”, among others, as well as invest instart-up companies, ventures, small- tomedium-sized enterprise and project businesses that engage in these businesses but have not previously attracted sufficient capital from the private sector.

Furthermore, as part of the Comprehensive Measures against Particulate Matter and the Eighth Basic Plan, announced by the Government in September 2017 and December 2017, respectively, the Government set forth the following policy directions relating to coal-fired generation units: (i) two coal-fired generation units scheduled for construction and four existing coal-fired generation units shall convert to LNG fuel use, (ii) in principle, construction of new coal-fired generation units shall not be planned, (iii) seven of the coal-fired generation units that are 30 years or older will be shut down on an accelerated schedule, (iv) beginning in 2018, coal-fired generation units that are 30 years or older shall temporarily cease operations from March through June of each year, (v) coal-fired generation units shall be put through comprehensive functional and environmental upgrades and (vi) coal-fired generation units shall be subject to emission standards that came into effect in January 2019 that are twice as more rigorous than the previous standards. In October 2018, the Government introduced a pilot regulation to lower the output of 35 coal-fired power plants to approximately 80% of their capacity that emit more than a certain amount of particulate matter. The regulation was formally implemented in January 2019, targeting 40 coal-fired power plants with high emissions of particulate matter. From March to June 2019, the scope expanded to cover 60 units in total. In addition, coal-fired generation units scheduled for

 

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preventive maintenance during the second half of 2019 was required to undertake such maintenance earlier in the spring of 2019. In November 2019, the Government pursued a reduction of coal power generation in order to implement the Special Measures to Respond to the High Concentration Period (December to March) of Particulate Matter. During this period, 8 to 15 coal generators (requiring preventive maintenance or are otherwise older) were first shut down, with a maximum of 49 generators subject to a cap of 80% on the output within the remaining reserve capacity range. As a result, the particulate matter emission was reduced by 2,503 tons, a 39% decrease compared to the same period during the previous year. We plan to continue to participate in the effort to reduce the particulate matter emissions from coal power generation plants, not only during the winter but also the spring season. For example, in March 2020, we suspended the operations of between 21 and 28 coal power generation plants and imposed a cap of 80% on the output of up to 37 coal power generation plants. Additionally, the Government adjusted the schedule to close down two decrepit coal generators (Boryeong #1 and #2). While such measures may be subject to change, we expect to incur significant costs of complying with such measures, including in connection with more stringent particulate matter pollution regulations, retrofitting and overall replacement of environmental facilities.

We have financed, and plan to finance in the future, our capital investment programs primarily through net cash provided by our operating activities and financing in the form of debt securities and loans from domestic financial institutions, and to a lesser extent, borrowings from overseas financial institutions. In addition, in order to prepare for potential liquidity shortage, we and our generation subsidiaries maintain several credit facilities with financial institutions in the aggregate amounts of Won 4,406 billion and US$2,493 million, the full amount of which was available as of December 31, 2019. We, KHNP, KOMIPO and KOWEPO also maintain global medium-term note programs in the aggregate amount of US$13 billion, of which approximately US$8 billion remains currently available for future drawdown. KOSEP also maintains an A$2 billion Australian dollar medium-term note program, of which approximately A$1.7 billion remains current available for future drawdown. See also Item 5.B. “Liquidity and Capital Resources—Capital Resources.”

Environmental Programs

The Environmental Policy Basic Act, the Air Quality Preservation Act, the Water Quality Preservation Act, the Marine Pollution Prevention Act and the Waste Management Act, collectively referred in this annual report as the Environmental Acts, are the major laws of Korea that regulate atmospheric emissions, waste water, noise and other emissions from our facilities, including power generators and transmission and distribution units. Our existing facilities are currently in material compliance with the requirements of these environmental laws and international agreements, such as the United Nations Framework Convention on Climate Change, the Montreal Protocol on Substances that Deplete the Ozone Layer, the Stockholm Convention on Persistent Organic Pollutants and the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal. In order to foster coordination among us and our generation subsidiaries in respect of climate change, we and 11 of our electricity-related subsidiaries formed the CEO Coordination Committee in June 2016. Additionally, we are endeavoring to develop and implement greenhouse gas reduction strategy in line with the new climate regime set forth by the Paris Climate Agreement.

We continuously endeavor to contribute to sustainable growth (whether as an economy, a society or an ecosystem) by actively taking actions that befit our social responsibility as a corporate citizen in the energy industry. For example, in 2005, we became the first public company in Korea to join the United Nations Global Compact, an international voluntary initiative designed to hold a forum for corporations, United Nations agencies, labor and civic groups to promote reforms in economic, environmental and social policies. As part of our involvement with such initiative, we issue an annual report named the “Sustainability Report” to disclose our activities from the perspectives of economy, environment and society, in accordance with the reporting guidelines of the Global Reporting Initiative, the official collaborating center of the United Nations Environment Program that works in cooperation with United Nations Secretary General. In recognition of our efforts and achievements to reduce greenhouse gas emissions in response to global climate change, in May 2013, we obtained the Carbon Trust Standard certification issued by Carbon Trust, a British nonprofit organization with

 

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the goal of establishing a sustainable, low carbon economy. In 2015, we obtained recertification from Carbon Trust by satisfying even more rigorous evaluation criteria. We are also a participant of the Carbon Disclosure Project, an international organization that promotes transparency in informational disclosure of carbon management process, and in 2017, 2018 and 2019 we were recognized by the Carbon Disclosure Project and received honors in energy and utility sector. In 2017, 2018 and 2019, pursuant to the Dow Jones Sustainability Indices, which measures management performance in terms of contribution to sustainability, we were selected as one of the notable companies in the Asia Pacific in the global electricity utility sector. We recognize the interest in ESG within the investors’ community and are continuously pursuing safe and clean energy supply and distribution by reducing greenhouse gas emissions and enhancing our ability to respond to climate change, the details of such efforts provided through periodic sustainability reports.

The table below sets forth the number of emission control equipment installed at thermal power plants by our generation subsidiaries as of December 31, 2019.

 

   KOSEP   KOMIPO   KOWEPO   KOSPO   EWP 

Flue Gas Desulphurization System

   14    10    14    10    15 

SelectiveNon-catalytic Reduction System

   2    —      —      —      7 

Selective Catalytic Reduction System

   16    12    17    16    29 

Electrostatic Precipitation System

   16    12    14    14    17 

Low NO2 Combustion System

   20    340    25    26    28 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   68    374    70    66    96 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In accordance with the Act on Allocation and Trading of Greenhouse Gas Emission Allowances, enacted in March 2013, the Government is currently in the process of implementing a greenhouse gas emission trading system under which the Government will allocate the amount of permitted greenhouse gas emission to companies by industry and a company whose business emits more carbon than the permitted amount may purchase the right to emit more carbon through the greenhouse gas emission trading exchange. This system is expected to be implemented in three stages. During the first phase (2015 to 2017), the Government set up and made a test run of the trading system to ensure its smooth operation; during this phase, the greenhouse gas emission allowances were allocated without charge. In July 2018, the Government released the allocation plan for the second phase (2018 to 2020). During the second phase, 97% of the greenhouse gas emission allowances may be allocated free of charge, with 3% allocated through an auction. During the third phase (2021 to 2025), the Government plans to run the system on an expanded scale with aggressive greenhouse gas emission reduction targets, with 10% of the greenhouse gas emission allowances allocated through an auction. In December 2016, the Government announced the Climate Change Response Initiatives and the 2030 National Greenhouse Gas Reduction Roadmap, which set forth the greenhouse gas emission trading system as one of the primary means to reach the emission and greenhouse gas reduction targets of the policies. The Second Climate Change Response Initiative was adopted in October 2019, which sets a national target of greenhouse gas level of 536 million tons in the aggregate, representing a 37% reduction from the base case projection of greenhouse gas in 2030 and a 24.4% reduction as compared to the emission amount in 2017.

Electricity conversion sector, in which we operate our business, is requested to reduce the greenhouse gas emission by 58 million tons by year 2030 according to the Government’s 2020 Nationally Determined Contributions (NDCs). In line with the policy, our target reduction of the greenhouse gas emission is 47 million tons by year 2030. Adhering to such emission and greenhouse gas reduction requirement is expected to result in our incurring significant compliance costs. For example, the daily market price of the KAUs traded through the Korea Exchange was at Won 8,640 per ton in early 2015, but the price has continued to rise, recording Won 40,900 per ton at its peak in December 23, 2019.

The table below sets forth the amount of annual emission from all generating facilities of our generation subsidiaries for the periods indicated. The amount of CO2 emissions may increase in the near future due to the

 

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construction of additional coal thermal power plants but is expected to decrease in the long-term, principally due to an increased use of LNG and renewable energy and the implementation of the greenhouse gas emission trading system.

 

Year(1)

  SOx
(g/MWh)
   NOx
(g/MWh)
   TSP(2)
(g/MWh)
   CO2
(kg/MWh)
 

2015

   165    266    8    464 

2016

   156    246    7    477 

2017

   138    177    7    506 

2018

   120    146    7    516 

 

Notes:

 

(1)

The amounts of annual emission for 2019 are expected to be determined in June 2020.

(2)

“TSP” means Total Suspended Particles.

While the Third Basic National Energy Plan prohibits construction of new coal-fired power plants, the additional coal-fired power plants under construction by KEPCO are pursuant to the Sixth Basic Plan released in 2013. In constructing the new power plants, we are applying the “Ultra Super Critical” technology designed to minimize emission of pollutants and maximize the efficiency by reducing the coal consumption. We are also committed to lowering our exposure to coal-generated energy in the long-term. For additional information, see Item 3.D. “Risk Factors— We are subject to various environmental regulations and related government initiatives, including in relation to climate change, which could cause significant compliance costs and operational liabilities.”

In order to comply with the current and expected environmental standards and address related legal and social concerns, we intend to continue to install additional equipment, make related capital expenditures and undertake several environment-friendly measures to foster community goodwill. For example, under the Persistent Organic Pollutants Management Act enacted in 2007, we are required to remove polychlorinated biphenyl, or PCB, a toxin, from the insulating oil of our transformers by 2025. In addition, when constructing certain large new transmission and distribution facilities, we assess and disclose their environmental impact at the planning stage of such construction, and we consult with local residents, environmental groups and technical experts to generate community support for such projects. We exercise additional caution in cases where such facilities are constructed near ecologically sensitive areas such as wetlands or preservation areas. We also make reasonable efforts to minimize any negative environmental impact, for example, by using more environment-friendly technology and hardware. In addition, we also undertake measures to minimize losses during the transmission and distribution process by making our power distribution network more energy-efficient in terms of loss of power, as well as to lower consumption of energy, water and other natural resources. In addition, we and our subsidiaries acquired the ISO 14001 certification, an environmental management system widely adopted internationally, in 2007 and have made it a high priority to make our electricity generation and distribution more environmentally friendly. In addition to the ISO 14001 certification, we further reinforced our environmental management system by acquiring in 2013 a domestic “GMS (Green Management System), KS I 7001/7002” certification, which relates to the management of resources, energy, green house effects and social responsibilities. In 2014, we were awarded the presidential award for environmental contributions as a corporate citizen, after scoring the highest among 102 corporations that competed for the award. In order to encourage the implementation of environment-friendly measures by other corporations and enhance environmental awareness at a social level, we have been disclosing our environment-related activities and achievements to the public through the Environment Information System managed by the Ministry of Environment since 2012.

Our environmental measures, including the use of environment-friendly but more expensive parts and equipment and allocation of capital expenditures for the installation of such facilities, may result in increased operating costs and liquidity requirement. The actual cost of installation and operation of such equipment and related liquidity requirement will depend on a variety of factors which may be beyond our control. There is no

 

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assurance that we will continue to be in material compliance with legal or social standards or requirements in the future in relation to the environment.

As part of our long-term strategic initiatives, we plan to take other measures designed to promote the generation and use of environmentally friendly, or green, energy. See Item 4.B. “Business Overview—Strategy.” In line with such strategic initiatives, we are, among others:

 

  

investing in and researching technologies that capture and utilize carbon dioxide;

 

  

planning to develop capacity of 41.2 gigawatts of renewable energy by 2030 with our generation subsidiaries according to our “Renewable Energy 2030” initiative;

 

  

implementing amid- to long-term goal of “energy shift through expanding renewable energy”, reviewed and approved by our board in October 2019;

 

  

pursuing overseas energy projects according to the “Overseas Generation Business Agreement”, signed by us and our generation subsidiaries at the end of 2019, which stipulates stringent internal guidelines in connection with investments in greenfield coal power plant projects; and

 

  

refining our disclosure of greenhouse gas emission and relevant data to global investors to meet the recommendations set forth by the Task-force on Climate-Related Financial Disclosures (TCFD) set up by the Financial Stability Board (FSB) in 2015.

Specifically, our internal guideline stipulates the following five factors to be considered and fulfilled before we and our generation subsidiaries pursue a greenfield coal power plant project overseas:

 

 1.

a coal-fired plant is a realistic option as part of the target country’s energy policy;

 

 2.

the project applies the latest low carbon technology, such as the “Ultra Super Critical” technology, and complies with the international environment standards;

 

 3.

export financing is available based on the OECD guidelines;

 

 4.

the project involves a joint business development with Korean companies and financial service industry; and

 

 5.

the project gains local acceptance via socially responsible investments to protect environment.

Some of our generation facilities are powered by renewable energy sources, such as solar energy, wind power and hydraulic power. While such facilities are currently insignificant as a proportion of our total generation capacity or generation volume of our generation subsidiaries, we expect that the portion will increase in the future, especially since we are required to comply with the Renewable Portfolio Standard program as described below.

The following table sets forth the generation capacity and generation volume in 2019 of our generation facilities that are powered by renewable energy sources.

 

   Generation Capacity
(megawatts)
  Generation Volume
(gigawatt-hours)
 

Hydraulic Power(1)

   652   1,018 

Wind Power

   139   192 

Solar Energy, Fuel Cells, Biogas and others

   1,196   5,236 
  

 

 

  

 

 

 

Subtotal

   1,986   6,446 

As percentage of total(2)

   2.4  1.6

 

Notes:

 

(1)

Excluding generation capacity and volume of pumped storage, which is generally not classified as renewable energy.

 

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(2)

As a percentage of the total generation capacity or total generation volume, as applicable, of us and our generation subsidiaries.

In order to deal with shortage of fuel and other resources and also to comply with various environmental standards, in 2012 the Government adopted the Renewable Portfolio Standard program, which replaced the Renewable Portfolio Agreement which had been in effect from 2006 to 2011. Under this program, each of our generation subsidiaries is required to generate a specified percentage of total electricity to be generated by such generation subsidiary in a given year in the form of renewable energy or, in case of a shortfall, purchase a corresponding amount of a Renewable Energy Certificate (a form of renewable energy credit) from other generation companies whose renewable energy generation surpass such percentage. The target percentage was 5.0% in 2018, 6.0% in 2019 and 7.0% in 2020 and will incrementally increase to 10.0% by 2023. Fines are to be levied on any subsidiary that fails to do so in the prescribed timeline. In 2018, all six of our generation subsidiaries met the target through renewable energy generation and/or the purchase of a Renewable Energy Certificate. Compliance by our generation subsidiaries of the 2019 target is currently under evaluation, and if any generation subsidiary is found to have failed to meet the target for 2019 or for subsequent years, such generation subsidiary may become subject to fines.

As to how we plan to finance our capital expenditures related to our environmental programs, see “—Capital Investment Program.”

In March 2017, the Electric Utility Act was amended to the effect that starting in June 2017, future national planning for electricity supply and demand in Korea should consider the environmental and safety impacts of such planning, such as desulfurization costs. Accordingly, the costs related to environmental and safety impacts such as the desulfurization costs, have been reflected in our variable cost of generating electricity since August 2019. In December 2019, the Regulation on the Operation of the Electricity Market was revised, under which our specific plans to reflect the cost of greenhouse gas emission allowances will be finalized within two years of such revision.

Furthermore, under the new electricity rate structure effected by the Government effective January 1, 2017, a temporary rate discount will apply in the case of investments in environmentally friendly facilities such as energy storage systems, renewable energy and electric cars. While the initial temporary rate discount had applied between 2017 and 2019, it was extended until 2020. In order to mitigate any potential burden on the consumers and shock to the electric car market, the temporary rate discount will be incrementally phased out by June 2022.

Community Programs

Building goodwill with local communities is important to us in light of concerns among the local residents and civic groups in Korea regarding construction and operation of generation units, particularly nuclear generation units. The Act for Supporting the Communities Surrounding Power Plants and the Act on the Compensation and Support for Areas Adjacent to Transmission and Substation Facilities require that the generation companies and the affected local governments carry out various activities up to a certain amount annually to address neighboring community concerns. Pursuant to these Acts, we and our generation subsidiaries, in conjunction with the affected local and municipal governments, undertake various programs, including scholarships and financial assistance tolow-income residents.

Under the Act for Supporting the Communities Surrounding Power Plants, activities required to be undertaken under the Act are funded partly by the Electric Power Industry Basis Fund (see “—Sales and Customers—Electricity Rates”) and partly by KHNP as part of its budget. KHNP is required to make annual contributions to the affected local communities in an amount equal to Won 0.25 per kilowatt-hour of electricity generated by its nuclear generation units during theone-year period before the immediately preceding fiscal year, Won 5 million per thousand kilowatts of hydroelectric generation capacity and Won 0.5 million per thousand kilowatts of pumped-storage generation capacity.In addition, under Korean tax law, KHNP is required to pay

 

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local tax levied on its nuclear generation units in an amount equal to Won 1 (effective January 1, 2015, which reflects an increase from the previous Won 0.5 per kilowatt-hour of their generation volume in the affected areas) and Won 2 per 10 cubic meters of water used for hydroelectric generation.

The Act on the Compensation and Support for Areas Adjacent to Transmission and Substation Facilities, enacted in January 2014 with effect from July 2014, prescribes measures to be taken by power generation or transmission companies with respect to the communities adjacent to transmission and substation facilities. Under this Act, those who own land or houses in the vicinity of transmission lines and substation may claim compensation for damages or compel purchase of such properties by the power generation or transmission companies which are legally obligated in principle to pay for such damages or purchase such properties. In addition, under this Act, residents of communities adjacent to transmission and substation facilities are entitled to subsidies on electricity tariff as well as support for a variety of welfare projects and collective business ventures.

Prior to the construction of a generation unit, our generation subsidiaries perform an environmental impact assessment which is designed to evaluate public hazards, damage to the environment and concerns of local residents. A report reflecting this evaluation and proposing measures to address the problems identified must be submitted to and approved by the Ministry of Trade, Industry and Energy following agreement with related administrative bodies, including the Ministry of Environment prior to the construction of the unit. Our generation subsidiaries are then required to implement the measures reflected in the approved report. Despite these activities, civic community groups may still oppose the construction and operation of generation units (including nuclear units), and such opposition could adversely impact our construction plans for generation units (including nuclear units) and have a material adverse effect on our business, results of operations and cash flow.

Upon relocation of our corporate headquarters in November 2014, we developed and established Bitgaram Energy Valley as a smart energy hub city in Gwangju and Jeollanamdo, to attract and facilitate the growth ofstart-ups and research institutions related to new energy industries while contributing to the local economy, balanced regional development and job creation. To achieve this goal, we provide funding, business networks and research and development assistance to companies which entered into investment contracts with us. As of December 31, 2019, we had signed agreements with 430 companies relating to investments in the Bitgaram Energy Valley, and we currently aim to increase the total number of companies investing in the Bitgaram Energy Valley to 500 companies by the end of 2020.

Nuclear Safety

KHNP takes nuclear safety as its top priority and continues to focus on ensuring the safe and reliable operation of nuclear power plants. KHNP also focuses on enhancing corporate ethics and transparency in the operation of its plants.

KHNP has a corporate code of ethics and is firmly committed to enhancing nuclear safety, developing new technologies and improving transparency. KHNP has also established the “Statement of Safety Policy for Nuclear Power Plants” to ensure the highest level of nuclear safety. Furthermore, KHNP invests approximately 5% of its total annual sales into research and development for the enhancement of nuclear safety and operational performance.

KHNP implements comprehensive programs to monitor, ensure and improve safety of nuclear power plants. In order to enhance nuclear safety through risk-informed assessment, KHNP conducts probabilistic safety assessments, including for low power-shutdown states, for all its nuclear power plants. In order to systematically verify nuclear safety and identify the potential areas for safety improvements, KHNP performs periodic safety reviews on a10-year frequency basis for all its operating units. These reviews have been completed for Kori #1, #2, #3, #4; Hanbit #1, #2, #3, #4, #5, #6; Wolsong #1, #2, #3 and #4; and Hanul #1, #2, #3, #4, #5, #6 once or more. Reviews for Wolsong #3, #4 and Hanul #1, #2, #3, #4 are in progress. In order to enhance nuclear safety and plant performance, KHNP has established a maintenance effectiveness monitoring program based on the

 

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maintenance rules issued by the United States Nuclear Regulatory Commission, which covers all of KHNP’s nuclear power plants in commercial operation.

KHNP has developed the Risk Monitoring System for operating nuclear power plants, which it implements in all of its nuclear power plants. The Risk Monitoring System is intended to help ensure nuclear plant safety. In addition, KHNP has developed and implemented the Severe Accident Management Guidelines and is developing the Severe Accident Management Guidelines for Low Power-Shutdown States in order to manage severe accidents for all of its nuclear power plants.

KHNP conducts various activities to enhance nuclear safety such as quality assurance audits and reviews by the KHNP Nuclear Review. KHNP maintains a close relationship with international nuclear organizations in order to enhance nuclear safety. KHNP invites international safety review teams such as the World Association of Nuclear Operators (“WANO”) Peer Review Team to its nuclear plants for purposes of meeting international standards for independent review of its facilities. KHNP actively exchanges relevant operational information and technical expertise with its peers in other countries. For example, KHNP conducted seven WANO Peer Reviews for Kori #2, #3 and #4 units and Hanbit #1, #2, #3 and #4 units and Wolsong #5 and #6 units as well as Hanul #1, #2, #3 and #4 units in 2019. The recommendations and findings from this event were shared with KHNP’s other nuclear plants to implement improvements at such plants. In addition, KHNP has applied for the Operational Safety Review Team at the International Atomic Energy Agency to conduct a mission at Shin-Kori #3 and #4 units in the second half year of 2020. The purpose of such application was to ensure that KHNP nuclear generation units reflect the global safety standards.

The average level of radiation dose per unit amounted to a relatively low level of 0.28man-Sv in 2019, which was substantially lower than the global average of 0.60man-Sv/year in 2019 as reported in the WANO performance indicator report.

In response to the damage to the nuclear facilities in Japan as a result of the tsunami and earthquake in March 2011, the Government conducted additional safety inspections on nuclear power plants by a group of experts from governmental authorities, civic groups and academia. As a result of such inspections, the Government required KHNP to perform 46 comprehensive safety improvement measures. As of December 31, 2019, KHNP has completed implementation of 43 measures and will implement the three remaining measures by 2020. The Government also established the Nuclear Safety & Security Commission in October 2011 for neutral and independent safety appraisals. KHNP developed ten additional measures through benchmarking of overseas cases and internal analysis of current operations. As of December 31, 2019, KHNP has completed implementation of eight measures and will implement the two remaining measures by 2022.

From time to time, our nuclear generation units may experience unexpected shutdowns. For example, on September 12, 2016, multiple earthquakes including a magnitude 5.8 earthquake hit the city of Gyeongju, a home to KHNP’s headquarters and Wolsong Nuclear Power Plant. Although there was no material safety issues, KHNP had manually stopped the operations of Wolsong Nuclear Power Plant units #1, 2, 3, and 4 according to the safety guidelines. All units have resumed their operations on December 5, 2016, with the approval by the Nuclear Power Safety Commission. KHNP continues to implement measures to improve the safety by reinforcing seismic capability of its core facilities and performing stress tests across all its nuclear power plants. In 2018, KHNP finished the implementation of such measures for 24 units and enhanced seismic design of the core facilities to withstand a magnitude 7.0 earthquake (6.5 before implementation). As for the units under construction (Shin-Kori#5 and #6), the core facilities will be able to withstand a magnitude 7.4 earthquake.

Low and intermediate level waste, or LILW, and spent fuels are stored in temporary storage facilities at each nuclear site of KHNP. The temporary LILW storage facilities at the nuclear sites had been sufficient to accommodate all LILWs produced up to 2015. Korea Radioactive Waste Agency (“KORAD”) completed the construction of a LILW disposal facility in the city of Gyeongju, and government approval for its operations was obtained in December 2014.

 

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In order to increase the storage capacity of temporary storage facilities for spent fuels, KHNP has been pursuing various projects, such as installing high-density racks in spent fuel pools and building dry storage facilities. Through these activities, we expect that the storage capacity for spent fuels in all nuclear sites will be sufficient to accommodate all the spent fuels produced by 2020. The policy for spent fuel management options is currently under development.

In 2009, the Radioactive Waste Management Act (“RWMA”) was enacted in order to centralize management of the disposal of spent fuel and LILW and enhance the security and efficiency of related management processes. The RWMA designates KORAD to manage the disposal of spent fuels and LILW. Pursuant to the RWMA, the Government has established the Radioactive Waste Management Fund. The management expense for LILW is paid when LILW is transferred to KORAD, and the charge for spent fuel is paid based on the quantity generated every quarter. LILW-related management costs and charges for spent fuel are reviewed by the Ministry of Trade, Industry and Energy every two years. In December 2019, after the review by the committee composed of Government officials, KHNP, Korea Radioactive Waste Management Corporation and experts in finance and accounting, LILW-related management costs were increased while charges for spent-fuel remained the same. The change in LILW-related management costs caused an increase in KHNP’s expenses relating to radioactive waste.

All of KHNP’s nuclear plants are currently in compliance with Korean law and regulations and the safety standards of the IAEA in all material respects. For a description of certain past incidents relating to quality assurance in respect of KHNP, see Item 3.D. “Risk Factors— Our risk management policies and procedures may not be fully effective at all times.”

Decommissioning

Decommissioning of a nuclear power unit is the process whereby the unit is shut down at the end of its life, the fuel is removed and the unit is eventually dismantled. KHNP implements a dismantling policy under which dismantling would take place five to ten years after the unit’s closure. KHNP renewed the operating license of Kori #1, the first nuclear power plant constructed in Korea, which commenced operation in 1978, for an additional ten years in 2007. At the recommendation of the Ministry of Trade, Industry and Energy, KHNP has decided not to renew the operating license of Kori #1 and the initial phase of decommissioning (namely, safety inspection and removal of spent fuels) of Kori #1 has begun after its permanent shutdown in June 2017. In February 2015, KHNP also renewed the operation license of Wolsong #1 (which originally expired in November 2012) for an additional ten years until 2022. In June 2015, reactivation of Wolsong #1 was approved by the NSSC after periodic inspection. However, a civic group has since then brought a lawsuit to reverse such approval, and in February 2017, a lower court ruled to annul the NSSC’s approval, which ruling has since been appealed. On June 15, 2018, the board of directors of KHNP decided to (i) retire Wolsong #1 unit earlier than planned due to its economic inefficiency and (ii) discontinue the construction of Chunji #1 and #2 as well as Daejin #1 and #2 units. As of December 31, 2019, impairment loss in connection with the property, plant and equipment of Wolsong #1 unit accrued to Won 572,216 million and reversal of impairment loss was Won 16,693 million. As of December 31, 2019, impairment loss in connection with the property, plant and equipment of Chunji #1 and #2 as well as Daejin #1 and #2 units amounted to Won 38,886 million. Although the board of directors did not make any decisions regarding Shin-Hanul #3 and #4 units, which are new nuclear plants under construction, we cannot assure you that the construction of these units will not be discontinued. As of December 31, 2019, impairment loss in connection with the property, plant and equipment of Shin-Hanul #3 and #4 units accrued to Won 134,736 million. KHNP retains full financial and operational responsibility for decommissioning its units.

KHNP has accumulated decommissioning costs as a liability since 1983. The decommissioning costs of nuclear facilities are defined by the Radioactive-Waste Management Act, which requires KHNP to credit annual appropriations separately. These costs are estimated based on studies conducted by the relevant committees, and are reviewed by the Ministry of Trade, Industry and Energy every two years. In 2019, the actual discount rates

 

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decreased and the decommissioning cost per unit increased. As of December 31, 2019, KHNP was required to accrue Won 19,097 billion for the costs of dismantling and decontaminating existing nuclear power plants, which consisted of dismantling costs of nuclear plants of Won 15,994 billion and dismantling costs of spent fuel and radioactive waste of Won 3,103 billion. For accounting treatment of decommissioning costs, see Item 5.A. “Operating Results—Critical Accounting Policies—Decommissioning Costs.”

Overseas Activities

We are engaged in a number of overseas activities. We believe that such activities help us diversify our revenue streams by leveraging the operational experience of us and our subsidiaries gathered from providing a full range of services, such as power plant construction and specialized engineering and maintenance services in Korea, as well as establishing strategic relationships with countries that are or may become providers of fuels.

Throughout the years, we have sought to expand our project portfolio to include the construction and operation of conventional thermal generation units, nuclear generation units and renewable energy power plants, transmission and distribution and mining and development of fuel sources. While strategically important, we believe that our overseas activities, as currently being conducted, are not in the aggregate significant in terms of scope or amount compared to our domestic activities. In addition, a number of the overseas contracts currently being pursued are based onnon-binding memoranda of understanding and the details of such projects may significantly change during the course of negotiating the definitive agreements.

Below is a description of our major overseas projects.

Generation projects

Nuclear Generation Project

In December 2009, following an international open bidding process, we entered into a prime contract for the original contract amount of US$18.6 billion with the Emirates Nuclear Energy Corporation (“ENEC”), a state-owned nuclear energy provider of the United Arab Emirates (“UAE”), to design and construct four civil nuclear power generation units to be located in Barakah, a region approximately 270 kilometers from Abu Dhabi, for the UAE’s peaceful nuclear energy program. Under the contract, we and our subcontractors, some of which are our subsidiaries, are to perform various duties including, among others, designing and constructing four nuclear power generation units each with a capacity of 1,400 megawatts, supplying nuclear fuel for three fuel cycles including initial loading, with each cycle currently projected to last for approximately 18 months, and providing technical support, training and education related to plant operation. In connection with the parties’ execution of an amendment to the prime contract, the target completion dates for the four units were amended to be by December 2020. The contract amount of US$18.6 billion was increased to US$19.1 billion, and the amendment was signed in November 2017.

On October 20, 2016, in order to foster a long-term strategic partnership and stable management of the units post-construction we entered into an investment agreement with ENEC to jointly establish Barakah One PJSC, a special purpose company which will oversee the operation and management of the nuclear power plant currently being constructed in Barakah, United Arab Emirates. Barakah One PJSC is capitalized with loans in the amount of US$19.6 billion and equity of US$4.7 billion. We have a 18% equity interest in Barakah One PJSC, and also have a 18% equity interest in Nawah Energy Company, a subsidiary of ENEC, which will also be responsible for the operation and maintenance of the Barakah nuclear power plant. On December 20, 2018, the board of directors of KEPCO resolved to invest additional US$380 million in Barakah One PJSC. With the additional investment, KEPCO’s total capital investment amount in Barakah One PJSC is expected to be US$1.28 billion. KEPCO’s equity interest in the project is 18%, which remains unchanged. The total project cost of the construction and operation of the Barakah nuclear power plant is expected to be approximately US$29.5 billion, and the operational period is expected to be 60 years after the project commercial operation date in 2025. Actual capital contribution is currently scheduled to be made in September 2025.

 

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Non-nuclear Generation Projects

We are currently engaged in three major power projects in the Philippines: (i) a “build, operate and transfer” of a1,200-megawatt combined-cycle power plant project in Ilijan, construction of which began in November 1997 and was completed in June 2002 and which is being operated by us until 2022 (the project cost of the Ilijan project was US$721 million, for which project finance on a limited recourse basis was provided), (ii) ownership of a 39.6% equity interest in SPC Power Corporation, an independent power producer, and a 39.6% equity interest in two distribution companies in the Philippines, and (iii) a “build, operate and own” of a200-megawatt CFBC coal power plant in Cebu for which construction began in February 2008 and was completed in May 2011, followed by operation thereof until 2036. The project cost of the Cebu project was US$451 million, for which project financing on a limited recourse basis was provided.

In April 2007, we formed a limited partnership with Shanxi International Electricity Group and Deutsche Bank in China to develop and operate power projects and coal mines in Shanxi province, China, which was approved by the Chinese government. The total capital investment in these projects amounted to US$1.33 billion, of which our capital investment was US$450 million. We are expected to participate in the operation of the project for a period of 50 years ending 2057. The total installed capacity of these projects is 6,992 megawatts and capacity under construction was 2,566 megawatts, and our equity interest in the partnership was 34%.

In July 2008, a consortium consisting of us and Xenel of Saudi Arabia won the bid to “build, own and operate” agas-fired power plant with installed capacity of 373 megawatts in Al Qatrana, near Amman, and we entered into definitive agreements in October 2009. Construction of this project was completed in December 2011, and the plant is currently in operation and will be operated until 2035. The total project cost was US$461 million, of which the consortium made an equity contribution of US$143 million and the remainder was funded with debt financing. We and Xenel own 80:20 equity interests in the project, respectively.

In December 2008, we formed a consortium with ACWA Power International of Saudi Arabia and submitted a bid for the 1,204 megawattoil-fired power project in Rabigh, Saudi Arabia. In March 2009, we were selected as the preferred bidder, and in July 2009, we entered into a power purchase agreement with Saudi Electricity Company. Construction of the project was completed in April 2013, and we will participate in the operation of the plant for 20 years. The total project cost was approximately US$2.5 billion. We currently hold a 40.0% equity interest in the joint venture entity, Rabigh Electricity Company, which operates the project.

In August 2010, a consortium led by us was selected as the preferred bidder in an international auction for the construction and operation of the Norte IIgas-fueled combined-cycle electricity generation facility in Chihuahua, Mexico, as ordered by the Commission Federal de Electricidad (“CFE”) of Mexico. The consortium established a special purpose vehicle, KST Electric Power Company (“KST”), to act as the operating entity, and in September 2010, KST entered into a power purchase agreement with CFE in relation to the construction and operation of a433-megawatt combined-cycle power plant at Chihuahua in Mexico. In October 2010, KST was licensed by the Mexican government as an independent power producer, which allows it to produce and sell electricity to CFE during the specified contract period. The project will be undertaken on a “build, own and operate” basis. The total cost of the project is approximately US$427 million. We hold a 56% equity interest in the consortium, with the remaining equity interests held by Samsung Asset Management (34% equity interest) and Techint, a company based in Mexico (10% equity interest). Approximately 6% (equating to 24% before refinancing) of the total project costs is being financed through equity investments by the consortium and the remaining 94% (equating to 77.5% before refinancing) through the project bond issuance guaranteed by Export-Import Bank of Korea. Commercial operation of this project commenced in December 2013, and the operation period will run for 25 years until 2038. Our wholly-owned subsidiary, KEPCO Energy Service Company, currently manages the operation of the project.

In October 2010, a consortium including us was selected by Abu Dhabi Water & Electricity Authority (“ADWEA”), astate-run utilities provider in the UAE, as the preferred bidder in an international bidding for the

 

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construction and operation of the combined-cycle naturalgas-fired electricity generation facilities in Shuweihat, UAE with aggregate capacity of 1,600 megawatts. Construction was completed in July 2014 and we will participate in the operation of the plant until 2039. The total project cost was approximately US$1.4 billion, of which 20% was financed through equity investments by the consortium members and the remaining 80% through debt financing. Equity interests in the consortium are owned by ADWEA (60.0%), Sumitomo (20.4%) and us (19.6%). The total amount of our equity investment in the project is approximately US$56 million.

In January 2012, a consortium consisting of us, Mitsubishi Corporation and Wartsila Development & Financial Services of Finland was selected by National Electric Power Corporation, astate-run electricity provider in Jordan, to construct and operate a diesel engine power project in Almanakher with an expected total generation capacity of 573 megawatts. Construction of this project was completed in October 2014 and the plant is currently in operation and will be operated until 2039. The total project cost was approximately US$760 million, of which the consortium made an equity contribution of approximately US$190 million and the remainder was funded with debt financing. We, Mitsubishi Corporation and Wartsila Development & Financial Services own 60:35:5 equity interests in the project, respectively. Our equity investment in this project is US$104 million.

In March 2013, a consortium consisting of us and Marubeni, a Japanese corporation, was selected by the Ministry of Industry and Trade of Vietnam for the construction and operation of a 1,200 megawatt coal-fired power plant in Thanh Hoa province, Vietnam. We started construction in July 2018 and to complete completion by July 2022, followed by operation for 25 years. The total project cost is expected to be US$2.5 billion, of which 24% will be funded by equity contribution and the remaining 76% by debt financing. The share capital of the special purpose entity in charge of this project is US$568 million, and we and Marubeni each hold 50% equity interest in such entity.

On October 6, 2016, a consortium comprised of us, Marubeni Corporation and four local entities, with equity interest in the consortium of 24.5%, 24.5% and 51.0%, respectively, was notified that it has been selected by the Republic of South Africa Department of Energy as the preferred bidder for the construction and operation project of a coal-fired power plant in the Republic of South Africa. Once negotiations and financing arrangements are completed, the construction of the coal-fired power plant is expected to commence. The plant is expected to have an aggregate capacity of 630 megawatts, and construction is expected to take 52 months to complete. The consortium plans to participate in the operation of the plant for a period of 30 years from the commercial operation date. The total cost of the project is estimated to be around US$2.14 billion, of which our total capital investment is expected to be approximately US$133 million. In connection with the project, we plan to establish a holding company and a project company in the Republic of South Africa.

On September 28, 2017, we entered into a joint development agreement with Tadmax Resources Bhd, a Malaysian corporation, in relation to a gas-fired power plant with capacity of 1,200 megawatts in Pulau Indah, Malaysia. We obtained approval for this project from Malaysia Energy Commission, the host entity of the project. We will hold a 25% equity interest in this project, and Worldwide Holdings Berhad will hold a 35%, and Tadmax Resources Bhd will hold a 40% equity interest in it. The total project cost is expected to be approximately US$800 million, and we expect to invest approximately US$40 million for the equity interest. Upon closing of the financing, the construction for this project will begin in January 2021, following the approval of the applicable tariff rates by the Malaysian Energy Commission, which occurred in the first quarter of 2020. This project marks our first entry into the Malaysian power generation market. We expect to enter into a power purchase agreement with Tenaga Nasional Berhad for a term of 21 years, with a goal of generating a stable revenue stream from this project.

On November 5, 2019, we entered into an Energy Conversion Agreement comprising of a power purchase agreement with the Guam Power Authority for a term of 25 years to construct and operate Ukudugas-fired power plants in Guam, United States, including 198 megawatts gas fired power plant, 65 megawattsback-up diesel generator and 25 megawatts energy storage facility. KEPCO and Korea East-West Power Co., Ltd., hold

 

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60% and 40% shares in the project, respectively. The total project cost is expected to be approximately US$700 million, and we expect to invest US$84 million for the equity interest. The construction of the project is expected to commence in 2021 upon approval of the environmental impact assessment and the issuance of relevant permits. The power station is expected to commence commercial operation in 2023. The completed power plants are expected to be operated as base load generators, replacing the existing old heavy fuel power plants in Guam.

Exploration and Production Projects

In order to secure a more reliable supply of fuel for power generation and hedge against fluctuations in fuel price, from 2007 to 2016, we pursued overseas exploration and production projects, including five bituminous coal projects and five uranium projects involving investments of approximately Won 1.4 trillion. However, pursuant to the Government’s Proposal for Adjustment of Functions of Public Institutions (Energy Sector) announced in June 2016, as of December 31, 2016, except for the Bylong project described below, we transferred all our assets and liabilities for our overseas resource business to our six generation subsidiaries, which are theend-consumers of fuels and are therefore expected to more responsively manage these projects. The amount of net assets that we transferred to our generation subsidiaries as of December 31, 2016 was Won 622 billion.

Some of the assets transferred include our equity interest in PT Adaro Energy TBK, which is one of the largest coal producers in Indonesia, as well as our 20% equity interest in PT. Bayan Resources Tbk pursuant to which we were entitled to anoff-take of 7 million tons per year beginning in 2015.

One exception to the transfers on such date was our 90% equity interest in KEPCO Bylong Pty Ltd (“KEPCO Bylong”). We transferred 10% of our equity interest in the KEPCO Bylong to our fivenon-nuclear generation subsidiaries as of December 31, 2016, and we plan to gradually transfer the remainder of our interest to them subject to the progress of the regulatory approval process and resource production phase of the project. In July 2015, KEPCO Bylong lodged a development application to the State Government of New South Wales (the “NSW”) of Australia. In September 2019, Independent Planning Commission of the NSW, which is the governmental authority with the approval power, refused to grant KEPCO Bylong’s development application. As of December 31, 2019, we have invested approximately Won 810 billion in the Bylong project, and, as of December 31, 2019, impairment loss in connection with the Bylong project was approximately Won 540 billion. While we remain committed to the Bylong project, we are currently assessing next steps by analyzing the implications of the refusal.

Our nuclear generation subsidiary, KHNP, is also pursuing development projects for procurements of uranium in countries including Canada, France and Niger.

Renewable Energy Projects

Our overseas renewable energy projects include the generation of electricity through renewable energy sources.

Since 2005, joint ventures between us and China Datang Corporation of the People’s Republic of China have built and operated a number of wind farms in Inner Mongolia, Liaoning and Gansu provinces. We own 40% of these joint ventures, whose equity in the aggregate amount is approximately US$450 million. The projects are fundedone-third by equity contributions andtwo-thirds by debt financing. As of December 31, 2019, the joint venture operated 22 wind farms with a total capacity of 1,017 megawatts and a7-megawatt photovoltaic power station.

In December 2015, we entered into an agreement with the Ministry of Energy and Mineral Resources of Jordan to build, own and operate a wind farm with installed capacity of 89.1 megawatts in Fujeij, Ma’an, Jordan. Commercial operations commenced on July 14, 2019. Total project cost is approximately US$181 million, of

 

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which 40% is financed through equity investments by us and the remaining 60% through debt financing. We believe that this project will help us to further diversify our business portfolio in the Middle East from the existing focus on nuclear and thermal power plants to expand to renewable energy facilities.

In June 2015, we entered into a memorandum of understanding with Energy Product, a Japanese local developer, to build, own and operate photovoltaic power station with a capacity of 28 megawatts, together with a 13.7 megawatts-hour energy storage system, in Chitose, Hokkaido prefecture in Japan. The parties subsequently signed the joint development agreement and other definitive agreements. The power station, in which we own 80.1% interest, started commercial operation in July 2017. Total project cost is approximately JPY 11.3 billion, of which 20% was financed through 80:20 equity investments by us and EP. The remaining 80% is funded through debt financing.

In August 2016, we entered into a Purchase and Sale Agreement with Cogentrix Solar Holdings to operate a photovoltaic power station in Colorado, United States, with a capacity of 30 megawatts for 25 years. Total project cost is approximately US$85 million, of which 50.1% was financed through 50.1:49.9 equity investments by us and a private equity fund formed by us and National Pension Service. It was our first foray into the North American power market.

In June 2017, a consortium between us and LG CNS Co., Ltd. won a project to build, own and operate a photovoltaic power station in Guam, United States, with a capacity of 60 megawatts for 25 years, including 32 megawatts-hour energy storage system. The total project cost is approximately US$200 million, of which 25% will be financed through equity investment by us and LG CNS Co., Ltd., each holding 70% and 30% of equity interests, respectively, and the remaining 75% will be funded through debt financing. The debt to equity ratio will be fixed upon financial closing. The consortium has entered into a power purchase agreement with Guam Power Authority in August 2018.

In September 2017, we entered into an agreement with Recurrent Energy to operate 3 solar photovoltaic project in southern California, United States, with a capacity of 235MW for 34 years. KEPCO partnered with the Corporate Partnership Fund, a Korean private equity fund. We invested USD 38 million in the project, and the transaction marks our largest investment in the U.S. solar market.

In October 2018, we entered into a Share Purchase Agreement and Share Subscription Agreement to operate a photovoltaic power station with a capacity of 50 megawatts in Calatagan in Philippines. The parties, KEPCO and Solar Philippines Power Project Holdings, Inc., subsequently signed the Shareholders’ Agreement in December 2018, in which KEPCO owns 38% interest. We financed PHP 2.25 billion (approximately USD 42.8 million) for the Calatagan Project, of which 80% was financed through equity investments and the remaining 20% was funded through debt financing.

In October 2019, KEPCO and Sprott Korea as a consortium entered into a Share Purchase Agreement and Shareholders Agreement with Candian Solar INC to develop and operate a photovoltaic power station with a capacity of 294 megawatts in Mexico, including the State of Sonora, for 35 years. We invested USD 41 million in the project, and the transaction marks KEPCO’s first investment in the solar market in Mexico.

Although renewable energy projects are currently insignificant as a proportion of our total overseas activities and our generation activities, we expect the portion of renewable energy projects to increase in the future as we seek to penetrate the overseas renewable energy market, diversify our businesses and actively address climate change. We expect to further diversify our business in the renewable energy sector to also include smart transmission and distribution facilities, smart grids and utilization of new energy related technologies.

 

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North Korea

Kaesong Complex

Since 2005, we have provided electricity to the industrial complex located in Kaesong, North Korea, which was established pursuant to an agreement made during the summit meeting of the two Koreas in June 2000. The Kaesong complex is the largest economic project between the two Koreas and is designed to combine the Republic’s capital and entrepreneurial expertise with the availability of land and labor of North Korea. In March 2005, we built a 22.9 kilovolt distribution line from Munsan substation in Paju, Gyeonggi Province to the Kaesong complex and became the first to supply electricity to pilot zones such as ShinWon Ebenezer. In April 2006, we started to construct a 154 kilovolt, 16 kilometer transmission line connecting Munsan substation to the Kaesong complex as well as Pyunghwa substation in the complex and began operations in May 2007.

At the end of 2015, we supplied electricity to 254 units, including administrative agencies, support facilities and resident corporations, using a tariff structure identical to that of South Korea. However, we suspended power transmission to the Kaesong Industrial Complex since February 11, 2016 following the Government’s decision to halt operations of the industrial complex to impede North Korea’s utilization of funds from the industrial complex to finance its nuclear and missile programs. As of December 31, 2019, the book value of our facility located at the complex was Won 16.6 billion. For the year ended December 31, 2019, the amount of trade receivables from the companies residing in Kaesong complex was Won 2.9 billion. It is currently uncertain if we can exercise the property rights for our facility in the Kaesong complex. No assurance can be given that we will not experience any material losses as a result of the suspension of this project or failure of the project as a result of a breakdown or escalation of hostilities in the relationship between the Republic and North Korea. See Item 3.D. “Risk Factors—Risks Relating to Korea and the Global Economy—Tensions with North Korea could have an adverse effect on us and the market value of our shares.”

Insurance

We and our generation subsidiaries carry insurance covering against certain risks, including fire, in respect of key assets, including buildings, equipment, machinery,construction-in-progress and procurement in transit, as well as, in the case of us, directors’ and officers’ liability insurance. We and our generation subsidiaries maintain casualty and liability insurance against risks related to our business to the extent we consider appropriate. Other than KHNP, neither we nor our generation subsidiaries separately insure against terrorist attacks. These insurance and indemnity policies, however, cover only a portion of the assets that we own and operate and do not cover all types or amounts of loss that could arise in connection with the ownership and operation of these assets.

Substantial liability may result from the operations of our nuclear generation units, the use and handling of nuclear fuel and possible radioactive emissions associated with such nuclear fuel. KHNP maintains property and liability insurance against risks of its business to the extent required by the related law and regulations or considered as appropriate and otherwise self-insures against such risks. KHNP carries insurance for its generation units against certain risks, including property damage, nuclear fuel transportation and liability insurance for personal injury and property damage. KHNP carries property damage insurance covering up to US$1 billion per accident for all properties within its plant complexes, which includes property insurance coverage for acts of terrorism up to US$300 million and for breakdown of machinery up to US$300 million. In addition to the insurance on operating nuclear power generation units, KHNP has construction insurance for Shin-Kori #4, #5 and #6 and Shin-Hanul #1 and #2. KHNP maintains nuclear liability insurance for personal injury and third-party property damage for coverage of up to 300 million Special Drawing Rights, or SDRs, which amounts to approximately US$409.7 million, at the rate of 1 SDR = US$1.365690 as posted on the Internet homepage of the International Monetary Fund on March 27, 2020 per plant complex, for a total coverage of 1.5 billion SDRs. KHNP is also the beneficiary of a Government indemnity with respect to such risks for damage claims of up to Won 300 million SDRs per nuclear plant complex, for a total coverage of 1.5 billion SDRs. Under the Nuclear Damage Compensation Act of 1969, as amended, KHNP is liable only up to 300 million SDRs, per single accident per plant complex; provided that such limitation will not apply where

 

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KHNP intentionally causes harm or knowingly fails to prevent the harm from occurring. KHNP will receive the Government’s support, subject to the approval of the National Assembly, if (i) the damages exceed the insurance coverage amount of 300 million SDRs and (ii) the Government deems such support to be necessary for the purposes of protecting damaged persons and supporting the development of nuclear energy business. KHNP carries insurance for its generation units and nuclear fuel transportation, and we believe that the level of insurance is generally adequate and is in compliance with relevant laws and regulations. In addition, KHNP is the beneficiary of Government indemnity which covers a portion of liability in excess of the insurance. However, such insurance is limited in terms of amount and scope of coverage and does not cover all types or amounts of losses which could arise in connection with the ownership and operation of nuclear plants. Accordingly, material adverse financial consequences could result from a serious accident or a natural disaster to the extent it is neither insured nor covered by the government indemnity. See Item 3.D. “Risk Factors—Risks Relating to KEPCO—The amount and scope of coverage of our insurance are limited.”

Competition

As of December 31, 2019, we and our generation subsidiaries owned approximately 66.8% of the total electricity generation capacity in Korea (excluding plants generating electricity for private or emergency use). New entrants to the electricity business will erode our market share and create significant competition, which could have a material adverse impact on our financial condition and results of operations.

In particular, we compete with independent power producers with respect to electricity generation. The independent power producers accounted for 27.3% of total power generation in 2019 and 33.2% of total generation capacity as of December 31, 2019. As of December 31, 2019, there were 20 independent power producers in Korea, excluding renewable energy producers. Private enterprises became permitted to own and operate coal-fired power plants in Korea only after the Ministry of Trade, Industry and Energy approved plans for independent power producers to construct coal-fired power plants under the Sixth Basic Plan announced in February 2013. Under the Eighth Basic Plan announced in December 2017, six coal-fired units under construction with aggregate generation capacity of 6,260 megawatts are scheduled to be completed between 2021 and 2022. While it remains to be seen whether construction of these generation units will be completed as scheduled, if these units were to be completed as scheduled and/or independent power producers are permitted to build additional generation capacity (whether coal-fired or not), our market share in Korea may decrease, which may have a material adverse effect on our results of operations and financial condition.

In addition, under the Community Energy System adopted by the Government in 2004, a minimal amount of electricity is supplied directly to consumers on a localized basis by independent power producers outside the cost-based pool system. Such system is used by our generation subsidiaries and most independent power producers to distribute electricity nationwide. The purpose of this system is to geographically decentralize electricity supply and thereby reduce transmission losses and improve the efficiency of energy use. These entities do not supply electricity on a national level but are licensed to supply electricity on a limited basis to their respective districts under the Community Energy System. As of March 31, 2020, the aggregate generation capacity of suppliers participating in the Community Energy System amounted to less than 1% of that of our generation subsidiaries in the aggregate. We currently do not expect the Community Energy System to be widely adopted, especially in light of the significant level of capital expenditure required for such direct supply. However, if the Community Energy System is widely adopted, it may erode our currently dominant market position in the generation and distribution of electricity in Korea and may have a material adverse effect on our business, results of operations and financial condition.

Our market dominance in the electricity distribution in Korea also may face potential erosion in light of the recent Proposal for Adjustment of Functions of Public Institutions (Energy Sector) announced by the Government in June 2016. This proposal contemplates a gradual opening of the electricity trading market to the private sector although no detailed roadmap has been provided for such opening. It is currently premature to predict to what extent, or in what direction, the liberalization of the electricity trading market will happen.

 

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Nonetheless, any significant liberalization of the electricity trading market may result in substantial reduction of our market share in electricity distribution in Korea, which would have a material adverse effect on our business, results of operation and cash flows.

The electric power industry, which began its liberalization process with the establishment of our power generation subsidiaries in April 2001, may become further liberalized in accordance with the Restructuring Plan. See Item 4.B. “Business Overview—Restructuring of the Electric Power Industry in Korea.”

In the residential sector, consumers may use natural gas, oil and coal for space and water heating and cooking. However, currently there is no practical substitute for electricity for lighting and other household appliances, which is available on commercially affordable terms.

In the commercial sector, electricity is the dominant energy source for lighting, office equipment and air conditioning. For its other uses, such as space and water heating, natural gas and, to a lesser extent, oil, provide competitive alternatives to electricity.

In the industrial sector, electricity is the dominant energy source for a number of industrial applications, including lighting and power for many types of industrial machinery and processes that are available on commercially affordable terms. For other uses, such as heating, electricity competes with oil and natural gas and potentially withgas-fired combined heating and power plants.

Regulation

We are a statutory juridical corporation established under the KEPCO Act for the purpose of ensuring a stable supply of electric power and further contributing toward the sound development of the national economy through facilitating development of electric power resources and carrying out proper and effective operation of the electricity business. The KEPCO Act (including the amendment thereto) prescribes that we engage in the following activities:

 

 1.

development of electric power resources;

 

 2.

generation, transmission, transformation and distribution of electricity and other related business activities;

 

 3.

research and development of technology related to the businesses mentioned in items 1 and 2;

 

 4.

overseas businesses related to the businesses mentioned in items 1 through 3;

 

 5.

investments or contributions related to the businesses mentioned in items 1 through 4;

 

 6.

businesses incidental to items 1 through 5;

 

 7.

Development and operation of certain real estate held by us to the extent that:

 

 a.

it is necessary to develop certain real estate held by us due to external factors, such as relocation, consolidation, conversion to indoor or underground facilities or deterioration of our substation or office; or

 

 b.

it is necessary to develop certain real estate held by us to accommodate development of relevant real estate due to such real estate being incorporated into or being adjacent to an area under planned urban development; and

 

 8.

other activities entrusted by the Government.

The KEPCO Act currently requires that our profits be applied in the following order of priority:

 

  

first, to make up any accumulated deficit;

 

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second, to set aside 20.0% or more of profits as a legal reserve until the accumulated reserve reachesone-half of our capital;

 

  

third, to pay dividends to shareholders;

 

  

fourth, to set aside a reserve for expansion of our business;

 

  

fifth, to set aside a voluntary reserve for the equalization of dividends; and

 

  

sixth, to carry forward surplus profit.

As of December 31, 2019, the legal reserve was Won 1,605 billion and the voluntary reserve was Won 34,785 billion, which consisted of reserve for business expansion of Won 28,968 billion, reserve for investment in social overhead capital of Won 5,277 billion, reserve for research and human development of Won 330 billion and reserve for equalizing dividends of Won 210 billion.

We are under the supervision of the Ministry of Trade, Industry and Energy, which has principal supervisory responsibility (in consultation with other Government agencies, such as the Ministry of Economy and Finance, as applicable) over us with respect to the appointments of our directors and our other senior management as well as approval of electricity tariff rate adjustments, among others.

Because the Government owns part of our capital stock, the Government’s Board of Audit and Inspection may audit our books.

The Electric Utility Act requires that licenses be obtained in relation to generation, transmission, distribution and sales of electricity, with limited exceptions. We hold the license to generate, transmit, distribute and sell electricity. Each of our six generation subsidiaries holds an electricity generation license. The Electric Utility Act governs the formulation and approval of electricity rates in Korea. See “—Sales and Customers—Electricity Rates” above.

Our operations are subject to various laws and regulations relating to environmental protection and safety.

Debt Reduction Program and Related Activities

In light of the general policy guideline of the Government for public institutions (including us and our generation subsidiaries) to reduce their respective overall debt levels, we and our generation subsidiaries have, in consultation with the Ministry of Trade, Industry and Energy and as approved by the Public Agencies Operating Committee, previously set targetdebt-to-equity levels every year from 2014 to 2017 and undertook various programs to reduce debt and improve the overall financial health, including through rationalizing and applying stricter review to (from a profitability and efficiency perspective) various aspects of our operations (both domestic and overseas), inviting private sector investments, disposing ofnon-core assets (such asnon-core or loss-generating overseas operations and real property unrelated to operations), reducing costs, exploring alternative ways to generate additional revenue and developing contingency plans for further cost savings. Such debt-reduction initiatives ended at the end of 2017 as initially planned. However, we plan to continue carry out similar initiatives to manage our level of debt.

Despite our best efforts, however, for reasons beyond our control, including macroeconomic environments, government regulations and market forces (such as international market prices for our fuels), we cannot assure whether we or our generation subsidiaries will be able to successfully reduce debt burdens or otherwise improve our financial health or to a level that would be optimal for our capital structure. If we or our generation subsidiaries fail to do so or the measures taken by us or our generation subsidiaries to reduce debt levels or improve financial health have unintended adverse consequences, such developments may have an adverse effect on our business, results of operations and financial condition.

 

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Establishment of an University

In light of the Government’s policy for Korea’s southwestern Honam region and in an effort to cultivate talents and establish a research platform for new market expansions, we plan to establish an university in South Jeolla Province. The university is planned to focus on energy studies and is expected to have 100 professors and more than 1,000 students. On April 17, 2020, the Ministry of Education gave us the permission to form a legal entity for the university, and by 2021 the entity will apply for an approval from the Ministry of Education to establish the university. The opening date is tentatively scheduled for 2022. The estimated cost of such project is Won 995 billion until 2025. Although the source of the funding has not yet been finalized, we are endeavoring to secure funds from both the central government and the municipality government. For example, for ten years after the commencement of the university, we anticipate receiving funding (to be used for expenses in operating the school) from the municipality government in the amount of Won 200 billion. We are also currently discussing with the government-wide University Establishment and Support Committee regarding a potential funding from the central government. On August 8, 2019, our Board of Directors resolved to make an initial contribution of Won 60 billion for the promotion, initial operation and the design of the university campus. After taking into account fundings from the municipality and central governments, we anticipate our contribution to the university until 2025 to be approximately Won 480 billion, subject to change depending on the amount of contribution from the central government. We cannot assure you that the magnitude of our expected contribution to the university will not have material adverse effects on our profit margins, results of operations or cash flows.

Proposed Sale of Certain Power Plants and Equity Interests

The following table summarizes our current plans for sale of certain of our assets. These sales will be made pursuant to the Government’s plans to reduce debt levels and improve management efficiency of public enterprises. The consummation of these plans, however, is subject to, among others, related Government policies and market conditions.

 

Equity Holdings

  

Primary Business

  Fair Value (1)
as of December 31,
2019
   Ownership
Percentage as of
December 31, 2019
   Ownership
Percentage

to be Sold
 
      (in billions of
Won)
     

KEPCO Engineering & Construction Co., Inc.

  Architectural engineering for utility plants   504    65.77    14.77 

Korea Electric Power Industrial Development Co., Ltd.

  Electricity metering   33    29.00    29.00 

 

Note:

 

(1)

Fair value has been computed as the product of the closing share price on December 31, 2019 multiplied by the number of shares owned by KEPCO.

KEPCO Engineering & Construction Co., Inc.

Pursuant to the Third Phase of the Public Institution Reform Plan announced by the Government in August 2008, we conducted the initial public offering of Korea Engineering and Construction Co., Inc., or KEPCO E&C formerly known as Korea Power Engineering Co., Ltd., in December 2009 for gross proceeds to us of Won 165 billion, following which we owned 77.9% of KEPCO E&C’s shares. In furtherance of the Public Institution Reform Plan and to improve our financial profile, we sold our equity interests representing 3.1%, 4.0%, 4.5% and 0.54% of KEPCO E&C shares in November 2011, December 2013, December 2014 and December 2016, respectively, in each case to third party investors. We currently hold a 65.77% equity interest in KEPCO E&C.

Korea Electric Power Industrial Development Co., Ltd.

In 2003, we privatized Korea Electric Power Industrial Development, or KEPID, formerly our wholly-owned subsidiary, by selling 51.0% of its equity interest to Korea Freedom Federation. Pursuant to the Fifth

 

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Phase of the Public Institution Reform Plan announced by the Government in 2009, we sold 20% of the KEPID shares through additional listing. We currently plan to sell the remaining 29.0% of KEPID’s equity interest based on, among others, considerations of economic and market conditions.

Item 4.C. Organizational Structure

As of December 31, 2019, we had 119 subsidiaries, 66 associates and 64 joint ventures (not including any special purpose entities).

Subsidiaries

Our wholly-owned six generation subsidiaries are KHNP, KOSEP, KOMIPO, KOWEPO, KOSPO and EWP. Ournon-generation subsidiaries include KEPCO E&C, KEPCO KPS, KEPCO NF, and KEPCO KDN. For a full list of our subsidiaries, including foreign subsidiaries, and their respective jurisdiction of incorporation, please see Exhibit 8.1 attached to this annual report.

Associates and Joint Ventures

An associate is an entity over which we have significant influence and that is neither a subsidiary nor a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but does not have control or joint control over those policies. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint ventures) have rights to the net assets of the arrangement.

The table below sets forth each of our associates and joint ventures as of December 31, 2019 by name, the percentage of our shareholdings and their principal activities.

 

   Ownership
(Percent)
   

Principal Activities

Associates:

    

Korea Gas Corporation(1)

   20   Importing and wholesaling LNG

Korea Electric Power Industrial Development Co., Ltd.

   29   Electricity metering and others

YTN Co., Ltd.

   21   Broadcasting

Cheongna Energy Co., Ltd.

   44   Generating and distributing vapor and hot/cold water

Gangwon Wind Power Co., Ltd.(2)

   15   Power generation

Hyundai Green Power Co., Ltd.

   29   Power generation

Korea Power Exchange(5)

   100   Management of power market and others

Hyundai Energy Co., Ltd.(8)

   31   Power generation

Ecollite Co., Ltd.

   36   Artificial light-weight aggregate

Taebaek Wind Power Co., Ltd.

   25   Power generation

Taeback Guinemi Wind Power Co., Ltd.

   25   Power generation

Pyeongchang Wind Power Co., Ltd.

   25   Power generation

Daeryun Power Co., Ltd.(3)

   9   Power generation

Changjuk Wind Power Co., Ltd.

   30   Power generation

KNH Solar Co., Ltd.

   27   Power generation

SPC Power Corporation

   38   Power generation

Gemeng International Energy Co., Ltd.

   34   Power generation

PT. Cirebon Electric Power

   28   Power generation

KNOC Nigerian East Oil Co., Ltd.(4)

   15   Resources development

KNOC Nigerian West Oil Co., Ltd.(4)

   15   Resources development

PT Wampu Electric Power

   46   Power generation

PT. Bayan Resources TBK

   20   Resources development

 

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   Ownership
(Percent)
   

Principal Activities

S-Power Co., Ltd.

   49   Power generation

Pioneer Gas Power Limited(7)

   39   Power generation

Eurasia Energy Holdings

   40   Power generation and resources development

Xe-PianXe-Namnoy Power Co., Ltd.

   25   Power generation

Hadong Mineral Fiber Co., Ltd.(3)

   8   Recycling fly ashes

Green Biomass Co., Ltd.(10)

   8   Power generation

PT. Mutiara Jawa

   29   Manufacturing and operating floating coal terminal

Samcheok Eco Materials Co., Ltd.(9)

   2   Recycling fly ashes

Noeul Green Energy Co., Ltd.

   29   Power generation

Naepo Green Energy Co., Ltd.

   42   Power generation

Goseong Green Energy Co., Ltd.(2)

   1   Power generation

Gangneung Eco Power Co., Ltd.(2)

   2   Power generation

Shin Pyeongtaek Power Co., Ltd.

   40   Power generation

Heang Bok Do Si Photovoltaic Power Co., Ltd.

   28   Power generation

Dongducheon Dream Power Co., Ltd.(14)

   34   Power generation

Jinbhuvish Power Generation Pvt. Ltd.(2)

   5   Power generation

Daejung Offshore Wind Power Co., Ltd.

   50   Power generation

GS Donghae Electric Power Co., Ltd.

   34   Power generation

Daegu Photovoltaic Co., Ltd.

   29   Power generation

Busan Green Energy Co., Ltd.

   29   Power generation

Gunsan Bio Energy Co., Ltd.(2)

   19   Power generation

Korea Electric Vehicle Charging Service

   28   Electric vehicle charge service

Korea Nuclear Partners Co., Ltd.

   29   Electric material agency

Korea Electric Power Corporation Fund(11)

   98   Developing electric enterprises

Energy Infra Asset Management Co., Ltd.(3)

   10   Asset management

Daegu clean Energy Co., Ltd.

   28   Renewable power generation

YaksuESS Co., Ltd

   29   Installing ESS related equipment

Nepal Water & Energy Development Company Private Limited(13)

   58   Construction and operation of utility plant

Gwangyang Green Energy Co., Ltd.

   20   Power generation

PND solar., Ltd

   29   Power generation

Hyundai Eco Energy Co., Ltd.(2)

   19   Power generation

YeongGwang Yaksu Wind Electric. Co., Ltd(2)

   10   Power generation

Green Energy Electricity Generation Co., Ltd.

   29   Power generation

Korea Energy Solutions Co., Ltd.

   20   R & D

ITR Co., Ltd.

   20   R & D

Structure test network Co., Ltd.

   20   Technical testing and consulting

Namjeongsusang Solar Power Operation Co., Ltd.(18)

   15   Power generation

Indeck Niles Development, LLC(23)

   50   Power generation

Indeck Niles Asset Management, LLC

   33   Power generation

Hanwha Corporation-linked Sunlight Power Special Private Equity Investment Trust No. 1

   49   Holding company

Suwon New Power Co., Ltd.

   40   Power generation

KPGE Inc.

   29   Power generation materials business

Gwangbaek Solar Power Investment Co., Ltd.(21)

   19   Power generation

Goduk Clean Energy Co., Ltd.(20)

   61   Fuel cell generation

 

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   Ownership
(Percent)
   

Principal Activities

Joint Ventures:

    

KEPCO-Uhde Inc.(6)

   53   Power generation

Shuweihat Asia Power Investment B.V.

   49   Holding company

Shuweihat Asia Operation & Maintenance Company(6)

   55   Maintenance of utility plant

Waterbury Lake Uranium L.P.

   33   Resources development

ASM-BG Investicii AD

   50   Power generation

RES Technology AD

   50   Power generation

KV Holdings, Inc.

   40   Power generation

KEPCO SPC Power Corporation(6)

   75   Construction and operation of utility plant

Gansu Datang Yumen Wind Power Co., Ltd.

   40   Power generation

Datang Chifeng Renewable Power Co., Ltd.

   40   Power generation

Datang KEPCO Chaoyang Renewable Power Co., Ltd.

   40   Power generation

Rabigh Electricity Company

   40   Power generation

Rabigh Operation & Maintenance Company Limited

   40   Maintenance of utility plant

Jamaica Public Service Company Limited

   40   Power generation

KW Nuclear Components Co., Ltd.

   45   Manufacturing

Busan Shinho Solar Power Co., Ltd.

   25   Power generation

Global Trade Of Power System Co., Ltd.

   29   Exporting products and technology of small or medium business by proxy

Expressway Solar-light Power Generation Co., Ltd.

   29   Power generation

Amman Asia Electric Power Company(6)

   60   Power generation

KAPES, Inc.(6)

   51   R&D

Honam Wind Power Co., Ltd.

   29   Power generation

Jeongam Wind Power Co., Ltd.

   40   Power generation

Korea Power Engineering Service Co., Ltd.

   29   Construction and service

Chun-cheon Energy Co., Ltd.

   30   Power generation

Yeonggwangbaeksu Wind Power Co., Ltd.(3)

   15   Power generation

Nghi Son 2 Power LLC

   50   Power generation

Kelar S.A(6)

   65   Power generation

PT. Tanjung Power Indonesia

   35   Power generation

Incheon New Power Co., Ltd.

   29   Power generation

Seokmun Energy Co., Ltd.

   29   Power generation

Daehan Wind Power PSC

   50   Power generation

Barakah One Company(12)

   18   Power generation

Nawah Energy Company(12)

   18   Operation of utility plant

MOMENTUM

   33   International thermonuclear experimental reactor construction management

Daegu Green Power Co., Ltd

   29   Power generation

Yeonggwang Wind Power Co., Ltd.

   46   Power generation

Chester Solar IV SpA

   45   Power generation

Chester Solar V SpA

   45   Power generation

Diego de Almagro Solar SpA

   45   Power generation

South Jamaica Power Company Limited

   20   Power generation

Daesan Green Energy Co., Ltd.

   35   Power generation

RE Holiday Holdings LLC

   50   Power generation

RE Pioneer Holdings LLC

   50   Power generation

 

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   Ownership
(Percent)
   

Principal Activities

RE Barren Ridge 1 Holdings LLC

   50   Power generation

RE Astoria 2 LandCo LLC

   50   Power generation

RE Barren Ridge LandCo LLC

   50   Power generation

Laurel SpA

   45   Power generation

KIAMCO KOWEPO Bannerton Hold Co Pty Ltd(3)

   12   Power generation

Chile Solar JV SpA

   50   Power generation

Taebaek Gadeoksan Wind Power Co., Ltd.

   38   Power generation

Cheong-Song Noraesan Wind Power Co., Ltd.

   29   Power generation

Chester Solar I SpA

   45   Power generation

Solar Philippines Calatagan Corporation

   38   Power generation

Saemangeum Solar Power Co., Ltd.(22)

   81   Power generation

Chungsongmeon BongSan wind power Co., Ltd.

   29   Power generation

Jaeun Resident Wind Power Plant Co., Ltd.

   29   Power generation

DE Energia SpA

   49   Power generation

Dangjin Eco Power Co., Ltd. (newly)(15)

   34   Power generation

Haemodum Solar Co., Ltd.

   49   Power generation

Yangyang Wind Power Co., Ltd.(17)

   100   Power generation

HORUS SOLAR, S.A. DE C.V.(19)

   15   Renewable power generation

RECURSOS SOLARES PV DE MEXICO II, S.A. DE C.V.(19)

   15   Renewable power generation

SUNMEX RENOVABLES, S.A. DE C.V.(19)

   15   Renewable power generation

Stavro Holding II AB

   20   Holding company

 

Notes:

(1)

The effective percentage of ownership (excluding the treasury stocks) is 21.57%.

(2)

Our effective percentage of ownership is less than 20%, but we can exercise significant influence by virtue of our contractual right to appoint directors to the board of directors of this entity and, through such directors, we can influence the financial and operating policy of the board of directors.

(3)

Our effective percentage of ownership is less than 20%, but we can exercise significant influence by virtue of our contractual right to appoint a director to the board of directors of this entity.

(4)

Our effective percentage of ownership is less than 20%, but we can exercise significant influence by virtue of our contractual right to appoint one out of four members of the steering committee of this entity. Moreover, we have significant financial transactions with this entity to the effect that we can exercise significant influence on this entity.

(5)

The Government regulates our ability to make operating and financial decisions over this entity, as the Government requires maintaining arms-length transactions between the Korea Power Exchange and our other subsidiaries. We can exercise significant influence by virtue of our right to nominate directors to the board of directors of this entity.

(6)

Our effective percentage of ownership is more than 50%. However, according to the shareholders’ agreement, all critical financial and operating decisions must be agreed to by all shareholders. For this reason, these entities are classified as joint ventures.

(7)

The reporting period of all associates and joint ventures ends on December 31, except for Pioneer Gas Power Limited, whose reporting period ends on March 31.

(8)

As of December 31, 2018, 15.64% of ownership of Hyundai Energy Co., Ltd. is held by NH Power II Co., Ltd. and NH Bank. According to the shareholders’ agreement reached on March 2011, we have a call option to acquire the investment in Hyundai Energy Co., Ltd. from NH Power II Co., Ltd. and NH Bank upon a certain rate of return, and NH Power II Co., Ltd. and NH Bank also have put options to dispose of their investment to us. In connection with this agreement, we applied the equity method on our 46.30% equity investment in Hyundai Energy Co., Ltd.

 

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(9)

Our effective percentage of ownership (excluding the redeemable convertible preferred stock) is 25.54%.

(10)

Our effective percentage of ownership is less than 20%, but we can exercise significant influence by virtue of our contractual right to appoint a director to the board of directors of this entity and the fact that a dominant portion of the investee’s sales transactions is generated from us.

(11)

Our effective percentage of ownership is more than 50% but we do not hold control over relevant business while we exercise significant influence by participating in the Investment Decision Committee. For this reason, this entity is classified as an associate.

(12)

Our effective percentage of ownership is less than 20%, but we have joint control over this entity as decisions on the major activities require the unanimous consent of the parties that collectively control this entity.

(13)

Our effective percentage of ownership is more than 50%, but we do not control this entity according to the shareholders’ agreement. For this reason, this entity is classified as an associate.

(14)

Our effective percentage of ownership is 34.01% considering redeemable convertible preferred stock.

(15)

Eumseong Natural Gas Power Co., Ltd. and Dangjin Eco Solar Power Co., Ltd. were established byspin-off from Dangjin Eco Power Co., Ltd. After thespin-off, Eumseong Natural Gas Power Co., Ltd. was merged and absorbed by us during December 2019.

(16)

Daejung Offshore Wind Power Co., Ltd. and GS Donghae Electric Power Co., Ltd. are reclassfied from joint ventures to associates, and Jeongam Wind Power Co., Ltd. and Korea Power Engineering Service Co., Ltd. are reclassified from associates to joint ventures during the year ended December 31, 2019.

(17)

The temporary percentage of ownership is more than 50% due to differences in the timing of the payment. We are expected to exert significant influence after payment is completed in the first quarter of 2020.

(18)

The effective percentage of ownership is less than 20%. However, we consider the major decision-making body to be the general decision of the board of directors, and the general decision of the board of directors can be passed only by two directors. For this reason, the entities are classified as an associate.

(19)

The effective percentage of ownership is less than 20%. However, according to the shareholders’ agreement, decisions on the major activities must be agreed to by all ownership parties. For this reason, the entities are classified as joint ventures

(20)

The effective percentage of ownership is 61%. However, it seems we don’t have power on the Goduk Clean Energy Co., Ltd. due to its proportion to make decisions, which is less than 50%. We can exercise significant influence on the entity by participating in the board of directors and others. Therefore the entity is classified as an associate.

(21)

The effective percentage of ownership is less than 20%. However, we can exercise significant influence by virtue of its contractual right to appoint a director to the board of directors of the entity.

(22)

The effective percentage of ownership is more than 50%. However, according to the shareholders’ agreement, all operation related decisions must be agreed by all ownership parties. For this reason, the entity is classified as a joint venture.

(23)

Although the investment amount is not paid as of December 31, 2019, we have an investment agreement on 50% of the interests. We can exercise significant influence by virtue of its contractual right to appoint a director to the board of directors of the entity.

Item 4.D. Property, Plant and Equipment

Our property consists mainly of power generation, transmission and distribution equipment and facilities in Korea. See Item 4.B. “Business Overview—Power Generation,” “—Transmission and Distribution” and “—Capital Investment Program.” In addition, we own our corporate headquarters building complex at 55Jeollyeok-ro,Naju-si,Jeollanam-do, 58322, Korea. As of December 31, 2019, the net book value of our property, plant and equipment was Won 164,702 billion. As of December 31, 2019, investment property, which is accounted for separately from our property, plant and equipment, amounted to Won 159 billion. No significant amount of our properties is leased. There are no material encumbrances on our properties, including power generation, transmission and distribution equipment and facilities.

 

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Pursuant to a Government plan announced in 2005, which mandated relocation of the headquarters of select government-invested enterprises from the Seoul metropolitan area to other provinces in Korea as part of an initiative to foster balanced economic growth in the provinces, we, our generation subsidiaries and our certain subsidiaries relocated our respective headquarters to the designated locations during 2014 and 2015. Our headquarters are currently located in Naju inJeollanam-do Province while the headquarters of our six generation subsidiaries and other subsidiaries are various cities outside of Seoul across Korea.

In connection with the relocation of our headquarters, in September 2014 we entered into an agreement to sell the property housing our prior headquarters to a consortium consisting of members of the Hyundai Motor group for Won 10,550 billion through an open bidding. The sale was completed in September 2015.

During 2019, we completed the sales of 270 properties (including residential properties, storage spaces, and substation lots that are located in Korea) which are not directly related to our operations for an aggregate sale price of approximately Won 55 billion. The book value of such properties amounted to Won 32 billion, representing 0.3% of our total real properties as of December 31, 2019. The foregoing sales reflect our ongoing efforts to improve our financial soundness through debt reduction and enhance our management efficiency, selling noncore properties that have no direct relations to electricity facilities.

 

ITEM 4A.

UNRESOLVED STAFF COMMENTS

We do not have any unresolved comments from the SEC staff regarding our periodic reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion on our operating and financial review and prospects together with our consolidated financial statements and the related notes which appear elsewhere in this annual report. Our results of operations, financial condition and cash flows may materially change from time to time, for reasons including various policy initiatives (including changes to the Restructuring Plan) by the Government in relation to the Korean electric power industry, and accordingly our historical performance may not be indicative of our future performance. See Item 4.B. “Business Overview—Restructuring of the Electric Power Industry in Korea” and Item 3D. “Risk Factors—The Government may adopt policy measures to substantially restructure the Korean electric power industry or our operational structure, which may have a material adverse effect on our business, operations and profitability.”

Item 5.A. Operating Results

Overview

We are a predominant market participant in the Korean electric power industry, and our business is heavily regulated by the Government, including with respect to the rates we charge to customers for the electricity we sell. In addition, our business requires a high level of capital expenditures for the construction of electricity generation, transmission and distribution facilities and is subject to a number of variable factors, including demand for electricity in Korea and fluctuations in fuel costs, which are in turn impacted by the movements in the exchange rates between the Won and other currencies.

Under the Electric Utility Act and the Price Stabilization Act, the Government generally establishes electricity rates at levels that are expected to permit us to recover our operating costs attributable to our basic electricity generation, transmission and distribution operations in addition to receiving a fair investment return on capital used in those operations. For a detailed description of the fair investment return, see Item 4.B. “Business Overview—Sales and Customers—Electricity Rates.”

 

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If fuel prices were to rise substantially and rapidly in the future, such rise may have a material adverse effect on our results of operations and profitability. For example, the net losses between 2018 and first half of 2019, were largely due to sustained rises in fuel costs that were neither timely nor sufficiently offset by a corresponding rise in electricity tariff rates. In part to address these concerns, the Government from time to time increases the electricity tariff rates. However, such increases may be insufficient to fully offset the adverse impact from the rise in fuel costs, and since such increases typically require lengthy public deliberations in order to be implemented, the tariff increases often occur with a significant time lag and as a result our results of operations and cash flows may suffer. On the other hand, if fuel prices decrease, substantial political pressure may lead the Government to lower the level of electricity tariff in a relatively shorter period of time due to the lack of public opposition, which could negatively affect our profit margins and in turn our financial condition and results of operations.

In addition, we expect complying with the Government environmental-related initiatives and regulations to continue to involve significant costs and resources on our part, which may adversely affect our results of operation, financial condition and cash flows. For example, we have spent approximately Won 710 billion for the greenhouse gas emission allowances in 2019, compared to Won 53 billion in 2018, and we anticipate that such cost will continue to increase in 2020 and thereafter. Further, as we are required to supply increasing amount of renewable energy, we expect that the environmental-related risks will continue to increase.

The results of our operations are largely affected by the following factors:

 

  

demand for electricity;

 

  

electricity rates we charge to our customers;

 

  

fuel costs;

 

  

costs of complying with the environmental-related policies and regulations; and

 

  

the exchange rates of Won against other foreign currencies, in particular the U.S. dollar.

Demand for Electricity

Our sales are largely dependent on the level of demand for electricity in Korea and the rates we charge for the electricity we sell.

Demand for electricity in Korea grew at a compounded average rate of 1.8% per annum for the five years ended December 31, 2019. According to the Bank of Korea, the compounded growth rate for GDP was approximately 2.7% for the same period. The GDP growth rate was approximately 3.1%, 2.7% and 2.0% during 2017, 2018 and 2019, respectively.

The table below sets forth, for the periods indicated, the annual rate of growth in Korea’s GDP and the annual rate of growth in electricity demand (measured by total annual electricity consumption) on ayear-on-year basis.

 

   2015  2016  2017  2018  2019 

Growth in GDP

   2.8  2.9  3.1  2.7  2.0

Growth in electricity consumption

   1.3  2.8  2.2  3.6  (1.1%) 

Demand for electricity may be categorized either by the type of its usage or by the type of customers. The following describes the demand for electricity by the type of its usage, namely, industrial, commercial and residential:

 

  

The industrial sector represents the largest segment of electricity consumption in Korea. Demand for electricity from the industrial sector was 289,240 gigawatt hours in 2019, representing a 1.3% decrease from 2018, largely due to the changes in the business environment resulting from the U.S.-China trade disputes and the Japanese export restrictions against Korea during 2019.

 

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Demand for electricity from the commercial sector depends largely on the level and scope of commercial activities in Korea. Demand for electricity from the commercial sector decreased to 116,227 gigawatt hours in 2019, representing a 0.6% decrease from 2018 largely due to the decrease in the commercial electricity usage for air conditioning and heating as a result of a more temperate weather.

 

  

Demand for electricity from the residential sector is largely dependent on population growth and use of heaters, air conditioners and other electronic appliances. Demand for electricity from the residential sector increased to 72,639 gigawatt hours in 2019, representing a 0.4% decrease compared to 2018, largely due to a decrease in household electricity usage for air conditioning and heating as a result of a more temperate weather. For a discussion on demand by the type of customers, see Item 4.B. “Business Overview—Sales and Customers—Demand by the Type of Usage.” Since our inception, we have had the predominant market share in terms of electricity generated in Korea.

Since our inception, we have had the predominant market share in terms of electricity generated in Korea. As for electricity we purchase from the market for transmission and distribution to ourend-users, our generation subsidiaries accounted for 77.8%, 74.0% and 73.2% in 2017, 2018 and 2019, respectively, while the remainder was accounted for by independent power producers. As for transmission and distribution of electricity, we have historically handled, expect to continue to handle, substantially all of such activities in Korea.

We expect that we will continue to have a dominant market share in the generation, transmission and distribution of electricity in Korea for the foreseeable future, absent any substantial changes to the Restructuring Plan or other policy initiatives by the Government in relation to the Korean electric power industry, or an unexpected level of market penetration by independent power producers or localized electricity suppliers under the Community Energy System. However, our market dominance in the electricity distribution in Korea may face potential erosion in light of the recent Proposal for Adjustment of Functions of Public Institutions (Energy Sector) announced by the Government in June 2016. This proposal contemplates a gradual opening of the electricity trading market to the private sector although no detailed roadmap has been provided for such opening. It is currently premature to predict to what extent, or in what direction, the liberalization of the electricity trading market will happen. Nonetheless, any significant liberalization of the electricity trading market may result in substantial reduction of our market share in electricity distribution in Korea, which would have a material adverse effect on our business, results of operation and cash flows. See Item 4.B. “Business Overview—Competition.”

Electricity Rates

Under the Electric Utility Act and the Price Stabilization Act, electricity rates are established at levels that will permit us to recover our operating costs attributable to our basic electricity generation, transmission and distribution operations in addition to receiving a fair investment return on capital used in those operations. For further discussion of fair investment return, see Item 4.B. “Business Overview—Sales and Customers—Electricity Rates.”

From time to time, our actual rate of return on invested capital may differ significantly from the fair rate of return on invested capital assumed for the purposes of electricity tariff approvals, for reasons, among others, related to movements in fuel prices, exchange rates and demand for electricity that differs from what is assumed for determining our fair rate of return. For example, between 1987 and 1990, the actual rate of return was above the fair rate of return due to declining fuel costs and rising demand for electricity at a rate not anticipated for purposes of determining our fair rate of return. Similarly, depreciation of the Won against the U.S. dollar accounted for our actual rates of return being lower than the fair rate of return for the period from 1996 to 2000. For the period between 2006 and 2013, our actual rates of return were lower than the fair rate of return largely due to a general increase in fuel costs and additional facility investment costs incurred, the effects of which were not offset by timely increases in our tariff rates. Between 2014 and 2016, however, largely due to the decrease in

 

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fuel costs reflective of the drop in oil prices, our actual rate of return has surpassed the fair rate of return; however, substantially all of the resulting excess has been used to fund capital expenditure and repair and maintenance, as well as to offer tariff discounts to economically or otherwise disadvantaged customers, and investments in renewable energy and other environmental programs.

Partly in response to the variance between our actual rates of return and the fair rates of return, the Government from time to time increases the electricity tariff rates, but there typically is a significant time lag for the tariff increases as such increases requires a series of deliberation processes and administrative procedures and the Government also has to consider other policy considerations, such as the inflationary effect of overall tariff increases and the efficiency of energy use from sector-specific tariff increases.

In the past, the Government effected tariff increases that typically covered all sectors, namely, residential, commercial and industrial. No cross-sector tariff increase has been implemented since November 2013, largely due to the downward trend in fuel costs.However, effective January 1, 2017, the Government made several adjustments to the existing rate structure in order to ease the burden of electricity tariff on residential consumers. First, the progressive rate structure applicable to the residential sector, which applies a gradient of increasing tariff rates for heavier electricity usage, was changed from asix-tiered structure with the highest rate being no more than 11.7 times the lowest rate (which gradient system has been in place since 2005) into a three-tiered structure with the highest rate being no more than three times the lowest rate in order to reflect the changes in the pattern of electricity consumption and reduce the electricity charges payable by consumers. Second, a new tariff structure was implemented to encourage energy saving by offering rate discounts to residential consumers that voluntarily reduce electricity consumption while charging special high rates to residential consumers with heavy electricity consumption during peak usage periods in the summer and the winter. Additionally, during July and August 2018, the Government reduced residential electricity charges by temporarily relaxing the application of the current tariff structure and offering higher rate discounts to economically or otherwise disadvantaged customers to ease the burden on households that have significantly increased their use of air conditioners during a heatwave. Subsequently, a joint task force team, consisting of industry experts, scholars and government officials, was formed, which announced three proposals for amending the current tariff structure aimed to lower electricity rates for households during the summer. As a result, in July 2019, the residential electricity tariff rate system was amended to expand the usage ceiling for the first two tiers of rates (from 200 kilowatts to 300 kilowatts for the first tier and from 400 kilowatts to 450 kilowatts for the second tier) applied during July and August each year. Further, in December 2019, the rate discounts offered to residential consumers who voluntarily reduced electricity consumption and those offered to traditional wet markets were abolished, with a temporary relief granted to the traditional wet markets committed to energy efficiency. The rate discount for electric vehicles will be gradually terminated in phases by June 2022. The effects of such adjustments on us are uncertain, and there can be no assurance that it will not have an adverse impact on our business, results of operations, financial condition and profitability. We plan to prepare a proposition for a sustainable tariff system designed to mitigate the financial burden on us. Though the timeline is subject to change, we are tentatively aiming to prepare the proposition by the first half of 2020, which will include (1) a reasonable adjustment of the rate discount applicable to the residential customers with low electricity usage and (2) an introduction of the tariff system to the residential sector where the rates change depending on the demand in a given season or time (namely, the“time-of-use tariff”). Despite the efforts, however, the downward tariff rate adjustments may change our revenues from the sale of electricity and accordingly have a material adverse effect on our results of operation and cash flows..

Fuel Costs

Our results of operations are also significantly affected by the cost of producing electricity, which is subject to a variety of factors, including, in particular, the cost of fuel.

Cost of fuel in any given year is a function of the volume of fuels consumed and the unit fuel cost for the various types of fuel used for generation of electricity which affects the cost structure for both our generation

 

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subsidiaries and independent power producers from whom we purchase electric power. A significant change in the unit fuel costs materially impacts the costs of electricity generated by our generation subsidiaries, which mainly comprise our fuel costs under the cost of sales, as well as, to our knowledge, the costs of electricity generated by the independent power producers that sell their electricity to us (see Item 4.A. “Purchase ofElectricity—Cost-based Pool System”), which mainly comprise our purchased power costs under the cost of sales. We are however unable to provide a comparative analysis since the unit fuel cost information for independent power producers and their cost structures are proprietary information.

Fuel costs constituted 31.7%, 34.5% and 31.6% of our cost of sales, and the ratio of fuel costs to our sales was 27.8%, 33.5% and 31.2% in 2017, 2018 and 2019, respectively. Substantially all of the fuel (except for anthracite coal) used by our generation subsidiaries is imported from outside of Korea at prices determined in part by prevailing market prices in currencies other than Won. In addition, our generation subsidiaries purchase a significant portion of their fuel requirements under contracts with limited quantity and duration. Pursuant to the terms of our long-term supply contracts, prices are adjusted from time to time subject to prevailing market conditions. See Item 4.B. “Business Overview—Fuel.”

Uranium accounted for 34.8%, 31.9% and 35.7% of our fuel requirements in 2017, 2018 and 2019, respectively. Coal accounted for 53.3%, 53.2% and 51.8% of our fuel requirements in 2017, 2018 and 2019, respectively. LNG accounted for 8.7%, 11.2% and 9.5% of our fuel requirements in 2017, 2018 and 2019, respectively. Oil accounted for 1.2%, 1.4% and 0.5% of our fuel requirements in 2017, 2018 and 2019, respectively. In each case, the fuel requirements are measured by the amount of electricity generated by us and our generation subsidiaries and do not include electricity purchased from independent power producers. In order to ensure stable supplies of fuel materials, our generation subsidiaries enter into long-term and medium-term contracts with various suppliers and supplement such supplies with fuel materials purchased on spot markets.

The price of bituminous coal, which represents our largest fuel requirement, fluctuates significantly from time to time. In 2019, approximately 81% of the bituminous coal requirements of our generation subsidiaries were purchased under long-term contracts and the remaining 19% purchased on the spot market. The average weekly spot price of “free on board” Newcastle coal 6000 GAR published by Bloomberg (Bloomberg Ticker: COASNE60) decreased from US$107.53 per ton in 2018 to US$77.49 per ton in 2019 and to US$69.48 per ton as of March 30, 2020. If the price of bituminous coal were to sharply rise, our generation subsidiaries may not be able to secure their respective bituminous coal supplies at prices commercially acceptable to them. In addition, any significant interruption or delay in the supply of fuel, bituminous coal in particular, from any of their suppliers could cause our generation subsidiaries to purchase fuel on the spot market at prices higher than contracted, resulting in an increase in fuel cost.

From 2017 to 2019, the prices of oil and LNG fluctuated significantly. The prices of oil and LNG are substantially dependent on the price of crude oil, and according to Bloomberg (Bloomberg Ticker: PGCRDUBA), the average daily spot price of Dubai crude oil increased from US$53.1 per barrel in 2017 to US$69.3 per barrel in 2018, and decreased to US$63.22 per barrel in 2019 and to US$22.51 per barrel as of March 30, 2020. While there was a significant decrease in the price of crude oil recently, there is no guarantee that this trend will continue.

Nuclear power has a stable and relativelylow-cost structure and forms a significant portion of electricity supplied in Korea. Due to significantly lower unit fuel costs compared to those for thermal power plants, our nuclear power plants are generally operated at full capacity with only routine shutdowns for fuel replacement and maintenance, with limited exceptions. In case of shortage in electricity generation resulting from stoppages of the nuclear power plants, we seek to make up for such shortage with power generated by our thermal power plants.

Because the Government heavily regulates the rates we charge for the electricity we sell (see Item 4.B. “Business Overview—Sales and Customers—Electricity Rates”), our ability to pass on such cost increases to our customers is limited. For example, from 2008 to 2012 we had consecutive net losses and, from time to time,

 

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operating losses, largely due to sustained rises in fuel costs that were neither timely nor sufficiently offset by a corresponding rise in electricity tariff rates. If fuel prices substantially increase and the Government, out of concern for inflation or for other reasons, maintains the current level of electricity tariff and does not increase it to a level to sufficiently offset the impact of rising fuel prices, the price increases will negatively affect our profit margins or even cause us to suffer operating and/or net losses, and our business, financial condition, results of operations and cash flows would suffer.

Movements of the Won against the U.S. Dollar and Other Foreign Currencies

Korean Won has fluctuated significantly against major currencies from time to time. For fluctuations in exchange rates, see Item 3.A. “Selected Financial Data—Currency Translations and Exchange Rates.” In particular, Korean Won underwent substantial fluctuations during the recent global financial crisis, and remains subject to significant volatility. The Noon Buying Rate per one U.S. dollar increased from Won 1,067.4 on December 31, 2017 to 1,112.9 on December 31, 2018 and increased again to Won 1,155.5 on December 31, 2019 and to Won 1,217.8 as of April 17, 2020. In 2018 and 2019, the Won generally depreciated against U.S. dollar and other foreign currencies, and such depreciation may result in a significant increase in the cost of fuel materials and equipment purchased from overseas as well as the cost of servicing our foreign currency debt. As of December 31, 2019, 17.5% of our long-term debt (including the current portion but excluding issue discounts and premium) without taking into consideration of swap transactions was denominated in foreign currencies, principally U.S. dollars. The prices for substantially all of the fuel materials and a significant portion of the equipment we purchase are stated in currencies other than Won, generally in U.S. dollars. Since a substantial portion of our revenues is denominated in Won, we must generally obtain foreign currencies through foreign currency-denominated financings or from foreign currency exchange markets to make such purchases or service such debt, fulfill our obligations under existing overseas investments and make new overseas investments. As a result, any significant depreciation of Won against U.S. dollar or other foreign currencies will have a material adverse effect on our profitability and results of operations. See Item 3.D. “Risk Factors—Risks Relating to KEPCO—The movement of Won against the U.S. dollar and other currencies may have a material adverse effect on us.”

Recent Accounting Changes

New Amendments Adopted

New amendments to IFRS and other accounting standards are set forth below.

IFRS 16 ‘Leases’

IFRS 16 replaces existing leases guidance, including IAS 17 ‘Lease’, IFRIC 4 ‘Determining whether an Arrangement contains a Lease’,SIC-15 ‘Operating Leases – Incentives’ andSIC-27 ‘Evaluating the Substance of Transactions Involving the Legal Form of a Lease’. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most leases under a singleon-balance sheet model.

Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17.

We have adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of January 1, 2019. Under this method, the standard is applied retrospectively with the

cumulative effect of initially applying the standard recognized at the date of initial application. We have elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (‘short-term leases’), and lease contracts for which the underlying asset is of low value (‘leases oflow-value assets’).

 

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The impacts on our consolidated statements of financial position on the date of initial application (January 1, 2019) are as follows:

 

In millions of Won  Original
carrying amount
under IAS 17
   Adjustment  New
carrying amount
under IFRS 16
 

Assets

     

Current assets

     

Cash and cash equivalents

  1,358,345    —     1,358,345 

Current financial assets, net

   2,359,895    —     2,359,895 

Trade and other receivables, net

   7,793,592    —     7,793,592 

Inventories, net

   7,188,253    —     7,188,253 

Income tax refund receivables

   143,214    —     143,214 

Currentnon-financial assets

   878,888    (3,021  875,867 

Assetsheld-for-sale

   22,881    —     22,881 
  

 

 

   

 

 

  

 

 

 

Total current assets

   19,745,068    (3,021  19,742,047 
  

 

 

   

 

 

  

 

 

 

Non-current assets

     

Non-current financial assets, net

   2,113,613    —     2,113,613 

Non-current trade and other receivables, net

   1,819,845    (10  1,819,835 

Property, plant and equipment, net

   152,743,194    4,947,947   157,691,141 

Investment properties, net

   159,559    —     159,559 

Goodwill

   2,582    —     2,582 

Intangible assets other than goodwill, net

   1,225,942    —     1,225,942 

Investments in associates

   4,064,820    —     4,064,820 

Investments in joint ventures

   1,813,525    —     1,813,525 

Deferred tax assets

   1,233,761    —     1,233,761 

Non-currentnon-financial assets

   327,152    (1,332  325,820 
  

 

 

   

 

 

  

 

 

 

Totalnon-current assets

   165,503,993    4,946,605   170,450,598 
  

 

 

   

 

 

  

 

 

 

Total Assets

  185,249,061    4,943,584   190,192,645 
  

 

 

   

 

 

  

 

 

 

 

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In millions of Won  Original
carrying
amount under
IAS 17
   Adjustment   New carrying
amount under
IFRS 16
 

Liabilities

      

Current liabilities

      

Trade and other payables, net

  6,405,395    510,304    6,915,699 

Current financial liabilities, net

   7,981,879    —      7,981,879 

Income tax payables

   285,420    —      285,420 

Currentnon-financial liabilities

   5,574,041    —      5,574,041 

Current provisions

   1,594,798    —      1,594,798 
  

 

 

   

 

 

   

 

 

 

Total current liabilities

   21,841,533    510,304    22,351,837 
  

 

 

   

 

 

   

 

 

 

Non-current liabilities

      

Non-current trade and other payables, net

   2,941,696    4,433,280    7,374,976 

Non-current financial liabilities, net

   53,364,911    —      53,364,911 

Non-currentnon-financial liabilities

   8,160,033    —      8,160,033 

Employee benefits liabilities, net

   1,645,069    —      1,645,069 

Deferred tax liabilities

   9,617,309    —      9,617,309 

Non-current provisions

   16,585,748    —      16,585,748 
  

 

 

   

 

 

   

 

 

 

Totalnon-current liabilities

   92,314,766    4,433,280    96,748,046 
  

 

 

   

 

 

   

 

 

 

Total Liabilities(*)

  114,156,299    4,943,584    119,099,883 
  

 

 

   

 

 

   

 

 

 

Equity

      

Contributed capital

  4,053,578    —      4,053,578 

Retained earnings

   51,519,119    —      51,519,119 

Other components of equity

   14,171,228    —      14,171,228 
  

 

 

   

 

 

   

 

 

 

Equity attributable to owners of the controlling company

   69,743,925    —      69,743,925 

Non-controlling interests

   1,348,837    —      1,348,837 
  

 

 

   

 

 

   

 

 

 

Total Equity

  71,092,762    —      71,092,762 
  

 

 

   

 

 

   

 

 

 

Total Liabilities and Equity

  185,249,061    4,943,584    190,192,645 
  

 

 

   

 

 

   

 

 

 

 

(*)

The adjustment from the total liabilities amounting to Won 4,943,584 is a present value of operating lease payment as of December 31, 2018, discounted by weighted average interest rate of lessee’s incremental borrowing rate as of January 1, 2019, and deducted by the present value of short-term leases andlow-value asset leases payments.

We have lease contracts for various items such as consecutive voyage charter contracts, power purchase agreements (PPA), real estate lease contracts including buildings, switchyard, and land for electric substation, vehicles, and other equipment.

Before adoption of IFRS 16, we, as a lessee, classified a lease contract as a finance lease if it transferred substantially all of the risks and rewards incidental to ownership of the leased asset to us; otherwise as an operating lease. Upon adoption of IFRS 16, we applied a single recognition and measurement approach for all leases, except for short-term leases and leases oflow-value assets. The standard provides specific transition requirements and practical expedients, which has been applied by us.

The significant accounting policies applied by us in preparation of its consolidated financial statements are described in Note 3.(8) to our consolidated financial statements included in this annual report.

 

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Critical Accounting Policies

The following discussion and analysis are based on our consolidated financial statements included in this annual report. The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. To aid in that understanding, our management has identified “critical accounting policies.”

We make a number of estimates and judgments in preparing our consolidated financial statements. These estimates may differ from actual results and have a significant impact on our recorded assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We consider an estimate to be a critical accounting estimate if it requires a high level of subjectivity or judgment, and a significant change in the estimate would have a material impact on our financial condition or results of operations. Further discussion of these critical accounting estimates and policies is included in the notes to our consolidated financial statements included in this annual report.

The accounting policies set out below have been applied consistently by us and our subsidiaries to all periods presented in the consolidated annual financial statements, unless otherwise indicated.

Sale and Purchase of Electricity

We sell electricity to customers and accounts for the generation, transmission and distribution of electricity together as a single performance obligation. We recognize sale of electricity at a point in time when electricity has been distributed to the customer. Our transaction price includes variable considerations due to the progressive electricity billing system, discounts on electricity bills for government policy purposes and penalties as well as a result of customer usage patterns, customer mix, meter reading schedules, weather and other factors. Variable consideration is estimated by using the expected value method, which predicts the amount of consideration to which we will be entitled. We recognize variable consideration only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved, which is when the customer is billed.

Construction Contracts

We provide services for power plant construction and engineering, procurement and construction (“EPC”), where each contract has a single performance obligation and is recognized over time on the estimated progress to completion of the construction using the cost-based input method. We believe using the cost-based input method represents a faithful depiction of the transfer of services to the customer. Costs incurred towards contract completion include costs associated with direct materials, labor, and other indirect costs related to contract performance. Judgment is required in estimating the costs expected to incur in completing the construction projects, which in turn involves estimating future materials, labor, contingencies and other related costs. Revenue is estimated based on the contractual amount; however, it can also be affected by uncertainties resulting from unexpected future events.

We recognize revenue in advance of billing the customer, which results in the recording of a contract asset. Once we meet the billing criteria and our rights to consideration become unconditional, the contract asset is then transferred to trade receivable. Billing requirements are generally structured around the completion of certain construction milestones. On some instances, contract liability is recognized when we receive consideration before being able to recognize revenue. Once revenue recognition conditions are met, the contract liability is subsequently released to revenue.

Derivative Instruments

We recognize rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. The gains and losses that result from the change in the fair value of derivative instruments are

 

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reported in current earnings. However, for derivative instruments designated as hedging the exposure of variable cash flows, the effective portions of the gains or losses on the hedging instruments are recorded as accumulated other comprehensive income (loss) and credited or charged to operations at the time the hedged transactions affect earnings, and the ineffective portions of the gains or losses are credited or charged immediately to operations.

Significant management judgment is involved in determining the fair value of estimated derivative instruments. The estimates and assumptions used by our management to determine fair value can be impacted by many factors, such as the estimated discount factor derived from observable market data, credit risk of the counterparty and the estimated cash flow based on settlement period, interest convention, and other contract information of the derivative instruments.

As of December 31, 2017, we had Won 395 billion of net amounts as liabilities. As of December 31, 2018, we had Won 210 billion of net amounts as liabilities. As of December 31, 2019, we had Won 141 billion of net amounts as assets. Changes in the estimated discount factor or cash flow, or changes in the assumptions and judgments by management underlying these estimates, may cause material revisions to the estimated total gain or loss effect of derivative instruments, which could have a material effect on the recorded asset or liability.

Our derivative financial instruments are entered into with major financial institutions, thereby minimizing the risk of credit loss from each counter party.

Decommissioning Costs

We recognize the fair value of estimated decommissioning costs as a liability in the period in which we incur a legal obligation associated with retirement of long-lived assets that result from acquisition, construction, development and/or normal use of the assets. We also recognize a corresponding asset that is depreciated over the life of the asset. Accretion expense consists ofperiod-to-period changes in the liability for decommissioning costs resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. Depreciation and accretion expenses are included in the cost of electric power in the accompanying consolidated statements of comprehensive income.

Significant management judgment is involved in determining the fair value of estimated decommissioning costs. The estimates and assumptions used by our management to determine fair value can be impacted by many factors, such as the estimated decommissioning costs based on engineering studies commissioned and approved by the Korean government, and changes in assumed dates of decommissioning, inflation rate, discount rate, decommissioning technology, regulation and the general economy.

As of December 31, 2017, 2018 and 2019, we had a liability for decommissioning costs in the amounts of Won 15,985 billion, Won 16,364 billion and Won 19,237 billion, respectively. Changes in the estimated costs or timing of decommissioning, or changes in the assumptions and judgments by management underlying these estimates, may cause material revisions to the estimated total cost to decommission these facilities, which could have a material effect on the recorded liability. We used discount rates of 2.94%, 2.94% and 2.43% and inflation rates of 1.21%, 1.21% and 1.10% when calculating the decommissioning cost liability of nuclear plants recorded as of December 31, 2017, 2018 and 2019, respectively. In addition, the following is a sensitivity analysis of the potential impact on decommissioning costs from a 0.1% increase or decrease in each of the inflation rate and the discount rate, assuming that all other aforementioned assumptions remain constant:

 

   Sensitivity to inflation rate  Sensitivity to discount rate 
  +0.10%   -0.10%  +0.10%  -0.10% 
   (in billions of Won) 

Increase (decrease) of liability for decommissioning costs

  400   (389 (368 379 

 

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See Notes 26 and 45 of the notes to our consolidated financial statements included in this annual report for further related information.

Provision for Decontamination of Transformer

Under the Persistent Organic Pollutants Management Act which was enacted in 2007, we are required to remove PCB from our transformers’ insulating oil by 2025. We are also required to inspect the PCB levels in our transformers and dispose of any PCBs in excess of established safety standards.

As of December 31, 2017, 2018 and 2019, we had liabilities of Won 180 billion, Won 148 billion and Won 153 billion, respectively, for inspection and disposal costs related to the decontamination of existing transformers.

The estimates and assumptions used by our management to determine fair value can be affected by many factors, such as the estimated costs of inspection and disposal, inflation rate, discount rate, regulations and the general economy.

Changes in the estimated costs or changes in the assumptions and judgments underlying these estimates may cause material revisions to the estimated total costs, which could have a material effect on our recorded liability. When calculating the provision for the decontamination of our transformers, we used a discount rate of 2.55% and an inflation rate of 1.23% as of December 31, 2017, a discount rate of 2.18% and an inflation rate of 1.27 % as of December 31, 2018 and a discount rate of 1.97% and an inflation rate of 1.09% as of December 31, 2019.

Deferred Tax Assets

In assessing the realizability of the deferred tax assets, our management considers whether it is probable that a portion or all of the deferred tax assets will not be realized. The ultimate realization of our deferred tax assets is dependent on whether we are able to generate future taxable income in specific tax jurisdictions during the periods in which temporary differences become deductible. Our management has scheduled the expected future reversals of the temporary differences and projected future taxable income in making this assessment. Based on these factors, our management believes that it is probable that we will realize the benefits of these temporary differences as of December 31, 2019. However, the amount of deferred tax assets that is realized may be different if we do not realize estimated future taxable income during the carry forward periods as originally expected.

In relation to the deferred tax assets recognized for tax loss, future taxable income is estimated considering the following: (i) five-yearmid-to long-term financial forecasts of earnings before tax approved by management and submitted to the Ministry of Economy and Finance, and (ii) average amount of tax adjustments for the recent three years.

For tax credits carried forward, similar to deferred tax assets recognized for tax loss, our management estimates the probability timing of future taxable profits in determining the probability of utilization of tax credits carried forward. In addition, our management considers the possible carry forward period and available tax credit or deductible temporary differences within the tax laws of each country in which the tax credits originated.

Similarly, our management also estimates the probability of utilization of temporary differences considering the probability of generating future taxable profits in the periods that the deductible temporary differences reverse. We do not recognize deferred tax assets for certain temporary differences associated with investments in subsidiaries, associates, and interests in joint ventures considering future dividends or disposals.

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities at each separate taxpaying entity. Under IFRS, a

 

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deferred tax asset is recognized for temporary differences that will result in deductible amounts in future years and for carry forwards. If, based on the weight of available evidence, it is more likely that some or the entire portion of the deferred tax asset will not be realized, that portion is deducted directly from the deferred tax asset.

We believe that the accounting estimate related to the realizability of deferred tax asset is a “critical accounting estimate” because: (i) it requires management to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities, and (ii) the difference between these assessments and the actual performance could have a material impact on the realization of tax benefits as reported in our results of operations. Management’s assumptions require significant judgment because actual performance has fluctuated in the past and may continue to do so.

Useful Lives of Property, Plant and Equipment

Property, plant and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated depreciation and accumulated impairment losses. The cost of property, plant and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Economic useful life is the duration of time the asset is expected to be productively employed by us, which may be less than its physical life. Management’s assumptions on the following factors, among others, affect the determination of estimated economic useful life: wear and tear, obsolescence, technical standards, changes in market demand and technological changes.

The estimated useful lives of our property, plant and equipment are as follows:

 

   Useful lives (years)

Buildings

  8 ~ 40

Structures

  8 ~ 50

Machinery

  2 ~ 32

Vehicles

  3 ~ 8

Loaded heavy water

  30

Asset retirement costs

  18, 30, 40, 60

Right-of-use assets

  1 ~ 32

Ships

  9

Others

  4~15

A component that is significant compared to the total cost of property, plant and equipment is depreciated over its separate useful life. Depreciation methods, residual values and useful lives of property, plant and equipment are reviewed at the end of each reporting period and if change is deemed appropriate, it is treated as a change in accounting estimate.

Impairment of Long-lived Assets

At the end of each reporting period, we review the carrying amounts of tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

 

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Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable

amount is the higher of fair value less costs to sell or value in use. In assessing value in use, the estimated future cash flows are discounted to their present values using apre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or a cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or the cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss. The recoverability of a cash-generating unit is assessed by comparing the carrying amount of the cash-generating unit with itsvalue-in-use (“VIU”) amount measured using the discounted cash flow model.

In the event that an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, ensuring that such carrying amount increase does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or the cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

The assessment of impairment is a critical accounting estimate, because significant management judgment is required to determine: (i) whether an indicator of impairment has occurred, (ii) how assets should be grouped, and (iii) the recoverable amount (including the preparation of the VIU estimate) of the asset or asset group in the case of impairment. If management’s assumptions about these assets change as a result of events or circumstances, and management believes the assets may have declined in value, we may record impairment charges, resulting in lower profits. Our management uses its best estimate in making these evaluations and considers various factors, including the future sales volume, unit sales price, cost of power purchase and discount rate. However, actual market prices and operating costs could vary from those used in the impairment evaluations, and the impact of such variations could be material. For the year ended December 31, 2017, we performed impairment tests on individual assets of KOMIPO and KOWEPO, both of which are wholly owned subsidiaries, due to potential indicators of impairment. For the year ended December 31, 2018, we performed impairment tests on individual assets of KHNP and KOWEPO due to potential indication of impairment. For the year ended December 31, 2019, we performed impairment tests on land and others of KEPCO Bylong Australia Pty., Ltd. due to potential indication of impairment. Accordingly, we recognized the amount by which the carrying amount exceeds its recoverable amount as impairment loss on our consolidated statements of comprehensive income. See Note 18 of the notes to our consolidated financial statements included in this annual report for further information.

Accrual for Loss Contingencies for Legal Claims

We are involved in legal proceedings regarding matters arising in the ordinary course of business. In relation to these matters, as of December 31, 2019, we and our subsidiaries were engaged in 586 lawsuits as a defendant and 199 lawsuits as a plaintiff. The total amount claimed against us and our subsidiaries was Won 698 billion and the total amount claimed by us was Won 707 billion as of December 31, 2019. As of December 31, 2019, our provisions for these legal claims amounted to Won 88 billion. These provisions are adjusted when events or circumstances cause these judgments or estimates to change.

Actual amounts of our liabilities as determined upon settlement of legal claims or by final decisions of the courts in relation thereto may be substantially different from the amounts of provisions recognized or contingent liabilities disclosed. If the actual amounts are higher than the amounts of related provisions, the resulting additional liabilities would adversely impact our results of operations, financial condition and cash flows.

 

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Consolidated Results of Operations

2019 Compared to 2018

In 2019, our consolidated sales, which is principally derived from the sale of electric power, decreased by 2.4% to Won 58,568 billion in 2019 from Won 60,033 billion in 2018, primarily reflecting a decrease in sales of electric power. Our sale of electric power decreased by 1.7% to Won 56,895 billion for 2019 from Won 57,898 billion for 2018, primarily due to a decrease in the volume of electricity sold and a decline in the average unit sales price. The volume of electricity sold decreased by 1.1% to 520,499 gigawatt hours in 2019 from 526,149 gigawatt hours in 2018, primarily due to a 1.3% decrease in the volume of electricity sold to the industrial sector, which represents the largest segment of electricity consumption in Korea, to 289,240 gigawatt hours in 2019 from 292,999 gigawatt hours in 2018; a 0.6% decrease in the volume of electricity sold to the commercial sector, which represents the second largest segment of electricity consumption in Korea, to 116,227 gigawatt hours in 2019 from 116,934 gigawatt hours in 2018; and a 0.4% decrease in the volume of electricity sold to the residential sector to 72,639 gigawatt hours in 2019 from 72,895 gigawatt hours in 2018. The decrease in the volume of electricity sold to the industrial sector was primarily due to the changes in the business environment resulting from the U.S.-China trade disputes and the Japanese export restrictions against Korea during 2019. The decrease in the volume of electricity sold to the commercial sector was primarily due to the decrease in the commercial electricity usage for air conditioning and heating as a result of a more temperate weather. The decrease in the volume of electricity sold to the residential sector was primarily due to a decrease in household electricity usage for air conditioning and heating as a result of a more temperate weather.Average unit sales price decreased by 0.08% to Won 108.66 per kilowatt-hour in 2019 from Won 108.75 per kilowatt-hour in 2018, primarily due to a decrease in the average tariff resulting from a rate discount applicable to households during the summer of 2019. Our sales of construction services decreased by 27.4% to Won 1,265 billion in 2019 from Won 1,742 billion in 2018, primarily due to a decrease in sales amount recorded from the ongoing construction of our nuclear complex construction projects in the United Arab Emirates as the construction projects progress over time. In addition to the above factors, our operating results were partly affected by sustained rises in fuel costs that were neither timely nor sufficiently offset by a corresponding rise in electricity tariff rates during the first half of 2019.

Our consolidated cost of sales, which is principally derived from the purchase of power from independent power producers and to a lesser extent, from raw materials used and depreciation, decreased by 0.7%, to Won 57,780 billion in 2019 from Won 58,208 billion in 2018, primarily due to a 0.2% decrease in power purchase and a 12.6% decrease in raw material used, which was partially offset by a 10.8% increase in depreciation and a 20.4% increase in other cost of sales, primarily due to an increase in the price of the greenhouse gas emission allowances and related costs.

Power purchase, which accounted for 31.6% and 31.5% of our cost of sales in 2019 and 2018, respectively, decreased by 0.2% to Won 18,270 billion in 2019 from Won 18,307 billion in 2018, primarily due to a 2.7% decrease in the LNG consumption tax, resulting in a decrease in the cost of purchasing LNG.

Raw materials used, which accounted for 29.6% and 33.6% of our cost of sales in 2019 and 2018, respectively, decreased by 12.6% to Won 17,084 billion in 2019 from Won 19,538 billion in 2018, largely due to an increased utilization rate of nuclear generation units, resulting in less raw materials used.

Depreciation expense, excluding amortization of nuclear fuel charged to fuel costs in the amounts of Won 1,050 billion and Won 923 billion in 2019 and 2018, respectively, increased by 10.5% to Won 9,684 billion in 2019 from Won 8,760 billion in 2018 primarily due to additional property, plant and equipment acquired in relation to the construction of new generation facilities pursuant to our capital investment program.

Other cost of sales increased by 20.4% to Won 2,613 billion in 2019 from Won 2,170 billion in 2018 primarily due to an increase in the price of the greenhouse gas emission allowances and related costs, as such allowances previously allocated free of charge diminish over time. For example, we have spent approximately

 

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Won 710 billion for the greenhouse gas emission allowances in 2019, compared to Won 53 billion in 2018. For further information, please see Item 4.B. “Business Overview—Environmental Programs.”

As a cumulative result of the foregoing factors, our consolidated gross profit decreased by 56.8% to Won 788 billion in 2019 from Won 1,825 billion in 2018, and our consolidated gross profit margin decreased to 1.3% in 2019 from 3.0% in 2018. The decreases in our consolidated gross profit and consolidated gross profit margin were largely attributable to a 2.4% decrease in our consolidated sales (which was mainly due to 1.1% decrease in the volume of electricity sold and a 27.4% decrease in the sales of construction services), which were partially offset by a 0.7% decrease in cost of sales (which was primarily due to 0.2% decrease in power purchase, a 12.6% decrease in raw materials used and a 4.5% decrease in welfare and benefit expenses, which were in turn partially offset by the 10.8% increase in depreciation and a 20.4% increase in other cost of sales).

Our consolidated selling and administrative expenses increased by 1.6% to Won 2,670 billion in 2019 from Won 2,628 billion in 2018, largely due to an increase in the retirement benefit expenses and other labor-related costs.

Our consolidated other income, net of expenses, increased by 2.3% to Won 756 billion in 2019 from Won 739 billion in 2018, mainly as a result of an increase in reversal of provisions and compensation and reparations revenue.

Our consolidated net other losses decreased to Won 582 billion in 2019 from net other losses of Won 621 billion in 2018, primarily due to the fact that impairment losses of Won 703 billion related to Wolsong #1 and Shin-Hanul #3 and #4 were recognized in 2018, compared to Won 3,819 million in 2019, the effect of which was partially offset by the impairment loss of Won 514 billion related to the mining rights of KEPCO Australia Pty., Ltd. and KEPCO Bylong Australia Pty., Ltd. in 2019.

As a cumulative result of the foregoing factors, our consolidated operating profit (loss) decreased by 149.3% to an operating loss of Won 1,708 billion in 2019 from an operating loss of Won 685 billion in 2018, and our consolidated operating income margin decreased to (2.9)% in 2019 from (1.1)% in 2018. These decreases were mainly due to a decrease in sales resulting from a weakened domestic economy, a general decline in electricity sales due to a decreased demand for air conditioning and heating, an increase in depreciation expense and an increase in the cost of greenhouse gas emission allowances.

Our consolidated finance expenses, net, increased by 5.9% to Won 1,772 billion in 2019 from Won 1,674 billion in 2018, primarily as a result of an increase in the interest expenses due to increased borrowings and bond issuances.

Our consolidated profit of associates or joint ventures using equity method decreased by 40.2% to Won 214 billion in 2019 from Won 358 billion in 2018, primarily due to a decline in sales and revenue of certain of our associates and joint ventures abroad and losses from Korea Gas Corporation’s overseas equity investments.

As a cumulative result of the foregoing factors, our consolidated profit (loss) before income taxes decreased by 63.2% to a loss of Won 3,266 billion in 2019 from a loss of Won 2,001 billion in 2018.

Our income tax benefit increased significantly to Won 1,002 billion in 2019 from Won 826 billion in 2018, largely as a result of the decrease in our profit before income taxes. Our effective tax rate, which represents tax expense as a percentage of profit before income taxes, was not calculated for income tax benefit caused by net operating losses in 2019 and 2018 and was 60.1% in 2017. See Note 41 to our financial statements included in this annual report.

As a cumulative result of the above factors, our consolidated loss increased by 92.7% to a loss of Won 2,264 billion in 2019 from a loss of Won 1,175 billion in 2018. Our consolidated net profit margin also decreased to (3.9)% in 2019 from (2.0)% in 2018. Our loss attributable to the owners of the company was a loss of Won 2,346 billion in 2019 compared to a loss of Won 1,315 billion in 2018.

 

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We reported consolidated other comprehensive income of Won 135 billion in 2019 compared to consolidated other comprehensive loss of Won 107 billion in 2018, largely due to an increase in the remeasurement of defined benefit liability, net of tax, and foreign currency translation gain of foreign operations, net of tax.

As a cumulative result of the above factors, our consolidated total comprehensive loss increased by 66.1% to a loss of Won 2,128 billion in 2019 from a loss of Won 1,282 billion in 2018.

2018 Compared to 2017

In 2018, our consolidated sales, which is principally derived from the sale of electric power, slightly increased by 1.2% to Won 60,033 billion in 2018 from 59,336 billion in 2017, primarily reflecting an increase in sales of electric power. Our sale of electric power increased by 3.8% to Won 57,898 billion for 2018 from Won 55,773 billion for 2017, primarily due to an increase in the volume of electricity sold, which was partially offset by a decline in the average unit sales price. The volume of electricity sold increased by 3.6% to 526,149 gigawatt hours in 2018 from 507,746 gigawatt hours in 2017, primarily due to a 2.5% increase in the volume of electricity sold to the industrial sector, which represents the largest segment of electricity consumption in Korea, to 292,999 gigawatt hours in 2018 from 285,969 gigawatt hours in 2017, a 5.1% increase in the volume of electricity sold to the commercial sector, which represents the second largest segment of electricity consumption in Korea, to 116,934 gigawatt hours in 2018 from 111,298 gigawatt hours in 2017, and a 6.3% increase in the volume of electricity sold to the residential sector to 72,895 gigawatt hours in 2018 from 68,544 gigawatt hours in 2017. The increase in the volume of electricity sold to the industrial sector was primarily due to the increased volume of semiconductor and other exports.The increase in the volume of electricity sold to the commercial sector was primarily due to extreme weather conditions that have led to increased demand for heating and air conditioning. The increase in the volume of electricity sold to the residential sector was primarily due to an increase in household electricity usage for air conditioning and heating as a result of extreme weather conditions. Average unit sales price decreased by 0.7% to Won 108.75 per kilowatt-hour in 2018 from Won 109.53 per kilowatt-hour in 2017, primarily due to a decrease in the average tariff resulting from a rate discount applicable to households during the summer of 2018. Our sales of construction services decreased by 45.8% to Won 1,742 billion in 2018 from Won 3,212 billion in 2017, primarily due to a decrease in sales amount recorded from the ongoing construction of our nuclear complex construction projects in the United Arab Emirates as the projects progress over time.

Our consolidated cost of sales, which is principally derived from the purchase of power from independent power producers and to a lesser extent, from raw materials used and depreciation, increased by 11.7%, to Won 58,208 billion in 2018 from Won 52,099 billion in 2017, primarily due to a 28.3% increase in power purchase, a 22.7% increase in raw material used and a 2.3% increase in depreciation, which were offset by a 45.5% decrease in other cost of sales.

Power purchase, which accounted for 31.5% and 27.4% of our cost of sales in 2018 and 2017, respectively, increased by 28.3% to Won 18,307 billion in 2018 from Won 14,264 billion in 2017, primarily due to a 9.0% increase in the unit cost of power purchased from Won 104.3 per kilowatt-hour in 2017 to Won 113.7 per kilowatt-hour in 2018, largely resulting from a general increase in international market prices for the main fuel types, which led to an increase in the price of electricity generated by independent power producers, from whom we are purchasing an increasing amount of electricity.

Raw materials used, which accounted for 33.6% and 30.6% of our cost of sales in 2018 and 2017, respectively, increased by 22.7% to Won 19,538 billion in 2018 from Won 15,925 billion in 2017, largely due to a general increase in international market prices.

Depreciation expense, excluding amortization of nuclear fuel charged to fuel costs in the amounts of Won 923 billion and Won 1,069 billion in 2018 and 2017, respectively, increased by 4.4% to Won 8,760 billion in

 

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2018 from Won 8,393 billion in 2017 primarily due to additional property, plant and equipment acquired in relation to the construction of new generation facilities pursuant to our capital investment program.

Other cost of sales decreased by 45.5% to Won 2,170 billion in 2018 from Won 3,980 billion in 2017 primarily due to a decrease of other cost of overseas sales in relation to our nuclear complex construction projects in the United Arab Emirates.

As a cumulative result of the foregoing factors, our consolidated gross profit decreased by 74.8% to Won 1,825 billion in 2018 from Won 7,237 billion in 2017, and our consolidated gross profit margin decreased to 3.0% in 2018 from 12.2% in 2017. The decreases in our consolidated gross profit and consolidated gross profit margin were largely attributable to a 11.7% increase in our consolidated cost of sales (which was mainly due to a 28.3% increase in power purchase, a 22.7% increase in raw materials used and the 2.3% increase in depreciation, which were offset by a 45.5% decrease in other cost of sales and a 14.6% decrease in welfare and benefit expense), which substantially outpaced the 1.2% increase in our consolidated sales (which was primarily due to the 3.6% increase in the volume of electricity sold, which was offset by a 45.8% decrease in the sales of construction services).

Our consolidated selling and administrative expenses decreased by 4.9% to Won 2,628 billion in 2018 from Won 2,763 billion in 2017, largely due to a 68.6% decrease in bad debt expense to Won 40 billion in 2018 from Won 127 billion in 2017, which mainly related to an allowance in 2017 for KOSEP’s accounts receivables with low possibility of collection from Hyundai Energy Co., Ltd., which was not applicable in 2018, and a 73.0% decrease in advertising expenses to Won 31 billion in 2018 from Won 115 billion in 2017, which mainly related to our sponsorships for the PyeongChang 2018 Winter Olympics incurred in 2017, which was not applicable in 2018.

Our consolidated other income, net of expenses, increased by 7.3% to Won 739 billion in 2018 from Won 689 billion in 2017, mainly as a result of an increase in gains on assets contributed, gains on liabilities exempted and income related to transfer of assets from customers, which include items of property, equipment, or cash that we receive from customers in relation to supplying electricity.

Our consolidated net other losses increased significantly to Won 621 billion in 2018 from net other gains of Won 157 billion in 2017, primarily due to an increase in impairment loss on property, plant and equipment, largely resulting from the early retirement of Wolsong#1 unit and a recognition of impairment loss related to Shin-Hanul #3 and #4 units.

As a cumulative result of the foregoing factors, our consolidated operating profit decreased by 112.9% to an operating loss of Won 685 billion in 2018 from an operating profit of Won 5,320 billion in 2017, and our consolidated operating income margin decreased to (1.1)% in 2018 from 9.0% in 2017. These decreases were mainly due to an increase in our cost of sales primarily as a result of an increase in raw materials and power purchases due to increases in the fuel costs and the volume of electricity sold.

Our consolidated finance expenses, net, increased by 4.8% to Won 1,674 billion in 2018 from Won 1,597 billion in 2017, primarily as a result of a decrease in net gains on foreign currency translation and transaction, which was partially offset by an increase in net gains on valuation of derivatives.

We recorded consolidated profit of associates or joint ventures using equity method of Won 358 billion in 2018 compared to a loss of Won 108 billion in 2017, primarily as a result of an increase in profit of Korea Gas Corporation.

As a cumulative result of the foregoing factors, our consolidated income (loss) before income taxes decreased by 155.4% to a loss of Won 2,001 billion in 2018 from an income of Won 3,614 billion in 2017.

 

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Our income tax benefit increased significantly to Won 826 billion in 2018 from an income tax expense of Won 2,173 billion in 2017, largely as a result of the decrease in our profit before income taxes. Our effective tax expense rate, which represents tax expense as a percentage of profit before income taxes, was not calculated for income tax benefit in 2018 and was 60.1% in 2017. Our recognition of deferred tax liabilities was mainly due to temporary differences with respect to property, plant and equipment and investments in subsidiaries and associates. The applicable statutory tax rate was 27.5% in 2018 and 2017. See Note 41 to our financial statements included in this annual report.

As a cumulative result of the above factors, our consolidated profit (loss) decreased by 181.5% to a loss of Won 1,175 billion in 2018 from a profit of Won 1,441 billion in 2017. Our consolidated net profit margin also decreased to (2.0)% in 2018 from 2.4% in 2017. Our profit (loss) attributable to the owners of the company was a loss of Won 1,315 billion in 2018 compared to a profit of Won 1,299 billion attributable to the owners of the company in 2017.

We reported consolidated other comprehensive loss of Won 107 billion in 2018 compared to consolidated other comprehensive loss of Won 95 billion in 2017, largely due to our recognition of loss from remeasurements of defined benefit liability whereas we recognized income from such remeasurements in 2017.

As a cumulative result of the above factors, our consolidated total comprehensive income (loss) decreased by 195.2% to a loss of Won 1,282 billion in 2018 from an income of Won 1,346 billion in 2017.

Inflation

The effects of inflation in Korea on our financial condition and results of operations are reflected primarily in construction costs as well as in labor expenses. Inflation in Korea has not had a significant impact on our results of operations in recent years. It is possible that inflation in the future may have an adverse effect on our financial condition or results of operations.

Segment Results

We operate the following business segments: transmission and distribution, nuclear power generation and thermal power generation and all others. The transmission and distribution segment, which is operated by us, the parent company, consists of operations related to the transmission, distribution and sale toend-users of electricity purchased from our generation subsidiaries as well as from independent power producers. The power generation segment, which is operated by our one nuclear generation subsidiary and fivenon-nuclear generation subsidiaries, consists of operations related to the generation of electricity sold to us through the Korea Power Exchange. The transmission and distribution segment and the power generation segment together represent our electricity business. The remainder of our operation is categorized as “all others.” The all other segment consists primarily of operations related to the plant maintenance and engineering service, information services, and sales of nuclear fuel, communication line leasing, overseas businesses and others. In 2017, 2018 and 2019, the unaffiliated revenues of the power generation segment (representing the six generation subsidiaries) and all our other revenues in the aggregate amounted to only 3.2%, 2.9% and 2.7% of our consolidated revenues, respectively, and the results of operations for our business segments substantially mirror our consolidated results of operations. For further information, see Note 4 of the notes to our consolidated financial statements included in this annual report.

 

Item 5.B.

Liquidity and Capital Resources

We expect that our capital requirements, capital resources and liquidity position may change in the course of implementing the Restructuring Plan. See Item 4.B. “ —Business Overview—Restructuring of the Electric Power Industry in Korea” and Item 3D. “Risk Factors—Risks Relating to KEPCO— The Government may adopt policy measures to substantially restructure the Korean electric power industry or our operational structure, which may have a material adverse effect on our business, operations and profitability.”

 

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Capital Requirements

We anticipate that the following represent the major sources of our capital requirements in the short-term to intermediate future:

 

  

capital expenditures pursuant to our capital investment program;

 

  

working capital requirements, the largest component of which is fuel purchases;

 

  

payment of principal and interest on our existing debt; and

 

  

overseas investments.

In addition, if there were to occur unanticipated material changes to the Restructuring Plan, the Basic Plan or other major policy initiatives of the Government relating to the electric power industry, or natural disasters, such developments may require a significant amount of additional capital requirements.

Capital Expenditures

We anticipate that capital expenditures will be the most significant use of our funds for the next several years. Our capital expenditures relate primarily to the construction of new generation units, maintenance of existing generation units and expansion of our transmission and distribution systems. Our capital expenditures generally follow budgets established under the Basic Plan, which contains projections relating to the supply and demand of electricity of Korea based on which we plan the construction of additional generation units and transmission systems.

Our total capital expenditures for the construction of generation, transmission and distribution facilities were Won 13,711 billion, Won 13,695 billion and Won 15,795 billion in 2017, 2018 and 2019, respectively, and under our current budgets, are estimated to be approximately Won 16,211 billion, Won 17,529 billion and Won 17,002 billion, in 2020, 2021 and 2022, respectively. We plan to finance our capital expenditures primarily through issuance of securities in the capital markets, borrowings from financial institutions and construction grants.

In January 2016, the Ministry of Trade, Industry and Energy announced an initiative to promote the new energy industry by creating the New Energy Industry Fund, which is made up of funds sponsored by government-affiliated energy companies. We contributed Won 500 billion to the funds in 2016. The purpose of these funds is to invest in substantially all frontiers of the new energy industry, including renewable energy, energy storage systems, electric vehicles,small-sized self-sustaining electricity generation grids known as “micro-grids”, among others, as well as invest instart-up companies, ventures, small- tomedium-sized enterprise and project businesses that engage in these businesses but have not previously attracted sufficient capital from the private sector.

Furthermore, as part of the Comprehensive Measures against Particulate Matter and the Eighth Basic Plan, announced by the Government in September 2017 and December 2017, respectively, the Government set forth the following policy directions relating to coal-fired generation units: (i) two coal-fired generation units scheduled for construction and four existing coal-fired generation units shall convert to LNG fuel use, (ii) in principle, construction of new coal-fired generation units shall not be planned, (iii) seven of the coal-fired generation units that are 30 years or older will be shut down on an accelerated schedule, (iv) beginning in 2018, coal-fired generation units that are 30 years or older shall temporarily cease operations from March through June of each year, (v) coal-fired generation units shall be put through comprehensive functional and environmental upgrades and (vi) coal-fired generation units shall be subject to emission standards that came into effect in January 2019 that are twice as more rigorous than the previous standards. Compliance with such measures is expected to result in our incurring significant costs.

 

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Fuel Purchases

We require significant funds to finance our operations, principally in relation to the purchase of fuels by our generation subsidiaries for generation of electricity. In 2017, 2018 and 2019, fuel costs constituted 31.7%, 34.5% and 31.6% of our cost of sales and the ratio of fuel costs to our sales was 27.8%, 33.5% and 31.2%, respectively. We plan to fund our fuel purchases primarily with net operating cash, although in cases of rapid increases in fuel prices as is the case from time to time, we may also rely on borrowings from financial institutions and issuance of debt securities in the capital markets.

Repayment of Existing Debt

Payments of principal and interest on indebtedness will require considerable resources. The table below sets forth the scheduled maturities of the outstanding interest-paying debt (excluding issue discounts and premium) without taking into consideration of swap transactions of us and our six wholly-owned generation subsidiaries as of December 31, 2019 for each year from 2020 to 2024 and thereafter. As of December 31, 2019, such debt represented 95.7% of our outstanding debt on a consolidated basis.

 

Year ended December 31

  Local
Currency
Borrowings
   Foreign Currency
Borrowings
   Domestic
Debentures
   Foreign
Debentures
   Total 
   (in billions of Won) 

2020

   938    —      6,360    1,190    8,488 

2021

   204    9    7,391    1,390    8,994 

2022

   204    1    6,400    2,142    8,747 

2023

   553    —      5,790    1,621    7,964 

2024

   203    —      5,380    1,300    6,883 

Thereafter

   32    —      21,710    2,268    24,010 

Total

   2,134    10    53,031    9,911    65,086 

We and our six wholly-owned generation subsidiaries incurred interest charges (including capitalized interest) in relation to our interest-paying debt of Won 2,287 billion, Won 2,362 billion and Won 2,536 billion in 2017, 2018 and 2019, respectively. We anticipate that interest charges will increase in future years because of, among other factors, anticipated increases in our long-term debt. See “—Capital Resources” below. The weighted average rates of interest on our and our six wholly-owned generation subsidiaries’ debt were 3.20%, 3.23% and 2.75% in 2017, 2018 and 2019, respectively.

Overseas Investments

As part of our revenue diversification and fuel procurement strategy, we plan to continue to make overseas investments on a selective basis, which will be funded primarily through foreign currency-denominated borrowings and debt securities issuances as well as net operating cash from such projects.

Capital Resources

We have traditionally met our working capital and other capital requirements primarily from net cash provided by operating activities, issuance of debt securities and borrowings from financial institutions. Net cash provided by operating activities is primarily a function of electricity sales and fuel purchases and is also affected by increases and decreases in trade receivables, trade payables and inventory related to electricity sales and fuel purchases. Net cash provided by operating activities was Won 11,250 billion, Won 6,680 billion and Won 8,213 billion in 2017, 2018 and 2019, respectively.

As of December 31, 2017, 2018 and 2019, our long-term debt (excluding the current portion but including issue discounts and premium), without taking into consideration of swap transactions, amounted to Won

 

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45,624 billion and Won 53,073 billion and Won 59,019 billion, respectively, representing 62.5%, 74.7% and 85.7% of shareholders’ equity, respectively, as of such dates. As of December 31, 2017, 2018 and 2019, the current portions of our long-term debt were Won 8,085 billion, Won 7,101 billion and Won 7,759 billion, respectively. As of December 31, 2017, 2018 and 2019, our short-term borrowings amounted to Won 1,038 billion, Won 861 billion and Won 1,099 billion, respectively. See Note 23 of the notes to our consolidated financial statements included in this annual report. Total long-term debt (including the current portion but excluding issue discounts and premium), without taking into consideration of swap transactions, as of December 31, 2019 was Won 66,890 billion, of which Won 55,196 billion was denominated in Won and an equivalent of Won 11,694 billion was denominated in foreign currencies, primarily U.S. dollars. We, KHNP, KOMIPO and KOWEPO also maintain global medium-term note programs in the aggregate amount of US$13 billion, of which approximately US$8 billion remains currently available for future drawdown. KOSEP also maintains an A$2 billion Australian dollar medium-term note program, of which approximately A$1.7 billion remains current available for future drawdown.

Subject to the implementation of our capital expenditure plan and the sale of our interests in our generation subsidiaries and other subsidiaries, our long-term debt may increase or decrease in future years. Until recently, a significant portion of our long-term debt was raised through foreign currency-denominated borrowings. Our foreign currency-denominated long-term debt (including the current portion but excluding issue discounts and premium), without taking into consideration of swap transactions, amounted to Won 10,671 billion and Won 11,694 billion as of December 31, 2018 and 2019, respectively.

Our ability to incur long-term debt in the future is subject to a variety of factors, many of which are beyond our control, including, the amount of capital that other Korean entities may seek to raise in capital markets. Economic, political and other conditions in Korea may also affect investor demand for our securities and those of other Korean entities. In addition, our ability to incur debt will also be affected by the Government’s policies relating to foreign currency borrowings, the liquidity of the Korean capital markets and our operating results and financial condition. In case of adverse developments in Korea, the price at which such financing may be available may not be acceptable to us.

We incur our short-term borrowings primarily through commercial papers sold to domestic financial institutions. We have not had, and we do not expect to have, any material difficulties in obtaining short-term borrowings. In addition, in order to prepare for potential liquidity shortage, we maintain several credit facilities with financial institutions, withWon-denominated facilities amounting to Won 4,406 billion in aggregate and foreign currency-denominated facilities amounting to US$2,493 million in aggregate. The full amount of these facilities was available as of December 31, 2019.

We may raise capital from time to time through the issuance of equity securities. However, there are certain restrictions on our ability to issue equity instrument, including limitations on shareholdings by foreigners. In addition, without changes in the existing KEPCO Act which requires that the Government, directly or pursuant to the Korea Development Bank Act, through Korea Development Bank, own at least 51% of our capital stock, it may be difficult or impossible for us to undertake any equity financing other than sales of treasury stock without the participation of the Government. Even if we are able to conduct equity financing with the participation of the Government, prevailing market conditions may be such that we may not be able conduct equity financing on terms that are commercially acceptable to us. See Item 3D. “Risk Factors—Risks Relating to Korea and the Global Economy.”

Our total shareholders’ equity decreased by 3.1% from Won 71,093 billion as of December 31, 2018 to Won 68,890 billion as of December 31, 2019, mainly as a result of a decrease in total comprehensive income.

Liquidity

Our liquidity is substantially affected by our acquisition of property, plant and equipment, fuel purchases and schedule of repayment of debt. Our property, plant and equipment increased by 7.8% from Won

 

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152,743 billion as of December 31, 2018 to Won 164,702 billion as of December 31, 2019. While the fuel costs decreased by 9.1% from Won 20,093 billion in 2018 to Won 18,261 billion in 2019, our current trade and other payables increased from Won 6,405 billion as of December 31, 2018 to Won 6,649 billion as of December 31, 2019. Our current financial liabilities increased by 11.9% from Won 7,982 billion as of December 31, 2018 to Won 8,931 billion as of December 31, 2019 according to our debt repayment schedule.

Our cash flows are also impacted by other factors. Our net cash provided by operating activities increased by 22.9% from Won 6,680 billion in 2018 to Won 8,213 billion in 2019. Although there was an increase in losses of Won 1,089 billion during 2019 compared to 2018, this was offset by the increase in depreciation by Won 1,066 billion and increase in increase to provisions by Won 1,244 billion.

Our cash flows from investing activities are mainly affected by the acquisition of property, plant and equipment and financial assets, which was Won 16,166 billion in 2019, as well as the proceeds from disposals of financial assets, which was Won 2,783 billion in 2019. Our net cash used in investing activities increased by 3.7% from Won 13,014 billion in 2018 to Won 13,499 billion in 2019, mainly due to an increase in acquisition of property, plant and equipment of Won 1,733 billion offset by the increase in proceeds from disposals of financial assets of Won 364 billion and decreases in acquisition of financial assets of Won 676 billion.

Our cash flows from financing activities are mainly affected by the proceeds and repayment of long-term borrowings and debt securities, which was Won 6,153 billion in 2019, as well as the payment of lease liabilities, which was Won 573 billion in 2019. Our net cash from financing activities was Won 5,302 billion in 2018 and Won 5,775 billion in 2019, respectively, largely due to an increase of Won 373 billion in proceeds from short-term borrowings, net.

 

Due to the capital-intensive nature of our business as well as significant volatility in fuel prices, from time to time we operate with working capital deficits, and we may have substantial working capital deficits in the future. As of December 31, 2017, 2018 and 2019, we had a working capital deficit of Won 4,283 billion, Won 2,096 billion and Won 4,749 billion, respectively. We have traditionally met our working capital and other capital requirements primarily with net cash provided by operating activities, issuance of debt securities, borrowings from financial institutions and construction grants. We also incur short-term borrowings primarily through commercial papers sold to domestic financial institutions. We have not had, and we do not expect to have, any material difficulties in obtaining short-term borrowings. See “—Capital Resources.”

We may face liquidity concerns in the case of sudden and sharp depreciation of the Won against major foreign currencies or depreciation over a sustained period of time. While substantially all of our revenues and our cash and cash equivalents are denominated in Won, we pay for substantially all of our fuel purchases in foreign currencies and a substantial portion of our long-term debt is denominated in foreign currencies, and payment of principal and interest thereon is made in foreign currencies. In the past, we have incurred foreign currency debt principally due to the limited availability and the high cost ofWon-denominated financing in Korea. However, in light of the increasing sophistication of the Korean capital markets and the recent increase in Won liquidity in the Korean financial markets, we plan to reduce the portion of our debt which is denominated in foreign currencies although we intend to continue to raise certain amounts of capital through long-term foreign currency debt for purposes of maintaining diversity in our funding sources as well as paying for overseas investments and fuel procurements in foreign currencies. As of December 31, 2019, 17.5% of our long-term debt (including the current portion but excluding issue discounts and premium) without taking into consideration of swap transactions was denominated principally in U.S. dollars.

We enter into currency swaps and other hedging arrangements with respect to our debt denominated in foreign currencies only to a limited extent due primarily to the limited size of the Korean market for such derivative arrangements. Such instruments include combined currency and interest rate swap agreements, interest rate swaps and foreign exchange agreements. We do not enter into derivative financial instruments in order to

 

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hedge market risk resulting from fluctuations in fuel costs. Our policy is to hold or issue derivative financial instruments for hedging purposes only. See Note 12 of the notes to our consolidated financial statements.

We paid dividends of Won 790 per share in respect of fiscal year 2017. We did not pay any dividends in respect of fiscal year 2018 and 2019.

Other

Our operations are materially affected by the policies and actions of the Government. See Item 4.B. “Business Overview—Regulation.”

 

Item 5.C.

Research and Development, Patents and Licenses, etc.

Research and Development

Our research and development program is focused on developing advanced electric power, renewable energy, smart grid and customer-friendly electricity service technologies that will enable us to become a global leader in the energy industry. In order to achieve our corporate vision of becoming a “A Smart Energy Creator” in 2014, we adopted the KEPCO Technology Strategy, which emphasizes enhanced technological convergence and customer service. As part of such strategy, we are continuously investing in technology development to preemptively respond to changes in the energy paradigm and to improve the quality of the electricity. As a result, we secured 24 core strategic technologies and 78first-in-class technologies in the related fields such as power network upgrading, 4th industrial revolution and renewable energy. In 2020, consistent with the Government guidelines, we plan to invest approximately 5.2% of our annual estimated net sales in the research and development. We also actively cope with changes in the external environment represented by 3Ds (Digitalization, Decarbonization and Decentralization) and established medium and long-term technology development strategies for core strategies to create sustainable new growth engines. We plan to invest in the following: (i) a system platform that combines technologies such as big data, artificial intelligence and cloud computing; (ii) digitalization technology of electric power facility; (iii) power energy storage technology; (iv) advanced renewable energy technology; (v) energy consumption optimization demand management technology; (vi) advanced power generation technology; (vii) international power grid connection technology and (viii) active distribution system technology to secure 103 core technologies that can contribute to national development and quality of life of our customers.

Our high-priority “creative smart energy” projects currently include the following:

 

  

acquiring integrated gasified process technology;

 

  

establishing smart energy cities for high efficient grid;

 

  

developing highly efficient absorbents for carbon capture;

 

  

commercializing offshore wind power plants; and

 

  

obtaining high-voltage direct currents technology suitable for domestic operation.

Our research and development activities also focus on the following:

 

  

in the thermal power generation sector, reducing the greenhouse effect, enhancing efficiency and reducing cost in power plant construction and operation as well as in our plant maintenance, including through improvements in damage analysis and environment-friendly inspections;

 

  

in the renewable energy sector, enhancing efficiency, lowering costs of power generation, identifying new energy sources and exploring new business opportunities;

 

  

in the electric power system sector, enhancing the stability and reliability in the operation of our electric power grid as well as enhancing efficiency in electricity distribution, including through

 

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build-out oflarge-sized electricity storage facilities and superconducting transmission cable grids, introducing preventive maintenance measures for substations and developing technologies related to system automation, power utilization and power line communication;

 

  

in the customer service sector, developing technologies enabling a greater range of business opportunities and heightened customer service in anticipation of the upcoming rollout of the smart grid system; and

 

  

in the technological convergence sector, identifying new business opportunities through convergence among technologies and businesses and maximizing synergy from such convergence in tandem with the promotion of creative economy in Korea as well as globally.

In addition, we cooperate closely with several other electric utility companies and research institutes, both foreign and domestic, on various projects to diversify the scope and scale of our research and development activities.

We and our six generation subsidiaries invested Won 975 billion, Won 929 billion and Won 976 billion in 2017, 2018 and 2019, respectively, and currently plan to invest Won 1,050 billion in 2020, on research and development. Our current focus in research and development is primarily in the development area ofICT-based smart energy technology. We had 1,355 employees engaged in research and development activities as of December 31, 2019. As a result of our research, we have 7,056 registered patents and 9,917 patent applications outstanding in Korea and abroad as of December 31, 2019.

 

Item 5.D.

Trend Information

Trends, uncertainties and events which could have a material impact on our sales, liquidity and capital resources are discussed above in Item 5.A. “Operating Results” and Item 5.B. “Liquidity and Capital Resources.”

 

Item 5.E.

Off-Balance Sheet Arrangements

We had no significantoff-balance sheet arrangements as of December 31, 2019.

 

Item 5.F.

Tabular Disclosure of Contractual Obligations

The following summarizes the Company’s known contractual obligations on a consolidated basis as of December 31, 2019 and the effect such obligations are expected to have on liquidity and cash flow in future periods.

 

   Payments Due by Period 

Contractual Obligations(1)

  Total   Less than
1 year
   1–3 years   3–5 years   After 5
years
 
   (in billions of Won) 

Long-term debt(2)

  66,890   7,762   23,603   10,063   25,462 

Short-term borrowings

   1,099    1,099    —      —      —   

Interest payments(3)

   12,410    1,800    3,180    2,033    5,397 

Lease liabilities

   5,757    686    1,190    1,145    2,736 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  86,156   11,347   27,973   13,241   33,595 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

 

(1)

Other than as set forth in this table, we have several other contractual obligations, including fuel purchase agreements. As for fuel purchase agreements, we have entered into several contracts under which we are committed to purchasing minimum quantities of fuel, including approximately 80 to 90 million tons of bituminous coal annually. As for all uranium ore concentrates, in order to ensure stable supply, we enter into

 

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 long-term and medium-term contracts with various suppliers and supplements such supplies with purchases in spot markets. We negotiate annually with Korea Gas Corporation and other suppliers to purchase LNG. The fuel purchase price is typically negotiated near or at time of purchase subject to prevailing market conditions. In 2019, we purchased fuel in the amount of Won 18.3 trillion.
(2)

Long-term debt represents long-term borrowings and debt securities including the current portion excluding interest.

(3)

Our long-term debt and short-term borrowings have fixed or variable rate of interest. For the variable rate of interest, we used the rate in effect as of December 31, 2019 in calculating the interest payments on debt for the periods indicated.

We entered into a power purchase agreement with GS EPS Co., Ltd. and two othernon-renewable energy independent power producers that are not part of the Community Energy System, under which we are required to purchase all electricity generated by these companies to the extent such electricity is traded through the Korea Power Exchange. The purchase prices for such electricity are predetermined under the power purchase agreements, subject to annual adjustments.We purchased power from these companies in the amounts of Won 941 billion, Won 966 billion and Won 500 billion in 2017, 2018 and 2019, respectively.

We meet our coal requirements primarily through purchases of bituminous coal and anthracite coal under long-term supply contracts with domestic and foreign suppliers to purchase. Under these long-term supply contracts, purchase prices are adjusted periodically based on prevailing market conditions. We also purchase a substantial portion of our LNG requirements from Korea Gas Corporation, a related party. We have also entered into long-term transportation contracts with Pan Ocean Co., Ltd. and others.

We import all uranium ore concentrates from sources outside Korea (including the United Kingdom, Kazakhstan, France, Germany, Niger, Canada and Japan) through medium- to long-term contracts and pay for such concentrates with currencies other than Won, primarily U.S. dollars. Contract prices for processing of uranium are generally based on market prices. See Note 49 of the notes to our consolidated financial statements for further details of these contracts.

Under the Long-term Transmission and Substation Plan approved by the Ministry of Trade, Industry and Energy, we are liable for the construction of all of our power transmission facilities and the maintenance and repair expenses for such facilities.

 

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Payment guarantee and short-term credit facilities from financial institutions as of December 31, 2019 were as follows:

Payment guarantee

 

Description

  Financial Institutions  Credit Lines 
      

(In millions of Won or
thousands of USD,

JPY, INR, CAD,

SAR, NPR, ZAR and

EUR)

 

Payment of import letter of credits

  Shinhan Bank   KRW    7,749 
  Shinhan Bank and others   USD    1,051,334 
  Societe Generale   MYR    2,500 

Inclusive credits

  Shinhan Bank   INR    92,348 
  Hana Bank   KRW    8,000 
  Hana Bank and others   USD    30,975 

Performance guarantees on Contract

  Seoul Guarantee Insurance and others   KRW    84,011 
  First Abu Dhabi Bank and others   USD    596,862 
  Korea Development Bank and others   JPY    637,495 
  Hana Bank and others   EUR    4,158 
  Hana Bank and others   INR    191,883 
  Hana Bank   CAD    464 
  Shinhan Bank   ZAR    55,730 

Guarantees for bid

  Hana Bank   USD    10,000 

Warranty bond and others

  Seoul Guarantee Insurance   KRW    44,047 
  Export-Import Bank of Korea and others   USD    714,654 
  Hana Bank   SAR    86,508 
  SMBC Bank   QAR    15,000 

Payment on payable from foreign country

  Nonghyup Bank   USD    4,680 

Trade finance

  BNP Paribas and others   USD    700,000 

Other guarantees

  Nonghyup Bank and others   KRW    537,064 
  Export-Import Bank of Korea and others   USD    1,562,194 
  Shinhan Bank   JPY    381,210 
  Standard Chartered   AED    50 

Overdraft and Others

 

Description

  Financial Institutions  Credit Lines 
      (In millions of Won,
thousands of USD or
thousands of PHP)
 

Overdraft

  Nonghyup Bank and others   KRW    2,105,500 

Commercial paper

  Hana Bank and others   KRW    1,250,000 

Limit amount available for card

  Hana Bank and others   KRW    51,904 
  Banco de Oro   PHP    5,000 

Loan limit

  Kookmin Bank and others   KRW    1,050,503 
  DBS Bank and others   USD    2,492,700 

We have outstanding borrowings with a limit of USD 275,600 thousand from its creditors such as International Finance Corporation. Regarding the borrowing contract, we have guaranteed capital contribution of USD 69,808 thousand and additional contribution up to USD 19,000 thousand for contingencies, if any. Moreover, for one of the electricity purchasers, Central Power Purchasing Agency Guarantee Ltd., we have

 

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provided payment guarantee up to USD 2,777 thousand, in case of construction delay or insufficient contract volume after commencement of the construction.

We have provided PT. Perusahaan Listrik Negara performance guarantee up to USD 2,293 thousand and investment guarantee up to USD 43,500 thousand to Mizuho bank and others in proportion to its ownership in the electricity purchase contract with PT. Cirebon Energi Prasarana in relation to the second electric power generation business in Cirebon, Indonesia.

We have provided MUFG Bank, Ltd. (MUFG) (formerly, the Bank of Tokyo Mitsubishi UFJ. Ltd. (BTMU)) borrowing guarantee up to USD 41,258 thousand proportion to its ownership in the equity bridge loan guarantee with PT. Cirebon Energi Prasarana in relation to the second electric power generation business in Cirebon, Indonesia.

We have provided the Export-Import Bank of Korea, BNP Paribas and ING Bank guarantee of mutual investment of USD 2,192 thousand, which is equivalent to the ownership interest of PT BS Energy and PT Nusantara Hydro Alam, in order to guarantee the expenses related to hydroelectric power business of Tanggamus, Indonesia.

We have provided the Export-Import Bank of Korea and SMBC guarantee of mutual investment of USD 401 thousand, which is equivalent to the ownership interest of PT Mega Power Mandiri, in order to guarantee the expenses related to hydroelectric power business of PT. Wampu Electric Power, our associate.

We have provided the DekaBank with an investment guarantee of EUR 13,800 thousand to Stavro Vind AB, to enter into a loan contract for the Sweden Wind Power (Stavro) construction operation project.

We are obligated to complete the construction of the waste oil refining for power generation business of Next energy Co., Ltd. (the contract amount of Won 14,700 million). We must compensate financial institution agents for the liquidated damages if the construction is not completed. Also, we have entered into a performance guarantee agreement with Next energy Co., Ltd. under which we are obligated to provide a supplemental funding if the amount of power generated or the operation time of the power plant does not reach the level agreed upon by the parties. We expect that an outflow of resources is probable due to guarantee of completing the construction hence have recognized revenue over time after deducting Won 5,244 million as the variable consideration for the contract amount of the project.

Existing guarantees provided by us to our associates and joint ventures as of December 31, 2019 are as follows.

 

Primary Guarantor

(Providing Company)

  

Principal Obligator

(Provided Company)

 

Type of

Guarantees

 Currency Credit Limit  

Guarantee (Final
Provided Company)

(In millions of Won or thousands of USD and SAR)

KEPCO

  Shuweihat Asia Operation & Maintenance Company Performance guarantees USD  11,000  SAPCO

KEPCO

  Rabigh Operation & Maintenance Company Limited Performance guarantees and others USD  1,387  RABEC

KEPCO

  Nghi Son 2 Power LLC Performance guarantees USD  70,000  SMBC Ho Chi Minh and others

KEPCO

  Barakah One Company Debt guarantees USD  900,000  Export-Import Bank of Korea and others
   Performance guarantees and others USD  4,430,240  

 

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Primary Guarantor

(Providing Company)

  

Principal Obligator

(Provided Company)

 

Type of

Guarantees

 Currency Credit Limit  

Guarantee (Final
Provided Company)

(In millions of Won or thousands of USD and SAR)

KEPCO

  RE Holiday Holdings LLC Performance guarantees USD  223,000  EPS Renewables Holdings, LLC, Santander Bank and others

KEPCO

  RE Pioneer Holdings LLC Performance guarantees USD  170,000  EPS Renewables Holdings, LLC, Santander Bank and others

KEPCO

  RE Barren Ridge 1 Holdings LLC Performance guarantees USD  149,000  EPS Renewables Holdings, LLC, Santander Bank and others

KEPCO

  Rabigh Electricity Company Performance guarantees SAR  6,508  Hana Bank
   Debt guarantees SAR  80,000  

KEPCO

  Shuweihat Asia Power Investment B.V. Performance guarantees USD  100,000  ING Bank

KEPCO

  Amman Asia Electric Power Company    

KOWEPO

  Cheongna Energy Co., Ltd. Collateralized money invested KRW  1,411  Hana Bank and others
   Guarantees for supplemental funding and others(*1) —    

KOWEPO

  Xe-PianXe-Namnoy Power Co., Ltd. Payment guarantees for business reserve USD  2,500  Krung Thai Bank
   Collateralized money invested KRW  72,935  
   Impounding bonus guarantees USD  5,000  SK E&C

KOWEPO

  Rabigh Operation & Maintenance Company Limited Performance guarantees and others SAR  5,600  Saudi Arabia British Bank

KOWEPO

  Daegu Photovoltaic Co., Ltd. Collateralized money invested KRW  2,060  Korea Development Bank

KOWEPO

  Dongducheon Dream Power Co., Ltd. Collateralized money invested(*7) KRW  41,531  Kookmin Bank and others
   Debt guarantees KRW  20,300  BNK Securities and others

KOWEPO

  PT. Mutiara Jawa Collateralized money invested KRW  1,438  Woori Bank

KOWEPO

  Haeng Bok Do Si Photovoltaic Power Co., Ltd. Collateralized money invested KRW  215  Nonghyup Bank

KOWEPO

  Shin Pyeongtaek Power Co., Ltd. Collateralized money invested KRW  66,956  Kookmin Bank
   Guarantees for supplemental funding(*1) —    Kookmin Bank and others

 

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Primary Guarantor

(Providing Company)

  

Principal Obligator

(Provided Company)

 

Type of

Guarantees

 Currency Credit Limit  

Guarantee (Final
Provided Company)

(In millions of Won or thousands of USD and SAR)

EWP

  Busan Shinho Solar Power Co., Ltd. Collateralized money invested KRW  5,045  Korea Development Bank and others

EWP

  Seokmun Energy Co., Ltd. Collateralized money invested KRW  17,342  Kookmin Bank and others
   Guarantees for supplemental funding(*1) —    

EWP

  Chun-cheon Energy Co., Ltd. Collateralized money invested KRW  34,872  Kookmin Bank and others
   Guarantees for supplemental funding(*1) KRW  20,000  

EWP

  Honam Wind Power Co., Ltd. Collateralized money invested KRW  4,375  Shinhan Bank and others
   Guarantees for supplemental funding(*1) —    

EWP

  GS Donghae Electric Power Co., Ltd. Collateralized money invested KRW  255,983  Korea Development Bank and others
   Guarantees for supplemental funding(*1) —    

EWP

  Yeonggwangbaeksu Wind Power Co., Ltd. Collateralized money invested KRW  3,040  Kookmin Bank and others

EWP

  Yeonggwang Wind Power Co., Ltd. Collateralized money invested KRW  17,627  KDB Capital Corporation and others
   Guarantees for supplemental funding(*1) —    

EWP

  Daesan Green Energy Co., Ltd. Collateralized money invested KRW  17,182  IBK
   Guarantees for supplemental funding(*1) KRW  18,989  IBK

EWP

  Taebaek Gadeoksan Wind Power Co., Ltd. Collateralized money invested KRW  7,846  Samsung Fire & Marine Insurance Co., Ltd. and others

EWP

  PT. Tanjung Power Indonesia Debt guarantees USD  24,544  Sumitomo mitsui banking
   Other guarantees USD  3,150  PT Adaro Indonesia
   Guarantees for supplemental funding(*1) —    Sumitomo mitsui banking and others
   Collateralized money invested KRW  34,327  MUFG and others

EWP

  South Jamaica Power Company Limited Performance guarantees USD  14,400  Societe Generale
   Collateralized money invested KRW  13,863  JCSD Trustee Services Limited and others

 

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Primary Guarantor

(Providing Company)

  

Principal Obligator

(Provided Company)

 

Type of

Guarantees

 Currency Credit Limit  

Guarantee (Final
Provided Company)

(In millions of Won or thousands of USD and SAR)

EWP Barbados 1 SRL

  South Jamaica Power Company Limited Guarantees for supplemental funding(*1, 3) —    JCSD Trustee Services Limited and others

EWP

  DE Energia SpA Collateralized money invested KRW  8,665  Mirae Asset Daewoo Co., Ltd. and others

EWP

   Debt guarantees KRW  6,632  

KOSPO

  KNH Solar Co., Ltd. Collateralized money invested KRW  2,382  Shinhan Bank and Kyobo Life Insurance Co., Ltd.
   Performance guarantees and guarantees for supplemental funding(*1) —    

KOSPO

  Daeryun Power Co., Ltd. Collateralized money invested KRW  26,247  Korea Development Bank and others
   Guarantees for supplemental funding and others(*1) KRW  8,000  

KOSPO

  Daegu Green Power Co., Ltd. Collateralized money invested KRW  22,824  Shinhan Bank and others
   Performance guarantees —    

KOSPO

  Kelar S.A Performance guarantees USD  61,692  Hana Bank, MUFG

KOSPO

  Daehan Wind Power PSC Debt guarantees(*9) USD  16,000  Shinhan Bank
   Performance guarantees USD  3,600  
   Debt guarantees(*9) USD  240  
   Performance Debt guarantees(*9) USD  1,898  Hana Bank

KOSPO

  Pyeongchang Wind Power Co., Ltd. Collateralized money invested KRW  5,877  Woori Bank and Shinhan Bank and others
   Performance guarantees —    

KOSPO

  Taebaek Guinemi Wind Power Co., Ltd. Collateralized money invested KRW  2,553  IBK
   Guarantees for supplemental funding(*1) —    

KOSPO

  Jeongam Wind Power Co., Ltd. Guarantees for supplemental funding(*1) and performance guarantees —    SK Securities Co., LTD., KDB Capital Corporation, and others
   Collateralized money invested KRW  4,437  

KOSPO

  Taebaek Wind Power Co., Ltd. Guarantees for supplemental funding(*1) —    Shinhan Bank and others

 

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Primary Guarantor

(Providing Company)

  

Principal Obligator

(Provided Company)

 

Type of

Guarantees

 Currency Credit Limit  

Guarantee (Final
Provided Company)

(In millions of Won or thousands of USD and SAR)

KOSPO

  Samcheok Eco Materials Co., Ltd. Payment guarantees(*47) —    SEM Investment Co., Ltd.

Kospo Chile SpA

  Kelar S.A. Collateralized money invested KRW  70,462  Export-Import Bank of Korea and others
  Chester Solar ISpA Collateralized money invested KRW  1,157  IBK
  Chester Solar IV SpA Collateralized money invested KRW  672  
  Chester Solar V SpA Collateralized money invested KRW  146  
  Diego de Almagro Solar Spa Collateralized money invested KRW  1,035  
  Laurel SpA Collateralized money invested KRW  595  

KOMIPO

  YeongGwang Yaksu Wind Electric. Co., Ltd. Collateralized money invested KRW  386  IBK and others

KOMIPO

  Hyundai Green Power Co., Ltd. Collateralized money invested KRW  124,253  Korea Development Bank and others

KOMIPO

  PT. Cirebon Electric Power Debt guarantees USD  11,248  Mizuho Bank

KOMIPO

  PT. Wampu Electric Power Debt guarantees USD  4,854  SMBC

KOMIPO

  Green Energy Electricity Generation Co., Ltd. Collateralized money invested KRW  163  IBK
   Guarantees for supplemental funding and others(*1) —    IBK and others

KOMIPO

  YaksuESS Co., Ltd. Collateralized money invested KRW  516  IBK

KOMIPO

  Namjeongsusang Solar Power Operation Co., Ltd. Collateralized money invested KRW  812  IBK

KOMIPO

  Gwangbaek Solar Power Investment Co., Ltd. Collateralized money invested KRW  2,054  IBK

KOSEP

  Hyundai Energy Co., Ltd. Collateralized money invested(*5) —    IBK
   Guarantees for supplemental funding and others(*1,6) KRW  76,800  NH investment & securities Co., Ltd. and others

KOSEP

  S-Power Co., Ltd. Collateralized money invested KRW  115,784  Korea Development Bank and others

 

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Primary Guarantor

(Providing Company)

  

Principal Obligator

(Provided Company)

 

Type of

Guarantees

 Currency  Credit Limit  

Guarantee (Final
Provided Company)

(In millions of Won or thousands of USD and SAR)

KOSEP

  RES Technology AD Collateralized money invested  KRW   16,248  UniCredit Bulbank and others

KOSEP

  ASM-BG Investicii AD Collateralized money invested  KRW   19,376  UniCredit Bulbank and others

KOSEP

  Expressway Solar-light Power Generation Co., Ltd. Guarantees for supplemental funding(*1,2)  KRW   2,500  Woori Bank

KOSEP

  Goseong Green Energy Co., Ltd. Collateralized money invested  KRW   2,340  Kyobo Life Insurance Co., Ltd. and others

KOSEP

  Gangneung Eco Power Co., Ltd. Collateralized money invested  KRW   2,430  Kyobo Life Insurance Co., Ltd. and others

KOSEP

  PND solar., Ltd. Collateralized money invested  KRW   1,144  IBK

KOSEP

  Hyundai Eco Energy Co., Ltd. Collateralized money invested  KRW   3,781  Samsung Life Insurance and others

KOSEP

  Jaeun Resident Wind Power Plant Co., Ltd. Collateralized money invested  KRW   2,198  IBK

KOSEP

  Cheongsong Myeonbongsan Wind Power Plant Co., Ltd. Collateralized money invested  KRW   2,764  Kyobo Life Insurance Co., Ltd. and others

KHNP

  Noeul Green Energy Co., Ltd. Collateralized money invested  KRW   6,611  Hana Bank and others
   Guarantees for supplemental funding(*1)  —     

KHNP

  Busan Green Energy Co., Ltd. Collateralized money invested  KRW   10,636  Shinhan Bank and others

KHNP

  Cheong-Song Noraesan Wind Power Co., Ltd. Collateralized money invested  KRW   3,044  Woori Bank and others
   Guarantees for supplemental funding(*1)  —     —    

KHNP

  Incheon New Power Co., Ltd. Collateralized money invested(*8)  —     —    Shinhan Bank
   Guarantees for supplemental funding(*1)  —     —    

 

Notes:

 

(1)

We guarantee to provide supplemental funding for business with respect to excessive business expenses or insufficient repayment of borrowings.

(2)

We have granted the right to Hana Financial Investment Co., Ltd., as an agent for the creditors to Expressway Solar-light Power Generation Co., Ltd. (“ESPG”), to the effect that in the event of acceleration of ESPG’s payment obligations under certain borrowings to such creditors, Hana Financial may demand us to dispose of shares in ESPG held by us and apply the resulting proceeds to repayment of ESPG’s obligations.

 

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(3)

This includes a guarantee for the shareholder’s capital payment in connection with the business of 190MW gas complex thermal power plant in Jamaica. EWP Barbados 1 SRL’s capital contribution amount is USD 18,400,000 and there is no residual guarantee amount among total collateral limit.

(4)

Controlling andnon-controlling common shareholders of Samcheok Eco Materials Co., Ltd. havepre-emption rights, if preferred shareholders sell their shares before December 23, 2020. And promised yield of the preferred stock is guaranteed through the transaction. As of December 31, 2019, we have recognized derivative liabilities of Won 6,205 million related to the the guarantee. Additionally, we are party to an agreement with Samcheok Eco Materials Co., Ltd. whereby compensation for the expected amount of damage must be settled if damage is incurred in relation to the fulfillment obligations for the coal ash supply.

(5)

We recognized an impairment loss on all of the equity securities of Hyundai Energy Co., Ltd. in prior years, and the acquisition cost of the securities provided as collateral is Won 47,067 million.

(6)

Pursuant to the guarantee agreement, we recognized other provisions of Won 28,717 million as the possibility of economic benefit outflow to fulfill the obligation was deemed probable and the amount could be reasonably estimated.

(7)

The common stocks of Dongducheon Dream Power Co., Ltd. held by us were pledged as collateral.

(8)

We recognized an impairment loss on all of the equity securities of Incheon New Power Co., Ltd. during the year ended December 31, 2019, and the acquisition cost of the securities provided as collateral is Won 461 million.

(9)

We provided a payment guarantee to Daehan Wind Power PSC for reimbursement of Equity Bridge Loan (EBL), a letter of credit for Debt Service Reserve Account (DSRA) and a guarantee for the swap termination costs and others.

Other than as described in this annual report and also in Notes 47 and 50 of the notes to our consolidated financial statements included in this annual report, we did not have any other material credit lines and guarantee commitments provided to any third parties as of December 31, 2019.

 

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ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Item 6.A. Directors and Senior Management

Board of Directors

Under the KEPCO Act, the Act on the Management of Public Institutions and our Articles of Incorporation, our board of directors, which is required to consist of not more than 15 directors, including the president, is vested with the authority over our management.

Pursuant to our Articles of Incorporation and the Act on the Management of Public Institutions, we have two types of directors: standing directors(sangim-isa in Korean) andnon-standing directors(bisangim-isa in Korean). The standing directors refer to our directors who serve their directorship positions in full-time capacity. Thenon-standing directors refer to our directors who do not serve their directorship positions in full-time capacity. Thenon-standing directors currently do not hold any executive positions with us or our subsidiaries.

Under our Articles of Incorporation, there may not be more than seven standing directors, including our president, and more than eightnon-standing directors. The number ofnon-standing directors must exceed the number of standing directors, including our president. A seniornon-standing director appointed by the Ministry of Economy and Finance becomes our chairman of the board following the review and resolution of the Public Agencies Operating Committee.

Our president serves as our chief executive officer and represents us and administers ourday-to-day business in all matters and bears the responsibility for the management’s performance. Our president is appointed by the President of the Republic upon the motion of the Ministry of Trade, Industry and Energy following the nomination by our director nomination committee, the review and resolution of the Public Agencies Operating Committee pursuant to the Act on the Management of Public Institutions and an approval at the general meeting of our shareholders.

Our standing director who concurrently serve as members of the audit committee are appointed through the same appointment process applicable to our president, except that the motion for appointment is made by the Ministry of Economy and Finance instead of the Ministry of Trade, Industry and Energy. Standing directors other than our president or those who concurrently serve as members of the audit committee are appointed by our president with the approval at the general meeting of our shareholders.

Ournon-standing directors must be appointed by the minister of the Ministry of Economy and Finance following the review and resolution of the Public Agencies Operating Committee from a pool of candidates recommended by the director nomination committee and must have ample knowledge and experience in business management. Appointment ofnon-standing directors to become part of the audit committee is subject to approval at the general meeting of our shareholders. Government officials that are not part of the teaching staff in national and public schools are ineligible to become ournon-standing directors.

The term of our president is three years, while that of our directors (standing ornon-standing, but not the president) is two years. According to the Act on the Management of Public Institutions, our president’s term cannot be terminated unless done so by the President of the Republic pursuant to the Act on the Management of Public Institutions or upon an event as specified in our Articles of Incorporation.

Attendance by a majority of the board members constitutes a voting quorum for our board meetings, and resolutions can be passed by a majority of the board members. In the event the president acts in violation of law or the Articles of Incorporation, is negligent in his duties, or otherwise is deemed to be significantly impeded in performing his official duties as president, the board of directors may by resolution request the minister of the Ministry of Trade, Industry and Energy to dismiss or recommend the dismissal of the president.

Ournon-standing directors may request any information necessary to fulfill their duties from our president, and except in special circumstances, our president must comply with such request.

 

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The names, titles and outside occupations, if any, of the directors as of April 17, 2020 and the respective years in which they took office are set forth below.

 

Name (Gender)

 Age 

Title

 

Outside Occupation

 

Position Held Since

JongKap, KIM (Male)

 68 President, Chief Executive Officer and Standing Director None April 13, 2018

Kim,Hoe-Chun (Male)

 59 Senior Executive Vice President for Business Management, Standing Director None July 16, 2018

Kim,Dong-Sub (Male)

 60 Senior Executive Vice President for Business Operations, Standing Director None July 16, 2018

Park, Hyung-Duck (Male)

 59 

Senior Executive Vice President for Strategy & Finance,

Chief Financial Officer, Standing Director

 None July 16, 2018

Lim, Hyun-Seung (Male)

 59 Senior Executive Vice President for Nuclear Power Generations, Standing Director None July 16, 2018

Kim,Sung-Arm (Male)

 60 Senior Executive Vice President for Power Grid, Standing Director None March 4, 2019

Kim,Jwa-Kwan (Male)

 60 Non-Standing Director and Chairman of the Board of Directors Professor of Environmental Engineering ,Catholic University of Pusan April 4, 2018

Kim, Chang-Joon (Male)

 75 Non-Standing Director Head of Gwangju Sports Council March 19, 2018

Yang, Bong-Ryull (Male)

 68 Non-Standing Director None April 4, 2018

Jung,Yeon-Gil (Male)

 53 Non-Standing Director and Member of the Audit Committee Professor of New Materials Engineering, Changwon University, Energy Policy Consultant of the Ministry of Trade, Industry and Energy April 4, 2018

Noh,Geum-Sun (Female)

 58 Non-Standing Director and Member of the Audit Committee None June 12, 2018

Choi, Seung-Kook (Male)

 54 Non-Standing Director Director of Solar and Wind Energy Cooperative Association June 12, 2018

Park,Cheol-Su (Male)

 51 Non-Standing Director 

Head of Self-Support Center in Naju

Director of the Naju Social Economy Network

 June 12, 2018

Park,Jong-Bae (Male)

 56 Non-Standing Director Professor of Electrical and Electronics Engineering, Konkuk University January 31, 2020

JongKap KIM has been our President and CEO since April 13, 2018. Prior to his current position, he served as the Chief Executive Officer of Siemens Korea, the Chief Executive Officer of SK Hynix, a Commissioner of Korean Intellectual Property Office, and a Vice Minister of Ministry of Trade, Industry and Energy. Mr. Kim received a Ph. D. in public administration from Sungkyunkwan University, M.A. in economics from Indiana University and M.B.A. from New York University.

 

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Kim,Hoe-Chun has been our Standing Director since July 16, 2018. Mr. Kim also currently serves as our Senior Vice President for Business Management and previously served as the Executive Vice President & Chief HR Officer and the Vice President of Corporate Planning Department. Mr. Kim received a Korean Executive M.B.A. from Helsinki School of Economics.

Kim,Dong-Sub has been our Standing Director since July 16, 2018. Mr. Kim also currently serves as our Senior Executive Vice President for Business Operations and previously served as the Executive Vice President & Chief Technology Officer and the Vice President of KEPCO Research Institute. Mr. Kim received a Ph.D. of engineering in technology policy from Yonsei University.

Park, Hyung-Duck has been our Standing Director since July 16, 2018. Mr. Park also currently serves as our Senior Executive Vice President for Strategy and Finance and Chief Financial Officer. Mr. Park previously served as the Vice President at Regional Headquarters KEPCO Gyeonggi and the Vice President of Sales and Marketing Department. Mr. Park received an Executive M.B.A. in utilities management from Helsinki School of Economics.

Lim, Hyun-Seung has been our Standing Director since July 16, 2018. Mr. Lim also currently serves as our Senior Executive Vice President for Nuclear Power Generations and previously served as the Vice President of UAE Nuclear Project Department in KEPCO and the Vice President of Global Nuclear Project Department. Mr. Lim received a B.ME from Sungkyunkwan University.

Kim,Sung-Arm has been our Standing Director since March 4, 2019. Mr. Kim also currently serves as our Senior Executive Vice President for Power Grid and previously served as the Vice President at Regional Headquarters KEPCO Namseoul and the Vice President of Transmission and Substation Construction Department. Mr. Kim received a B.S. in electrical engineering from Hongik University.

Kim,Jwa-Kwan has been ourNon-Standing Director since April 4, 2018. Mr. Kim is currently the professor of Environmental Engineering at Catholic University of Pusan. Mr. Kim previously served as a visiting professor at the Seoul National University Graduate School of Environmental Studies. Mr. Kim received a B.S. in environmental engineering from Pukyong National University and a Ph.D. in public administration from Seoul National University.

Kim, Chang-Joon has been ourNon-Standing Director since March 19, 2018. Mr. Kim is currently Head of Gwangju Sports Council. Mr. Kim previously served as a member of the Electricity Regulatory Commission (KOREC). Mr. Kim received a B.S. in veterinary science at Chonnam National University.

Yang, Bong-Ryull has been ourNon-Standing Director since April 4, 2018. Mr. Yang previously served as the Ambassador of the Republic of Korea to Malaysia and the Vice President of Public Affairs in Gwangju Institute of Science and Technology. Mr. Yang received a B.A. in politics at Seoul National University and a Ph.D. in business administration from Gwangju University.

Jung,Yeon-Gil has been ourNon-Standing Director since April 4, 2018. Mr. Jung is currently Professor of New Materials Engineering at Changwon University and the Energy Policy Consultant of the Ministry of Trade, Industry and Energy. Mr. Jung previously served as vice-chairman of the Korean Ceramic Society. Mr. Jung received a B.S. and a Ph.D in material engineering from Hanyang University.

Noh,Geum-Sun has been ourNon-Standing Director since June 12, 2018. Ms. Noh is a certified public accountant and previously served as the President of EOS Partners, the Executive Auditor of National Pension Service andco-representative of Mirae Accounting Firm. Ms. Noh received a B.S. in nursing from Seoul National University.

Choi, Seung-Kook has been ourNon-Standing Director since June 12, 2018. Mr. Choi currently serves as the Director of Solar and Wind Energy Cooperative Association. Mr. Choi previously served as aco-representative

 

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of Korea NGO’s Energy Network. Mr. Choi received a B.A. in sociology from Hanyang University and a M.A. in urban administration from the University of Seoul.

Park,Cheol-Su has been ourNon-Standing Director since June 12, 2018. Mr. Park currently serves as the head of Self-Support Center in Naju and the director of Naju Social Economy Network. Mr. Park received a B.A. in English literature from Gwangju University and a M.A. in public administration from Chonnam National University.

Park,Jong-Bae has been ourNon-Standing Director since January 31, 2020. Mr. Park is currently the professor of Electrical and Electronics Engineering at Konkuk University. Mr. Park previously served as a Head of the Office of Career Development and Placement at Konkuk University. Mr. Park received a B.S. and a Ph.D in Electrical and Electronics Engineering from Seoul National University.

The business address of our directors is 55Jeollyeok-ro,Naju-si,Jeollanam-do, 58322, Korea.

Audit Committee

Under the Act on the Management of Public Institutions, which took effect as of April 1, 2007, we are designated as a “market-oriented public enterprise” and, as such, are required to establish an audit committee in lieu of thepre-existing board of auditors upon expiration of the term of the last remaining member of the board of auditors. In September 2007, we amended our Articles of Incorporation to establish, in lieu of thepre-existing board of auditors, an audit committee meeting the requirements under the Sarbanes-Oxley Act. Under the Act on the Management of Public Institutions, the Korean Commercial Act and the amended Articles of Incorporation, we are required to maintain an audit committee consisting of three members, of which not less than two members are required to benon-standing directors. The roles and responsibilities of our audit committee members are to perform the functions of an audit committee meeting the requirements under the Sarbanes-Oxley Act. Our audit committee was established on December 8, 2008.

Noh,Geum-Sun and Jung,Yeon-Gil, bothnon-standing directors, are currently members of our audit committee. Lee,Jung-Hee voluntarily resigned as a standing director and as a member of the audit committee on December 13, 2019. Under Korean law, Lee,Jung-Hee retains the rights and is subject to obligations as a member of the audit committee and a standing director, to the extent such rights and obligations are connected to performance of his duties as a member of the audit committee, until his successor to take his place at our audit committee is approved and appointed at a general meeting of the shareholders. All such members of the audit committee are independent within the meaning of the Korea Stock Exchange listing standards, the regulations promulgated under the Korean Commercial Act and the New York Stock Exchange listing standards.

Item 6.B. Compensation

The aggregate amount of remuneration paid to our standing andnon-standing directors in the aggregate consist of (i) salaries and wages paid to standing andnon-standing directors, which amounted to Won 1,543 million in aggregate in 2019, and (ii) accrued retirement and severance benefits for standing directors, which amounted to Won 31 million in 2019. Under the Act on the Management of Public Institution, our executive officers consist of the president and the standing andnon-standing directors. Standing directors, except the standing director who concurrently serves as a member of our audit committee, take executive positions with our company while the other directors, includingnon-standing directors, do not. We do not have any other officer who is in charge of a principal business unit, division or function, any other officer who performs a policy making function or any other person who performs similar policy making functions for us.

Item 6.C. Board Practices

Under the Act on the Management of Public Institutions and our Articles of Incorporation, for appoints made after April 1, 2007, the term of office for our president is three years and the term of our office for our

 

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directors (whether standing ornon-standing but not the president) is two years. Our president and directors may be reappointed for one or more additional terms of one year. In order to be reappointed, the president must be evaluated on the basis of his management performance; a standing director, on the basis of the performance of the duties for which he was elected to perform, or if the standing director has executed an incentive bonus contract, on the basis of his performance under the contract; and anon-standing director, on the basis of his performance of the duties for which he was elected to perform.

Our board currently does not maintain a compensation committee. See Item 16G. “Corporate Governance.” However, we currently maintain an audit committee meeting the requirements of the Sarbanes-Oxley Act to perform the roles and responsibilities of the compensation committee. Prior to the establishment of the audit committee on December 8, 2008 pursuant to the Act on the Management of Public Institutions, we maintained a board of auditors, which performed the roles and responsibilities required of an audit committee under the Sarbanes-Oxley Act, including the supervision of the financial and accounting audit by the independent registered public accountants.

Our president’s management contract includes benefits upon termination of his employment. The amount for termination benefits payable equals the average value of compensation for one month times the number of years the president is employed by us, provided that the president is only eligible for termination benefits after more than one year of continuous service.

The termination benefits for our standing directors are determined in accordance with our internal regulations for executive compensation. Standing directors are eligible for benefits only upon termination of employment or death following one year of continuous service.

See also Item 16G. “Corporate Governance” for a further description of our board practices.

Item 6.D. Employees

As of December 31, 2019, we and our generation subsidiaries had a total of 47,452 regular employees, almost all of whom are employed within Korea. Approximately 10.5% of our regular employees (including employees of our generation subsidiaries) are located at our head office.

The following table sets forth the number of and other information relating to our regular employees, not including directors or senior management, as of December 31, 2019.

 

   KEPCO   KHNP   KOSEP   KOMIPO   KOWEPO   KOSPO   EWP   Total 

Regular Employees

                

Administrative

   5,094    997    304    373    270    299    396    7,733 

Engineers

   12,220    9,683    1,991    2,192    1,983    1,751    2,059    31,879 

Others

   5,659    1,154    190    200    244    388    5    7,840 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   22,973    11,834    2,485    2,765    2,497    2,438    2,460    47,452 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Head Office Employees

   1,741    1,292    412    378    393    402    370    4,988 

% of total

   7.6%    10.9%    16.6%    13.7%    15.7%    16.5%    15.0%    10.5% 

Members of Labor Union

   17,463    8,304    1,827    1,656    1,734    1,651    1,948    34,583 

% of total

   76.0%    70.2%    73.5%    59.9%    69.4%    67.7%    79.2%    72.9% 

We and each of our generation subsidiaries have separate labor unions. Approximately 72.9% of our and our generation subsidiaries’ employees in the aggregate are members of these labor unions, each of which negotiates a collective bargaining agreement for its members each year. Under applicable Korean law, an employee-employer cooperation committee comprised of an equal number of representatives of management and labor (which shall be no less than three and no more than ten representatives from each of management and labor) is

 

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required to be established. Accordingly, an employee-employer cooperation committee composed of eight representatives of management and eight representatives of labor has been established at us and at each of our generation subsidiaries. The committee meets periodically to discuss various labor issues.

Since our formation in 1981, our businesses had not been interrupted by any work stoppages or strikes except in early 2002, when employees belonging to our fivenon-nuclear generation subsidiaries went on strike for six weeks to protest the Government’s decision to privatize suchnon-nuclear generation subsidiaries according to the Restructuring Plan, which privatization plan has since been suspended indefinitely. See Item 3.D. “Risk Factors—Risks Relating to KEPCO—The Government may adopt policy measures to substantially restructure the Korean electric power industry or our operational structure, which may have a material adverse effect on our business, operations and profitability.”

We believe our relations with our employees are generally good.

Item 6.E. Share Ownership

As of December 31, 2019, none of our directors and members of our administrative, supervisory or management bodies own more than 0.1% of our common stock individually and in aggregate.

 

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Item 7.A. Major Shareholders

The following table sets forth certain information relating to certain owners of our capital stock as of December 31, 2019, the date we last closed our shareholders’ registry:

 

Title of Class

  

Identity of Person or Group

  Shares Owned   Percentage of
Class(1) (%)
 

Common stock

  Government   116,841,794    18.2 
  Korea Development Bank(2)   211,235,264    32.9 
    

 

 

   

 

 

 
  Subtotal   328,077,058    51.1 
  National Pension Service   50,592,477    7.9 
  Employee Stock Ownership Association   917,698    0.1 
  Directors as a group   750    0.0 
  Public(non-Koreans)   154,843,683    24.1 
  

Common shares

   127,250,445    19.8 
  

American depositary shares

   27,593,238    4.3 
  Public (Koreans)   107,532,411    16.8 
    

 

 

   

 

 

 
  Total   641,964,077    100.0 
    

 

 

   

 

 

 

 

Notes:

 

(1)

Percentages are based on issued shares of common stock.

(2)

Korea Development Bank is a Government-controlled entity.

All of our shareholders have equal voting rights. See Item 10.B. “Memorandum and Articles of Incorporation—Description of Capital Stock—Voting Rights.”

Item 7.B. Related Party Transactions

We are engaged in a variety of transactions with our affiliates. We have related party transactions with Government-controlled entities such as Korea Gas Corporation, our consolidated subsidiaries and our equity investees. In addition, we engage in related party transactions with Korea Development Bank, one of our major shareholders. See Note 47 of the Notes to our consolidated financial statements included in this annual report for a description of transaction and balances with our related parties.

 

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In the past three years, our related party transactions principally consisted of purchases of LNG from Korea Gas Corporation and long-term borrowings from Korea Development Bank. In 2017, 2018 and 2019, we and our generation subsidiaries purchased LNG from Korea Gas Corporation in the aggregate amount of Won 3,246 billion, Won 5,191 billion and Won 4,049 billion, respectively. As of December 31, 2019, we had borrowings from Korea Development Bank in the aggregate amount of Won 259 billion, which had an interest rate range of 0.50% to 4.60% as well as 1 year KoFC bond rate +0.95 for certain operating funds.

We also engage in extensive transactions with our consolidated generation subsidiaries, including the purchase of electricity from them through Korea Power Exchange, sales of electricity to them, payment and receipt of commissions for services and receivables and payables transactions. These are eliminated in the consolidation process. We also provide guarantees for certain of our affiliates. See Item 5.F. “Tabular Disclosure of Contractual Obligations—Overdraft and Others.” We also have certain relationships with the Korea Power Exchange. See Item 4.B. “Business Overview—Purchase of Electricity—Cost-based Pool System.”

For a further description of our transactions with our affiliates, see Note 47 of the Notes to our consolidated financial statements included in this annual report.

Item 7.C. Interests of Experts and Counsel

Not Applicable

 

ITEM 8.

FINANCIAL INFORMATION

Item 8.A. Consolidated Statements and Other Financial Information

We prepare our consolidated financial statements in compliance with requirements under Item 18. “Financial Statements.”

Legal Proceedings

As of December 31, 2019, we and our subsidiaries were engaged in 586 lawsuits as a defendant and 199 lawsuits as a plaintiff. As of the same date, the total amount of damages claimed against us and our subsidiaries was Won 698 billion, for which we have made a provision of Won 88 billion as of December 31, 2019, and the total amount claimed by us and our subsidiaries was Won 707 billion as of December 31, 2019. While the outcome of any of these lawsuits cannot presently be determined with certainty, our management currently believes that the final results from these lawsuits will not have a material adverse effect on our liquidity, financial position or results of operations.

The following are potentially significant claims pertaining to us and our subsidiaries.

In December 2013, the Supreme Court of Korea ruled that regular bonuses fall under the category of ordinary wages on the condition that those bonuses are paid regularly and uniformly, and that any agreement which excludes such regular bonuses from ordinary wage is invalid. One of the key rulings provides that bonuses that are given to employees (i) on a regular and continuous basis and (ii) calculated according to the actual number of days worked (iii) that are not incentive-based must be included in the calculation of “ordinary wages.” The Supreme Court further ruled that in spite of invalidity of such agreements, employees shall not retroactively claim additional wages incurred due to such court decision, in case that such claims bring to employees unexpected benefits which substantially exceeds the wage level agreed by employers and employees and cause an unpredicted increase in expenditures for their company, which would lead the company to material managerial difficulty or would be a threat to the existence of the company. In that case, the claim is not acceptable since it is unjust and is in breach of the principle of good faith. As a result of such ruling by the Supreme Court of Korea, we and our subsidiaries became subject to a number of lawsuits filed by various industry-wide and company-specific labor unions based on claims that ordinary wage had been paid without including certain items that

 

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should have been included as ordinary wage. In July 2016, the court ruled against us, and in accordance with the court’s ruling, in August 2016 we paid Won 55.1 billion to the employees for three years of back pay plus interest. As of December 31, 2019, however, 25 lawsuits were pending against our subsidiaries for an aggregate claim amount of Won 61 billion, for which our subsidiaries set aside an aggregate amount of Won 29 billion to cover any potential future payments of additional ordinary wage in relation to the related lawsuits. All cases are currentlyon-going at various stages of proceedings. We cannot presently assure you that the courts will not ultimately rule against our subsidiaries in these lawsuits, or that the amount of our reserves against these lawsuits will be sufficient to cover the amounts actually payable under court rulings. Any of these developments would adversely affect our results of operations.

During the period from 2014 to 2019, certain residential customers filed class action lawsuits against us based on the claim that electricity tariffs, determined under the progressive rate structure, were excessive. As of December 31, 2019, we were subject to 14 such lawsuits brought by approximately 10,000 plaintiffs with an aggregate claim amount of Won 5.8 billion. Of these 14 lawsuits, seven cases are currently pending in the third round of proceedings (for which we won all of the first and second rounds of proceedings, except for one case) and three cases are currently pending in the second round of proceedings (for which we won all of the first rounds of proceedings). Four cases are currently pending in the first round of proceedings.

In November 2019, prosecutors indicted six of KHNP’s employees for, among others, failing to immediately shut down Hanbit #1 reactor when its thermal output exceeded the threshold specified by the nuclear safety technical operations manual and filing false reports to the NSSC. KHNP is also indicted for secondary liability from its employees’ alleged wrongdoings. The case stemmed from the NSSC’s investigations into the manual shutdown of Hanbit #1 reactor during a diagnostic test in May 2019. The case is currently pending, and we cannot assure you that the outcomes of the ongoing case will not have any material adverse effect on us, our reputation and our operating results.

In addition, our generation subsidiaries, currently and from time to time, are involved in lawsuits incidental to the conduct of their business. A significant number of such lawsuits are based on the claim that the construction and operation of the electricity generation units owned by our generation subsidiaries have impaired neighboring fish farms. For example, in May 2012, a group of merchants and fishermen in the Jeolla region have sued KHNP for damages from pollutants released by a generation unit. The case is still pending. Our generation subsidiaries normally pay compensation to the members of fishery associations near our power plant complex for expected losses and damages arising from the construction and operation of their power plants in advance. Despite such compensation paid by us, a claim may still be filed against our generation subsidiaries challenging the compensation paid by us.

The nuclear power plant at Wolsong #1 unit began operations in 1982 and ended its operations in 2012 pursuant to its30-year operating license. In February 2015, the NSSC evaluated the safety of operating Wolsong #1 unit and approved its extended operation until November 2022. However, a civic group filed a lawsuit to annul such decision, and in February 2017, the Seoul Administrative Court ruled against the NSSC. The NSSC appealed this decision, and the civic group has filed an injunction to suspend the operation of the Wolsong #1 unit. The civic group’s injunction was denied in July 2017. KHNP, which operated the unit pursuant to the NSSC’s initial decision, has joined this lawsuit. On June 15, 2018, the board of directors of KHNP decided to (i) retire Wolsong #1 unit earlier than planned due to its economic inefficiency and (ii) discontinue the construction of Chunji #1 and #2 as well as Daejin #1 and #2 units. As of December 31, 2019, impairment loss in connection with the property, plant and equipment of Wolsong #1 unit accrued to Won 572,216 million and reversal of impairment loss was Won 16,693 million. As of December 31, 2019, impairment loss in connection with the property, plant and equipment of Chunji #1 and #2 as well as Daejin #1 and #2 units amounted to Won 38,886 million. Although the board of directors did not make any decisions regarding Shin-Hanul #3 and #4 units, which are new nuclear plants under construction, we cannot assure you that the construction of these units will not be discontinued. As of December 31, 2019, impairment loss in connection with the property, plant and equipment of Shin-Hanul #3 and #4 units accrued to Won 134,736 million. There are ten other nuclear

 

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generation units whose life under their initial operating license will expire in the next ten years, or by 2030. We may find it more difficult to have the life of other nuclear units extended as well. Furthermore, in June 2016, Greenpeace and 559 Korean nationals brought a lawsuit against the NSSC to revoke the permit the NSSC granted to KHNP in relation to the construction of Shin-Kori #5 and #6 nuclear generation units. The lower court ruled on this case in February 2019, both parties appealed, and the case is currently pending in the Seoul High Court. Additionally, in May 2019, a group of 729 Korean nationals brought a lawsuit against the NSSC, challenging its decision to suspend the operation of Shin-Kori #4. In July 2019, we have applied to participate in the lawsuit as a stakeholder. The case is currently pending in the Seoul High Court. We cannot assure you that there will not be new challenges to prohibit the construction of new nuclear units in the future, whereby we may experience a loss of revenues and an increase in our overall fuel costs (as nuclear fuel is the cheapest compared to coal, LNG or oil) as a result of such prohibition, which could adversely affect our results of operation and financial condition.

We and our subsidiaries are also involved in the following arbitrations, among others.

 

  

SAP Korea Ltd brought a breach of contract claim against us and KEPCO KDN Co., Ltd., one of our subsidiaries, in relation to the enterprise resource planning software serviced by SAP Korea. In that connection, arbitration was filed in the International Chamber of Commerce International Court of Arbitration. We have not recognized any provision because the probability of economic benefit outflow is remote and the related amount cannot be reliably estimated.

 

  

Hyundai E&C, GS Engineering & Construction Corp. and Hansol SeenTec Co., Ltd. filed an arbitration case against us at the Korea Commercial Arbitration Board to request payment for additional construction costs. As of December 31, 2018, we have recognized the litigation provisions of Won 204,787 million in relation to this arbitration case and made the payment according to the results of this arbitration.

 

  

Halla Corporation filed an arbitration case against us at the Korea Commercial Arbitration Board to request payment for additional construction costs, and we filed an arbitration case against Halla Corporation to request penalty payment for the delayed construction work. As of December 31, 2019, we have recognized Won 19,754 million of provision estimated to be required to fulfill our obligations in relation to this arbitration. In January 2020, according to the results of this arbitration, we have made a reversal of the provision of Won 19,754 million.

 

  

Enzen, one of our subcontractors, filed an arbitration case against us over a contractual dispute in connection with the electric power IT modernization project in Kerala, India. We have not recognized any losses because the probability of economic benefit outflow is remote and the related amount cannot be reasonably determined.

 

  

In September 2019, we filed for arbitration against IL KWANG E&C Co., Ltd. at the Korea Commercial Arbitration Board, in relation to damage claims received as of December 31, 2019. We have not recognized any estimated provision because the related amount cannot be reasonably determined as of December 31, 2019.

From 2017 to 2018, the Korea Customs Service (“KCS”) conducted an investigation on a group of individuals and companies suspected of illegally importing North Korean coal. KOSEP was subject to a written investigation in 2018, as it had procured coal from a direct supplier that, in turn, purchased the coal from one of the traders who was suspected of such illegal activity. The transaction between KOSEP and the direct supplier was denominated in U.S. dollars. Neither KOSEP nor its direct supplier were found to have committed any wrongdoing. KCS concluded the investigation in August 2018 and ultimately accused three individuals and three companies (none of which included KOSEP or its direct supplier) of document forgery and violation of applicable customs and compliance law. Prosecutors indicted these individuals and companies as well as additional parties, and in October 2019, the Daegu District Court sentenced the defendants to imprisonment and/or fines. Neither KOSEP nor its direct supplier were implicated, and no legal action has been taken, or is currently pending, against KOSEP or any of its directors or officers. However, we cannot assure you that this

 

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investigation, the result of the trial and/or related events will not have any material adverse effect on us, our reputation, our common shares or our American depositary shares.

On November 9, 2018, certain of our former executive and employees were convicted in a district court on charges for receiving bribes. In May 2019, the appellate court confirmed the charges.

As part of our efforts to prevent recurrence of similar cases, we have implemented the following measures:

 

  

Implementing web training program on integrity for all employees,

 

  

Strengthening integrity and anti-corruption evaluation systems for high-ranking officers and reflecting such results in performance evaluations, and

 

  

Increasing the punishment and penalties for employee corruption.

We do not believe such claims or proceedings, individually or in the aggregate, have had or will have a material adverse effect on us and our generation subsidiaries. However, we cannot assure you that this will be the case in the future, given the possibility that we may become subject to more legal and arbitral proceedings arising from changes in the environmental laws and regulations as they become applicable to us and our generation subsidiaries, and the related growth in demand for more compensation by actual and potential affected parties. Further, we cannot assure you that the above convictions and/or related events will not have an adverse effect on our reputation as well as the price of our common shares and our American depositary shares.

Dividend Policy

For our dividend policy, see Item 10.B. “Memorandum and Articles of Incorporation—Description of Capital Stock—Dividend Rights.” For a description of the tax consequences of dividends paid to our shareholders, see Item 10.E. “Taxation—Korean Taxes—Shares or ADSs—Dividends on the Shares of Common Stock or ADSs” and Item 10.E. “Taxation—U.S. Federal Income Tax Consideration for U.S. Persons—Tax Consequences with Respect to Common Stock and ADSs—Distributions on Common Stock or ADSs.”

Item 8.B. Significant Changes

Not Applicable

 

ITEM 9.

THE OFFER AND LISTING

Item 9.A. Offer and Listing Details

Notes

We have issued the following registered notes and debentures, which are traded principally in theover-the-counter market:

 

  

7.95%Zero-To-Full Debentures, due April 1, 2096 (the “7.95% Debentures”);

 

  

6% Debentures due December 1, 2026, (the “6% Debentures”);

 

  

7% Debentures due February 1, 2027 (the “7% Debentures”); and

 

  

6-3/4% Debentures due August 1, 2027 (the“6-3/4% Debentures,” and together with the 7.95% Debentures, the 6% Debentures and the 7% Debentures, the “Registered Debt Securities”).

Sales prices for the Registered Debt Securities are not regularly reported on any United States securities exchange or other United States securities quotation service.

 

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Share Capital

The principal trading market for our common stock is the Korea Exchange. Our common stock is also listed on the New York Stock Exchange in the form of ADSs. The ADSs have been issued by Citibank, N.A. as depositary and are listed on the New York Stock Exchange under the symbol “KEP.” One ADS representsone-half of one share of our common stock. As of December 31, 2019, the date we last closed our shareholders’ registry, 55,186,476 ADSs representing 4.3 % shares of our common stock were outstanding.

Common Stock

Shares of our common stock are listed on the KRX KOSPI Market of the Korea Exchange. The table below shows the high and low closing prices on the KRX KOSPI Market of the Korea Exchange for our common stock since 2015.

 

   Price 

Period

  High   Low 
   (In Won) 

2015

    

First Quarter

   46,000    39,150 

Second Quarter

   48,500    42,450 

Third Quarter

   52,200    46,300 

Fourth Quarter

   53,300    47,500 

2016

    

First Quarter

   60,600    49,800 

Second Quarter

   63,000    57,400 

Third Quarter

   62,900    54,000 

Fourth Quarter

   54,500    43,200 

2017

    

First Quarter

   48,750    40,350 

Second Quarter

   46,700    40,800 

Third Quarter

   45,500    38,200 

Fourth Quarter

   41,100    37,350 

2018

    

First Quarter

   37,750    30,850 

Second Quarter

   37,750    32,000 

Third Quarter

   33,300    28,700 

Fourth Quarter

   34,350    23,850 

October

   29,350    23,850 

November

   30,800    26,600 

December

   34,350    29,750 

2019

    

First Quarter

   35,800    29,900 

Second Quarter

   30,350    24,700 

Third Quarter

   27,950    24,700 

Fourth Quarter

   29,250    25,100 

October

   26,300    25,100 

November

   28,150    25,250 

December

   29,250    27,450 

2020

    

First Quarter

   28,500    16,250 

January

   28,500    25,550 

February

   26,100    21,300 

March

   22,800    16,250 

April (through April 17)

   21,200    19,000 

 

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ADSs

The table below shows the high and low closing prices on the New York Stock Exchange for the outstanding ADSs since 2015. Each ADS representsone-half of one share of our common stock.

 

   Closing Price per ADS 

Period

      High           Low     
   (In US$) 

2015

    

First Quarter

   21.01    18.26 

Second Quarter

   22.53    19.29 

Third Quarter

   22.13    19.45 

Fourth Quarter

   23.31    20.28 

2016

    

First Quarter

   21.01    18.26 

Second Quarter

   26.90    24.67 

Third Quarter

   28.31    24.38 

Fourth Quarter

   24.34    18.48 

2017

    

First Quarter

   21.35    17.53 

Second Quarter

   20.80    17.82 

Third Quarter

   20.38    16.73 

Fourth Quarter

   18.22    16.60 

2018

    

First Quarter

   17.83    14.28 

Second Quarter

   17.43    14.34 

Third Quarter

   14.70    12.62 

Fourth Quarter

   14.96    10.52 

2019

    

First Quarter

   15.75    13.01 

Second Quarter

   13.20    10.42 

Third Quarter

   11.79    10.24 

Fourth Quarter

   12.22    10.52 

October

   11.19    10.52 

November

   12.22    10.97 

December

   12.16    11.69 

2020

    

First Quarter

   12.23    6.34 

January

   12.23    10.57 

February

   11.03    8.79 

March

   9.23    6.34 

April (through April 17)

   8.76    7.53 

Item 9.B. Plan of Distribution

Not A