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Risk Management

12 Months Ended

Dec. 31, 2018

Risk Management [Abstract]

Risk Management

48.

Risk Management

(1)

Capital risk management

The Company manages its capital to ensure that entities in the Company will be able to continue while maximizing the return to shareholder through the optimization of the debt and equity balance. The capital structure of the Company consists of net debt (offset by cash and cash equivalents) and equity. The Company’s overall capital risk management strategy remains consistent with the prior year.

Details of the Company’s capital management accounts as of December 31, 2017 and 2018 are as follows:


		2017			2018
		In millions of won
Total borrowings and debt securities	￦		54,747,392			61,034,627
Cash and cash equivalents			2,369,739			1,358,345

Net borrowings and debt securities			52,377,653			59,676,282

Total shareholder’s equity			72,964,641			71,092,762

Debt to equity ratio			71.78	%		83.94	%

(2)

Financial risk management

The Company is exposed to various risks related to its financial instruments, such as, market risk (currency risk, interest rate risk, price risk), credit risk. The Company monitors and manages the financial risks relating to the operations of the Company through internal risk reports which analyze exposures by degree and magnitude of risks. The Company uses derivative financial instruments to hedge certain risk exposures. The Company’s overall financial risk management strategy remains consistent with the prior year.

(i)

Credit risk

Credit risk is the risk of finance loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises primarily from the sales activities, securities and derivatives. In addition, credit risk exposure may exist within financial guarantees and unused line of credits. As these financial institutions the Company makes transactions with are reputable financial institutions, the credit risk from them are considered limited. The Company decides credit transaction limits based on evaluation of client’s credit, through information obtained from the credit bureau and disclosed financial position at committing contracts.

①

Credit risk management

Electricity sales, the main operations of the Company are the necessity for daily life and industrial activities of Korean nationals, and have importance as one of the national key industries. The Company dominates the domestic market supplying electricity to customers. The Company is not exposed to significant credit risk as customers of the Company are diverse and are from various industries and areas. The Company uses publicly available information and its own internal data related to trade receivables, to rate its major customers and to measure the credit risk that a counter party will default on a contractual obligation. For the incurred but not recognized loss, it is measured considering overdue period.

②

Impairment and allowance account

In accordance with the Company policies, individual material financial assets are assessed on a regular basis, trade receivables that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Value of the acquired collateral (including the confirmation of feasibility) and estimated collectable amounts are included in this assessment.

Allowance for bad debts assessed on a collective basis are recognized for (i) the group of assets which individually are not material and (ii) incurred but not recognized losses that are assessed using statistical methods, judgment and past experience.

Book values of the financial assets represent the maximum exposed amounts of the credit risk. Details of the Company’s level of maximum exposure to credit risk as of December 31, 2017 and 2018 are as follows:


		2017		2018
		In millions of won
Cash and cash equivalents	￦		2,369,739		1,358,345
Financial assets at fair value through profit or loss			—		920,935
Financial assets at fair value through profit or loss			111,512		—
Derivative assets (trading)			22,020		37,631
Equity investment at fair value through other comprehensive income			—		399,495
Available-for-sale financial assets			699,833		—
Financial assets at amortized cost			—		14,042
Held-to-maturity investments			3,144		—
Loans			905,641		718,674
Long-term/short-term financial instruments			2,244,514		2,318,027
Derivative assets (applying hedge accounting)			10,606		64,704
Trade and other receivables			9,683,769		9,613,437
Financial guarantee contracts(*)			1,154,862		1,310,817

(*)

Maximum exposure associated with the financial guarantee contracts is the maximum amounts of the obligation.

As of the reporting date, there are no financial assets and non-financial assets that were acquired through the exercise of the right of collateralized assets and reinforcement of credit arrangement.

(ii)

Market risk

Market risk is the risk that the Company’s fair values of the financial instruments or future cash flows are affected by the changes in the market. Market risk consists of interest rate risk, currency risk and other price risk.

(iii)

Sensitivity analysis

Significant assets and liabilities with uncertainties in underlying assumptions

①

Defined benefit obligation

A sensitivity analysis of defined benefit obligation assuming a 1% increase and decrease movements in the actuarial valuation assumptions as of December 31, 2017 and 2018 are as follows:


			2017						2018
Type	Accounts		1% Increase			1% Decrease			1% Increase			1% Decrease
	In millions of won
Future salary increases	Increase (decrease) in defined benefit obligation	￦		354,852			(305,494	)		416,956			(363,820	)
Discount rate	Increase (decrease) in defined benefit obligation			(313,597	)		377,148			(377,221	)		445,833

Changes of employee benefits assuming a 1% increase and decrease movements in discount rate on plan asset for the years ended December 31, 2017 and 2018 are ￦8,926 million and ￦14,646 million, respectively.

②

Provisions

Changes in provisions due to movements in underlying assumptions as of December 31, 2017 and 2018 are as follows:


Type	Accounts	2017			2018
PCBs	Inflation rate		1.23	%		1.27	%
	Discount rate		2.55	%		2.18	%
Nuclear plants	Inflation rate		1.21	%		1.21	%
	Discount rate		2.94	%		2.94	%
Spent fuel	Inflation rate		2.93	%		2.93	%
	Discount rate		4.49	%		4.49	%

A sensitivity analysis of provisions assuming a 0.1% increase and decrease movements in the underlying assumptions as of December 31, 2017 and 2018 are as follows:


			2017						2018
Type	Accounts		0.1% Increase			0.1% Decrease			0.1% Increase			0.1% Decrease
	In millions of won
Discount rate	PCBs	￦		(811	)		816			(623	)		627
	Nuclear plants			(262,949	)		270,370			(256,513	)		263,595
	Spent fuel			(51,015	)		52,997			(49,182	)		51,098
Inflation rate	PCBs			826			(822	)		632			(629	)
	Nuclear plants			287,926			(280,249	)		294,984			(287,110	)
	Spent fuel			53,763			(51,823	)		51,837			(49,961	)

Management judgment effected by uncertainties in underlying assumptions

①

Foreign currency risk

The Company undertakes transactions denominated in foreign currencies; consequently, exposures to exchange rate fluctuations arise. The carrying amounts of the Company’s foreign currency denominated monetary assets and monetary liabilities as of December 31, 2017 and 2018 are as follows:


	Assets				Liabilities
Type	2017		2018		2017		2018
	In thousands of foreign currencies
AED		5,693		10,513		2,049		5,890
AUD		145		143		652,259		717,712
BDT		60,208		71,575		1,001		1,175
BWP		797		1,214		—		—
CAD		82		96		171		4
CHF		—		—		400,004		400,000
CNY		13,007		—		26,140		26,140
EUR		5,708		337		68,003		105,673
GBP		3		—		2,327		1
HKD		—		—		—		1,650,000
IDR		167,775		60,568		—		206,935
INR		1,228,259		1,228,795		227,078		183,963
JOD		1,624		2,764		5		5
JPY		799,501		35,935		21,624,128		390,921
KZT		359		319		—		—
MGA		2,762,572		3,318,447		319,581		170,641
NOK		—		—		482		—
PHP		189,261		709,285		125,431		66,985
PKR		251,190		305,542		4,676		3,588
SAR		1,191		2,024		44		—
SEK		—		—		449,002		450,000
USD		1,653,858		1,422,510		8,321,335		8,103,602
UYU		12,955		39,898		10,586		4,253
ZAR		361		170		4		4
MMK		—		25,208		—		—
GHS		—		25,794		—		—

A sensitivity analysis on the Company’s income for the period assuming a 10% increase and decrease in currency exchange rates as of December 31, 2017 and 2018 are as follows:


		2017					2018
Type		10% Increase			10% Decrease		10% Increase			10% Decrease
		In millions of won
Increase (decrease) of profit before income tax	￦		(844,122	)		844,122		(887,561	)		887,561
Increase (decrease) of shareholder’s equity(*)			(844,122	)		844,122		(887,561	)		887,561

(*)

The effect on the shareholders’ equity excluding the impact of income taxes.

The sensitivity analysis above is conducted for monetary assets and liabilities denominated in foreign currencies other than functional currency, without consideration of hedge effect of related derivatives, as of December 31, 2017 and 2018.

To manage its foreign currency risk related to foreign currency denominated receivables and payables, the Company has a policy to enter into currency forward agreements. In addition, to manage its foreign currency risk related to foreign currency denominated expected sales transactions and purchase transactions, the Company enters into cross-currency swap agreements.

②

Interest rate risk

The Company is exposed to interest rate risk due to its borrowing with floating interest rates. A 1% increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.

The Company’s borrowings and debt securities with floating interest rates as of December 31, 2017 and 2018 are as follows:


Type		2017		2018
		In millions of won
Short-term borrowings	￦		290,873		24,235
Long-term borrowings			1,743,252		2,358,860
Debt securities			685,700		—

	￦		2,719,825		2,383,095

A sensitivity analysis on the Company’s long-term borrowings and debt securities assuming a 1% increase and decrease in interest rates, without consideration of hedge effect of related derivatives for the years ended December 31, 2017 and 2018 are as follows:


		2017					2018
Type		1% Increase			1% Decrease		1% Increase			1% Decrease
		In millions of won
Increase (decrease) of profit before income tax	￦		(27,198	)		27,198		(23,831	)		23,831
Increase (decrease) of shareholder’s equity(*)			(27,198	)		27,198		(23,831	)		23,831

(*)

The effect on the shareholders’ equity excluding the impact of income taxes.

To manage its interest rate risks, the Company enters into certain interest swap agreements or maintains an appropriate mix of fixed and floating rate borrowings.

③

Electricity rates risk

The Company is exposed to electricity rates risk due to the rate regulation of the government which considers the effect of electricity rate on the national economy.

A sensitivity analysis on the Company’s income for the period assuming a 1% increase and decrease in price of electricity for the years ended December 31, 2017 and 2018 are as follows:


		2017					2018
Type		1% Increase		1% Decrease			1% Increase		1% Decrease
		In millions of won
Increase (decrease) of profit before income tax	￦		546,499		(546,499	)		568,420		(568,420	)
Increase (decrease) of shareholder’s equity(*)			546,499		(546,499	)		568,420		(568,420	)

(*)

The effect on the shareholders’ equity excluding the impact of income taxes.

(iv)

Liquidity risk

The Company has established an appropriate liquidity risk management framework for the management of the Company’s short, medium and long-term funding and liquidity management requirements. The Company manages liquidity risk by continuously monitoring forecasted and actual cash flows, and by matching the maturity profiles of financial assets and liabilities.

In addition, the Company has established credit lines on its trade financing and bank overdrafts, and through payment guarantees it has received, it maintains an adequate credit (borrowing) line. In addition, the Company has the ability to utilize excess cash or long-term borrowings for major construction investments.

The following table shows the details of maturities of non-derivative financial liabilities as of December 31, 2017 and 2018. This table, based on the undiscounted cash flows of the non-derivative financial liabilities including estimated interests, has been prepared based on the respective liabilities’ earliest maturity date.


		2017
Type		Less than 1 year		1~2 Years		2~5 Years		More than 5 years		Total
		In millions of won
Borrowings and debt securities	￦		10,748,437		7,948,320		21,331,394		22,694,867		62,723,018
Finance lease liabilities			174,534		87,709		185,284		108,749		556,276
Trade and other payables			5,867,729		301,165		698,289		1,937,558		8,804,741
Financial guarantee contracts(*)			7,081		18,054		1,049,667		80,060		1,154,862

	￦		16,797,781		8,355,248		23,264,634		24,821,234		73,238,897


		2018
Type		Less than 1 year		1~2 Years		2~5 Years		More than 5 years		Total
		In millions of won
Borrowings and debt securities	￦		10,204,471		9,274,378		28,143,311		25,312,534		72,934,694
Finance lease liabilities			87,709		87,709		141,074		65,250		381,742
Trade and other payables			6,348,195		150,479		375,661		2,188,950		9,063,285
Financial guarantee contracts(*)			91,722		855,488		363,607		—		1,310,817

	￦		16,732,097		10,368,054		29,023,653		27,566,734		83,690,538

(*)

This represents the total guarantee amounts associated with the financial guarantee contracts. Financial guarantee liabilities which are recognized as of December 31, 2017 and 2018 are ￦23,475 million and ￦15,586 million, respectively.

The expected maturities for non-derivative financial assets as of December 31, 2017 and 2018 in detail are as follows:


		2017
Type		Less than 1 year		1~5 Years		More than 5 years		*Other()**		Total
		In millions of won
Cash and cash equivalents	￦		2,369,739		—		—		—		2,369,739
Available-for-sale financial assets			—		—		214,156		485,677		699,833
Held-to-maturity investments			5		3,139		—		—		3,144
Loans			244,309		261,672		429,628		10,821		946,430
Long-term/short-term financial instruments			1,702,084		201,821		340,304		305		2,244,514
Financial assets at fair value through profit or loss			—		—		111,512		—		111,512
Trade and other receivables			7,930,715		920,539		788,795		52,031		9,692,080

	￦		12,246,852		1,387,171		1,884,395		548,834		16,067,252


		2018
Type		Less than 1 year		1~5 Years		More than 5 years		*Other()**		Total
		In millions of won
Cash and cash equivalents	￦		1,358,345		—		—		—		1,358,345
Equity investment at fair value through other comprehensive income			—		—		—		399,495		399,495
Financial assets at amortized cost			11,956		2,086		—		—		14,042
Loans			123,646		314,744		319,988		—		758,378
Long-term/short-term financial instruments			1,869,286		278,899		164,057		5,785		2,318,027
Financial assets at fair value through profit or loss			313,893		81,828		483,398		41,816		920,935
Trade and other receivables			7,795,619		1,067,800		701,743		57,651		9,622,813

	￦		11,472,745		1,745,357		1,669,186		504,747		15,392,035

(*)

The maturities cannot be presently determined.

Derivative liabilities classified by maturity periods which from reporting date to maturity date of contract as of December 31, 2017 and 2018 are as follows:


		2017
Type		Less than 1 year			1~2 Years			2~5 Years			More than 5 years			Total
		In millions of won
Net settlement
—Trading	￦		(774	)		—			—			—			(774	)
Gross settlement
—Trading			(51,496	)		(19,887	)		(16,597	)		(4,967	)		(92,947	)
—Hedging			(17,547	)		(28,977	)		(192,205	)		(44,137	)		(282,866	)

	￦		(69,817	)		(48,864	)		(208,802	)		(49,104	)		(376,587	)


		2018
Type		Less than 1 year		1~2 Years			2~5 Years		More than 5 years			Total
		In millions of won
Net settlement
—Trading	￦		—		—			—		—			—
Gross settlement
—Trading			5,734		16,565			28,283		40,124			90,706
—Hedging			5,154		(43,447	)		71,840		(40,917	)		(7,370	)

	￦		10,888		(26,882	)		100,123		(793	)		83,336

(3)

Fair value risk

The fair value of the Company’s actively-traded financial instruments (i.e. FVTPL, FVOCI, etc.) is based on the traded market-price as of the reporting period end. The fair value of the Company’s financial assets is the amount which the asset could be exchanged for or the amount a liability could be settled for.

The fair values of financial instruments where no active market exists or where quoted prices are not otherwise available are determined by using valuation techniques. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the Company uses that technique.

For trade receivables and payables, the Company considers the carrying value net of impairment as fair value. While for disclosure purposes, the fair value of financial liabilities is estimated by discounting a financial instruments with similar contractual cash flows based on the effective interest method.

(i)

Fair value and book value of financial assets and liabilities as of December 31, 2017 and 2018 are as follows:


		2017				2018
Type		Book value		Fair value		Book value		Fair value
		In millions of won
Assets recognized at fair value
Financial assets at fair value through other comprehensive income	￦		—		—		399,495		399,495
Available-for-sale financial assets(*1)			699,833		699,833		—		—
Derivative assets (trading)			22,020		22,020		37,631		37,631
Derivative assets (applying hedge accounting)			10,606		10,606		64,704		64,704
Long-term financial instruments			542,430		542,430		—		—
Short-term financial instruments			1,702,084		1,702,084		—		—
Financial assets at fair value through profit or loss			—		—		920,935		920,935
Financial assets at fair value through profit or loss			111,512		111,512		—		—

	￦		3,088,485		3,088,485		1,422,765		1,422,765

Assets carried at amortized cost
Financial assets at amortized cost	￦		—		—		14,042		14,042
Held-to-maturity investments			3,144		3,144		—		—
Loans and receivables			905,641		905,641		718,674		718,674
Long-term financial instruments			—		—		448,741		448,741
Short-term financial instruments			—		—		1,869,286		1,869,286
Trade and other receivables			9,683,769		9,683,769		9,613,437		9,613,437
Cash and cash equivalents			2,369,739		2,369,739		1,358,345		1,358,345

	￦		12,962,293		12,962,293		14,022,525		14,022,525

Liabilities recognized at fair value
Derivative liabilities (trading)	￦		150,929		150,929		99,010		99,010
Derivative liabilities (applying hedge accounting)			277,130		277,130		213,153		213,153

	￦		428,059		428,059		312,163		312,163

Liabilities carried at amortized cost
Secured borrowings	￦		1,055,554		1,055,554		741,029		741,029
Unsecured bond			51,146,783		53,436,659		56,603,988		58,804,070
Finance lease liabilities			418,260		418,260		283,806		283,806
Unsecured borrowings			2,476,196		2,477,055		3,522,602		3,950,517
Trade and other payables(*2)			8,804,741		8,804,741		9,063,285		9,063,285
Bank overdraft			68,859		68,859		167,008		167,008

	￦		63,970,393		66,261,128		70,381,718		73,009,715

(*1)

Book value of equity securities held by the Company that were measured at cost as of December 31, 2017 is ￦37,926 million as a quoted market price does not exist in an active market and its fair value cannot be measured reliably.

(*2)

Excludes finance lease liabilities.

(ii)

Interest rates used for determining fair value

The interest rates used to discount estimated cash flows, when applicable, are based on the government yield curve at the reporting date plus an adequate credit spread.

The discount rate used for calculating fair value as of December 31, 2017 and 2018 are as follows:


Type	2017		2018
Derivatives		0.03% ~ 4.16%		0.02% ~ 4.16%
Borrowings and debt securities		0.08% ~ 4.38%		0.51% ~ 5.14%
Finance lease		9.00% ~ 10.83%		3.50% ~ 10.83%

(iii)

Fair value hierarchy

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, classified as Level 1, 2 or 3, based on the degree to which the fair value is observable.

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2: Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and

Level 3: Inputs that are not based on observable market data.

Fair values of financial instruments by hierarchy level as of December 31, 2017 and 2018 are as follows:


		2017
Type		Level 1		Level 2		Level 3		Total
		In millions of won
Financial assets at fair value
Available-for-sale financial assets	￦		274,453		214,156		173,298		661,907
Derivative assets			—		18,466		14,160		32,626
Financial assets at fair value through profit or loss			—		111,512		—		111,512

	￦		274,453		344,134		187,458		806,045

Financial liabilities at fair value
Derivative liabilities	￦		—		428,059		—		428,059

		2018
Type		Level 1		Level 2		Level 3		Total
		In millions of won
Financial assets at fair value
Financial assets at fair value through other comprehensive income	￦		210,056		—		189,439		399,495
Derivative assets			—		100,490		1,845		102,335
Financial assets at fair value through profit or loss			106,600		809,283		5,052		920,935

	￦		316,656		909,773		196,336		1,422,765,

Financial liabilities at fair value
Derivative liabilities	￦		—		310,008		2,155		312,163

The fair value of financial assets (FVTPL and FVOCI) publicly traded is measured at the closing bid price quoted at the end of the reporting period. Meanwhile, the fair value of unquoted financial assets (FVTPL and FVOCI) is calculated using the valuation results from an external pricing service in which weighted average borrowing rates of interest of evaluated companies are used as a discount rate. The fair value of derivatives is measured using valuation model which is determined at the present value of estimated future cash flows discounted at current market interest rate.

Changes of financial assets and liabilities which are classified as level 3 for the years ended December 31, 2017 and 2018 are as follows:


		2017
		Beginning balance		Acquisition		Reclassified category			Valuation			Disposal		Foreign currency translation		Ending balance
		In millions of won
Financial assets at fair value
Available-for-sale financial assets
Unlisted securities	￦		269,461		—		(92,128	)		(6,201	)		—		2,166		173,298


		2018
		Beginning balance		Effect of change in accounting policy		Acquisition		Reclassified category		Valuation			Disposal			Foreign currency translation		Ending balance
		In millions of won
Financial assets at fair value
Financial assets at fair value through profit or loss
Cooperative	￦		—		5,038		—		—		14			—			—		5,052
Financial assets at fair value through other comprehensive income
Unlisted securities			—		197,450		—		—		(11,744	)		(326	)		4,059		189,439