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Risk Management

12 Months Ended

Dec. 31, 2019

Risk Management [Abstract]

Risk Management

45.

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, 2018 and 2019 are as follows:


		2018			2019
		In millions of won
Total borrowings and debt securities	￦		61,034,627			67,876,541
Cash and cash equivalents			1,358,345			1,810,129

Net borrowings and debt securities			59,676,282			66,066,412

Total shareholders’ equity			71,092,762			68,889,649

Debt to equity ratio			83.94	%		95.90	%

(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, 2018 and 2019 are as follows:


		2018		2019
		In millions of won
Cash and cash equivalents	￦		1,358,345		1,810,129
Financial assets at fair value through profit or loss			920,935		747,261
Derivative assets (trading)			37,631		165,204
Financial assets at amortized cost			14,042		13,609
Loans			718,674		738,707
Long-term/short-term financial instruments			2,318,027		1,960,227
Derivative assets (applying hedge accounting)			64,704		145,829
Trade and other receivables			9,613,437		9,703,749
Financial guarantee contracts(*)			1,310,817		3,338,566

(*)

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, 2018 and 2019 are as follows:


			2018						2019
Type	Accounts		1% Increase			1% Decrease			1% Increase			1% Decrease
			In millions of won
Future salary increases	Increase (decrease) in defined benefit obligation	￦		416,956			(363,820	)		442,748			(386,147	)
Discount rate	Increase (decrease) in defined benefit obligation			(377,221	)		445,833			(402,099	)		475,765

Changes of employee benefits assuming a 1% increase and decrease movements in discount rate on plan asset for the years ended December 31, 2018 and 2019 are ￦14,646 million and ￦17,734 million, respectively.

②

Provisions

Changes in provisions due to movements in underlying assumptions as of December 31, 2018 and 2019 are as follows:


Type	Accounts	2018			2019
PCBs	Inflation rate		1.27	%		1.09	%
	Discount rate		2.18	%		1.97	%
Nuclear plants	Inflation rate		1.21	%		1.10	%
	Discount rate		2.94	%		2.43	%
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, 2018 and 2019 are as follows:


			2018						2019
Type	Accounts		0.1% Increase			0.1% Decrease			0.1% Increase			0.1% Decrease
			In millions of won
Discount rate	PCBs	￦		(623	)		627			(527	)		530
	Nuclear plants			(256,513	)		263,595			(316,184	)		325,828
	Spent fuel			(49,182	)		51,098			(51,607	)		53,621
Inflation rate	PCBs			632			(629	)		534			(532	)
	Nuclear plants			294,984			(287,110	)		346,082			(336,182	)
	Spent fuel			51,837			(49,961	)		54,396			(52,424	)

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, 2018 and 2019 are as follows:


	Assets				Liabilities
Type	2018		2019		2018		2019
	In thousands of foreign currencies
AED		10,513		57,403		5,890		40,061
AUD		143		143		717,712		1,036,785
BDT		71,575		85,547		1,175		635
BWP		1,214		1,437		—		—
CAD		96		86		4		3,112
CHF		—		—		400,000		500,753
CNY		—		—		26,140		26,140
CZK		—		—		—		243
EUR		337		208		105,673		111,199
GBP		—		—		1		191
GHS		25,794		—		—		—
HKD		—		—		1,650,000		1,648,815
IDR		60,568		376,136		206,935		219,801
INR		1,228,795		1,244,170		183,963		210,232
JOD		2,764		1,516		5		147
JPY		35,935		109,970		390,921		314,402
KZT		319		319		—		—
MGA		3,318,447		3,858,201		170,641		133,403
MMK		25,208		29,651		—		—
PHP		709,285		175,210		66,985		130,073
PKR		305,542		354,361		3,588		4,366
SAR		2,024		2,653		—		480
SEK		—		—		450,000		449,072
USD		1,422,510		1,227,054		8,103,602		9,963,928
UYU		39,898		58,781		4,253		8,213
VND		—		418,998		—		1,375
ZAR		170		450		4		6

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, 2018 and 2019 are as follows:


		2018					2019
Type		10% Increase			10% Decrease		10% Increase			10% Decrease
		In millions of won
Increase (decrease) of profit before income tax	￦		(887,561	)		887,561		(1,197,530	)		1,197,530
Increase (decrease) of shareholder’s equity(*)			(887,561	)		887,561		(1,197,530	)		1,197,530

(*)

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, 2018 and 2019.

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, 2018 and 2019 are as follows:


Type		2018		2019
		In millions of won
Short-term borrowings	￦		24,235		—
Long-term borrowings			2,358,860		2,273,579
Debt securities			—		243,102

	￦		2,383,095		2,516,681

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, 2018 and 2019 are as follows:


		2018					2019
Type		1% Increase			1% Decrease		1% Increase			1% Decrease
		In millions of won
Increase (decrease) of profit before income tax	￦		(23,831	)		23,831		(25,167	)		25,167
Increase (decrease) of shareholder’s equity(*)			(23,831	)		23,831		(25,167	)		25,167

(*)

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, 2018 and 2019 are as follows:


		2018					2019
Type		1% Increase		1% Decrease			1% Increase		1% Decrease
		In millions of won
Increase (decrease) of profit before income tax	￦		568,420		(568,420	)		559,390		(559,390	)
Increase (decrease) of shareholder’s equity(*)			568,420		(568,420	)		559,390		(559,390	)

(*)

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, 2018 and 2019. 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.


		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


		2019
Type		Less than 1 year		1~2 Years		2~5 Years		More than 5 years		Total
		In millions of won
Borrowings and debt securities	￦		10,660,737		10,997,510		27,881,873		30,859,669		80,399,789
Lease liabilities			686,445		617,449		1,717,434		2,735,681		5,757,009
Trade and other payables			6,014,054		382,809		971,469		1,176,697		8,545,029
Financial guarantee contracts(*)			937,091		302,186		32,314		2,066,975		3,338,566

	￦		18,298,327		12,299,954		30,603,090		36,839,022		98,040,393

(*)

This represents the total guarantee amounts associated with the financial guarantee contracts. Financial guarantee liabilities which are recognized as of December 31, 2018 and 2019 are ￦15,586 million and ￦81,357 million, respectively.

The expected maturities for non-derivative financial assets as of December 31, 2018 and 2019 in detail are as follows:


		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
Financial assets 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


		2019
Type		Less than 1 year		1~5 Years		More than 5 years		*Other()**		Total
		In millions of won
Cash and cash equivalents	￦		1,810,129		—		—		—		1,810,129
Financial assets at fair value through other comprehensive income			—		—		—		379,170		379,170
Financial assets at amortized cost			12,302		1,307		—		—		13,609
Loans			64,081		346,583		336,502		27,606		774,772
Long-term/short-term financial instruments			1,351,971		269,863		—		338,393		1,960,227
Financial assets at fair value through profit or loss			131,385		79		—		615,797		747,261
Trade and other receivables			7,703,746		980,951		818,431		207,979		9,711,107

	￦		11,073,614		1,598,783		1,154,933		1,568,945		15,396,275

(*)

The maturities cannot be presently determined.

Derivative liabilities classified by maturity periods which from reporting date to maturity dates as per the contracts as of December 31, 2018 and 2019 are as follows:


		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


		2019
Type		Less than 1 year			1~2 Years			2~5 Years			More than 5 years			Total
		In millions of won
Net settlement
—Trading	￦		(3,017	)		—			—			—			(3,017	)
Gross settlement
—Trading			(15,011	)		(8,295	)		(39,654	)		4,235			(58,725	)
—Hedging			(59,846	)		(21,466	)		(1,914	)		(33,588	)		(116,814	)

	￦		(77,874	)		(29,761	)		(41,568	)		(29,353	)		(178,556	)

(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 are estimated by discounting the 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, 2018 and 2019 are as follows:


		2018				2019
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		379,170		379,170
Derivative assets (trading)			37,631		37,631		165,204		165,204
Derivative assets (applying hedge accounting)			64,704		64,704		145,829		145,829
Financial assets at fair value through profit or loss			920,935		920,935		747,261		747,261

	￦		1,422,765		1,422,765		1,437,464		1,437,464

Assets carried at amortized cost
Financial assets at amortized cost	￦		14,042		14,042		13,609		13,609
Loans and receivables			718,674		718,674		738,707		738,707
Long-term financial instruments			448,741		448,741		608,256		608,256
Short-term financial instruments			1,869,286		1,869,286		1,351,971		1,351,971
Trade and other receivables			9,613,437		9,613,437		9,703,749		9,703,749
Cash and cash equivalents			1,358,345		1,358,345		1,810,129		1,810,129

	￦		14,022,525		14,022,525		14,226,421		14,226,421

Liabilities recognized at fair value
Derivative liabilities (trading)	￦		99,010		99,010		53,147		53,147
Derivative liabilities (applying hedge accounting)			213,153		213,153		116,813		116,813

	￦		312,163		312,163		169,960		169,960

Liabilities carried at amortized cost
Secured borrowings	￦		741,029		741,029		227,135		227,135
Unsecured bond			56,603,988		58,804,070		63,171,664		66,917,421
Lease liabilities			—		—		5,070,133		5,070,133
Finance lease liabilities			283,806		283,806		—		—
Unsecured borrowings			3,522,602		3,950,517		4,104,523		4,113,955
Trade and other payables(*)			9,063,285		9,063,285		8,545,029		8,545,029
Bank overdraft			167,008		167,008		373,219		373,219

	￦		70,381,718		73,009,715		81,491,703		85,246,892

(*)

Excludes lease liabilities (current year) and finance lease liabilities (prior year)

(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, 2018 and 2019 are as follows:


Type	2018		2019
Derivatives		0.02% ~ 4.16%		0.01% ~ 4.16%
Borrowings and debt securities		0.51% ~ 5.14%		0.17% ~ 3.90%
Lease		3.50% ~ 10.83%		1.38% ~ 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, 2018 and 2019 are as follows:


		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


		2019
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	￦		201,202		—		177,968		379,170
Derivative assets			—		308,399		2,634		311,033
Financial assets at fair value through profit or loss			—		742,105		5,156		747,261

	￦		201,202		1,050,504		185,758		1,437,464

Financial liabilities at fair value
Derivative liabilities	￦		—		169,960		—		169,960

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, 2018 and 2019 are as follows:


		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


		2019
		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	￦		5,052		—		40		—		64		—			—		5,156
Financial assets at fair value through other comprehensive income
Unlisted securities			189,439		—		1,876		—		3,715		(19,315	)		2,253		177,968