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Risk Management

12 Months Ended

Dec. 31, 2020

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, 2019 and 2020 are as follows:


		2019			2020
		In millions of won
Total borrowings and debt securities	￦		67,876,541			69,724,581
Cash and cash equivalents			1,810,129			2,029,584

Net borrowings and debt securities			66,066,412			67,694,997

Total equity			68,889,649			70,666,846

Debt to equity ratio			95.90	%		95.79	%

(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, 2019 and 2020 are as follows:


		2019		2020
		In millions of won
Cash and cash equivalents	￦		1,810,129		2,029,584
Financial assets at fair value through profit or loss(*1)			747,261		1,808,404
Derivative assets (trading)			165,204		110,764
Financial assets at amortized cost			13,609		14,422
Loans			738,707		790,162
Long-term/short-term financial instruments			1,960,227		2,062,103
Derivative assets (applying hedge accounting)			145,829		55,649
Trade and other receivables			9,703,749		9,780,039
Financial guarantee contracts(*2)			3,338,566		3,224,696

(*1)

Equity investments held by the Company are excluded.

(*2)

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, 2019 and 2020 are as follows:


			2019						2020
Type	Accounts		1% Increase			1% Decrease			1% Increase			1% Decrease
			In millions of won
Future salary increases	Increase (decrease) in defined benefit obligation	￦		442,748			(386,147	)		488,087			(425,708	)
Discount rate	Increase (decrease) in defined benefit obligation			(402,099	)		475,765			(443,527	)		524,856

Changes of employee benefits assuming a 1% increase and decrease movements in discount rate on plan asset for the years ended December 31, 2019 and 2020 are ￦17,734 million and ￦20,960 million, respectively.

②

Provisions

Changes in provisions due to movements in underlying assumptions as of December 31, 2019 and 2020 are as follows:


Type	Accounts	2019			2020
PCBs	Inflation rate		1.09	%		1.06	%
	Discount rate		1.97	%		1.83	%
Nuclear plants	Inflation rate		1.10	%		1.07	%
	Discount rate		2.43	%		2.20	%
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, 2019 and 2020 are as follows:


			2019						2020
Type	Accounts		0.1% Increase			0.1% Decrease			0.1% Increase			0.1% Decrease
			In millions of won
Discount rate	PCBs	￦		(527	)		530			(292	)		293
	Nuclear plants			(316,184	)		325,828			(326,926	)		336,928
	Spent fuel			(51,607	)		53,621			(51,558	)		53,571
Inflation rate	PCBs			534			(532	)		295			(294	)
	Nuclear plants			346,082			(336,182	)		357,676			(347,450	)
	Spent fuel			54,396			(52,424	)		54,345			(52,375	)

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, 2019 and 2020 are as follows:


	Assets				Liabilities
Type	2019		2020		2019		2020
	In thousands of foreign currencies
AED		57,403		39,678		40,061		31,594
AUD		143		133		1,036,785		707,538
BDT		85,547		93,442		635		—
BWP		1,437		890		—		—
EGP		—		—		—		948
CAD		86		247		3,112		1,840
CHF		—		—		500,753		500,406
CNY		—		—		26,140		—
CZK		—		—		243		2,033
EUR		208		310		111,199		121,069
GBP		—		—		191		43
HKD		—		—		1,648,815		1,651,839
IDR		376,136		342,496		219,801		555,241
INR		1,244,170		1,231,895		210,232		155,134
JOD		1,516		1,673		147		—
JPY		109,970		825,269		314,402		484,585
KZT		319		1,510		—		—
MGA		3,858,201		5,645,349		133,403		—
MMK		29,651		11,032		—		—
PHP		175,210		191,122		130,073		104,161
PKR		354,361		371,328		4,366		12,222
SAR		2,653		2,178		480		—
SEK		—		—		449,072		449,824
USD		1,227,054		1,445,522		9,963,928		12,234,563
UYU		58,781		78,265		8,213		1,585
VND		418,998		672,563		1,375		—
ZAR		450		303		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, 2019 and 2020 are as follows:


		2019					2020
Type		10% Increase			10% Decrease		10% Increase			10% Decrease
		In millions of won
Increase (decrease) of profit before income tax	￦		(1,197,530	)		1,197,530		(1,336,821	)		1,336,821
Increase (decrease) of equity(*)			(1,197,530	)		1,197,530		(1,336,821	)		1,336,821

(*)

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, 2019 and 2020.

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 currency forward agreements.

There is an economic relationship between the hedged item and the hedging instrument as the terms of cross-currency swap agreement is consistent with the terms of expected transaction (repayment of foreign debt securities and others). The hedging ratio is 1:1 as the risk of cross-currency swap agreement matches the hedged instrument. As of December 31, 2020, the hedging instrument (cross-currency swap) hedges the risk of the hedged item(repayment of foreign debt securities and others).

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, 2019 and 2020 are as follows:


Type		2019		2020
		In millions of won
Short-term borrowings	￦		—		171,518
Long-term borrowings			2,273,579		2,191,322
Debt securities			243,102		250,968

	￦		2,516,681		2,613,808

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, 2019 and 2020 are as follows:


		2019					2020
Type		1% Increase			1% Decrease		1% Increase			1% Decrease
		In millions of won
Increase (decrease) of profit before income tax	￦		(25,167	)		25,167		(26,138	)		26,138
Increase (decrease) of shareholder’s equity (*)			(25,167	)		25,167		(26,138	)		26,138

(*)

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

The Company manages its interest rate risk by having a balanced portfolio of fixed and variable rate loans and borrowings. To manage this, the Company enters into interest rate swaps, in which it agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. The above analysis measures the interest rate risk before reflecting the hedge effect by related derivatives.

③

Electricity rates risk

Following the approval of the Ministry of Trade, Industry and Energy (MOTIE) on December 17, 2020, the Company has adopted a new pricing system, “the cost pass-through tariff system”, beginning January 1, 2021. Under the cost pass-through system, the electricity rates are not predetermined at fixed rates but change upon approval by Ministry of Trade, Industry and Energy (“MOTIE”) under Electric Utility Act of Korea.

The Company is exposed to electricity rates risk due to changes in government regulations and policies on national power supply schemes and electricity billing rates, in consideration of 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, 2019 and 2020 is as follows:


		2019					2020
Type		1% Increase		1% Decrease			1% Increase		1% Decrease
		In millions of won
Increase (decrease) of profit before income tax	￦		559,390		(559,390	)		557,310		(557,310	)
Increase (decrease) of shareholder’s equity(*)			559,390		(559,390	)		557,310		(557,310	)

(*)

The effect on the 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.


		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
Finance 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


		2020
Type		Less than 1 year		1~2 Years		2~5 Years		More than 5 years		Total
		In millions of won
Borrowings and debt securities	￦		12,413,346		10,919,041		24,778,020		34,215,888		82,326,295
Finance lease liabilities			614,442		569,161		1,564,377		2,461,557		5,209,537
Trade and other payables			5,679,856		373,907		894,903		1,167,171		8,115,837
Financial guarantee contracts (*)			926,244		348,860		26,230		1,923,362		3,224,696

	￦		19,633,888		12,210,969		27,263,530		39,767,978		98,876,365

(*)

This represents the total guarantee amounts associated with the financial guarantee contracts. Financial guarantee liabilities which are recognized as of December 31, 2019 and 2020 are ￦81,357 million and ￦66,354 million, respectively.

The following table shows the details of maturities of non-derivative financial liabilities as of December 31, 2019 and 2020. 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.

The expected maturities for non-derivative financial assets as of December 31, 2019 and 2020 in detail are as follows:


		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


		2020
Type		Less than 1 year		1~5 Years		More than 5 years		*Other ()**		Total
		In millions of won
Cash and cash equivalents	￦		2,029,584		—		—		—		2,029,584
Financial assets at fair value through other comprehensive income			—		—		—		358,559		358,559
Financial assets at amortized cost			13,149		1,265		8		—		14,422
Loans			78,805		385,571		325,212		31,506		821,094
Long-term/short-term financial instruments			1,483,482		252,349		386		325,886		2,062,103
Financial assets at fair value through profit or loss			1,196,101		—		2,690		682,591		1,881,382
Trade and other receivables			7,920,005		1,160,400		704,494		—		9,784,899

	￦		12,721,126		1,799,585		1,032,790		1,398,542		16,952,043

(*)

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, 2019 and 2020 are as follows:


		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	)


		2020
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			(12,777	)		(22,827	)		(118,704	)		(4,380	)		(158,688	)
—Hedging			(37,858	)		(39,528	)		(75,450	)		(55,208	)		(208,044	)

	￦		(50,635	)		(62,355	)		(194,154	)		(59,588	)		(366,732	)

Derivative assets classified by maturity periods which from reporting date to maturity dates as per the contracts as of December 31, 2019 and 2020 are as follows:


		2019
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			21		43,931		72,386		56,315		172,653
—Hedging			27,597		47,222		71,010		—		145,829
—Others			—		—		—		2,634		2,634

	￦		27,618		91,153		143,396		58,949		321,116


		2020
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			18,332		1,529		45,237		52,163		117,261
—Hedging			11,191		—		41,206		3,252		55,649

	￦		29,523		1,529		86,443		55,415		172,910

(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, 2019 and 2020 are as follows:


		2019				2020
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	￦		379,170		379,170		358,559		358,559
Derivative assets (trading)			165,204		165,204		110,764		110,764
Derivative assets (applying hedge accounting)			145,829		145,829		55,649		55,649
Financial assets at fair value through profit or loss			747,261		747,261		1,881,382		1,881,382

	￦		1,437,464		1,437,464		2,406,354		2,406,354

Assets carried at amortized cost
Financial assets at amortized cost	￦		13,609		13,609		14,422		14,422
Loans and receivables			738,707		738,707		790,162		790,162
Long-term financial instruments			608,256		608,256		578,621		578,621
Short-term financial instruments			1,351,971		1,351,971		1,483,482		1,483,482
Trade and other receivables			9,703,749		9,703,749		9,780,039		9,780,039
Cash and cash equivalents			1,810,129		1,810,129		2,029,584		2,029,584

	￦		14,226,421		14,226,421		14,676,310		14,676,310

Liabilities recognized at fair value
Derivative liabilities (trading)	￦		53,147		53,147		157,926		157,926
Derivative liabilities (applying hedge accounting)			116,813		116,813		207,193		207,193

	￦		169,960		169,960		365,119		365,119

Liabilities carried at amortized cost
Secured borrowings	￦		227,135		227,135		63,614		63,614
Unsecured bond			63,171,664		66,917,421		64,607,401		68,839,316
Lease liabilities			5,070,133		5,070,133		4,621,096		4,621,096
Unsecured borrowings			4,104,523		4,113,955		4,808,206		5,513,242
Trade and other payables (*)			8,545,029		8,545,029		8,115,837		8,115,837
Bank overdraft			373,219		373,219		245,360		245,360

	￦		81,491,703		85,246,892		82,461,514		87,398,465

(*)

Excludes 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, 2019 and 2020 are as follows:


Type	2019		2020
Derivatives		0.01% ~ 4.16%		(-) 0.73% ~ 3.08%
Borrowings and debt securities		0.17% ~ 3.90%		(-) 0.53% ~ 4.38%
Finance lease		1.38% ~ 10.83%		0.57% ~ 16.60%

(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, 2019 and 2020 are as follows:


		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


		2020
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	￦		194,670		—		163,889		358,559
Derivative assets			—		166,413		—		166,413
Financial assets at fair value through profit or loss			—		1,875,690		5,692		1,881,382

	￦		194,670		2,042,103		169,581		2,406,354

Financial liabilities at fair value
Derivative liabilities	￦		—		365,119		—		365,119

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, 2019 and 2020 are as follows:


		2019
		Beginning balance		Acquisitions		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


		2020
		Beginning balance		Acquisitions		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	￦		5,156		359		—		623			(446	)		—		5,692
Financial assets at fair value through other comprehensive income
Unlisted securities			177,968		2,900		—		(23,128	)		(1	)		6,150		163,889