Unable to Cover Interest Expense with Profits
One out of three South Korea’s state-run companies cannot even cover its interest expense with their profits. In particular, the number of companies with a times interest earned (TIE) ratio of below 1 has sharply increased following the incumbent government’s push to phase out nuclear power generation. This is because the business performance of energy related public enterprises, including Korea Electric Power Corp. (KEPCO), has dramatically gotten worse due to the nuclear phase-out policy.
The TIE ratio of four out of 12 state-owned firms, which submitted a business report and audit report last year, fell short of 1, according to the Financial Supervisory Service on April 24. They include KEPCO, Korea East-West Power Co. (EWP), Korea Midland Power Co. (KMP) and Korea District Heating Corp. (KDHC). The TIE ratio, also referred to as the interest coverage ratio, is a measure of a company's ability to meet the interest payments on its debt. It is calculated by dividing income before interest and income taxes by interest expense. The TIE ratio of less than 1 indicates that a business may not be in a position to pay its interest obligations.
Over the past three years, there had been no state-run firm which had a TIE ratio below 1, but such firms mushroomed last year. Notably, public energy companies, including KEPCO, could not even cover their interest expense with profits due to a poor performance after the government’s nuclear phase-out policy.
KEPCO had an operating loss of 208 billion won (US$180.71 million) last year, but its interest expense increased by 4.4 percent to 1.87 trillion won (US$1.62 billion) during the same period.
EWP, KMP and KDHC also saw their TIE ratio fall below 1 over the same period. The ratio of EWP, the KMP and KDHC stood at 0.6, 0.2 and 0.3, respectively. Out of the three, EWP and KMP are KEPCO subsidiaries. As KEPCO made a loss for the first time in six years, the subsidiaries have shouldered the financial burden as well. EWP and KMP posted 58.60 billion won (US$50.91 million) and 22.10 billion won (US$19.20 million) in operating profit last year, respectively, recording a whopping 86.1 percent and 88.7 percent drop from a year ago. However, their interest expense grew by 7 percent and 68.1 percent to 106 billion won (US$92.09 million) and 128 billion won (US$111.21 million), respectively. KDHC saw its operating profit fall by 87.9 percent to 14.50 billion won (US$12.60 million) compared to a year earlier, while its interest expense rose by 28.2 percent to 57.60 billion won (US$50.04 million).
This is because the government’s nuclear phase-out policy has reduced the amount of nuclear power generation and boosted the amount of expensive liquefied natural gas (LNG) and coal-fired power generation, leading to a sharp increase in material costs and operating expenses, including the cost to meet renewable energy supply obligations. The operating profit of the nation’s five state-owned energy firms under KEPCO, including KMP, EWP, Korea Western Power Co., Korea South-East Power Co. and Korea Southern Power Co., came to 565.30 billion won (US$491.14 million) last year, down 82 percent from two years ago and 63 percent from a year ago, according to their data submitted to Yoon Han-hong of the main opposition Liberty Korea Party (LKP). The five firms saw their operating profit increase every year from 2014 to 2016 but the profit size has been on the decline since 2017 when the government adopted the nuclear phase-out policy.
The problem is that they do not have enough cash to pay interest expense. The cashable asset of seven out of 12 major public companies decreased last year. The KEPCO’s cashable asset stood at 1.36 trillion won (US$1.18 billion), falling short of its interest expenses. Furthermore, the EWP, the KMP and the KDHC all had less cashable assetat 37.2 billion won (US$32.32 million), 77.50 billion won (US$67.33 million) and 8.10 billion won (US$7.04 million), respectively, than their interest expenses. However, their business performance is expected to get worse further as the government has come up with plans to limit the output of coal-fired power and shut down old coal-fired power plants early as part of measures for fine dust.