Abstract:
Samsung Electronics and SK Hynix, South Korea's two major storage semiconductor giants, have officially rejected a huge advance payment plan proposed by South Korea's state-owned power giant Korea Electric Power Company (KEPCO). According to an official written response document disclosed by the office of Representative Lee Cheol-gyu of the Korean National Assembly’s Climate, Energy, Environment and Labor Committee, the two chip manufacturers made it clear after rigorous internal evaluation that they were unable to accept the proposal to prepay up to 25 trillion won (approximately US$18.7 billion) in electricity bills in advance to assist them in building transmission pipeline networks.
This highly unusual fundraising initiative is led by Korea Electric Power Company, which is in serious financial trouble. According to the plan, Korea Electric Power plans to use the actual power consumption scale of the two chip companies last year as the basis for calculation, requiring Samsung Electronics and SK Hynix to prepay approximately 20 trillion won and 5 trillion won respectively in advance, which is equivalent to a one-time advance for the next five years of electricity bills. In return and interest compensation, KEPCO promised to provide preferential interest rates higher than the two-year Korean government bond yield, and return the interest to the two companies by deducting the interest from the actual electricity bills every half year. KEPCO originally planned to use this huge advance payment exclusively to build a national backbone transmission network, focusing on ensuring the power load of the Yongin giant semiconductor industry cluster in southern Seoul and the ultra-large-scale wafer fab in Hunan.
However, the proposal sparked strong financial concerns within the two semiconductor giants. Industry insiders revealed that Samsung Electronics formally conveyed its rejection position to Korea Electric Power Co., Ltd. on September 9 by its vice president-level executives, and SK Hynix also made the same decision. The core reason for the rejection lies in the high cyclical volatility of the semiconductor industry. Although the current global artificial intelligence boom has boosted demand for cutting-edge memory chips such as high-bandwidth memory (HBM), no one can guarantee that this super boom cycle will continue smoothly for five years. In the face of highly uncertain future market trends, prematurely locking up tens of trillions of won in highly liquid cash reserves will bring an unbearable heavy burden to the company's cross-cycle mid- to long-term capital expenditures and free cash flow management. The two chip companies ultimately chose to prioritize avoiding uncontrollable operating risks rather than prematurely overdraft in exchange for speeding up power facilities.
Behind this unprecedented request for advance payment, it reflects the extremely serious debt crisis of Korea Electric Power Company. Due to the long-term high international fossil energy prices and the lag in adjustment of end-user and industrial electricity prices, as of the end of June this year, Korea Electric Power's total liabilities have expanded to 210.7 trillion won, and the financial interest expenses that need to be paid every day alone are as high as approximately 11.5 billion won. To make matters worse, the South Korean government has previously approved special relief clauses that temporarily increased its corporate bond issuance limit to 5 times the total capital and provident fund. It will officially expire at the end of next year, forcing it to urgently open new financing channels other than conventional bond issuance to fill the infrastructure gap. Korea Electric Power previously confirmed that it had not issued such prepayment requirements for electricity bills to other companies other than the two semiconductor giants.
South Korean energy and industry analysts pointed out that as the two largest industrial electricity customers officially closed the door to prepayment, KEPCO's plan to use customer prepayments to stabilize its reliance on bond issuance and promote power grid construction has encountered a major setback. In the future, Korea Electric Power will have to rely on its own meager cash flow and limited debt issuance quota to maintain operations, which will not only increase the difficulty of resolving its huge debt, but may also pose a potential risk of delay in the delivery of subsequent supporting power infrastructure for the Yongin Super Semiconductor Cluster, which South Korea has high hopes for.
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