Samsung, SK hynix reject KEPCO's $18 billion prepayment plan

Korea Electric Power Corp. asked Samsung Electronics and SK hynix to prepay five years of electricity bills. Both said no.

Samsung Electronics and SK hynix rejected KEPCO's proposal that they prepay a combined 25 trillion won, roughly 18 billion dollars, to finance the transmission lines and substations needed to power new semiconductor clusters in Yongin, south of Seoul, and the Honam region. Samsung's share was about 20 trillion won and SK hynix's about 5 trillion won, amounts equal to roughly five years of the bills each paid last year. "The companies have ultimately rejected Kepco's proposal," a KEPCO spokesman said in a text message to Bloomberg.

The refusal appears in a written response KEPCO submitted to Rep. Lee Chul-gyu of the People Power Party, a member of the National Assembly's Climate, Energy, Environment and Labor Committee. The utility said the companies replied that participation would be difficult after internal review. It also said no company other than Samsung and SK hynix had been offered the prepayment option and no company had been designated as a future candidate for one.

The plan, on KEPCO's own account, was not a pilot with a queue of other industrial customers behind it. It was these two, or nobody.

KEPCO delivered the proposal on July 9, and Samsung communicated its refusal through a vice president-level executive on Sept. 9, Chosun Ilbo reported. The terms were not punitive: the 25 trillion won would have been paid in monthly installments across about a year, with KEPCO paying interest above the yield on two-year government bonds, and principal and interest deducted from the companies' electricity bills every six months. Both chipmakers reviewed the offer favorably on its merits, according to Chosun, because it raised the odds of getting power to the Yongin and Honam clusters on schedule.

The constraint was the five-year bet embedded in the structure. A company official in Seoul, speaking anonymously, told Reuters the firms were unsure such large upfront payments were necessary, citing uncertainty over the long-term durability of semiconductor demand.

Demand was not the only pressure in the background. Citigroup recently cut its third-quarter operating profit forecast for Samsung Electronics by about 10 percent, from 115.5 trillion won to 104.1 trillion won, and for SK hynix by about 3 percent, from 76.7 trillion won to 74 trillion won, citing the burden of a strengthening won, the Korea JoongAng Daily reported. Exporters selling in dollars see won revenue shrink as the currency firms.

The scale of what KEPCO is trying to wire explains why it went looking for customer money in the first place. LS Securities estimates three mega-projects will require 39.7 gigawatts in total: 15 GW for the Yongin semiconductor cluster, 18.4 GW for AI data centers and 6.3 GW for the Honam cluster, according to Seoul Economic Daily. LS Securities projects KEPCO's operating cash flow at 18.19 trillion won this year against 18.93 trillion won of tangible and intangible asset investment, with total borrowings around 130 trillion won by year end. Total liabilities stood at 210.7 trillion won at the end of June, with daily interest expenses of about 11.5 billion won.

Borrowing more is the obvious fallback, and it is the one with a clock on it. KEPCO's bond issuance ceiling is, in principle, twice the sum of its capital and reserves. After the losses of 2022, the KEPCO Act was revised to allow up to five times, and six times in urgent cases, but that exemption expires at the end of 2027, after which the two-times limit returns. The utility issued 12.21 trillion won of bonds through the end of August, at August yields of 4.00 percent for two-year notes, 4.22 percent for three-year and 4.41 percent for five-year paper.

That leaves three routes to the same money: rate increases, outside capital, or more debt against a ceiling that is scheduled to drop. A KEPCO official told Seoul Economic Daily the utility is monitoring its bond issuance limit under various scenarios given external volatility including the Middle East conflict, and plans to pursue countermeasures that minimize the burden on the public.

Nothing about the rejection reduces the requirement. The fabs still need multi-gigawatt connections, and KEPCO is the only supplier there is.