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KOGAS Additional Discussion Report: Tariff Pass-Through and Under-Collected Gas Costs

KOGAS Additional Discussion Report: Tariff Pass-Through and Under-Collected Gas Costs

1. Purpose and Treatment

This report is a supplemental report that connects the user-provided discussion on KOGAS’s tariff structure and 2026 pass-through conditions with the context of the existing reports. The numerical figures, media-based information, LNG spot prices, and detailed tariff schedule items discussed here have not been re-verified against primary sources in this work. Accordingly, this report separates “context already confirmed in existing reports” from “additional claims and estimates raised in the discussion.”

The core view confirmed in the existing KOGAS issuer summary and the 1Q 2026 issuer flash remains unchanged. KOGAS is a core government-related natural gas infrastructure issuer in Korea, responsible for LNG imports, receiving terminals, regasification, storage, the nationwide pipeline network, and wholesale supply to city gas companies and power plants. The tariff framework and expectations of government support underpin its credit quality. At the same time, tariff pass-through is not fully automatic and can be delayed by the government’s consideration of inflation and household affordability. Such delays flow through to under-collected amounts, non-financial assets, operating cash flow, and financial debt.

2. Discussion Takeaway

The most important analytical takeaway from the discussion is that KOGAS’s pass-through should be separated into “regulatory recovery rights” and “near-term cash recovery.” At the institutional level, there is a cost-recovery framework under which raw material costs, supply costs, and a guaranteed return are reflected in tariffs. However, city gas tariffs for civil, residential, and heating use are politically prone to restraint. When LNG prices or FX rates move sharply, KOGAS is likely to bear raw material costs first and recover the difference through future tariffs.

In 1Q 2026, under-collected amounts for civil city gas decreased by approximately KRW 493bn, from KRW 13.8649tn at end-2025 to KRW 13.3717tn at end-March 2026. This indicates that at least part of the past under-collected balance is being recovered. However, this does not mean “full immediate pass-through” or that the under-collected cost problem has been resolved. Under-collected amounts remain in the KRW 13tn range, and reported borrowings also exceed KRW 35tn. From a credit perspective, the improvement in 1Q is positive, but it is still necessary to monitor how LNG prices, oil-linked contracts, USD/KRW, and the government’s residential tariff decisions move in 2H 2026.

If the discussion is rounded into credit report language, KOGAS’s tariff pass-through is “working, but not clean.” Raw material cost pass-through may have started to occur relatively quickly for power generation, industrial, and commercial use, while meaningful recovery of the civil under-collected balance, which is central to KOGAS’s financial constraints, is difficult to confirm without actual increases in residential tariffs.

3. Discussion Notes

3.1 Regulatory context confirmed in existing reports

The existing issuer summary describes that MOTIE determines the unit supply margin after consultation with MOEF and KOGAS, and that KOGAS calculates the Formula Price by adding this supply margin to the unit raw material cost, which includes LNG costs, transportation costs, insurance, taxes, and provisions for the recovery of under-collected amounts. By design, the system is structured to recover reasonable supply costs, raw material costs, and a guaranteed return.

At the same time, the existing issuer summary treats the government’s authority to suspend periodic adjustments to selling prices as a KOGAS-specific credit constraint. Amounts that should have been recoverable under the Formula Price but could not be billed during such suspension periods are recorded as current or non-current non-financial assets, depending on the expected recovery timing. Therefore, under-collected amounts have characteristics closer to regulatory assets than ordinary trade receivables. They are recognised in accounting terms as assets recoverable in the future, but they have not been collected in cash, requiring KOGAS to bridge the funding gap through borrowings or bond issuance.

The 1Q 2026 issuer flash treated the approximately KRW 493bn reduction in under-collected amounts for civil city gas as a positive factor. However, the flash maintained the position that tariff recovery capacity should not be judged as structurally improved until operating cash flow, tariff revisions, continued reduction in under-collected amounts, and lower borrowings can be confirmed together.

3.2 Additional discussion point: AGT, IGT, and differences in recovery speed by use

The user-provided discussion presents a framework for viewing KOGAS’s tariffs through two systems: AGT and IGT. AGT is described as the existing average tariff system, under which the average procurement cost of all effective LNG sales and purchase agreements is reflected in customer tariffs. IGT is described as a system introduced for new power plants and similar customers from 2022 onward, linking specific LNG sales and purchase agreements with specific power plants. These AGT/IGT details are not yet reflected in the existing issuer summary in this work, and should be incorporated into permanent reports only after confirmation through official materials or GMTN documentation.

By use category, the discussion indicates the following differences in recovery speed. For power generation, industrial, and commercial use, raw material cost adjustments are relatively quick and are more likely to be reflected monthly. In contrast, civil, residential, and heating tariffs are normally adjusted every two months when raw material cost changes exceed a certain threshold, but because the government can suspend adjustments, they are more exposed to political restraint. This view is consistent with the core point in the existing issuer summary that pass-through is “not fully automatic.” However, the specific rules on two-month adjustments, the 3% trigger, and tariff revision rules by use category need to be checked against KOGAS’s official tariff schedule, MOTIE materials, and the GMTN offering circular at the next update.

3.3 Has pass-through started in 2026?

The discussion characterises the 2026 pass-through situation as “partly underway, but not yet meaningful for civil use.” This is a media-based understanding that tariffs were raised in April 2026 for power generation, commercial, industrial, and certain other uses, while civil and residential tariffs have largely been kept unchanged under the policy of restraining public utility charges.

When combined with the figures in the existing flash, this framework is useful in practice. The reduction in civil under-collected amounts in 1Q 2026 indicates that recovery of past balances has not completely stopped. However, if LNG procurement prices or won weakness re-emerge while residential tariffs do not rise meaningfully, the pace of recovery could slow in 2H 2026, or under-collected amounts could start increasing again. Therefore, the focus for 2026 is not only whether the balance decreased in 1Q, but also whether tariff decisions for civil use from July-August onward can avoid a renewed increase.

3.4 Price impact of “full pass-through”

The discussion estimates “full pass-through” in two ways. The first case reflects only the current raw material cost gap in residential tariffs. Based on the KOGAS official tariff schedule cited in the user-provided discussion, if the civil/residential raw material cost of KRW 17.712/MJ is aligned with the raw material cost for commercial, industrial, and other uses of KRW 19.6132/MJ, the difference is KRW 1.9012/MJ. Relative to the residential wholesale tariff of KRW 20.8495/MJ, this implies room for an increase of approximately 9.1%. This figure has not been verified in this work, and the June 2026 KOGAS tariff schedule and use classifications need to be checked directly at the next review.

The second case assumes the full short-term recovery of past under-collected amounts for civil use. Based on the past explanation in the discussion that a KRW 1/MJ tariff increase could recover approximately KRW 0.5tn, the discussion estimates that eliminating more than KRW 13tn of under-collected amounts at once would require an additional charge in the high KRW 20/MJ range, which could be more than double the current residential wholesale tariff. This estimate illustrates the scale of KOGAS’s under-collected balance in theoretical terms, but is politically and practically unrealistic. For credit analysis, the appropriate focus is not one-off recovery, but whether several rounds of tariff increases in the low single-digit to high single-digit percentage range can reduce the under-collected balance over several years.

This point illustrates why KOGAS should be assessed not only on “whether it can ultimately recover costs,” but also on “how quickly it can turn those recovery rights into cash.” Even if the regulatory recovery right is strong, slow recovery speed leaves a heavy burden on operating cash flow and interest-bearing debt.

3.5 View on LNG procurement costs and FX

The discussion notes that Asian LNG prices have risen from the beginning of 2026 to the current period, and that three factors—spot JKM, oil-linked LNG contracts, and USD/KRW—could push up KOGAS’s raw material costs. KOGAS’s procurement costs are not determined solely by spot JKM; they are affected by long-term contracts, oil linkage, procurement mix, FX rates, and transportation costs. Therefore, the rate of increase in JKM should not be mechanically applied to KOGAS’s entire procurement volume.

However, directionally, higher spot prices and won weakness increase the cost of additional procurement or short-term procurement and raise the won-denominated amount of USD LNG payments. If civil tariff revisions are delayed, these factors could drive a renewed expansion of under-collected amounts. At the next update, JKM, oil prices, USD/KRW, KOGAS tariff revisions, and non-financial asset balances need to be monitored together.

4. Monitoring / Next Check

At the next review, KOGAS’s pass-through should be analysed by use category, timing, and accounting line item. Even if tariff revisions progress for power generation, industrial, and commercial use, the stand-alone financial constraint will remain significant if under-collected amounts for civil use do not decline. Conversely, if residential tariffs are increased modestly but continuously, and under-collected amounts, non-financial assets, borrowings, and operating cash flow improve at the same time, the likelihood of normalisation in KOGAS’s stand-alone financial profile would increase.

Monitoring items include civil city gas tariff revisions in July-August 2026, civil under-collected amounts in 2Q and 3Q 2026, current and non-current non-financial assets, operating cash flow, borrowing balance, USD/KRW, oil-linked LNG prices, JKM, and MOTIE/MOEF public utility tariff policy. For possible inclusion in internal notes, the next data update should consider stating that “civil tariff revisions and the recovery pace of under-collected amounts should be treated as key confirmation points for KOGAS’s stand-alone financial normalisation in 2H 2026.”

5. Unverified / Pending Items

This report leaves the following points from the user-provided discussion as unverified items: the institutional details of AGT and IGT, the conditions for application to new power plants from 2022 onward, the two-month adjustment cycle and 3% trigger for civil tariffs, the specific provisions for the government’s authority to suspend adjustments, city gas wholesale tariffs by use category as of 1 June 2026, the recovery amount of under-collected costs per KRW 1/MJ tariff increase, media reports on tariff increases by use category in April 2026, the outlook for tariff adjustments in July-August 2026, and JKM or Asian LNG price data from FRED, Reuters, Trading Economics, or similar sources. These need to be verified against primary sources or reliable public sources at the next update.

In addition, the 1Q 2026 issuer flash has not directly confirmed operating cash flow. To treat improvement in KOGAS’s pass-through as a substantive credit improvement, it is necessary to confirm not only a reduction in under-collected amounts, but also operating cash flow, a decline in non-financial assets, lower borrowings, and reduced finance costs as a package.

6. Reference Context