KEP

Business Context and Reporting Period

Company: Korea Electric Power Corporation (KEPCO)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2003
Business Overview: KEPCO is the sole integrated electric utility in the Republic of Korea, responsible for the transmission and distribution of electricity and generating approximately 90% of the country's total electricity. The company operates under a government-mandated restructuring plan that split generation assets into six wholly-owned subsidiaries in 2001. As of the filing date, the government and the Korea Development Bank (KDB) collectively own approximately 54% of the company's capital stock.

Key Financial Metrics (Year Ended Dec 31, 2003)

Note: Significant differences between Korean GAAP and U.S. GAAP exist, primarily due to asset revaluation, treatment of foreign currency translation, and regulatory accounting. U.S. GAAP net income is significantly higher due to the reversal of certain Korean GAAP adjustments and the recognition of a cumulative effect of accounting changes regarding asset retirement obligations.

Material Changes vs. Prior Period (2002)

• Revenue Growth: Operating revenues increased by 6.6% (Korean GAAP) to Won 22,775 billion, driven by a 5.4% increase in electricity sales volume. This growth was partially offset by a 1.5% reduction in electricity rates implemented in March 2004 (effective for the period) and a rate adjustment in January 2003.
• Profit Decline: Net income decreased by 23.8% to Won 2,323 billion. This decline was primarily caused by a 10% increase in fuel costs and a 13% increase in labor costs, which outpaced revenue growth.
• Non-Operating Results: The company reported a net non-operating loss of Won 1,114 billion in 2003, compared to a gain of Won 124 billion in 2002. This shift was largely due to foreign exchange transaction and translation losses of Won 207 billion (vs. gains of Won 512 billion in 2002) and a significant decrease in gains on the disposal of investments.
• Capital Expenditures: Total capital expenditures were Won 6,782 billion in 2003, slightly higher than the Won 6,653 billion spent in 2002.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Fuel Price Impact: Management expects operating income and net income to decrease significantly in 2004 and beyond. Recent increases in bituminous coal and oil prices have had a material adverse effect on profitability. The company estimates that rising fuel costs will continue to pressure margins as the ability to pass these costs to customers is limited by government-regulated rates.
• Restructuring Status: In June 2004, the Ministry of Commerce, Industry and Energy (MOCIE) announced the suspension of the plan to form and privatize distribution subsidiaries. The privatization of non-nuclear generation subsidiaries remains in progress but has been delayed due to market conditions.
• Capital Requirements: The company anticipates substantial additional indebtedness will be required to refinance existing debt and fund capital expenditures for new generation plants. Capital expenditures are estimated at Won 8.1 trillion in 2004 and Won 9.0 trillion in 2005.

Material Risks and Contingencies

• Fuel Price Volatility: Approximately 30% of fuel requirements are purchased on the spot market. Soaring global coal and oil prices directly impact operating costs.
• Currency Risk: Approximately 36.2% of debt is denominated in foreign currencies (primarily USD and JPY), while revenues are in Won. Depreciation of the Won increases debt servicing costs and fuel import costs.
• Nuclear Safety and Regulation: The company operates 18 nuclear units. Incidents in late 2003 (Younggwang-5 and Younggwang-6) led to temporary shutdowns. While operations resumed in 2004, future accidents or regulatory suspensions could cause material revenue loss.
• Labor Unrest: Approximately 62.5% of employees in generation subsidiaries are unionized. Past strikes have occurred regarding privatization plans, and future labor unrest could disrupt power supply.
• Joint and Several Liability: KEPCO remains jointly and severally liable for approximately Won 3,090 billion of domestic debt of its generation subsidiaries until specific guarantees are provided.

Key Facts for Investor Verification

• GAAP Reconciliation: Verify the significant difference between Korean GAAP net income (Won 2.3 trillion) and U.S. GAAP net income (Won 4.6 trillion) to understand the impact of regulatory accounting and asset revaluation on reported profitability.
• Fuel Cost Pass-Through: Monitor the timeline and magnitude of government-approved rate adjustments to determine if they will offset the projected 2004 fuel cost increases.
• Debt Maturity Profile: Review the scheduled maturities of long-term debt, noting that Won 6,624 billion is due in 2004, requiring significant refinancing or cash flow management.
• Restructuring Timeline: Track the status of the privatization of generation subsidiaries (specifically KOSEP) and the potential impact of the suspended distribution privatization on future capital structure.
• Exchange Rate Sensitivity: Assess the impact of Won depreciation on the company's foreign currency-denominated debt and fuel import costs, as a 10% depreciation is estimated to decrease pre-tax income by over Won 700 billion.