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, 2006
Business Overview: KEPCO is a statutory juridical corporation and the principal electricity generator, transmitter, and distributor in the Republic of Korea. The company operates under a government-mandated restructuring plan that spun off generation assets into six wholly-owned subsidiaries in 2001. The government maintains a controlling interest (51.07% as of June 2007) through direct ownership and Korea Development Bank. KEPCO is subject to significant government regulation regarding electricity rates, capital investment, and operational policies.

Key Financial Metrics (2006)

Note: US$ amounts are translated at the rate of 930.00 Won to US$1.00 (December 31, 2006 noon buying rate).

Material Changes vs. Prior Period (2005)

• Revenue Growth: Operating revenues increased by 7.7% (from 25,445 billion Won to 27,409 billion Won), driven primarily by a 4.9% increase in electricity sales volume and a 2.8% average tariff increase implemented in late 2005.
• Profit Decline: Despite revenue growth, Net Income decreased by 7.6% (from 2,408 billion Won to 2,226 billion Won). Operating Income fell 13.4% due to a disproportionate rise in operating expenses.
• Cost Pressures: Operating expenses rose 11.6%, largely due to an 18.1% increase in fuel costs (from 7,568 billion Won to 8,938 billion Won). Fuel costs represented 37.2% of operating expenses in 2006, up from 35.2% in 2005, driven by higher global prices for oil, LNG, and coal.
• Non-Operating Items: Net non-operating loss improved significantly to 6 billion Won in 2006 from a loss of 90 billion Won in 2005, primarily due to a 40.4% increase in foreign currency transaction gains (benefiting from Won appreciation) which offset valuation losses on currency swaps.
• Working Capital: The company moved from a working capital deficit of 130 billion Won in 2005 to a surplus of 171 billion Won in 2006, aided by increased cash equivalents.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Fuel Price Sensitivity: Management expects fuel prices to remain at record highs throughout 2007. Consequently, operating income and net income are projected to decrease significantly in 2007 compared to prior periods, as the ability to pass cost increases to customers is limited by government-regulated rates.
• Capital Investment: Capital expenditures are estimated to be approximately 10.7 trillion Won in both 2007 and 2008 to fund the construction of new generation units (nuclear, coal, LNG) and transmission/distribution expansion under the Third Basic Plan.
• Dividends: A dividend of 621 billion Won related to 2006 income was declared and paid in April 2007.

Key Risks and Contingencies

• Regulatory and Restructuring Risk: The government's restructuring plan and potential future privatization of generation subsidiaries could materially alter the business environment. The plan to privatize distribution subsidiaries was suspended in favor of internal "strategy business units."
• Fuel Price Volatility: Substantially all fuel (except anthracite coal) is imported in foreign currencies. Increases in global fuel prices and depreciation of the Won against the US dollar significantly impact profitability.
• North Korea Tensions: Geopolitical tensions with North Korea pose risks to regional stability and could adversely affect the company's operations and the market value of its securities.
• Nuclear Safety and Decommissioning: Operations involve inherent nuclear risks. The company has recorded a liability of 7,543 billion Won for decommissioning costs. A permanent storage facility for low and intermediate-level radioactive waste is under construction in Gyeongju, with operations expected to begin in 2010.
• Legal Proceedings: As of December 31, 2006, the company was a defendant in 325 lawsuits with total claims of 409 billion Won. Management believes the outcome will not have a material adverse effect.

Investor Verification Checklist

• Fuel Cost Pass-Through: Verify the timeline and magnitude of future electricity rate adjustments approved by the Ministry of Commerce, Industry and Energy (MOCIE) to offset rising fuel costs.
• Won Exchange Rate Exposure: Assess the impact of Won depreciation on the company's foreign currency-denominated debt (approx. 30% of total debt) and fuel import costs.
• Privatization Progress: Monitor the status of the privatization of non-nuclear generation subsidiaries (e.g., KOSEP) and the potential impact on consolidated financials.
• Nuclear Decommissioning Liability: Review updates on the engineering studies and discount rates used to calculate the 7.5 trillion Won decommissioning liability.
• Capital Expenditure Execution: Track the actual capital spending against the budgeted 10.7 trillion Won for 2007-2008 to ensure alignment with the Third Basic Plan.