Form 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 6-K

 


REPORT OF FOREIGN PRIVATE ISSUER

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the Month of October 2007

 


KOREA ELECTRIC POWER CORPORATION

(Translation of registrant’s name into English)

 


167, Samseong-dong, Gangnam-gu, Seoul 135-791, Korea

(Address of principal executive offices)

 


Indicate by check mark whether the registrant files or will

file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F    X          Form 40-F

Indicate by check mark if the registrant is submitting the Form 6-K in

paper as permitted by Regulation S-T Rule 101(b)(1):             

Indicate by check mark if the registrant is submitting the Form 6-K in

paper as permitted by Regulation S-T Rule 101(b)(7):             

Indicate by check mark whether the registrant by furnishing the

information contained in this form is also thereby furnishing the

information to the Commission pursuant to Rule 12g3-2(b) under the

Securities Exchange Act of 1934.

Yes                  No  X  

If “Yes” is marked, indicate below the file number assigned to the

registrant in connection with Rule 12g3-2(b): 82-            .

This Report of Foreign Private Issuer on Form 6-K is deemed filed for all purposes under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including by reference in the Registration Statement on Form F-3 (Registration No. 33-99550) and the Registration Statement on Form F-3 (Registration No. 333-9180).

 



KOREA ELECTRIC POWER CORPORATION

AND SUBSIDIARIES

Consolidated Financial Statements

(Unaudited)

As of June 30, 2006 and 2007


Korea Electric Power Corporation and Subsidiaries

Consolidated Balance Sheets

December 31, 2006 and June 30, 2007

(Unaudited)

(In millions of Korean Won and in thousands of U.S. dollars)

 

     Won     U.S. Dollars (note 2)  

Assets

   2006     2007     2006     2007  

Property, Plant and Equipment (notes 3 and 5):

        

Utility plant

   (Won) 95,803,562     98,122,521     $ 103,840,843     106,354,347  

Less: accumulated depreciation

     (34,839,815 )   (37,525,875 )     (37,762,643 )   (40,674,046 )

Less: construction grants

     (4,090,157 )   (4,352,389 )     (4,433,294 )   (4,717,525 )
                            
     56,873,590     56,244,257       61,644,906     60,962,776  

Construction in-progress

     8,393,339     9,892,807       9,097,484     10,722,748  

Less: construction grants

     —       (33 )     —       (36 )
                            
     65,266,929     66,137,031       70,742,390     71,685,488  
                            

Investments and others:

        

Long-term investment securities (note 6)

     1,730,270     1,780,175       1,875,428     1,929,520  

Long-term loans (notes 7 and 19)

     391,172     407,988       423,989     442,215  

Derivatives (note 21)

     2,248     634       2,436     687  

Intangibles, net (note 4)

     854,283     816,124       925,952     884,591  

Non-current deferred income tax assets

        

Other non-current assets (notes 8 and 16)

     399,259     449,320       432,754     487,015  
                            
     3,377,232     3,454,241       3,660,559     3,744,029  
                            

Current assets:

        

Cash and cash equivalents (note 16)

     1,845,892     1,539,446       2,000,751     1,668,595  

Trade receivables, less allowance for doubtful accounts of (Won) 50,173 in 2006 and (Won) 47,033 in 2007 (notes 16 and 26)

     2,396,648     2,221,222       2,597,711     2,407,568  

Other account receivables, less allowance for doubtful accounts of (Won) 9,871 in 2006 and (Won) 11,597 in 2007 (notes 16 and 26)

     359,372     269,377       389,521     291,976  

Short-term investment securities (note 6)

     15,239     26       16,517     28  

Short-term financial instruments (note 16)

     1,163,613     1,520,333       1,261,232     1,647,879  

Inventories (notes 5 and 9)

     2,098,976     2,318,248       2,275,066     2,512,734  

Derivatives (note 21)

     479,879     555.374       520,138     600,882  

Current deferred income tax assets

     230,376     178,215       249,703     193,166  

Other current assets (notes 7, 10 and 16)

     201,330     256,580       218,220     278,105  
                            
     8,791,325     8,857,821       9,528,859     9,600,933  
                            

Total assets

   (Won) 77,435,486     78,449,093     $ 83.931,808     85,030,450  
                            

(Continued)


Korea Electric Power Corporation and Subsidiaries

Consolidated Balance Sheets, Continued

December 31, 2006 and June 30, 2007

(Unaudited)

(In millions of Korean Won and in thousands of U.S. dollars, except share data)

 

     Won     U.S. Dollars (note 2)  

Liabilities and Shareholders’ Equity

   2006     2007     2006     2007  

Stockholders’ equity:

        

Common stock of (Won) 5,000 par value Authorized - 1,200,000,000 shares Issued and outstanding - 641,567,712 shares

   (Won) 3,207,839     3,207,839     $ 3,476,955     3,476,955  

Capital surplus (note 11)

     14,517,143     14,514,307       15,735,035     15,731,961  

Retained earnings (note 12)

     26,118,850     26,413,839       28,310,048     28,629,784  

Capital adjustments (note 13); Treasury stock

     (796,980 )   (791,104 )     (863,841 )   (857,476 )

Accumulated other comprehensive income (note 13)

     37,895     56,658       41,074     61,411  

Minority interest in consolidated Subsidiaries

     150,740     154,028       163,386     166,950  
                            

Total shareholders’ equity

     43,235,487     43,555,567       46,862,657     47,209,585  
                            

Long-term liabilities:

        

Long-term borrowings (notes 15 and 26)

     15,427,624     14,359,120       16,721,899     15,563,755  

Reserve for retirement and severance benefits, net (note 17)

     1,184,249     1,247,970       1,283,600     1,352,666  

Liability for decommissioning cost (note 18)

     7,543,491     7,849,745       8,176,340     8,508,286  

Reserve for self-insurance

     103,942     103,298       112,662     111,964  

Derivatives (note 21)

     252,523     249,722       273,708     270,672  

Non-current deferred income tax liabilities

     547,672     546,604       593,618     592,460  

Other long-term liabilities (note 28)

     519,821     417,000       563,430     451,984  
                            
     25,579,322     24,773,459       27,725,257     26,851,787  
                            

Current liabilities:

        

Trade payables (notes 16 and 26)

     1,172,000     1,034,029       1,270,323     1,120,777  

Other accounts payable (notes 16 and 26)

     874,759     592,468       948,145     596,268  

Short-term borrowings (notes 14 and 26)

     476,720     558,136       516,714     604,960  

Current portion of long-term debt (note 15)

     4,221,171     5,674,291       4,575,299     6,196,230  

Income tax payable

     881,855     1,134,575       955,837     1,229,758  

Accrued expenses (note 16)

     293,484     293,097       318,105     317,686  

Dividends payable

     3,075     2,651       3,333     2,873  

Derivatives (note 21)

     6,738     112,188       7,303     —    

Other current liabilities (notes 16 and 20)

     690,875     718,632       748,835     900,520  
                            
     8,620,677     10,120,067       9,343,894     10,969,072  
                            

Total liabilities

     34,199,999     34,893,526       37,069,151     37,820,859  
                            

Commitments and contingencies (note 28)

     —       —         —       —    
                            

Total shareholders’ equity and liabilities

   (Won) 77,435,486     78,449,093     $ 83.931,808     85,030,444  
                            

See accompanying notes to consolidated financial statements.


Korea Electric Power Corporation and Subsidiaries

Consolidated Statements of Income

For the six-month periods ended June 30, 2006 and 2007

(Unaudited)

(In millions of Korean Won and in thousands of U.S. dollars, except earnings per share)

 

     Won     U.S. Dollars (note 2)  
     2006     2007     2006     2007  

Operating revenues:

        

Sale of electricity (note 26)

   (Won) 12,718,586     13,482,856     $ 13,785,591     14,613,978  

Other operating revenues

     277,906     309,225       301,220     335,167  
                            
     12,996,492     13,792,081       14,086,811     14,949,145  
                            

Operating expenses (notes 22, 23 and 26):

        

Power generation, transmission and distribution

     10,616,248     11,275,718       11,506,881     12,221,676  

Other operating costs

     142,411     195,654       154,358     212,068  

Selling and administrative expenses

     732,331     701,261       793,769     760,092  
                            
     11,490,990     12,172,633       12,455,008     13,193,836  
                            

Operating income

     1,505,502     1,619,448       1,631,804     1,755,309  

Other income (expense):

        

Interest income

     66,555     88,525       72,138     95,952  

Interest expense

     (360,171 )   (345,562 )     (390,387 )   (374,552 )

Gain (loss) on foreign currency transactions and translation, net

     246,295     10,804       266,958     11,710  

Donations (note 30)

     (8,637 )   (61,223 )     (9,362 )   (66,359 )

Equity income of affiliates, net (note 6)

     64,973     80,140       70,424     86,863  

Gain (loss) on disposal of utility plant, net

     (1,655 )   9,535       (1,794 )   10,335  

Valuation gain on currency and interest rate swaps, net (note 21)

     (145,985 )   (30,904 )     (158,232 )   (33,497 )

Other, net

     92,701     142,872       100,478     154,858  
                            
     (45,924 )   (105,813 )     (49,777 )   (114,690 )
                            

Ordinary income

     1,459,578     1,513,635       1,582,027     1,640,619  

Income tax expense (note 24)

     (509,240 )   (580,493 )     (551,962 )   (629,192 )
                            

Income before minority interest

     950,338     933,142       1,030,065     1,011,427  

Minority interest in earnings of consolidated subsidiaries

     (11,802 )   (17,072 )     (12,792 )   (18,504 )
                            

Net income

   (Won) 938,536     916,070     $ 1,017,273     992,922  
                            

Basic earnings per share (note 25)

   (Won) 1,473     1,474     $ 1.60     1.60  
                            

Diluted earnings per share (note 25)

   (Won) 1,466     1,446     $ 1.59     1.57  
                            

See accompanying notes to consolidated financial statements.


Korea Electric Power Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity

For the six-month periods ended June 30, 2006 and 2007

(Unaudited)

(In millions of Korean Won and in thousands of U.S. dollars)

 

     Won  
    

Common

stock

  

Capital

surplus

   

Retained

earnings

   

Capital

adjustments

   

Accumulated

Other

Comprehensive

income

   

Minority

interest

    Total  

Balances at January 1, 2006

   (Won) 3,207,839    14,421,065     24,626,421     (118,293 )   53,556     147,062     42,337,650  

Net income

     —      —       938,535     —       —       —       938,535  

Dividends declared

     —      —       (731,535 )   —       —       —       (731,535 )

Issuance of common stock for convertible bond

     —      3,870     —       —       —       —       3,869  

Gain on disposal of treasury stock, net of tax

     —      7,072     —       —       —       —       7,072  

Change in retained earnings of subsidiaries

     —      —       (1,648 )   —       —       —       (1,648 )

Changes in treasury stock

     —      —       —       13,742     —       —       13,742  

Changes in unrealized losses on available-for-sale securities

     —      —       —       —       (574 )   —       (574 )

Changes in unrealized losses on investments in affiliates

     —      —       —       —       2,186     —       2,186  

Changes in translation Adjustments of foreign subsidiaries

     —      —       —       —       (17,542 )   —       (17,542 )

Changes in losses on valuation of derivatives

     —      —       —       —       (33,766 )   —       (33,766 )

Changes in minority interests

     —      —       —       —         (1,220 )   (1,220 )

Other

     —      (55 )   52     —       —       —       (3 )
                                           

Balances at June 30, 2006

   (Won) 3,207,839    14,431,952     24,831,825     (104,551 )   3,861     145,842     42,516,767  
                                           

Balances at January 1, 2007

   (Won) 3,207,839    14,517,143     26,118,850     (796,980 )   37,895     150,740     43,235,487  

Net income

     —      —       916,070     —       —       —       916,070  

Dividends declared

     —      —       (621,081 )   —       —       —       (621,081 )

Issuance of common stock for convertible bond

     —      (9,903 )   —       —       —       —       (9,903 )

Gain on disposal of treasury stock, net of tax

      19,809     —       —       —       —       19,809  

Changes in treasury stock

     —      —       —       5,876         5,876  

Changes in unrealized losses on available-for-sale securities

     —      —       —         4,408     —       4,408  

Changes in unrealized losses on investments in affiliates

     —      —       —         1,461     —       1,461  

Changes in translation Adjustments of foreign subsidiaries

     —      —       —       —       8,959     —       8,959  

Changes in losses on valuation of derivatives

     —      —       —       —       3,937     —       3,937  

Changes in minority interests

     —      —       —       —       —       3,288     3,288  

Other

     —      (12,742 )     —       —       —       (12,742 )
                                           

Balances at June 30, 2007

   (Won) 3,207,839    14,514,307     26,413,839     (791,104 )   56,660     154,028     43,555,569  
                                           

U.S. dollars (note 2)

   $ 3,476,955    15,731,961     28,629,784     (857,472 )   61,413     166,950     47,209,591  
                                           

See accompanying notes to consolidated financial statements.


Korea Electric Power Corporation and Subsidiaries

Consolidated Statements of Cash Flows

For the six-month periods ended June 30, 2006 and 2007

(Unaudited)

(In millions of Korean Won and in thousands of U.S. dollars)

 

     Won     U.S. Dollars (note 2)  
     2006     2007     2006     2007  

Cash flows from operating activities:

        

Net income

   (Won) 938,536     916,070     $ 1,017,273     992,922  

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

     2,769,671     2,744,132       3,002,028     2,974,346  

Amortization of nuclear fuel and heavy water

     41,549     40,980       45,035     44,418  

Utility plant removal cost

     91,898     121,129       99,608     131,291  

Provision for severance and retirement benefits

     105,445     89,649       114,291     97,170  

Provision for decommissioning costs

     162,498     174,763       176,131     189,424  

Bad debt expense

     15,287     6,991       16,569     7,577  

Interest expense, net

     12,158     22,343       13,178     24,217  

Gain on foreign currency translation, net

     (216,914 )   (14,297 )     (235,112 )   (15,496 )

Equity income of affiliates, net

     (64,973 )   (80,139 )     (70,424 )   (86,862 )

Gain (loss) on disposal of utility plant, net

     1,655     (6,713 )     1,794     (7,276 )

Deferred income tax expense (benefit), net

     (87,360 )   171,644       (94,689 )   186,044  

Valuation loss (gain) on currency and interest rate swaps

     145,985     (30,903 )     158,232     (33,496 )

Changes in assets and liabilities:

        

Decrease in trade receivables

     368,449     325,345       399,359     352,640  

Decrease in other accounts receivable

     73,844     267,373       80,039     289,804  

Increase in inventories

     (255,700 )   (427,286 )     (277,152 )   (463,132 )

Increase in other current assets

     (219,543 )   (75,686 )     (237,961 )   (82,036 )

Decrease in trade payables

     (491,996 )   (141,969 )     (533,271 )   (153,879 )

Decrease in other accounts payable

     (525,027 )   (516,009 )     (569,073 )   (559,299 )

Increase in income tax payable

     26,213     237,844       28,412     257,798  

Decrease in accrued expenses

     10,473     1,934       11,352     2,096  

Decrease in other current liabilities

     (3,315 )   (37,610 )     (3,593 )   (40,765 )

Decrease in other long-term liabilities

     (7,385 )   (18,977 )     (8,005 )   (20,569 )

Payment of severance and retirement benefits

     (17,895 )   (29,942 )     (19,396 )   (32,454 )

Payment of decommissioning costs

     (6,222 )   (2,632 )     (6,744 )   (2,853 )

Payment of self-insurance

     (895 )   (644 )     (970 )   (698 )

Other, net

     79,237     (33,132 )     85,884     (35,912 )
                            

Net cash provided by operating activities

     2,945,673     3,704,258       3,192,795     4,015,020  
                            

(Continued)


Korea Electric Power Corporation and Subsidiaries

Consolidated Statements of Cash Flows, Continued

For the six-month periods ended June 30, 2006 and 2007

(Unaudited)

(In millions of Korean Won and in thousands of U.S. dollars)

 

     Won     U.S. Dollars (note 2)  
     2006     2007     2006     2007  

Cash flows from investing activities:

        

Proceeds from disposal of utility plant

   (Won) 19,531     16,707     21,170     18,109  

Additions to utility plant

     (3,023,869 )   (3,861,031 )   (3,277,551 )   (4,184,946 )

Receipt of construction grants

     401,166     460,428     434,821     499,055  

Proceeds from disposal of investment securities,

     50,808     64,694     55,070     70,121  

Acquisition of investment securities

     (46,058 )   (415 )   (49,922 )   (450 )

Decrease in long-term loans

     (44,270 )   22,676     (47,984 )   24,578  

Acquisition of intangibles

     (28,140 )   (61,756 )   (30,501 )   (66,937 )

Decrease (increase) in other non-current assets

     3,335     (21,017 )   3,615     (22,780 )

Acquisition of financial instruments, net

     (146,695 )   (356,704 )   (159,002 )   (386,629 )

Decrease in short-term loans, net

     7,548     42,501     8,181     46,067  
                      

Net cash used in investing activities

     (2,806,644 )   (3,693,917 )   (3,042,103 )   (4,003,812 )
                          

Cash flows from financing activities:

        

Proceeds from long-term debt

     2,751,721     2,255,655     2,982,572     2,444,889  

Repayment of long-term debt

     (114,631 )   (179,852 )   (124,248 )   (194,940 )

Repayment of current portion of long-term debt

     (1,507,241 )   (1,774,338 )   (1,633,688 )   (1,923,193 )

Proceeds from short-term borrowings, net

     305,687     81,489     331,332     88,325  

Dividends paid

     (739,146 )   (635,249 )   (801,155 )   (688,542 )

Other, net

     10,473     (70,255 )   11,352     (76,149 )
                          

Net cash used in financing activities

     706,863     (322,550 )   766,164     (349,610 )
                          

Effect of exchange rate changes on cash and cash equivalents

     (7,288 )   5,763     (7,899 )   6,246  

Net decrease in cash and cash equivalents

     838,604     (306,446 )   908,957     (332,155 )

Cash and cash equivalents, at beginning of the period

     1,399,031     1,845,892     1,516,400     2,000,750  
                          

Cash and cash equivalents, at end of the period

     2,237,635     1,539,446     2,425,358     1,668,595  
                          

See accompanying notes to consolidated financial statements.


Korea Electric Power Corporation

Notes to Consolidated Financial Statements

June 30, 2006 and 2007

(Unaudited)

 

(1) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements

 

  (a) Description of Business

Korea Electric Power Corporation (KEPCO) was incorporated on January 1, 1982 in accordance with the Korea Electric Power Corporation Act (the “KEPCO Act”) to engage in the generation, transmission and distribution of electricity and development of electric power resources in the Republic of Korea. KEPCO was given a status of government-invested enterprise on December 31, 1983 following the enactment of the Government-Invested Enterprise Management Basic Act. KEPCO’s stock was listed on the Korea Stock Exchange on August 10, 1989 and the Company listed its Depository Receipts (DR) on the New York Stock Exchange on October 27, 1994.

The Korea Electric Power Corporation Act, or the KEPCO Act, requires that the Government, directly, or pursuant to The Korea Development Bank Act, through Korea Development Bank (“KDB”), which is wholly owned by the Korean Government, own at least 51% of KEPCO’s issued common stock. As of June 30, 2006, the Government of the Republic of Korea, Korea Development Bank and foreign investors hold 21.12%, 29.95% and 30.04%, respectively, of KEPCO’s shares.

KEPCO divided its generation business unit into 6 subsidiaries on April 2,2001 in accordance with the Plan for Restructuring the Electricity Industry announced by the Ministry of Commerce, Energy and Industry on January 21, 1999, and established an Sub Business Unit system in order to enhance internal competence on September 25, 2006.

 

  (b) Basis of Presenting Consolidated Financial Statements

KEPCO maintains its accounting records in Korean Won and prepares the consolidated financial statements in the Korean language (Hangul) in conformity with the Korea Electric Power Corporation Act (“KEPCO Act”), the Accounting Regulations for Government Invested Enterprises, which have been approved by the Korean Ministry of Finance and Economy and, in the absence of specialized accounting regulations for utility companies, the accounting principles generally accepted in the Republic of Korea (collectively “Korean GAAP”). Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these consolidated financial statements are intended for use only by those who are informed about Korean accounting principles and practices, KEPCO Act and Accounting Regulations for Government Invested Enterprises. The accompanying consolidated financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language consolidated financial statements. Certain information included in the Korean language consolidated financial statements, but not required for a fair presentation of the Company’s financial position, results of operations or cash flows, is not presented in the accompanying consolidated financial statements.


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

In 2006, the Company additionally adopted Statements of Korea Accounting Standards (“SKAS”) No. 20 “Related Party Disclosure”, which is effective from January 1, 2006

The consolidated financial statements include the accounts of KEPCO and its controlled subsidiaries (collectively referred to as the “Company”). Controlled subsidiaries include (i) majority-owned entities of either the Company or controlled subsidiaries and (ii) other entities where the Company or any of its controlled subsidiary owns more than 30% of total outstanding common stock and is the largest shareholder.

For investments in companies, whether or not publicly held, that are not controlled, but under the Company’s significant influence, the Company utilizes the equity method of accounting. Significant influence is generally deemed to exist if the Company can exercise influence over the operating and financial policies of an investee. The ability to exercise that influence may be indicated in several ways, such as the Company’s representation on its board of directors, the Company’s participation in its policy making processes, material transactions with the investee, interchange of managerial personnel, or technological dependency. Also, if the Company owns directly or indirectly 20% or more of the voting stock of an investee and the investee is not required to be consolidated, the Company generally presumes that the investee is under significant influence.

All intercompany balances including trade receivables and trade payables are eliminated in consolidation. Profits and losses on intercompany sales of products, property or other assets are eliminated in the consolidated financial statements based on the gross profit or loss recognized. For sales from KEPCO to subsidiaries (downstream sales), the full amount of intercompany gain or loss is eliminated in the consolidated statement of income. For upstream sales, the elimination is allocated proportionately to consolidated income and minority interests.

i) The Company’s ownership percentages of the companies which were consolidated at December 31, 2006 and June 30, 2007 are summarized as follows:

 

    

Year of

Establishment

   Ownership
percentage(%)
    

Subsidiaries

      2006    2007   

Primary business

Korea Hydro & Nuclear Power Co., Ltd.    2001    100.0    100.0    Power generation
Korea South-East Power Co., Ltd. (*1)    2001    100.0    100.0    Power generation
Korea Midland Power Co., Ltd.    2001    100.0    100.0    Power generation
Korea Western Power Co., Ltd.    2001    100.0    100.0    Power generation
Korea Southern Power Co., Ltd.    2001    100.0    100.0    Power generation
Korea East-West Power Co., Ltd.    2001    100.0    100.0    Power generation
Korea Power Engineering Co., Ltd.    1977    97.9    97.9    Engineering for utility plant
Korea Plant Services & Engineering Co., Ltd.    1984    100.0    100.0    Utility plant maintenance
KEPCO Nuclear Fuel Co., Ltd.    1982    96.4    96.4    Nuclear fuel
Korea Electric Power Data Network Co., Ltd.    1992    100.0    100.0    Information services
KEPCO International Hong Kong Ltd.    1995    100.0    100.0    Holding Company
KEPCO International Philippines Inc.    2000    100.0    100.0    Holding Company
KEPCO China International Ltd.    2004    100.0    100.0    Holding Company
KEPCO Gansu International Ltd.    2005    100.0    100.0    Holding Company
KEPCO Philippines Holdings Inc.    2005    100.0    100.0    Holding Company
KEPCO Asia International Ltd.    2005    85.0    85.0    Holding Company

 

2


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

    

Year of

establishment

  Ownership
percentage(%)
   

Subsidiaries

    2006   2007  

Primary business

KEPCO Philippines Corporation (*2)

  1995   100.0   100.0  

Utility plant rehabilitation and operation (Subsidiary of KEPCO International Hong Kong Ltd.)

KEPCO Ilijan Corporation (*2)

  1997   51.0   51.0  

Construction and operation of utility plant (Subsidiary of KEPCO International Philippines Inc.)

Jiaozuo KEPCO Power Company Ltd.

  2004   77.0   77.0  

Construction and operation of utility plant (Subsidiary of KEPCO China International Ltd.)

KEPCO Salcon Power Corporation

  2005   60.0   60.0  

Construction and operation of utility plant (Subsidiary of KEPCO Philippines Corporation)

KEPCO Lebanon SARL

  2006   100.0   100.0   Operation of utility plant

KEPCO Neimenggu international Ltd.

  2006   100.0   100.0   Holding Company

(*1) Korea South-east Power Co., Ltd was designated as a primary in July 2002 according to Privatization process of Electronic Industry Restructuring Plan at Ministry of Commerce, Industry and Energy. As a way of Privatization, some of shareholders’ equity is scheduled to be issued in the public market. For this, as a primary party, Woori Investment Securities Co.,, Daewoo Investment Securities, Co., and Hyundai Securities Co. consisted a Consortium, and conducted an amendment of the company’s articles and 100% free issue of new shares in October 2003. Also the company will decide the most appropriate listing timing considering conditions of Stock market in the future.
(*2) KEPCO Philippines Co, & KEPCO Ilijan Co, transfers their Power Utilities to National Power Corporation according to the contract with National Power Corporation in Philippines from September 15, 1995 and June 5, 2002 after using 15 years and 20 years respectively.

 

3


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  ii) The Company’s ownership percentages of affiliated companies which were accounted for by the equity method at December 31, 2006 and June 30, 2007 are summarized as follows:

 

Subsidiaries

   Year of
establishment
   percentage(%)   

Primary business

      2006    2007   

Korea Gas Corporation

   1983    24.5    24.5   

Sales of liquefied natural gas

Korea District Heating Co., Ltd.

   1985    26.1    26.1   

Providing of heating

Power-com Corporation

   2000    43.1    43.1   

Communication line leasing

Korea Electric Power Industrial Development Co., Ltd.

   1990    49.0    49.0   

Disposal of power-plant ash and electric meter reading

YTN

   1993    21.4    21.4   

Broadcasting

Gansu Datang Yumen Wind Power Co., Ltd. (*1)

   2005    40.0    40.0   

Construction and operation of utility plant

Salcon Power Corporation(*2)

   1994    40.0    40.0   

Construction and operation of utility plant

Datang Chifang Renewable Co., Ltd(*3)

   2006    40.0    40.0   

Construction and operation of utility plant


(*1) KEPCO Gansu International Ltd. owns 40.0% of the shares of Gansu Datang Yumen Wind Power Co., Ltd.
(*2) KEPCO Philippines Holdings Inc. owns 40.0% of the shares of Salcon Power Corporation
(*3) KEPCO Neimenggu international Ltd. owns 40.0% of the shares of Datang Chifang Renewable Co., Ltd

 

  (c) Property, Plant and Equipment

Property, plant and equipment are stated at cost, except in the case of revaluation made in accordance with the KEPCO Act and the Assets Revaluation Law of Korea. Significant additions or improvements extending useful lives of assets are capitalized. However, normal maintenance and repairs are charged to expense as incurred.

The Company capitalizes interest cost and other financial charges on borrowing associated with the manufacture, purchase, or construction of property, plant and equipment, incurred prior to completing the acquisition, as part of the cost of such assets. The calculation of capitalized interest includes exchange differences arising from foreign borrowings to the extent that they are regarded as an adjustment to interest costs, which is limited to the extent of interest cost calculated by the weighted average interest rate of local currency borrowings. For the six-month periods ended June 30, 2006 and 2007, the amounts of capitalized interest were (Won)101,513 million and (Won)136,982 million, respectively.

Depreciation is computed by the declining-balance method (straight-line method for buildings, structures, loaded heavy water and capitalized asset retirement cost of nuclear power plants and unit-of-production method for loaded nuclear fuel and capitalized asset retirement costs of low and intermediate level wastes) using rates based on the estimated useful lives described in the Korean Corporate Income Tax Law and as permitted under the Accounting Regulations for Government Invested Enterprises (which approximates the economic useful lives of assets) as follows:

 

4


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

    

Estimated

useful life

Buildings

   8 ~ 40

Structures

   8 ~ 30

Machinery

   5 ~ 16

Vehicles

   4 ~ 5

Loaded heavy water (inclued in nuclear fuel)

   30

Loaded nuclear fuel

   —  

Capitalized asset retirement cost of nuclear power plant

   30
~ 40

Capitalized asset retirement costs of low & intermediate level wastes

   —  

Others

   4 ~ 9

Effective January 1, 2003, the Company adopted SKAS No. 5 “Tangible Assets.” Under this standard, the Company recorded the fair value of the liabilities for decommissioning costs as a liability in the period in which the Company incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. This standard was applicable to any new plants from January 1, 2003. However, this standard did not have any impact on the 2003 financial statements because there were no new utility plants in 2003.

As it relates to decommissioning costs, all existing plants as of December 31, 2003 were accounted for under the previous method (note 1(q)). However, as described in note 1(q), in 2004, the Company adopted SKAS No. 17 and retrospectively adjusted the liability for decommissioning costs at the estimated fair value using discounted cash flows to settle the asset retirement obligations of dismantlement of the nuclear power plants, spent fuel and radioactive waste. In addition, the corresponding asset (calculated at the net book value amount as of January 1, 2004) related to all existing plants was recognized as a utility asset. The Company subsequently depreciates the capitalized asset retirement costs using the straight-line (dismantling costs) and units-of-production depreciation method (spent fuel and radioactive wastes). The impact of adopting SKAS No. 17 is disclosed in note 18.

Changes in capitalized asset retirement costs for the six-month period ended June 30, 2007 are as follows :

 

    

Book value

as of

January 1, 2007

   

Adjustment of

book value

   Incurred    

Book value as of

June 30,

2007

 

Capitalized asset retirement costs of nuclear power plant

   (Won) 2,159,839     —      —       2,159,839  

Accumulated depreciation

     (757,077 )   —      (29,498 )   (786,575 )

Capitalized asset retirement

         

Costs of low & intermediate level wastes

     1,963,323     —      103,706     2,067,029  

Accumulated depreciation

     (1,709,249 )   —      (81,272 )   (1,790,521 )
                         
   (Won) 1,656,836     —      (7,064 )   1,649,772  
                         

 

5


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

KEPCO records the following funds and materials, which relate to the construction of transmission and distribution facilities as construction grants:

 

   

Grants from the government or public institutions

 

   

Funds, construction materials or other items contributed by customers

When the Company receives grants which relate to the construction of transmission and distribution facilities, such amounts are initially recorded and presented in the accompanying consolidated financial statements as deductions from the assets acquired under such grants and are offset against depreciation expense during the estimated useful lives of the related assets. KEPCO received (Won)399,255 million and (Won)470,568 million of construction grants, and offset (Won)93,189 million and (Won)171,763 million against depreciation expense, and (Won)29,385 million and (Won) 56,403 million against utility plant removal cost for the six-month periods ended June 30, 2006 and 2007, respectively.

 

  (d) Asset Impairment

When the book value exceeds the estimated recoverable value of an asset due to obsolescence, physical damage or decline in market value, and the amount is material, the impaired asset is recorded at the recoverable value, and the resulting impairment loss is charged to current operations. If the recoverable value exceeds the adjusted book value of the asset in a subsequent period, the recoveries of previously recognized losses are recognized as gain in subsequent periods to the extent the net realizable value equals the book value of the assets before the loss is recognized after consideration of accumulated depreciation.

The Company evaluates the long-lived assets for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable. These computations utilize judgments and assumptions inherent in management’s estimate of undiscounted future cash flows to determine recoverability of an asset. If management’s assumptions about these assets change as a result of events or circumstances, and management believes the assets may have declined in value, then the Company will record impairment charges, resulting in lower profits. Management uses its best estimate in making these evaluations and considers various factors, including the future prices of energy, fuel costs and operating costs. However, actual market prices and operating costs could vary from those used in the impairment evaluations, and the impact of such variations could be material.

 

  (e) Investments in Securities

Upon acquisition, securities are recorded at cost. The cost includes the market value of the consideration given and incidental expenses. If the market price of the consideration given is not available, the market prices of the securities purchased are used as the basis for measurement.

Upon acquisition, the Company classifies debt and marketable equity securities into one of the three categories: held-to-maturity, available-for-sale, or trading securities and such determination should be reassessed at each balance sheet date. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) are classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used to generate profit on short-term differences in price. Investments not classified as either held-to-maturity or trading securities are classified as available-for-sale securities.

Trading securities are carried at fair value, with unrealized holding gains and losses included in income. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported as a capital adjustment. Investments

 

6


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

in equity securities that do not have readily determinable fair values are stated at cost. Declines in value judged to be other-than-temporary on available-for-sale securities are charged to current results of operations. Investments in debt securities that are classified into held-to-maturity are reported at amortized cost at the balance sheet date and such amortization is included in interest income.

Marketable securities are recorded at the quoted market prices as of the period end. Non-marketable debt securities are recorded at the fair values derived from the discounted cash flows by using an interest rate deemed to approximate the market interest rate. The market interest rate is determined by the issuers’ credit rating announced by the accredited credit rating agencies in Korea. Money market funds are recorded at the fair value determined by the investment management companies.

Trading securities are classified as current assets, whereas available-for-sale securities and held-to-maturity securities are classified as long-term investments. However, available-for-sale securities whose maturity dates are due within one year from the balance sheet date or whose likelihood of being disposed of within one year from the balance sheet date is probable are classified as current assets. Likewise, held-to-maturity securities whose maturity dates are due within one year from the balance sheet date are classified as current assets.

Securities are evaluated at each balance sheet date to determine whether there is any objective evidence of impairment loss. When any such evidence exists, unless there is a clear counter-evidence that recognition of impairment is unnecessary, the Company estimates the recoverable amount of the impaired security and recognizes any impairment loss in current operations. The amount of impairment loss of held-to-maturity or non-marketable equity securities is measured as the difference between the recoverable amount and the carrying amount. The recoverable amount of held-to-maturity security is the present value of expected future cash flows discounted at the securities’ original effective interest rate. For available-for-sale debt or equity security stated at fair value, the amount of impairment loss to be recognized in the current period is determined by subtracting the amount of impairment loss of debt or equity security already recognized in prior period from the amount of amortized cost in excess of the recoverable amount for debt security or the amount of the acquisition cost in excess of the fair value for equity security.

For non-marketable equity securities accounted for at acquisition cost, the impairment loss is equal to the difference between the recoverable amount and the carrying amount. If the realizable value subsequently recovers, the increase in value is recorded in current operations, up to the amount of the previously recognized impairment loss, while for the security stated at amortized cost or acquisition cost, the increase in value is recorded in current operations, so that its recovered value does not exceed what its amortized cost would be as of the recovery date if there had been no impairment loss.

If the intent and ability to hold the securities change, transferred securities are accounted for at fair value. In case held-to-maturity securities are reclassified into available-for-sale securities, unrealized gain or loss between the book value and fair value is reported in shareholders’ equity as a capital adjustment. In case the available for sale securities are reclassified into held-to-maturity securities, the unrealized gain or loss at the date of the transfer continues to be reported in shareholders’ equity as a capital adjustment, but it is amortized over the remaining term of the security using the effective interest rate method.

 

  (f) Investment Securities under the Equity Method of Accounting

Investments in affiliated companies of which the Company owns 20% or more of the voting stock or over which the Company has significant management control are stated at an amount as determined using the equity method. Under the equity method of accounting, the Company’s initial investment is recognized at cost and is subsequently increased or decreased to reflect the changes in Company’s share of the net assets of investee. The Company’s share of the profit or loss of the investee is recognized in the investor’s profit or loss and other changes in the investee’s equity are recognized directly in equity of the Company.

 

7


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

Any excess in the Company’s acquisition cost over the Company’s share of the net fair value of the investee’s identifiable net assets is considered as goodwill and amortized by the straight-line method over the estimated useful life. The amortization of such goodwill is recorded against the equity income (losses) of affiliates. When events or circumstances indicate that carrying amount may not be recoverable, the Company reviews goodwill for any impairment.

Assets and liabilities of foreign-based companies accounted for using the equity method are translated at current rate of exchange at the balance sheet date while profit and loss items in the statement of income are translated at average rate and capital account at historical rate. The translation gains and losses arising from collective translation of the foreign currency financial statements of foreign-based companies are offset and the balance is accumulated as capital adjustment.

 

  (g) Intangible Assets

Intangible assets are stated at cost less accumulated amortization, as described below.

 

  (i) Research and Development Costs

Expenditure on research activities, undertaken with the prospects of gaining new scientific or technical knowledge and understanding, is recognized in the statement of income as an expense as incurred.

Expenditure on development incurred in conjunction with new products or technologies, in which the elements of costs can be identified and future economic benefits are clearly expected, is capitalized and amortized on a straight-line basis over 5 years. The capitalized expenditure includes the cost of materials, direct labor and an appropriate proportion of overheads.

 

  (ii) Other Intangible Assets

Other intangible assets, which consist of industrial rights, land rights and others, are stated at cost less accumulated amortization and impairment losses. Such intangible assets are amortized using the straight-line method over a reasonable period, from 4 years to 50 years, based on the nature of the asset.

The Company reviews for the impairment of intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

 

  (h) Cash Equivalents

The Company considers short-term financial instruments with maturities of three months or less at the acquisition date to be cash equivalents.

 

8


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (i) Financial Instruments

Short-term financial instruments are financial instruments handled by financial institutions which are held for short-term cash management purposes or will mature within one year, including time deposits, installment savings deposits and restricted bank deposits.

 

  (j) Allowance for Doubtful Accounts

The allowance for doubtful accounts is estimated based on an analysis of individual accounts and past experience of collection. Smaller-balance homogeneous receivables are evaluated considering current economic conditions and trends, prior charge-off experience and delinquencies.

 

  (k) Inventories

Inventories are stated at the lower of cost or net realizable value, cost being determined using the weighted average method for raw materials, moving-average method for supplies and specific-identification method for other inventories. The Company maintains perpetual inventory records, which are adjusted through physical counts at the end of year.

 

  (l) Valuation of Receivables and Payables at Present Value

Receivables and payables arising from long-term cash loans/borrowings and other similar loan/borrowing transactions are stated at present value. The difference between nominal value and present value is deducted directly from the nominal value of related receivables or payables and is amortized using the effective interest rate method. The amount amortized is included in interest expense or interest income.

 

  (m) Convertible Bonds

When issuing convertible bonds, the value of the conversion rights is recognized separately as a component of capital surplus. Considerations for conversion rights is measured by deducting the present value of ordinary or straight debt securities from the gross proceeds of the convertible bonds received at the date of issuance.

Convertible bonds are not subject to foreign currency translation because convertible bonds are regarded as non-monetary foreign currency liabilities in accordance with Korean GAAP. When the conversion rights are exercised during an accounting period, the value of common shares issued pursuant to the exercise shall be measured based on the carrying amount of the convertible bonds determined on the actual date such rights have been exercised.

 

  (n) Discount (Premium) on Debentures

Discount (premium) on debenture issued, which represents the difference between the face value and issuance price of debentures, is amortized using the effective interest rate method over the life of the debentures. The amount amortized is included in interest expense.

 

9


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (o) Retirement and Severance Benefits

Employees and directors who have been with the Company for more than one year are entitled to lump-sum payments based on current rates of pay and length of service when they leave the Company. The Company’s estimated liability under the plan which would be payable if all employees left on the balance sheet date is accrued in the accompanying balance sheets.

Although funding of the retirement and severance benefits are not required, tax deductions, however, are limited if the liability is not funded. The Company has purchased severance insurance deposits, which meet the funding requirement for tax deduction purposes. These consist of individual severance insurance deposits, in which the beneficiary is the respective employee, with a balance of (Won)343,093 million and (Won)315,618 million as of December 31, 2006 and June 30, 2007, respectively, which are presented as deduction from accrual of retirement and severance benefits.

Through March 1999, under the National Pension Scheme of Korea, the Company transferred a certain portion of retirement allowances of employees to the National Pension Fund. The amount transferred will reduce the retirement and severance benefit amount to be payable to the employees when they leave the Company and is accordingly reflected in the accompanying financial statements as a reduction from the retirement and severance benefit liability. However, due to a new regulation applied since April 1999, such transfers to the National Pension Fund are no longer required.

 

  (p) Reserve for Self-Insurance

In accordance with the Accounting Regulations for Government Invested Enterprises, the Company provides a self-insurance reserve for loss from accident and liability to third parties that may arise in connection with the Company’s non-insured facilities. The self-insurance reserve is recorded until the amount meets a certain percentage of non-insured buildings and machinery. Payments made to settle applicable claims are charged to this reserve.

 

  (q) Liability for Decommissioning Costs

Prior to January 1, 2003, the Company recorded a liability for the estimated decommissioning costs of nuclear facilities based on engineering studies and the expected decommissioning dates of the nuclear power plant. Additions to the liability were charged to expense in amounts such that the current costs would be fully accrued for at estimated dates of decommissioning on a straight-line basis.

Effective January 1, 2003, the Company adopted SKAS No. 5 “Tangible Assets.” Under this standard, the Company records the fair value of liabilities for the decommissioning costs as a liability in the period in which the Company incurs a legal obligation associated with the retirement of tangible long-lived assets. However, this standard was only applicable to new plants (with an associated asset retirement liability) put into service after January 1, 2003. For plants put into service before January 1, 2003, SKAS No. 5 did not apply and the previous Korean GAAP (as described above) was required. Since the Company did not place into service any assets with liabilities for decommissioning costs during 2003, SKAS No. 5 had no impact on the 2003 consolidated financial statements.

In October 2004, Korea Accounting Standard Board issued SKAS No. 17 “Provisions and Contingent Liabilities & Assets.” In January 2005, the Company decided to early adopt SKAS No. 17. Under this standard, the Company retrospectively adjusted the liability for decommissioning costs at the estimated fair value using discounted cash flows

 

10


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

(also based on engineering studies and the expected decommissioning dates) to settle the liabilities for decommissioning costs and the same amount was recognized as an utility asset. The liability for decommissioning costs should be adjusted based on the best estimates on each balance sheet date. Under SKAS No. 17, the discount rate was set at the date of adoption (January 1, 2004) and should be applied in all future periods. In addition, any new obligation arising from new plant would use the discount rate in effect at the time of its commencement. Accretion expense consists of period-to-period changes in the liability for decommissioning costs resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. The Company subsequently depreciates the asset retirement costs using the straight-line and units-of-production depreciation method.

 

  (r) Foreign Currency Translation

KEPCO and its domestic subsidiaries maintain their accounts in Korean Won. Transactions in foreign currencies are recorded in Korean Won based on the prevailing rates of exchange on the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at the balance sheet date, with the resulting gains and losses recognized in current results of operations. Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at (Won)926.8 to US$1, the rate of exchange on June 30, 2007. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated into Korean Won at the foreign exchange rate prevailing at the date of the transaction.

Foreign currency assets and liabilities of foreign-based operations and the Company’s overseas subsidiaries are translated at current rate of exchange at the balance sheet date while profit and loss items in the statement of income are translated at average rate and capital account at historical rate. The translation gains and losses arising from collective translation of the foreign currency financial statements of foreign-based operations and the Company’s overseas subsidiaries are offset and the balance is accumulated as a capital adjustment.

 

  (s) Derivatives

All derivative instruments are accounted for at fair value with the valuation gain or loss recorded as an asset or liability. If the derivative instrument is not part of a transaction qualifying as a hedge, the adjustment to fair value is reflected in current operations. The accounting for derivative transactions that are part of a qualified hedge based both on the purpose of the transaction and on meeting the specified criteria for hedge accounting differs depending on whether the transaction is a fair value hedge or a cash flow hedge. Fair value hedge accounting is applied to a derivative instrument designed as hedging the exposure to changes in the fair value of an asset or a liability or a firm commitment (hedged item) that is attributable to a particular risk. The gain or loss on the hedging derivative instruments and on the hedged item attributable to the hedged risk is reflected in current operations. Cash flow hedge accounting is applied to a derivative instrument designated as hedging the exposure to variability in expected future cash flows of an asset or a liability or a forecasted transaction that is attributable to a particular risk.

The effective portion of gain or loss on a derivative instrument designated as a cash flow hedge is recorded as a capital adjustment and the ineffective portion is recorded in current operations.

The effective portion of gain or loss recorded as a capital adjustment is reclassified to current earnings in the same period during which the hedged forecasted transaction affects earnings. If the hedged transaction results in the acquisition of an asset or the incurrence of a liability, the gain or loss in capital adjustment is added to or deducted from the asset or the liability.

 

11


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (t) Revenue Recognition

The Company recognizes revenue from the sale of electric power based on meter readings made on a monthly basis. The Company does not accrue revenue for power sold after the meter readings but prior to the end of the accounting period. The Company recognizes revenue on long-term construction contracts based on the percentage-of-completion method, whereby revenue is recognized based on the actual costs incurred as a percentage of total estimated costs of the contract.

 

  (u) Income Taxes

Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.

A deferred tax asset is recognized only to the extent that it is probable that future taxable income will be available against which the unused tax losses and credits can be utilized. A deferred tax asset is reduced to the extent that it is no longer probable that the related tax benefit will be realized.

 

12


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (v) Dividends payable

Dividends are recorded when approved by the board of director and shareholders.

 

  (w) Prior Period Adjustments

Prior period adjustments resulting from other than fundamental errors are charged or credited to result of operations for the current period. The fundamental errors are defined as errors with such a significant effect on the financial statements for one or more prior periods that those financial statements can no longer be considered to have been reliable at the date of their issue. Prior period adjustments resulting from the fundamental errors are charged or credited to the beginning balance of retained earnings, and the financial statements of the prior year are restated.

 

  (x) Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income, after addition for the effect of expenses related to dilutive securities on net income, by the weighted average number of common shares plus the dilutive potential common shares.

 

  (y) Minority Interest in Consolidated Subsidiaries

Minority interest in consolidated subsidiaries is presented as a separate component of stockholders’ equity in the consolidated balance sheets.

 

  (z) Use of Estimates

The preparation of consolidated financial statements in accordance with Korean GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to financial statements. Actual results could differ from those estimates.

 

13


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (aa) Accounting Principles

Certain subsidiaries apply different accounting methods for cost of inventory and the depreciation of fixed assets and intangible assets than those of KEPCO. The effect of the different accounting is not considered material.

 

  (i) Cost of Inventory

 

Company

   Raw material    Supplies    Others

KEPCO

   Weighted-average    Moving-average    Specific identification

Korea Hydro & Nuclear Power Co., Ltd.

   Moving-average    Moving-average    Moving average

Korea Western Power Co., Ltd.

   Weighted-average    Weighted-average    Weighted-average

Korea Power Engineering Co., Ltd.

   Weighted-average    FIFO    FIFO

Korea Plant Service & Engineering Co., Ltd.

   Weighted-average    FIFO    Specific identification

KEPCO Nuclear Fuel Co., Ltd.

   Weighted-average    Weighted-average    Specific identification

Korea Electric Power Data Network Co., Ltd.

   Moving-average    Moving-average    Moving-average

KEPCO Philippines Corporation

   Weighted-average    Weighted-average    Weighted- average

KEPCO Ilijan Corporation

   Weighted-average    Weighted-average    Weighted- average

 

  (ii) Depreciation Methods

 

Company

   Machinery    Vehicles    Others    Computer software

KEPCO

   Declining- balance    Declining- balance    Declining- balance    Straight-line

Korea Hydro & Nuclear Power Co., Ltd.

   Declining- balance    Declining- balance    Declining- balance    Declining- balance

Korea Plant Service & Engineering Co., Ltd.

   Declining- balance    Declining- balance    Declining- balance    Declining- balance

KEPCO Nuclear Fuel Co., Ltd.

   Straight-line    Straight-line    Straight-line    Straight-line

Korea Electric Power Data Network Co., Ltd.

   Straight-line    Straight-line    Straight-line    Straight-line

KEPCO Philippines Corporation

   Straight-line    Straight-line    Straight-line    Straight-line

KEPCO Ilijan Corporation

   Straight-line    Straight-line    Straight-line    Straight-line

 

14


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (ab) Elimination of Investments and Shareholder’s Equity

For consolidated subsidiaries and investments accounted for under the equity method, if the acquisition date is not as of the fiscal year end of the investee, the nearest fiscal year end of such investee is considered as the acquisition date in determining the amount of goodwill or negative goodwill.

The elimination entries of the parent company’s investments against the related investees’ shareholders’ equity at December 31, 2006 and June 30, 2007 are summarized as follows:

<2006>

 

Won (millions)

  

Won (millions)

Accounts

   Amount   

Accounts

   Amount

Common stock

   (Won) 2,666,540   

Investments in affiliates

   (Won) 17,999,678

Capital surplus

     15,448,710   

Consolidated capital surplus

     2,192

Retained earnings

     7,817,566   

Consolidated retained earnings

     7,758,572

Consolidated Capital adjustment

     158,728   

Equity gain of affiliates

     19,105
     

Capital adjustment

     169,239
     

Minority interests

     142,353
     

Other

     405
                
   (Won) 26,091,544       (Won) 26,091,544
                

<2007>

 

Won (millions)

  

Won (millions)

Accounts

   Amount   

Accounts

   Amount

Common stock

   (Won) 2,666,540   

Investments in affiliates

   (Won) 17,999,678

Capital surplus

     15,448,710   

Consolidated capital surplus

     2,192

Retained earnings

     8,671,654   

Consolidated retained earnings

     8,599,796

Consolidated Capital adjustment

     221,746   

Equity gain of affiliates

     19,074
     

Capital adjustment

     232,330
     

Minority interests

     155,175
     

Other

     405
                
   (Won) 27,008,650       (Won) 27,008,650
                

 

15


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

(2) Basis of Translating Consolidated Financial Statements

The consolidated financial statements are expressed in Korean Won and, solely for the convenience of the reader, the consolidated financial statements have been translated into United States dollars at the rate of (Won)922.6 to US$1, the noon buying rate in the City of New York for cable transfers in Won as certified for customs purposes by the Federal Reserve Bank of New York as of June 30, 2007. The translation should not be construed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any other rate.

 

(3) Property, Plant and Equipment

 

  (a) Asset revaluation

KEPCO revalued its property, plant and equipment in accordance with the KEPCO Act and the Asset Revaluation Law (the latest revaluation date was January 1, 1999), and recorded a revaluation gain of (Won)12,552,973 million as a reserve for asset revaluation, a component of capital surplus.

 

  (b) Officially Declared Value of Land

The officially declared value of land at June 30, 2007, as announced by the Minister of Construction and Transportation, is as follows:

 

     Won (millions)

Purpose

   Book value    Declared value

Land - utility plant, transmission and distibution sites and other

   (Won) 6,013,138    9,135,536

The officially declared value of land, which is used for government purposes, is not intended to represent fair value.

 

  (c) Utility plant

Changes in property, plant and equipment and construction grants for the six-month periods ended June 30, 2007 are as follows:

 

     Won (millions)  
    

Book value

as of

January 1, 2007

    Acquisitions     Disposals     Depreciation     Others    

Book value
as of

June 30, 2007

 

Land

   (Won) 5,993,983     1,240     (2,578 )   —       20,493     6,013,138  

Buildings

     7,248,966     2,897     (4,472 )   (310,499 )   179,283     7,116,175  

Structures

     27,513,258     6,034     (625 )   (459,071 )   1,189,493     28,249,089  

Machinery

     16,845,422     28,411     (620 )   (1,501,573 )   969,962     16,341,602  

Vehicles

     32,411     2,584     (185 )   (9,175 )   207     25,842  

Nuclear fuel

     970,873     —       —       (196,778 )   240,151     1,014,246  

Capitalized asset retirement cost

     1,656,836     —       —       (110,770 )   103,706     1,649,772  

Others

     698,735     19,959     (9,571 )   (49,862 )   (475,709 )   183,552  

Construction in- progress

     8,393,340     3,799,906     (1,413,842 )   —       (886,630 )   9,892,774  

Construction grants

     (4,086,894 )   (470,568 )   —       171,763     56,403     (4,329,296 )
                                      
   (Won) 65,266,930     3,390,463     (1,431,893 )   (2,465,965 )   1,397,359     66,156,894  
                                      

 

16


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

The Company depreciates the capitalized asset retirement costs using the straight-line and units-of-production depreciation methods

 

(4) Intangible Assets

Changes in intangible assets for the six-month period ended June 30, 2007 are as follows:

 

     Won (millions)  
    

Book value

as of
January 1, 2007

    Acquisitions     Amortization     Others    

Book value
as of

June 30, 2007

 

Port facility usage right

   (Won) 133,414     —       (4,422 )     128,992  

Water usage right

     73,924       (8,476 )     65,448  

Dam usage right

     6,398     —       (72 )   —       6,326  

Electricity usage right

     35,510     —       (46,660 )   47,028     35,878  

Future radioactive wastes repository sites usage rights (*1)

     300,000     —       —         300,000  

Computer software

     175,933     15,123     (36,890 )   44,286     198,452  

Others

     129,104     46,633     (9,884 )   (84,825 )   81,028  

Construction grants

     (33,873 )   (1,928 )   699     —       (35,102 )
                                
   (Won) 820,410     59,828     (105,705 )   6,489     781,022  
                                

(*1) In November 2005, GyeongJu city was selected as the repository site for Low and Intermediate-Level Radioactive Wastes (“LILRW”). In relation to the future repository site, the Korean government enacted the ‘Special Act for the Region Hosting Low and Intermediate Radioactive Wastes Repository Site’ (the “Act”) to support the area. In compliance with the Act, the Company is obligated to pay (Won)300,000 million to the region in consideration for building the repository site. As of June 30, 2006, the timing of this payment obligation has not been determined. As a result, the Company recognized this obligation as an intangible asset and other long-term liabilities.

In addition, the Company expensed research and development cost amounting to W224,215 million and W301,964 million for the six-month periods ended June 30, 2006 and 2007, respectively

 

(5) Insured Assets

Insured assets as of June 30, 2007 are as follows:

 

          Won (millions)

Insured assets

  

Insurance type

   Insured value

Buildings and machinery

  

Fire insurance

   (Won) 805,190

Buildings and machinery

  

Nuclear property insurance

     472,668

Buildings, machinery and construction in progress

  

Construction and shipping insurance

     8,679,796

Buildings

  

General insurance

     20,689,174

Construction in progress

  

Construction insurance

     1,165,617

Inventories and machinery

  

Shipping insurance

     4,782,633

 

17


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

In addition, as of June 30, 2007, the Company carries compensation and responsibility insurance in relation to the operation of the nuclear power plants and gas accident, construction and other general insurance for its utility plants and inventories, damage insurance for its light water nuclear reactor construction in North Korea, general insurance for vehicles, casualty insurance for its employees and responsibility insurance for its directors.

 

(6) Investment securities

 

  (a) Short-term Investment securities as of December 31, 2006 and June 30, 2007 are summarized as follows:

 

     Won (millions)
     2006        2007    

Short-term investment securities

     

Available-for-sale securities

   (Won) 15,145    —  

Held-to-maturity securities

     94    26
           
   (Won) 15,239    26
           

Available-for-sale securities consist of bond funds and held-to-maturity securities consist of debt securities including government and municipal bonds.

 

  (b) Long-term investments other than those under the equity method as of December 31, 2006 and June 30, 2007 are summarized as follows:

 

     2006
    

Ownership

%

  

Acquisition

cost

  

Book

value

Available-for-sale:

        

Equity securities:

        

Energy Savings Investment Cooperatives (*1, *2)

   25.0~48.0    (Won) 5,000    5,000

Korea Power Exchange (*1, *3)

   100.0      127,839    127,839

Hwan Young Steel Co., Ltd. (*1)

   0.14      1,091    97

KNOC Nigerian East Oil Co., Ltd (*5)

   15.0      12    12

KNOC Nigerian West Oil Co., Ltd (*5)

   15.0      12    12

Dolphin Property Limited. (*5)

   15.0      12    12

Equity securities in treasury stock fund (*4)

        11,713    15,381

Other equity securities (*1)

        24,695    24,695

Debt securities

        5,149    10,310
              
        175,523    183,358
              

Held-to-maturity:

        

Government and municipal bonds

        3,531    3,531
              

Total

      (Won) 179,054    186,889
              

 

18


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

     2007
     Ownership
%
   Acquisition
cost
   Book
value

Available-for-sale:

        

Equity securities:

        

Energy Savings Investment Cooperatives (*1, *2)

   25.0~48.0    (Won) 5,000    5,000

Korea Power Exchange (*1, *3)

   100.0      127,839    127,839

Hwan Young Steel Co., Ltd. (*1)

   0.14      96    96

KNOC Nigerian East Oil Co., Ltd (*5)

   15.0      12    12

KNOC Nigerian West Oil Co., Ltd (*5)

   15.0      12    12

Dolphin Property Limited (*5)

   15.0      12    12

Equity securities in treasury stock fund (*4)

        18,481    29,728

Other equity securities (*1)

        30,210    30,210

Debt securities

        5,149    8,386
              
        186,811    201,295
              

Held-to-maturity:

        

Government and municipal bonds

        3,556    3,556
              

Total

      (Won) 190,367    204,851
              

(*1) These available-for-sale non-marketable equity securities are stated at cost due to the lack of information to determine fair value.
(*2) As described in note 1(f), investment in affiliates in which the Company owns 20% or more of the voting stock should be stated at an amount as determined using equity method of accounting. However, if the difference between the equity method and cost is considered to be immaterial, the Company can record the investment within available-for-sale securities at cost.
(*3) Korea Power Exchange operates under the regulations for government affiliated organization and the Electricity Enterprises Act. Moreover, when the purpose of establishment, articles of incorporation of Korea Power Exchange and electric power market managerial regulations are considered, the Company does not appear to have significant management control. Therefore, the investment is accounted for under the cost method.
(*4) In order to stabilize the price of the Company’s common stock in the market, the Company entered into a treasury stock fund (the Fund) composed of treasury stock and other equity securities in December, 1992. The treasury stock (excluded from the above table) is recorded at cost within capital adjustments (note 13). The other equity securities in the Fund are recorded at fair value within available-for-sale securities. As of June 30, 2007, gains on the valuation of these available-for-sale securities in the Fund, which are recorded in capital adjustments, amount to (Won)8,154 million (after excluding deferred tax). As of December 31, 2006, gains on these securities of (Won)2,659 million (after excluding deferred tax) were recorded in capital adjustments.
(*5) The Company invested in overseas oil development industry with a consortium of Korean companies (the “Korean Consortium”) consisting of the company, Korea National Oil Corporation and Deawoo Shipbuilding & Marine Engineering Co., Ltd. The Korean Consortium, owing 60% equity interest in the hoint venture incorporated with English Equator and Nigeria, invested in KNOC Nigerian East 323, KNOC Nigerian West 321 and Dolphin Property Ltd. Additionally, the Company provides performance guarantees of US$25 Million related to the oil and gas producing activities and US$35 million related to the construction of power generation plants and gas pipes to the Nigerian government.

 

19


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (c) Investments in affiliated companies accounted for using the equity method as of December 31, 2006 and June 30, 2007 are as follows:

 

     2006
     Ownership
%
   Acquisition
cost
   Net asset
value
  

Book

value

Korea Gas Corporation (*1)

   24.5      94,500    860,503    860,503

Korea District Heating Co., Ltd. (*1)

   26.1      5,660    184,458    184,458

LG powercomm Corporation (*1,2)

   43.1      323,470    382,036    376,831

Korea Electric Power Industrial Development Co., Ltd. (*1)

   49.0      7,987    48,130    48,130

YTN (*1)

   21.4      59,000    26,677    26,677

Gansu Datang Yumen Wind Power Co., Ltd. (*1)

   40.0      7,163    5,808    5,808

Salcon Power Corporation (*1)

   40.0      21,620    22,921    22,921

Datang Chifang Renewable Co., Ltd (*1)

   40.0      18,053    18,053    18,053
                   
      (Won) 537,453    1,548,586    1,543,381
                   

 

     2007
     Ownership
%
   Acquisition
cost
   Net asset
value
  

Book

value

Korea Gas Corporation (*1)

   24.5      94,500    901,862    901,862

Korea District Heating Co., Ltd. (*1)

   26.1      5,660    195,982    195,982

LG powercomm Corporation (*1,2)

   43.1      323,470    385,064    380,603

Korea Electric Power Industrial Development Co., Ltd. (*1)

   49.0      7,987    25,501    25,501

YTN (*1)

   21.4      59,000    26,923    26,923

Gansu Datang Yumen Wind Power Co., Ltd. (*1)

   40.0      7,163    6,773    6,773

Salcon Power Corporation (*1)

   40.0      21,620    20,427    20,427

Datang Chifang Renewable Co., Ltd (*1)

   40.0      18,053    17,253    17,253
                   
      (Won) 537,453    1,579,785    1,575,324
                   

(*1) KEPCO used unaudited financial statements of the above affiliated companies when applying the equity method of accounting.
(*2) As of June 30, 2007, unrealized profits of (Won)4,461 million arisen from the transaction with Powercomm Corporation were eliminated.

 

20


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (d) Changes in investments in affiliated companies under the equity method for the year ended December 31, 2006 are as follows:

 

     2006
    

Book value

as of

January 1, 2006

  

Equity income

of affiliates

    Others (*)    

Book value

as of

Dec 31, 2006

Korea Gas Corporation

   (Won) 819,100    60,649     (19,246 )   860,503

Korea District Heating Co.

     176,173    8,193     92     184,458

LG powercomm Corporation

     400,979    (23,510 )   (638 )   376,831

Korea Electric Power Industrial Development Co., Ltd.

     24,525    29,005     (5,400 )   48,130

YTN

     25,014    1,586     77     26,677

Gansu Datang Yumen Wind Power Co., Ltd.

     2,719    —       3,089     5,808

Salcon Power Corporation

     —      4,086     18,835     22,921

Datang Chifang Renewable Co., Ltd

     —      —       18,053     18,053
                       
   (Won) 1,448,510    80,009     14,862     1,543,381
                       

Changes in investments in affiliated companies under the equity method for the six-month period ended June 30, 2007 are as follows:

 

     2007
    

Book value

as of

January 1, 2007

  

Equity income

of affiliates

    Others (*)    

Book value

as of

June 30, 2007

Korea Gas Corporation

   (Won) 860,503    62,203     (20,843 )   901,863

Korea District Heating Co.

     184,458    11,469     55     195,982

LG powercomm Corporation

     376,831    3,772     —       380,603

Korea Electric Power Industrial Development Co., Ltd.

     48,130    2,361     (24,990 )   25,501

YTN

     26,677    470     (225 )   26,922

Gansu Datang Yumen Wind Power Co., Ltd.

     5,808    (385 )   1,350     6,773

Salcon Power Corporation

     22,921    1,295     (3,789 )   20,427

Datang Chifang Renewable Co., Ltd

     18,053    (1,045 )   245     17,253
                       
   (Won) 1,543,381    80,140     (48,197 )   1,575,324
                       

(*) Others are composed of acquisition (disposal) of investment, dividends and the changes in values in equity due to the capital surplus and gain (loss) on investment securities in capital adjustments.

The Company has recorded unrealized losses of (Won)990 million and million relating to the above affiliates as of December 31, 2006 and June 30, 2007, respectively, and unrealized gains of (Won)117,870 million and (Won) million as of December 31, 2006 and June 30, 2007, respectively, which have been accounted for as capital adjustments. These capital adjustments have been recorded as unrealized losses on equity securities of affiliates within stockholders’ equity.

The Company has recorded unrealized gains of (Won)2,659 million and (Won)1,701 million relating to the above affiliates as of December 31, 2006 and June 30, 2007 respectively. These capital adjustments have been recorded as unrealized gains on equity securities of affiliates within stockholders’ equity.

 

21


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

(7) Loans to employees

The Company has provided housing and tuition loans to employees as follows as of December 31, 2006 and June 30, 2007:

 

     Won (millions)
     2006    2007

Short-term loans

   (Won) 24,597    24,445

Long-term loans

     355,447    374,451
           
   (Won) 380,044    398,896
           

 

(8) Other Non-current Assets

Other non-current assets as of December 31, 2006 and June 30, 2007 are as follows:

 

     Won (millions)
     2006    2007

Deposit

   (Won) 166,718    183,350

Others

     232,541    265,970
           
   (Won) 399,259    449,320
           

 

(9) Inventories

Inventories as of December 31, 2006 and June 30, 2007 are summarized as follows:

 

     Won (millions)
     2006    2007

Raw materials

   (Won) 1,158,662    1,209,922

Supplies

     806,356    949,744

Other

     133,958    158,582
           
   (Won) 2,098,976    2,318,248
           

 

(10) Other Current Assets

Other current assets at December 31, 2006 and June 30, 2007 are summarized as follows:

 

     Won (millions)
     2006    2007

Short-term loans (note 7)

   (Won) 27,226    25,221

Accrued interest income

     28,289    31,587

Advance payments

     24,045    30,396

Prepaid expenses

     27,262    57,525

Currency Forwards (note 21)

     64   

Others

     94,444    111,851
           
   (Won) 201,330    256,580
           

 

22


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

(11) Capital Surplus

Capital surplus as of December 31, 2006 and June 30, 2007 and are as follows:

 

     Won (millions)
     2006    2007
Paid-in capital in excess of par value    (Won) 835,140    835,140
Reserves for asset revaluation(*2)      12,552,973    12,552,973
Other capital surplus(*1)      1,129,030    1,126,194
           
   (Won) 14,517,143    14,514,307
           

(*1) As described in note 1(u), effective January 1, 2005, the Company adopted SKAS No. 16 “Income Taxes.” As a result, deferred taxes are recognized on temporary differences related to the conversion right of convertible bond that is reported as a component of capital surplus.
(*2) The Company revalued its property, plant and equipment in accordance with the KEPCO Act and the Asset Revaluation Law, and recorded a revaluation gain of (Won)12,552,973 million as a reserve for asset revaluation. The reserve for asset revaluation may be credited to paid-in capital or offset against any accumulated deficit by resolution of the shareholders.

 

(12) Appropriated Retained Earnings

Appropriated retained earnings as of December 31, 2006 and June 30, 2007 are summarized as follows:

 

     Won (millions)
     2006    2007
Legal reserve    (Won) 1,603,919    1,603,919
Reserve for business rationalization      31,900    31,900
Reserve for business expansion      16,588,939    17,919,081
Reserve for investment on social overhead capital      5,217,449    5,277,449
Reserve for research and human development      270,000    330,000

Reserve for dividend equalization

     210,000    210,000
           
   (Won) 23,922,207    25,372,349
           

The KEPCO Act requires the Company to appropriate a legal reserve equal to at least 20 percent of net income for each accounting period until the reserve equals 50 percent of the common stock. The legal reserve is not available for cash dividends; however, this reserve may be credited to paid-in capital or offset against accumulated deficit by the resolution of the shareholders.

Prior to 1990, according to the KEPCO Act, at least 20 percent of net income in each fiscal year was required to be established as a reserve for business expansion until such reserve equals the common stock. Beginning in 1990, no such reserve is required.

The reserve for the investment on social overhead capital and the reserve for research and human development are appropriated by the Company to avail itself of qualified tax credits to reduce corporate tax liabilities. These reserves are not available for cash dividends for a certain period defined in the Tax Incentive Control Law.

 

23


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

Until December 10, 2002 under the Special Tax Treatment Control Law, investment tax credit was allowed for certain investments. The Company was, however, required to appropriate from retained earnings the amount of tax benefits received and transfer such amount into a reserve for business rationalization. Effective December 11, 2002, the Company is no longer required to establish a reserve for business rationalization despite tax benefits received for certain investments and, consequently, the existing balance is now regarded as a voluntary reserve.

The reserve for dividend equalization, which is considered a voluntary reserve, is appropriated by the Company to reduce fluctuation of dividend rate for the purpose of stock price and credit rating stabilization.

 

(13) Capital Adjustments

Capital adjustments as of December 31, 2006 and June 30, 2007 are as follows:

 

     Won (millions)  
     2007     2006  
Treasury stock    (Won) (796,980 )   (791,104 )
Gain on valuation of available- for-sale securities      5,448     9,855  
Equity gain of affiliates      117,870     118,353  
Equity loss of affiliates      (990 )   (12 )
Overseas operations translation credit      (79,723 )   (70,765 )
Gain (loss) on valuation of cash flow hedges      (4,710 )   (773 )
              
   (Won) (759,085 )   (734,446 )
              

The Company has shares held as treasury stock amounting to (Won) 118,293 million (5,450,062 shares) and (Won) 104,551 million (4,700,067 shares) as of December 31, 2005 and June 30, 2006, respectively, for the purpose of stock price stabilization.

 

(14) Short-term borrowings

Short-term borrowings as of December 31, 2006 and June 30, 2007 are as follows:

 

Lender

   Type    Annual
Interest rate (%)
   Won (millions)
         2006    2007
Local currency borrowings Woori Bank and others    General    3.50~5.23    (Won) 323,081    553,915

Foreign currency borrowings National Austrailia Bank and others

   Usance and

Others

   5.53~5.54      153,639    24,221
                 
         (Won) 476,720    558,136
                 

 

24


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

(15) Long-term borrowings

Long-term borrowings as of December 31, 2006 and June 30, 2007 are as follows:

 

  (a) Local currency long-term borrowings

 

Lender

  

Type

  

Annual

Interest rate (%)

   Won (millions)  
         2006     2007  

Korea Development Bank

   Industrial facility    4.81~5.71    (Won) 4,720,055     4,921,400  

Industrial Bank of Korea

          

Ministry of Commerce, Industry and Energy

   Rural area
Development
   4.00      50,000     40,000  

National Agricultural Cooperative Federation

   Rural area
development
   4.00      50,000     40,000  
   Industrial facility    4.82~5.21      150,000     140,625  

the Small and Medium Industry Bank

   Rural area
Development
   4.00      22,000     22,000  
   Development    based rates-1.25      48,000     48,000  

Korea Exchange Bank

   Rural area

Development

   4.00      110,000     110,000  
   Energy

rationalization

   3.50      13,600     14,482  
   Industrial facility    5.31      —       100,000  

Woori Bank

   Development    based rates-1.25      17,900     17,900  

Korea Resources Corp.

   Development    based rates-1.25      6,000     4,000  
   Foreign Resource
Development
   2.50~3.50      60,100     52,933  

Hana Bank

   Rural area

Development

   4.00   

 


101,500


 

 

101,500


 

Kookmin Bank

   Rural Area

Development

   4.00      —       31,350  

Others

   General    6.00      684,572     683,746  
                    
           6,033,727     6,327,936  

Less: Current portion

           (1,434,557 )   (1,578,624 )
                    
         (Won) 4,599,170     4,749,312  
                    

(b) Foreign currency long-term borrowings

 

Lender

  

Type

  

Annual
interest rate (%)

  Won (millions)  
        2006     2007  
Japan Bank of International Cooperation    Facility    8.28   (Won) 138,130     124,858  
Korea National Oil Corp.    Oil    T-bond( 3 yrs.)-2.25     6,787     6,766  
   Development       
The Export-Import Bank of Korea    Project loans
Facility
   7.27     36,381     36,364  
US-EXIM       4.48     72,618     72,639  
Others       0.00~5.76     39,399     43,621  
                   
          293,315     284,248  

Less: Current portion

          (36,428 )   (42,669 )
                   
        (Won) 256,887     241,579  
                   

 

25


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (c) Debentures

 

    Annual
interest rate (%)
  Won (millions)  
    2006     2007  
Local currency debentures      
Electricity bonds   3.43~5.29   (Won) 4,675,000     4,925,000  
Corporate bonds   3.54~7.17     3,010,010     2,920,010  
               
      7,685,010     7,845,010  
               
Foreign currency debentures(*)      
FY-93   5.00+2x(JPY/KRW-11.03)     325,360     324,380  
FY-96   6.00~ 8.28     239,385     238,060  
FY-97   6.75 ~ 7.05     429,872     379,726  
FY-02   1.04 ~ 4.63     976,080     973,140  
FY-03(*)   1.33 ~ 4.75     676,256     669,532  
FY-04   0.51 ~ 5.75     936,929     925,895  
FY-05   3.13 ~ 5.25     584,440     589,537  
FY-06   5.50 ~ 6.00     604,240     602,420  
               
      4,772,562     4,702,690  
               
      12,457,572     12,547,700  

Less: Current portion

      (2,752,160 )   (4,054,661 )

Discount

      (39,844 )   (35,461 )
               
    (Won) 9,665,568     8,457,578  
               

(*) In 2003, the Company issued foreign debentures to KEPCO Cayman Company Limited of US$250 million and the right to exchange the debentures into shares of Powercomm Corporation held by the Company. KEPCO Cayman Company Limited issued foreign debentures of US$250 million under substantially similar terms and conditions as the debentures issued by the Company to KEPCO Cayman Company Limited, the details of which are as follows:
- Maturity date: November 26, 2008
- Exchangeable upon Qualifying Public Offering (QPO): QPO means the first listing on the Korea Stock Exchange, New York Stock Exchange or National Association of Securities Dealers Automated Quotations (NASDAQ) meeting certain requirements. Powercomm Corporation is not required to complete a QPO prior to the maturity of the debentures. The Company does not guarantee the QPO of Powercomm Corporation.
- Shares to be exchanged: Powercomm Corporation’s shares or DR.

-

Exchangeable period: From 10th day after the listing of Powercomm Corporation to 10th day before its maturity.

- Exchange price: 120% of lower amount of market price on the listing day or weighted average price for 10 days after its listing.
- Early redemption: When certain conditions are met or after 3 years from the listing, outstanding debentures are redeemable at the guaranteed return of 2.88% (102.74% of issuance amount).
- Repayment at the maturity: Repayment will be made with the guaranteed return of 3.68% (109.13% of issuance amounts).

As requested by bondholders to redeem the bond on the third year from issue date, the Company, on November 27, 2006, redeemed before maturity US$ 191.96 million of the bonds, representing 76.78% of the issued price, paying a total of US$ 197.22 million after applying the secured profit ratio of 2.88%. The paid amount was 102.74% of the issue price.

 

26


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (d) Exchangeable Bonds

 

Description

   Annual
interest rate %
   Won (millions)  
      2006     2007  
Overseas exchangeable bonds(*1)    0.00    (Won) 10,642     1,344  
Overseas exchangeable bonds(*2)    0.00      485,682     485,681  
Overseas exchangeable bonds(*2)    0.00      555,114     555,114  
                 
        1,051,438     1,042,139  

Plus: Premium on debentures issued

        314     29  

Less: Discount on debentures issued

        (80,822 )   (73,311 )

Conversion right adjustment

        (64,931 )   (58,206 )
                 

Exchangeable bonds, net

      (Won) 905,999     910,651  
                 

(*1) On November 4, 2003, the Company issued overseas exchangeable bonds of JPY28,245,468,400 at a premium. During 2005, the bondholders converted JPY14,438,543,000 into 344,704 shares of common stock and 10,444,768 shares of DR (equivalent to 5,222,384 shares of common stock). During 2006, exchangeable bonds of JPY10,501,022,000 were converted into 745,309 shares of common stock and 6,607,174 shares of DR (equivalent to 3,303,587 shares of common stock).

During 2007, exchangeable bonds of JPY869,850,000 were converted into 335,309 shares of common stock and 6,607,174 shares of DR (equivalent to 3,303,587 shares of common stock).

As of June 30, 2007, the remaining number of common stock to be converted is 48,445 shares if the conversion right is exercised. As of June 30, 2007, the details of the bonds were as follows:

- Maturity date: November 4, 2008
- Amount to be paid at maturity: JPY125,645,000

-

Exchange period: From December 15, 2003 to 10th day prior to its maturity.

- Shares to be exchanged: Common stock of the Company or its equivalent DR
- Exchange price: (Won)30,000 per share converted at KRW10.621/JPY, the exchange rate at the date of issuance
- Put option: Bondholders had a put option could be exercised for JPY26,834,000 on November 6, 2006 which expired unexercised.
- Call option: The Company has a call option that it can exercise on or at any time after November 6, 2006. Notes are callable if the closing price per Common Share on the Korea Stock Exchange or the ADSs on the New York Stock Exchange in each case, for each of any 20 Trading Days in a 30 consecutive Trading period ending not more than 5 days prior to the date on which notice such redemption is given, is at least 120% of the Conversion Price or of the Conversion Price per ADS.
- In accordance with Article 17 “Issuance of Convertible Bonds” and Article 11 “Calculation of Dividend for New Shares” of the Articles of Incorporation of the Company, distribution of dividends on new shares resulting from conversion of exchangeable bonds is deemed to have been issued at the end of the immediately preceding fiscal year.

 

(*2) On November 21, 2006, the Company issued overseas exchangeable bonds of JPY61,345,128,000 and EUR463,320,780 with a discount value (JPY60,810,000,000 and EUR401,700,000). The Company acquired 18,900,000 treasury shares in the amount of (Won)740,949 million to redeem overseas exchangeable bonds of JPY61,345,128,000 and EUR463,320,780. As of June 30, 2007, the details of the bonds were as follows:
- Maturity date: November 23, 2011
- Amount to be paid at maturity: JPY61,345,128,000 and EUR463,320,780

-

Exchange period: From January 4, 2007 to 10th day prior to its maturity.

- Shares to be exchanged: Common stock of the Company or its equivalent DR
- Exchange price: (Won)51,000 per share converted at KRW199.8/EUR, the exchange rate at the date of issuance

 

27


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

- Put option: Bondholders have a put option that they can exercise for JPY61,132,293,000 and EUR437,612,000 on November 23, 2009.
- Call option: The Company has a call option that it can exercise on or at any time after November 23, 2009. Notes are callable if the closing price per Common Share on the Korea Stock Exchange or the ADSs on the New York Stock Exchange in each case, for each of any 20 Trading Days in a 30 consecutive Trading period ending not more than 5 days prior to the date on which notice such redemption is given, is at least 120% of the Conversion Price or of the Conversion Price per ADS.

(e) Foreign currency debts, by currency, as of December 31, 2006 and June 30, 2007 are as follows:

 

     Won (millions), US$ JPY, EUR, GBP and CNY (thousands)
     2006    2007
    

Foreign

currency

   Won
equivalent
  

Foreign

currency

   Won
equivalent

Short-term
Borrowings

   US$ 165,274    153,639    US$ 26,134    (Won) 24,221
                 

Long-term

   US$ 274,958    255,601    US$ 259,632      240,627

    borrowings

   CNY 317,000    37,714    CNY 358,400      43,621
                 
      293,315         284,248

Debentures

   US$ 4,435,270    4,109,640    US$ 4,429,919      4,090220
   JPY  40,000,000    312,732    JPY 40,000,000      300,972
   EUR 250,000    305,560    EUR 250,000      311,498
   GBP 24,467    44,630    GBP —        —  
                 
      4,772,562         4,702,690

Exchangeable

   JPY  62,340,623    496,324    JPY  61,470,773      487,025

bond

   EUR 463,321    555,114    EUR 463,321      555,114
                 
      1,051,438         1,042,139
      6,270,954       (Won) 6,062,531
                 

 

  (f) Aggregate maturities of the Company’s long-term debt as of June 30, 2007 are as follows:

 

     Won (millions)

Year ended

June 30

  

Local

currency

borrowings

  

Foreign

currency

borrowings

  

Domestic

debentures

  

Foreign

debentures

  

Exchangeable

Bonds

   Total

2007.7.1-2008.6.30

   1,578,624    42,669    2,370,000    1,684,661    —      5,675,954

2008.7.1-2009.6.30

   1,875,307    42,668    1,635,000    59,835    1,344    3,614,154

2009.7.1-2010.6.30

   1,701,540    42,522    2,050,000    1,071    —      3,795,133

2010.7.1-2011.6.30

   741,571    42,521    840,000    683,207    —      2,307,299

2011.7.1-2012.6.30

   318,584    38,969    830,010    886    1,040,795    2,229,244

Thereafter

   112,310    74,899    120,000    2,273,030    —      2,580,239
                             
   6,327,936    284,248    7,845,010    4,702,690    1,042,139    20,202,023
                             

 

28


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

(16) Assets and Liabilities Denominated in Foreign Currencies

Significant assets and liabilities of the Company (excluding foreign subsidiaries) denominated in foreign currencies other than those mentioned in note 15(e) as of December 31, 2006 and June 30, 2007 are as follows:

 

     Won (millions), US$, JPY and EUR (thousands)
     2006    2007
     Foreign
currency
(thousands) (*)
   Won
equivalent
(millions)
   Foreign
currency
(thousands) (*)
   Won
equivalent
(millions)

Assets:

           

Cash and cash equivalents

   US$ 4,346    (Won) 4,040    US$ 31,482    (Won) 29,178
   RS —        —        40,824      930
   PHP —        —        12,337      247
   AUD —        —        801      629

Short-term financial instruments

   US$ 5,567      5,175    US$ -      —  

Trade receivables

   US$ 8,123      7,552    US$ 4,234      3,841
   AUD —        —        845      662
   RS —        —        38,844      878

Other

   US$ 200      186    US$ 30,590      28,352

account receivables

   EUR 50      61    EUR 95      119

Other current assets

   US$ 385      358    US$ -      —  
   AUD —        —      AUD 50      39
   PHP —        —      PHP 10,989      220

Other non-current

   US$ 384      358    US$ 1,341      1,243

assets

   JPY 14,091      110    JPY 14,428      108
   EUR 20      25    EUR 20      25
                   
      (Won) 17,865       (Won) 66,471
                   

Liabilities:

           

Trade payables

   US$  248,845    (Won) 231,326    US$ 141,235    (Won) 115,087
   EUR  2,035      2,487    EUR 139      174
   JPY 27,000      211    JPY -      —  
   AUD —        —      AUD 385      296

Other accounts payable

   US$ 193,655      180,031    US$ 36,149      33,503
   EUR  1,076      1,316    EUR 7      9
   JPY  25,634      200    JPY -      —  
   CHF —        —      CHF 452      340

Other current liability

   US$ 5,898      5,484    US$ 785      727
   RS —        —      RS 16,985      39
   PHP —        —      PHP 1,654      33
   AUD —        —      AUD 128      100
                   
      (Won) 421,055       (Won) 154,389
                   

(*) Foreign currencies other than US$, JPY and EUR are converted into US$.

 

29


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

(17) Retirement and Severance Benefits

Changes in retirement and severance benefits for the year ended December 31, 2006 and for six-month period ended June 30, 2007 are summarized as follows:

 

     Won (millions)  
     2006     2007  

Estimated severance liability at beginning of year

   (Won) 1,255,744     1,527,435  

Provision for retirement and severance benefits

     313,078     93,955  

Increase arising from change in consolidated subsidiaries

     1,746     —    

Payments

     (43,133 )   (57,709 )

Estimated severance liability at end of period

     1,527,435     1,563,681  

Transfer to National Pension Fund

     (93 )   (93 )

Deposit for severance benefit insurance

     (343,093 )   (315,618 )

Net balance at end of period

   (Won) 1,184,249     1,247,970  

 

(18) Liability for Decommissioning Costs

Under the Korean Electricity Business Act (“EBA”) Article 94, the Company is required to record a liability for the decommissioning of nuclear facilities and disposal of radioactive wastes. In addition, under the Korean Atomic Energy Act (“AEA”), an entity which constructs and operates a nuclear power reactor and related facilities must obtain permission from the Korean Minister of Science and Technology (“MOST”).

Effective January 1, 2004, the Company adopted SKAS No. 17 and retrospectively adjusted the liability for decommissioning costs at the estimated fair value using discounted cash flows to settle the asset retirement obligations of dismantlement of the nuclear power plants, spent fuel and radioactive wastes. In addition, during 2004, the Company updated its estimates of the liability for decommissioning costs based on new engineering studies (the “2004 study”) provided by third parties.

The 2004 study revised certain essential factors such as timing of cash outflows. As required by SKAS No. 17, the change in accounting included the revised factors from the 2004 study since these factors were the Company’s best estimates at the time the Company elected to adopt SKAS No. 17. With the adoption of SKAS No. 17, the Company remeasured the liability for decommissioning costs and reflected the cumulative effect of such change in accounting including the effect of the change in estimate into the beginning balance of retained earnings as of January 1, 2004.

Due to the adoption of this standard, the Company remeasured the liability for decommissioning costs as of January 1, 2004 and reflected a cumulative effect of such change in accounting up to fiscal year 2003 into the beginning balance of 2004 retained earnings as follows:

 

     Won (millions)
    

As previously

reported

   Difference    After adoption

Retained earnings

   (Won) 2,925,808    687,362    3,613,170

Asset retirement costs, net

     —      1,504,173    1,504,173

Liability for decommissioning costs

     5,091,070    556,088    5,647,158

Deferred income tax liabilities

     82,621    260,723    343,344

As of June 30, 2007, the Company has recorded a liability of (Won)7,849,745 million as the cost of dismantling and decontaminating existing nuclear power plants, consisting of dismantling costs of nuclear plant of (Won)4,014,472 million and storage costs of spent fuel and radioactive waste of (Won)3,835,273 million. Accretion expense consists of period-to-period changes in the liability for decommissioning costs resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. This cost is included in cost of electric power in the accompanying consolidated statements of income.

 

30


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

(19) Receivables at Present Value

Present value discounts on long-term loans as of December 31, 2006 and June 30, 2007 are as follows:

 

               Won (millions)
               2006
    

Imputed

Interest rate (%)

   Period    Nominal value    Discount   

Present

value

Young-kwang

   7.20    10 years    (Won) 3,349    1,618    1,731

Ul-jin

   6.00    10 years      8,600    2,841    5,759

Kori

   5.00    10 years      14,880    4,420    10,460

Kori

   4.00    10 years      15,120    3,941    11,179
                      
         (Won) 41,949    12,820    29,129
                      
               Won (millions)
               2007
     Interest rate (%)    Period    Nominal value    Discount   

Present

value

Young-kwang

   7.20    10 years    (Won) 3,350    435    2,915

Ul-jin

   6.00    10 years      8,600    1,413    7,187

Kori

   4.00    10 years      30,000    7,897    22,103
                      
         (Won) 41,950    9,745    32,205
                      

 

(20) Other Current Liabilities

Other current liabilities as of December 31, 2006 and June 30, 2007 are as follows:

 

     Won (millions)
     2006    2007

Advance received

   (Won) 141,996    141,969

Withholdings

     173,515    159,801

Unearned revenue

     57,294    46,474

Others

     318,070    482,576
           
   (Won) 690,875    830,820
           

 

(21) Derivative Instruments Transactions

The Company has entered into the various swap contracts to hedge risks involving exchange rate and interest rate of foreign currency debts.

 

31


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (a) Currency swap contracts as of June 30, 2007 are as follows:

 

    

Contract

Year

  

Settlement

Year

   Contract amounts in millions   

Contract interest rate per annum

           Pay    Receive   

Pay (%)

   Receive (%)

J.P. Morgan Chase Bank & Deutsche Bank(*1)

   2002    2007    JPY 76,700    US$ 650    1.18    4.25

Barclays Bank PLC, London

   2002    2007    JPY 30,400    US$ 250    1.04    3M

Libor+0.75

ABN AMRO

   2002    2008    KRW 181,500    US$ 150    5.95    4.63

J.P. Morgan Chase Bank & Deutsche Bank

   2003    2008    JPY 23,770    US$ 200    1.28    4.25

Credit Suisse First Boston

   2003    2013    KRW 177,720    US$ 150    5.12    4.75

ABN AMRO

   2004    2008    KRW 123,700    US$ 100    4.25    5.30

Deutsche Bank

   2004    2008    KRW 61,850    US$ 50    4.25    5.30

Barclays Bank PLC

   2004    2014    US$ 150    KRW 172,875    5.75    5.10

J.P. Morgan Chase Bank

   2004    2011    KRW 86,400    US$ 75   

Within 3 years:

4.875

After 3 years:

4.875-(10.9-JPY/KRW Spot rate)

   4.95

Credit Suisse First Boston

   2004    2011    KRW 86,400    US$ 75   

Within 3 years: 4.875

After 3 years:

4.875-(10.9-JPY/KRW Spot rate)

   4.95

Barclays Bank PLC, London

   2004    2011    KRW 138,251    US$ 120    4.85    4.875

BNP PARIBAS

   2004    2011    KRW 17,282    US$ 15    4.85    4.875

HANA BANK

   2004    2011    KRW 17,282    US$ 15    4.85    4.875

Credit Suisse First Boston

   2004    2011    KRW 115,210    US$ 100    4.85    4.875

Barclays Bank PLC, London

   2005    2012    KRW 155,400    US$ 150    5.59    5.25

Lehman Brothers

   2005    2012    KRW 51,800    US$ 50    5.59    5.25

Deutsche Bank

   2005    2012    KRW 51,800    US$ 50    5.59    5.25

BNP PARIBAS

   2005    2012    KRW 51,735    US$ 50    5.59    5.25

Barclays

   2006    2008    KRW 68,606    JPY 8,000    5.61    1.33

Deutsche Bank

   2006    2008    KRW 17,151    JPY 2,000    5.61    1.33

Credit Suisse First Boston

   2006    2016    KRW 94,735    US$ 100    5.26    6.00

Barclays

   2006    2016    KRW 94,735    US$ 100    5.26    6.00

Citibank

   2006    2016    KRW 94,735    US$ 100    5.24    6.00

UBS (*2)

   2006    2016    KRW 98,100    US$ 100    5.48    5.50

Credit Suisse First Boston

   2006    2016    KRW 98,100    US$ 100    5.48    5.50

Barclays

   2006    2016    KRW 71,888    US$ 75    4.81    5.50

Deutsche Bank

   2006    2016    KRW 71,888    US$ 75    4.81    5.50

Goldman Sachs

   2007    2008    KRW 54,215    JPY 7,000    4.98    1.33

JP Morgan

   2007    2008    KRW 23,234    JPY 3,000    4.98    1.33

(*1) Under the terms of these derivative contract, if the Republic of Korea declares default on its debts, KEPCO is entitled to receive Korean government bonds instead of cash from JP Morgan Chase Bank and Deutsche Bank. Valuation for these embedded derivatives is reflected in the valuation of the currency swap. The Company pays JPY7,670 million which is 10% of the contract amount every March and September and will receive US$650 million in September 2007.
(*2) With the currency swap contract which has the same effect as issuing fixed rate bonds in Korean won, the Company accounted for the valuation profit and loss from the said currency swap contract as accumulated other comprehensive income after applying cash flow hedge accounting.

 

32


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (b) Interest rate swap contracts as of June 30, 2007 are as follows:

 

    

Notional amount

in millions

   Contract interest rate per annum

Counterparty

      Pay (%)    Receive (%)    Term

Korea Foreign Exchange Bank

   KRW 50,000    5,24(3M CD+0.21%)    5.42    2007~2010

   KRW 50,000    5,26(3M CD+0.25%)    5,19    2007~2010

JPMorgan Chase Bank

   KRW 172,800    4.65    Within 2 years: 4.875

After 2 years : 4.875-
(10.9-JPY/KRW
Spot rate)

   2005-2011

 

  (c) Valuation gains and losses on derivative contracts recorded as other income or expense for the six-month periods ended June 30, 2006 and 2007 are as follows:

 

     Won (millions)  
     2006     2007  

Currency swap

    

Gains

   (Won) 599     23,511  

Losses

     (139,025 )   (25,224 )

Interest rate swap

    

Gains

     1,196     441  

Losses

     (8,755 )   —    

Currency Forward

    

Gains

     2  

Losses

     (29,828 )

Swaption

    

Gains

     194  

Losses

     —       —    
              
   (Won) (145,985 )   (30,904 )
              

 

  (d) The gains (losses) on derivative qualifying as cash flow hedge of (Won) (773)million and ((Won) 4,710 million) are reflected within capital adjustment for the year ended December 31, 2006 and for the six-month periods ended June 30, 2007, respectively.

 

(22) Power Generation, Transmission and Distribution Expenses

Power generation, transmission and distribution expenses for the six-month periods ended June 30, 2006 and 2007 are as follows:

 

     Won (millions)
     2006    2007

Fuel

   (Won) 4,431,088    4,854,742

Purchase of electric power

     1,004,877    1,151,298

Labor

     739,783    806,201

Depreciation and amortization

     2,664,485    2,376,187

Maintenance

     902,138    963,600

Provision for decommissioning costs

     162,498    174,763

Ordinary development expenses

     174,267    213,066

Others

     537,112    735,861
           
   (Won) 10,616,248    11,275,718
           

 

33


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

(23) Selling, General and Administrative Expenses

Details of selling, general and administrative expenses for the six-month periods ended June 30, 2006 and 2007 are as follows:

 

     Won (millions)
     2006    2007

Salaries

   (Won) 259,227    239,650

Employee benefits

     50,505    44,431

Taxes and dues

     12,049    19,767

Rent

     12,081    13,451

Depreciation and amortization

     32,314    37,302

Maintenance

     7,228    4,391

Commission and consultation fees

     49,434    44,863

Ordinary development expenses

     46,349    45,162

Collection expense

     164,435    161,556

Promotion

     12,102    15,548

Bad debts

     15,287    6,991

Communication

     15,935    16,445

Insurance

     2,543    1,195

Rewards

     1,167    1,138

Others

     51,675    49,371
           
   (Won) 732,331    701,261
           

 

(24) Income Taxes

The Company is subject to a number of income taxes based on taxable at the following normal tax rates:

 

Taxable earnings

   Tax rate  

Up to (Won)100 million

   14.3 %

Over (Won)100 million

   27.5 %

 

34


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

The components of income tax expense for the six-month periods ended June 30, 2006 and 2007 are summarized as follows:

 

     Won (millions)  
     2006     2007  

Current income tax expense of KEPCO

   (Won) 45,957     109,786  

Deferred income tax expense of KEPCO

     71,400     73,336  
              
     117,357     183,122  

Income taxes of subsidiaries

     391,883     397,371  
              

Income taxes

   (Won) 509,240     580,493  
              

Effective tax rate

   (Won) 34.89 %   38.35 %
              

 

(25) Earnings Per Share

Basic earnings per common share are calculated by dividing net income by the weighted-average number of shares of common stock outstanding for the six-periods ended June 30, 2006 and 2007 as follows:

 

     Won (millions)
     2006    2007

Net income

   (Won) 938,536    916,070

Weighted-average number of common shares outstanding

     636,959,868    621,417,135
           

Basic earnings per common share in Won

   (Won) 1,473    1,474
           

Diluted earnings per share are calculated by dividing diluted net income by the weighted-average number of shares of common equivalent stock outstanding for the six-month periods ended June 30, 2006 and 2007 are calculated as follows:

 

     Won (millions)
     2006    2007

Net income

   (Won) 938,536    916,070

Exchangeable bond interest

     593    9,898
           

Diluted net income

     939,129    925,968
           

Weighted-average number of common shares and diluted securities outstanding

     640,457,985    640,365,046
           

Diluted earnings per share in Won

   (Won) 1,466    1,446
           

 

35


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

(26) Transactions and Balances with Related Companies

 

  (a) Significant transactions between the Company and related parties for the six-month periods ended June 30, 2006 and 2007 are as follows.

 

          Won (millions)

Related party

   Transactions    2006    2007

Sales and other income:

        

Korea Gas Corporation

        —      740

Korea District Heating Co.

   Sales of electricity      
   and others    (Won) 106,008    99,819

LG Powercomm Corporation

        37,850    17

Others

        6,539    2,233
              
      (Won) 150,397    102,809
              

Purchases and other expenses:

        

Korea Gas Corporation

   Purchases of LNG    (Won) 2,437,175    2,516,064

Korea District Heating Co.

   Commissions for
service and others
     
        348    73

LG Powercomm Corporation

        33,026    3,472

Korea Electric Power Industrial Development, Ltd.

        81,710    29,388

Others

        875    —  
              
      (Won) 2,553,134    2,548,997
              

 

  (b) Receivables and payables arising from related parties transactions as of December 31, 2006 and June 30, 2007 are as follows:

 

          Won (millions)

Related party

   Accounts    2006    2007

Receivables:

        

Korea Gas Corporation

   Trade receivables and

other accounts receivable

   (Won) 200    19

Korea District Heating Co.

        50,141    12,156

LG Powercomm Corporation

        1    —  

Korea Electric Power Industrial Development, Ltd.

        429    445
              
      (Won) 50,771    12,620
              

Payables:

        

Korea Gas Corporation

   Trade payables and      
   other accounts payable    (Won) 521,146    414,377

Korea District Heating Co.

        —      —  

LG Powercomm Corporation

        336    363

Korea Electric Power Industrial Development, Ltd.

        7,073    3,103
              
      (Won) 528,555    417,843
              

 

36


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (c) Short-term and long-term borrowings from related parties as of December 31, 2006 and June 30, 2007 are as follows:

 

Lender

   Type    interest rate %    2006    2007

Korea Development Bank

   Facility    4.72~5.67    (Won) 4,634,375      4,850,000

Korea Development Bank

   General    5.49      85,680      71,400

The Export-Import Bank of Korea

   Project loan    7.27      36,381      —  

Industrial Bank of Korea

   Rural area
development
   4.00      22,000      22,000

Industrial Bank of Korea

   Borrowings    4.00      —        13,000

Industrial Bank of Korea

   Rural area
development
   Libor-1.25      48,000      35,000

Korea Resources Corporation

   Energy
rationalization
   Libor-1.25      6,000      4,000

Korea Resources Corporation

   Facility    2.5~3.5      35,765   

Ministry of Commerce, Industry and Energy

   Rural area
development
   4.00      50,000      40,000
                   
         (Won) 4,946,617    (Won) 5,071,165
                   

 

  (d) Garantees provided by related companies for the Company as of June 30, 2007 are as follows:

 

          Won (millions), USD, JPY and GBP (thousands)

Type

   Related party    Currency   

Guaranteed

amounts

  

Type of

borrowings

  

Balance of

borrowing as of

June 30, 2007

Payment guarantee (*)

   Korea
Development
Bank
   US$      740,771    Foreign
currency
bond
   US$      536,417

(*) To facilitate the Restructuring Plan described in note1(a), Korea Development Bank has provided a repayment guarantee to creditors of certain foreign currency debentures of the Company, which existed at the time of spin-off, but not redeemed as of June 30, 2007, as consideration for the elimination of the joint and several liability of the Company and its power generation subsidiaries.

 

37


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

(27) Transactions and Balances with Consolidated Subsidiaries

 

  (a) Significant transactions among KEPCO and consolidated subsidiaries for the year ended December 31, 2006 and the six-months ended June 30, 2007 are as follows. These were eliminated in consolidation:

 

          Won (millions)

Consolidated subsidiaries

   Transactions    2006    2007

Sales and other income:

        

Korea Electric Power Corporation

   Sales of electricity      
   and others    (Won) 445,603    126,339

Korea Hydro & Nuclear Power Co., Ltd.

        5,562,882    2,697,895

Korea South-East Power Co., Ltd.

        1,975,454    1,067,364

Korea Midland Power Co., Ltd.

        2,490,256    1,370,267

Korea Western Power Co., Ltd.

        2,418,072    1,558,566

Korea Southern Power Co., Ltd.

        3,309,389    1,819,506

Korea East-West Power Co., Ltd.

        2,504,917    1,362,512

Others

   Commissions for service
and others
     1,139,645    492,784
              
      (Won) 19,846,218    10,495,233
              

Purchases and other expenses:

        

Korea Electric Power Corporation (*)

   Purchases of electricity

and others

   (Won) 18,598,155    9,991,268

Korea Hydro & Nuclear Power Co., Ltd.

   Commissions for service

and others

     653,112    312,850

Korea South-East Power Co., Ltd.

        106,451    39,799

Korea Midland Power Co., Ltd.

        154,113    46,944

Korea Western Power Co., Ltd.

        83,392    45,710

Korea Southern Power Co., Ltd.

        84,777    26,103

Korea East-West Power Co., Ltd.

        81,381    56,493

Others

        10,049    7,186
              
      (Won) 19,771,430    10,526,353
              

(*) KEPCO has purchased electricity from its power generation subsidiaries through Korea Power Exchange.

 

38


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (b) Receivables and payables arising from KEPCO and consolidated subsidiaries transactions as of December 31, 2006 and June 30, 2007 are as follows. These were eliminated in the consolidation:

 

          Won (millions)

Consolidated subsidiaries

   Accounts    2006    2007

Receivables:

        

Korea Electric Power Corporation

   Trade receivables
and others
   (Won) 46,463    27,809

Korea Hydro & Nuclear Power Co., Ltd.

        390,592    374,907

Korea South-East Power Co., Ltd.

        175,008    149,328

Korea Midland Power Co., Ltd.

        200,259    228,767

Korea Western Power Co., Ltd.

        236,559    224,498

Korea Southern Power Co., Ltd.

        277,232    279,870

Korea East-West Power Co., Ltd.

        227,644    207,963

Others

        233,935    40,660
              
      (Won) 1,787,692    1,533,802
              

Payables:

        

Korea Electric Power Corporation (*)

   Trade payables
and others
   (Won) 1,575,494    1,438,359

Korea Hydro & Nuclear Power

        

Co., Ltd.

        50,142    29,529

Korea South-East Power Co., Ltd.

        15,787    13,232

Korea Midland Power Co., Ltd.

        22,271    4,738

Korea Western Power Co., Ltd.

        7,499    5,720

Korea Southern Power Co., Ltd.

        10,615    1,553

Korea East-West Power Co., Ltd.

        12,745    5,394

Others

        75,507    38,514
              
      (Won) 1,770,060    1,537,039
              

(*) KEPCO has purchased electricity from its power generation subsidiaries through Korea Power Exchange.

 

39


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (c) The elimination entries of revenues and expenses among KEPCO and consolidated subsidiaries for the six-month periods ended June 30, 2007 are summarized as follows:

 

Won (millions)

  

Won (millions)

Accounts

   Amount   

Accounts

   Amount

Operating revenues

   (Won) 10,096,586    Operating expenses    (Won) 10,081,333

Rental income

     8,519    Rent expenses      1,965

Interest income

     32,578    Interest expenses      32,578

Others

     5,989    Others      27,796
                
   (Won) 10,143,672       (Won) 10,143,672
                

 

  (d) The elimination entries of receivables and payables among KEPCO and consolidated subsidiaries as of June 30, 2007 are summarized as follows:

 

Won (millions)

  

Won (millions)

Accounts

   Amount   

Accounts

   Amount

Trade payables

   (Won) 1,440,136    Trade receivables    (Won) 1,463,878

Accounts payable

     223,193    Long-term receivables      1,373,517

Long-term accounts payable

     1,373,517    Other accounts receivables      211,547

Contribution in aid of

construction

     1,550,234    Rights of electricity And gas utilization      1,550,234

Accrued expense

     12,252    Construction-in-progress      41,002

Others

     42,945    Others      2,099
                
   (Won) 4,642,277       (Won) 4,642,277
                

 

  (e) KEPCO Ilijan Corporation, which is the subsidiary of KEPCO International Philippines Inc., is engaged in the power generation business in the Philippines and borrowed US$281,032,000 as project financing from Japan Bank of International Cooperation and others for that business. In connection with the borrowing, KEPCO Ilijan Corporation’s investment securities, accounted for under the equity method, and held by KEPCO International Philippines Inc., were pledged as collateral. The Company has provided Japan Bank of International Cooperation and others with guarantees to the extent not exceeding US$72,000,000 for the performance of the power generation business of KEPCO Ilijan Corporation.

 

40


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

(28) Commitments and Contingencies:

 

  (a) The Company is involved in legal proceedings regarding matters arising in the ordinary course of business. Related to these matters, as of June 30, 2007, the Company is engaged in 327 lawsuits as a defendant and 61 lawsuits as a plaintiff. The total amount claimed against the Company is (Won)406,108 million and the total amount claimed by the Company is (Won)43,614 million as of June 30, 2007. As of June 30, 2007, the Company has recorded a liability related to the above claims amounts to (Won)38,735 million, which has been accounted for other long-term liabilities. In the opinion of management, the ultimate results of these lawsuits will not have a material adverse effect on the Company’s financial position, results of operation, or liquidity.

 

  (b) Short-term Credit Facilities

Payment guarantee and short-term credit facilities from financial institutions as of June 30, 2007 are as follows:

 

(i)     Payment Guarantee

 

     
          Won (millions), US$ (thousands)

Description

  

Financial institution

   Credit lines
Payment of import letter of credit   

Korea Exchange Bank and others

   US$ 1,219,400
      (Won) 217,100
Payment of customs duties    Korea Exchange Bank    (Won) 2,688
Credits    Korea Exchange Bank    (Won) 122,300
Borrowings    Woori Bank and others    (Won) 300,000
      US$ 80,000
Performance bond   

Seoul Guarantee Insurance Co., Ltd. and others

  
      (Won) 80,000
Payment of foreign currency    Korea Exchange Bank    US$ 415,000

 

(ii)    Overdraft and Others

 

     
          Won (millions), US$ (thousands)

Description

  

Financial institution

   Credit lines
Overdraft   

National Agricultural Cooperative Federation and others

   (Won) 700,000
Discount on promissory note   

Korea Exchange Bank

   (Won) 269,000
Commercial Paper   

Korea Exchange Bank and others

   (Won) 700,000
Trade finaning   

Shinhan Bank

   US$ 2,000
Other   

Shinhan Bank and others

   (Won) 82,000

 

  (c) The Company is provided with guarantees from Seoul Guarantee Insurance Co., Ltd. and others for performance of contract, warranty fees and bids for construction work in relation to overseas constructions.

 

  (d) The Company has provided a promissory note of (Won)1,771 million to Hyundai Heavy Industry, Co., Ltd. as a guarantee for performance of contract.

 

  (e)

A key stipulation of the Agreed Framework signed by the United States and North Korea in October 1994 was that a US-led international consortium would construct two commercial light water reactors in North Korea in return for certain nuclear non-proliferation steps to be taken by North Korea. The Korean Peninsula Energy Development Organization (“KEDO”) was chartered in March 1995 as the international consortium stipulated by the Agreed Framework and signed

 

41


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

an agreement with North Korea in December 1995 to supply the light water reactors. Kumho, North Korea was selected as the site for such light water reactors and KEDO designated the Company as its prime contractor to build two units of pressurized light water reactors with a total capacity of 2,000 megawatts. The Company entered into a fixed price turnkey contract with KEDO, which became effective on February 3, 2000. The contract amount was US$4,182 million subject to adjustment to cover any changes in the price level.

In November 2002, amid suspicions that North Korea was engaged in an undeclared program to enrich uranium, KEDO suspended the supply of heavy fuel oil to North Korea, which was part of the Agreed Framework. Subsequently, North Korea withdrew from the Treaty on the Non-Proliferation of Nuclear Weapons in January 2003 and resumed operations at the Yongbyon facility, a nuclear facility whose operations had been frozen under the Agreed Framework. Several diplomatic initiatives were taken to resolve these issues to no avail.

In December 2003, asserting that North Korea had not met the conditions required for the continuation of the project, KEDO suspended the construction of the project for one year, which was subsequently extended to November 30, 2005. However, the Company continued to perform maintenance for the project during 2004 and 2005. In December 2005, KEDO sent a delegation to North Korea to discuss the issues regarding the project’s termination and demobilization. During the meeting, North Korea requested KEDO to withdraw all of its personnel. On January 8, 2006, KEDO completed the withdrawal of all workers from the project site.

The Executive Board of KEDO decided to terminate the light water reactor project as of May 31, 2006. KEDO notified the Company of the termination of the project and the related turnkey contract between KEDO and the Company. On December 12, 2006, the Company entered into the Termination Agreement (“TA”) with KEDO.

Pursuant to the terms of the TA, the Company accepts substantially all rights and obligations related to the light water reactor supplements outside of North Korea, from KEDO. In exchange, the Company waives the right to claim any expenses incurred and any probable claims by subcontractors to KEDO. As of June 30, 2007, the Company offset the existing accounts receivables from KEDO, which it surrendered according to the “TA”, against advance received. As a result, the Company recorded in other non-current assets the estimated fair value of assets received amounting to (Won)94,088 million for which the proceeds from disposal will be applied to existing and future obligations which was also offset existing advance received recorded in current and non-current liabilities. In addition, the Company recorded in other long-term liabilities estimated claims currently reasonably estimable to coordinated contractors amounting to (Won)20,647 million. Final settlement of ultimate gains or losses from the project is contingent upon full disposal of related assets and settlement of obligations.

 

  (f) The Company entered into a Power Purchase Agreement with GS EPS Co., Ltd. and other independent powe0r producers for power purchases in accordance with the Electricity Business Act. These purchase agreements require the Company to purchase minimum amounts which the Company has historically exceeded. The power purchased under these agreements amounted to (Won)692,977 million and (Won)665,004 million for the years ended June 30, 2006 and 2007 respectively. In relation to the power purchases, the Company entered into long-term purchase contracts with various suppliers and the terms of these contracts can be summarized as follows:

 

Generation type

   Contract expiration term

Combined cycle unit

   2018~2025

Hydroelectric units

   2009~2032

Small hydroelectric and other units

   2007~2019

Under these contracts, purchase quantities are not fixed, and purchase prices are annually reset based on certain formula for each generation type.

 

42


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

  (g) The Company has contracted Doosan Industrial Co., Ltd. and others amounting to W3,956,695 million, US$40,950 thousand and JPY17,792,100 thousand in the aggregate as of June 30, 2007, for construction of power plant facilities and facility maintenance

 

  (h) The Company has bituminous coal, anthracite Coal, oil and LNG purchase contracts with domestic and foreign suppliers including Korea Gas Corporation (a related party) as of June 30, 2007. Under these contracts, the Company must purchase an annual quantity of coal. The purchase price is determined based on market prices. In relation to coal imports, the Company entered into long-term transportation contracts with Hanjin Shipping Co., Ltd. and others as of June 30, 2007.

 

Fuel type

  

Contract expiration

Term

  

Quantity

Bituminous Coal

   2007~2013    41,845 thousand ton/year

Anthracite Coal

   2007    Set by government

Oil

   2007    1,941 thousand kl/year

LNG

   2026    Mutual agreement

 

  (i) During 2001, the Company voluntarily suspended operations of the Gangneung hydroelectric generating plant to improve the quality of water used in generating electricity. The expenses related to the suspension of operations, including depreciation on the utility plant during 2007 and 2006 amounting to (Won)1,718 million and (Won)3,569 million, respectively, were charged to other expenses. In December 2005, a hearing was held by government officials, and attended by representatives of the Company, Gangneung residents and Korea Environment Institute (KEI). At the hearing, the Korean government ordered the conditional suspension of operations based on the KEI findings on the environmental effect of Gangneung hydroelectric generating plant. As of June 30, 2007, Gangneung hydroelectric generating plant is still under conditional suspension of operations based on the KEI findings. The Company will be able to utilize this plant in the future provided that the quality of the water improves and the residents of Gangneung consent to operations. Moreover, Korea South-East Power Co., Ltd., a subsidiary of KEPCO, has recognized provisions for litigations regarding losses on fishery rights related to Samchonpo Thermal Power Site Division amounting to (Won) 16,570 million which was reasonably estimated based upon practices of other companies in the same industry.

 

  (j) In April 2005, Korea Midland Power Co., Ltd. invested in Gangwon wind power corporation amounting to (Won) 5,679 million (15% of interest) to participate in renewable energy industry. Gangwon wind power corporation entered into the loan contract for financing construction costs. The Company has agreed to pay construction costs incurred in excess of estimated costs up to (Won)1,203 million. Also, investments in Gangwon wind power (book value of (Won) 5,725 million) are restricted as collateral with Industrial Bank of Korea and BNP PARIBAS.

 

  (k) The Company provides performance guarantees related to the operation of the Lebanon power generation plant amounting to US$17,113 thousand to the Lebanon Electricity Agency.

 

  (l) In May 2006, the international consortium, which Korea Midland Power Co., Ltd. participated in, acts as the preferred contractor for the Cirebon private power generation industry, as ordered by Indonesia PLN. A power purchase agreement is being negotiated and summary of the agreement is as follows.

 

Name of Business

  

Construction and operation of Indonesia

Cirebon thermal power generation

Plant Capacity    660MW * 1 Plant
Total Construction Fee    US$736,000 thousand
Construction Period    3 years from completion of resources supply

 

43


Korea Electric Power Corporation

Notes to Consolidated Financial Statements, Continued

(Unaudited)

 

KEPCO is currently providing payment guarantee amounting to US $ 825 thousand for the above project as of June 30, 2007. Immediately after the PPA is signed, PT. Cirebon Electric Power, the Indonesian local corporation, is expected to pay performance guarantee equivalent to IDF 45 billion to PLN Indonesia. Korea Midland Power Co., Ltd. is expected to provide backup guarantee amounting to IDF 1.23 billion (equivalent to the equity ratio of 27.5%) to Mizho Bank, Indonesia.

 

(29) Segment Information

 

  (a) The following table provides information for each operating segment for the six-month periods ended June 30, 2006 and 2007

 

     Won (million)  
     2006  
     Electric business     Consolidation  
    

Transmission

& distribution

    Power
generation
    All other     adjustment     Consolidated  

Unaffiliated revenues

   (Won) 12,725,185     110,160     161,147     —       12,996,492  

Intersegment revenues

     127,693     9,329,835     507,348     (9,964,876 )   —    
                                

Total revenues

     12,852,878     9,439,995     668,495     (9,964,876 )   12,996,492  

Cost of