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 December 2008

 

 

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

CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2007 and 2008


KOREA ELECTRIC POWER CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND June 30, 2008

 

     Won     U.S. dollars
(Note 2)
 
     2007     2008     2008  
     (In millions)     (In thousands)  

Assets

      

Property, plant and equipment (Notes 3 and 4):

   (Won) 102,741,962     (Won) 105,722,461     $ 100,995,856  

Less: accumulated depreciation

     (40,383,055 )     (43,152,222 )     (41,222,986 )

Less: construction grants

     (4,619,883 )     (4,896,549 )     (4,677,635 )
                        
     57,739,024       57,673,690       55,095,235  

Construction in-progress

     9,824,129       10,347,501       9,884,889  
                        

Net property, plant and equipment

     67,563,153       68,021,191       64,980,124  
                        

Investments and other assets:

      

Long-term investment securities (Note 6)

     2,309,321       2,562,567       2,448,001  

Long-term loans (Notes 7)

     428,674       545,983       521,573  

Financial derivatives

     14,898       249,978       238,802  

Intangible assets (Notes 5 and 30)

     841,327       800,850       765,046  

Deferred income tax assets (Note 26)

     1,983,649       2,108,914       2,014,629  

Other non-current assets (Notes 8, 18 and 31)

     452,772       437,635       418,069  
                        

Total non-current assets

     73,593,794       74,727,118       71,386,245  
                        

Current assets:

      

Cash and cash equivalents (Notes 9 and 18)

     1,574,329       1,837,528       1,755,376  

Trade receivables, less allowance for doubtful accounts of (Won)50,173 million in 2006 and (Won)53,924 million in 2007 (Notes 18, 29 and 30)

     2,602,570       2,312,831       2,209,430  

Other accounts receivable, less allowance for doubtful accounts of (Won)9,871 million in 2006 and (Won)12,818 million in 2007 (Notes 18, 29 and 30)

     393,323       346,783       331,278  

Short-term investment securities (Note 6)

     21,304       24,989       23,872  

Short-term financial instruments (Note 18)

     1,583,271       330,779       315,991  

Financial derivatives

     7,633       5,361       5,120  

Inventories (Note 10)

     2,632,938       3,412,760       3,260,183  

Deferred income tax assets (Note 26)

     279,757       339,734       324,545  

Other current assets (Notes 11 and 18)

     239,673       601,317       574,434  
                        

Total current assets

     9,334,798       9,212,082       8,800,230  
                        

Total assets

   (Won) 82,928,592     (Won) 83,939,200     $ 80,186,474  
                        

(Continued)


KOREA ELECTRIC POWER CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

DECEMBER 31, 2007 AND June 30, 2008

 

     Won     U.S. dollars
(Note 2)
 
     2007     2008     2008  
     (In millions)     (In thousands)  

Liabilities and Shareholders’ Equity

      

Shareholders’ equity:

      

Common stock of (Won)5,000 par value authorized 1,200,000,000 shares - Issued and outstanding 641,567,712 shares in 2007 and 2006 (Note 12)

   (Won) 3,207,839     (Won) 3,207,839     $ 3,064,424  

Capital surplus (Note 12)

     14,558,256       14,558,383       13,907,511  

Capital adjustments (Note 14)

     (741,825 )     (741,489 )     (708,339 )

Accumulated other comprehensive income (Notes 15 and 33)

     83,915       190,199       181,696  

Retained earnings:

      

Appropriated (Note 13)

     25,372,349       26,462,200       25,279,136  

Before appropriations

     1,551,878       (474,317 )     (453,111 )

Minority interest in consolidated subsidiaries

     234,441       268,255       256,262  
                        

Total shareholders’ equity

     44,266,853       43,471,070       41,527,579  
                        

Long-term liabilities:

      

Long-term debt, net (Notes 17 and 29)

     16,120,521       18,883,986       18,039,727  

Accrual for retirement and severance benefits, net (Note 19)

     1,388,932       1,623,006       1,550,445  

Liability for decommissioning costs (Note 20)

     8,206,267       8,503,622       8,123,445  

Provision for decontamination of transformer (Note 21)

     222,485       275,585       263,264  

Reserve for self insurance

     109,273       108,748       103,886  

Financial derivatives

     210,976       74,633       71,296  

Deferred income tax liabilities (Note 26)

     2,547,775       2,498,141       2,386,455  

Other long-term liabilities (Note 31)

     517,552       440,420       420,730  
                        

Total long-term liabilities

     29,323,781       32,408,141       30,959,248  
                        

Current liabilities:

      

Trade payables (Notes 18, 29 and 30)

     1,572,141       1,295,533       1,237,613  

Other accounts payable (Note 18, 29 and 30)

     701,172       491,796       469,809  

Short-term borrowings (Note 16)

     820,315       1,154,748       1,103,122  

Current portion of long-term debt, net (Notes 17 and 29)

     4,670,260       3,756,031       3,588,108  

Income tax payable

     474,986       341,332       326,072  

Accrued expense (Note 18)

     340,682       318,135       303,912  

Financial derivatives

     40,256       15,367       14,680  

Deferred income tax liabilities (Note 26)

     19,152       5,646       5,394  

Other current liabilities (Notes 3, 18 and 22)

     698,994       681,401       650,937  
                        

Total current liabilities

     9,337,958       8,059,989       7,699,647  
                        

Total liabilities

     38,661,739       40,468,130       38,658,894  
                        

Commitments and contingencies (Note 31)

      

Total shareholders’ equity and liabilities

   (Won) 82,928,592     (Won) 83,939,200     $ 80,186,474  
                        

See accompanying notes to the consolidated financial statements.


KOREA ELECTRIC POWER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2007 AND 2008

 

     Won     U.S. dollars
(Note 2)
 
     2007     2008     2008  
     (In millions, except per share amounts     (In thousands, except
per share amounts)
 

OPERATING REVENUES:
(Notes 29 and 30)

      

Sale of electricity

   (Won) 13,482,856     (Won) 14,563,870     $ 13,912,753  

Other operating revenues

     309,225       393,438       375,848  
                        
     13,792,081       14,957,308       14,288,601  
                        

OPERATING EXPENSES
(Notes 24, 25, 29 and 30):

      

Power generation, transmission and distribution costs

     11,275,718       13,805,541       13,188,327  

Purchased power

      

Other operating costs

     195,654       602,167       575,246  

Selling and administrative expenses

     701,261       798,599       762,895  
                        
     12,172,633       15,206,307       14,526,468  
                        

OPERATING INCOME

     1,619,448       (248,999 )     (237,867 )
                        

OTHER INCOME (EXPENSES):

      

Interest income

     88,525       81,664       78,013  

Interest expenses

     (345,562 )     (422,568 )     (403,676 )

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

     10,804       (591,383 )     (564,944 )

Donations

     (61,223 )     (36,542 )     (34,908 )

Equity income of affiliates, net (Note 6)

     80,140       110,493       105,553  

Gain on disposal of investments, net

     —         2,972       2,839  

Loss on disposal of property, plant and equipment, net

     9,535       4,214       4,026  

Valuation gain (loss) on financial derivatives, net
(Note 23)

     (30,904 )     342,297       326,994  

Other, net

     124,183       167,887       160,381  
                        
     (124,502 )     (340,966 )     (325,722 )
                        

INCOME BEFORE INCOME TAX

     1,494,946       (589,965 )     (563,589 )

INCOME TAX EXPENSES (Note 26)

     (561,804 )     142,426       136,058  
                        

NET INCOME

     933,142       (447,539 )     (427,531 )
                        

Controlling interest

   (Won) 916,070     (Won) (469,380 )   $ (448,395 )

Minority interest

     17,072       21,841       20,864  
                        
   (Won) 933,142     (Won) (447,539 )   $ (427,531 )
                        

BASIC EARNINGS PER SHARE
(Note 27)

   (Won) 1,474     (Won) (754 )   $ (720 )
                        

DILUTED EARNINGS PER SHARE

    (Note 27)

   (Won) 1,446     (Won) (754 )   $ (720 )
                        

See accompanying notes to the consolidated financial statements


KOREA ELECTRIC POWER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2007 AND 2008

 

     Won (In millions)  
     Common
stock
   Capital
surplus
    Retained
earnings
    Capital
adjustments
    Accumulated
other
comprehensive
income
   Minority
interests
    Total  

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     —       —      17,072     933,142  

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

     —      —       —       —       8,958    —       8,958  

Changes in losses on valuation of derivatives

     —      —       —       —       3,936    —       3,936  

Changes in minority interests

     —      —       —       —       —      (13,784 )   (13,784 )

Other

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

Balances at June 30, 2007

   (Won) 3,207,839    14,514,307     26,413,839     (791,104 )   56,658    154,028     43,555,567  
                                          

Balances at January 1, 2007

   (Won) 3,207,839    14,558,256     26,924,227     (741,825 )   83,915    234,441     44,266,853  

Net income

     —        (469,380 )   —       —      21,841     (447,539 )

Dividends declared

     —        (466,964 )   —       —      —       (466,964 )

Issuance of common stock for convertible bond

     —      (84 )   —       —       —      —       (84 )

Gain on disposal of treasury stock, net of tax

     —      259     —       —       —      —       259  

Changes in treasury stock

     —      —       —       336     —      —       336  

Changes in unrealized gains on available-for-sale securities

     —      —       —       —       2,395    —       2,395  

Equity in other comprehensive income of affiliates

     —      —       —       —       87,757    —       87,757  

Changes in translation adjustments of foreign subsidiaries

     —      —       —       —       13,632    —       13,632  

Changes in valuation of derivatives

     —      —       —       —       2,500    —       2,500  

Changes in minority interests

     —      —       —       —       —      11,973     11,973  

Others

     —      (48 )   —       —       —      —       (48 )

Balances at June 30, 2008

     3,207,839    14,558,383     25,987,883     (741,489 )   190,199    268,255     43,471,070  
                                          

U.S. dollars (In thousands)

     3,064,424    13,907,511     24,826,025     (708,339 )   181,696    256,262     41,527,579  

See accompanying notes to the consolidated financial statements.


KOREA ELECTRIC POWER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2007 AND 2008

 

     Won     U.S. dollars
(Note 2)
 
     2007     2008     2008  
     (In millions)     (In thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net income

   933,142     (Won) (447,539 )   $ (427,531 )

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

      

Depreciation and amortization

   2,744,132       2,852,043       2,724,535  

Amortization of nuclear fuel and heavy water

   40,980       44,182       42,207  

Utility plant removal cost

   121,129       113,614       108,535  

Provision for severance and retirement benefits

   89,649       262,539       250,801  

Provision for decommissioning costs

   174,763       185,595       177,297  

Bad debt expense

   6,991       10,519       10,049  

Interest expense, net

   22,343       18,252       17,436  

Gain on foreign currency translation, net

   (14,297 )     507,325       484,644  

Equity income of affiliates, net

   (80,139 )     (110,493 )     (105,553 )

Loss on disposal of utility plant, net

   (6,713 )     (4,214 )     (4,026 )

Deferred income tax expense (benefit), net

   171,644       (249,085 )     (237,949 )

Valuation gain on currency and interest rate swaps

   (30,903 )     (342,297 )     (326,994 )

Changes in assets and liabilities:

      

Decrease in trade receivables

   325,345       287,861       274,991  

Decrease in other accounts receivable

   267,373       63,255       60,427  

Increase in inventories

   (427,286 )     (867,702 )     (828,909 )

Increase in other current assets

   (75,686 )     (416,559 )     (397,936 )

Decrease in trade payables

   (141,969 )     (285,028 )     (272,285 )

Decrease in other accounts payable

   (516,009 )     (237,798 )     (227,167 )

Increase in income tax payable

   237,844       (134,006 )     (128,015 )

Decrease in accrued expenses

   1,934       (23,512 )     (22,461 )

Decrease in other current liabilities

   (37,610 )     (11,681 )     (11,159 )

Decrease in other long-term liabilities

   (18,977 )     (22,224 )     (21,230 )

Payment of severance and retirement benefits

   (29,942 )     (31,266 )     (29,868 )

Payment of decommissioning costs

   (2,632 )     —         —    

Payment of self-insurance

   (644 )     (525 )     (502 )

Dividends income

   49,214       437       417  

Other, net

   (50,204 )     101,313       96,784  
                      

Net cash provided by operating activities

   3,753,472       1,263,006       1,206,540  
                      

(Continued)


KOREA ELECTRIC POWER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006, 2007 AND 2008

(CONTINUED)

 

     Won     U.S. dollars
(Note 2)
 
     2007     2008     2008  
     (In millions)     (In thousands)  

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Proceeds from disposal of utility plant

     16,707     (Won) 23,923     $ 22,853  

Additions to utility plant

     (3,861,031 )     (3,584,496 )     (3,424,241 )

Receipt of construction grants

     460,428       467,730       446,819  

Proceeds from disposal of investment securities

     15,480       6,257       5,977  

Acquisition of investment securities

     (415 )     (45,476 )     (43,443 )

Increase in long-term loans, net

     22,676       (120,033 )     (114,667 )

Acquisition of intangible assets

     (61,756 )     (58,779 )     (56,151 )

Increase in other non-current assets

     (21,017 )     (30,798 )     (29,421 )

Acquisition of financial instruments, net

     (356,704 )     1,267,495       1,210,828  

Decrease in short-term loans, net

     42,501       13,662       13,051  

Other

     —         (217 )     (207 )
                        

Net cash used in investing activities

     (3,743,131 )     (2,060,732 )     (1,968,601 )
                        

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Proceeds from long-term debt

     2,255,655       4,631,350       4,424,293  

Repayment of long-term debt

     (179,852 )     (207,249 )     (197,983 )

Repayment of current portion of long-term debt

     (1,774,338 )     (3,150,824 )     (3,009,958 )

Proceeds from short-term borrowings, net

     81,489       329,826       315,080  

Dividends paid

     (635,249 )     (478,916 )     (457,505 )

Other, net

     (70,255 )     (86,767 )     (82,888 )
                        

Net cash provided by (used in) financing activities

     (322,550 )     1,037,420       991,039  
                        

CHANGE IN CASH AND CASH EQUIVALENTS FROM THE TRANSLATION OF FOREIGN SUBSIDIARIES

     5,763       23,505       22,454  

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (Note 29)

     (306,446 )     263,199       251,432  

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

     1,845,892       1,574,329       1,503,944  
                        

CASH AND CASH EQUIVALENTS, END OF YEAR

   (Won) 1,539,446     (Won) 1,837,528     $ 1,755,376  
                        

See accompanying notes to the consolidated financial statements.


KOREA ELECTRIC POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND June 30, 2008

 

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

 

  (a) Organization and Description of Business

Korea Electric Power Corporation (the “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. The Company was given the status of a government-invested enterprise on December 31, 1983 following the enactment of the Government-Invested Enterprise Management Basic Act. The Company’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. On April 1, 2007 KEPCO became designated a market orientated enterprise.

As of December 31, 2007, the Government of the Republic of Korea, Korea Development Bank (“KDB”), which is wholly owned by the Korean Government, and foreign investors held 21.12%, 29.95% and 27.47%, respectively, of the Company’s shares.

In accordance with the restructuring plan by the Ministry of Knowledge Economy (the “MKE”, formerly the Ministry of Commerce, Industry and Energy) on January 21, 1999 (the “Restructuring Plan”), the Company spun off its power generation division on April 2, 2001, resulting in the establishment of six power generation subsidiaries. Also, to create internal competition among the business divisions and ultimately improve efficiency, KEPCO launched the strategic business units 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 KEPCO Act, Accounting Regulations for Public Enterprise·Associate Government Agency, which have been approved by the Korean Ministry of Strategy and Finance(formerly 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”). 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, changes in shareholders’ equity or cash flows, is not presented in the accompanying consolidated financial statements.

In other hand, significant accounting principles of presenting consolidated financial statements are the same as those of prior years except items below.

In 2007, the Company also adopted amended SKAS No. 16 - “Income Taxes” which are amended such that additional payment of income taxes and income tax refunds, formerly classified as other income (expenses), are reclassified as income taxes.

Certain amounts and accounts of prior years’ financial statements are reclassified to conform to the current period’s presentation. This reclassification does not affect the net income (controlling interest in net income) or shareholders’ equity of prior years


  (c) Principles of Consolidation

The consolidated financial statements include the accounts of KEPCO and its controlled subsidiaries (collectively referred to as the “Company”). Controlled subsidiaries include majority-owned entities by either the Company or controlled subsidiaries and other entities where the Company or 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.

When a controlling company still has control over its subsidiaries even after the controlling company sold a portion of its investment in the subsidiaries, the disposal gain or loss realized in connection with the sale of a subsidiary’s common stock should be presented as additions or deductions of consolidated capital surplus in the consolidated financial statements.

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 downstream sales, the full amount of intercompany profit is eliminated in the consolidated statements of income. For upstream sales, the elimination is allocated proportionately to consolidated income and minority interests.

 

  (d) Consolidated Subsidiaries

 

Subsidiaries

   Ownership
Year of
establishment
   Percentage (%)   

Primary business

      2007    2008   

Korea Hydro & Nuclear Power Co., Ltd.

   2001    100.0    100.0   

Power generation

Korea South-East Power Co., Ltd.

   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., Inc.

   1977    97.9    97.9   

Engineering for utility plant

KEPCO KPS.

   1984    80.0    80.0   

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

KEPCO Lebanon SARL

   2006    100.0    100.0   

Operation of utility plant

KEPCO Neimenggu International Ltd.

   2006    100.0    100.0   

Holding Company

KEPCO Shanxi international Ltd.

   2007    100.0    100.0   

Holding Company

KEPCO Philippines Corporation

   1995    100.0    100.0   

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

KEPCO Ilijan Corporation

   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    76.0    76.0   

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

Komipo Global Pte Ltd. (*)

   2007    100.0    100.0   

Construction and operation of coal plant

 

  (*) Prior years’ amount of total assets of Komico Global Pte, Ltd is over 7 billion KRW, So the entity is included in consolidated subsidiaries from this year.

 

- 2 -


  (e) Affiliates Accounted for Using the Equity Method

 

Affiliate

   Ownership
Year of
establishment
   percentage (%)   

Primary business

      2007    2008   

Korea Gas Corporation

   1983    24.5    24.5   

Importing and wholesaling LNG

Korea District Heating Co., Ltd.

   1985    26.1    26.1   

Generating and distributing electricity and heat

LG Powercom Corporation

   2000    43.1    43.1   

Leasing telecommunication lines and providing internet access

Korea Electric Power Industrial Development Co., Ltd.

   1990    49.0    49.0   

Electricity metering

YTN

   1993    21.4    21.4   

Broadcasting

Gansu Datang Yumen Wind Power Co., Ltd.

   2005    40.0    40.0   

Construction and operation of utility plant

Salcon Power Corporation

   2006    40.0    40.0   

Operation of utility plant

Datang Chifang Renewable Co., Ltd.

   2006    40.0    40.0   

Construction and operation of utility plant

Gemeng International Energy Group Co., Ltd.

   2007    34.0    34.0   

Construction and operation of utility plant

KEPCO Energy Resource Nigeria Ltd.

   2007    30.0    30.0   

Construction and operation of utility plant

Gangwon Wind Power Co., Ltd

   2001    15.0    15.0   

Wind power generating

Hyundai Green Power Co. Ltd.

   2007    29.0    29.0   

Generating electricity

Cheongna Energy Co., Ltd.

   2005    27.0    27.0   

Generating and distributing

Cirebon Electric Power.

   2007    —      27.5   

Construction and operation of utility plant

 

  (f) 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.

 

- 3 -


The elimination entries of the KEPCO’s investments against the related investees’ shareholders’ equity at June 30, 2008 is summarized as follows:

 

Won (millions)

      

Won (millions)

Accounts

   Amount       

Accounts

   Amount

Common stock

   (Won) 2,921,917     

Investments in affiliates

   (Won) 27,306,872

Capital surplus

     15,486,408     

Consolidated capital surplus

     66,201

Retained earnings

     22,487,115     

Consolidated retained earnings

     13,949,202

Accumulated other comprehensive income

     202,248     

Accumulated other comprehensive income

     215,971

Other

     713,186     

Minority interests

     272,628
                  
   (Won) 41,810,874         (Won) 41,810,874
                  

 

(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 as of and for the six-month period ended June 30, 2008, have been translated into United States dollars at the rate of (Won)1,046.8 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, 2008. 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

The Company 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). As of June 30, 2008, the Company has 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, 2008, as announced by the Minister of Land and Transportation and Maritime Affairs is as follows:

 

     Won (millions)

Purpose

   Book value    Declared value

Land - utility plant, transmission and distribution sites and other

   (Won) 6,146,358    10,054,447

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

 

- 4 -


  (c) Changes in Property, Plant and Equipment

Changes in property, plant and equipment and construction grants for the year ended December 31, 2007 and for the six-month period ended June 30, 2008 are as follows:

 

     Won (millions)  
     2007  
     Book value
as of
January 1, 2007
    Acquisitions     Disposals     Depreciation     Others(*)     Book value
as of
December 31, 2007
 

Land

   (Won) 5,993,983     6,516     (6,422 )   —       131,997     6,126,074  

Buildings

     7,248,966     9,255     (22,849 )   (631,168 )   687,580     7,291,784  

Structures

     27,514,542     12,899     (638 )   (1,243,864 )   2,122,476     28,405,415  

Machinery

     16,847,383     116,958     (16,212 )   (3,183,094 )   3,284,176     17,049,211  

Vehicles

     32,429     7,593     (12 )   (19,653 )   11,304     31,661  

Loaded nuclear fuel

     970,873     354,529     —       (392,139 )   —       933,263  

Capitalized asset retirement cost

     1,656,836     442,393     —       (239,271 )   —       1,859,958  

Others

     698,765     93,944     (1,030 )   (170,733 )   40,594     661,540  

Construction in-progress

     8,393,339     8,297,606     (1,062 )   —       (6,865,754 )   9,824,129  

Construction grants

     (4,090,044 )   (1,032,055 )   —       345,620     156,596     (4,619,883 )
                                      
   (Won) 65,267,072     8,309,638     (48,225 )   (5,534,302 )   (431,031 )   67,563,152  
                                      
     Won (millions)  
     2008  
     Book value
as of
January 1, 2008
    Acquisitions     Disposals     Depreciation     Others(*)     Book value
as of
June 30, 2008
 

Land

   (Won) 6,126,074     65     (11,856 )   —       32,075     6,146,358  

Buildings

     7,291,784     664     (12,272 )   (327,897 )   243,933     7,196,212  

Structures

     28,405,415     559     (60 )   (637,226 )   962,687     28,731,375  

Machinery

     17,049,211     6,320     (1,527 )   (1,497,097 )   1,539,032     17,095,939  

Vehicles

     31,661     2,869     (12 )   (9,215 )   2,856     28,159  

Loaded nuclear fuel

     933,263     —       —       (208,192 )   174,720     899,791  

Capitalized asset retirement cost

     1,859,958     —       —       (128,381 )   71,176     1,802,753  

Others

     661,540     35,699     (2,755 )   (78,066 )   53,232     669,650  

Construction in- progress

     9,824,129     3,538,320     —       —       (3,014,947 )   10,347,502  

Construction grants

     (4,619,883 )   (470,820 )   —       145,522     48,633     (4,896,548 )
                                      
   (Won) 67,563,152     3,113,676     (28,482 )   (2,740,552 )   113,397     68,021,191  
                                      

 

  (*) Others include transfers between asset categories, acquisition of capitalized asset retirement cost, and other non-cash items.

For the year ended December 31, 2007 and the six-month period ended June 30, 2008, the amounts of capitalized interest were (Won)240,165 million and (Won)161,850 million, respectively, which include net foreign currency transactions and translation losses of (Won)56,387 million and (Won)55,089 million, respectively.

 

(4) Insured Assets

Insured assets as of June 30, 2008 are as follows:

 

          Won (millions)

Insured assets

  

Insurance type

   Insured value

Buildings and machinery

  

Fire insurance

   (Won) 1,035,833

Buildings and machinery

  

Nuclear property insurance

     2,377,283

Buildings, machinery and construction in progress

  

Construction and shipping insurance

     12,503,624

Buildings

  

General insurance

     20,654,438

Construction in progress

  

Construction insurance

     14,552

Inventories and machinery

  

Shipping insurance

     5,446,118

 

- 5 -


In addition, as of June 30, 2008, the Company carries compensation and responsibility insurance in relation to the operation of the nuclear power plants and gas accidents, construction and other general insurance for its utility plants and inventories and general insurance for vehicles.

 

(5) Intangible Assets

Changes in intangible assets for the year ended December 31, 2007 and for the six-month period ended June 30, 2008 are as follows:

 

     Won (millions)
     2007
     Book value
as of
January 1, 2007
   Acquisitions    Amortization     Others     Book value
as of
December 31, 2007

Capitalized development cost

   (Won) 71,610    12,117    (18,606 )   2,552     67,673

Port facility usage right

     133,414    18,598    (8,099 )   2,398     146,311

Water usage right

     73,924    —      (16,951 )   424     57,397

Dam usage right

     6,398    —      (145 )   (4,236 )   2,017

Electricity usage right

     35,510    98,404    (94,301 )   11,322     50,935

Computer software and capitalized research and development costs

     104,323    10,692    (52,099 )   78,400     141,316

Others

     428,961    29,023    (16,906 )   (65,400 )   375,678
                            
   (Won) 854,140    168,834    (207,107 )   25,460     841,327
                            
     Won (millions)
     2008
     Book value
as of
January 1, 2008
   Acquisitions    Amortization     Others     Book value
as of
June 30, 2008

Capitalized development cost

   (Won) 67,673    5,353    (10,297 )   (601 )   62,128

Port facility usage right

     146,311    —      (4,753 )   (16,203 )   125,355

Water usage right

     57,397    —      (8,475 )   (425 )   48,497

Dam usage right

     2,017    —      (72 )   4,236     6,181

Electricity usage right

     50,935    20,805    (46,410 )   8,324     33,654

Computer software and capitalized research and development costs

     141,316    9,318    (30,879 )   (397 )   119,358

Others

     375,678    23,303    (10,605 )   17,301     405,677
                            
   (Won) 841,327    58,779    (111,491 )   12,235     800,850
                            

In addition, the Company expensed research and development cost amounting to (Won)301,964 million and (Won)268,684 million for the six-month periods ended June 30, 2007 and 2008, respectively.

 

(6) Investment Securities

 

  (a) Short-term Investment securities as of December 31, 2007 and June 30, 2008 are summarized as follows:

 

     Won (millions)
     2007    2008

Short-term investment securities

     

Trading Securities

   (Won) 9,637    (Won) 19,269

Available-for-sale securities

     11,579      5,075

Held-to-maturity securities

     88      644
             
   (Won) 21,304    (Won) 24,988
             

 

- 6 -


Available-for-sale securities consist of beneficiary certificates 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, 2007 and June 30, 2008 are summarized as follows:

 

     Won (millions)
     2007
     Ownership
%
   Acquisition
cost
   Book
value

Available-for-sale:

        

Equity securities:

        

Energy Savings Investment Cooperatives

   48.0    (Won) 2,400    (Won) 2,400

Korea Power Exchange

   100.0      127,839      127,839

Hwan Young Steel Co., Ltd.

   0.14      1,091      97

KNOC Nigerian East Oil Co., Ltd.

   15.0      12      12

KNOC Nigerian West Oil Co., Ltd.

   15.0      12      12

Dolphin Property Limited

   15.0      12      12

KEPCO Australia Pty Ltd.

   100.0      6,877      6,877

KEPCO Canada Energy Ltd.

   100.0      823      823

Korea Electric Power Nigeria Ltd.

   100.0      76      76

Cockatoo Coal Ltd.

   4.77      6,793      10,999

Other equity securities

   —        21,376      21,376

Debt securities

   —        5,149      8,737
                
        172,460      179,260
                

Held-to-maturity:

        

Government and municipal bonds

        3,454      3,454
                

Total

      (Won) 175,914    (Won) 182,714
                
     Won (millions)
     2008
     Ownership
%
   Acquisition
cost
   Book
value

Available-for-sale:

        

Equity securities:

        

Energy Savings Investment Cooperatives

   48.0    (Won) 2,400    (Won) 2,400

Korea Power Exchange

   100.0      127,839      127,839

Hwan Young Steel Co., Ltd.

   0.10      1,091      97

KNOC Nigerian East Oil Co., Ltd.

   15.0      12      12

KNOC Nigerian West Oil Co., Ltd.

   15.0      12      12

Dolphin Property Limited

   15.0      12      12

KEPCO Australia Pty Ltd.

   100.0      15,349      15,349

KEPCO Canada Energy Ltd.

   100.0      1,215      1,215

Korea Electric Power Nigeria Ltd.

   100.0      76      76

Cockatoo Coal Ltd.

   4.77      6,794      17,086

Other equity securities

   —        55,580      55,402

Debt securities

   —        3,207      5,271
                
        213,587      224,771
                

Held-to-maturity:

        

Government and municipal bonds

        2,600      2,600
                

Total

      (Won) 216,187    (Won) 227,371
                

The (Won)10,292 million difference between acquisition cost and fair value of Cockatoo Coal Ltd. is accounted for as other comprehensive income, before income tax.

Korea Power Exchange operates under the regulations for government affiliated organization, electric power market managerial regulations, and the Electricity Enterprises Act. Moreover, considering the purpose of establishment and articles of incorporation of Korea Power Exchange, the Company does not appear to have significant management control. Therefore, the investment is accounted for as available-for-sale securities.

Even though the Company owns more than 20% of the total outstanding stock of Third Energy Savings Professional Investment Associate, Korea Waterbury Uranium Corporation, KWULP, KOSEP Australia Pty. Ltd., KOSPO Australia

 

- 7 -


Pty. Ltd., KOWEPO Australia Pty, Ltd., KOMIPO Australia Pty. Ltd, KOWEPO International Cor and Sylandus Holding BV, the Company did not apply the equity method of accounting to these investment as their net assets or their capital stock are not significant or their total assets as of the previous year end were less than 7 billion.

The investment in Eco Energy was sold, resulting to a gain of (Won)1,854 million which was accounted for as gain on disposal of investment under other operating income.

 

  (c) Investments in affiliated companies accounted for using the equity method as of December 31, 2007 and June 30, 2008 are as follows:

 

     Won (millions)
     2007
     Ownership
%
    Acquisition
cost
   Net asset
value
   Book
value

Korea Gas Corporation

   24.5     (Won) 94,500    938,137    938,137

Korea District Heating Co., Ltd.

   26.1       5,660    187,503    187,503

LG Powercom Corporation (*1)

   43.1       323,470    393,043    389,326

Korea Electric Power Industrial Development Co., Ltd.

   49.0       7,987    29,379    29,379

YTN

   21.4       59,000    28,493    28,493

Gansu Datang Yumen Wind Power Co., Ltd.

   40.0       7,163    7,543    7,543

Salcon Power Corporation

   40.0       20,635    22,580    22,580

Datang Chifang Renewable Co., Ltd.

   40.0       60,787    64,159    64,159

Gemeng International Energy Group Co. Ltd.

   34.0       413,153    413,153    413,153

KEPCO Energy Resource Nigeria Limited.

   30.0       7,824    7,625    7,625

Gangwon Wind Power Co., Ltd. (*2)

   15.0       5,725    7,159    7,306

Hyundai Green Power Co. Ltd.

   29.0       16,878    16,364    16,364

Komipo Global Pte Ltd. (*3)

   100.0       13,540    13,540    13,540

Cheongna Energy Co., Ltd.

   27.0       1,800    1,499    1,499
                  
     (Won) 1,038,122    2,130,177    2,126,607
                  
     Won (millions)
     2008
     Ownership
%
    Acquisition
cost
   Net asset
value
   Book
value

Korea Gas Corporation (*4)

   24.5     (Won) 94,500    1,009,225    1,009,226

Korea District Heating Co., Ltd.

   26.1       5,660    194,878    194,878

LG Powercom Corporation (*1)

   43.1       323,470    401,599    399,272

Korea Electric Power Industrial Development Co., Ltd.

   49.0       7,987    27,291    27,291

YTN (*4)

   21.4       59,000    29,281    29,281

Gansu Datang Yumen Wind Power Co., Ltd.

   40.0       7,163    8,700    8,700

Salcon Power Corporation

   40.0       20,635    26,549    26,549

Datang Chifang Renewable Co., Ltd.

   40.0       60,787    72,154    76,898

Gemeng International Energy Group Co. Ltd.

   34.0       413,153    506,910    506,910

KEPCO Energy Resource Nigeria Limited.

   30.0       7,824    8,472    8,472

Gangwon Wind Power Co., Ltd. (*2)

   15.0       5,725    7,094    7,216

Hyundai Green Power Co. Ltd. (*5)

   29.0       16,878    16,096    16,096

Cireborn Electronic Power (*3)

   27.5 %     21,219    21,219    21,219

Cheongna Energy Co., Ltd.

   27.0       3,690    3,189    3,189
                  
     (Won) 1,047,691    2,332,657    2,335,197
                  
 
  (*1) As of June 30, 2008, the balance of unrealized profits deducted from net asset value of LG power corporation is (Won)2,328 million.
  (*2) Despite of holding less than 20% of the total number of voting stock of Gangwon Wind Power Co., Ltd., the Company utilizes the equity method of accounting to the investment, as the Company has significant influence over the operating and financial policies of Gangwon Wind Power Co., Ltd.

 

- 8 -


  (*3) As Komipo Global Pte Ltd., which was accounted for under the equity method in 2007, is now a consolidated subsidiary, Cirebon Electric Power, owned by Komipo Global Pte Ltd., is accounted for using the equity method.
  (*4) Among affiliates accounted for using the equity method, Korea Gas Corporation and YTN were listed in the Korea Stock Exchange, and whose market values as of June 30, 2008, are (Won)1,440,180 million and (Won)43,155 million, respectively.
  (*5) Hyundai Green Power Corporation was established in April 2, 2007, to construct the generating plant of Hyundai-steel (Danggin plant), using ephemeral gas. The plant consisted of four 100MW level generators , started its construction on December 2007 and will be completed in December 2012

 

  (d) Changes in investments in affiliated companies under the equity method for the year ended December 31, 2007 and for the six-month period ended June 30, 2008 are as follows:

 

      Won (millions)
     2007
     Book value
as of
January 1, 2007
   Equity income
(loss) of affiliates
    Others (*)     Book value
as of
December 31, 2007

Korea Gas Corporation

   (Won) 860,503    90,450     (12,816 )   938,137

Korea District Heating Co.

     184,458    3,901     (857 )   187,502

LG Powercom Corporation

     376,831    12,495     —       389,326

Korea Electric Power Industrial Development, Ltd.

     48,130    6,239     (24,990 )   29,379

YTN

     26,678    2,040     (225 )   28,493

Gansu Datang Yumen Wind Power Co., Ltd.

     5,808    —       1,735     7,543

Salcon Power Corporation

     22,921    3,433     (3,774 )   22,580

Datang Chifang Renewable Co., Ltd.

     18,052    1,059     45,048     64,159

Gemeng International Energy Group Co. Ltd.

     —      —       413,153     413,153

KEPCO Energy Resource

         

Nigeria Limited.

     —      (887 )   8,512     7,625

Gangwon Wind Power Co., Ltd

     —      1,572     5,735     7,307

Hyundai Green Power Co. Ltd.

     —      (437 )   16,801     16,364

Komipo Global Pte Ltd.

     —      —       13,540     13,540

Cheongna Energy Co., Ltd.

     —      (301 )   1,800     1,499
                       
   (Won) 1,543,381    119,564     463,662     2,126,607
                       
      Won (millions)
     2008
     Book value
as of
January 1, 2008
   Equity income
(loss) of affiliates
    Others (*)     Book value
as of
June 30, 2008

Korea Gas Corporation

   (Won) 938,137    96,860     (25,771 )   1,009,226

Korea District Heating Co.

     187,502    7,918     (542 )   194,878

LG Powercom Corporation

     389,326    9,948     (2 )   399,272

Korea Electric Power Industrial Development, Ltd.

     29,379    3,302     (5,390 )   27,291

YTN

     28,493    1,043     (255 )   29,281

Gansu Datang Yumen Wind Power Co., Ltd.

     7,543    (211 )   1,368     8,700

Salcon Power Corporation

     22,580    (1,339 )   5,308     26,549

Datang Chifang Renewable Co., Ltd.

     64,159    2,368     10,370     76,897

Gemeng International Energy Group Co. Ltd.

     413,153    (9,253 )   103,010     506,910

KEPCO Energy Resource

         

Nigeria Limited.

     7,625    (13 )   860     8,472

Gangwon Wind Power Co., Ltd

     7,307    337     (428 )   7,216

Hyundai Green Power Co. Ltd.

     16,364    (267 )   —       16,097

Cireborn Electronic Power

     —      —       21,219     21,219

Cheongna Energy Co., Ltd.

     1,499    (200 )   1,890     3,189

Kimpo Global Pte Ltd.

     13,540    —       (13,540 )   —  
                       
   (Won) 2,126,607    110,493     98,097     2,335,197
                       
 
  (*) Others are composed of acquisition (disposal) of investment, dividends and the changes in values in equity due to capital surplus and gain (loss) on investment securities in accumulated other comprehensive income.

 

- 9 -


The Company has recorded unrealized losses of (Won)53 million and (Won)161 million relating to the above affiliates as of December 31, 2007 and June 30, 2008, respectively, and unrealized gains of (Won)124,667 million and (Won)212,532 million as of December 31, 2007 and June 30, 2008, respectively, which have been accounted for as accumulated other comprehensive income. This accumulated other comprehensive income have been recorded as unrealized gains and losses on equity securities of affiliates within shareholders’ equity as accumulated other comprehensive income.

 

  (e) Summarized financial information regarding affiliated companies accounted for using the equity method as of December 31, 2007 and June 30, 2008 is shown in the following table. There are no significant differences between carrying value of investment and share of underlying net equity.

 

      Korea Gas Corporation    Korea District Heating Co.  
     Won (millions)    Won (millions)  
     2007    2008    2007    2008  

Total assets

   12,576,842    13,142,634    1,998,662    1,958,223  
                     

Total liabilities

   8,740,682    9,004,915    1,279,503    1,210,775  
                     

Net assets

   3,836,160    4,137,719    719,159    747,448  
                     

Net sales

   14,264,791    10,709,490    686,212    623,978  

Net earnings

   364,050    398,528    14,964    30,368  
      LG Powercom Corporation    Korea Electric Power Industrial
Development Co., Ltd.
 
     Won (millions)    Won (millions)  
     2007    2008    2007    2008  

Total assets

   1,663,383    1,744,872    118,587    118,951  
                     

Total liabilities

   752,070    813,720    58,492    63,256  
                     

Net assets

   911,313    931,152    60,095    55,695  
                     

Net sales

   1,109,618    621,118    202,717    122,532  

Net earnings

   25,522    19,844    12,732    6,740  
      YTN    Gansu Datang Yumen Wind
Power Co., Ltd.
 
     Won (millions)    Won (millions)  
     2007    2008    2007    2008  

Total assets

   186,349    184,849    57,356    72,897  
                     

Total liabilities

   53,382    48,204    39,129    51,896  
                     

Net assets

   132,967    136,645    18,227    21,001  
                     

Net sales

   96,949    51,698    4,135    2,525  

Net earnings

   9,520    4,868    —      (528 )

 

- 10 -


      Salcon Power Corporation     Datang Chifeng
Renewable Co., Ltd.
 
     Won (millions)     Won (millions)  
     2007    2008     2007     2008  

Total assets

   72,416    73,007     377,902     566,738  
                       

Total liabilities

   4,894    6,634     241,150     386,353  
                       

Net assets

   67,522    66,373     136,752     180,385  
                       

Net sales

   27,429    10,625     14,064     16,709  

Net earnings

   8,121    5,477     2,267     6,679  
      Gangwon Wind Power Co.     Hyundai Green Power Co., Ltd.  
     Won (millions)     Won (millions)  
     2007    2008     2007     2008  

Total assets

   161,139    161,622     60,656     78,871  
                       

Total liabilities

   113,410    114,332     4,228     23,365  
                       

Net assets

   47,729    47,290     56,428     55,506  
                       

Net sales

   19,359    6,339     —       —    

Net earnings

   7,317    2,413     (1,507 )   (922 )
      KOMIPO Global Pte Ltd.     Cheongna Energy Co., Ltd.  
     Won (millions)     Won (millions)  
     2007    2008     2007     2008  

Total assets

   13,540    —       21,620     28,659  
                       

Total liabilities

   —      —       16,102     16,847  
                       

Net assets

   13,540    —       5,518     11,812  
                       

Net sales

   —      —       —       226  

Net earnings

   —      —       510     (601 )
      Gemeng International Energy
Group Co., Ltd.
    KEPCO Energy Resource
Nigeria Limited.
 
     Won (millions)     Won (millions)  
     2007    2008     2007     2008  

Total assets

   413,153    1,492,985     28,600     39,132  
                       

Total liabilities

   —      2,075     3,183     10,893  
                       

Net assets

   413,153    1,490,910     25,417     28,239  
                       

Net sales

   —      704,323     —       1,852  

Net earnings

   —      (27,217 )   —       (44 )

 

- 11 -


(7) Loans to Employees

The Company has provided housing and tuition loans to employees as follows as of December 31, 2007 and June 30, 2008:

 

     Won (millions)
     2007    2008

Current portion of long-term loans (note 11)

   (Won) 26,531    27,754

Long-term loans

     396,191    415,811
           
   (Won) 422,722    443,565
           

 

(8) Other Non-current Assets

Other non-current assets as of December 31, 2007 and June 30, 2008 are as follows:

 

     Won (millions)
     2007    2008

Deposits

   (Won) 246,446    226,315

Assets received from KEDO (note 31e)

     93,971    93,804

Others

     112,355    117,516
           
   (Won) 452,772    437,635
           

 

(9) Restricted Cash and Cash Equivalents and Financial Instruments

There are certain amounts included in cash and cash equivalents and financial instruments, which are restricted in use for expenditures for certain business purposes as of December 31, 2007 and June 30, 2008 as follows:

 

     Won (millions)
     2007    2008

Cash and cash equivalents

   (Won) 75,023    64,887

Long-term financial instruments

     5    5
           
   (Won) 75,028    64,892
           

 

(10) Inventories

Inventories as of December 31, 2007 and June 30, 2008 are summarized as follows:

 

     Won (millions)
     2007    2008

Raw materials

   (Won) 1,369,768    1,983,915

Supplies

     1,055,311    1,139,866

Other

     207,859    288,979
           
   (Won) 2,632,938    3,412,760
           

 

(11) Other Current Assets

Other current assets as of December 31, 2007 and June 30, 2008 are summarized as follows:

 

     Won (millions)
     2007    2008

Current portion of long-term loans (note 7)

   (Won) 27,982    28,568

Accrued interest income

     43,186    29,859

Advance payments

     44,110    68,564

Prepaid expenses

     23,732    81,499

Others

     100,663    392,827
           
   (Won) 239,673    601,317
           

 

- 12 -


(12) Shareholders’ Equity

 

  (a) Capital Stock

The Company’s authorized share capital is 1,200,000,000 shares, which consists of shares of common stock and shares of non-voting preferred stock, par value (Won)5,000 per share. Under the Company’s articles of incorporation, the Company is authorized to issue up to 150,000,000 shares of non-voting preferred stock. No shares of preferred stock have ever been issued. As June 30, 2008, 641,567,712 shares of common stock have been issued.

 

(13) Appropriated Retained Earnings

Appropriated retained earnings as of December 31, 2007 and June 30, 2008 are summarized as follows:

 

     Won (millions)
     2007    2008

Involuntary:

     

Legal reserve (*1)

   (Won) 1,603,919    1,603,919

Voluntary:

     

Reserve for investment on social overhead capital (*2)

     5,277,449    5,277,449

Reserve for research and human resources development (*2)

     330,000    330,000

Reserve for business rationalization (*3)

     31,900    31,900

Reserve for business expansion

     17,919,081    19,008,932

Reserve for dividend equalization

     210,000    210,000
           
     23,768,430    24,858,281
           
   (Won) 25,372,349    26,462,200
           

 

  (*1) 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.
  (*2) 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 as defined in the Tax Incentive Control Law.
  (*3) Until December 10, 2002 under the Special Tax Treatment Control Law (the “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 for tax benefits received for certain investments. However, existing reserves are not available for cash dividends and can be credited only to paid-in capital or offset against any accumulated deficit by resolution of the shareholders.

 

(14) Capital Adjustments

The Company has treasury stock amounting to (Won)741,825 million (18,948,627 shares) and (Won)741,489 million (18,929,995 shares) as of December 31, 2007 and June 30, 2008, respectively, for the purpose of stock price stabilization.

 

- 13 -


(15) Accumulated other Comprehensive Income

Accumulated other comprehensive income, net of tax as of December 31, 2007 and June 30, 2008 are as follows:

 

     Won (millions)  
     2007     2008  

Gain on valuation of available- for-sale securities, net

   (Won) 4,139     6,534  

Equity in other comprehensive income of affiliates

     124,614     212,371  

Overseas operation translation credit

     (50,864 )   (37,231 )

Gain (loss) on valuation of cash flow hedges

     6,026     8,525  
              
   (Won) 83,915     190,199  
              

 

(16) Short-term Borrowings

Short-term borrowings as of December 31, 2007 and June 30, 2008 are as follows:

 

  (a) Local Currency Short-term Borrowings

 

     Type    Annual
  interest rate %  
   Won (millions)

Lender

         2007    2008

Woori Bank

   Commercial paper    3.75~6.26    (Won) 290,000    981,483

Korea Exchange Bank

   Industrial facility    6.20      230,000    —  

Korea Resources Corporation

   General    4.25~5.25      11,297    —  

Kookmin Bank

   General    4.61      —      —  
                 
         (Won) 531,297    981,483
                 

 

  (b) Foreign Currency Short-term Borrowings

 

     Type    Annual
interest rate %
   Won (millions)

Lender

         2007    2008

BNP Paribas

   General    3.50~4.55      9,548    24,771

BOA

   General    3M Libor(Yen)
+ 0.7~0.9
     18,794    41,435

SMBC

   General    3M Libor (Yen)
+ 0.44
     199,999    —  

Other

   Usance
etc.
   3.26~5.49      60,677    107,059
                 
         (Won) 289,018    173,265
                 

 

(17) Long-term Debt

Long-term borrowings as of December 31, 2007 and June 30, 2008 are as follows:

 

  (a) Local Currency Long-term Borrowings

 

Lender

   Type    Maturity    Annual
interest rate %
   Won (millions)  
            2007     2008  

Korea Development Bank

   Facility    2007~2012    5.04~6.52    (Won) 4,709,620     3,982,840  

Industrial Bank of Korea

   Development

of power resource

   2012    4.00~4.25      70,000     122,266  

Ministry of Knowledge Economy

   Development

of power resource

   2010    4.00      30,000     30,000  

National Agricultural Cooperative Federation

   Development

of power resource

   2011    4.00~5.10      161,875     133,125  

Korea Exchange Bank

   Energy

rationalization

   2011~2021    3.50~5.81      423,882     1,023,282  

Others

   General    2008~2042    0.50~5.21      912,078     908,726  
                       
              6,307,455     6,200,239  

Less: Current portion

              (1,563,975 )   (1,859,271 )
                       
            (Won) 4,743,480     4,340,968  
                       

 

- 14 -


  (b) Foreign Currency Long-term Borrowings

 

     Type    Maturity    Annual
interest rate %
   Won (millions)  

Lender

            2007     2008  

Japan Bank for International Cooperation

   Facility    2014    8.28    (Won) 121,373     124,891  

Korea National Oil Corporation

   Oil production    2021~2022    3Y treasury
note – 3.00
     7,945     8,836  

The Export-Import Bank of Korea

   Project loans    2014    7.27      107,130     160,585  

Woori Bank

   Project loans    2009~2017    LIBOR+0.30      56,292     62,604  

USEXIM

   Facility    2015    4.48      64,025     65,996  

Others

   Facility    2007~2010    7.56~9.00      82,589     94,411  
                       
              439,354     517,323  

Less: Current portion

              (42,559 )   (123,254 )
                       
            (Won) 396,795     394,069  
                       

 

  (c) Debentures

 

     Maturity    Annual
interest rate %
  Won (millions)  
        2007     2008  

Local currency debentures:

         

Electricity bonds

   2006~2013    3.43~5.29   (Won) 5,870,000     6,865,000  

Corporate bonds

   2006~2011    3.54~7.17     3,100,010     3,180,010  
                   
          8,970,010     10,045,010  
                   

Foreign currency debentures:

         

FY-93

   2013    5.00+2x(JPY

/KRW-11.03)

    328,370     365,190  

FY-96

   2006~2096    (6M Libor+0.13
~0.14)~8.278
    240,386     266,682  

FY-97

   2010    6.75~8.50     295,267     328,376  

FY-02

   2007~2008    1.04~5.95     140,730     —    

FY-03(*1)

   2008~2013    1.33~4.75     693,071     222,598  

FY-04

   2007~2034    0.51~5.75     784,487     872,686  

FY-05

   2010~2012    3.125~5.25     626,775     724,785  

FY-06

   2016    5.55~6.00     609,831     678,210  

FY-07

   2010    1.34~5.09     466,664     549,804  

FY-08

      3M USD Libor+
1.7~1.8%,

3M JPY Libor+1.7%,
2.27~5.38

    —       972,785  
                   
          4,185,581     4,981,116  
                   
          13,155,591     15,026,126  

Less: Current portion

          (3,064,243 )   (1,772,363 )

Discount

          (34,407 )   (42,270 )
                   
        (Won) 10,056,941     13,211,493  
                   
 
  (*1) 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 LG Powercom 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

 

- 15 -


  - 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. LG Powercom Corporation is not required to complete a QPO prior to the maturity of the debentures. The Company does not guarantee the QPO of LG Powercom Corporation.
  - Shares to be exchanged: LG Powercom Corporation’s shares or DR.
 

-

Exchangeable period: From 10th day after the listing of LG Powercom 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).

Also, the Company is providing payment guarantees for the foreign currency debentures issued by KEPCO Cayman Company Limited. The Company has unconditionally and irrevocably guaranteed full and timely repayment of principal and interest of the debentures.

For early redemption claim on November 27, 2006, the Company paid US$197,220 thousand which amounts 76.78% of issued amounts based on the guaranteed return of 2.88% (102.74% of issuance amount).

 

  (d) Exchangeable Bonds

 

     Annual
interest rate %
   Won (millions)  

Description

      2007     2008  

Overseas exchangeable bonds (*1)

   0.00    (Won) 1,343     827  

Overseas exchangeable bonds (*2)

   0.00      485,682     485,682  

Overseas exchangeable bonds (*2)

   0.00      555,114     555,114  
                 
        1,042,139     1,041,623  

Less:  Current portion, net of premium of nil million in 2007 and (Won)5 in 2008 and net of conversion right adjustment of nil million in 2007 and (Won)10 in 2008

        (1,323 )   (822 )

Plus:  Premium on debentures issued

        18     5  

Less:  Discount on debentures issued

        (65,601 )   (57,769 )

 Conversion right adjustment

        (51,928 )   (45,581 )
                 

 Exchangeable bonds, net

      (Won) 923,305     937,456  
                 
 
  (*1) On November 4, 2003, the Company issued overseas exchangeable bonds of JPY 28,245,468,400.

The details of the bonds were as follows:

 

  - Maturity date: November 4, 2008
  - 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 Deposit Receipt (“DR”).
  - Exchange price: (Won)30,000 per share
  - 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.

 

- 16 -


In 2007, the bondholders converted JPY 25,809,416,000 (99.52%) into 1,425,402 shares of common stock and 17,051,942 shares of DR(equivalent to 8,252,971 shares of common stock), and during the six-month period ended June 30, 2008, the bondholders also converted JPY 48,325,000 (0.19%) into 18,632 shares of common stock. As of June 30, 2008, the number of common stocks available for conversion is 29,812 shares, if the conversion rights of the remaining exchangeable bonds are exercised.

 

  (*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 main terms of the bonds are 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

 

  - Put option: Bondholders have a put option that they can exercise for JPY61,132,293,000 and EUR437,612,000 on November 23, 2009.

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.

 

(e) Foreign currency debts, by currency, as of December 31, 2007 and June 30, 2008 are as follows:

 

     Won (millions), US$, JPY, EUR, GBP and CNY(thousands)
     2007    2008
     Foreign
currency
   Won
equivalent
   Foreign
currency
   Won
equivalent

Short-term borrowings

   US$ 74,851    (Won) 70,225    US$ 166,079    (Won) 173,265
   JPY 26,336,000      218,793    JPY —        —  
                   
        289,018         173,265
                   

Long-term borrowings

   US$ 420,265      394,293    US$ 445,176      464,646
   CNY 350,800      45,061    CNY 346,421      52,677
                   
        439,354         517,323
                   

Debentures

   US$ 3,434,277      3,206,936    US$     
   JPY 76,000,000      633,330    JPY 3,743,645      3,891,915
   EUR 250,000      345,315    EUR 69,000,000      677,436
   GBP —        —      GBP 250,000      411,765
                   
        4,185,581         4,981,116
                   

Exchangeable bond

   JPY 61,470,773      487,025    JPY 61,422,448      486,509
   EUR 463,321      555,114    EUR 463,321      555,114
                   
        1,042,139         1,041,623
                   
      (Won) 5,956,092       (Won) 6,713,327
                   

 

- 17 -


  (f) Aggregate maturities of the Company’s long-term debt as of June 30, 2008 are as follows:

 

      Won(millions)

Year ended June 30

   Domestic
currency
borrowings
   Foreign
currency
borrowings
   Domestic
debentures
   Foreign
debentures
   Exchangeable
bonds
   Total

2009

   (Won) 1,859,271    123,254    1,705,000    67,363    827    3,755,715

2010

     2,259,503    70,928    2,280,000    1,205    —      4,611,636

2011

     1,118,978    71,110    3,070,000    1,726,790    —      5,986,878

2012

     524,169    66,306    1,040,010    997    1,040,796    2,672,278

2013

     230,027    66,153    1,680,000    1,461,612    —      3,437,792

Thereafter

     208,291    119,572    270,000    1,723,149    —      2,321,012
                               
   (Won) 6,200,239    517,323    10,045,010    4,981,116    1,041,623    22,785,311
                               

 

(18) 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 18(e) as of December 31, 2007 and June 30, 2008 are as follows:

 

      Won (millions), US$, JPY and EUR (thousands)
      2007    2008
      Foreign currency
(thousands) (*)
   Won
equivalent
(millions)
   Foreign currency
(thousands) (*)
   Won
equivalent
(millions)

Assets:

           

Cash and cash equivalents

   US$

CNY

PHP

INR

CHF

AUD

   3,402

61

320

56,223

200

1,098

   (Won)

 

 

 

 

 

3,192

8

7

1,342

166

904

   US$

CNY

PHP

INR

CHF

AUD

   3,783

73

5,093

166,554

—  

1,611

   (Won)

 

 

 

 

 

 3,943

11

119

4,062

—  

1,617

Short-term financial instruments

   INR    35,000      835    INR    15,000      366

Short-term loan

   US$    705      661    US$    —        —  

Trade receivables

   US$    6,592      6,185    US$    5,055      5,254
   INR

AUD

CAD

   5,989

—  

110

    

 

 

143

—  

105

   INR

AUD

CAD

   1,463

14

—  

    

 

 

36

14

—  

Other accounts receivable

   US$    766      719    US$    484      505
   EUR

GBP

   49

—  

    

 

68

—  

   EUR

GBP

   6

1

    

 

10

1

Accrued income

   INR    828      20    INR    141      3

Deposit

   US$

EUR

CAD

CNY

   438

—  

—  

11

    

 

 

 

411

—  

—  

1

   US$

EUR

CAD

CNY

   376

2

2

40

    

 

 

 

392

3

3

6

Advance payments

   US$    1,000      938    US$    —        —  

Other current assets

   PHP

INR

AUD

   4,471

4,102

141

    

 

 

102

98

116

   PHP

INR

AUD

   2,144

4,817

63

    

 

 

50

118

63

Other non-current assets

   US$

US$

EUP

JPY

   1,174

213

22

13,428

    

 

 

 

1,100

200

30

112

   US$

US$

EUR

JPY

   1,174

195

29

13,428

    

 

 

 

1,224

203

48

132

                         
         (Won) 17,463          (Won) 18,183
                         

 

- 18 -


     Won (millions), US$, JPY and EUR (thousands)
     2007    2008
     Foreign currency
(thousands) (*)
   Won
equivalent
(millions)
   Foreign currency
(thousands) (*)
   Won
equivalent
(millions)

Liabilities:

           

Trade payables

   US$

EUR

PHP

INR

AUD

GBP

CAD

332,983

89

5,754

2,129

6

7

21

   (Won)

 

 

 

 

 

 

312,404

124

131

51

5

14

20

   US$

EUR

PHP

INR

AUD

GBP

CAD

353,992

2,429

—  

—  

101

—  

—  

    

 

 

 

 

 

 

369,355

4,002

—  

—  

101

—  

—  

Other accounts payable

   US$

EUR

JPY

PHP

INR

CHF

SEK

1,400

291

—  

521

4,335

12,404

291

    

 

 

 

 

 

 

1,313

402

—  

12

103

10,321

43

   US$

EUR

JPY

PHP

INR

CHF

SEK

602

620

22,275

—  

—  

—  

—  

    

 

 

 

 

 

 

627

1,022

218

—  

—  

—  

—  

Withholdings

   US$

EUR

CAD

76

6

59

    

 

 

72

8

56

   US$

EUR

CAD

92

—  

129

    

 

 

95

—  

133

Advance received

   US$ 1,000      938    US$ —        —  

Accrued expense

   US$ 562      542    US$ —        —  

Other current liabilities

   US$

 

 

340

2,893

175

    

 

 

319

69

144

   US$

INR

AUD

100

8,664

95

    

 

 

105

211

95

                   
      (Won) 327,091       (Won) 375,964
                   

 

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

 

(19) Retirement and Severance Benefits

Changes in retirement and severance benefits for the year ended December 31, 2007 and for the six-month period ended June 30, 2008 are summarized as follows:

 

     Won (millions)  
     2007     2008  

Estimated accrual at beginning of year

   (Won) 1,527,435     1,776,614  

Provision for retirement and severance benefits

     329,771     265,337  

Payments

     (84,080 )   (36,207 )

Others

     3,488     14  
              

Estimated accrual at end of year

     1,776,614     2,005,758  

Transfer to National Pension Fund

     (91 )   (91 )

Deposit for severance benefit insurance

     (387,591 )   (382,661 )
              

Net balance at end of year

   (Won) 1,388,932     1,623,006  
              

_____________

    
  (*) Funding of the retirement and severance benefits are not required, however, tax deductions are limited if the liability is not funded. The Company purchased individual severance insurance deposits, which meet the funding requirement for tax deduction purposes, in which the beneficiary is the respective employee, with a balance of (Won)382,661 million as of June 30, 2008, and are presented as a deduction from the accrual of retirement and severance benefits.

The company transferred (Won)91 million to the National Pension in accordance with the National Pension Scheme of Korea, and it is reflected in the consolidated balance sheet as a reduction of the retirement and severance benefit liability.

 

- 19 -


(20) Liability for Decommissioning Costs

The Company recorded a liability for the decommissioning of nuclear facilities and disposal of radioactive wastes. The amounts and timing of expenditures on decommissioning of nuclear facilities and disposal of radioactive wastes are expected to occur in the long-term period and may vary because of changes in assumed dates of regulatory requirement.

Changes in the liability for decommissioning costs for the year ended December 31, 2007 and for the six-month period ended June 30, 2008 are summarized as follows:

 

     Won (millions)  
     2007     2008  

Balance at beginning of year

   (Won) 7,543,491     8,206,267  

Prior year adjustment

     —       —    

Liabilities incurred:

    

Expense

     88,641     115,358  

Assets

     241,845     186,117  

Accretion expense for year

     339,749     —    

Payments for year

     (7,459 )   (4,120 )
              

Balance at end of year

   (Won) 8,206,267     8,503,622  
              

 

(21) Provision for Decontamination of Transformer

Under the new regulation of Persistent Organic Pollutants Management Act, enacted in 2007, the Company is required to inspect and dispose of transformers and recorded a liability for inspection and disposal cost related to decontamination of existing transformers. Expenditures on inspection and disposal of transformers are expected to occur in the following 8 years and they can vary because of changes in assumed dates of regulatory requirement, technology.

 

(22) Other Current Liabilities

Other current liabilities as of December 31, 2007 and June 30, 2008 are as follows:

 

     Won (millions)
     2007    2008

Advance received

      (Won) 29,732       51,596

Withholdings

     202,088    187,768

Unearned revenue

     44,613    48,867

Dividends payable

     2,787    7,930

Others

     419,774    385,240
           
   (Won) 698,994    681,401
           

 

- 20 -


(23) Derivative Instruments Transactions

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

 

  (a) Currency swap contracts as of June 30, 2008 are as follows:

 

     Contract
Year
   Settlement
Year
   Contract amounts in thousands    Contract interest rate per annum

Counterparty

         Pay    Receive    Pay (%)     Receive (%)

Barclays

   2008    2013    KRW 287,080,000    US$ 200,000    7.50 %   7.80%

Credit Suisse First Boston

   2008    2013    KRW 140,265,000    US$ 150,000    7.40 %   7.80%

Deutsche Bank

   2008    2010    KRW 172,958,750    EUR 125,000    2.50 %   3.10%

Merrill Lynch

   2008    2010    KRW 86,479,375    EUR 62,500    2.50 %   3.10%

UBS

   2008    2010    KRW 86,479,375    EUR 62,500    2.50 %   3.10%

ANZ

   2008    2011    KRW 52,025,000    US$ 50,000    5.20 %   3M USD
Libor+1.8%

DBS

   2008    2011    KRW 51,730,000    US$ 50,000    5.80 %   3M USD
Libor+1.7%

Woori Investment Securities

   2008    2011    KRW 10,346,000    US$ 10,000    5.80 %   3M USD
Libor+1.7%

Mizuho

   2008    2011    KRW 28,860,000    JPY 3,000,000    5.80 %   3M JPY
Libor+1.7%

J.P. Morgan Chase Bank & Deutsche Bank

   2003    2008    JPY 23,770,000    US$ 200,000    1.28 %   4.25%

CSFB

   2003    2013    KRW 177,720    US$ 150,000    5.12 %   4.75%

CSFB

   2006    2016    KRW 94,735    US$ 100,000    5.26 %   6.00%

Barclays

   2006    2016    KRW 94,735    US$ 100,000    5.26 %   6.00%

Citibank

   2006    2016    KRW 94,735    US$ 100,000    5.24 %   6.00%

TOKYO-MITSUBISHI UFJ BANK

   2007    2010    KRW 112,600    JPY 14,000,000    5.09 %   JPY Euro Yen
3m Tibor + 0.5%

JPMorgan Chase Bank

   2004    2011    KRW 86,400    US$ 75,000    4.95 %   Within 3 Years :
4.875%

After 4 years:

[4.875%-(10.9-
JPY/KRW Spot
rate)]

Credit Suisse First Boston

   2004    2011    KRW 86,400    US$ 75,000    4.95 %   Within 3 Years:
4.875%

After 4 years :
[4.875%-(10.9-
JPY/KRW Spot
rate)]

UBS AG

   2006    2016    KRW 98,100    US$ 100,000    5.48 %   5.50%

Credit Suisse First Boston

   2006    2016    KRW 98,100    US$ 100,000    5.48 %   5.50%

TOKYO-MITSUBISHI UFJ BANK

   2007    2010    KRW 115,783    JPY 14,000,000    4.72 %   1.65%

Mitsui Sumitomo SMBC

   2007    2010    KRW 116,620    JPY 14,000,000    4.56 %   Euro Yen Libor
rate 3m+0.05%

Citigroup

   2008    2013    KRW 113,304    US$ 120,000    4.96 %   5.375%

Goldman Sachs

   2008    2013    KRW 113,304    US$ 120,000    4.96 %   5.375%

Barclays

   2008    2013    KRW 56,652    US$ 60,000    4.96 %   5.375%

BTMU

   2007    2010    KRW 109,060    JPY 14,000,000    5.29 %   3M Euro Yen
Tibor+0.5%

Barclays

   2006    2016    KRW 71,888    US$ 75,000    4.81 %   5.50%

Deutsche Bank

   2006    2016    KRW 71,888    US$ 75,000    4.81 %   5.50%

BNP Paribas

   2008    2011    KRW 48,650    US$ 50,000    4.15 %   3M Libor+1.3%

Abn-Amro

   2008    2011    KRW 29,190    US$ 30,000    4.15 %   3M Libor+1.3%

Woori Investment Securities

   2008    2011    KRW 19,460    US$ 20,000    4.15 %   3M Libor+1.3%

Barclays Bank PLC

   2004    2014    KRW 172,875    US$ 150,000    5.10 %   5.75%

Barclays Bank PLC

   2004    2014    KRW 138,252    US$ 120,000    4.85 %   4.88%

BNP Paribas

   2008    2011    KRW 46,750    JPY 5,000,000    4.50 %   JPY Libor +
1.3%

ABN AMRO

   2008    2011    KRW 28,050    JPY 3,000,000    4.50 %   JPY Libor +
1.3%

ANZ

   2008    2011    KRW 18,700    JPY 2,000,000    4.50 %   JPY Libor +
1.3%

ABN AMRO

   2008    2013    KRW 149,040    US$ 150,000    5.03 %   5.38%

Deutsche Bank

   2008    2013    KRW 149,040    US$ 150,000    5.03 %   5.38%

BNP Paribas

   2004    2011    KRW 17,282    US$ 15,000    4.85 %   4.88%

Hana Bank

   2004    2011    KRW 17,282    US$ 15,000    4.85 %   4.88%

CSFB

   2004    2011    KRW 115,210    US$ 100,000    4.85 %   4.88%

Barclays

   2005    2012    KRW 155,400    US$ 150,000    5.59 %   5.25%

Lehman Brothers (*1)

   2005    2012    KRW 51,800    US$ 50,000    5.59 %   5.25%

Deutsche Bank

   2005    2012    KRW 51,800    US$ 50,000    5.59 %   5.25%

BNP Paribas

   2005    2012    KRW 51,735    US$ 50,000    5.59 %   5.25%

 

(*1) As Lehman Brothers filed for bankruptcy on September 15, 2008, above currency swap contract expired as of that date.

 

- 21 -


  (b) Interest rate swap contracts as of June 30, 2008 are as follows:

 

Counterparty

   Notional amount
in thousands
   Contract interest rate per annum     
      Pay (%)    

Receive (%)

  

Term

Korea Exchange Bank

   KRW 50,000    5.19 %   3M CD + 0.22%    2007-2010

Korea Exchange Bank

   KRW 50,000    5.42 %   3M CD + 0.21%    2007-2010

Korea Exchange Bank

   KRW 100,000    5.42 %   3M CD + 0.22%    2007-2010

Korea Exchange Bank

   KRW 100,000    5.54 %   3M CD + 0.27%    2007-2010

Korea Exchange Bank

   KRW 100,000    5.30 %   3M CD + 0.35%    2008-2011

Korea Exchange Bank

   KRW 100,000    5.17 %   3M CD + 0.38%    2008-2011

 

  (c) Currency forward contracts as of June 30, 2008 are as follows:

 

     Contract
Date
   Settlement
Date
   Contract amounts    Contract
exchange rate
         Receive (millions)    Pay (millions)   

Kookmin Bank

   2008.05.23    2008.11.23    KRW 243,230    JPY 24,000    10.135

J.P.Morgan Chase Bank

   2007.02.14    2008.01.28    KRW 191,287    JPY 23,770    8.05

Citi Bank

   2008.05.20    2008.07.15    KRW 26,445    USD 25    1042.6

Deutche

   2008.03.11    2009.03.20    USD 6    KRW 5,490    basic rate < 915

Deutche

   2008.03.11    2009.03.20    USD 3    KRW 2,745    985 ³ basic rate ³ 915

Deutche

   2008.03.11    2009.03.20      USD  3,000 * (1,000-basic rate)          1,000 ³ basic rate ³ 985

Deutche

   2008.03.11    2009.03.20      USD  6,000 * (1,000-basic rate)          basic rate ³ 1,000

Barclays

   2008.05.29    2009.06.30    KRW 6,192    USD 6    basic rate > 1,032

Barclays

   2008.06.04    2009.06.30    KRW 6,390    USD 6    basic rate > 1,065

Barclays

   2008.06.12    2009.06.30    KRW 6,180    USD 6    basic rate > 1,030

Bank of America

   2008.06.19    2009.05.29    KRW 6,222    USD 6    basic rate > 1,037

Bank of America

   2008.06.19    2009.05.29    KRW 6,216    USD 6    basic rate > 1,036

Bank of America

   2008.06.23    2009.05.29    KRW 11,520    USD 12    basic rate > 960

 

  (d) Valuation gains and losses on swap and forward contracts that do not qualify as hedges recorded as other income or expense for the six-month period ended June 30, 2007 and 2008 are as follows:

 

     Won (millions)  
     2007     2008  

Currency swaps

    

Gains

   (Won) 23,511     354,880  

Losses

     (25,224 )   (7,094 )

Interest rate swaps

    

Gains

     441     4,555  

Losses

     —       (38 )

Currency forwards

    

Gains

     2     5,361  

Losses

     (29,828 )   (15,367 )

Swaptions

    

Gains

     194     —    
              
     (30,904 )   342,297  
              

 

  (e) The losses (gains) on currency swap contracts qualifying as cash flow hedges of ((Won) 6,026 million) and ((Won) 8,525 million) are reflected within accumulated other comprehensive income for the year ended December 31, 2007 and for the six-month period ended June 30, 2008, respectively.

 

- 22 -


  (f) The transaction gains on derivatives are (Won)6,520 million, and (Won)54,507 million for the six-month period ended June 30, 2007 and 2008, respectively. The transaction losses on derivatives are (Won)13,278 million, and (Won)48,621 million for the six-month period ended June 30, 2007 and 2008, respectively. Transaction gains and losses are included in other income (expense) in the accompanying consolidated statements of income.

 

(24) Power Generation, Transmission and Distribution Expenses

Power generation, transmission and distribution expenses for the six-month period ended June 30, 2006, 2007, 2008 are as follows:

 

     Won (millions)
     2007    2008

Fuel

   (Won) 4,854,742    6,694,584

Purchase of electric power

     1,151,298    1,924,481

Labor

     806,201    1,054,483

Depreciation and amortization

     2,376,187    2,442,815

Maintenance

     963,600    802,194

Provision for decommissioning costs/accretion and related expenses

     174,763    185,595

Research and development cost

     213,066    207,534

Others

     735,861    493,855
           
   (Won) 11,275,718    13,805,541
           

 

(25) Selling and Administrative Expenses

Details of selling and administrative expenses for the six-month period ended June 30, 2006, 2007 and 2008 are as follows:

 

     Won (millions)
     2007    2008

Labor

   (Won) 239,650    321,956

Employee benefits

     44,431    38,929

Sales commissions

     161,556    196,529

Depreciation and amortization

     37,302    37,587

Promotion

     15,548    12,142

Commission-others

     44,863    31,341

Bad debts

     6,991    10,519

Maintenance

     4,391    8,031

Research and development cost

     45,162    48,047

Others

     101,367    93,518
           
   (Won) 701,261    798,599
           

 

- 23 -


(26) Income Taxes

Income tax expenses for the six-month period ended June 30, 2007 and 2008 are summarized as follow:

 

     Won (millions)  
     2007     2008  

Current income taxes

   (Won) 554,919     96,881  

Deferred income taxes allocated directly to shareholder’s equity

     16,214     9,075  

Deferred income taxes

     (9,329 )   (248,382 )
              

Income tax expenses

   (Won) 561,804     (142,426 )
              

The relation between Income before income taxes and Income tax expenses:

 

     Won (millions)  
     2007     2008  

Income before income taxes

   (Won) 1,494,946     (589,965 )

Statutory tax rate

     27.5 %   27.5 %

Expected taxes at statutory rate

     411,110     (162,240 )

Dividend income

     (159,345 )   (182,224 )

Deferred tax on equity income of affiliates

     294,288     145,435  

Others

     15,752     56,603  
              

Income tax expenses

   (Won) 561,804     (142,426 )
              

Effective tax rate

     37.6 %   24.1 %

 

(27) Earnings Per Share

Basic earnings per common share are calculated by dividing controlling interest in net income by the weighted-average number of shares of common stock outstanding for each of the six-month period ended June 30, 2007 and 2008 as follows:

 

     Won (millions)  
     2007    2008  

Controlling interest in net income

   (Won) 916,070    (469,380 )

Weighted-average number of common shares outstanding

     621,417,135    622,637,717  
             

Basic earnings per common share

   (Won) 1,474    (754 )
             

Diluted earnings per share are calculated by dividing diluted controlling interest in net income by the weighted-average number of shares of common equivalent stock outstanding for the six-month period ended June 30, 2007 and 2008 as follows:

 

     Won (millions)  
     2007    2008  

Controlling interest in net income

   (Won) 916,070    (469,380 )

Exchangeable bond interest

     9,898    —    
             

Diluted net income

     925,968    (469,380 )
             

Weighted-average number of common shares and diluted securities outstanding

     640,365,046    622,637,717  
             

Diluted earnings per share

   (Won) 1,446    (754 )
             

 

- 24 -


Exchangeable bonds to be convertible into common stocks as of June 30, 2008 are presented below:

 

     Won    Exchange period    Number of shares
to be issued
     Exchange price      

Overseas exchangeable bonds 1st

   30,000    2003.12.15 ~ 2008.10.24    29,812

Overseas exchangeable bonds 2nd

   51,000    2007.01.04 ~ 2011.11.11    18,899,466

 

(28) Non-cash Investing and Financing Activities

Significant non-cash investing and financing activities for the six-month period ended June 30, 2007 and 2008 are summarized as follows:

 

     Won (millions)
     2007    2008

Conversion of exchangeable bonds

   (Won) 9,299    510

 

(29) Transactions and Balances with Related Companies

 

  (a) Significant transactions between the Company and related parties for the six-month period ended June 30, 2007 and 2008 are as follows.

 

          Won (millions)

Related Party

   Transactions    2007    2008

Operating revenue and other income:

        

Korea Gas Corporation

   Sales of electricity

and others

   (Won) 740    17,291

Korea District Heating Co., Ltd.

        99,819    136,768

LG Powercom Corporation

        17    36,969

Korea Electric Power Industrial Development Co., Ltd.

        2,233    6,101

Others

        —      294
              
      (Won) 102,809    197,423
              

Operating and other expenses:

        

Korea Gas Corporation

   Purchases of LNG    (Won) 2,516,064    3,566,735

Korea District Heating Co., Ltd.

   Commissions for service

and others

     73    280

LG Powercom Corporation

        3,472    35,964

Korea Electric Power Industrial Development Co., Ltd.

        29,388    68,677

others

        —      450
              
      (Won) 2,548,997    3,672,106
              

 

- 25 -


  (b) Receivables and payables arising from related parties transactions as of December 31, 2007 and June 30, 2008 are as follows:

 

Related party

   Accounts    Won (millions)
      2007    2008

Receivables:

        

Korea Gas Corporation

   Trade receivables and
other accounts receivable
   (Won) 13    1,837

Korea District Heating Co., Ltd

        35,146    10,081

LG Powercom Corporation

        10,677    17,016

Korea Electric Power Industrial Development Co., Ltd.

        455    596
              
      (Won) 46,291    29,530
              

Payables:

        

Korea Gas Corporation

   Trade payables and

other accounts payable

   (Won) 518,527    520,012

Korea District Heating Co., Ltd.

        6    2,060

LG Powercom Corporation

        2,195    2,640

Korea Electric Power Industrial Development Co., Ltd.

        9,697    9,375

YTN

        165    66
              
      (Won) 530,590    534,153
              

 

  (c) Long-term borrowings from related parties as of December 31, 2007 and June 30, 2008 are as follows:

 

Lender

   Type    interest rate %    Won (millions)
         2007    2008

Korea Development Bank

   Facility    4.72~5.67    (Won) 4,709,620    3,982,840

Ministry of Knowledge Economy

   Rural area
development
   4.00      30,000    30,000
                 
         (Won) 4,739,620    4,012,840
                 

 

  (d) Guarantees provided by related companies for the Company as of June 30, 2008 are as follows:

 

          USD (thousand)

Type

   Related party    Currency    Guaranteed
amounts
   Type of borrowings

Payment guarantee (*)

   Korea
    Development
    Bank
   US$      704,587    Foreign
currency bond

 

(*)    Korea Development Bank has provided a repayment guarantee for some of foreign currency debentures of KEPCO and debt related to the power generation business of KEPCO Ilijan Corporation, which existed at the time of spin-off.

 

- 26 -


(30) Transactions and Balances with Consolidated Subsidiaries

 

  (a) Significant transactions among KEPCO and consolidated subsidiaries for the year ended December 31, 2007, and for the six-month period ended June 30, 2008 are as follows. These were eliminated in consolidation:

 

Consolidated subsidiaries

   Transactions    2007    2008

Operating revenue and other income:

        

Korea Electric Power Corporation

   Sales of electricity

and others

   (Won) 2,074,993    1,283,290

Korea Hydro & Nuclear Power Co., Ltd.

        5,514,741    2,135,200

Korea South-East Power Co., Ltd.

        2,146,334    1,729,336

Korea Midland Power Co., Ltd.

        2,802,963    1,698,558

Korea Western Power Co., Ltd.

        3,100,953    60,122

Korea Southern Power Co., Ltd.

        3,733,243    1,617,622

Korea East-West Power Co., Ltd.

        2,868,392    251,480

Others

   Commissions for
service and others
     1,208,577    3,350,881
              
      (Won) 23,450,196    12,126,489
              

Operating and other expenses:

        

Korea Electric Power Corporation (*)

   Purchased power
and others
   (Won) 20,499,256    71,700

Korea Hydro & Nuclear Power Co., Ltd.

   Commissions for

service and others

     1,184,959    42,399

Korea South-East Power Co., Ltd.

        697,311    64,347

Korea Midland Power Co., Ltd.

        184,033    74,230

Korea Western Power Co., Ltd.

        265,827    50,557

Korea Southern Power Co., Ltd.

        210,037    80,680

Korea East-West Power Co., Ltd.

        398,958    11,380,173

Others

        9,815    362,403
              
      (Won) 23,450,196    12,126,489
              

 

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

 

- 27 -


  (b) Receivables and payables arising from KEPCO and consolidated subsidiaries transactions as of December 31, 2007 and June 30, 2008 are as follows. These were eliminated in the consolidation:

 

Consolidated subsidiaries

   Accounts    Won (millions)
      2007    2008

Receivables:

        

Korea Electric Power Corporation

   Trade receivables
and other accounts
receivable
   (Won) 1,503,653    733,550

Korea Hydro & Nuclear Power Co., Ltd.

        480,349    431,245

Korea South-East Power Co., Ltd.

        191,038    534,558

Korea Midland Power Co., Ltd.

        313,647    374,031

Korea Western Power Co., Ltd.

        281,070    15,308

Korea Southern Power Co., Ltd.

        350,606    283,302

Korea East-West Power Co., Ltd.

        295,004    1,464,303

Others

        107,806    1,103,833
              
      (Won) 3,523,173    4,940,130
              

Payables:

        

Korea Electric Power Corporation (*)

   Trade payables
and other

accounts payable

   (Won) 1,852,042    552,178

Korea Hydro & Nuclear Power Co., Ltd.

        442,787    123,490

Korea South-East Power Co., Ltd.

        560,675    266,980

Korea Midland Power Co., Ltd.

        54,830    141,411

Korea Western Power Co., Ltd.

        123,866    20,217

Korea Southern Power Co., Ltd.

        123,110    62,840

Korea East-West Power Co., Ltd.

        270,444    3,191,938

Others

        95,419    581,076
              
      (Won) 3,523,173    4,940,130
              

 

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

 

  (c) The elimination entries of revenues and expenses among KEPCO and consolidated subsidiaries for the six-month period ended June 30, 2008 are summarized as follows:

 

Won (millions)

  

Won (millions)

Accounts

   Amount   

Accounts

   Amount

Operating revenues

   (Won) 12,075,080    Operating expenses    (Won) 12,046,945

Rental income

     35,000    Rent expenses      7,110

Interest income

     9,757    Commissions      33,823

Other income

     6,652    Interest expenses      34,991
      Other expenses      3,620
                
   (Won) 12,126,489       (Won) 12,126,489
                

 

- 28 -


  (d) The elimination entries of receivables and payables among KEPCO and consolidated subsidiaries as of June 30, 2008 are summarized as follows:

 

Won (millions)

  

Won (millions)

Accounts

   Amount   

Accounts

   Amount

Trade payables

   (Won) 1,673,800    Trade receivables    (Won) 1,900,784

Short-term borrowings

     35,251    Short-term loans      5,126

Other accounts payable

     413,019    Other accounts receivables      190,712

Advances received

     75,922    Advance payments      75,922

Accrued expenses

     5,375    Accrued income      238

Unearned revenue

     9,491    Prepaid expenses      9,502

Long-term borrowings

     47,299    Long-term loans      52,565

Other long-term account payable

     1,243,701   

Other long-term account receivable

     1,244,332

Construction grants

     1,502,723    Other intangible asset      1,502,723

Others

     16,099    Others      40,776
                
   (Won) 5,022,680       (Won) 5,022,680
                

 

  (e) The Company has provided guarantees for related companies as of June 30, 2008 as follows:

 

Type

  

Guaranteed company

   US$(thousands)

Other (*1)

   KEPCO Ilijan Co.    US$ 72,000

Other (*2)

   KEPCO Lebanon SARL..    US$ 17,277

Other (*3)

   KEPCO Shanxi international Ltd.    US$ 180,000

Other (*4)

   KEPCO SALCON Power Corporation.    US$ 100,000

_________

 

     
  (*1) KEPCO Ilijan Corporation, which is a subsidiary of KEPCO International Philippines Inc., is engaged in the power generation business in the Philippines and borrowed US$281 million in 2000 as project financing from Japan Bank of International Corporation and others. In connection with the borrowing, KEPCO Ilijan Corporation’s investment securities under the equity method held by KEPCO International Philippines Inc. were pledged as collateral. The Company has provided the National Power Corporation and others with the guarantee not to exceed US$ 72 million on performance of the power generation business of KEPCO Ilijan Corporation.
  (*2) The Company has provided Lebanon Electric Power Service Corporation with the guarantee with a limit of US$ 18 million on the performance contract of KEPCO Lebanon SARL.
  (*3) The Company’s investment in the development business in China is through a wholly owned subsidiary, KEPCO Shanxi International Ltd., which entered into a building consortium with Sansu International Electric Corporation and Deutsche Bank. For this business, the consortium established Gemeng International Energy Group Co. Ltd. (34%). The Company is providing payment guarantee US$180 million that KEPCO Shanxi International Ltd. borrowed from HSBC and Export-Import Bank of Korea. Also if Gemeng International Energy Group Co., Ltd. goes bankrupt in two years or it is not listed on the Hong Kong Stock Exchange within six years, the Company agreed to pay the investment of Deutsche Bank (amounting to US$110,640,000) and related interest based on Libor+2% until the day that the conditions are not met.
  (*4) The Company established KEPCO SALCON Power Corporation to operate the Sebu Power Plant. The Company guarantees the borrowings of KEPCO SALCON Power Corporation for the operation of the local power plant from Export-Import Bank of Korea up to the limit of US$100 million.

 

- 29 -


(31) 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, 2008, the Company is engaged in 355 lawsuits as a defendant and 75 lawsuits as a plaintiff. The total amount claimed against the Company is (Won)390,129 million and the total amount claimed by the Company is (Won)51,457 million as of June 30,2008. As of June 30, 2008, the Company recorded a liability related to the above claims amounting to (Won)28,298 million in other long-term liabilities. The outcome of these lawsuits cannot presently be determined. 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, 2008 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$  1,723,380
      (Won) 18,764

Inclusive credits

   Korea Exchange Bank    (Won) 122,300
Borrowings    Woori Bank and others    US$ 75,000
      (Won) 184,000
Performance guarantees    Korea Exchange Bank and others    US$ 158,620
Payment of foreign currency (*)    Korea Exchange Bank    EUR 136
      INR 29,125
   Shinhan Bank    US$ 12,303
Payment of local currency    Korea Exchange Bank    (Won) 1,286,650

__________

 

     
  (*) Foreign currencies other than US$ are converted into US$.

 

  (ii) Overdraft and Others

 

          Won (millions), US$ (thousands)

Description

  

Financial institution

   Credit lines

Overdraft

   National Agricultural Cooperative
        Federation and others
   (Won) 955,000

Discount on promissory note

   Korea Exchange Bank and others    (Won) 269,000

Commercial paper

   Korea Exchange Bank and others    (Won) 406,500
      US$ 80,000

Trade financing

   National Agricultural Cooperative
        Federation and others
   (Won) 55,302

Repayment guarantees for foreign currency debentures

   Korea Develop Bank    US$ 704,587

Banker’s Usance

   Hana Bank    US$ 15,000

 

  (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.

 

- 30 -


  (e) The Company entered into an arrangement with the Korea Peninsula Energy Development Organization (“KEDO”) on December 15, 1999, to construct two 1,000,000 KW-class pressurized light-water reactor units in North Korea. But, the executive board of KEDO decided to terminate the light water reactor project on May 31, 2006 due to the political environment surrounding the Korean peninsula. On December 12, 2006, the Company entered into the Termination Agreement (“TA”) with KEDO.

According to the TA, the Company mainly accepts all rights and obligations related to the light water reactor outside of North Korea, from KEDO. In exchange, the Company waives the right to claim any expenses incurred and any potential claims by subcontractors to KEDO. As a result, the Company recorded transferred equipment in accordance with the TA as other non-current assets amounting to (Won)93,804 million. In addition, the Company recorded the estimated claims by subcontractors as other long-term liabilities amounting to (Won)17,927 million.

Pursuant to the terms of the TA, the Company is required to report the disposal or reuse of the transferred equipment to KEDO, and the gains and losses from the TA are shared with KEDO through the negotiation between two parties. The Company’s management believes that ultimate gains or losses are not reasonably estimated as of June 30, 2008 as it is contingent upon disposal or reuse of the related assets and settlement of obligations.

 

  (f) The Company entered into a Power Purchase Agreement with GS EPS Co., Ltd. and other independent power 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)665.004 million, and (Won)1,010.892 million for the six-month period ended June 30, 2007 and 2008, 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.

 

  (g) The Company has contracted Doosan Industrial Co., Ltd. and others amounting to (Won)3,347,600 million and JPY17,792,100 thousand in the aggregate as of June 30, 2008, 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, 2008. Also the Company has a LNG long-term purchase contract with Korea Gas Corporation as of June 30, 2008.

 

  (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 for the six-month period ended June 30, 2008 amounting to (Won)2,731 million were charged to other expenses. On the other hand, the amounts of compensation for the residents of Gangneung related to improvement of quality of water are not reasonably measurable as of June 30, 2008.

 

  (j) As the national project administrator, the Company is currently researching the use of RDF (Refuse Derived Fuel) as an alternative source for power generation at Wonju city in the Gangwon province. For the project, the Company is expected to receive a total funding of (Won)90 billion from Korea Energy Management Corp. As of June 30, 2008, the Company received funding of (Won)850 million, inclusive of POSCO’s contribution of (Won)76 million (based on its commitment to invest 15% of total research expenses exclusive of government subsidies).

 

  (k) 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 Daewoo Shipbuilding & Marine Engineering Co., Ltd. The Korean Consortium, owning 60% equity interest in the joint venture with Equator Exploration Limited and the Nigerian government, invested in KNOC Nigerian East 323, KNOC Nigerian West 321. In relation to the contract, the Company provides performance guarantees amounting to US$67 million to the Nigeria government.

 

- 31 -


  (l) Subsidiaries have contracts with Hanjin Shipping Co. on long-term marine transportation for stable delivery of raw materials.

 

(32) Segment Information

The below segment information is based on the management’s disaggregation of the Company for making operating decisions. Operating segments that have similar economic characteristics and are similar in terms of the nature of their products and services, the nature of the production process, the type or class of customer, and methods of distribution have been aggregated into a segment.

Other segments that cannot be classified into the above-mentioned two segments have been combined and disclosed in an “all other” category. All other consist primarily of the operations from the engineering and maintenance for utility plant, information services, and sales of nuclear fuel, communication line leasing and others.

The Company evaluates performance of each segment based on net income. There are no revenues from transactions with a single external customer that amount to 10 percent or more of the consolidated revenues of the Company.

 

  (a) The following table provides information for each operating segment for the six-month period ended June 30, 2007 and 2008.

 

     Won (millions)  
     2007  
     Electric business     All other     Consolidation
adjustment
    Consolidated  
     Transmission
& distribution
    Power
generation(*)
       

Unaffiliated revenues

   (Won) 13,529,525     60,009     153,494     —       13,743,028  

Intersegment revenues

     148,523     9,867,513     631,446     (10,598,429 )   49,053  
                                

Total operating revenues

     13,678,048     9,927,522     784,940     (10,598,429 )   13,792,081  

Cost of goods sold

     (13,089,748 )   (8,302,954 )   (585,486 )   10,506,816     (11,471,372 )

Selling and administrative expenses

     (525,116 )   (128,205 )   (71,191 )   23,251     (701,261 )
                                

Operating income

     63,184     1,496,363     128,263     (68,362 )   1,619,448  
                                

Interest income

     39,892     62,519     20,470     (34,356 )   88,525  

Interest expense

     (280,554 )   (85,260 )   (14,104 )   34,356     (345,562 )

Equity income of affiliates

     1,159,317     —       2,287     (1,080,035 )   81,569  

Other, net

     242,103     (48,085 )   47,726     (172,089 )   69,655  
                                

Income before income taxes

     1,223,942     1,425,537     184,642     (1,320,486 )   1,513,635  

Income taxes

     (183,122 )   (388,622 )   (29,827 )   21,079     (580,492 )
                                

Segment earnings
before minority interests

   (Won) 1,040,820     1,036,916     154,814     (1,299,407 )   933,143  
                                
     Won (millions)  
     2008  
     Electric business     All other     Consolidation
adjustment
    Consolidated  
     Transmission
& distribution
    Power
generation(*)
       

Unaffiliated revenues

   (Won) 14,652,020     47,226     258,062     —       14,957,308  

Intersegment revenues

     208,710     11,260,665     612,271     (12,081,646 )   —    
                                

Total operating revenues

     14,860,730     11,307,891     870,333     (12,081,646 )   14,957,308  

Cost of goods sold

     (15,369,466 )   (10,312,810 )   (657,146 )   11,931,714     (14,407,708 )

Selling and administrative expenses

     (618,537 )   (144,947 )   (85,762 )   50,647     (798,599 )
                                

Operating income

     (1,127,273 )   850,134     127,425     (99,285 )   (248,999 )
                                

Interest income

     42,385     53,579     24,482     (38,782 )   81,664  

Interest expense

     (335,712 )   (104,606 )   (21,002 )   38,752     (422,568 )

Equity income of affiliates

     771,104     337     964     (650,628 )   121,777  

Other, net

     (167,930 )   (81,522 )   58,538     69,075     (121,839 )
                                

Income before income taxes

     (817,426 )   717,922     190,407     (680,868 )   (589,965 )

Income taxes

     353,540     (195,643 )   (42,645 )   27,174     142,426  
                                

Segment earnings
before minority interests

   (Won) (463,886 )   522,279     147,762     (653,694 )   (447,539 )
                                

 

- 32 -


  (b) The following table provides asset information for each operating segment as of December 31, 2007 and June 30, 2008.

 

     Won (millions)
     Electric business    All other    Consolidation
adjustment
    Consolidated
     Transmission
& distribution
   Power
generation(*)
       

December 31, 2007

             

Property, plant and equipment

   (Won) 31,018,141    34,441,625    883,464    1,219,923     67,563,153

Total assets

     65,642,591    45,483,784    3,145,329    (31,343,112 )   82,928,592

June 30, 2008

             

Property, plant and equipment

   (Won) 31,254,652    34,578,395    965,305    1,222,839     68,021,192

Total assets

     65,885,917    45,699,370    3,292,678    (30,938,765 )   83,939,200

 

  (*) Only includes the information for domestic power generation companies.

 

(33) Comprehensive Statement of Income

Comprehensive income for the six-month period ended June 30, 2007 and 2008 is summarized as follows:

 

     Korean Won(in millions)     Translation into
U.S. Dollar
(Note 2)
(in thousands)
 
     2007    2008     2008  

Net income

   (Won) 933,142    (Won) (447,539 )   $ (427,531 )

Other comprehensive income, net of tax :

       

Gain (loss) on valuation of available-for-sale securities

     4,408      2,395       2,288  

Equity in other comprehensive income of affiliates

     1,461      87,757       83,834  

Gain (loss) on valuation of derivatives

     3,936      2,500       2,388  

Overseas operations translation

     8,958      13,632       13,023  
                       

Comprehensive income

   (Won) 951,905    (Won) (341,255 )   $ (325,998 )
                       

The amounts of tax allocated to the other comprehensive income for the year ended December 31, 2007 and for the six-month period ended June 30, 2008 are as follows:

 

     Korean Won(in millions)     Translation into
U.S. Dollar
(Note 2)
(in thousands)
 
     2007     2008     2008  

Gain (loss) on valuation of available-for-sale securities

   (Won) (1,672 )   (Won) (908 )   $ (867 )

Equity in other comprehensive income of affiliates

     (554 )     (33,287 )     (31,799 )

Gain (loss) on valuation of derivatives

     (1,493 )     (948 )     (906 )

Overseas operations translation

     (3,398 )     (5,171 )     (4,940 )
                        

Comprehensive income

   (Won) (7,117 )   (Won) (40,314 )   $ (38,512 )
                        

 

- 33 -


(34) Reconciliation to United States Generally Accepted Accounting Principles

The accompanying consolidated financial statements are prepared in accordance with Korean GAAP which differs in certain respects from U.S. generally accepted accounting principles (“U.S. GAAP”). The significant differences between Korean GAAP and U.S. GAAP that affect the Company’s consolidated financial statements are described below.

 

  (a) Revenue Recognition

The Company reads meters and bills customers on a cycle basis. The Company does not accrue revenue for power sold to customers between the meter-reading date and balance sheet date but records the revenue in the subsequent period. Under Korean GAAP, such practice is consistent with the Accounting Regulations for Public Enterprise Associated Government Agency, which have been approved by the Korean Ministry of Strategy and Finance (formerly the Korean Ministry of Finance and Economy) and considered by the utility industry in Korea as Korean GAAP. However under U.S. GAAP beginning in 2006, the Company recognizes unbilled revenue representing the sale of power between the cycle meter-reading date and the balance sheet date. Prior to 2006, the Company did not recognize any difference for amounts recognized under Korean GAAP, and had concluded that such prior year uncorrected differences were quantitatively and qualitatively immaterial to the Company’s prior year consolidated financial statements using the income statement approach.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires the use of the “dual approach” (both an income statement approach and a balance sheet approach) when evaluating whether an error is material to an entity’s financial statements, based on all relevant quantitative and qualitative factors. The SEC issued SAB 108 to address what the SEC identified as diversity in practice whereby entities were using either an income statement approach or a balance sheet approach, but not both.

Effective December 31, 2006, the Company adopted SAB 108 and recorded the effects of prior year uncorrected differences which arose prior to January 1, 2006, as a cumulative effect adjustment to beginning retained earnings as of January 1, 2006 in accordance with the “dual approach” set forth in SAB 108. The impact of SAB 108 adoption at December 31, 2006 to beginning retained earnings is shown below.

 

     Korean Won (in millions)
     Accounts receivable    Current deferred income
tax assets (liabilities)
    Retained earnings

Balance as of December 31, 2005, as reported

   (Won) 2,162,747    (Won) 1,402,759     (Won) 27,365,456

Cumulated effect adjustment for adoption of SAB 108

     943,818      (259,550 )     684,268
                     

Balance as of January 1, 2006, as adjusted

   (Won) 3,106,565    (Won) 1,143,209     (Won) 28,049,724
                     

Translation into U.S. dollars
(Note 2)
(in thousand)

   $ 3,339,868    $ 1,229,257     $ 30,160,993
                     

 

- 34 -


  (b) Asset Revaluation and Depreciation

Under Korean GAAP, property, plant and equipment are stated at cost, except for those assets that are stated at their appraised values in accordance with the KEPCO Act and the Assets Revaluation Law of Korea. In connection with an asset revaluation, a new basis for the property, plant and equipment is established. Asset revaluations are not permitted after January 1, 2001.

Under U.S. GAAP, property, plant and equipment must be stated at cost less accumulated depreciation and impairment. The revaluation of property, plant and equipment and the resulting depreciation of revalued amounts are not included in consolidated financial statements prepared in accordance with U.S. GAAP. When revalued assets are sold, revaluation surplus related to those assets under Korean GAAP would be reflected in income as additional gain on the sale of property, plant and equipment under U.S. GAAP.

 

  (c) Special Depreciation

Under Korean GAAP, special depreciation allowed prior to 1994, which represents accelerated depreciation of certain facilities and equipment acquired for energy saving and anti-pollution purposes, is not recognized under U.S. GAAP. The U.S. GAAP reconciliation reflects the adjustment of special depreciation to the Company’s normal depreciation method, based on the economic useful life of the asset.

 

  (d) Accounting for Regulation

U.S. GAAP, pursuant to Statements of Financial Accounting Standards (“SFAS”) No. 71 “Accounting for the Effects of Certain Types of Regulation” differs in certain respects from the application of U.S. GAAP by non-regulated businesses. As a result, a regulated utility is required to defer the recognition of costs (a regulatory asset) or recognize obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in future utility rates.

 

  (e) Reversal of Eliminated Profit on Transactions with Subsidiaries and Affiliated Companies

Under Korean GAAP, the Company’s share of the profit on transactions between KEPCO and its affiliated companies is eliminated in the preparation of the consolidated financial statements. No elimination of such profit is required in accordance with U.S. GAAP for regulated enterprises, where the sales prices are reasonable and it is probable that, through the rate making process, future revenues approximately equal to the sales price will result from the Company’s use of the utility plant. The Company meets both of these criteria, and no elimination of profit is necessary for reporting under U.S. GAAP.

 

  (f) Foreign Currency Translation

As discussed in note 1(f), under Korean GAAP, the Company capitalizes certain foreign exchange transaction and translation gains and losses on borrowings associated with certain qualified assets during the construction period.

Under U.S. GAAP, all foreign exchange transaction gains and losses (referred to as either transaction or translation gains (losses) under Korean GAAP) should be included in the results of operations for the current period. Accordingly, the amounts of foreign exchange transaction and translation gains and losses included in property, plant and equipment under Korean GAAP were reversed into results of operations for the current period under U.S. GAAP.

Under Korean GAAP, convertible bonds denominated in foreign currency are regarded as non-monetary liabilities since they have equity-like characteristics. Accordingly, the Company does not recognize the associated foreign currency translation gain or loss.

Under U.S. GAAP, convertible bonds denominated in foreign currency are translated at exchange rates as of the balance sheet date, and the resulting foreign currency transaction gain or loss is included in the results of operations.

 

- 35 -


  (g) Intangible Assets

Under Korean GAAP, all costs incurred during the research phase are expensed as incurred. Costs incurred during the development phase are recognized an asset only if all of the following criteria for recognition are satisfied; (1) it is probable that future economic benefits that are attributable to the asset will flow into the entity; and (2) the cost of the asset can be reliably measured. If the costs incurred fail to satisfy all of these criteria, they are recorded as periodic expense as incurred.

Under U.S. GAAP, all costs incurred during the research and development stages are expensed as incurred with the exception of certain computer software costs defined in Statement of Position (the “SOP”) 98-1. Under SOP 98-1, Internal and external costs incurred to develop internal-use computer software during the application development stage should be capitalized.

As discussed in note 5, under Korean GAAP, the Company recognized the payment of (Won)300 billion to the City of Gyeongju as an intangible asset. Under U.S. GAAP, the Company reclassified it to a construction-in-progress in utility plants. Under Korean GAAP and U.S. GAAP, such amount will be amortized using the unit-of-production method upon completion of repository site.

 

  (h) Deferred Income Taxes

Under Korean GAAP, prior to January 1, 2005, deferred taxes were not recognized for temporary differences related to the conversion right of the convertible bond issued, unrealized gains and losses on investment securities, equity in other comprehensive income of affiliates and unrealized gains and losses on derivatives considered to be cash flow hedges that were reported as a separate component of shareholders’ equity. Effective January 1, 2005, the Company adopted SKAS No. 16 “Income Taxes.” In accordance with this standard, deferred taxes are recognized on the temporary differences related to the conversion right of the convertible bond issued, unrealized gains and losses on investment securities, equity in other comprehensive income of affiliates and unrealized gains and losses on derivatives considered to be cash flow hedges and are reported as a separate component of shareholders’ equity.

Under U.S. GAAP, deferred taxes are recognized on the temporary differences related to unrealized holding gains and losses on available-for-sale securities and unrealized gains and losses on derivatives considered to be cash flow hedges and are included in equity as a component of accumulated other comprehensive income, net of applicable taxes.

 

  (i) Accounting for Uncertainty in Income Taxes

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN48”) - “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” which set outs a consistent framework to use to determine the appropriate level of tax reserve for uncertain tax positions. This interpretation uses two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not to be sustained. The amount of the benefit is then measured to be the highest tax benefit which is greater than 50% likely to be realized. The difference between the benefit recognized for a position in accordance with this FIN 48 and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit.

The Company adopted FIN 48 effective January 1, 2007, and the adoption resulted in a decrease of the beginning balance of retained earnings as of January 1, 2007 by (Won)6,920 million. Additionally, in connection with the adoption of FIN 48, the Company elected to classify interest and penalties related to tax positions as a component of income tax expense.

 

- 36 -


The beginning balance of unrecognized tax benefits reconciles to the balance as of December 31, 2007 in the following table:

 

     Korean Won
(in millions)
    Translation into
U.S. Dollars(Note 2)
(in thousands)
 
     2007     2007  

Total unrecognized tax benefits at January 1, 2007

   (Won) 17,200     $ 18,380  

Amount of increase for current year’s tax position

     1,231       1,315  

Gross amount of increases for prior years’ tax position

     —         —    

Gross amount of decreases for prior years’ tax position

     (12,741 )     (13,615 )
                

Total unrecognized tax benefits at December 31, 2007

   (Won) 5,690     $ 6,080  
                

Any changes in the amounts of unrecognized tax benefits related to temporary differences would result in a reclassification to deferred tax liability, and any changes in the amounts of unrecognized tax benefits related to permanent differences would result in an adjustment to income tax expense and therefore, the Company’s effective tax rate. As of December 31, 2007 and June 30, 2008, the unrecognized tax benefits included above which would, if recognized, affect the effective tax rate is (Won)2,106 million and (Won)2,138 million, respectively.

The Company’s continuing practice is to recognize interest and penalties, if any, related to income tax matters in income tax expense. After the adoption of FIN 48, the Company has total gross accrual for interest income and penalties of (Won)7,691 million and (Won)7,914 million as of December 31, 2007 and June 30, 2008, respectively. During 2008, the Company recognized income tax expense of (Won)256 million related to interest and penalties.

The Company belongs to the tax jurisdiction of the Republic of Korea, and during six-month ended June 30, 2008, tax examinations for six entities, including KEPCO, were carried out, the results of which have not been advised but may cause significant change in unrecognized tax benefits which cannot be estimated as of report date.

 

  (j) Liabilities for Decommissioning Costs

Prior to 2003

Under Korean GAAP, prior to January 1, 2003, the Company accrued for estimated decommissioning costs of nuclear facilities based on engineering studies and the expected decommissioning dates of the nuclear power plant. Annual additions to the reserve were in amounts such that the expected costs would be fully accrued for at the estimated dates of decommissioning on a straight-line basis.

Under U.S. GAAP, prior to January 1, 2003, accounting for liabilities for decommissioning costs was substantially the same as Korean GAAP.

2003

Under Korean GAAP, effective January 1, 2003, the Company adopted Korea Accounting Standard Board issued Statement of Korea Accounting Standards (“SKAS”) No. 5 “Tangible Assets.” Under this standard, the Company would record the fair value of the 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 plant’s 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.

 

- 37 -


Under U.S. GAAP, effective January 1, 2003, the Company adopted SFAS No. 143 “Accounting for Asset Retirement Costs” Under SFAS No. 143, the Company is required to recognize an estimated liability for legal obligations associated with the retirement of tangible long-lived assets. The Company measures the liability at fair value when incurred and capitalizes a corresponding amount as part of the book value of the related long-lived assets. The increase in the capitalized cost is included in determining depreciation expense over the estimated useful life of these assets. Since the fair value of the liabilities for decommissioning costs is determined using a present value approach, accretion of the liability due to the passage of time is recognized each period as expense until the settlement of the liability.

SFAS No. 143 applies to all existing long-lived assets including those acquired before January 1, 2003. As a result of the adoption of SFAS No. 143, the Company recognized a pre-tax gain as a cumulative effect of accounting change of (Won) 1,775,306 million on January 1, 2003. In addition, for the year ended December 31, 2003, the Company recorded accretion expense and depreciation expense under U.S. GAAP while reversing the provision for decommissioning costs recorded under Korean GAAP.

2004 and thereafter

In October 2004, KASB issued Statement of SKAS No. 17 “Provisions and Contingent Liability & Asset”. 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 (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. Under SKAS No. 17, the discount rate was set at the date of adoption and should be applied in all future periods. In addition, any new plants 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. In addition, as required by SKAS No. 17, the cumulative effect of a change in accounting included any changes in estimate that took place during 2004. Due to the adoption of this standard, the Company re-measured the liability for decommissioning costs as of January 1, 2004 and reflected the cumulative effect of a change in accounting up to prior year into current year retained earnings.

Under U.S. GAAP, the Company continues to apply SFAS No. 143 in 2004 and thereafter.

Since the adoption of SKAS No. 17 and up to date, Korean GAAP and U.S. GAAP for recording the liabilities for decommissioning costs are substantially the same except for the following:

 

   

Under U.S. GAAP, the discount rate for existing decommissioning liabilities was set when the Company adopted SFAS No. 143 (6.49% as of January 1, 2003). Under Korean GAAP, the discount rate for existing decommissioning liabilities was set when the Company adopted SKAS No. 17 (4.36% as of December 2004).

 

   

Under U.S. GAAP, any changes that result in upward revisions to the undiscounted estimated cash flows shall be treated as a new liability and discounted at the then current discount rate. Any downward revisions to the undiscounted estimated cash flows will result in a reduction of the liability for decommissioning costs and shall be reduced from the recorded discounted liability at the rate that was used at the time the obligation was originally recorded. Under Korean GAAP, regardless of upward or downward revisions to the undiscounted estimated cash flows, the historical discount rate will be applied in all future periods.

As explained in note 21, under Korean GAAP, the Company has accrued (Won)8,503,622 million for the cost of dismantling and decontaminating existing nuclear power plants as of June 30, 2008. Under U.S. GAAP, the Company has accrued (Won)6,190,827 million for the cost of dismantling and decontaminating existing nuclear power plants as of June 30, 2008. Substantially all of the difference between the U.S. GAAP liability and the Korean

GAAP liability is due to the impact of the discount rate described in the first bullet above.

 

- 38 -


Amounts reconciled from Korean GAAP to U.S. GAAP for capitalized asset retirement costs, net of accumulated depreciation and liabilities for decommission costs are as follows:

 

     Korean Won (in millions)     Translation into
U.S. Dollar
(Note 2)
(in thousands)
 
     2007     2008     2008  

Decrease in capitalized asset retirement costs, net of accumulated depreciation

   (Won) (919,159 )   (Won) (894,244 )   $ (854,264 )

Decrease in liabilities for decommissioning costs

     2,294,969       2,301,335       2,198,448  
                        
   (Won) 1,375,810     (Won) 1,407,091     $ 1,344,184  
                        

Details of the Company’s asset retirement costs as of December 31, 2007 and June 30, 2008 under U.S. GAAP are as follows:

 

     Korean Won (in millions)     Translation into
U.S. Dollar
(Note 2)
(in thousands)
 
     2007     2008     2008  

Capitalized asset retirement costs

   (Won) 1,613,433     (Won) 1,688,609     $ 1,613,115  

Less : accumulated depreciation

     (873,182 )     (968,114 )     (924,832 )
                        
   (Won) 740,251     (Won) 720,495     $ 688,283  
                        

Changes in liabilities for decommissioning costs for the years ended December 31, 2007 and June 30, 2008 under U.S. GAAP is as follows:

 

     Korean Won (in millions)     Translation into
U.S. Dollar
(Note 2)
(in thousands)
 
     2007     2008     2008  

Balance at beginning of year

   (Won) 5,297,018     (Won) 5,911,298     $ 5,647,018  

Liabilities incurred

     306,196       119,358       114,022  

Accretion expense for the year

     363,841       164,045       156,711  

Liabilities reversed (*1)

     (48,298 )     —         —    

Payments

     (7,459 )     (3,991 )     (3,813 )
                        

Balance at end of year

   (Won) 5,911,298     (Won) 6,190,710     $ 5,913,938  
                        

 

  (*1) In 2007, the usage period of Kori-1 nuclear generation unit was extended by 10 years under the permission of MESK. Accordingly, the Company recorded the difference between previously estimated and newly estimated amounts for the decrease in the liability.

 

  (k) Convertible Bonds

Under Korean GAAP, the value of conversion rights is recognized as capital surplus. Also, the convertible bonds are not subject to foreign currency translation as convertible bonds are regarded as non-monetary foreign currency liabilities.

Under U.S. GAAP, per SFAS No. 133, unless a conversion right would be considered an embedded derivative instrument requiring bifurcation, no portion of the proceeds from the issuance of the convertible debt securities shall be attributed to the conversion feature. The Company has determined that the conversion feature embedded in our convertible debt should not be bifurcated. Also, the convertible bonds are subject to foreign currency translation because these convertible bonds were regarded as monetary foreign currency liabilities.

 

- 39 -


  (l) Principles of Consolidation

Under Korean GAAP, minority interests in consolidated subsidiaries are presented as a component of shareholders’ equity in the consolidated balance sheet.

Under U.S. GAAP, minority interests are presented outside of the shareholders’ equity section in the consolidated balance sheet.

 

  (m) Reserve for Self-insurance

Under Korean GAAP, in accordance with Accounting Regulations for Public Enterprise · Associate Government Agency, 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.

U.S. GAAP considers loss from accidents and liability to third parties to be a contingency that is only provided for when a liability has been incurred. Contingent losses for self-insurance are generally recognized as a liability (undiscounted) when probable and reasonably estimable.

 

  (n) Gain or loss on partial disposal of subsidiaries

Under Korean GAAP, when the parent company disposes of a portion of its investment in a subsidiary but still retains a controlling interest, any gain or loss on disposal should be recognized in capital surplus.

Under US GAAP, such gain or loss on disposal is recognized in other income.

 

  (o) Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of significant financial instruments in which it is practicable to estimate that value:

 

  (i) Cash and cash equivalents, short term financial instruments, trade receivables, short-term borrowings, and trade payables: The carrying amount approximates fair value because of its nature or relatively short maturity.

 

  (ii) Investments: The fair value of investments with marketability is estimated based on quoted market prices for those or similar investments. For other investments for which there are no quoted market prices, it was not practicable to estimate the fair value of investments in unlisted companies.

 

  (iii) Long-term debt: The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues, or on the current rates offered for debt of the same remaining maturities.

 

- 40 -


The carrying amounts and estimated fair values of the Company’s consolidated financial instruments as of December 31, 2007 and June 30, 2008 are summarized as follows :

 

     Korea Won (in millions)  
     2007     2008  
     Carrying
Amount
    Fair value     Carrying
Amount
    Fair value  

Cash and cash equivalents

   (Won) 1,574,329     (Won) 1,574,329     (Won) 1,823,591     (Won) 1,823,591  

Short-term financial instruments

     1,583,271       1,583,271       330,779       330,779  

Trade receivables and account receivables-other

     2,995,893       2,995,893       2,695,614       2,695,614  

Investments:

        

Practicable to estimate fair value

     44,495       44,495       30,676       30,676  

Not practicable

     159,523       N/A       221,683       N/A  

Short-term borrowings

     (820,315 )     (820,315 )     (1,154,748 )     (1,154,748 )

Trade payables and accounts payable-other

     (2,273,313 )     (2,273,313 )     (1,787,329 )     (1,787,329 )

Long-term debt, including current portion

     (20,790,781 )     (20,712,008 )     (22,640,017 )     (22,640,017 )

Currency and interest swaps, net

     (228,701 )     (228,701 )     180,706       180,706  

 

  (p) Supplementary U.S. GAAP Disclosures

The Company’s supplementary information for the statement of cash flows is as follows:

 

     Korean Won (in millions)    Translation into
U.S. Dollar (Note 2)
(in thousands)
     2007    2008    2008

Interest paid, net of capitalized portion

   903,916    557,506    $ 532,581

Income taxes paid

   1,385,254    998,289      953,658

 

  (q) Recent Changes in U.S. GAAP

In September 2006, the FASB issued statement No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. SFAS 157 is required to be applied prospectively, except for certain financial instruments. Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. The Company does not expect SFAS 157 will have a material impact on its results from operations or financial position.

In February 2008, the FASB issued Staff Position No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purpose of Lease Classification or Measurement Under Statement 13” (“FSP 157-1”) in order to amend SFAS No. 157 to exclude FASB Statement No. 13, “Accounting for Leases” (“SFAS No. 13”) and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS No. 13. In addition, in February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for non-financial assets and non-financial liabilities, except for those that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). The Company is currently evaluating the impact that SFAS No. 157, FSP 157-1 and FSP 157-2 may have on consolidated financial statements.

 

- 41 -


In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which provides companies with an option to report selected financial assets and liabilities at fair value in an attempt to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. This Statement is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption may have on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations(SFAS 141R)” SFAS 141R establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of an entity’s fiscal year that begins on or after December 15, 2008. The Company is evaluating the impact of SFAS 141R on our consolidated financial statements for any potential business combinations subsequent to January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (SFAS 160). SFAS 160 requires the ownership interest in subsidiaries held by parties other than the parent be clearly identified and presented in the consolidated balance sheets within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of earnings; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. This statement is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the impact that the adoption may have on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 requires increased qualitative, quantitative, and credit-risk disclosures. Required qualitative disclosures include: (1) How and why an entity is using a derivative instrument or hedging activity (e.g., for risk management or other purposes). (2) How the entity is accounting for its derivative instrument and hedged items under Statement 133 (and related guidance). (3) How the instrument affects the entity’s financial position, financial performance, and cash flows. This statement is effective for fiscal years beginning on or after November 15, 2008. The Company is currently evaluating the impact that the adoption may have on our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. SFAS 162 addresses to establish that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Statement 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the impact that the adoption may have on our consolidated financial statements.

 

- 42 -


  (r) Impact on Reconciliation of Adoption of Statement of Korean Accounting Standards

Effective January 1, 2007, the Company adopted the SKAS No. 21 “Preparation and Presentation of Financial Statements”, SKAS No. 23 “Earning per Share”, SKAS No.25 “Consolidation Financial Statement” and amended SKAS No.16 “Income Taxes”. The impact of those statements on the reconciliation to U.S. GAAP in 2007 was immaterial.

 

  (s) Effect on Net Income and Shareholders’ Equity

The effects of the significant adjustments to net income and shareholders’ equity that are required if U.S. GAAP were applied instead of Korean GAAP are summarized as follows:

 

      Korean Won (in
millions)
    Translation into U.S
dollars (Note2)
 
     2007     2008     2008  

NET INCOME UNDER KOREAN GAAP

   933,142     (447,539 )   $ (427,531 )

ADJUSTMENTS:

      

MINORITY INTERESTS

   (17,072 )   (21,841 )     (20,855 )

OPERATING INCOME

      

Asset revaluation (note 35(b))

   208,892     179,398       171,377  

Special depreciation (note 35(c))

   (2,664 )   (2,182 )     (2,084 )

Regulated operations (note 35(d))

   90     (118,005 )     (112,729 )

Capitalized foreign currency translation (note 35(f))

   72,989     65,825       62,882  

Reversal of eliminated profit on transactions with subsidiaries and affiliates (note 35(e))

   (4,725 )   (20,710 )     (19,784 )

Liabilities for decommissioning costs and capitalized asset retirement costs (note 35(j))

   39,950     31,280       29,882  

Reserve for self-insurance (note 35(m))

   (644 )   (525 )     (502 )

Revenue recognition (note 35(a))

   (148,843 )   (149,423 )     (142,743 )

Intangible assets (note 35(g))

   —       (11,591 )     (11,073 )

Classification differences in the consolidated statements of income (*)

   (51,689 )   (48,370 )     (46,207 )

OTHER INCOME (EXPENSES)

      

Asset revaluation – equity investments (note 35(b))

   7,219     12,259       11,711  

Capitalized foreign currency translation (note 35(f))

   4,731     (2,800 )     (2,675 )

Convertible bonds (note 35(k))

   20,876     (205,664 )     (196,469 )

Classification differences in the consolidated statements of income (*)

   51,689     48,370       46,207  

INCOME TAX EXPENSES

      

Deferred income taxes

   (52,742 )   90,322       86,284  
                    

Fin48 Liabilities (note 35(i))

   —       (256 )     (245 )

EQUITY INCOME OF AFFILIATES, NET OF TAX

   89,151     107,970       115,377  
                    

NET INCOME UNDER U.S. GAAP

   1,061,199     (601,452 )   $ (574,563 )
                    

 

(*) Certain donations and gain or loss on disposal of property, plant and equipment are recorded in other income or expenses under Korean GAAP while recorded in operating expenses under U.S. GAAP since those are regarded as operating expenses. This reclassification does not affect the net income under U.S. GAAP.

 

- 43 -


     Korean Won (in millions)     Translation into
U.S. dollars (Note 2)
(in thousands)
 
     2007     2008     2008  

SHAREHOLDERS’ EQUITY UNDER KOREAN GAAP

   44,266,853     43,471,070     $ 41,527,579  

ADJUSTMENTS:

      

Current Asset

      

Account Receivables Revenue recognition (note 34(a))

   995,387     845,965       808,144  

UTILITY PLANT

      

Asset revaluation (note 34(b))

   (6,766,801 )   (6,678,090 )     (6,379,528 )

Capitalized asset retirement costs (note 34(j))

   (919,159 )   (894,244 )     (854,264 )

Construction in progress (note 34(g))

   300,000     300,000       286,588  

Special depreciation (note 34(c))

   2,776     593       566  

Capitalized foreign currency translation (note 34(f))

   (1,180,796 )   (1,125,684 )     (1,075,357 )

Reversal of eliminated profit on transactions with subsidiaries and affiliates (note 34(e))

   115,549     94,839       90,599  

INTANGIBLE ASSETS

      

Future radioactive wastes repository sites usage rights (note 34(g))

   (300,000 )   (300,000 )     (286,588 )

Research and development cost (note 34(g))

   (44,013 )   (55,604 )     (53,118 )

INVESTMENT SECURITIES

      

Asset revaluation (note 34(b))

   (48,784 )   (36,525 )     (34,892 )

DEFERRED INCOME TAXES

   1,533,405     1,631,497       1,558,557  

LIABILITIES

      

Liabilities for decommissioning costs (note 34(j))

   2,294,969     2,301,335       2,198,448  

Regulated operation (note 34(d))

   (731,340 )   (849,345 )     (811,373 )

Reserve for self-insurance (note 34(m))

   109,273     108,748       103,886  

Convertible bonds (note 34(k))

   (166,436 )   (373,556 )     (356,855 )

Fin48 Liabilities (note 34(i))

   (13,380 )   (13,839 )     (13,220 )

MINORITY INTERESTS

   (234,441 )   (268,255 )     (255,262 )
                    

SHAREHOLDERS’ EQUITY UNDER U.S. GAAP

   39,213,062     38,158,905     $ 36,452,910  
                    

 

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The reconciliation of operating income from Korean GAAP to U.S. GAAP for the six-month period ended June 30, 2007 and 2008 is as follows:

 

     Korean Won (in millions)     Translation into
U.S. dollars (Note 2)
(in thousands)
 
     2007     2008     2008  

Operating income under Korean GAAP

   (Won) 1,619,448     (248,999 )   $ (237,867 )

Asset revaluation

     208,892     179,398       171,377  

Special depreciation

     (2,664 )   (2,182 )     (2,084 )

Regulated operation

     90     (118,005 )     (112,729 )

Capitalized foreign currency translation

     72,989     65,825       62,882  

Reversal of eliminated profit on transactions with subsidiaries and affiliates

     (4,725 )   (20,710 )     (19,784 )

Asset retirement obligation

     39,950     31,280       29,882  

Reserve for self-insurance

     —       (525 )     (502 )

Revenue recognition

     (148,843 )   (149,423 )     (142,473 )

Intangible Assets

     —       (11,591 )     (11,073 )

Classification differences in the consolidated statements of income

     (51,689 )   (48,370 )     (46,207 )

Operating income under U.S. GAAP

   (Won) 1,733,448     (323,302 )   $ (308,848 )
                      

The reconciliation of utility plant from Korean GAAP to U.S. GAAP at December 31, 2007 and June 30, 2008 is as follows:

 

     Korean Won (in millions)     Translation into
U.S. dollars (Note 2)
(in thousands)
 
     2007     2008     2008  

Utility plant, net under Korean GAAP

   (Won) 67,563,153     68,021,194     $ 64,980,124  

Asset revaluation

     (6,766,801 )   (6,678,090 )     (6,379,528 )

Construction in-progress

     300,000     300,000       286,588  

Capitalized asset retirement costs

     (919,159 )   (894,244 )     (854,264 )

Special depreciation

     2,776     593       566  

Capitalized foreign currency translation

     (1,180,796 )   (1,125,684 )     (1,075,357 )

Reversal of eliminated profit on transactions with subsidiaries and affiliates

     115,549     94,839       90,599  
                      

Utility plant, net under U.S. GAAP

   (Won) 59,114,722     59,718,608     $ 57,048,728  
                      

 

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The reconciliation of total assets from Korean GAAP to U.S. GAAP at December 31, 2007 and June 30, 2008 is as follows:

 

      Korean Won (in millions)     Translation into
U.S. dollars (Note 2)
(in thousands)
 
     2007     2008     2008  

Total assets under Korean GAAP

   (Won) 82,928,592     83,939,200     $ 80,186,473  

Adjustments:

      

Account Receivables

     995,387     845,965       808,144  

Utility Plant

     (8,448,431 )   (8,302,586 )     (7,931,397 )

Intangible assets

     (344,013 )   (355,604 )     (339,706 )

Investment securities:

      

Asset revaluation

     (48,784 )   (36,525 )     (34,892 )

Deferred income taxes

     1,533,405     1,631,497       1,558,557  
                      

Total assets under U.S. GAAP

   (Won) 76,616,156     77,721,947     $ 74,247,179  
                      

The tax effects of temporary differences that resulted in significant portions of the deferred tax assets and liabilities at December 31, 2007 and June 30, 2008, computed under U.S. GAAP, and the description of the financial statement items that created these differences are as follows:

 

      Korean Won (in millions)     Translation into
U.S. dollars (Note 2)
(in thousands)
 
     2007     2008     2008  

Deferred tax assets adjustments:

      

Asset revaluation

   (Won) 1,660,776     1,642,299     $ 1,568,876  

Convertible bond

     45,770     102,728       98,135  

Regulated operation

     201,119     233,570       223,128  

Capitalized foreign currency translation

     324,719     309,563       295,723  

Decommissioning cost

     2,253,648     2,335,312       2,230,906  

Intangible assets

     12,104     15,291       14,607  

Others, net

     350,808     455,559       435,192  

Fin48 Liabilities

     3,584     3,786       3,617  
                      

Total deferred tax assets adjustments

     4,852,528     5,098,108       4,870,184  
                      

Deferred tax liabilities adjustments:

      

Special depreciation

     (763 )   (163 )     (156 )

Asset retirement obligation, net

     (378,347 )   (386,950 )     (369,650 )

Investment in social overhead capital

     (130,351 )   (108,061 )     (103,230 )

Reserve for self insurance

     (30,050 )   (29,906 )     (28,569 )

Investment in subsidiaries and affiliates

     (2,809,402 )   (2,764,030 )     (2,640,457 )

Revenue Recognition

     (273,731 )   (232,640 )     (222,239 )
                      

Total deferred tax liabilities adjustments

   (Won) (3,622,644 )   (3,521,750 )   $ (3,364,301 )
                      

Net deferred tax assets adjustments:

     1,533,405     1,631,497       1,558,557  
                      

Net deferred tax liabilities under Korean GAAP

   (Won) (303,521 )   (55,139 )   $ (52,674 )
                      

Net deferred tax assets under U.S. GAAP

   (Won) 1,229,884     1,576,358     $ 1,505,883  
                      

 

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Basic earning per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. . Earnings per share for the six-month period ended June 30, 2007 and 2008 under U.S. GAAP are as follows:

 

     Korean Won
(in millions, except per share data)
    Translation into
U.S. dollars (Note 2)
(in thousands,
except per share data)
 
     2007    2008     2008  

Net income under U.S. GAAP (a)

   1,061,119    (601,452 )   $ (574,562 )
                   

Effect of dilutive Securities

   9,898    —         —    
                   

Adjusted net income (b)

   1,071,097    (601,452     $ (574,562 )
                   

Weighted-average shares (c)

   621,417,135    622,637,717       622,637,717  

Effect dilutive securities

   18,941,911    —         —    
                   

Adjusted weighted average shares (d)

   640,365,046    622,637,717       622,637,717  
                   

Basic earnings per share under U.S. GAAP (a)/(c)

   1,708    (966 )   $ (0.92 )
                   

Diluted earnings per share under U.S. GAAP (b)/(d)

   1,673    (966 )   $ (0.92 )
                   

Basic earnings per ADS under U.S. GAAP

   854    (483 )   $ (0.46 )
                   

Diluted earnings per ADS under U.S. GAAP

   836    (483 )   $ (0.46 )
                   

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

By:  

/s/    Kim, Myung-Whan

Name:   Kim, Myung-Whan
Title:   Director General, Finance Team

Date: December 22, 2008

 

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