Rating Review Presentation

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Korea Western Power Co., Ltd.

• Rating Review Presentation
• to
• Standard Poors

29 June 2006
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KOWEPOs Credit Strengths
Strong Operations Experienced Management
Solid Financials Robust Capital Structure
Prospering Economy Solid Sovereign Credit
Favorable Industry Conditions Regulatory
Environment

• High correlation between electricity demand
  growth and Korean GDP growth
• Cost Based Pool System expected to continue
• Six Gencos account for over 90 of Korean power
  consumption

• Stable revenue and cash flows
• Strong debt servicing ability
• Solid capital structure to support capital
  expenditure

• Credit profile benefits from the expected
  additional capacity as required by the Power
  Supply and Demand Plan
• Diversified and secured sources of key raw
  materials
• Highly sophisticated and experienced management

• Strong outlook for GDP growth
• Outstanding external liquidity position, dynamic
  diverse export sectors
• Sound financial markets improving financial
  sector
• Positive credit rating momentum

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Strong Mitigating Factors to Credit Concerns
Business risk under the deregulation plan

• Delayed privatization plan of Gencos
• Performance expected to be further enhanced once
  new generating units at Cheongsong and Taean
  become operational in Dec 2006 and 2007/2008
  respectively
• KOWEPO is one of the best performers among Korean
  thermal Gencos

Capex requirement to fund capacity expansion

• Strong debt servicing ability due to stable,
  recurring revenue and cash flows
• Strong balance sheet to support business
  expansion
• Increasing revenue led by stable growth of
  electricity demand

• Ability to fully pass fuel cost to KEPCO under
  the current Cost Based Pool system (CBP)
• CBP is expected to remain unchanged as MOCIE
  halted the distribution sectors separation plan
  and suspended the implementation of Two-Way
  Bidding Pool system (TWBP)

Exposure to high raw material costs

• Good operating track record of power plants with
  low historical incidents and diligent plant
  maintenance
• Continuing investment to improve reliability of
  generation facilities

Exposure to potential generation unit breakdown
4

• Company Overview
• Regulatory Environment
• Operations
• Financial Management
• Concluding Remarks

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Introduction to KOWEPO
Inception
Spun off from KEPCO in April 2, 2001
Ownership
100 owned by KEPCO (54 owned by Korean Govt)
Generation Capacity
8,880 MW (Operation 7,280 MW, Construction
1,600 MW)
Total Assets
2006 Q1 KRW 3,365 bn (USD 3.45 bn) 2005
KRW 3,262 bn (USD 3.22 bn)
Total Revenue
2006 Q1 KRW 680 bn (USD 0.7 bn) 2005 KRW
2,227 bn (USD 2.20 bn)
Net Income
2006 Q1 KRW 79.7 bn (USD 82 mn) 2005 KRW 180.6
bn (USD 178.3 mn)
(KRW/USD FX rate 975.90 as of 31st Mar. 2006,
1013.00 as of 31st Dec. 2005)
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Strategy Maintain Market Position

• KOWEPO plans to maintain its leading market
  position and superior operating performance
  promoting growth with new plant constructions

KRW billion Not reflected in 2nd Power
Supply and Demand Plan by MOCIE
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Strategy Diversify Revenue Sources

• KOWEPO will diversify its revenue sources by
  investing in new business, overseas project, and
  new or renewable energy

8

• Company Overview
• Regulatory Environment
• Operations
• Financial Management
• Concluding Remarks

9
Power Industry Restructuring Process
The power industry restructuring plan has faced
some obstacles, and the implementation of future
plans has been suspended

• Expiration of vesting contracts
• Retail competition

HOLD

• MOCIE announced restructuring plan for power
  industry

• Incorporation of generation companies
• Cost-based pool bidding (CBP) mechanism

• IPO of KOSEP was delayed until the offering price
  exceeds the book price. The timing of IPO is
  unforeseeable

• Implementation of TWBP was suspended

HOLD
1999
2000
2002
2001
2003
2004
2005
2007
2008
2006
2009

• Introduction of vesting contracts for gencos
• Spin off distribution sector from KEPCO
• Wholesale competition

HOLD

• Initiation of KOSEP privatization

• Plan to separate KEPCOs distribution sector was
  halted due to substantial risk and uncertain
  benefits from the separation plan
• Determined that discos will operate as
  independent divisions within KEPCO and these
  divisions will compete internally within KEPCO

HOLD

• The suspension of disco setup cleared the
  industry uncertainty considerably
• Expected continued government efforts in the
  industry restructuring with a well-paced, gradual
  approach

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Power Price Determination

• Prices are determined according to the type of
  markets base load and non-base load

Price
Base Load Price (Nuclear and Coal Power Plant)
CP BLMP
Oil / LNG
Capacity Payment
BLMP
Non-BaseLoad

• CP includes construction cost and operation cost
  of standard coal fired power plants
• Fixed cost is reimbursed to Gencos by KEPCO
  regardless of their operation

• If fuel price/kWh is at or above KRW 18.95 - Fuel
  costs incurred by each generators are fully
  compensated
• If fuel price/kWh is below KRW 18.95
• - BLMP is set at the highest fuel cost among
  generators dispatched

Coal
Non-Base Load Price (LNG, Oil, Hydro Power) CP
SMP
Base Load
Nuclear
Capacity Payment
SMP

• CP includes construction cost and operation cost
  of peak-load power plants
• Fixed cost is reimbursed to Gencos by KEPCO
  regardless of the operation

• SMP is set at the highest fuel cost among
  generators dispatched

Power Demand

• To mitigate financial imbalance caused by oil
  price hikes between KEPCO and Gencos, the 5th
  Cost Assessment Committee decided to lower CP of
  base load units on 29 May 2006
• CP for base load units will be reduced from
  KRW20.49/kWh to KRW13.22/kWh from June to August
  2006, after which the Committee will analyze the
  effects and review whether to continue the
  adjustments. The CP adjustments will only be
  effective until the end of 2006 at the latest.

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CBP Market Improvements

• Korean Government is continuously working towards
  further improvements of the CBP market process.
  It requested Korea Development Institute to
  prepare for a CBP market improvement plan. The
  result was announced in February 2006
• CBP market improvement plan will be implemented
  starting from 2007 to 2008 in phases

Unification of Double Market
Regional Price Differentiation
Price Differentiation by Seasons and by Reserve
Margin

• Unify currently split electricity market (base
  load and non-base load) into a single market
• To solve profit imbalance between KEPCO and
  Gencos, it is expected to introduce CfD (Contract
  for Difference)

• Differentiate prices among power generators based
  on the demand concentration of the location
• Generators that are close to metropolitan region
  are more beneficial

• Differentiate CP based on high demand periods and
  normal periods
• Such differentiation allows the procurement of
  supply capacity during peak periods of demand

• As CBP system continues, gencos are expected to
  continue to generate stable profit and cash flow
• After the introduction of CBP market improvement
  plan, profitability is expected to remain at
  similar levels

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• Company Overview
• Regulatory Environment
• Operations
• Financial Management
• Concluding Remarks

13
Operation Overview

• Base load, intermediate load, and peak load
  account for 41, 19 and 40 respectively in
  terms of generation capacity
• 90 of capacity is located in or near the Seoul
  and Gyeonggi metropolitan areas
• Seoul and Gyeonggi metropolitan areas comprises
  approx. 40 of total national demand

Location of Plant Complex
Generation Capacity by Type of Plant (1Q 2006)
4,500
4,000MW
4,000
3,480MW
Taean T/P (1,000 MW)
3,500
CheongsongP/S (600 MW)
3,000
Samrangjin P/S (600 MW)
2,500
2,000
Taean T/P (3,000 MW)
Seoincheon C/C(1,800 MW)
1,400MW
1,500
Pyeongtaek T/P(1,400 MW)
1,000
500
Pyeongtaek C/C (480 MW)
0
Base Load
Intermediate Load
Peak Load
In Operation
Under Construction
Note T/P denotes Thermal Power Plant, C/C
denotes Combined Cycle, P/S denotes Pumped
Storage
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KOWEPOs Market Position
Generation Capacity Market Share (1Q 2006)
Sales Volume Market Share (1Q 2006)
(MW)
(GWh)
(10.7)
(11.6)
(1.7)
(11.0)
(12.4)
(11.4)
(37.7)
(29.0)
(11.5)
(12.3)
(12.0)
(14.1)
(12.0)
(12.7)
Total Generation Capacity63,003 MW
Total Electricity Sales90,755 GWh
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Strong Operational Efficiency

• Thermal efficiency and utilization rate have been
  relatively stable over the years.

Thermal Efficiency
Utilization Rate


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Cost Saving Measures
Remarkable Cost Cutting Initiatives
Seoincheon

• Completed all units of Gas Turbines uprate in
  April 2006
• Improvements
• Thermal efficiency 3
• Combined generation capacity 10
• NOx emission level reduction 75
• Approximate annual saving of KRW 2.9 billion per
  turbine

Pyeongtaek

• Completed Desulfurization facility installment on
  February 2005
• Purchased cheaper high sulfur oil (2.59) rather
  than low sulfur oil (0.3)
• Increased utilization rate from 28.1 in 2004 to
  44.8 in 2005
• Fuel cost of saving of approximately KRW 27
  billion per year

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• Company Overview
• Regulatory Environment
• Operations
• Financial Management
• Concluding Remarks

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Capital Structure (1Q 2006)
Capital Structure
Assets

• KRW 3,365 billion
• Fixed Assets/Total Assets Ratio 89.6

KRW billion
Liabilities

• KRW 1,144 billion
• Liability-to-Equity Ratio 51.5

Shareholders Equity

• KRW 2,221 billion
• Stake is Wholly Owned by KEPCO

Revenue

• KRW 680 billion

Profitability

• EBIT KRW 114.1 billion
• Net Income KRW 79.7 billion

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Financial Performance

• KOWEPO achieved robust performance in 1Q 2006
  with revenue of KRW 680 billion and net income of
  KRW 79.7 billion despite high fuel costs
• KOWEPOs revenue has shown a stable performance
• Net Income in 2004 and 2005 were lower than in
  2003 mainly due to
• In case of Taean T/P, it does not create margins
  in BLMP due to fuel price hikes from 2004

Net Income
Revenue
KRW billion
KRW billion
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Reduced Interest Expense and Leverage

• Coverage ratios have been increased significantly
  due to KOWEPOs proactive debt restructuring
  activities including early redemptions of
  existing high interest rate debts and lowering
  funding rate
• Leverage ratios have decreased since our
  inception in 2001, but have started to increase
  slightly due to the expansion of our capacity at
  our Taean Plant, which is expected to peak this
  year

Coverage
Leverage
Times

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Strong Competitive Position (FY 2005)
Revenue
EBIT
Net Income
KRW billion
KRW billion
KRW billion
Leverage
EBIT Margin
EBITDA Int. Coverage
Times


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Financial Forecast
Revenue Operating Cost Forecasts
KRW billion
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Ratio Analysis

• Profitability would increase in 2008 after the
  completion of Taean Plant 7 by 2007 and 8 by
  2008
• With lowered debts and strong cash flow, KOWEPO
  expects the leverage to fall gradually

Profitability
Leverage

EBITDA margin
EBIT margin
ROA
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Debt Profile and Strategy

• KOWEPO prefers long-term funding of at least 5
  years as the plant construction usually takes
  around 5 years to complete
• The company prefers to borrow 60 to 70 of its
  total debt from the domestic capital market and
  the remaining from the international markets.
• 82 of KOWEPOs debts carry fixed interest rate,
  while 18 are in floating rate
• All of our debts unsecured and our debt maturity
  profile evenly distributed

Debt Repayment
Currency Distribution (1Q 2006)
Type of Instrument (1Q 2006)
KRW billion
KRW billion
Total Debt Profile KRW 711.1 billion
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Capex and Funding
Capital Expenditure Schedule
KRW billion
568
491
290
214
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Risk Management and Hedging Strategy

• KOWEPO introduced risk management in four areas
  finance, fuel, electricity bidding, and
  generation facilities
• Risk management committee was established in
  November 2003 to oversee the risk management
  initiatives
• The committee meets every quarter to discuss key
  issues and to make decisions on the topics
  discussed
• Finance
• Foreign currency risk management committee
  oversees the risk management on foreign currency
  debt
• The committee meets every quarter to establish
  foreign currency risk management planning, fix
  hedging ratio for foreign currency risk, and
  review performance the hedging tools
• Fuel
• Electricity bidding system KOWEPO has
  implemented a market simulator called Plexos
  which enables KOWEPO
  to predict market price and optimally place
  its bid into the power pool
• Generation facilities
• Plants under operation are covered by package
  insurance based on repurchase prices (market
  price) which amount to around KRW 3,400 billion.
• As for the plants under construction, all the
  risks relating to construction are covered by
  erection all risks insurance which amount to
  around KRW 780 billion.

Source Tex Report, Argus Coal Information,
2005
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• Company Overview
• Regulatory Environment
• Operations
• Financial Management
• Concluding Remarks

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Concluding Remarks
Favourable Industry Conditions
Prospering Economy Solid Sovereign Credit
Regulatory Environment
Solid Financials Robust Capital Structure
Strong Operations Experienced Management
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Korea Western Power Co. Ltd.

• Additional Information for SP

30
Key Assumptions
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Performance and Projection
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Long-Term Supply Contracts

• KOWEPO enters into long-term supply contracts to
  
• Control the costs of bituminous coal, oil and LNG
  amid the rising prices
• Assure an adequate supply of the raw materials
  for a smooth operation

Bituminous Coal Contracts
Note Long-Term Supply Contracts as of YE2005
Under discussion regarding volume, price, and
terms
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Composition of Liquid Assets (1Q 2006)