LATIN AMERICAN

EQUITY RESEARCH
18 NOVEMBER 2014 Sector Report | Chile | Utilities
ENDESA AND ENERSIS: FUNDAMENTALS REMAIN STRONG
UPDATING ESTIMATES AND INTRODUCING YE2015 TARGET PRICES
Nicolas Schild* Francisco Errandonea* Maria Carolina Carneiro*
Chile: Santander Investment Chile Limitada Chile: Santander Investment Chile Limitada Brazil: Banco Santander S.A.
+5622-336-3361 | nschild@santander.cl +5622-336-3357 | ferrando@santander.cl +5511-3012-6682 | macarneiro@santander.com.br

Net/Net: We reiterate our Buy ratings for Endesa and Enersis, and are updating our estimates and introducing our YE2015
target prices. We believe the market is too focused on the short term and is not considering medium-/long-term positives,
such as new LNG contracts, renewal of contracts at higher prices, positive exposure to the LatAm generation business,
and recovery of distribution business tariff gaps. In terms of valuation, both stocks look attractive, in our view.

 We believe the market is too influenced by short-term headwinds for Endesa. The market has reduced its
medium-term EBITDA estimate (two-year forward estimates) from US$2.5 billion in YE2012 to US$2.2 billion for
YE2014, influenced, in our view, by short-term headwinds (hydrology and halt of Bocamina II). However, we believe
Endesa’s fundamentals have improved in the last year and that fading headwinds should help improve the market’s
outlook, thereby supporting the stock.

 Contract renewal and LNG capacity boost and stabilize earnings. The start-up of 5,650 GWh regulated contracts
(25% total) in Chile during 2014 at a 65% YoY higher price should boost the top line by US$700 million, in our view.
Moreover, in 2015 the auction process for contracts to be renewed in 2022 begins, representing about 56% of the
expected demand in Chile for the next decade. Based on the new price ceiling for tender offers, we expect more
attractive prices. In addition, flexibility brought by Endesa’s competitive LNG supply contract, Bocamina II (coal), and its
hydro capacity should allow it to take advantage of the spot market under all hydro scenarios.

 We believe Bocamina II is a bump in the road. A better outlook for the 2014-15 ice-melting season should help to
protect Endesa’s results from the impact of the absence of Bocamina II (350 MW, coal). Energy in water reservoirs are
48% higher YoY, and regulators’ outlook for this melting season is 48% better than the previous season. In addition, the
recent Supreme Court ruling and agreement with fishermen should allow a restart in 2H15, in our view; and we believe
halt of Bocamina II is not relevant in terms of DCF (between 1-2%).

 Mixed expectations for distribution business. In Brazil, we expect the pass-through to clients of involuntary
exposure to the spot market to offset the tariff revision process. In Colombia we expect weaker results due to tariff
revisions. In Chile, we expect to see a recovery in Chilectra’s results, due to efficiency gains and recovery in demand.

 Enersis gains attention from its controller. According to Enel, its source of growth will be LatAm, where Enersis is its
main investment vehicle. We believe recent changes in Enel with respect to Enersis’s reporting structure and changes in
management confirm the growing importance of Enersis. We expect Enel to continue this process in the medium term
by working on the unlocking of projects, to continue purchasing minorities, or inclusively considering the merger of
Endesa and Enersis, which has a numbers of constraints and for which the approach to minorities would be of significant
importance.
Com pany Ticker C. Price Mcap TP (US$) Upside EV/EBITDA P/E Div Yield
(US$ m n) YE 2014 YE 2015 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E
Endesa EOC US 44.65 12,207 54.0 55.80 25% 10.2 9.7 7.1 19.8 17.4 11.6 4.6% 2.4% 2.8%
Enersis ENI US 15.79 15,503 18.8 19.22 22% 6.8 6.1 5 18.8 14.6 12 6.5% 2.5% 3.3%
So urces: Santander estimates and B lo o mberg

IMPORTANT DISCLOSURES/CERTIFICATIONS ARE IN THE “IMPORTANT DISCLOSURES” SECTION OF THIS REPORT.

U.S. investors’ inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629 / (212) 350-3918.
* Employed by a non-US affiliate of Santander Investment Securities, Inc. and is not registered/qualified as a research analyst under FINRA rules.
CONSENSUS MISSING BIG PICTURE
We reiterate our positive view on Endesa Chile and Enersis, as we believe the market consensus
is not properly estimating recurring EBITDA of the generation business and is largely ignoring
upside risks on distribution. In our view, Endesa has faced headwinds, mainly related to still-weak
hydrology and the longer-than-expected closure of the Bocamina II facility, which affected quarterly
earnings visibility. However, we see several sources of earnings growth for the coming years, such as:

1. A 22% increase in average regulated prices in Chile due to renewal of contracts, mainly thanks to
high-priced tender offer during 2014.

2. Endesa’s efficient and flexible new LNG capacity after contract renegotiation, which allows it to
take advantage of the spot market under any hydrology scenario.

3. New plants in Colombia adding 545 MW of capacity, with a negative correlation to Chilean
hydrology, which helps reduce overall risks.

4. A number of upside risks that we believe have positive value, such as an improvement in
hydrology, some underutilized assets (Gas Atacama), the value of some international operations
(Colombia and Peru), and our assumption that Bocamina II will likely resume operations,
especially after the recent ruling by the Supreme Court.

5. We believe on the medium-term distribution business results should stabilize, especially in Brazil
where the drought has severely affected the performance of Ampla and Coelce, damaging results
visibility.

GENERATION: TOO MUCH FOCUS IN THE SHORT RUN

At Endesa, we believe short-term headwinds have led the market to forget long-term solid
fundamentals. Since YE2012, medium-/long-term EBITDA estimates, measured by two-year forward
estimates, have dropped by 12% to US$2.2 billion, even when medium/long-term fundamentals have
improved (renegotiation of LNG contracts and incorporation of new regulated clients). We believe this is
an overreaction of the market to nonrecurring impacts (mainly drought and Bocamina II halt) and we
expect the normalization in those estimates to boost the stocks.

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Figure 1. Endesa’s Consensus EBITDA Estimate Evolution (Left Axis, US$ Millions) and Stock Price
(Right Axis)

$3,100 $54
$2,900 $52
$2,700
$50
$2,500
$48
$2,300
$46
$2,100
$44
$1,900
$1,700 $42

$1,500 $40
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14

2014E EBITDA 2016E EBITDA EOC Stock Price (Right)

Sources: Bloomberg and Santander.

We expect EBITDA of Endesa Chile should be at least US$2.5 billion, not the US$2.2 billion
assumed by the consensus. We expect 29% EBITDA growth (in US$) between 2013 and 2016,
reaching US$2.5 billion on the back of (1) start-up of regulated contracts in Chile at a 65% higher average
price, (2) restart of Bocamina II (350 MW, coal), which has been halted since December 2013, (3)
Endesa’s efficient thermal capacity brought by the new LNG contract, (4) recovery of hydrology in Chile,
and (4) start-up of El Quimbo (400 MW) and Salaco(145 MW) hydro project in Colombia. Moreover, if we
do a simple exercise of taking 2013 as a base, extracting all one-off benefits and adding new structural
developments (new regulated contracts and renegotiation of LNG supply) and normalization of hydrology,
we believe we easily can get to a “recurring EBITDA” in-line with our estimates.

Figure 2. We Believe Endesa Should Easily Reach US$2.5 Billion EBITDA in Upcoming Years

$ 2,900
$ 2,700
$ 2,500
$ 2,300
$ 2,100
$ 1,900
$ 1,700
$ 1,500
Spot with LNG

Quimbo & Salaco

Est. regular EBITDA

New Contracts

FX and lower prices in

2013 EBITDA

Normal hydrology in Chile

Non-recurrent effect Peru

FX and lower growth

inArgentina

Colombia

Sources: Endesa and Santander estimates.

3
HIGHER AVERAGE PRICES IN CHILE

New contracts to boost results. Recently the company has signed a number of new contracts at higher
priced compared to the rest of the contract basis. The average of all contracts started in 2014 is $120
MWh, a 65% increase from average contract prices one year ago, for a total of 25% of all energy
commitments in Chile. As such, we expect average regulated prices of the Chilean operation of Endesa
Chile to increase by 22% in 2013-16 and contracts starting in 2014 to bring more than US$700 million to
the top line and US$300-350 million in EBITDA.

1. In 3Q13, Endesa signed a 3,500-GWh regulated contract for US$129.5 MWh, at the ceiling of the
tender offer, an historically high price as there was no other player with spare efficient capacity.

2. A 750-GWh regulated contract signed at US$112/MWh in September 2014.

3. Start-up of 1,400-GWh regulated contracts that started in in January 2014 at an average price of
US$103 MWh, which comes from 2010 tender offer process.

Figure 3. Endesa Average Energy Price (US$/MWh)

$ 95
$ 90
$ 85
$ 80
$ 75
$ 70
$ 65
$ 60
May-10

May-11

May-12

May-13

May-14

May-15

Jan-16
May-16
Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15
Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Note: does not include capacity payment (US$ 8-11/MWh). Sources: Santander and Systep.

We might see further increase in average prices. On the back of the reduced availability of efficient
capacity, we have seen a trend of increased prices in regulated auctions. On 3Q14 adjusted prices, the
first contracts signed by Endesa were at US$59/MWh, and the last one, in 2014, was signed at
US$112/MWh. The first contracts will be re-auctioned by 2015-16 (starting supply in 2022), and will likely
to be priced upward, as we do not foresee the entrance of new efficient capacity in the mid-term (apart
from some renewables and Alto Maipo 531 MW, which is almost fully contracted). In our model, we are
assuming contracts to be renewed at US$95-105 MWh, which is in-line with actual government’s goal but
significantly below maximum regulatory price of US$128/MWh. We believe this is a possible upside that
could trigger the stock.

4
Figure 4. Endesa’s Long-Term Regulated Contracts (3Q14 Adjusted)
Auction Process Supply Start Supply End Energy (GWh/year) % of regulated contracts Price (US$ MW/h)
2006-1 Jan/2010 Dec/2021 6,395 35% $59
2006-2 Jan/2011 Dec/2021 3,200 17% $60
2008-1 Jan/2010 Dec/2024 3,060 17% $105
2010-1 Jan/2014 Dec/2027 1,400 8% $103
2013-1 Sep/2013 Dec/2024 3,500 19% $130
2013-2 Sep/2014 Dec/2025 750 4% $113
Total 18,305 100% $86

Sources: Santander and CDEC-SIC.

Figure 5. Max Tender Offer Price Allowed by Regulator (Energy + Capacity Payment)

$160

$140

$120

$100

$80

$60

$40

$20
DIC-08

Mar-09

9-Aug
Oct-06

May-09

May-10
Apr-08

Oct-10

May-11

Apr-12

Oct-13

Apr-14
Dec-05

Agu-06

Sep-07

Sep-08

Nov-09

Nov-12
Monomic Price (US$/MWh) Max Tender offer Price (US$/MWh)

Sources: Santander and CNE.

HYDROLOGY: LNG AND CONTRACT STRUCTURE LIMIT DOWNSIDE

Endesa will likely to be a seller to the spot market, even in dry years, which should reduce
downside risk of hydrology. In August 2014, as part of 2013-3 regulated auction process, Endesa
published its estimates on generation versus demand under different scenarios. As shown in Figure 6,
under those estimates, Endesa would be selling between 25% and 2% of its generation on spot, which
contrasts with the buying net spot market position the company had recently, which increased volatility of
its Chilean results. The new LNG contract with British Gas, signed in 3Q13, at a price equivalent to
generating at US$70-85/ MWh, is almost half the previous price and significantly below the LNG price
paid by competitors (some US$110-120/MWh), which allows Endesa to deviate the shipments if it expects
lower needs in the SIC system. That said, in the future, we expect Endesa to move from a strong buyer to
the main net seller in the spot market. We see upside risk here because we are not integrating
possibilities from extra volume granted in the contract (ship to other country).

5
Figure 6. Endesa’s Estimate of Generation/Contracts in Chile under Different Scenarios for Hydrology

180%
170%
160%
150%
140%
130%
120%
110%
100%
90%
2015 2016 2017 2018 2019 2020 2021 2022 2023

Normal Worst Case (Years 68-69) Bad (Years 96-97)

Adverse (Years 98-99) Contracts

Sources: CNE, Endesa and Santander.

We are assuming a normal to dry scenario for 2015. For Endesa we are assuming a hydro load factor
for Chile of 42% in 2015, only 2% higher than in 2014E (despite 1H14 had a bigger drag in reservoirs
from 2H13). Moreover, under a long-term scenario we estimate Endesa can generate 13,900 GWh (or
44% load factor) with hydro (enough to supply 61% of total contracts) despite in the legal bases of the last
tender offer Endesa estimates as normal hydrology between 15,700-15,900 GWh. We believe that if
rainfall and reservoirs finally normalize, there could be interesting upside for Endesa, as the market could
start improving the estimates for a “normal” load factor. This could represent above 10% upside for our
target price.

Figure 7. Rainfall in Laja Reservoir (E) (Main Reservoir for Endesa)/Rainfall in Chile
2,000
14,000
1,800
1,600 12,000
1,400 10,000
1,200
8,000
1,000
800 6,000
600 4,000
400
2,000
200
0 0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2013 2014 Normal

Rainfall in mm Acumulated rainfall in Chile (mm)

Sources: DGA and Santander.

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Figure 8. Net Position in the Spot Market

60

40

20

-20

-40

-60

-80

-100
O/12

O/13
N/12

D/12

N/13

D/13
J/13

J/14
A/13

J/13

J/13

A/13

S/13

A/14

J/14

J/14

A/14

S/14
M/13

M/13

M/14

M/14
F/13

F/14
Endesa Colbun Aes Gener

Sources: CDEC-SIC and Santander.

Figure 9. Thermal Curve Offer (Y: Marginal Cost per Facility; X: Ranking of Facilities)
$450

Bio- Coal LNG Diesel

$400
mass

$350
San Isidro
$300 (778MW)

$250 Bocamina
I&II
(478MW)
$200

$150

$100

$50

$0
0 20 40 60 80 100 120 140 160 180

Sources: CDEC-SIC and Santander.

BOCAMINA II: SHOULD RETURN BY 2H15

The stoppage of the coal facility Bocamina II (350 MW, coal) deteriorates earnings visibility, but in
terms of valuations it is only a bump in the road. We are assuming Bocamina II will be back
generating by 3Q15. Although this could affect earnings visibility, the impact is limited in terms of DCF. As
shown in Figure 10, in a dry scenario for 2015, with spot prices averaging US$122 MWh, we estimate that
not having Bocamina II has a negative EBITDA impact of US$206 million (1.6% of valuation), while in a
normal hydro scenario this reaches US$122 million (1% of valuation).

7
Figure 10. Impact of Bocamina Halt (US$ Million, Left Axis) / Marginal Costs (US$MWh, Right Axis)

$35 $180

$30 $160

$140
$25
$120
$20
$100
$15
$80
$10
$60
$5
$40

$0 $20
Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15
-$5 $0

Dry Normal Humid

Marginal Cost (Dry) Marginal Cost (normal) Marginal Cost (Dry)

Sources: CDEC-SIC and Santander.

Recent Supreme Court ruling makes us more positive on the plant reopening. In November 2014,
the Supreme Court ruled that Bocamina II can be restarted only after it offers enough guarantees
(checked by the regulator) that it would implement in the short term (1) effective solutions to sea life being
destroyed by power plant cooling systems and (2) the installation of a desulfurizer in Bocamina I. In our
model, we assume the regulator will allow the restart of Bocamina during 3Q15, as soon as it finishes the
desulfurizer and cooling system, and gets approval for the US$184 million investment plans. We also
highlight Endesa reached an economic agreement with local fishermen, which, in our opinion, should help
significantly reduce social pressure on the area.

WE LIKE ENDESA’S EXPOSURE TO ANDEAN REGION

We believe Colombia and Peru offer a solid growth perspective for the coming years, as both countries
have an attractive combination of good economic perspectives, regulatory stability, less environmental
constrains from government, communities and politics to attract investment in the sector. In this sense,
we believe Endesa has the advantage of being a geographically diversified company, providing more
stability to cash flow and less dependence from hydrology.

Colombia: Increasing our estimates for Emgesa. Before the deterioration of hydrology in Chile
Colombian operation (Emgesa) accounted for 20-25% of EBITDA, which we expect to increase to 34%
under normal scenarios for hydrology in all countries, and the start-up of Salaco Chain optimization (145
MW) in 2014 and El Quimbo (400 MW) in 2015. We are increasing our 2016-2019 EBITDA estimate of
Emgesa from a range of US$740-770 million to US$850-900 million, on the back of (1) 9% higher long-
term Monomic (energy + capacity payment) prices, following company guidance and Colombian

8
regulator’s estimates, reaching US$66 MWh in 2016 (US$56 for energy and US$10 for capacity), (2) 4%
increase in long-term hydro generation estimate, reaching 15,200 GWh/year, following company
guidance. Also, we highlight the negative correlation in hydrology between Colombia and Chile, which
helps to stabilize results in extreme hydrological scenarios.

Figure 11. Monomic Price Estimate for Emgesa (US$MWh)

$120

$100

$80

$60

$40

$20

$0
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
2016
2017
2018
2019
Monomic Price (US$MWh) Monomic Price (US$MWh) (Estimate)

Sources: Emgesa and Santander.

Peru: We believe Curibamba project (192 MW) could start construction in 2015. In early October
2014 Minister of Enery and Mining granted Edegel (Endesa’s vehicle in Peru) the definitive generation
concession for its Curibamna 192 MW project, which consists of two turbines located in rivers Comas and
Uchubamba, with an estimated annual generation of 1,060 GWh/year. According to the last updated
summited by Edegel in Peru, the capex of the projects should reach US$480 million and the construction
period is 50 months. We do not have this project considered in our estimates, as it still has to be
approved by the board of directors of Endesa, which we believe could happen in 2015. The construction
of this project could have an estimated 3-4% impact on our valuations.

9
DISTRIBUTION BUSINESS: MIX TARIFF REVISIONS
CHILE
Chilectra: We expect a recovery in results for 2014 and 2015. In 2013 and 2014, Enersis distribution
business in Chile (Chilectra) was negatively affected by a 2012 tariff revision and weak volume growth.
However, we expect 2015 to be more positive (EBITDA of 12% YoY) based on higher consumption in the
concession areas and efficiency gains. We see upside risk if the government finally recognizes the
increase into tariff of higher energy costs after the start-up of new contract at higher prices. Although this
should affect EBITDA (is already provisioned), it could have an impact on cash. As a reference, the
Minister of Energy estimated in September 2014 that the update of this component, which has not been
done since November 2012, could imply an increase between 5-8% in client’s tariffs.

BRAZIL
Coelce: Normalization in the sector to offset Coelce tariff revision: We expect results to improve in
2015 despite Coelce’s fourth tariff cycle starts to be applied in April 2015, because (1) exposure to the
spot market has been reduced significantly, reaching 3.66% in 3Q14, (2) government should give back to
Coelce more than R$130 million between April 2015-16 related to the involuntary exposure to spot
market, and (3) in April 2015 Coelce will stop returning money to clients from the delay in last tariff
revision. As an example, in 9M14 we estimate EBTIDA of Coelce should have been about $R562 million,
while both negative effects reduced reported EBITDA it to $R326 million. We estimate EBITDA growth of
11% in 2015, reaching US$191 million. We expect capex to decrease to R$220-250 million in the coming
years as the company is finishing the social connection programs.

Figure 12. Coelce’s Reported EBITDA versus Regulated EBITDA

$800

$700 +72%
$600

$500 $130 $562

$400
$106
$300

$200
$326
$100

$0
Reported EBITDA Extraordinary Involuntary exposure to Pro forma 9M14
9M14 devolution of tariff from spot market EBITDA
2011-2012 period

Sources: Coelce and Santander.

Ampla: Situation to get better in 2015. We expect EBITDA to rise by 7% in 2015, reaching US$348
million, following (1) our expectation that starting in April 2015 the Brazilian government will pass through
to tariff about $R130 million accumulated up to 3Q14 from involuntary exposure to the spot market and

10
(2) efficiency gains after +2.6% tariff revision in April 2014 as part of the 2014-18 tariff revision cycle.
Also, we expect Ampla to reduce overall losses from the current 17-18% to 15-16% in 2019.

COLOMBIA
Codensa: 2014 tariff revision process to affect results in 2015. New tariff revision cycle should be
concluded by 4Q14 or 1Q15, which we expect to imply a 2% reduction in WACC, from the current 13.9%.
We estimate that for every 1% reduction in WACC the impact on results is US$33 million. Also, we
believe the regulator could introduce a new methodology regarding commercialization costs, with an extra
negative impact on EBITDA of US$8 million. In the short term, we expect a recovery in results as the
company is gradually passing through to clients the extra cost generated in 1H14 due to the rise in spot
prices.

PERU
Edelnor: 1.2% increase in tariff. During 2014 Enersis distribution concession in Peru (Edelnor) posted
a 1% rise in its tariffs as a result of 2013 tariff revision cycle. Next tariff revision cycle should take place in
2017, where we assume a 3% decline in tariffs. We expect EBITDA to continue growing 8-9% in the
coming years, following the connection of new clients and positive perspectives for GDP growth.

ARGENTINA
Edesur: Results to continue depending on subsidies. The tariffs for final costumers have remained
frozen for the last few years and the government has gradually been recognizing costs for the company.
However, this has not been enough to compensate capex needs for Edesur (Enersis distribution business
in Argentina). On October 2014, the Secretary of Energy issued a new resolution, which gives back some
extra costs between April and August 2014. This will represent a positive impact in Edesur of US$92
million for 4Q14. For a medium-term perspective, although we believe 2015 presidential elections could
bring some positive news for Edesur, we do not expect a recovery in the short term for the distribution
business and we believe the generation business has better perspectives than distribution. We value the
Argentinian distribution business at zero.

Figure 13. Schedule for Tariff Revisions in Distribution Business

Sources: Santander and Enel presentations.

11
ENERSIS GAINS IMPORTANCE FOR ENEL: WHAT IS THE
NEXT STEP?
Enel to simplify structure to improve decision making. During Enel’s (controller of Enersis) 1H14
conference call, the company announced the reorganization of Endesa Spain and Enersis. Enel Energy
Europe (EEE, the vehicle that held 92% of Endesa Spain) made an offer for 60.6% of Enersis, moving the
control of Enersis from Spain to Italy. Although this transaction does not alter our valuations, we believe it
could be potentially beneficial for Enersis, as it will make the structure and reporting simpler and easier to
make decisions to improve the business.

Figure 14. Enel Transaction to Transfer Enersis from Spain to Italy

Sources: Santander and Enel presentations.

POSSIBLE DISPOSAL OF CAPITAL INCREASE

From the US$2,400 million cash raised in March 2014 capital increase, Enersis has spent 36% in
buying minorities in Edegel and Coelce, and in FX losses. We believe the company may use the
remaining US$1,542 million in buying (1) the remaining 16.4% of Edegel (generation in Peru), which
would require US$320 million at current market prices, (2) 26% of Coelce (distribution in Brazil), in
US$293 at current market prices, which we believe could likely happen after February 2015 when the
regulatory year in Brazil is due and Enersis can set a new price for an eventual tender offer, (3) 24% of
Edelnor (distribution in Peru) for about US$259 million, and (4) 5% of Endesa Chile for US$625 million,
reaching the maximum level permitted by the company’s statute.

12
Figure 15. Use of Funds from Capital Increase and Possible Targets

Transaction Amount (US$ million) Business Detail

Cash from Capital Increase $2,400 Cash raised in 2013 capital increase
Edegel -$413 Gx Acquicition of 21.14% of Edegel
Coelce -$242 Dx Acquicition of 15% of Coelce
FX losses -$200 Due to USD/CLP depreciation
Remaining Cash $1,545
Target: Edegel -$320 Gx Acquicition of 16,4%
Target: Edelnor -$259 Dx Acquicition of 24%
Target: Coelce -$293 Dx Acquicition of 26%
Target: Endesa -$625 Gx Acquicition of 5%, reching maximum of 65%

Sources: Santander and Enel presentations.

We do not expect Enersis to give back cash via dividends. As part of the negotiation with Chilean
Pension Funds for 2013 capital increase, Enersis’ controller made the commitment of not delivering
extraordinary dividends for at least two years after the transaction, which expires in March 2015.
However, in-line with company guidance, we are assuming a dividend policy for Enersis of 50% in the
coming years. We believe delivering extraordinary dividends would face tough opposition from minority
shareholders, as the commitment of the controller was to use the cash from the equity raise.

POSSIBILITY OF ENERSIS AND ENDESA MERGER

Enel unveils new structure and updates strategy. Following the control change announcement of
Enersis from Spain to Italy, Enersis updated the strategy for the company with the main purpose of the
new structure to create a simpler organization so as to take quicker and better decisions and improve the
capex allocation and opex efficiencies. In March 2015, Enel will launch a new mid-term plan and provide
the details on this new structure: (1) cost-cutting program implications, (2) capex optimization, and (3)
financial targets.

Figure 16. Enel Reorganization of Assets in Different Business and Regions

Sources: Santander and Enel presentations.

13
We believe the new restructuring plan could consider the merging of Endesa and Enersis.
Following Enel’s restructuring plan, we do not dismiss the fact that Enel could push the merger of both
entities in order to create cost synergies and order their LatAm assets, having separated investment
vehicles for the generation, distribution and transmission businesses. The impact of this type of
transaction on the stock price would depend on the approach of the controller to the minority
shareholders and the structure of the transaction itself. Also, there are some relevant constraints Enel
would have to comply to in order for such a transaction to come to fruition:

Most Relevant Constraints for Possible Transaction

1. Restriction of antitrust for Endesa and Enersis to merge generation and distribution in
Chile. According to the Chilean Electricity Law, there are no restrictions on market concentration
for generation and distribution activities. However, Chilean antitrust authorities have imposed
certain measures to increase the transparency within the different companies that form the
Enersis group. The FNE’s resolution 667/2002 mainly requires the following:

- board members of Enersis, Endesa Chile and Chilectra be elected from different and
independent groups;
- Enersis, Endesa Chile and Chilectra may not merge companies within the Enersis group,
which operate in electricity generation and distribution; instead, Enersis must continue to
maintain both business segments separately through companies that are independent
business units; and
- Enersis, Endesa Chile and Chilectra must remain subject to the regulatory authority of the
SVS and comply with the regulations applicable to publicly held stock corporations, even if
they should lose such designation.

2. Enersis bylaws prohibit having a shareholder with more than 65% of shares. Enersis bylaws
prohibit any shareholder from exercising voting power with respect to more than 65% of the
common stock owned by such shareholder or on behalf of others representing more than 65% of
the outstanding issued shares with voting rights. However, we believe if the terms of the
transaction are attractive to minorities they can change the bylaws with 75% of the votes, where
they already have 60% of it.

3. Concentration limits of local Pension Funds. Currently all pension funds comply with the
concentration limitation of having less than 2.75% of each of their funds in a particular company
where the controller owns between 50-65% of shares. In case of a merger between Endesa and
Enersis, and especially if Enel increases its participation on the merge entity above 65%
(concentration limits falls from 2.75% to 1.1%), we believe there could be a significant selling
pressure on both names.
14
VALUATIONS
2015 valuation multiples affected by short-term negative results; 2016 valuations look more
attractive. We estimate Endesa and Enersis are trading at 2015E forward FV/EBITDA of 9.7x and 6.3x,
which are 9% and 7% premiums with respect to their three-year average. In terms of P/E, we estimate
Endesa and Enersis trade at 17.4x and 14.6x, respectively, which is similar to their last three-year
average. However, we believe in the case of Endesa and Enersis, 2015 multiples are not representative
of the real value of the company given the short-term affecting results (poor hydrology, halt of Bocamina
II, tariff revisions). This is why, using our medium-term normalized EBITDA and net income estimates
both companies trade at a discount to historical results.

Figure 17. EOC and ENI FV/EBITDA and P/E (Forward, Using 2016 EBITDA Estimate)
30
12

11 25

10
20
9

8 15

7
10
6

5 5

4
Jan/09 Aug/09 Mar/10 Oct/10 May/11 Dec/11 Jul/12 Feb/13 Sep/13 Apr/14 Nov/14 0
Nov/07 Jun/08 Jan/09 Aug/09 Mar/10 Oct/10 May/11 Dec/11 Jul/12 Feb/13 Sep/13 Apr/14 Nov/14

Enersis Enersis 3Y Average Endesa Endesa 3YA Average Enersis Enersis 3YA Endesa Endesa Average

Sources: Santander and Enel presentations.

Figure 18. EOC and ENI Implicit Distribution Business P/E (Forward, Using 2016 Net Income Estimate)
35

30

25

20

15

10

0
Jan/09 Jul/09 Jan/10 Jul/10 Jan/11 Jul/11 Jan/12 Jul/12 Jan/13 Jul/13 Jan/14 Jul/14

Implicit Distribution Enersis Implicit Distribution 3YA Endesa Endesa 3YA

Sources: Santander and Enel presentations

15
EVALUATION OF RISK FACTORS
Different scenario for water supply. In our estimates we assume a normal to dry scenario for Chile and
Colombia, with load factors reaching 40% and 55%, respectively. Weaker hydrology could harm earnings
visibility due to higher exposure of the company to the spot market.

Introduction of green, or hydro, taxes in Chile. The tax reform presented by the new government
included the introduction of green taxes. However, we have not included (1) all potential taxes for
particulate materials, nitrogen oxide, and sulfur dioxide of at least US$00.01/ton, with a higher tax in
zones of the country with higher pollution levels, and (2) introduction of hydro generation taxes. If these
taxes are put into effect, it could negatively affect valuations for Endesa and Enersis.

Unexpected halt/stoppage of power plants. The current tight situation of supply-demand equilibrium
implies a large proportion of thermals in the systems operating for a long period. An unexpected halt of
operations at efficient facilities or equipment failure represent a risk to all gencos we follow. For Chile, we
highlight the case of Bocamina II, which is hurting Endesa’s results.

Increase in raw material prices. We believe a potential increase in raw material prices (especially for
coal, gas, or LNG) could have a negative effect on Endesa, as an important part of regulated contracts
are indexed to the U.S. CPI, thus allowing a lower pass-through of cost to prices.

Risks of rationing in Brazil. A scenario of rationing is hard to anticipate, as costs implied to several
agents holding contracts in regulated markets are supposed to be covered afterward through tariffs.
However, rules for rationing are not given per current legislation and will be determined according to the
severity of the drought scenario and expected costs implied for the system.

Continuation of over-costs for distribution business in Brazil. For 2015 we assume an improvement
in Brazilian distribution business following the pass-through to clients of over-costs related to the
involuntary exposure to the spot market in 2014. If spot prices pressure continues or higher costs are not
fully recognized in tariffs, this could have a negative effect on our valuations.

Restructuring of Endesa and Enersis in unfavorable conditions for minorities. We cannot rule out
that following the global restructuring plans of Enel, the company will decide to restructure Endesa and
Enersis. In this case, we believe the impact on the stock would depend on the conditions of the
agreements and the approach of Enel to Enersis and Endesa’s minorities.

16
 COMPANY REPORT | CHILE—UTILITIES

ENDESA CHILE BUY

UNVEILING THE POTENTIAL CURRENT PRICE: US$44.65
INTRODUCING YE2015 TARGET PRICE OF US$55.80; TARGET PRICE: US$55.80
REPLACING YE2014 TARGET PRICE OF US$54.00

Net/Net: We believe Endesa’s strong fundamentals have remained intact and full potential should be seen in the coming
years. The renewal of contracts and restart of Bocamina II should aid margins, while its flexible thermal capacity allows the
company to be fully covered against all hydro scenarios.

Nicolas Schild*
 We believe fundamentals remain strong, and Endesa should unveil its Chile: Santander Investment Chile Limitada
+5622-336-3361 | nschild@santander.cl
capacity in the coming years. In our view, this would help to improve
Francisco Errandonea*
market EBITDA estimates that were overly negative, in our view,
Chile: Santander Investment Chile Limitada
following the short-term headwinds of the last years. +5622-336-3357 | ferrando@santander.cl

Maria Carolina Carneiro*

 Contract renewal to boost earnings: The start-up of 5,650 GWh Brazil: Banco Santander S.A.
+5511-3012-6682 | macarneiro@santander.com.br
regulated contracts in Chile during 2014 at an average price of
US$120 MWh, an increase of 65% from the 2013 average, should
boost top-line results by US$700 million. Also, 2015 starts the
auction process for contracts to be renewed in 2022, which
represents about 56% of the expected demand in Chile for next
decade. Following the increase in ceiling for tender offers in the Company Statistics
last years, we expect more attractive prices for generators. Bloomberg EOC US / ENDESA CI
Current Price (11/14/14) US$ 44.65 / Ch$ 889.56
 Good performer under all hydro scenarios: Endesa’s flexibility brought Target Price (YE 2015) US$ 55.80 / Ch$ 1,125.00
52-Week Range (US$) 37.92 - 47.91
by its competitive LNG supply contract and by being an active player
Market Capitalization (US$ Mn) 12,207
in hydro facilities allows it to take advantage of the spot market under Float (%) 40.0
all hydrological scenarios. We estimate that in the next five years 3-Mth Avg. Daily Vol (US$ Mn) 4.3
Shares Outstanding - Mn 273
Endesa will sell between 2% and 25% of its energy to the spot market.
Price Performance (US$)
 Better hydrology to protect results in the coming quarters. In Chile EOC US IPSA
120
energy in water reservoirs is 42% higher than in 2013 and regulators’
outlook for 2014-15 ice melting season is 48% higher than last 110

season. We expect this to protect margins from the halt of Bocamina

100
(350 MW coal) since December 2013.
Estimates & Valuation Ratios 90

(US$) 2013A 2014E 2015E 2016E

P/E 17.0 19.8 17.4 11.6 80
N-12 M-13 J-13 N-13 M-14 J-14 N-14
FV/EBITDA 9.8 10.2 9.7 7.1
Sources: FactSet, Santander estimates and company reports.
FCF Yield (%) 5.1 (6.6) 2.2 8.2
Div Yield (%) 4.9 4.6 2.4 2.8
Net Debt/EBITDA 1.5 1.6 1.6 0.9
Sources: FactSet, Santander estimates and company reports.

17
ENDESA CHILE
Financial Highlights: P&L, Balance Sheet and CF Statement, 2013–16E; in Billions (Ch$), Millions Company Description
(US$) Endesa Chile is the largest electricity generation company
Ch$ US$ in Chile, and one of the largest privately held electricity
P&L ACCOUNT 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E generators in the region. With operations in Chile,
Total Revenue 2,027 2,387 2,513 2,681 4,094 4,212 4,237 4,409 Argentina, Colombia, Peru, and Brazil (via the 38.9%
YoY change (%) (12.6) 17.7 5.3 6.7 (14.1) 2.9 0.6 4.0 stake it owns in Endesa Brazil, consolidated by Enersis),
Gross Profit 1,000 1,117 1,195 1,573 2,020 1,972 2,015 2,588 and a total consolidated installed capacity of 15,555 MW.
YoY change (%) 24.1 11.7 7.0 31.6 21.9 (2.4) 2.2 28.4 Endesa Chile is arguably the most regionally diversified
energy-generating platform in Latin America.
EBITDA 979 1,091 1,168 1,545 1,977 1,925 1,969 2,542
YoY change (%) 21.1 11.4 7.1 32.3 19.0 (2.6) 2.3 29.1 Key Personnel: Enrico Viale (Chairman), Valter Moro
As % of Revenue 54.2 49.0 50.2 61.0 54.2 49.0 50.2 61.0 (CEO), Fernando Gardeweg (CFO), Susana Rey (IR
Operating Income 783 878 950 1,322 1,581 1,549 1,602 2,175 Director) and Catalina González (Head of IR)
YoY change (%) 27.8 12.1 8.3 39.1 25.6 (2.0) 3.4 35.7 Web: www.endesa.cl
As % of Revenue 38.6 36.8 37.8 49.3 38.6 36.8 37.8 49.3
Financial Results (224) (257) (276) (310) (452) (453) (466) (509) EBITDA Breakdown per Country, 2015E
Taxes (205) (271) (259) (371) (414) (479) (436) (610)
Net Profit 354 349 415 642 715 616 700 1,056
YoY change (%) 51.1 (1.3) 18.9 54.5 48.5 (13.8) 13.6 50.7
Perú
As % of Revenue 17.5 14.6 16.5 23.9 17.5 14.6 16.5 23.9 14.0%
CASH FLOW 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E
Depreciation & Amortization (196) (213) (217) (223) (396) (376) (367) (367) Colombia
Other Noncash Items 0 0 0 0 0 0 0 0 40.0%
Changes in Working Capital 129 (155) 12 9 261 (274) 20 15
Operating Cash Flow 673 407 645 874 1,359 719 1,087 1,438 Chile
Capital Expenditures (367) (862) (487) (269) (741) (1,521) (821) (442) 43.0%
Argentina
Free Cash Flow 306 (455) 158 605 618 (803) 266 996 3.0%
Other Invest./(Divestments) 95 118 0 0 191 208 0 0
Change in Debt (38) 311 (177) (184) (76) 550 (298) (303)
Dividends (294) (318) (175) (208) (594) (562) (294) (342)
Capital Increases/Other 0 0 0 0 0 0 0 0 Installed capacity by technology, 2015E
BALANCE SHEET 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E
Cash and Equivalents 348 351 157 371 657 600 260 607
Current Assets 965 1,022 875 1,125 1,823 1,746 1,447 1,842
Fixed Assets 4,692 5,341 5,610 5,656 8,861 9,130 9,273 9,258
Total Assets 6,762 7,411 7,535 7,830 12,770 12,669 12,454 12,817
Hydro
Current Liabilities 1,238 1,193 959 1,021 2,339 2,039 1,586 1,671 57.0%
Long-Term Liabilities 1,936 2,304 2,420 2,219 3,656 3,938 3,999 3,633
Shareholders' Equity 2,652 2,917 3,158 3,592 5,008 4,986 5,219 5,879
Total Financial Debt 1,894 2,206 2,029 1,845 3,578 3,771 3,354 3,021
Thermal
ST Debt 354 407 114 131 668 696 189 214 43.0%
LT Debt 1,541 1,799 1,915 1,715 2,910 3,075 3,165 2,807

FINANCIAL RATIOS 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E
Net Debt 1,547 1,855 1,872 1,474 2,921 3,171 3,094 2,413
Capital Employed 10,031 10,031 10,608 10,539 18,942 17,146 17,535 17,250 Shareholder Structure, Current
Net Debt/EBITDA 1.6 1.7 1.6 1.0 1.5 1.6 1.6 0.9
Net Debt/Equity 0.6 0.6 0.6 0.4 0.6 0.7 0.6 0.4
Capex/Revenue (%) 18.1 36.1 19.4 10.0 18.1 36.1 19.4 10.0
ADR Others
Int Cover (%) 6.9 7.3 7.8 11.5 6.9 7.3 7.8 11.5 holders 21.0%
Dividend Payout (%) 125.4 89.9 50.0 50.0 123.2 78.8 47.5 50.0 4.0%
Chilean
ROCE (%) 10.7 12.3 12.2 17.1 11.2 12.8 12.2 17.1
Pension
ROE (%) 13.6 12.5 13.7 19.0 13.8 12.4 13.7 19.0 Funds
15.0%
MARKET RATIOS 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E
P/E 18.1 20.8 17.5 11.3 17.0 19.8 17.4 11.6 Enersis
60.0%
P/CE 11.6 12.9 11.5 8.4 11.0 12.3 11.4 8.6
FV/EBITDA 10.4 10.6 9.8 7.0 9.8 10.2 9.7 7.1
FV/EBIT 13.0 13.2 12.0 8.1 12.3 12.6 12.0 8.3
FV/Revenue 5.0 4.9 4.5 4.0 4.7 4.6 4.5 4.1 Sources for all charts and tables: Company reports and Santander
estimates.
P/BV 2.4 2.5 2.3 2.0 2.4 2.4 2.3 2.1
FCF Yield (%) 4.8 (6.3) 2.2 8.3 5.1 (6.6) 2.2 8.2
Div Yield (%) 4.6 4.4 2.4 2.9 4.9 4.6 2.4 2.8

PER SHARE DATA 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E
EPS 1,295 1,278 1,519 2,347 2.17 2.15 2.55 3.94
DPS 1,075 1,164 639 760 1.81 1.95 1.07 1.28
BVPS 9,700 10,669 11,549 13,137 16.29 17.92 19.40 22.06

18
EARNINGS OUTLOOK
2014: Colombia and better hydrology offset Bocamina II. We expect EBITDA to increase 11.4%
during 2014 based on (1) 14% depreciation of Chilean peso versus dollar, (2) 27% YoY EBTIDA growth
in Colombia, due to sharp increase in prices related to El Niño ENSO Cycle expectations while Emgesa
has maintained good reservoir levels, and CLP/COP depreciation (3) 9% YoY rise in Peru EBITDA
following the increase in prices, and (4) flat EBITDA in Chile as the halt of Bocamina II (350 MW, coal) is
fully offset by 20% higher hydro generation, consolidation of GasAtacama and 23% rise in sales following
the start-up of regulated supply contract at high prices. Finally, we expect net income to fall 1% due to
operational improvement that is offset by lower profits in related company (weak performance in Endesa
Brazil), higher taxes (tax reform in Chile and FX), and higher minority interest due to the better relative
performance in Colombia, where Endesa owns 26,9% of net income.

2015: Delaying Bocamina to 4Q14. We expect EBITDA to increase 7.1% YoY in 2015 due to (1) 46%
YoY increase in Chilean EBITDA following the 24% growth in sales due to the ramp-up of regulated
contracts and lower impact of halt in Bocamina II versus 2014. The latter is due to lower expectations for
spot prices in Chile thanks to the improvement of hydrology and restart of the power plant in 3Q15. This
would be offset by a 16% EBITDA decline in Colombia due to our expectations for lower spot prices in the
system after the start-up of new hydro generation projects. Also, we expect a 22% YoY decline in
EBITDA in Argentina, owing to high inflation and Argentinian peso depreciation. Finally, net income would
grow 19% YoY thanks to better operating results and low comparison base.

2016: Time to unveil the potential. We forecast EBITDA to reach Ch$1,545 billion (up 32% YoY),
thanks to (1) hydro normalization in Chile, reaching a load factor of 44%, (2) start-up of Bocamina II (350
MW, coal), (3) ramp-up of regulated contract in Chile, and (4) start-up of El Quimbo (400 MW, hydro) in
Colombia during 3Q15.

19
CHANGE IN ESTIMATES
Figure 19. Endesa—Estimate Revisions, 2014–16E (Ch$ in Millions*)
2014E 2015E 2016E
Previous Current Change Previous Current Change Introducing
Revenue 2,288,124 2,386,691 4.31% 2,476,613 2,513,341 1.48% 2,680,551
Op. Margin 747,632 877,602 17.38% 1,023,703 950,346 -7.17% 1,322,132
EBITDA 946,728 1,090,828 15.22% 1,235,123 1,167,756 -5.45% 1,545,256
EBITDA Margin 41.38% 45.70% 433 49.87% 46.46% -341 57.65%
Net Income 298,757 349,262 16.91% 506,183 415,360 -17.94% 641,727
EPS 0.036 0.043 16.91% 0.062 0.051 -17.94% 0.078

Sources: Santander estimates

2014: Colombia boosts results while better hydrology in Chile contains effects of delay of
Bocamina II. We are increasing our 2014 top-line estimate by 4.3%; 4% lower-than-expected energy
demand in Chile (in our view, related to economic deceleration) has been fully offset by solid top-line
growth in Colombia associated with sharp increases in prices due to expectations of El Niño Enso Cycle.
Also, we are raising our estimates for 2014 EBITDA by 15.22% due to (1) 5% better outlook for Chilean
operations and (2) a 33% rise in our 2014 EBITDA estimate for Colombia. The Chilean operations are on
the back of 40% lower fuel expenses thanks to the improvement in hydro generation of 16% and lower
use of diesel facilities, which managed to offset the delay of the start-up of Bocamina II (350 MW coal),
which we were expecting for 4Q14. In Colombia, as we are increasing our average sales price by 22% to
US$83 MWh due to a sharp rise in spot prices related to El Niño ENSO Cycle expectation (dry conditions)
while Endesa’s reservoir remain at a high level. Finally, we are raising our bottom-line estimate by 16.9%
thanks to the improvement in operational results and a US$104 million positive effect related to the
agreement with Mitsubishi Company to reduce Endesa Costanera (Argentina) debt.

2015: Lowering results due to delay in Bocamina. We are raising 2015 our top-line estimate by 1.48%,
as weaker expectations in Argentina following the depreciation of local currency are offset by higher
contract prices in the Peruvian operations (Edegel). We are reducing our EBITDA estimate by 5.45% due
to 18% lower EBITDA in Chile, as we are delaying the start-up of Bocamina II to 3Q15, which would lead
to higher purchases in the spot market to fulfill the contract ramp-up. Finally, we are reducing our 2015
net income forecast by 18% due to weaker operating results outlook, increase in taxes estimates (rise in
taxes in Chile and Colombia), and higher minority interest due to better results expectations for Colombia.

20
FINANCIAL STATEMENTS
Figure 20. Endesa Chile: Financial Statements, 2013–16E (Billions of Chilean Pesos)
2013A 2014E 2015E 2016E
Income Statement
Net Revenue 2,027 2,387 2,513 2,681
YoY Change (%) (12.6) 17.7 5.3 6.7
Cost of Goods Sold (1,027) (1,269) (1,318) (1,107)
Gross Profit 1,000 1,117 1,195 1,573
SG&A Expenses (218) (240) (245) (251)
Operating Profit 783 878 950 1,322
YoY Change (%) 27.8 12.1 8.3 39.1
Financial Results (224) (257) (276) (310)
FX Gain/Loss (14) (41) (17) (17)
Other Financial Gains/Losses 0 0 0 0
Other Income/Expenses 3 43 0 0
Equity Income 119 78 93 91
Pre-Tax Profit 768 887 886 1,268
Taxes (205) (271) (259) (371)
Minority Interest (210) (267) (212) (256)
Net Profit 354 349 415 642
YoY Change (%) 51.1 (1.3) 18.9 54.5
Depreciation & Amortization (196) (213) (217) (223)
EBITDA 979 1,091 1,168 1,545
YoY Change (%) 21.1 11.4 7.1 32.3
Balance Sheet
Total Assets 6,762 7,411 7,535 7,830
Cash and Equivalents 348 351 157 371
Accounts Receivable 248 297 325 346
Inventories 46 64 70 75
Other Current Assets 192 173 173 173
Property& Plant and Equipment 4,692 5,341 5,610 5,656
Other Long-Term Assets 1,104 1,049 1,049 1,049
Total Liabilities 3,174 3,496 3,379 3,240
Accounts Payable 728 625 684 729
Short-Term Debt 354 407 114 131
Other Current Liabilities 157 161 161 161
Long-Term Debt 1,541 1,799 1,915 1,715
Other Long-Term Liabilities 395 505 505 505
Minority Interest 936 998 998 998
Shareholders' Equity 2,652 2,917 3,158 3,592
Cash Flow
Net Profit 354 349 415 642
Depreciation & Amortization (196) (213) (217) (223)
Other Noncash Items 0 0 0 0
Changes in Working Capital 129 (155) 12 9
Operating Cash Flow 673 407 645 874
Capital Expenditures (367) (862) (487) (269)
Other Investments/(Divestments) 95 118 0 0
Change in Debt (38) 311 (177) (184)
Dividends (294) (318) (175) (208)
Capital Increases/Other 0 0 0 0
Net Cash Flow 88 (0) (193) 214
Free Cash Flow 306 (455) 158 605
Sources: FactSet, Bloomberg, Santander estimates and company reports.

21
FINANCIAL STATEMENTS
Figure 21. Endesa Chile: Financial Statements, 2013–16E (U.S. Dollars in Millions)
2013A 2014E 2015E 2016E
Income Statement
Net Revenue 4,094 4,212 4,237 4,409
YoY Change (%) (14.1) 2.9 0.6 4.0
Cost of Goods Sold (2,074) (2,240) (2,222) (1,821)
Gross Profit 2,020 1,972 2,015 2,588
SG&A Expenses (439) (423) (413) (413)
Operating Profit 1,581 1,549 1,602 2,175
YoY Change (%) 25.6 (2.0) 3.4 35.7
Financial Results (452) (453) (466) (509)
FX Gain/Loss (28) (72) (28) (28)
Other Financial Gains/Losses 0 0 0 0
Other Income/Expenses 7 77 0 0
Equity Income 241 138 156 149
Pre-Tax Profit 1,552 1,566 1,494 2,086
Taxes (414) (479) (436) (610)
Minority Interest (423) (471) (357) (421)
Net Profit 715 616 700 1,056
YoY Change (%) 48.5 (13.8) 13.6 50.7
Depreciation & Amortization (396) (376) (367) (367)
EBITDA 1,977 1,925 1,969 2,542
YoY Change (%) 19.0 (2.6) 2.3 29.1
Balance Sheet
Total Assets 12,770 12,669 12,454 12,817
Cash and Equivalents 657 600 260 607
Accounts Receivable 468 507 537 567
Inventories 87 109 116 122
Other Current Assets 362 296 286 283
Property& Plant and Equipment 8,861 9,130 9,273 9,258
Other Long-Term Assets 2,086 1,793 1,734 1,717
Total Liabilities 5,995 5,977 5,585 5,304
Accounts Payable 1,374 1,068 1,131 1,194
Short-Term Debt 668 696 189 214
Other Current Liabilities 296 275 266 263
Long-Term Debt 2,910 3,075 3,165 2,807
Other Long-Term Liabilities 746 863 834 826
Minority Interest 1,767 1,707 1,650 1,634
Shareholders' Equity 5,008 4,986 5,219 5,879
Cash Flow
Net Profit 715 616 700 1,056
Depreciation & Amortization (396) (376) (367) (367)
Other Noncash Items 0 0 0 0
Changes in Working Capital 261 (274) 20 15
Operating Cash Flow 1,359 719 1,087 1,438
Capital Expenditures (741) (1,521) (821) (442)
Other Investments/(Divestments) 191 208 0 0
Change in Debt (76) 550 (298) (303)
Dividends (594) (562) (294) (342)
Capital Increases/Other 0 0 0 0
Net Cash Flow 178 (1) (326) 351
Free Cash Flow 618 (803) 266 996
Sources: FactSet, Bloomberg, Santander estimates and company reports.

22
18 NOVEMBER 2014 FLASH NOTE | CHILE—UTILITIES

ENERSIS BUY
ALL ROADS LEAD TO ROME CURRENT PRICE: US$15.79
INTRODUCING YE2015 TARGET PRICE OF US$19.22; TARGET PRICE: US$19.22
REPLACING YE2014 TARGET PRICE OF US$18.75

Net/Net: We remain positive on Enersis, mainly because we like the exposure of the company to the generation business
growth story (via Endesa) and because we expect to see normalization in the distribution business in the coming years,
which has been affected by nonrecurring events (especially in Brazil).

Nicolas Schild*
 Recovery in Brazilian distribution business: We expect a recovery in Chile: Santander Investment Chile Limitada
+5622-336-3361 | nschild@santander.cl
results for the coming years, as over-cost generated by involuntary
Francisco Errandonea*
exposure to spot market in 2014 should be passed into tariff. This
Chile: Santander Investment Chile Limitada
would offset the negative effect of Coelce and Ampla tariff revision +5622-336-3357 | ferrando@santander.cl

cycle, which we expect to be announced in the coming months. Maria Carolina Carneiro*
Brazil: Banco Santander S.A.
+5511-3012-6682 | macarneiro@santander.com.br
 Enersis gaining relevance for the controller. The recent change of
Enersis from Endesa Spain to be controlled directly by Enel group
shows how relevant Enel’s LatAm operations have become. We
believe the controller could promote changes in the future, such as
boosting use of proceeds from 2013 capital increase or even
promoting new changes in Endesa/Enersis structure. Company Statistics
Bloomberg ENI US / ENERSIS CI
 Contract renewal in generation business to boost results: In Chile the Current Price (11/13/14) US$ 15.79 / Ch$ 187.90
start-up of regulated contracts during 2014 at significant higher Target Price (YE 2015) US$ 19.22 / Ch$ 230.00
52-Week Range (US$) 13.12 - 17.72
prices should boost results. 2015 starts the auction process to
Market Capitalization (US$ Mn) 15,503
renew contracts expiring in 2021-22, which we expect to come at Float (%) 39.4
attractive prices for generation companies. 3-Mth Avg. Daily Vol (US$ Mn) 8.1
Shares Outstanding - Mn 982

 Protected in all hydro scenarios. The flexibility brought by its

Price Performance (US$)
competitive LNG supply contract and by being an active player in ENI US IPSA
130
hydro facilities allows Endesa to take advantage of the spot market
120
under all hydrological scenarios. We estimate in the next five years
110
Endesa can sell between 2% and 25% of its energy to the spot market
100

90

80
Estimates & Valuation Ratios
(US$) 2013A 2014E 2015E 2016E 70
N-12 M-13 J-13 N-13 M-14 J-14 N-14
P/E 11.1 18.8 14.6 12.0
Sources: FactSet, Santander estimates and company reports.
FV/EBITDA 5.0 6.5 6.3 5.3
FCF Yield (%) (2.1) (3.6) 2.2 6.4
Div Yield (%) 6.6 6.5 2.5 3.3
Net Debt/EBITDA 0.5 1.1 1.1 0.8
Sources: FactSet, Santander estimates and company reports.

23
ENERSIS
Financial Highlights: P&L, Balance Sheet and CF Statement, 2013–16E; in Billions (Ch$), Millions Company Description
(US$) Enersis is an integrated electricity group involved in the
Ch$ US$ generation, transmission, and distribution of electrical
P&L ACCOUNT 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E power in Latin America. Originally a distribution company
Total Revenue 6,264 6,971 7,053 7,454 12,650 12,303 11,891 12,261 in Chile, Enersis has gradually expanded into Argentina,
YoY change (%) (3.6) 11.3 1.2 5.7 (5.2) (2.7) (3.4) 3.1 Brazil, Chile, Colombia, and Peru as an active player
Gross Profit 2,665 2,671 2,780 3,202 5,381 4,713 4,687 5,267 following the privatization of Latin American electricity
YoY change (%) 14.7 0.2 4.1 15.2 12.7 (12.4) (0.6) 12.4 assets in the 1990s. Controlling 14,781 MW of generating
EBITDA 2,251 2,182 2,338 2,749 4,547 3,851 3,942 4,522
capacity through Endesa Chile and Endesa Brasil, as well
as electricity distribution sales totaling 45,107 GWh during
YoY change (%) 15.6 (3.1) 7.2 17.6 13.6 (15.3) 2.4 14.7
9M2014, Enersis is the largest publicly traded electricity
As % of Revenue 36.3 31.5 33.3 37.0 36.3 31.5 33.3 37.0
group in the region. The company is controlled by Enel,
Operating Income 1,741 1,664 1,810 2,200 3,516 2,936 3,052 3,619 which owns 61% of the company, and listed on the stock
YoY change (%) 18.4 (4.5) 8.8 21.5 16.3 (16.5) 4.0 18.6 exchanges of Santiago and New York.
As % of Revenue 27.8 23.9 25.7 29.5 27.8 23.9 25.7 29.5
Financial Results (578) (694) (711) (806) (1,168) (1,225) (1,199) (1,326)
Key Personnel: Jorge Rosenblut (Chairman), Luigi
Ferraris (CEO), Eduardo Escaffi (CFO), Pedro Cañamero
Taxes (504) (503) (471) (607) (1,018) (888) (794) (998)
(Director of IR) and Denisse Labarca (Head of IR)
Net Profit 659 466 628 787 1,330 823 1,059 1,295
Web: www.enersis.cl
YoY change (%) 74.5 (29.2) 34.8 25.3 71.5 (38.1) 28.8 22.2
As % of Revenue 10.5 6.7 8.9 10.6 10.5 6.7 8.9 10.6
Discos EBITDA by Country, 2015E
CASH FLOW 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E
Depreciation & Amortization (510) (518) (528) (549) (1,031) (915) (890) (903)
Other Noncash Items 0 0 0 0 0 0 0 0
Changes in Working Capital (429) 215 5 8 (867) 379 8 14 Perú
13.1%
Operating Cash Flow 665 821 1,161 1,345 1,342 1,449 1,957 2,212 Chile
Capital Expenditures (819) (1,140) (956) (743) (1,655) (2,012) (1,612) (1,221) Colombia 22.3%
Free Cash Flow (155) (319) 205 602 (312) (563) 346 990 33.9%
Other Invest./(Divestments) (1,586) 474 0 0 (3,203) 836 0 0
Change in Debt 110 285 (444) (516) 223 503 (749) (849)
Dividends (482) (568) (233) (314) (973) (1,003) (393) (517)
Argentina
Capital Increases/Other 2,844 0 0 0 5,744 0 0 0 -3.4% Brazil
34.1%
BALANCE SHEET 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E
Cash and Equivalents 2,387 1,450 978 749 4,509 2,478 1,616 1,227
Current Assets 3,896 3,267 2,845 2,702 7,358 5,584 4,702 4,423
Fixed Assets 7,434 8,434 8,862 9,055 14,038 14,417 14,648 14,822
Total Assets 15,178 15,730 15,736 15,787 28,663 26,889 26,010 25,841
EBITDA by Segment, 2015E
Current Liabilities 2,981 2,559 2,614 2,621 5,630 4,374 4,321 4,290
Long-Term Liabilities 3,689 4,461 4,017 3,588 6,966 7,625 6,639 5,873
Shareholders' Equity 6,169 6,476 6,871 7,344 11,649 11,070 11,357 12,021 Transmision
Total Financial Debt 3,697 3,982 3,538 3,022 6,982 6,807 5,848 4,946 Distribution 2.1%
ST Debt 907 588 588 501 1,712 1,006 973 820 40.4%
LT Debt 2,790 3,393 2,950 2,521 5,269 5,801 4,875 4,126

FINANCIAL RATIOS 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E
Net Debt 1,310 2,532 2,560 2,272 2,473 4,328 4,231 3,719
Capital Employed 9,809 11,721 12,144 12,417 18,524 20,036 20,073 20,324 Generation
57.5%
Net Debt/EBITDA 0.6 1.2 1.1 0.8 0.5 1.1 1.1 0.8
Net Debt/Equity 0.2 0.4 0.4 0.3 0.2 0.4 0.4 0.3
Capex/Revenue (%) 13.1 16.4 13.6 10.0 13.1 16.4 13.6 10.0
Int Cover (%) 6.1 4.4 5.9 8.0 6.1 4.4 5.9 8.0
Dividend Payout (%) 127.7 86.3 50.0 50.0 125.4 75.7 47.5 50.0
Shareholder Structure, Current
ROCE (%) 23.5 18.7 19.0 22.9 24.6 19.5 19.0 22.9
ROE (%) 13.1 7.4 9.4 11.1 13.4 7.3 9.4 11.1
ADR Others
Holders
MARKET RATIOS 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E 13.0%
12.0%
P/E 11.7 19.7 14.6 11.7 11.1 18.8 14.6 12.0 Chilean
P/CE 6.6 9.3 8.0 6.9 6.2 8.9 8.0 7.1 Pension
Funds
FV/EBITDA 5.3 6.8 6.3 5.2 5.0 6.5 6.3 5.3 14.0%
FV/EBIT 6.9 9.0 8.1 6.5 6.5 8.6 8.1 6.6
FV/Revenue 1.9 2.1 2.1 1.9 1.8 2.0 2.1 2.0
Endesa
P/BV 1.3 1.4 1.3 1.3 1.3 1.4 1.4 1.3 Latam
FCF Yield (%) (2.0) (3.5) 2.2 6.5 (2.1) (3.6) 2.2 6.4 61.0%

Div Yield (%) 6.2 6.2 2.5 3.4 6.6 6.5 2.5 3.3

PER SHARE DATA 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E Sources for all charts and tables: Company reports and Santander
estimates.
EPS 671 475 640 802 1.13 0.80 1.08 1.35
DPS 491 579 237 320 0.83 0.97 0.40 0.54
BVPS 6,283 6,595 6,998 7,480 10.57 11.09 11.77 12.58

24
EARNINGS OUTLOOK
2014: Results stronger in generation, weaker in distribution. We expect EBITDA to decline 3.1%
YoY, mainly due to the poor performance of the distribution business and high comparison basis in
Argentina. In Brazil we expect a 24% YoY EBITDA decline in Ampla (involuntary exposure to spot market
and tariff revision) and 9% YoY decline in Coelce (exposure to spot market). Also, we expect an EBITDA
decline in the Argentinian distribution business (Edesur) of Ch$202,715 million to Ch$65,856, mainly due
to high comparison basis as result of a nonrecurring/noncash event during 2013 (US$426 million).
However, we expect this operation to remain under pressure as tariffs remain frozen while inflation
continues affecting costs. On the other hand, we expect this to be offset by positive performance of
generation business due to higher prices and better hydrology in Chile and Colombia, which managed to
offset the halt of Bocamina II. We expect net income to decrease 29% YoY due to nonrecurring events in
Brazil (revaluation of assets in Ampla and Coelce) affecting financial expenses and to higher taxes in
Chile and Colombia.

2015: Better hydrology to benefit generation and recovery in Brazilian distribution business. We
forecast 7.2% YoY EBITDA growth in 2015, mainly due to (1) better hydrology and higher prices in Chile,
offsetting the halt of Bocamina II (350 MW, coal), (2) pass-through of higher costs to final clients in
Brazilian distribution business, and (3) outlook for distribution business in Chile. This would be offset by
still-weak performance in Argentinian distribution business and tariff revision in Colombia (Codensa). We
highlight our estimate of a 35% growth in net income mainly due to the absence of nonrecurring events
related to the revalorization of distribution assets in Brazil, lower impact from FX depreciation, and lower
effect from deferred taxes into bottom line.

2016: Generation business to drive recovery in results. For 2016, we expect EBITDA and net income
growth of 18% YoY and 25% YoY, respectively, mainly due to (1) further normalization of hydrology in
Chile, with load factor reaching 44%, (2) restart of Bocamina II (350 MW), diminishing the dependence
from the spot market, (3) full ramp-up of new regulated contracts in Chile, and (4) start-up of El Quimbo
400 MW hydro project in Colombia (4Q15).

25
CHANGES IN ESTIMATES
Figure 22 Enersis Estimate Revisions, 2014–16E ($Ch in Millions*)
2014E 2015E 2016E
Previous Current Change Previous Current Change Introducing
Revenue 6,315,349 6,971,100 10.38% 6,562,849 7,052,690 7.46% 7,542,497
Op. Margin 1,605,134 1,663,609 3.64% 1,885,032 1,810,311 -3.96% 2,261,394
EBITDA 2,094,403 2,181,958 4.18% 2,387,694 2,338,095 -2.08% 2,814,357
EBITDA Margin 33.16% 31.30% -186 36.38% 33.15% -323 37.31%
Net Income 612,129 466,148 -23.85% 717,472 628,258 -12.43% 787,085
EPS 12.469 9.495 -23.85% 14.615 12.797 -12.43% 16.033

Sources: Santander estimates.

2014: Better performance in Colombia offset by negative nonoperational effects in Brazil. We are
raising our 2014 top-line and EBITDA estimates by 10% and 4%, respectively, as a result of higher prices
in the generation business and better hydrology in Chile and Colombia. This should be partially offset by
the Brazilian operations, where results have been lower than expected due to involuntary exposure to
high spot prices in the Brazilian distribution business and a weaker performance in the generation
business, especially Cachoeria, which is currently buying energy in the spot market to supply its
contracts. We are reducing our 2014 net income estimate by 24% as a result of the negative effects on
nonoperating profit from the revaluation of assets in the Brazilian distribution business.

2015: Maintaining EBITDA estimate, but lowering bottom-line estimate. We are maintaining our 2015
EBITDA estimate, as the negative effect on margins from the halt of Bocamina II should be offset by
better hydrology in Chile and higher prices in Colombia. We are reducing our bottom-line estimate by
12.4% due to higher taxes in Chile and Colombia, and to the increase in minorities due to higher-than-
expected results in Colombia, where Enersis consolidates only 49% of the operation.

26
Endesa Chile – Three Year Stock Performance (US$)
H 56.0 B 56.0 B 61.5 B 61.0 B 58.2 B 57.0 B 54.0 B 55.8
11/18/11 12/12/11 4/9/12 1/4/13 6/21/13 12/17/13 4/7/14 11/14/14
56 8

52 8

48 7

44 7

40 6

36 6
N-11 F-12 M-12 A-12 N-12 F-13 M-13 A-13 N-13 F-14 M-14 A-14 N-14
Endesa Chile (L Axis) IPSA (R Axis)
Sources: FactSet and Santander.

Valuation & Risks

Our YE2015 target price is derived from a sum-of-the-parts methodology, with the cost of capital
differing for each country. We use a 2.5% perpetuity growth rate.
Risks include volumes and FX risks in Brazil, different scenario for water supply, taxes changes
for generation in Chile, unexpected halt of power plants, increase in raw material prices, exposure
to spot market or rationing in Brazil and changes in the structure of Enersis or Endesa.
Enersis – Three Year Stock Performance (US$)
H 22.0 B 22.0 H 23.0 B 23.5 B 22.0 B 18.8 B 19.2
11/18/11 12/12/11 4/9/12 1/4/13 6/21/13 1/9/14 11/14/14
22 8

20 8

18 7

16 7

14 6

12 6
N-11 F-12 M-12 A-12 N-12 F-13 M-13 A-13 N-13 F-14 M-14 A-14 N-14
Enersis (L Axis) IPSA (R Axis)
Sources: FactSet and Santander.

Valuation & Risks

We value Enersis using a SOTP methodology to price in the various country risks.
Risks include potential changes in distribution business ROE, further delay in minorities
acquisition plan, volumes and FX risks in Brazil, different scenario for water supply, taxes
changes for generation in Chile, unexpected halt of power plants, increase in raw material prices,
exposure to spot market or rationing in Brazil and changes in the structure of Enersis or Endesa.

Note: Entel is followed by Santander’s European Team; for further information, please contact:
+34-91-257-2035.

27
 IMPORTANT DISCLOSURES

Key to Investment Codes

% of % of Companies Provided
Companies Investment Banking
Covered with Services in the Past 12
Rating Definition This Rating Months
Buy (B) Expected to outperform the local market benchmark by more than 10%. 51.30 5.95
Hold (H) Expected to perform within a range of 0% to 10% above the local market
37.17 5.58
benchmark.
Underperform Expected to underperform the local market benchmark. 10.04 0.74
Under Review (U/R) 1.49 0.74
The numbers above reflect our Latin American universe as of Tuesday, November 18, 2014.
For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving
these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other
electronic systems.
Target prices are year-end 2014 unless otherwise specified. Recommendations are based on a total return basis (expected share price
appreciation + prospective dividend yield) unless otherwise specified.
Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment
Securities Inc., 45 East 53rd Street, 17th Floor (Attn: Research Disclosures), New York, NY 10022 USA.
Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above
methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the
report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American
equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included
in the body of this report.
The benchmark used for local market performance is the country risk of each country plus the 1-year U.S. Treasury yield plus 5.5% of equity risk
premium, unless otherwise specified. The benchmark plus the 10.0% differential used to determine the rating is time adjusted to make it comparable
with the total return of the stock over the same period. For additional information about our rating methodology, please call (212) 350 3974.
This research report (“report”) has been prepared by Santander Investment Securities Inc. ("SIS"; SIS is a subsidiary of Santander Investment I, S.A.
which is wholly owned by Banco Santander, S.A. "Santander"]) on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for
information purposes only. This report must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities
mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities).
Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should
take into account the content of the related prospectus filed with and available from the entity governing the related market and the company issuing the
security. This report is issued in Spain by Santander Investment Bolsa, Sociedad de Valores, S.A. (“Santander Investment Bolsa”) and in the United
Kingdom by Banco Santander, S.A., London Branch. Santander London is authorized by the Bank of Spain. This report is not being issued to private
customers. SIS, Santander London and Santander Investment Bolsa are members of Grupo Santander.
The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed, that
their recommendations reflect solely and exclusively their personal opinions, and that such opinions were prepared in an independent and autonomous
manner, including as regards the institution to which they are linked, and that they have not received and will not receive direct or indirect compensation
in exchange for expressing specific recommendations or views in this report, since their compensation and the compensation system applying to Grupo
Santander and any of its affiliates is not pegged to the pricing of any of the securities issued by the companies evaluated in the report, or to the income
arising from the businesses and financial transactions carried out by Grupo Santander and any of its affiliates: Maria Carolina Carneiro*, Francisco
Errandonea*, Nicolas Schild*.
*Employed by a non-US affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under FINRA rules and is
not an associated person of the member firm, and, therefore, may not be subject to the FINRA Rule 2711 and Incorporated NYSE Rule 472 restrictions
on communications with a subject company, public appearances, and trading securities held by a research analyst account.
As per the requirements of the Brazilian CVM, the following analysts hereby certify that I do not maintain a relationship with any individual working for the
companies whose securities were evaluated in the disclosed report. That I do not own, directly or indirectly, securities issued by the company evaluated.
That Iamnot involved in the acquisition, disposal and intermediation of such securities on the market: Maria Carolina Carneiro.
Grupo Santander receives non-investment banking revenue from Endesa Chile.
Within the past 12 months, Grupo Santander has received compensation for investment banking services from Enersis.
The information contained within this report has been compiled from sources believed to be reliable. Although all reasonable care has been taken to
ensure the information contained within these reports is not untrue or misleading, we make no representation that such information is accurate or
complete and it should not be relied upon as such. All opinions and estimates included within this report constitute our judgment as of the date of the
report and are subject to change without notice.
From time to time, Grupo Santander and/or any of its officers or directors may have a long or short position in, or otherwise be directly or indirectly
interested in, the securities, options, rights or warrants of companies mentioned herein.
Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any
transaction in any security discussed herein should contact and place orders in the United States with SIS, which, without in any way limiting the
foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) for this
report and its dissemination in the United States.
© 2014 by Santander Investment Securities Inc. All Rights Reserved.

2014 28