LATIN AMERICAN

EQUITY RESEARCH
22 DECEMBER 2014 Sector Report | | Chile Utilities

CHILE UTILITIES
ENERSIS/ENDESA CHILE: NOTES FROM NON-DEAL ROADSHOW TO ASIA

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 hosted meetings with Enersis and Endesa Chile’s management and investors in Asia. The main topics
discussed included: (1) the long-term outlook (highlighting the relevance of Enel’s 2015-2019 industrial plan to be
published in 1Q15); (2) margin recovery in the disco units; (3) higher priced contracts; (4) the improved outlook for
hydrology; (5) the startup of new projects; and (6) a possible restart of Bocamina II.

 All eyes on 2015-2019 industrial plan: As is the case in March of each year, Enel (Enersis’ parent company) is set to
publish its industrial plan for the next five years in 1Q15, which also could become an opportunity for Enersis to
publish its own industrial plan thereafter. We believe that the plan for Latin America could show key alignments in
terms of: (1) the company’s growth strategy and a possible discussion of the structure of LatAm units; (2) potential
uses for the remaining proceeds from the 2013 capital increase (US$1.6 billion); (3) capex disclosure for the new
investment program and maintenance; and (4) EBITDA and net Income guidance.

 Distribution business over punished: Management believes that the implied valuation of distribution business is at
discount. Moreover, in Brazilian operations, the company expects margins to improve as a result of: (1) the annual
pass-through of involuntary costs expected for April 2015; (2) a new cap on spot prices; and (3) flag mechanisms;
combined, the company believes that these factors could reduce volatility in results and improve the cash position of
the distribution business in the short/medium term.

 Better outlook for generation business: Endesa Chile’s management maintains a positive outlook for 2015 based on:
(1) a better start of the year due to a more favorable 2014-2015 ice-melting season; (2) an improved outlook for
hydrology in 2015, based on El Niño Enso Cycle expectations; (3) higher prices in Chile due to the ramp-up of
regulated contracts at higher prices; (4) positive perspectives for the restart of Bocamina II, as repairs should be
concluded during the first part of 2015; and (5) the startup of El Quimbo (400 MW) and Salaco (145 MW) in Colombia.
Also, management expects to take an investment decision on Punta Alcalde (740 MW coal facility) during 2015.

Company Ticker C. Price Mcap TP Upside EV/EBITDA P/E Div Yield

(US$ mn) YE 2015 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E
Endesa EOC US 43.03 11,764 55.80 30% 9.8 9.4 6.9 19 16.6 11.2 4.8% 2.5% 3.0%
Enersis ENI US 15.63 15,346 19.22 23% 6.5 6.2 5.2 18.7 14.5 11.9 6.5% 2.6% 3.4%
So urces: Santander estimates and B lo o mberg
* Current Price and Target Price in U.S. dollars.

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.
NOTES ON THE NDR TO ASIA

Enersis could publish new industrial plan after March 2015. Following the publication of the Enel Group’s
industrial plan, expected for March 2015; Enersis could also publish its own industrial plan for 2015-2019
period. Among topics that we believe could be included, we highlight a strategy for LatAm units (and a
more clear structure in LatAm), following Enel’s new mandate of having a grid structure based, on one
side on: (1) the creation of global business line units; and (1) generation, distribution, renewables,
upstream gas and trading; and, on the other side, organized by region: Italy, Iberia, LatAm and East
Europe. Given that a possible re-organization of strategy for LatAm could include “clearing” the structure
of assets in LatAm, we expect any changes would involve negotiation with all minorities and the antitrust
authority.

Use of proceeds from capital increase and growth strategy. Investors explored the potential guidance for
the US$1.6 billion remaining proceeds from 2013 capital increase. In the last industrial plan, the company
committed to use: (1) two-thirds for buying minorities, which until now has implied an increase in the
company’s share of net income from about 60% after the capital increase to about 67% now; and (2) one-
third for M&A activity, with a particular interest in the Brazilian distribution business.

Optimization of capex and cash flows. Following a long-term strategy, we believe that it is possible to
have better capex allocation in units, which could provide higher growth and implied returns. Even though
the company has no state thus, we think that if cash generation remains strong and new opportunities of
acquisition do not materialize, a higher dividend policy could be implemented given the better outlook for
cash flow generation.

Distribution business seems to be under valuated. Management believes the market has undervalued the
Enersis’ distribution business: We note that by simply extracting Endesa Chile from Enersis’ valuation, the
distribution business trades at an FV/EBITDA of ~4x, which is below the company’s LatAm peers and
significantly less than the last M&A transaction in Chile (above 10x FV/EBITDA).

Positive on the distribution business. Management believes that the outlook for the distribution business
has improved in the last few months (especially in Brazil) due to: (1) the expectation of higher tariffs in
2015 stemming from the pass-through of involuntary costs to final clients; (2) a cap of spot prices at
R$350, which should reduce the maximum exposure to spot market if the drought continues; (3) a flag
mechanism starting in 2015, which makes monthly increases of tariffs in the event of sharp increase in
spot prices; (4) the new regulatory WACC is more favorable compared to the regulator’s first proposition
of 7.16%; and (5) improved forecast for economic growth in concession areas with respect to the rest of

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Brazil.

Endesa Chile: better outlook for generation business. Endesa Chile’s management seemed to be positive
on the growth outlook for the generation business, which would come from: (1) the ramp-up of regulated
contracts in Chile at higher prices (more than 50% higher than 2013 average); (2) a better hydrological
outlook due to a more favorable 2014-2015 ice-melting season and El Niño Enso Cycle forecast for 2015;
(3) the possibility of restarting Bocamina II (350M W, halted since December 2013), after repairs expected
for the first part of next year and authorization by environmental authority; and (4) the startup of El
Quimbo (400 MW, 2H15) and Salaco Chain optimization (145MW, 4Q14), which should help support
results in Colombia for next year.

Long-term prices: sustained at reasonable levels. After some years of stress in Chilean markets, following
several constraints related to hydrology, the availability of gas and efficient thermal facilities, the outlook
for the marginal cost of operating are improving. However, given the lack of new capacity coming into
stream next years, mainly a result of environmental constraints, management believes new price levels
could be sustained at better levels. Moreover, recent auctions already show price levels that are
sustainable at reasonable levels, possibly implying better margins for companies in the long term.

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Endesa Chile – Three-Year Stock Performance (US$)
B 56.0 B 61.5 B 61.0 B 58.2 B 57.0 B 54.0 B 55.8
12/22/11 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
D-11 M-12 J-12 S-12 D-12 M-13 J-13 S-13 D-13 M-14 J-14 S-14 D-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 Chile.
Enersis – Three-Year Stock Performance (US$)
B 22.0 H 23.0 B 23.5 B 22.0 B 18.8 B 19.2
12/22/11 4/9/12 1/4/13 6/21/13 1/9/14 11/18/14
22 8

20 8

18 7

16 7

14 6

12 6
D-11 M-12 J-12 S-12 D-12 M-13 J-13 S-13 D-13 M-14 J-14 S-14 D-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
Chile.

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 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%. 48.90 9.56
Hold (H) Expected to perform within a range of 0% to 10% above the local market
42.28 5.88
benchmark.
Underperform Expected to underperform the local market benchmark. 8.82 1.10
Under Review (U/R) 0.00 0.00
The numbers above reflect our Latin American universe as of Tuesday, December 23, 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*, and 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 we do not maintain a relationship with any individual working for
the companies whose securities were evaluated in the disclosed report. That we do not own, directly or indirectly, securities issued by the company
evaluated. That we are not 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.
Santander or its affiliates and the securities investment clubs, portfolios and funds managed by them do not have any direct or indirect ownership
interest equal to or higher than one percent (1%) of the capital stock of any of the companies whose securities were evaluated in this report and are not
involved in the acquisition, disposal and intermediation of such securities on the market
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.

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