ECL. Equity Research. New contract triggers start of coal project, interconnection. Chile Electric & Other Utilities Company Note 15 December 2014

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1 Equity Research ECL New contract triggers start of coal project, interconnection E.CL won a block for 5,4GWh at US$19.5/MWh E.CL was awarded a 15-yr 5,4GWh annual contract in Block 3 for the supply of energy starting in 218 at an embedded price of US$19.5/MWh. The win has two implications: 1) since E.CL only has SING grid exposure, it will have to build the interconnection of the SING and SIC (58km, US$7mn) and will likely announce this by end-jan 215; and 2) since most of E.CL s energy is already contracted in the SING, the block won in this auction will trigger the start of construction of at least the first unit (375MW, US$1.1bn investment) of the coal facility and the port associated with the plant. If we include the first coal unit in our valuation, our target price would jump to CLP1,1/sh., offering 2% upside. Is one unit enough? Additional energy might be needed One generation unit (2,8GWh, 85% load factor) only satisfies 56% of the energy allocated in this auction. E.CL thus has 3 options: 1) increase its combined-cycle generation with more LNG (most likely), 2) increase coal generation (possible), or 3) build a second coal unit (unlikely, given the heavy US$7mn investment needed for the second unit). We believe it will opt to build the second coal unit if it is able to sign a PPA with a mining company in the future (currently uncertain). Chile Electric & Other Utilities Company Note 15 December 214 Rating 12m Price Target Price RIC: ECL.SA, BBG: ECL CI Trading Data and Return Forecasts Buy CLP1,45./US$1.7 CLP922.2/US$ wk range CLP /US$ Market cap. CLP971bn/US$1,577m Shares o/s (m) 1,53.3 Free float 48% Avg. daily volume(' Shares) 77 Avg. daily value (CLP m) Forecast price appreciation +13.3% Forecast dividend yield 2.% Forecast stock return +15.3% Stock Performance (CLP) 1,6. 1,4. 1,2. 1, Will it finance these projects by raising debt or a capital increase? E.CL is looking to de-risk 5% of the interconnection project. Partners for the construction of the coal plant are likely to be a mining company or an equipment supplier. E.CL already has a partnership with Antofagasta Minerals (4%) in the CTH coal project. It has some room to raise debt (comfortable financial ratios), but a capital increase is also possible. Buy maintained; CLP1,45/sh TP, DCF-based The drop in oil prices and generation efficiency will lower fuel costs, while the sale of gas to AES Gener should provide additional revenue. Further news on the SIC-SING interconnection and the future development of its environmentally approved coal facility should be the main catalysts of the stock price Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep-14 Price Target (CLP) Stock Price (CLP) Rel. IPSA Tomas Gonzalez Chile - BTG Pactual tomas.gonzalez@btgpactual.com Antonio Junqueira, CFA New York BTG Pactual US Capital LLC antonio.junqueira@btgpactual.com Dec-14 3 Valuation 12/212 12/213 12/214E 12/215E 12/216E RoIC (EBIT) % EV/EBITDA P/E Net dividend yield % Financials (US$mn) 12/212 12/213 12/214E 12/215E 12/216E Revenues 1,159 1,194 1,244 1,286 1,293 EBITDA Net Income EPS (US$) Net DPS (US$) Net (debt) / cash (831) (778) (77) (767) (743) Source: Company reports, Bovespa, BTG Pactual S.A. estimates. / Valuations: based on the last share price of the year; (E) based on a share price of CLP922.2, on 11 December 214. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 1 Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 15 December 214 page 2 E.CL Chart 1: E.CL financial ratios (x) Chart 2: E.CL debt maturity profile (US$mn) A E 214E Source: E.CL, BTG Pactual. Ebitda/Interest expenses Net debt/ebitda Source: E.CL, BTG Pactual. Current Pro-Forma Ebitda Chart 3: E.CL stake in the SING (MW) Chart 4: E.CL installed capacity mix (MW) E-CL 52% AES Gener 2% Coal 53% Gas/diesel 33% Source: E.CL. Other 4% Endesa Chile + GasAtacama 24% Source: E.CL. Renewable 1% Diesel 14% Chart 5: E.CL ownership Pension Funds 21% GDF Suez 53% Chile Institutional Investors 19% Source: E.CL. Foreign Institutional Others Investors 1% 7%

3 15 December 214 page 3 New auction to satisfy future demand The following paragraphs below, and through the end of this report, are an excerpt of the Chilean Electric Utility report: Stocks for a Rainy Season; Setting new TP s, we released in October 13. That complements the information above. The CNE (National Energy Commission) has modified the basis of the next auction process, which is aimed at placing the remaining energy, expected to be awarded by December 23, 214. The new auction should involve four blocks (see Chart 1). The first two blocks total 1,GWh per year, with one starting in 216 and the other in 217, for a period of 15 years. The main change introduced by the authority is the time differentiation of the energy in these two blocks. The government aims to allow the incorporation of renewable energy producers into this tender offer, including photovoltaic generation (during times of increased solar radiation) and wind (towards the end of the day, when these plants enjoy a better performance). In the third block, which starts in 218, the energy needed increases to 2,4GWh. For , the energy is 6,GWh. In the fourth block, which starts in 219, the energy needed increases to 2,5GWh. For , the energy is 5,GWh. Chart 6: New auction energy requirements by blocks(gwh) 6, 3, - Source: Dx companies. Block 1 Block 2 Block 3 Block 4 These blocks seem adequate to promote the participation of renewable energy. Note that a new law requires generators to satisfy up to 2% of demand from contract commitments with NCRE (Non-Conventional Renewable Energy) by 225 (this deadline was extended from 22, giving generators more time to comply). The obligation starts with a 5% benchmark by 214. The law requires generators either to build renewable capacity or to buy renewable energy from third parties. Both are likely to increase generation costs. Plenty of room for new competitors Most of the largest generators have signed contracts with distribution companies through past energy auctions since its creation in 26. Generators started to supply

4 15 December 214 page 4 these contracts in 21. Most contracts were awarded in the last 1-15 years and do not expire until 22/25. Charts below show the regulated contracts (auctions awarded) of the four largest electricity companies in Chile. Unless generators substantially expand capacity (and they are not currently doing so), more energy (GWh) will not become available until 22, when existing contracts with generators start to expire. Chart 7: Endesa Chile auctions and availability (GWh) 2, 1, 2,377 3,427 6,527 7,877 8,537 15,288 Source: Dx companies Endesa Available Chart 8: Colbun auctions and availability (GWh) 1, 5, Source: Dx companies. 2,232 2, Colbun Available 3,432 3,432 5,932 5,932 Chart 9: AES Gener auctions and availability (GWh) 1, 5, Source: Dx companies AES Gener Available 3 1,2 4,1 Chart 1: E.CL auctions and availability (GWh) 2,5 1,25 1,8 1,8 1,8 1,8 1,8 1,8 Source: Dx companies ECL Available The new energy requirements of the auction schedule for the end of this year follow the profile shown in Chart 1 below. They begin in 216 with 1.TWh and increase through 22 to a peak of 13.TWh for the following 1 years. In 23, they start to decline.

5 15 December 214 page 5 Both Endesa Chile and Colbun will have 4.6TWh, 6.TWh and 1.2TWh available in 22, 221 and 222, respectively, after the termination of some of their contracts. The energy requirements of the new energy auction are already set at 13.TWh over those years. Only in 224, the energy available in the system from the four largest generators will exceed the energy requirements set by the new auction. Chart 11: Energy available from Gx vs. New Auction requirements (GWh) 35, 28, 21, 14, 13,GWh 7, Energy available from Gx New Auction Source: Dx companies, CNE. For reference, the energy requirements peak at 13,GWh, in This amount is equivalent to 5 thermal plants (coal or natural gas/lng) of around 35MW each (assuming 85% load factor), as shown in Chart 11. In other words, 1,75MW of capacity will be needed to satisfy that amount of energy. Chart 12: New auction energy requirements (GWh) and N of plants of 35MW each 15, 12, 9, 6, 3, Source: Dx companies. Pricing for the auction is still attractive, but lower than in the past According to the latest Preliminary Node Price Report, released by the CNE in September 214, the auction s energy price will be capped at ~US$11/MWh (monomic = energy+capacity), 35% higher than the average energy price from past auctions (US$8/MWh) but below the past auction figure of US$118/MWh. CNE will announce the definitive cap by end-october, but it should be in the same range.

6 15 December 214 page 6 Chart 13: Historic ceiling price of past auctions monomic (US$/MWh) Apr-6 Apr-7 Apr-8 Apr-9 Apr-1 Apr-11 Apr-12 Apr-13 Apr-14 Monomic Price Source: CNE. The monomic price has been decreasing due to the incorporation into the expansion plan, prepared by the CNE every six months, of new generation plants under construction and new facilities proposed by generators to start operations in coming years. However, note that most of these projects have not yet been given the goahead from either the companies or the environmental regulator. We expect electricity prices for future auctions to remain strong in historical terms, based on: (i) the continued tight supply/demand balance; (ii) the change in the matrix expansion; and (iii) still poor reservoir levels. Long-term auction prices should lead to more stable generation prices for regulated customers and thus stability in earnings and cash flow. We believe that in the next auction a cap of around US$11/MWh should support the construction of new capacity and the expansion of existing plants based on coal and LNG, like the projects detailed below or others from renewable sources. Some of these large coal and LNG projects have already obtained environmental approval and need only a Power Purchase Agreement (PPA) or a block in an energy auction to start construction. However, no investment decisions have been made yet. The delay in the decisions are related to: 1) the difficulty of building new capacity, obtaining the environmental permits, or facing environmental or legal opposition, or 2) the decision among mining companies to postpone some projects that require a large amount of energy.

7 15 December 214 page 7 Table 1: Future coal and LNG developments Company Name Type Capacity Situation BHP Billiton (Escondida) Kelar CCGT 5 New ENAP N/A CCGT 3 New Endesa Chile Quintero CCGT 155 Expansion Endesa Chile Taltal CCGT 12 Expansion Endesa Chile Punta Alcalde Coal 75 New Colbun Candelaria CCGT 12 Expansion Colbun Santa Maria II Coal 35 New E.CL IEM Coal 75 New AES Gener Los Robles Coal 75 New Source: Company reports. The system s expansion, which in the past was based on coal, now appears to be shifting toward LNG in a move that should be supported by higher electricity prices. In fact, one of the short/medium-term goals of the Energy Agenda that the government proposed on May 15, 214, assigned an important role to natural gas (LNG) in Chile s electricity matrix. In the short term, the government (through ENAP state-owned oil company) will take the lead in deploying more natural gas in the system (lower prices from higher negotiated volumes), and this should help combined cycle capacity, which today is running with diesel. In our view, this step is the only way to reduce electricity prices in the SIC system through 217, given the lack of new capacity (efficient projects) under construction. In the medium and long term, along with the expansion of the GNL Quintero terminal (currently under construction), ENAP plans to build a third terminal in the south-central area of the country for the sale and distribution of gas, depending on demand, and future combined cycle thermal projects might also be involved. At the same time, the gas distribution market will be regulated to control costs. ENAP s capitalization would be needed to help finance these plans. The government also proposed improvements in the country s transmission system in addition to promoting the interconnection of both the SIC and SING grids. A bill to be submitted in 2H15 will provide a new regulatory framework for transmission and include renewable projects. Interconnection of SIC/SING grids, energy flow from north to south In mid-213, the CNE (National Energy Commission) decided to interconnect Chile s two largest transmission systems, the SIC and SING grids. As proposed by E.CL, the interconnection will be between the Encuentro substation in the north (SING) and Cardones in the south (SIC). The estimated timing for the construction is ~3 months after detailed engineering. If the decision is made in the next few months, the estimated start of operations would initially be in early 218. The project could face some delays from trouble in obtaining environmental permits or concessions for relevant segments. This transmission line could be defined by the regulator as a: 1) trunk line in a regulated system or 2) an additional line in a non-regulated system.

8 15 December 214 page 8 Figure 1: Transmission system is comprised of Source: Transelec. Each classification would be remunerated differently. Trunk transmission lines ensure a 1% rate of return on the market value of the transmission assets, by law. They provide a return on an inflation-indexed base rate, generating a real revenue stream. Pricing rules are defined for existing transmission assets, and new transmission investments are encouraged by defining the pricing rules for new assets as needed. By contrast, for an additional transmission line, facilities are used to connect power stations with the trunk or sub-transmission systems and supply electricity to nonregulated users. A fee is received for the energy transmitted. We believe this transmission line is highly likely to be classified as a trunk line given the regulator s current transmission study. And if it is not recognized as a trunk line in this study, it could be classified as a trunk line in the future. The success of the interconnection will depend partly on the energy demand from mining companies in the Copiapo region in the northern part of the SIC grid and partly from the SING grid. In addition, through this interconnection, generators in the SING grid will be able to sell energy from the North to the South and expand the universe of clients, which includes regulated client contracts granted through auctions. We believe E.CL s coal project, Infrastructura Energetica Mejillones (IEM) at 75MW, a US$2bn investment, and 4 months of construction has already obtained environmental permits, though it competes directly with GasAtacama (78MW combined cycle), which is already operational. Note that GasAtacama was built in the 199s to operate with Argentinean gas, but natural gas became scarce in 23 and was no longer available in 27. Since then, the plant has been burning diesel instead of gas. In addition, this interconnection will help to reduce the cost overruns the northern grid is facing today due to system restrictions on operating current installed capacity at full generation.

9 ECL 15 December 214 page 9 EC L Income Statement (US$mn) 12/29 12/21 12/211 12/212 12/213 12/214E 12/215E 12/216E Revenue 428 1,121 1,257 1,159 1,194 1,244 1,286 1,293 Operating expenses (ex depn) (289) (785) (889) (927) (959) (965) (996) (976) EBITDA (BTG Pactual) Depreciation (31) (99) (114) (144) (134) (135) (137) (141) Operating income (EBIT, BTG Pactual) Other income & associates (1) 21 (13) 7 3 (2) 1 Net Interest (7) (11) (28) (49) (64) (47) (46) (47) Abnormal items (pre-tax) Profit before tax Tax (2) (45) (47) (38) (17) (23) (25) (33) Profit after tax Abnormal items (post-tax) Minorities / pref dividends (3) (9) (7) (7) (7) Net Income (local GAAP) Adjusted Net Income Tax rate (%) Per Share 12/29 12/21 12/211 12/212 12/213 12/214E 12/215E 12/216E EPS (local GAAP) EPS (BTG Pactual) Net DPS BVPS Cash Flow (US$mn) 12/29 12/21 12/211 12/212 12/213 12/214E 12/215E 12/216E Net Income Depreciation Net change in working capital (27) (9) (42) 4 15 (14) 1 Other (operating) Net cash from operations Cash from investing activities (26) (187) (121) (188) (98) (1) (219) (168) Cash from financing activities 1, (99) 4 (75) (47) (32) (37) Bal sheet chge in cash & equivalents 82 (32) 44 (6) 34 6 (58) 9 Balance Sheet (US$mn) 12/29 12/21 12/211 12/212 12/213 12/214E 12/215E 12/216E Cash and equivalents Other current assets Total current assets Net tangible fixed assets 1,649 1,739 1,791 1,961 1,944 1,892 1,974 2, Net intangible fixed assets Investments / other assets Total assets 2,6 2,812 2,811 3,17 2,997 2,977 3,22 3,41 Trade payables & other ST liabilities Short term debt Total current liabilities Long term debt Other long term liabilities Total liabilities 1,1 1,191 1,133 1,217 1,19 1,165 1,161 1,118 Equity & minority interests 1,51 1,621 1,678 1,8 1,87 1,812 1,861 1,923 Total liabilities & equities 2,6 2,812 2,811 3,17 2,997 2,977 3,22 3,41 Company Profile: ECL SA, formerly Empresa Electrica Del Norte Grande SA or Edelnor SA, is a Chile-based company primarily engaged in the energy sector. The Company's activities comprise the production, transportation and distribution of electric energy and natural gas; the purchase, sale and transportation of liquid, solid and gaseous fuels; as well as the provision of engineering consulting services. The Company's products and services are principally oriented towards the mining companies and other industries operating in the north of Chile, such as Corporacion Nacional del Cobre de Chile (Codelco), Minera Zaldivar, Minera Esperanza and Lomas Bayas, among others. Its facilities include steam-electric power plants in Tocopilla and Mejillones, diesel power plants in Arica, Iquique and in the area of Barilles, as well as a hydroelectric power plant in Chapiquina. Financial ratios 12/212 12/213 12/214E 12/215E 12/216E EBITDA margin 22.% 21.1% 22.7% 22.7% 24.6% Operating margin 9.6% 9.9% 11.8% 12.% 13.7% Net margin 2.4% 2.7% 5.5% 5.9% 7.% RoE 1.6% 1.9% 4.% 4.4% 5.1% RoIC 4.4% 4.5% 5.8% 6.% 6.7% EBITDA / net interest 5.2x 3.9x 6.x 6.3x 6.8x Net debt / EBITDA 3.3x 3.1x 2.5x 2.6x 2.3x Total debt / EBITDA 3.6x 3.6x 3.1x 3.1x 2.8x Net debt / (net debt + equity) 31.6% 3.1% 28.1% 29.2% 27.9% Source: Company reports and BTG Pactual estimates. Valuations: based on the last share price of that year(e) based on share price as of 11 December 214

10 15 December 214 page 1 Required Disclosures This report has been prepared by BTG Pactual Chile S.A. Corredores de Bolsa. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. BTG Pactual Rating Buy Neutral Sell Definition Coverage *1 IB Services *2 Expected total return 1% above the company s sector average. Expected total return between +1% and -1% the company s sector average. Expected total return 1% below the company s sector average. 46% 41% 49% 47% 5% 9% 1: Percentage of companies under coverage globally within the 12-month rating category. 2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. Absolute return requirements Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed: a) a Buy rated stock must have an expected total return above 15% b) a Neutral rated stock can not have an expected total return below -5% c) a stock with expected total return above 5% must be rated Buy Analyst Certification Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that: (i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco BTG Pactual S.A., BTG Pactual Chile S.A. Corredores de Bolsa and/or its affiliates, as the case may be; (ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities discussed herein. Research analysts contributing to this report who are employed by a non-us Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not subject to the restrictions contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. or BTG Pactual Chile S.A. Corredores de Bolsa as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by Banco BTG Pactual S.A., BTG Pactual Chile S.A. Corredores de Bolsa and/or its affiliates. Statement of Risk Concerns on investment in E-CL relate to Chile s Northern (SING) grid: (1) Unexpected auction developments could change energy bid volumes; (2) Lower growth in the SING area would affect revenues; (3) FX factors might add volatility to earnings; (4) A rally in the oil price could raise variable costs; (5) Intense use of diesel (vs. gas) could cause mechanical problems at thermal plants; (6) Environmental pressures could cause cost overruns; and (7) Stock liquidity is low though improvement is likely, to fund future investments. Company Disclosures Company Name Reuters 12-mo rating Price Price date AES GENER 1, 2, 4, 6, 12, 18, 19, 2 GENER.SA Neutral CLP Colbun 1, 2, 4, 6, 18, 19, 2 N.A. Buy CLP ECL 1, 2, 4, 9, 18, 2, 22 ECL.SA Buy CLP Endesa Chile 18, 19, 2, 21, 22 N.A. Buy CLP Within the past 12 months, BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A., its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 2. BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A., its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services and/or products and services other than investment services from this company/entity within the next three months. 4. This company/entity is, or within the past 12 months has been, a client of BTG Pactual Chile S.A. Corredores de Bolsa and Banco BTG Pactual S.A. and investment banking services are being, or have been, provided. 6. BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A. and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with this company, entity or person, entities or funds which represents the same interest of this company/entity. 9. BTG Pactual Chile S.A. Corredores de Bolsa and/or Banco BTG Pactual S.A., has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates or subsidiaries within the past 12 months. 12. Directors or employees of BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A., its affiliates or subsidiaries take part on the advisory board of this company. 18. As of the end of the month immediately preceding the date of publication of this report, neither BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A., nor its affiliates or subsidiaries beneficially own 1% or more of any class of common equity securities. 19. Neither BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A. nor its affiliates or subsidiaries have managed or co-managed a public offering of securities for the company within the past 12 months. 2. Neither BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A. nor its affiliates or subsidiaries engaged in market making activities in the subject company's securities at the time this research report was published. 21. BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A. or its affiliates or subsidiaries have not received compensation for investment banking services from the companies in the past 12 months. 22. BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A. or its affiliates or subsidiaries do not expect to receive or intends to seek compensation for investment banking services from the companies within the next 3 months.

11 15 December 214 page 11 AES GENER 4. Stock Price (CLP) Price Target (CLP) Buy Neutral Sell No Rating 15-Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec-14 Source: BTG Pactual and Economatica. Prices as of 11 December 214 Colbun Stock Price (CLP) Price Target (CLP) Buy Neutral Sell No Rating 15-Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec-14 Source: BTG Pactual and Economatica. Prices as of 11 December 214 ECL 16. Stock Price (CLP) Price Target (CLP) Buy Neutral Sell No Rating 15-Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec-14 Source: BTG Pactual and Economatica. Prices as of 11 December 214

12 15 December 214 page 12 Endesa Chile Stock Price (CLP) Price Target (CLP) Buy Neutral Sell No Rating 15-Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec-14 Source: BTG Pactual and Economatica. Prices as of 11 December 214

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