Colombia, Equities EEB Attractive new investment in Peru at fair price; reducing room for potentially aggressive inorganic growth in 2014

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1 COP USD mn January 29th, 2014 Colombia, Equities EEB Attractive new investment in Peru at fair price; reducing room for potentially aggressive inorganic growth in 2014 EEB signed a contract to purchase 23.6% of Transportadora de Gas del Perú (TGP) and 100% of Operadora de Gas del Amazonas (COGA) through its natural gas subsidiary, TGI. EEB would pay around USD 650mn at 9.6x EV/EBITDA 2013E. There are two clear messages we want to convey with this report: 1) the transaction is positive as we believe TGP is an attractive asset, acquired at fair price, and aligned with EEB s strategy; and 2) EEB s management s apparent determination to continue growing aggressively through M&As in the short term, calls for caution. TGP is the largest transporter of natural and liquid gas in Peru. We believe EEB can materialize the acquisition into growth and profitability, having thorough knowledge of both sector and country. TGP operates in a strategic sector with high growth potential, and the transaction multiple looks reasonable. On the other hand, due to this acquisition and the size of other transactions in which EEB has expressed intentions to participate - namely acquiring Isagen's control, and increasing the stake in TGI, the company could have significant liquidity needs in the short term, stressing its leverage position or resulting in overhang risk. Also, the stock remains exposed to the uncertainty surrounding the situation of the mayor of Bogotá, and the sale flow of Ecopetrol s stake in EEB (6.9%). In light of the risk factors that affect the stock price, and despite EEB s high growth opportunities, strong fundamentals, and room for upside from current prices, we maintain our HOLD rating and our 2014 T.P. of 1,800, based on a SOTP model, with target multiples of 11.8x EV/EBITDA 2014E and 14.4x P/E. Valuation Summary E 2014E 2015E FV/EBITDA P/E P/CF P/BV Div. Yield 7.0% 2.7% 2.9% 5.2% 5.4% Company Alert Rating Hold Industry Utilities Ticker ADTV and Performance Source: Bloomberg, Credicorp Capital CREDICORP CAPITAL EQUITY RESEARCH Jaime Pedroza +(571) ext jpedroza@credicorpcapital.com César Cuervo +(571) ext ccuervo@credicorpcapital.com eeb cb Price (COP) 1,350 LTM Range (COP) 1,620-1,295 Target 1,800 Expected Return 38.5% Market Cap (USD mn) 6,197 Shares Outstanding (mn) 9,181 Free Float 13.3% ADTV (USD mn) 1.5 1,800 1,600 1,400 1,200 1,000 - Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 EEB Colcap This report is property of IM Trust S.A. and/or Credicorp Capital Colombia S.A Sociedad Comisionista de Bolsa and/or Credicorp Capital S.A.A. and/or its subsidiaries (hereinafter jointly called Credicorp Capital ), therefore, no part of this the material or its content, nor any copy of it may altered in any way, transmitted, copied or distributed to any third party without prior and express written consent of Credicorp Capital. In making this report, Credicorp Capital has relied on information from public sources. Credicorp Capital has not verified the truthfulness, completeness or accuracy of the information accessed, nor has audit the information in any way.. Accordingly, this report does not constitute a statement, assertion or guarantee (express or implied) as to the truth, accuracy or completeness of the information contained herein or any other written or oral information furnished to any person and/or their advisors.

2 EEB s Ownership (as of Sep-2013) Corficol; 4% Ecopetrol ; 7% Pension funds; 7% Other; 6% Bogota D.C.; 76% EEB Income Statement COP mn E 2014E 2015E Revenues 1,421,664 1,585,105 1,910,819 2,090,498 2,305,826 EBIT 550, , , , ,743 EBITDA 1,082,048 1,279,394 1,728,791 1,867,330 2,011,402 Net Income 305, ,701 1,099,013 1,148,744 1,202,173 EPS EBIT Margin 38.7% 35.2% 35.8% 36.8% 37.3% EBITDA Margin 76.1% 80.7% 90.5% 89.3% 87.2% Net Margin 21.5% 43.6% 57.5% 55.0% 52.1% Sources: Company Reports and Credicorp Capital; E Credicorp Capital Estimates EEB s Revenues Breakdown (Sep 2013) Dividends; 37% EEB s Value Breakdown Codensa; 18.9% Gas distribution; 22% Promigas ; 4.1% Gas Natural; 4.0% Emgesa; 30.0% Power distribution; 9% Other; 4.9% Power transmission; 3% Gas transportation; 28% EEB Cons.; 38.1% EEB Balance Sheet COP mn E 2014E 2015E Cash & Equivalents 953, ,918 1,362,361 1,356,159 1,354,113 Total Current Assets 1,573,506 1,458,644 1,568,914 1,647,131 1,731,015 Total Assets 13,956,870 14,689,730 15,800,240 16,587,948 17,432,726 Current Liabilities 622, , , , ,428 Financial Debt 3,374,919 3,203,989 3,882,646 4,090,329 4,308,005 Total Liabilities 4,574,731 4,492,725 5,080,373 5,353,193 5,657,783 Minority Interest 1,068,188 1,202,345 1,250,000 1,258,342 1,267,615 Shareholder's Equity 8,313,951 8,994,660 9,469,867 9,976,413 10,507,329 Total Liabilities + Equity 13,956,870 14,689,730 15,800,240 16,587,948 17,432,726 EBITDA / Fin. Expenses Financial Debt /EBITDA Financial Debt /Equity ROE 3.7% 8.0% 11.9% 11.8% 11.7% ROA 2.2% 4.8% 7.2% 7.1% 7.1% Sources: Company Reports and Credicorp Capital; E Credicorp Capital Estimates EEB Cash Flow Statement COP mn E 2014E 2015E Initial Cash 588, , ,918 1,362,361 1,356,159 Cash from Operations 2,031, ,107 1,309,071 1,336,566 1,415,524 CAPEX -1,846, , , , ,258 Changes in Financial Debt 422, , , , ,675 Dividends (Paid) Received -753, , , , ,257 Taxes -57,339-74,432-75,191-83,417-92,730 Changes in Equity 567, Final Cash 953, ,918 1,362,361 1,356,159 1,354,113 Change in Cash 364, , ,443-6,203-2,045 Sources: Company Reports and Credicorp Capital; E Credicorp Capital Estimates 2

3 TGP s Acquisition: the deal According to information released by EEB, the deal s estimated amount is USD 650mn for 23.6% of Transportadora de Gas del Perú (TGP), and 100% of Operadora de Gas del Amazonas (COGA). TGP s acquisition will be done through natural gas subsidiary, TGI. The deal was signed with Tecpetrol International, a subsidiary of Techint, and is pending the decision of TGP s current shareholders regarding their preferred acquisition rights. They have a 30-day period to reach a decision. We estimate a low probability of those preferred acquisition rights being exercised, given: 1) the recent deal on TGP s Equity between Graña y Montero (Peru) and Pluspetrol; and 2) according to EEB, over the past twelve months, several of the current TGP s shareholders have expressed their willingness to sell their stakes in the company. The funding involves USD 292 mn of available cash and an international syndicated loan for USD 350 mn. The company plans to prepay part of this debt (USD mn) between 2014 and 2015 out of TGI s cash generation capacity, and dividends received from TGP itself. The remainder (USD mn) would increase TGI s long-term debt. TGI would be the biggest individual investor in TGP Although the transaction involves just 23.61% of TGP s outstanding shares, TGI would be the largest individual investor in the company. TGP s Ownership Structure GyM 13.0% SK Corporation 11.2% GDF Suez 8.1% CFI 0.6% Sipco Peru Pipeline 21.2% Tech Petrol (Stake to be acquired by EEB/TGI) 23.6% Source: TGP, Credicorp Capital Hunt Oil 22.4% Transaction multiple looks reasonable compared to global gas utilities peers, but is higher than that observed in recent transactions on TGP s equity. Transaction multiples: The deal s multiple is 9.6x EV/EBITDA 2013E, in line with the 9.5x trailing EV/EBITDA observed in listed global gas utilities. The multiple seems attractive when compared to the 10.4x observed in recent ( ) transactions in Latin America. However, it is worth highlighting that on November 20th, 2013 Graña y Montero announced the acquisition of a 12.38% stake in TGP, formerly owned by Pluspetrol Resources for USD 237 mn. The transaction multiple was 7.1x EV/EBITDA 2013E, a lower price probably explained by the seller s interest in cashing-out. Thus, the multiple looks reasonable compared to listed peers and recent transactions, but is higher than the ones observed in recent transactions on TGP s equity. The higher multiple could be explained by the advantages that come from controlling COGA, TGP s operator, and becoming the highest individual shareholder on TGP. Nevertheless, we highlight that EEB won t acquire a majority stake, hence a control premium can hardly be claimed to be the reason for the higher price. 3

4 EEB s investment plan and indebtedness capacity EEB has approved an investment plan for about USD 7,500 mn between 2013 and 2017 Long term investment plans: EEB approved an investment plan for about USD 7,500 mn between 2013 and The Company had not released guidance regarding acquisition targets, potential markets, nor businesses to invest in. However, regarding funding, EEB estimates that 43% of this amount will be funded through debt, 34% with other nonfinancial sources (we estimate it could mean equity issuance or strategic associations) and 26% with cash flow generation. According to the management s recent statements, TGP s transaction is part of this investment plan. Also, EEB is analyzing to participate in the sale of Isagen, (~USD 4bn; Government s 57% + tender to minority shareholders), and to buy the 32% stake of Citi Venture in TGI (USD ~ 800 mn according to local media sources, amount not confirmed by management). All these transactions should most likely close in 2014, which could imply that around 73% of the total 5-years investment plan could be deployed this year (without including CAPEX already in execution in projects in Peru, Colombia and Guatemala). It is difficult to think EEB will be capable of fully materializing all three acquisitions the same year. However, according to Sandra Fonseca, CEO, and Gustavo Petro, Mayor of Bogota and chairman of the board, the company is definitely going to participate in the two remaining opportunities. A small token: in a public speech held January 17 th, Petro said to his followers gathered in downtown Bogota: ( ) look at EEB, it just bought the main gas transporter in Peru, it already owns the main gas transporter in Colombia, and we want to buy the main electric power generator in Colombia, ISAGEN. Although very political (and in fact inaccurate, as ISAGEN is the third generator, not the first), this kind of announcements may lead the market to thinking the company is being serious about acquiring, or at least trying to acquire ISAGEN and TGI. We see significant risks for additional debt issuance or equity overhang risk, if investments opportunities were to materialize in Cash position and indebtedness capacity: EEB has an adequate cash position and leverage ratios. As of Sep-13, EEB had USD 596 mn in cash and equivalents, its Net Debt/EBITDA ratio was 1.8x, and the Interest Coverage was 7.6x (covenant: >2.25x). Hence, if we take into account only TGP s transaction for USD 650 mn, EEB should have no problem to fund it with cash and additional debt. However, if we include the other projects in which EEB has expressed intentions to participate - namely Isagen and additional stake in TGI, for a total of approximately USD 4.8 bn, the company could have significant liquidity needs in the short term which could result in additional debt issuance or in a significant equity overhang risk. If we add up the three acquisitions we have mentioned, EEB will deploy USD 5.5 bn out of its investment plan solely in According to our estimates, EEB could increase its net debt position by USD 1.5 bn in order to comply with its indebtedness covenant at 3.5x which according to management is the threshold at which rating agencies would reduce their rating from current BBB-. On a more stressed scenario, EEB could increase its net debt position by US$ 2.4 bn to reach the maximum level of indebtedness established in the covenant (4.5x). Therefore, since the possible acquisitions have an estimated amount of USD 5.5 bn, and EEB s additional indebtedness capacity at the more stressed scenario is USD 2.4 bn, we see significant risks for additional debt issues if these investment opportunities were to materialize. The possibility of inviting strategic partners to participate in one or both of the additional purchases would partially alleviate financing pressures. In fact, we don t rule out a scenario where, joining forces with a partner, EEB only acquires 51% of ISAGEN (~USD 2bn) and no additional part of TGI, as it already holds control of the latter. In any case, leverage levels would look tight. 4

5 Impact on valuation Since October 31st, 2013, EEB s stock has shown a steep decline taking it to prices not seen since mid In this period, EEB s stock fell 11.95%, in line with but relatively better than the Colombian market, as Colcap index felt 14.15%. More recently, EEB has underperformed, losing almost 200bp more than the index (-8.79% vs %). We believe this behavior is explained by: i) the recent announcements reinforcing the company s intention to aggressively grow in the short term; ii) the uncertainty generated by the situation of Bogota s mayor; iii) Ecopetrol s interest in selling its 6.9% stake in the company; and iv) a reduction in traded volumes increasing volatility. We emphasize it is unlikely for EEB to be capable of deploying USD 5.5 billion in M&As only in However, should the investment opportunities fully materialize, the company s current financial situation would change dramatically, and in consequence, result in a revision of our 2014 target price, likely a downgrade due to the uncertainty regarding its funding sources and the overhang risk. In addition to that, EEB s stock is affected by the sale of Ecopetrol s stake in the company (6.9%,worth circa USD 500 mn at current prices), not necessarily negative for the stock (as the block could be sold to a strategic investor above market price or add liquidity to the stock), but definitely adding uncertainty in absence of any new official announcement by Ecopetrol. The uncertainty surrounding the situation of Bogota s Mayor also adds up as Mr. Petro remains strongly refusing to accept Colombia s Inspector General decision to removing him from his post and banning him from participating in politics for fifteen years. In the past few days, while the Inspector General has maintained his views, other non-related judicial instances have contradicted him based on the interpretation that the Inspector s decision supposedly violated voters rights. Thus, latest developments seem to indicate this matter will be solved with Bogota going to the polls in early March. For now, and despite EEB s high growth opportunities, strong fundamentals, and room for upside from current prices (+34%, total return) we maintain our HOLD rating and our 2014 T.P. of 1,800, based on a SOTP model. The value of Emgesa, Codensa, Promigas, ISA, Isagen (EEB already owns 2.52%), and EEB consolidated, was based on a DCF model. These investments represent 93% of EEB s total estimated value. Our valuation implies 2014 target multiples of 11.8x FV/Adjusted EBITDA (includes dividends received from non-controlling investments which are considered as operating revenues, given their long-term and strategic nature), and 14.4x P/E. 5

6 Transportadora de Gas del Perú -TGP TGP is the largest transporter of natural gas and liquid gas in Peru TGP is the largest transporter of natural and liquid gas in Peru. It has a concession with the Peruvian Government until 2033, extendable for another 30 years. In 2012, TGP delivered ~95% of the natural and liquid gas in Peru, extracted from the Camisea gas fields in the Peruvian Amazon. For natural gas transportation, it has a 838 km pipeline network with a 1,230 mcfd installed capacity. For liquid gas transportation, it has a 560 km pipeline network with a 130,000 barrels/day installed capacity. TGP s customers include power generators, natural gas distributors, and industrial companies in Peru. Between 2008 and 2012, revenues grew at a 24% CAGR and the EBITDA grew at a 29% CAGR. TGP Income Statement USD mn Sep 2013 Revenues EBIT EBITDA n.d Net Income EBIT margin 53.4% 49.4% 48.1% 48.0% 28.7% EBITDA margin 70.3% 67.8% 68.2% 70.0% n.d Net margin 22.0% 21.1% 20.7% 19.7% 6.1% TGP Balance Sheet USD mn Sep 2013 Cash and equivalents Current Assets Total Assets 1,464 1,746 1,865 1,852 1,825 Current Liabilities Financial Debt Total liabilities 1,162 1,369 1,404 1,299 1,319 Minority interest Shareholders equity Total Liabilities + Equity 1,464 1,746 1,865 1,852 1,825 EBITDA / fin. expenses n.d Financial Debt / EBITDA n.d Financial Debt / Equity Source: TGP, Credicorp Capital 6

7 Important Disclosures This report is property of IM Trust S.A. and/or Credicorp Capital Colombia S.A. Sociedad Comisionista de Bolsa and/or Credicorp Capital Perú S.A.A. and/or its subsidiaries (hereinafter jointly referred to as Credicorp Capital ), therefore, no part of this the material or its content, nor any copy of it, may be altered in any way, transmitted, copied or distributed to any third party without prior and express written consent of Credicorp Capital. In making this report, Credicorp Capital has relied on public information. Credicorp Capital has not verified the truthfulness, completeness or accuracy of the information accessed, nor has audited the information in any way. Accordingly, this report does not constitute a statement, assertion or guarantee (express or implied) as to the truth, accuracy or completeness of the information contained herein or any other written or oral information furnished to any person and/or their advisors. Unless otherwise stated, the information used in this report is not confidential, nor constitutes privileged information that may mean the violation of the rules of the stock market, or that could mean failure to comply with copyright legislation. This report is not intended and shall not be understood in any way as to: a) predict the future or guarantee a specific financial result; b) ensure the fulfillment of the scenarios described in it; c) be an investment advice or opinion that could be considered as Credicorp Capital recommendations. The information contained in this report is only for referential purposes. While reading it, you should consider that the information contained in this report may be oriented to a specific segment of clients or investors, with a certain risk profile that may not be yours. Unless otherwise stated, this report does not contain investment recommendations or other suggestions that may be understood to be given under the stock market intermediaries special duty to clients classified as investors. When recommendations are made, the report will clearly specify the investors risk profile to which the recommendation is intended. Credicorp Capital can seek and/or conduct business with companies that are mentioned in the report, and they can also execute buying and selling transactions of shares that are mentioned. It is important to state that the fluctuation in exchange rates can have adverse effects on investments values. It is client responsibility to determine how to use the information contained in this report. Hence, the client is the sole responsible for investment decisions or any other operation he/she might perform in the stock market based on this report. In other words, the investment or operation result made by the client using the information contained in this report is of her/his sole responsibility. Credicorp Capital does not assume any responsibility, obligation or duty for any action or omission derived from the use of this document. Credicorp Capital recommends to their clients to ask for professional advice from financial, legal, accounting, tax experts before adopting an investment decision. Under no circumstances the information contained in this report may be considered as a financial, legal, accounting or taxation opinion, neither as a recommendation or investment advice. Rating System Rating Buy Hold Underperform Definition Expected returns of 5 percentage points or more in excess over the expected return of the local index, over the next months. Expected returns of +/- 5% in excess/below the expected return of the local index over the next months. Expected to underperform the local index by 5 percentage points or more over the next months. N of Companies covered with this rating Companies covered with this rating (% ) 28 39% 32 44% 12 17% Under Review Company coverage is under review. 0 0% Total %

8 CONTACT LIST ANDEAN RESEARCH TEAM EQUITY SALES & TRADING Heinrich Lessau Hugo Horta Head of Research Head of Capital Markets # (562) # (511) Ext EQUITY RESEARCH EQUITY SALES & TRADING CHILE COLOMBIA PERÚ Hernán Arellano Head of Equities Francisca Manuschevich Daniel Velandia Alejandro Rabanal harellano@credicorpcapital.com Head of Equity Research Head of Research & Chief Economist Head of Equity Research # (562) fmanuschevich@credicorpcapital.com dvelandia@credicorpcapital.com arabanal@credicorpcapital.com # (562) # (571) Ext 1505 # (511) Ext Roberto Salas Marilyn Macdonald Cristián Castillo Equity Sales International Equity Sales International Sales Trader International Christopher DiSalvatore César Cuervo Fernando Pereda rsalas@credicorpcapital.com mar_macdonald@btconnect.com ccastillo@credicorpcapital.com Senior Analyst: Retail & Financials Head of Equity / Oil & Gas Senior Analyst: Cement & Utilities # (562) # (4477) # (786) cdisalvatore@credicorpcapital.com ccuervo@credicorpcapital.com fpereda@credicorpcapital.com # (562) # (571) Ext 1012 # (511) Ext CHILE PERÚ COLOMBIA Arturo Prado Jaime Pedroza Héctor Collantes René Ossa Rodrigo Zavala Sergio Ortíz Senior Analyst: Natural Resources Senior Analyst: Utilities Senior Analyst: Mining Equity Sales International Head of Equity - Peru Head of Equity Sales - Colombia aprado@credicorpcapital.com jpedroza@credicorpcapital.com hcollantes@credicorpcapital.com reneossa@credicorpcapital.com rzavala@credicorpcapital.com sortiz@credicorpcapital.com # (562) # (571) Ext 1025 # (511) Ext # (562) # (511) Ext # (571) Ext 1273 Andrés Ossa Juan C. Domínguez Iván Bogarín Christian Munchmeyer Úrsula Mitterhofer Juan A. Jiménez Analyst: Telecom & Utilities Senior Analyst: Banks Senior Analyst: Retail & Others Sales & Trading International Sales & Trading Head of Equity Sales International aossa@credicorpcapital.com jcdominguez@credicorpcapital.com ibogarin@credicorpcapital.com cmunchmeyer@credicorpcapital.com umitterhofer@credicorpcapital.com jjimenez@credicorpcapital.com # (562) # (571) Ext 1026 # (511) Ext # (562) # (511) Ext # (571) Ext 1701 Javier Günther Juliana Valencia Omar Avellaneda Santiago Castro Analyst: Construction & Health Serv. Analyst: GEA & BVC Senior Analyst: Infrastructure Sales & Trading International jgunther@credicorpcapital.com jvalenciam@credicorpcapital.com eavellaneda@credicorpcapital.com scastro@credicorpcapital.com # (562) # (571) Ext 1365 # (511) Ext # (571) Ext 1344 M. Pilar González Sebastián Gallego Alberto Zapata Analyst: Transport Analyst: Oil & Gas Research Assistant mpgonzalez@credicorpcapital.com sgallego@credicorpcapital.com azapatag@credicorpcapital.com # (562) # (571) Ext 1594 # (511) Ext Felipe García Head of Fixed Income Lourdes Alamos fgarcia@credicorpcapital.com Research Assistant # (571) Ext 1280 lalamos@credicorpcapital.com # (562) CHILE COLOMBIA PERÚ FIXED INCOME & ECONOMICS RESEARCH FIXED INCOME SALES & TRADING Gonzalo Covarrubias Carlos Sanchez Alfredo Bejar Head of Fixed Income Trading Head of Fixed Income Trading Head of Fixed Income/FX Trading gcovarrubias@imtrust.cl csanchez@credicorpcapital.com vyong@credicorpcapital.com CHILE COLOMBIA PERÚ # (562) # (571) # (511) # (511) Paulina Yazigi Daniel Velandia Alejandro Rabanal Belén Larraín Christian Jarrin Vallerie Yong Head of FI Research & Chief EconomisHead of Research & Chief Economist Head of Fixed Income Research Head of International FI Trading RM Fixed Income Offshore Fixed Income Senior Trader pyazigi@credicorpcapital.com dvelandia@credicorpcapital.com arabanal@credicorpcapital.com blarrain@imtrust.cl cjarrin@credicorpcapital.com vyong@credicorpcapital.com # (562) # (571) Ext 1505 # (511) Ext # (562) # (571) # (511) # (511) Felipe Lubiano Laura Mesa Irvin León Guido Riquelme Andrés Valderrama Lizeth Espíritu Fixed Income Analyst Fixed Income Analyst Fixed Income Analyst Head of Local FI Trading Fixed Income Trader Fixed Income Trader flubiano@credicorpcapital.com lmesa@credecorpcapital.com ileon@credicorpcapital.com griquelme@imtrust.cl jvalderramma@credicorpcapital.com lespiritu@credicorpcapital.com # (562) # (571) Ext 9138 # (511) Ext # (562) # (571) # (511) # (511) Paulina Valdivieso Sergio Ferro Verónica Miyagusuku Cristián Fuentes Juan Camilo Murcia Evangeline Arapoglou Fixed Income Analyst Fixed Income Analyst Fixed Income Analyst Fixed Income Trader Fixed Income Trader Fixed Income Trader pvaldivieso@credicorpcapital.com sferro@credicorpcapita.com vmiyagusuku@credicorpcapital.com cfuentes@imtrust.cl jmurcia@credicorpcapital.com earapoglou@credicorpcapital.com # (562) # (571) Ext 1609 # (511) Ext # (562) # (511) Ext 1180 # (511) # (511) Andrés Osorio Benjamín Diaz Economist Fixed Income Trader aosorio@credicorpcapital.com bdiaz@imtrust.cl # (562) # (562)