FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of November, 2012
Commission File Number: 001-12440
ENERSIS S.A.
(Translation of Registrant’s Name into English)
Santa Rosa 76
Santiago, Chile
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file
annual reports under cover of Form 20-F or Form 40-F:
Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes [ ] No [X]
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes [ ] No [X]
Indicate by check mark whether by furnishing the information
ontained in this Form, the Registrant is also thereby furnishing the
information to the Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes [ ] No [X]
If °;Yes” is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): N/A
Enersis S.A.
TABLE OF CONTENTS
The following are English translations of documents made publicly available to shareholders or holders of American Depositary Shares of Enersis S.A. (the “Company”) in connection with the proposed capital increase by the Company in which Endesa S.A., the Company’s controlling shareholder, would subscribe for additional shares with a non-monetary contribution of equity interests in a portfolio of companies, and the other shareholders would subscribe for additional shares with cash.
Item
1. Translation of Opinion of Director Pablo Yrarrázaval V. dated October 30, 2012
2. Translation of Opinion of Director Andrea Brentan dated October 30, 2012
3. Translation of Opinion of Director Rafael Miranda R. dated October 30, 2012
4. Translation of Directors’ Committee Report dated October 29, 2012
5. Translation of Opinion of Director Leonidas Vial E. dated October 30, 2012
6. Translation of Opinion of Director Hernan Somerville S. dated October 31, 2012
7. Translation of Opinion of Director Eugenio Tironi B. dated October 30, 2012
8. Translation of Opinion of Director Rafael Fernández M. dated October 30, 2012
9. Translation of Independent Appraisal Report of IM Trust Asesorías Financieras S.A. dated October 24, 2012
10. Translation of Expert Appraisal Report of Eduardo Walker H. dated July 23, 2012
11. Translation of Independent Appraisal Report of Claro y Asociados Ltda. dated
October 24, 2012
DISCLAIMMER: THE ENGLISH VERSION OF THIS OPINION WAS TRANSLATED FOR THE CONVENIENCE OF THE READER. THIS TRANSLATION HAS NOT BEEN REVIEWED OR APPROVED BY MR. PABLO YRARRAZAVAL.
Santiago, October 30, 2012
Shareholders of Enersis S.A.,
SANTIAGO
Ref.: Pronouncement on the related
parties transaction among - capital increase of Enersis S.A.
Dear Sir,
As Director and Chairman of the Board of Directors of Enersis S.A. ("Enersis"), a publicly held limited liability stock company registered as No 175/1983 of the Securities Register of the Superintendence of Securities and Insurance ("SVS"), and in compliance with dispositions set by the Chilean Companies Act 18,046 ("LSA"), Article 147, numeral 5), I issue my pronouncement with respect to the convenience of the Proposed Transaction in terms of its best interest to Enersis, according to how it is defined below.
l. Background
On June 18, 2012, the majority shareholder of the Company, Endesa, S.A., through its subsidiary Endesa Latinoamérica S.A. (both companies "Endesa" unless otherwise stated), sent me a letter, as chairman of the Board of Directors of Enersis, proposing a capital increase of Enersis, to be subscribed, both in money and other non-monetary assets representing the total participations that Endesa Spain owns through Endesa (the “Contributed Assets”) in South America, other than Enersis.
Therefore, the “Proposed Transaction”, with respect to which I pronounce myself through this document, consist in a capital increase of Enersis in which Endesa would subscribe its proportion of the new shares to be issued by contributing its total shares of a new company to be established according to the laws of Spain, that would be called “Cono Sur”, and whose only assets would be its total participations, and would be free of liabilities. The other shareholders (or their assignees), if they decide, would subscribe their proportion of the new shares by paying pro rata in cash.
On August 3, 2012, through the Official Letter No 18,684, the Superintendence of Securities and insurance ("SVS") considered the Proposed Transaction, in spite of being a capital increase, to be a related party transaction and ordered that the Board of Directors of Enersis give strict compliance not only to the provisions of Articles 15 and 67 of the LSA, which regulate capital increases payable with assets other than money, but also comply with the provisions of Title XVI of the LSA.
On August 6, 2012, the Board of Directors of Enersis agreed to submit the Proposed Transaction to the approval procedures established in Title XVI of the LSA.
II. Pronouncement on the relationship to the controlling shareholder
I declare that I am a Director and Chairman of Enersis since July 26, 2002 and that I was appointed Director with the votes of the majority shareholder at the ´Shareholders’ Meeting that appointed the current Board of Directors, which was held on April 22, 2010. Additionally, I declare that these votes were decisive to be elected as a director. I also declare that during the Board of Directors’ meeting of April 23, 2012, I was appointed Chairman of the Board of Directors, being elected previously at the Shareholders Meeting held on April 22, 2010.
I declare that I have interest in the Proposed Transaction according to the interpretation performed by the SVS in its Official Letter No 21001 of August 29,2012, in its section III.l, which made applicable to the Transaction that resolved by the Superintendence on April 18, 2012 in its Offitial Letter No 9914 to the company Enjoy S.A.
Such declaration of interest was repeated formally to the Company in the Board of Directors’ meeting of September 5, 2012.
With respect to Endesa, a wholly-owned company by Endesa S.A (Endesa Spain), I was member of the Board of Directors of the latter by virtue of the resolutions adopted by the Universal Extraordinary General Shareholders’ Meeting that was held on October 10, 2006. On June 27, 2008, I resigned as a consequence of the reduction of such Board of Directors to three members. Similarly, since June 17, 2004, I form part of the Latin American Executive Committee, and to this day still hold an advisor position to such committee.
I also declare that I am directly and indirectly a shareholder of Enersis S.A.
Other than the aforementioned, I have no relationship with the counterparts nor have interest in the Operation.
III. General Considerations
According to LSA, I must give my opinion with respect to the Proposed Transaction, in the terms and conditions presented by the majority shareholder. This proposal, a unique and indivisible package to be contributed by the majority shareholder in a capital increase in which the minority shareholders must subscribe on a pro rata basis with contributions in money.
In my opinion, the Proposed Transaction should consider the following questions:
1. If these assets, all together in Cono Sur, were for sale by a third party, would they be interesting for Enersis? That is, whether the price is adequate or not, or who is the owner of the assets.
2. If the response to this first question is affirmative, and considering the Proposed Transaction, the question to be asked is, what should be the price to be paid for Cono Sur?
3. Considering the incorporation of Cono Sur interesting for Enersis and having determined an appropriate price, then one must wonder what implications the way Endesa has proposed to do this, namely through a capital increase for an amount equivalent to 1/60.62% times the value at which Cono Sur is contributed and in which the other shareholders contribute money.
The transaction under analysis has two particular characteristics:
(i) not all shareholders contribute with the same assets
(ii) the contribution in money may reach a significant amount
These two particular characteristics therefore make necessary to formulate the following two questions:
a. What effect would for Enersis raise this amount of money ?
b. How do you compare the contribution made by Endesa to the contribution that may be made by the other shareholders of Enersis? For the reasons outlined below, this part of the question should be responded as part of the analysis of the value of the contribution of Cono Sur.
III.1. Contribution of the Proposed Transaction to the Best Interest of Enersis
1. Enersis is currently a leading company in generation and distribution of electricity in South America, with a strong presence in Argentina, Brazil, Chile, Colombia, and Peru.
2. South America is one of the regions with greater socio-economic and demographic dynamism. However, it is also a region that still presents a low per capita electricity consumption rate. Therefore, it is likely that the countries in which Enersis currently operates present a high growth potential.
3. The companies whose participations Endesa offers to contribute to Enersis, are companies with high growth potential and low risk, considering that they are businesses that Enersis already knows and, in their great majority, are managed by Enersis. Therefore, they are assets in which Enersis would have an interest in increasing its participation, such is the case of Emgesa, Codensa, Endesa Brazil, Ampla, Coelce, Cien, Cachoeira Dourada, Fortaleza, Edegel, Edelnor, Edesur, Cemsa, San Isidro or to acquire; as in the case of Piura, Dock Sud and Yacylec, without regard to who divests, since they are a set of assets that Enersis also would be interested in purchasing from a non-related third party.
4. Additionally, the purchase of Cono Sur represents an opportunity for Enersis to improve its current situation, from a corporate point of view. In effect, the current structure presents major opportunities for improvement, which I mention below:
a. Enersis performs 100% of the effort, but only obtains part of the results. For example, in 2011 only 43% of the consolidated net income was received by its shareholders, although it consolidated 100% of the debt; and
b. The existence of multiple subsidiaries with third party participations gives rise to a significant minority interest, which makes financial analysis of Enersis difficult, and leading market analysts to eventually apply higher discounts to the value of our Company.
5. The acquisition of Cono Sur would constitute an important step in the simplification of the current ownership structure. Additionally, considering that this is a package that includes all the shares that Endesa has in the region, Enersis would achieve substantial change through one transaction, which is reasonable to expect will have a positive impact from the day the operation is materialized.
6. The contribution of the assets in Emgesa and Codensa should clearly and finally allow consolidating such companies; option that is currently possible exclusively due to a shareholders agreement in which Endesa grants Endesa Chile and Enersis, respectively, the political control of such companies. This grant may be unilaterally revoked with a notice with 3 years in advance, which would imply that Enersis would have to cease to consolidate approximately USD 1,000 million of EBITDA.
7. The Proposed Transaction consolidates Enersis as the only investment vehicle of Endesa and Enel S.p.A., in the region, with the exception of Enel Green Power involved in non-conventional renewable energy investments, thus eliminating potential conflicts of interest that could arise in the future.
Based on all the aforementioned, my opinion is that the Proposed Transaction is of interest to Enersis and contributes to their best interest, given that is in line with its strategic focus.
III.2. The Proposed Operation meets price, terms and conditions to those prevailing in the market
Then the following question must be answered. Which should be the price of Cono Sur?
In this regard, it should be noted that this particular operation is without precedent in the market or comparable operations, therefore to refer to “market prices” becomes particularly complex. For this reason, the Board of Directors of Enersis determined to hire the independent valuator IM Trust Asesorias Financieras S.A. (“IM Trust”) to determine the value that meets the "conditions that prevail in the market at the time of the Transaction." The Directors Committee also determined hiring an independent valuator, Claro y Asociados Limitada (“Claro y Asociados"), with the same purpose.
What is relevant to the Proposed Transaction, from the “market price” perspective, seems to be (i) the value at which the shares are contribute and, (ii) how the value of Cono Sur that Endesa contributes compares to the amount that the other shareholders contribute in money, thus should be determined if all shareholders had the option to subscribe under equal conditions.
The criteria followed by both independent valuators is to estimate the market value of Cono Sur linking it to the market capitalization of Enersis, to the extent that they even express the market value of Cono Sur as a percentage of the market capitalization of Enersis.
Therefore, it seems reasonable to me to consider the estimates made by the independent valuators appointed be the Board of Directors of Enersis, IM Trust, and by the Directors’ Committee of Enersis, Claro y Asociados.
.
The reports of IM Trust and Claro y Asociados, both issued on October 24, are available to the shareholders and the general public on the Enersis’ website, and I highly recommend shareholders to read these reports in detail. Additionally, the report by the expert appraiser Eduardo Walker dated July 23, 2012, also contributes in establishing the value of Cono Sur.
III.2.a. Estimate of the value of Cono Sur performed by the expert appraiser Eduardo Walker
The valuation of Cono Sur made by the expert appraiser Eduardo Walker was based on the discounted cash flow method of each of the cContributed Assets. Using this method, he determined a value of USD 4,862 million as the economic value of the equity of Cono Sur. Mr. Walker was asked an expert appraisal of the value of the Cono Sur, without this necessarily representing a market value. It is also worth mentioning that the value of the assets is very similar to those assigned by other valuators.
III.2.b. Estimate of the value of Cono Sur performed by IM Trust
Briefly, IM Trust estimates the market value of Cono Sur by applying a “discount” to the value resulting from the addition of the value of the shares estimated based on the discounted cash flow method (DCF). The “discount” applied is obtained by comparing the market capitalization of Enersis at a certain time with the value of Enersis estimated using the DCF method, both performed under similar conditions.
According to IM Trust, the value of Cono Sur should be (a) the value of the Contributed Assets using the DCF method estimated to be USD 4,709 million (midpoint between the range from USD 4,591 million to USD 4,826 million), minus (b) a “discount" that is determined by comparing (i) the stock market value of Enersis, calculated before the capital increase, using the stock price at which the capital increase is subscribed, to (ii) the value of Enersis according to the DCF method, value that IM Trust estimates to be USD 14,836 million, which was determined using the same parameters as the USD 4,709 million estimate for Cono Sur.
Since, as of the date of such report, the subscribing price of the capital increase was unknown, IMTrust states that the market value of Cono Sur, in the framework of the Proposed Transaction, should be the equivalent of a 30.9 % to 32.5 % participation in Enersis.
Using the closing price per share of Enersis the day before the report, that is, at October 23, 2012 (CLP 162.2), IM Trust concludes that the market value of Cono Sur would fall between USD 3,445 million and USD 3,621 million. Also, IM Trust sets a range from USD 3,972 million and USD 4,176 million for the price of Enersis of CLP 187 that reflects the market value before the capital increase announcement.
Finally, and only as a reference, IM Trust reports two additional values:
· The valuation of Cono Sur “by multiples of comparable companies”, which IM Trust estimates to be USD 4,165 million.
· The valuation of Cono Sur "by market consensus ", which IM Trust estimates at USD 3,827 million.
III.2.c. Estimate of the value of Cono Sur performed by Claro y Asociados
Claro y Asociados estimates the market value of Cono Sur by using two alternative methods:
1. A first method similar to that used by IM Trust which consists in applying to the value obtained by the DCF of Cono Sur a “ discount” that is obtained by comparing the stock market capitalization value of Enersis to the value of Enersis estimated using the DCF method.
The value estimated by Claro y Asociados for Cono Sur would be USD 3,870 million.
2. A second method, which consists in applying the multiple of EV/EBITDA of Enersis to the aggregate value of the EBlTDAs that would be contributed.
The value that Claro y Asociados estimates for Cono Sur according to this method would be USD 3,912 million.
As in the case of IM Trust, Claro y Asociados links the value of Cono Sur to the market capitalization value of Enersis, expressed as a percentage of the latter, obtaining a range that goes from 34.97 % to 35.35 % of the market capitalization value of Enersis.
Therefore, for Claro y Asociados, the value of Cono Sur on October 22, 2012 would be located within the range of USD 3,870 million and USD 3,912 million.
Based on this information, I believe the following regarding the market value of Cono Sur:
1. The three reports received by the Board of Directors show consistency in terms of the value of Cono Sur obtained by discounting cash flow projections of the companies. The maximum difference between the values does not exceed 5% (USD 4,627 million and USD 4,862 million).
2. In order to adjust to market value, both independent valuators take the approach of setting a valuation that is, in relative terms, the valorization of Enersis, agreeing that the best comparison to Cono Sur is Enersis.
3. It is necessary to define the market value of Enersis in order to define the market value that best represents Cono Sur.
4. A regular market practice is to take the price of the stock the day before the announcement as a reference for the capital increase. The closing price of Enersis on July 25 was CLP 187 per share.
5. Based on this information the market value of Cono Sur would settle, as is included in the report of IMTrust, at USD 4,074 million. This value would be in my opinion the fair value for the transaction.
6. The market has adjusted the value of Enersis during these last few weeks reducing it price. This adjustment is influenced by the capital increase announcement and therefore is a reference in terms of minimum values of Enersis. The day prior to the publication of the reports, the price of the stock was CLP 162 per share. Based on this price, the market value of Cono Sur would be USD 3.533 million. This amount would represent the lower limit of the transaction.
7. Claro y Asociados report stands the market value of Cono Sur at USD 3,870 million which is within the range of the figures proposed earlier.
8. In order to validate the values proposed the valuators performed a valuation by comparable multiples. In both cases, the results averaged USD 4,170 million, which are very close to the value of Cono Sur that I consider here.
9. In conclusion, the range of the market value of Cono Sur should be between USD 3,533 million and USD 4,074 million.
10. Although the range of values presented is constructed from different quotations for Enersis, the range is defined on the basis of absolute monetary values that do not depend on the future prices of the stock, avoiding the possibility of an undefined transaction and eliminating uncertainty that could complicate the decision making process of shareholders.
III.3. Use of proceeds obtained through the capital increase
As Enersis has informed, the money that it raised through the proposed capital increase would be used mainly towards three objectives:
1. Increase the participation of Enersis in its subsidiaries by purchasing the shareholdings of third parties in such companies;
2. Inorganic expansion by purchasing companies and electricity assets in the region; and
3. Organic expansion by financing new capacity investment projects, mainly in generation, in various subsidiaries of Enersis.
Notwithstanding the foregoing, personally, I would like to mention the following considerations:
1. Enersis has important growth opportunities, and more importantly, the technical and professional resources to, first of all, properly evaluate them and then implement them;
2. To have the resources today significantly reduces the implementation risk of these initiatives, and, in my opinion, increases its probability of success;
3. Even more, experience proves that the best opportunities to develop new investments, being acquisitions or new developments, occur in a restrictive financial context;
4. Now, with regard to how much cash is necessary or sufficient in this context, it seems to me that, given the variety and the size of the opportunities, if they become a reality within a short period of time, this could mean that the funds raised could even be insufficient. As, for example, how IM Trust includes in its report, just increasing the participation of Enersis in those companies which trade in the stock market, could imply an investment from USD 1,764 million and USD 1,898 million;
5. According to the Valuations aforementioned and under the conditions just described, both valuators agree that the operation is accretive.
6. It is difficult to estimate how much and when the money will be invested, considering that the three alternatives of use of proceeds mentioned do not depend on factors that Enersis controls (willingness to sell, market conditions, competition from other potential buyers, environmental approvals, etc.), that could lead to a temporary cash balance, with a financial cost. Although the Company´s “track” record, allows assuming a proper management of the resources received; and
7. However, for me, this possible effect represents lower risk than to resign to grow inorganically more quickly than would be possible by simply reinvesting the profits of each year.
In summary, I believe the proposed structure, by raising today an amount of money equivalent to
0.65 of the value of the contribution of Cono Sur (obtained by calculating 39.38/60.62, which corresponde to maintain the current shareholding proportions) significantly reduces the risk of obtaining reasonable cost financing in the future. This, considering the current condition of the international financial markets that present clear signs of volatility, in my opinion is very positive for Enersis.
Now then, this does not imply ignoring that maintaining excess cash for a very long time becomes a “burden” for Enersis in terms of return, as investors will continue to demand returns on their total asset portfolio that exceed the returns of investing cash in safe financial instruments, which becomes particularly troublesome in a low interest rate environment like today.
IV. Directors’ Committee Report
The Directors Committee, in its extraordinary meeting held on October 29, 2012, confirms that the Proposed Operation “contributes to the best interest”.
When the value of Cono Sur was informed, the three members did not agree, but they place the range from a minimum of USD 3,452 million to a maximum of USD 3,935 million. These figures are all related to the market values of Enersis and the exchange rate prevailing at the day of the valuation.
With respect to the use of proceeds, although they acknowledge it is not a matter that depends exclusively on Enersis, the solid “track record” of the Company to execute expansion plans and the existence of opportunities in the region, could lead to think that it will have the ability to find and develop investment and growth opportunities.”
With regard to the other terms and conditions requested by the Directors’ Committee, I agree that they are matters which should be covered and governed in the documentation where the transaction is formalized:
a) Representations and warranties for Piura, Yacylec, and Central Dock Sud, to be common in this type of operations;
b) Commitment from the controller with respect to Enersis being the only investment vehicle, except for Enel Green Power; and
c) Commitment to hold Enersis free from any potential tax contingencies related to the structure of the operation.
V. Conclusions
As a conclusion, in my opinion:
1. The Proposed Transaction has an strategic sense, as it allows increasing the participation of Enersis in businesses and countries in which the Company has interest to continue to grow;
2. Considering that the contributed assets are currently known and managed by Enersis, being able to incorporate them at market price is an opportunity for the Company;
3. The Proposed Transaction consolidates Enersis as the only investment vehicle of Endesa and Enel S.P.A. for the region (except Enel Green Power) and Enersis would rightfully, without the need of a shareholders agreement, consolidate all their assets in South America;
4. The price of the Proposed Transaction considered at a market price, should range between USD 3,533 million and USD 4,074 million; and
5. Enersis has important growth opportunities and, more importantly, the technical and professional resources to, first, properly evaluate them and then implement them, although it is difficult to estimate when and how much may be invested. The "track" record of the Company allows trusting that the resources that would be received would be managed properly.
Based on the above, I think the Proposed Transaction contributes to Enersis’ best interest.
Sincerely,
|
Pablo Yrarrazaval V. Chariman of the Board of Directors Enersis S.A. |
DISCLAIMMER: THE ENGLISH VERSION OF THIS OPINION WAS TRANSLATED FOR THE CONVENIENCE OF THE READER. THIS TRANSLATION HAS NOT BEEN REVIEWED OR APPROVED BY MR. ANDREA BRENTAN.
Santiago, October 30, 2012
Enersis S.A. Shareholders,
Ref.: Pronouncement on Enersis S.A. Capital Increase
I have the pleasure to deliver my personal pronouncement, as Director of the publicly-held limited liability stock company Enersis S.A (Enersis or the Company, indistinctly), based in Chile and registered in the Superintendence of Securities and Insurance (SVS) with the No 175/1983 with respect to the ongoing capital increase of Enersis S.A. (the Transaction) under the following terms and considerations:
I. BACKGROUND INFORMATION
1. On June 18, 2012, the controlling shareholder of the Company, Endesa, S.A., through its subsidiary Endesa Latinoamérica, S.A. (both companies "Endesa" unless otherwise stated), sent a letter to the president of the Board of Enersis, by means of which a capital increase of the Company was proposed. This capital increase would be performed, according to the letter just mentioned and other information sent later by Endesa directly and through its subsidiary Endesa Latinoamérica, S.A., within the following terms:
(i) Endesa may contribute to Enersis the total capital of a company named Cono Sur Participaciones, S.L. ("Cono Sur"), free from liabilities and whose only assets would be the total amount of shareholdings the Endesa Group holds in South America and which are different from those held by Enersis, directly or indirectly. These shareholdings are described in detail in Annex 1 to this document.
(ii) The other shareholders of Enersis may participate in the capital increase by paying their prorated proportion in cash.
2. On August 3, 2012 the SVS conducted an administrative interpretation by means of Offitial Letter No18,684, according to which it considered, in particular and ad-hoc terms, that the ongoing capital increase governed by articles 15 and 67 of the Corporations Law must be complemented by the rules included in Title XVI of the Chilean Companies Act (“LSA” in its Spanish acronym). Consequently, and to support such complementation, the SVS considered that the Transaction should be treated as an operation among related parties, identifying the related parties, under such interpretation, to be Endesa and Enersis.
3. On August 9, 2012, by agreement 69/12 the Board of Directors of Enersis resolved voluntarily submitting to this administrative interpretation for the purpose of continuing with the ongoing Transaction and avoid the possible adverse consequences to the Company that could follow due to its temporary interruption, although the Board disagreed with the source and substance of that interpretation, as the corresponding board meeting record shows, and particularly in the response issued by the Board to Offitial Letter No18,684 of the SVS.
4. Title XVI of the LSA states in Article 147 No 5 that every board member of a publicly-held limited liability stock company, that is involved in a transaction among related parties must issue an opinion with respect to the convenience, in terms of social interest, of the Transaction and then make it available to shareholders. Such Title XVI was administratively interpreted by the SVS in order to associate to Articles 15 and 67 of LSA by Offitial Letter No21001 of August 29, 2012, and therefore the Board of Directors of Enersis resolved following this interpretation voluntarily, and coherent with what was stated in the second paragraph above.
II. STATEMENTS ON THE DIRECTOR OF ENERSIS STATUS AND HIS RELATIONSHIP TO THE CONTROLLING SHAREHOLDER
1. I declare I am a member of the Board of Directors of Enersis since July 28, 2009 and that during the shareholders meeting that was held on April 22, 2010, I was appointed director with the votes of the controlling shareholder Endesa Latinoamérica, S.A. I also state that these votes were decisive to be elected as a director.
2. I state that I was elected director of Enersis at the shareholders’ meeting that was held on April 22, 2010 and I was appointed Vice Chairman of such body at the Board meeting held on April 23, of that same year.
3. I declare that I have interest in the operation in accordance with the administrative interpretation made by the SVS in section III.l of Offitial Letter No 21,001 of August 29, 2012, which made what the Superintendence had resolved on April 18, 2012 in Offitial Letter No 9,914 to the company Enjoy S.A. applicable to the Transaction.
4. Such declaration of interest was repeated formally to the Company in the September 5th, 2012 Board meeting.
5. I also state that I hold the position of CEO in Endesa, S.A. since June 30, 2009.
6. I declare owning 100 (one hundred) shares of Endesa, S.A and I have no shares or securities issued by Enersis.
III. RELATIONSHIP BETWEEN THE ACTIONS TAKEN BY THE DIRECTORS AND THE RESOLUTIONS ADOPTED BY THE BOARD OF DIRECTORS WHICH AFFECT THE ANALYSIS OF THIS OPERATION
The proposed capital increase transaction has resulted from a complete and thorough process carried out by the board of directors of the company. As a member of such Board I can attest to the dedication and diligence that has been observed in order to comply with the legal rules governing the transaction and with the administrative interpretations that the Superintendence of Securities and Insurance has performed on the subject, constantly maintaining not only the purpose to comply, but also what is considered best in terms of social interest. Therefore, I can report, as exemplary, on the following activities that have been undertaken at the initiative of the directors of the company and that have developed both within and outside of a legally constituted meeting.
The search for an independent valuator in order to comply with the dispositions of Article 147 of the Chilean Companies Act began during the board meeting of Enersis that was held on August 31, 2012.
Within this context, Enersis contacted the companies IM Trust and Claro y Asociados, specialists in strategic and financial consulting services, for them to independently evaluate the capital increase in Enersis proposed by Endesa.
The Board of Enersis appointed IM Trust as independent expert valuator of the transaction.
Similarly, the Directors Committee unanimously appointed Claro y Asociados Ltda. as independent valuator of the transaction, for the same purpose.
Management Presentations was held on September 12 and 13 of 2012, opportunities in which the local chief executive officers presented the main drivers and the respective projections of the business to the independent valuators.
A presentation on regulatory issues of both electricity generation and distribution was held on September 12, 2012, in order to clarify any doubts that the independent valuators could have about the business. Afterwards, an electronic information system was implemented where the questions asked by the independent valuators and the answers given by the company were recorded. Both valuators had access to all questions and answers presented.
On September 20, 2012, Enersis made a presentation on energy management and energy processing by the company, explaining, for this purpose, the
Company´s commercial policy.
A meeting with the independent valuators was held on September 27, 2012, to explain the composition of the margins of each business line and the cash flow indexation, among other relevant subjects.
Several meetings with the independent valuators was held on October 4, 2012, when they were informed and relevant subjects related to economic, financial, tax, legal and accounting aspects were analyzed.
On October 8, 2012, an informative meeting with independent valuators and management of the company took place, opportunity in which questions were raised about the business of the Group´s companies in Chile, Colombia, Brazil and Peru.
On October 11, 2012, a coordination meeting attended by valuators, Board members and management took place to learn about the state of progress of the appraisals, information received and new requirements for information requested by the external appraisers.
It should be noted that the Board ordered the permanent and continuous remission of all the information relating to the transaction this statement refers to, to the Directors’ Committee, for that corporate body to examine the history of the transaction and issue the report required by Article 50 bis of the Chilean Companies Act.
The directors met with the independent valuator IM Trust on the 20th and 27th of September of 2012, the 4th, 11th, 17th, and 19th of October of 2012, in order to inform them on the progress of their report and any information they were lacking or additional requirements. The directors asked IM Trust questions that they considered and resolved.
This past October 24, 2012, the Directors’ Committee received the report from the independent valuator Claro y Asociados, and that same day, the Board received IM Trust’s report.
IV. CONVINIENCE OF THE OPERATION FOR THE BEST INTEREST
1. Background Information
1.1 Enersis today
Enersis is a multinational electricity company, with a portfolio of diversified assets in five Latin-American countries, which maintains a permanent and embedded presence in the region.
The rootedness in the countries and communities where it operates and its capacity to respond to the energy needs of the countries and their citizens make Enersis a reference in the region:
· The main private electricity generation operator in the region, 14,832 MW of installed capacity as of December 31, 2011 (58% hydroelectric, 37% combined cycle and fuel gas, 4% coal, 1% wind farm) and 56.9 TWh of electricity generated in 2011.
· The main electricity distribution operator in the region, 13.7 million customers as of December 31, 2011and 69.6 TWh of electricity distributed in 2011.
· A key player in the regional interconnection, by participating in the interconnection between Argentina and Brazil (CIEN), with a line 1,000 kilometers long and 2,100 MW of capacity.
· A player in the gas business in Chile, by participating in the Liquefied Natural Gas (GNL) Import Terminal in Quintero, and also in the Atacama and Tal Tal gas pipelines to supply the generation power plants with the same name and the Electrogas pipeline (San Bernardo-Quillota and extension to Quintero) needed to operate the San Isidro power plant with gas.
· Enersis employs 10,884 employees directly as of December 31, 2011, and during that year had a monthly average of 8,000 outsourced workers.
1.2 International expansion
To become what it is today, Enersis developed a successful international expansion plan that began in 1992 through successive inorganic growth operations and also through organic growth.
1.2.1 Inorganic growth
In terms of inorganic growth, Enersis has successfully purchased controlling share assets and minority shareholdings within the entire Latin-American region proving its ability to successfully accomplish acquisitions creating value. The main purchase processes in which Enersis has participated are detailed in Annex (II).
All these operations involved the purchase of more than 11,000 MW and 6.7 million customers. Through them Enersis has transformed its profile laying the foundations for the multinational company it is today.
1.2.2 Creation of value: synergies and efficiencies
Enersis has also proven its ability to create value finding synergies and new efficiencies, transforming the companies purchased in modern and efficient companies. Some relevant examples are mentioned in Annex (III).
The capacity to extract synergies and efficiencies from the operations to make the companies more profitable forms part of the core of Enersis management and it is not an objective that it pursues not only after an asset acquisition process. Enersis is one of the most efficient companies in the region as shown by various benchmarks performed thanks to the management standards it applies leveraging its economies of scale and the unification of key functions.
In recent years Enersis has benefitted from a new cycle of improvement in efficiency and operational excellence by leveraging its membership to the Enel group, multinational present in 40 countries. Through the exchange of best practices and joint purchases and successive synergy and efficiency plans, Enersis has achieved recurring annual savings of approximately EUR 200 million.
1.2.3 Organic growth
In terms of organic growth, Enersis has been able to grow at a rate greater than the high growth economies in which it operates, also proving its ability in this form of growth:
· In generation, Enersis has been able to install more than 4,000 MW in different expansion projects.
· In distribution, Enersis has also experienced successful organic growth, being able to grow at a higher rate than the already high growth rate of its concession areas. To this day, Enersis has electrified practically its entire concessions and as of December 31, 2011 has 11,512 km of high-voltage lines, 152,033 km of medium voltage lines, and 138,921 km of low voltage lines. The installed capacity of substations was 35,660 MVA.
· The expansion of distribution lines and sub transmission lines also creates value to shareholders. The regulatory frameworks establish clear signals to foster the development and investment in new networks and its efficient management assures investment returns that create value.
· The returns recognized by regulation are attractive, the tariff revisions are based on technical and objective criteria, and conflict resolution mechanisms exist. All this, coupled with the search for excellence in operations to capture efficiencies, which are also shared with customers make distribution a solid and profitable business for shareholders.
The main organic growth projects that Enersis has developed are detailed in Annex (IV).
Both organic and inorganic growth has led Enersis to:
· go from a USD 94 million EBITDA in 1991 to USD 4,399 million in 2011
· go from one million customers in Chile to almost 14 million in five countries within the same period
· increase distribution sales from de 5 to 70 TWh
· go from no presence at all in generation to 14.8 GW of installed capacity
1.3 Current Corporate structure and potential improvements
In this successful international expansion and value creation process, Enersis was accompanied by Endesa first as a partner and later as controlling shareholder. This explains why today Endesa participates directly as shareholder of several of Enersis Group companies. This leads to opportunities of improvement and optimization today:
1.3.1 Control through temporary agreements:
· Enersis control of some companies in which it has a minority interest, such as Codensa and Emgesa in Colombia, is possible due to political rights assignment agreements with Endesa, which can be terminated unilaterally by Endesa.
· Enersis and Endesa also have a "Strategic Alliance" agreement that is renewed quarterly and unilaterally by Endesa, whereby the parties agreed to a formula designed to make joint investments in the electricity and in the gas distribution businesses in certain regions of America.
· On the other hand, Enersis manages, through agreements with Endesa, assets in which Enersis has no ownership share. (DockSud and Empresa Eléctrica de Piura EEPSA).
1.3.2 Double management and development vehicle in Latin-America:
· Within the current corporate structure of the controlling shareholder there are two management and development vehicle for the region, Enersis and Endesa. This situation introduces certain uncertainty as to the future perspectives of Enersis as it has been mentioned as a risk factor on the company’s 20-F form.
· Also, the complexity of the current structure leads to a certain lack of visibility of cash flows which impacts the understanding of the business, and therefore, the adequate valuation of the stock.
1.3.3 Imbalance between management effort and consolidated figures (EBITDA, debt, net income):
· There is currently an imbalance between management effort, debt consolidation, EBITDA and net profit of Enersis, because although Enersis consolidates 100% of the debt and of EBITDA, it accounts for only 43% of net income.
1.4 Considerations on growth in the region
In spite of the challenging global macroeconomic environment after the financial crisis, Latin America has continued to grow, and in terms of future perspectives of growth, according to the latest October 2012 World Economic Outlook report , after Asia, the continent will be the fastest growing area in the world.
Source: IMF
Within this positive scenario, the countries in which Enersis stand out for their past and expected growth rate, generally higher than the average in the Latin-American region.
|
Gross Domestric Product by country |
2009 |
2010 |
2011 |
2012 |
2013 |
|
Argentina |
0.9 |
9.2 |
8.9 |
2.6 |
3.1 |
|
Brazil |
-0.2 |
7.5 |
2.7 |
1.5 |
4.0 |
|
Colombia |
0.8 |
4.3 |
5.9 |
4.3 |
4.4 |
|
Chile |
-1.5 |
5.2 |
5.9 |
5.0 |
4.4 |
|
Peru |
0.9 |
8.8 |
6.9 |
6.0 |
5.8 |
Source: FMI
Economic and demographic growth in the region and the electricity consumption per capita increase that will come along with its development translates into expectations of high electricity demand and significant investment needed. According to the 2011 World Economic Outlook report Latin-America will require investing a total of USD 718,000 million in the industry from 2011 to 2035, USD 404,000 million in generation, USD 94,000 million in transmission and USD 220,000 million in distribution.
In the light of its position and having developed the capabilities to create value through organic and inorganic growth, Enersis must be prepared to continue capturing the projected growth in the region.
2. Benefits of the proposed transaction
Considering the elements discussed in the previous chapter, the transaction would generate Enersis and all its shareholders the benefits that will be presented in the following paragraphs.
2.1 Advantages that derive from transferring assets of Cono Sur to Enersis
· The acquisition of the shareholdings of Cono Sur is a unique opportunity to acquire assets in the region without increasing operational risk or the need of additional managerial resources, considering that Enersis currently already manages the assets contributed by Endesa through this transaction, and therefore has a deep understanding of the markets in which they operate, the quality of the assets, their competitive position, their operational, economic and financial condition.
· The assets contributed by Endesa improve the diversification of Enersis present portfolio, increasing its exposure to markets with greater potential, particularly Brazil and Colombia. Consequently, the balance of the EBITDA of Enersis, adjusted to ownership will increase. If Chile represented 46% of total EBITDA in 2011 and Brazil 36% and Colombia 10%, with the capital increase, Chile would represent 33%, Brazil 39% and Colombia 17%.
· When acquiring assets, a due diligence is normally performed. In spite of the detail of a normal due diligence, some risks remain, considering it is almost impossible to know 100% of a company in such a short period of time. In this case, the learning process about the business is guaranteed by the years of directly managing the business, which is what makes this transaction the best possible acquisition.
2.2 Improvements and optimizations of the current corporate structure
2.2.1 Putting an end to double management and development vehicle in Latin-American
· With the contribution of Endesa Spain’s shareholdings to Enersis, it becomes the only investment vehicle of Endesa Spain in the region.
2.2.2 Granting definite control
· Uncertainty related to the renewal of the Strategic Alliance is eliminated, increasing alignment of Enersis and Endesa Spain´s interests in the region.
· The transaction allows transforming into definitive the political rights grant (temporary and unilaterally modifiable by Endesa Spain) that Enersis has of Codensa and Emgesa.
2.2.3 Reducing the imbalance between management effort and consolidated figures (EBITDA, debt, net income)
· Enersis will increase its economic interest in 12 companies, 9 of which it already controls and operates and receives the goodwill of the contribution, leading to a significant reduction in the difference between current consolidated EBITDA (100%) and Enersis share of net income (43%). Considering 2011 data, the contribution of participations would allow:
i. increasing net profit of Enersis in roughly 356 ThUSD which assumes increasing Enersis’ share of net income from 43% to 63%.
ii. Enersis to receive 237 ThUSD in dividends that before would be distributed to Endesa, which, ceteris paribus, represents a 52% increase in dividends received Enersis en 2011.
2.2.4 Corporate simplification and increased visibility of flows
· The contribution of Endesa assets to Enersis allows simplifying the current corporate structure, eliminating the dispersion of the shareholdings in different vehicles. After the transaction, the visibility of the flows coming from such assets and the understanding of the business, particularly by the financial community, will allow a better understanding and possibly a greater valuation of Enersis’ stock.
· Annex (V) shows the valuations that some financial institutions perform with respect to the assets contributed, where the dispersion among valuations can be observed.
· Along with this valuation of Enersis, this capital increase creates additional value because it transforms the company, from a holding company, into a parent and, therefore should reduce the implicit discount that the market applies to holding companies today. A simplified structure minimizes any potential discount caused by considering Enersis a holding; it generates synergies/efficiencies and will add clarity to the corporate structure.
· There would also be a simplification of the companies governance, which would contribute to the efficiency and speed of the decision making process and in some cases would optimize the organizational structure allowing to increase focus of management on growth. The following may be mentioned as examples:
· Emgesa, Codensa, EEPSA, Dock Sud and Cemsa, where the shareholdings contributed would allow consolidating Enersis’ control, without requiring the support of third parties.
· Endesa Brasil and Edesur, where the shareholdings contributed would allow appointing at least one additional board member, strengthening corporate governance of Enersis.
· Also, this transaction will make it easier for Enersis to make future corporate structure simplifications leading to more efficient cost and organizational structures that will allow continuing to increase visibility in the market, with the benefits that such implies.
2.3 Capture regional growth
2.3.1. Increase in financial muscle to capture growth
· The structure of the proposed transaction allows Enersis to grow significantly in its current asset base and increase control of its subsidiaries, but at the same time, to obtain resources to finance its growth. In fact, the acquisition of the shareholdings does not imply a cash outflow, but on the contrary, implies raising new resources that will remain in Enersis and would allow facing a new cycle of growth and creation of value.
· Therefore, the transaction assures the company the financial muscle before beginning to invest, avoiding consequently the refinancing risk in the current volatile market and difficult debt access environment
· Having this additional financial capacity, Enersis may also, if necessary, move quickly to close any “opportunistic” operation.
· Into the future, Enersis will benefit from the dividend increase received from the shareholdings contributed by Endesa.
2.3.2 Higher position in the financial market
· The transaction will significantly improve the liquidity of the stock, increasing floating capital in around 50%-60% (depending on the subscription %) which could lead to an increase in the number of shares traded daily on the Chilean Stock Exchange as well as ADRs on the New York Stock Exchange
· Enersis will increase its weight in the IPSA index, which could lead to an increase in the demand for the stock, since Enersis would be positioned as the second largest firm in terms of market capitalization in the Santiago Exchange, and number one in terms of weight in the index.
2.3.3 Optimum use of resources for growth
· The proceeds raised with this transaction will be used to grow in three major areas:
1. Acquisition of minority shareholdings in companies controlled by Enersis.
2. Taking advantage of M&A opportunities that derive from the consolidation of the markets in which Enersis operates.
3. Organic development in generation and distribution expansion projects.
2.3.3. A Organic development with expansion projects:
· The need of new generation capacity in the countries in which we operate is very significant. Therefore, estimates indicate that during the following ten years, 62 GW of new capacity will be needed in Brazil, 9 GW in Chile, 7 GW in Colombia and 9 GW in Peru.
· The Enersis Group, through Endesa Chile, has a great portfolio of projects in different stages of development. Enersis is carrying out projects for a total of 11,400 MW, of which 2,319 MW are in the basic engineering stage, 4,322 MW are in the feasibility stage, 3,384 MW are in the pre-feasibility stage and 1,376 MW are in the conceptual development stage. Of these, 2,307 MW already have environmental approval. The projects are details in Annex (VI)
· The experience of the Enersis Group in the development and construction of Greenfield projects, with more than 4,000 MW built during the last fifteen years, and the engineering, promotion and management of project capabilities developed support the future development of this portfolio and the creation of value for shareholders.
· Not only has the initial development of these projects contributed to the guaranteed continuity of each country’s electricity system supply, but it has also created value for the shareholder. This creation of value is ensured by the internal capacities developed in engineering, the thoroughness of studies prior to developing investments, the selection of efficient and competitive projects based on their profitability, and the rigor with which each operation is executed and controlled.
· In terms of distribution, the presence of Enersis in five of the major metropolitan areas of the region (Buenos Aires, Bogota, Lima, Rio de Janeiro, and Santiago) is beneficial due to the demographic tendency of high population concentration in the large urbanizations. This factor, along with the progressive increase of electricity consumption per capita that is still far from the OCDE nations, suggests a higher need for investments in new customer connections, low voltage networks, substations, and sub transmission networks that allow an extension in range and maximize the capacity of networks. The regulations in countries where we operate promote this investment with recognized and attractive profitability, excluding the particular case of Argentina due to its ongoing development of a new regulatory framework.
· In this aspect, the development of concessions Enersis has been a part of maintains a rhythm of growth that has been sustained throughout the last years, which translates into:
o An increase of 400,000 new customers a year
o 2.4 TWh increase of energy distributed annually
o An increase in network capacity by 1,207 MVA a year
o The development of 6,450 km of distribution lines of high, medium and low voltage a year
· In the future, this growth rate is expected to continue or even intensify, as well as maintaining a stable and favorable regulatory framework, as far as the economies and companies where Enersis is present do so as well.
Due to the previously mentioned, Enersis has the experience and capacity to capture the organic growth that Latin America will undergo, and create value through the investments that are to be executed in generation as well as in distribution.
2.3.3. B Acquisition of other minority interests in companies controlled by Enersis
After the capital increase takes place, several minority interests of the companies controlled by Enersis will be owned by third parties. It would be very beneficial for Enersis to acquire these shareholdings for the following reasons, which are in line with those described in paragraphs 2.1 and 2.2.
· They do not increase Enersis risk profile:
o The acquisition of minority interests implies an opportunity to acquire assets in the region without increasing the industry risk profile or the need of additional management resources, given that Enersis currently already manages the assets and therefore has a deep understanding of the markets in which they operate, the assets quality, their competitive position, and their operational, economic and financial condition.
· They reduce the imbalance between management effort and consolidated figures (EBITDA, debt, net income):
o Through these operations, Enersis will increase its economic interest in companies which it already controls and operates, leading to a significant reduction in the difference between consolidated EBITDA and Enersis’ share of net income.
o This also will allow improving access to the flows generated by the operations of its subsidiaries without increasing debt to distribute dividends outside the scope of consolidation.
· They simplify the corporate structure even more:
o These operations allow Enersis to continue simplifying the corporate structure even more, reducing the dispersion of the shareholdings in different vehicles, and therefore increasing the visibility of the flows coming from such assets and the understanding of the business by outsiders, improving analyst’s valuation of Enersis’ stock.
Given the nature of these transactions, it is not possible or convenient for Enersis to disclose details on which specific operations there is interest in, considering that it constitutes strategic information that could harm social interest. It is not possible to disclose an implementation timetable that would not compromise the creation of value of these transactions either.
2.3.3. C Taking advantage of M&A opportunities that derive from the consolidation of the markets in which Enersis operates
Inorganic growth and the creation of value by increasing efficiency in the companies acquired has historically been a source of growth for Enersis.
There are currently a great number of merger and acquisition transactions in the electricity markets in which Enersis operates. Participation in these consolidation processes of the industry is an opportunity, for a company with Enersis’ position and experience, to create value.
Given the nature of these transactions, it is not possible or convenient for Enersis to disclose details on which specific operations there is interest in, considering that it constitutes strategic information that could harm social interest. It is not possible to disclose an implementation timetable that would not compromise the creation of value of these transactions either. In any case, it is reasonable to expect that there will be several opportunities in the market in the near future that Enersis can take advantage of. Some of them are mentioned below as examples.
· Expected consolidation of the industry in Brazil in the short term:
· The maturity of the distribution sector in the country makes scale synergies more important in order to maximize returns and Enersis has the advantage of owning significant assets both in the South/Southeast (Ampla) as in the North/Northeast (Coelce), that have proven to be particularly effective in reducing losses, integrating, and increasing efficiency.
· More than 64 distribution companies and the government have announced their interest in the consolidation of the industry.
· There are several inefficient assets with serious economic difficulties that need operational and financial restructuring, a process in which Enersis has extensive experience with excellent results.
· Enersis’ competitors have been very active in the consolidation process: among others, CPFL has consolidated in the renewables sector in Brazil, Iberdrola acquired Elektro and Cemig has made acquisitions in transmission and in the distribution company Light.
· The Colombian government is expected to continue with its privatization plan of electricity companies:
· The government has been privatizing some of their regional distributors, such as the acquisition of Empresa Eléctrica de Cundinamarca by a consortium in which Codensa participates, the acquisition of distributors Santander and Norte Santander by EPM and the acquisition of Empresa de Energía de Boyacá by the investment fund Brookfield Asset Management.
· The government has announced its intention to privatize additional regional distribution companies and some generators state owned, although they have still not disclosed a specific timetable.
· The privatization processes of distributors Meta, Quindío, Nariño, Cauca, Huila and Caquetá and the generator Gecelca are expected to begin in 2013.
· There may also be opportunities in privatization processes in Peru:
· Only the distributors of Lima and Ica are currently in private hands, as the result of privatization processes carried out in the nineties. The rest of the distribution companies are still owned by the state. The government has expressed the potential of incorporating a private partner in order to achieve more efficient operations.
· The intention to sell an important interest in generation has also been announced.
3 Conclusions:
3.1 Best interest of the transaction
In the light of background information and the benefits exposed and based on available information to date, I state that, to the effect of article 147 of the LSA, I think that the Transaction in terms of both, the contribution of Endesa shareholdings, and in terms of the contribution in money of other shareholders of Enersis, is attractive from a strategic, business, and operational point of view and is very convenient in terms of Enersis’ best interest.
Naturally, the economic terms of the transaction must be correct, as argued later in this document.
3.2 Use of proceeds
In the light of background information and the benefits exposed and based on available information to date, I state that, to the effect of article 147 of the LSA, my opinion is that:
I. There are specific opportunities for Enersis to acquire minority interests, creating value for its shareholders. The size of these operations could use a significant part of the proceeds raised through the capital increase.
II. Enersis may take advantage of these M&A opportunities offered by the electricity industry in the region.
These opportunities, all together, adding organic development opportunities, allow using the proceeds raised through the capital increase in an optimum manner, creating value for shareholders.
Additionally, Enersis will be provided with the economic resources before the transactions are executed, representing a particularly relevant aspect considering current financial markets conditions.
Part of the cash, which will be minimized in amount and time, may not be used. This inconvenience is definitely lower than the undoubted greater advantages that the structure of the transaction offers in terms of growth for the company.
The long and successful experience of Enersis in carrying out growth operations represents a guarantee in terms of optimum use of funds.
V. Economic terms of the transaction – Market conditions
Three valuations have been received on the value of Cono Sur, that is summarized below.
V.l.1 Report of expert appraiser Mr. Eduardo Walker H.
Mr. Walker, as expert appraiser, was commissioned to perform a valuation of the shares that Endesa could contribute to the Transaction. His report, dated July 23, 2012, estimates the total value of such shareholdings to be USD 4,862 million.
The general method used by the Expert appraiser in his valuation of the assets of Endesa consisted in the sum of the parts. A DCF valuation of each company was calculated and then contrasted to market multiples.
Mr. Walker had access, among other information, to financial statements, projections of fundamental variables estimated by Enersis and by the companies being valued, detail of assets and liabilities with related parties, summary of the Company´s main contracts with third parties and current industry regulatory frameworks.
The main considerations of Mr. Walker’s analysis to highlight are:
· Discount rate: the expert appraiser was conservative, using parameters, such as the 20 year US Treasury bond as the risk free rate; instead of the 10 year term frequently used by the financial community, due to its maximum liquidity- which implies an upward bias, and therefore a negative effect on the outcome of his valuation.
· Pipeline of projects: they were not included in the value of the projects that are currently in the development phase.
· The value of the tax advantage of the losses of holding companies was not included in the valuation: although the negative cash flows of the holding companies were taken into consideration, the positive tax effect of those cash flows was not considered in the valuation.
· Perpetuity values: the expert appraiser has been conservative. In most cases such perpetuity is considered not to increase in real terms (with the exception of Ampla and Coelce, in which a real growth rate of 0.5% was established).
· Multiples determined by the valuations: Once the present value of the future cash flows of each company was obtained, the expert appraiser calculates the multiples that allow comparing his valuations to market values of other comparable companies. In general, the multiples of the companies valued are within the ranges for the comparable companies.
|
In summary, according to my understanding, the valuation report of the expert appraiser is based on a thorough analysis of the operations of each company considered, delving into each and every one of the assumptions underlying the projections and contrasting its coherence in the context of its corresponding market. The valuations have been performed with a conservative prism, not only with respect to the restrictive adjustments included in the projections of flows, but also in the calculation of the respective discount rates, the perpetuity values, by not considering the value of the projects in the pipeline and by not considering the tax advantage of the losses of a holding company. |
V.1.2 Report of Independent Valuator appointed by the Board of Directors: IM Trust
IM TRUST ASESORÍAS FINANCIERAS S.A. was commissioned in order to independently and appropriately evaluate the transaction proposed by Endesa in Enersis. Its report, dated October 24, 2012, includes, among other things:
· The calculation of the value of Enersis and also of Cono Sur using the DCF method,
· Converting the value calculated to market conditions
IM Trust had access to the same information mentioned previously when referring to the expert appraiser Walker. Additionally, a virtual data room was placed at their disposition, where the questions asked by the valuators (IMTrust and Claro y Asociados) were answered.
First of all, IMTrust used the discounted cash flow method (DCF) for its valuation of Enersis and Cono Sur. Also, on the basis of public information and the opinions of independent analysts, the valuations calculated were compared, in terms of magnitude, to market conditions and the value of companies from similar industries, using multiples of comparable companies.
The main considerations of the DCF valuation are:
· Discount rate: uses parameters that assume an upward bias and, therefore a negative effect on the outcome of their valuation, such as the 20 year US Treasury bond as the risk free rate; instead of the 10 year term frequently used by the financial community, due to its maximum liquidity.
· Cash flows: the projections disclosed by Enersis for the valuation were conservatively adjusted by the application of IMTrust criteria. In distribution, the regulated electricity price of every country is adjusted due to the revision of the regulator WACC negatively affecting the profit of the activity.
· Perpetuity values: IMTrust’s estimate of the perpetuity is conservative, due to the application of normalized cash, the use of a zero growth rate in real terms and the strict limitation of concession periods without exception.
· Pipeline projects: also presents conservative elements. It assigns no value to the expansion of the business, including only the projects under construction, and assigning zero value to the 11,400 MW that Enersis currently has in different stages of development.
· Value of the Argentine option: even though IM Trust considers the discussion of a new regulatory framework as announced by Argentine authorities in August 2012, it adopts a completely conservative position by including a value of zero to all shareholdings in this country, assigning therefore zero probability to the normalization of the regulation in this country.
· Control and synergies premium: IM Trust also adopts a conservative position because it considers that the transaction does, by no means, imply a change in control or management of assets, and therefore has assigned no value to the Control and synergies premium.
· Provisions: The valuation has been discounted due to the estimate of higher legal contingencies provisions than the amount provisioned by the Company.
· Value from having only one corporate vehicle: it does not consider any value due to having only one management and development vehicle in South America.
· Value of not going through with the transaction: it does not consider the value of the possible consequences of not going forward with the transaction.
· The increase in value due to the increase in the stock’s liquidity, explained previously is not considered.
· Acquisition of minority interests: although it is stated that Enersis may purchase minority interests creating value, this value is not considered in the valuation.
Applying the DCF method, the value of Cono Sur calculated is USD 4,709 million, while the multiples of comparable companies analysis provides a result of USD 4,165 million.
The value obtained using market consensus analysis is USD 3,827 million.
Methodology and results to determine if the proposed transaction adjusts in terms of price and conditions to those prevailing in the market
The methodology considers the assumption that the market value of Cono Sur must be consistent, in relative terms, with the market value of Enersis. For this reason, it concludes that Cono Sur represents between 30.9% and 32.5% of the value of Enersis.
Considerations about this matter will be developed later in this document.
Summary of the use of proceeds analysis
Also, with respect to the use of resources, IMTrust applies a conservative prism.
It recognizes the use of the money contribution of the capital increase to acquire the following minority shareholdings that would imply value creation:
· Acquisition of minority interests in Coelce (41.1%), Edegel (37.5%), Edelnor (24.3%) and Endesa Chile (5.0%)
· Assumes a 75% probability of success equally to all
As a result, the amount estimated to be used to purchase minority shareholdings falls between USD 1,764 million and USD 1,898 million, which represents an important part of the cash that would be raise through the capital increase.
It assumes that the balance of cash, not used to purchase minority interests, is maintained in cash and invested at a 1% annual rate before taxes. This is because, although it admits the possibility of acquisition opportunities showing up in the short term, it is not considered. Financing organic projects is not considered either.
.
Summary of the accretion and dilution exercise
The outcome of this accretion and dilution exercise is observed to be neutral in 2013 and accretive in 2014 y 2015.
Sensitivity analysis is performed with respect to the price per share of the capital increase and the value of Cono Sur shareholdings.
The accretion and dilution analysis is presented and performed by using a methodology that is standardly used in the market.
|
In summary, according to my understanding, the report of IMTrust reflects a solid and deep analysis of the companies involved. The valuations performed, in general, have a conservative bias. With respect to the exchange ratio between Cono Sur and Enersis, comments will be presented later in this document. Although proceeds are only used to purchase minority interests, the transaction is accretive in 2014 and 2015 in terms of net profit per share of Enersis. Finally, the strategic sense of the transaction, which in general produces positive effects on Enersis, is acknowledged, and concludes that the transaction would contribute to the best interest of the Company and its shareholders if carried out at market conditions. |
V.1.3 Report of Independent Valuator appointed by the Directors’ Committee: Claro y Asociados
Claro y Asociados Ltda was unanimously appointed as valuator, in order to independently and appropriately evaluate the transaction proposed by Endesa in Enersis. Their report, presented on October 24, 2012, includes among other things:
· A combined valuation including the DCF method, comparable multiples and Cono Sur transactions.
· Converting the value calculated to market conditions
Claro y Asociados had access to the same information mentioned previously when referring to IMTrust, including the virtual data room.
First of all, Claro y Asociados used the discounted cash flow method (DCF) to perform its valuation of Enersis and Cono Sur, obtaining a USD 4,627 million value for Cono Sur.
The main criteria of the valuation to highlight of the analysis performed by Claro y Asociados are:
· Discount rate: as compared to the other valuators, and to what is most frequently used in this type of analysis, they use the discount rate of local currencies rather than converting the cash flows to USD based on the expected values of the exchange rate to discount of the WACC in USD. The parameters used are based on a 20 year risk free rate (except in Chile), which introduces a conservative result.
· Perpetuity values: A perpetuity assuming a 3% growth rate is considered for Codensa, and 2% for Ampla and Coelce. Taking our long term inflation projections of these countries into account, 3.3% and 4.1% respectively, implies a 30 bps negative growth rate in real terms for Codensa and 210 bps for Ampla and Coelce, a hypothesis unprecedented and extremely conservative.
· Value of the Argentine option: the position adopted by Claro y Asociados with respect to the shareholdings in Argentina are even more conservative than the position adopted by IMTrust, resulting in a USD 12 million negative aggregate value, therefore assigning a zero probability to the normalization of the regulatory framework of the country.
· Control and synergies premium: adopts a conservative position, considering that the transaction by no means implies a change in control or management of assets, and therefore has assigned no value to the control and synergies premium.
· Increase the liquidity of the stock: adopts a conservative position by not assigning a value to the increase in the liquidity of the Enersis’ shares.
Polynomial formula: the valuation performed by Claro y Asociados is composed by weighting the results of three valuation methodologies, DCF, stock market multiples, (which obtains a USD 4,179 million value for Cono Sur) and multiples of comparable transactions (which obtains a USD 4,914 million value for Cono Sur), applying an 80%, 15% and 5% weight, respectively. The value of Cono Sur calculated by applying this method is USD 4,579 million.
Methodology and results to determine if the proposed transaction adjusts in terms of price and conditions to those prevailing in the market
Claro y Asociados considers that Enersis represents the best benchmark for the valuation of the Contributed Assest and therefore considers that the fair price determination is a relation in terms of an exchange value between Enersis and the shareholdings.
According to Claro y Asociados, Cono Sur represents:
· 34.97% of Enersis calculated as a relation of the DCF of Enersis and Cono Sur
· 35.35% of Enersis, calculating Cono Sur with the EV/EBITDA multiple of Enersis applied to the EBITDA of Cono Sur.
Considerations on this matter will be presented later in this document.
Summary of the use of proceeds analysis
Claro y Asociados indicates that the M&A investment opportunities, purchase of minority interests and advanced stage Greenfield projects may reach a value that is consistent with the amount of the capital increase and that Enersis has the capability to manage them.
Impact of the transaction: methodology and results of the accretion and dilution exercise
The capital increase transaction, by itself, adds less value than the USD 4,245 million value of Cono Sur.
The potential accretion and dilution impact of the use of proceeds buying minorities and M&A operations will depend on the timing and pricing in which the operations take place.
|
In summary, according to my understanding, the analysis of Claro y Asociados, based on comprehensive and thorough information they have had access to, offers a solid result, in terms of the DCF, although in general, it stands on conservative assumptions. In terms of its references to an exchange ratio between Cono Sur and Enersis, it will be discussed later in the document. Finally, it concludes that the transaction strategically makes sense for Enersis and in general should produce positive effects on the Company and would contribute to the best interest of Enersis and its shareholders, if carried out at market conditions. |
V.1.4. Directors’ Committee report
According to my understanding, the Directors’ Committee report identifies some important positive aspects of the transaction and that I definitely agree with:
· With respect to the shareholdings to be contributed by Endesa, it identifies it as a good opportunity because:
o It relates to companies that Enersis already knows and has managed for a long time.
o It would consolidate the political rights currently granted on a temporary basis.
o It would transform Enersis in the only investment vehicle in the region.
o It would allow Enersis to receive benefits from the first day in which the contribution is materialized.
o It would increase the economic interest of Enersis in the assets in which the Company already participates, which already manages and consolidates.
o It would allow reducing the “holding discount” effect.
o All these results would be achieved through only one transaction.
· There are, currently, numerous strategic investment opportunities in the region, representing significant amounts in the short and long term.
· The availability of cash as a result of the capital increase will allow:
· the acquisition of the minority interests in the companies that Enersis already consolidates, which will be positive for Enersis due to the reasons discussed previously.
· the strategic acquisitions that the region offers, in which Enersis has a broad and successful track record
· financing Enersis’ organic development projects
The Committee, in its report, also highlights the possibility of, temporarily, not using the cash raised through the capital increase. This aspect has been discussed throughout this document: this inconvenience is definitely lower than the greater advantages that the transactions structure offers in terms of growth for the Company.
Aspects highlighted individually by directors:
· A possible discount on the value of Cono Sur. Several arguments have been discussed in this document about the possibility of having a premium on the value of Cono Sur, and not a discount.
· The invalidity of Mr. Walker’s appraisal valuation. The other two directors insisted on the validity of Mr. Walker’s appraisal valuation, considering that there has not been any argument presented that would establish that Mr. Walkers appraisal report is invalid. I agree with the validity of Mr. Walker appraisal report.
· The acquisition of minority interests in companies that Enersis already consolidates would not be strategic. Several arguments have been discussed in this document against such opinion.
· The M&A operations could take place without the capital increase. The Directors’ Committee report itself established that t is an advantage to have resources available to continue Enersis growth process.
.
The Directors Committee, in their report , also make some recommendations:
· Sole investment vehicle in the region: we recommend its formalization. I think the formalization of Enersis being the only management and conventional energy project developer in the region (excepting EGP) is correct, in due time.
· Reps and Warranties referring to companies in which Enersis currently has no stake. I understand this concern, but it is also necessary to keep in mind that they are companies that have been managed by Enersis for many years.
· Tax contingencies caused by the transaction: I understand this issue in general and must be analysis with depth and detail.
· 65% conditionality: in general it is a well-known topic because it is covered by Enersis bylaws. In due time, the final terms of this conditionality must be disclosed.
· Lack of information about price fixing mechanism: as the report itself states, it is a matter that must be resolved by the shareholders.
V.2 Considerations about the exchange ratio
The expert appraiser, Walker, was commissioned to perform a valuation of Cono Sur, while the valuators, IMTrust and Claro y Asociados were to, also, pronounce themselves about the market conditions that would make the value of the money contribution parallel to the contribution in assets. From this point of view, both valuators refer to the possibility of using an exchange ratio between Enersis and Cono Sur.
The use of an exchange ratio as the method to determine the amount of the capital increase, that is, to fix the value of the assets of Cono Sur as a percentage of the total value of Enersis, presents a series of inconveniences that make it not advisable:
· Indetermination of the amount of the capital increase: the determination of a fixed number of shares would leave the final value of the assets in the hands of the market and therefore also the final amount of the capital increase. This would imply that the minority shareholders will not know the amount of cash they need to invest in order to subscribe their portion of the capital increase and therefore avoid dilution
· Discrimination: given that the contribution in assets is made by only one shareholder, and the corresponding number of shares to receive in exchange is fixed, the indetermination just mentioned only affects the shareholders that will contribute in cash, and therefore not to all shareholders alike
· Minimum price: this type of transaction would be subject to potential speculative stock market moves that could put downward pressure to the price of Enersis.
· Market conditions: the transaction must be carried out at market conditions. When it is said that the transaction must be carried out under market conditions, refers to the value of the transaction carried out in the market under normal conditions that could pick up value creation levers and factors not considered in the stock market price, and not literally referring to the specific price of the stock at a specific moment in time that could be affected by many exogenous factors.
· Valuation: in a scenario of a significant Enersis stock price increase, the final contribution of assets could lead the value of the final contribution in assets exceed the ranges established by valuators, which would go against the spirit of the evaluation process. Additionally, it would make the transaction appear to be imbalances for those shareholders that subscribe in cash since they would be forced to increase their investment if they decided to exercise their preemptive right to subscribe.
· Legal complexity: The formulation of a shareholders meeting summon and the dynamics of the approval process during the meeting would be extremely complex considering that a transaction with these characteristics has not occurred before. Its legal admittance would not be assured.
Due to all the above, the use of an exchange ratio must be discarded and the implementation of a procedure to fixed an absolute value for the assets to be contributed by Endesa and for the calculation of the amount of the capital increase is advisable.
Although the use of an exchange ratio due to the inconveniences previously mentioned are not advisable, it is appropriate to think in terms of the relation between the values of Cono Sur and Enersis, as it is developed later in this document.
Finally, even though I recommend not using an exchange ratio, the proportion between the value of Cono Sur and the value of Enersis proposed by IM Trust and –although to a lower extent by- the proposal of Claro y Asociados, seems sub estimated: such exchange ratio dies not consider the creation of value, in the short, medium and long term that the transaction implies and that would modify that percentage.
V.3 Adjustment of the DCF valuations to market conditions
· The Discounted Cash Flow (DCF) with conservative criteria such as those described by theevaluators in their reports place the value of Cono Sur within a range from USD 4,627 y 4,862 million.
· When incorporating these shareholdings, you could be willing to pay up to the value resulting from the DCF calculated with conservative criteria and guarantee the shareholder a minimum retribution equal to the required cost of capital.
· The DCF figures are supported by transactions carried out by comparable companies, as shown in the report of Claro y Asociados. With these considerations, the value of Cono Sur would reach USD 4,900 million.
· The market price is frequently used as the lower limit price of a transaction, and therefore most operations are carried out at a price in between the DCF and the market value (recent acquisitions in Chile paid premiums of up to 50% above the market price).
· Both valuators relate the market value of Cono Sur to the value of Enersis and estimate a proportion of 31.7% and 35.2%. This percentage, called the exchange ratio, is used to calculate the value of Cono Sur according to different price quotes of Enersis. Both reports are serious and independent and therefore consider appropriate to calculate the average of both (33.4%).
· The matter now is to determine which date or dates for the price quote of Enersis are appropriate for this transaction and that better represent the market value:
o Future moment when capital increase takes place
o Today
o The moment of the announcement, a non-distorted price
o A combination
· This is a high impact matter, considering that the price of Enersis has fluctuated significantly since the announcement of the transaction.
· In my opinion, using a future value would leave the transaction open, undetermined and could lead to discrimination among shareholders. I therefore discard this alternative.
· Take the price as of today as the only reference would not be convenient:
o The value is currently affected by the capital increase announcement. Since the announcement, the price of the stock declined 13% while the IPSA fell only 1%.
o The standard practice adopted by companies in acquisition operations is to consider the price the day before the respective operation.
· Due to all this, in my opinion, the range of the value, at market conditions, for this transaction should be identified the following way:
o The lower limit is obtained by using the current price of Enersis as a reference (163.8 Ch$/share) and
o The upper limit should be obtained using the market price of Enersis the day before the announcement (187 Ch$/share). This last price is a good reference because it is not affected by the capital increase and is similar to the average value over the past 12 months before the announcement.
This leads to a range going from USD 3,709 to 4,235 million.
· The values within the established range (USD 3,709-4,235 million), I consider represent the best market reference for the price of Cono Sur. The independent valuators determined a USD 4,172 million value of Cono Sur by Multiples (financial ratios observed in comparable companies that trade in the stock exchange).
· The mid-point of the range that I consider adequate (USD 3,972 million) implies a 16% discount compared to the DCF value, giving Enersis shareholders the assurance that they will receive a return sufficiently attractive above the cost of capital.
|
Andrea Brentan
|
Annex I
Corporate shareholdings that Endesa owns in South America and that will be contributed through the capital increase:
|
Company |
Shareholding |
|
Argentina |
|
|
Edesur |
6.23% |
|
Inversora Dock Sud |
57.14% |
|
Yacylec |
22.22% |
|
Cemsa |
55.00% |
|
Brazil |
|
|
Endesa Brasil |
28.48% |
|
Ampla Investimentos |
7.70% |
|
Ampla Energía |
7.70% |
|
Chile |
|
|
San Isidro |
4.38% |
|
Colombia |
|
|
Emgesa |
21.60% |
|
Codensa |
26.66% |
|
Peru |
|
|
Distrilima |
34.83% |
|
Cabo Blanco |
80.00% |
|
Generalima |
100.00% |
Annex II
Main Acquisition processes in which Enersis has successfully participated:
· Acquisition, in a consortium, of 60% of Empresa de Distribución Eléctrica de Lima Norte S.A., Edelnor (Peru, 1994). The distribution company Edechancay was also acquired and was later absorbed by the first.
· Acquisition, in a consortium, of 60% of the generation company Edegel (Peru, 1995).
· Acquisition, in a consortium, of 70.26% of the shares of the distribution company previously called Companhia de Electricidade do Río de Janeiro S.A., Cerj, whose current legal name is Ampla Energía e Servicos S.A. (Brazil, 1996).
· Acquisition of 99.9% of Central Hidroeléctrica de Betania (Colombia,l996).
· Acquisition of 78.9% of the generation company Centrais Elétricas Cachoeira Dourada (Brazil,1997).
· Acquisition, in a consortium, of 48.5% of the distribution company of Bogota, Codensa, and an additional 5.5% of Empresa Energía de Bogotá (Colombia, 1997).
· Acquisition, in a consortium, of 48.5% of the generation company of Bogota, Emgesa, and an additional 5.5% of Empresa Energía de Bogotá (Colombia, 1997).
· Acquisition, in a consortium, of 89% of the distribution company Companhia Energética de Ceará S.A., Coelce (Brazil, 1998).
· The Group was awarded the electric interconnection project between Argentina and Brazil (1998).
· Increase in the stake of Endesa Chile from 17.2% to 25.28%, that later become a subsidiary of Enersis (Chile, 1996). Later, an additional 35% was acquired reaching a total 60% of ownership (Chile, 1999).
· Acquisition of an additional 18.5% ownership share of Ampla, exercising an option that Endesa had given Enersis and Chilectra, by mans of which Enersis reached a direct and indirect 57.4% ownership share of Ampla (Brazil, 2000).
· Acquisition of the generation company Termocartagena (Colombia, 2006).
· Merger of generation companies Edegel and Etevensa, the latter owned by Endesa. Through this operation, Enersis also consolidates the assets of the latter adding thermal generation assets to a portfolio predominantly hydroelectric (Peru, 2006).
· Acquisition of 82.34% ownership share of distribution company Empresa de Energía de Cundinamarca (Colombia, 2009).
· Endesa Chile’s acquisition of an additional 29.35% of its Peruvian subsidiary, Edegel, increasing its direct and indirect ownership share to 62.46% (2009). The package was purchased from Endesa Latin-American.
· Acquisition of an additional 24% of its Peruvian subsidiary, Edelnor, increasing its direct and indirect ownership share to 57.53% (2009). The package purchased was owned by Endesa Latinoamerica.
· Acquisition, in a consortium, of 60% of the generation company, Central Costanera, currently Endesa Costanera and 51% of the distributor of the southern part of Buenos Aires, Edesur, in 1992, 59% of the generation company Hidroeléctrica El Chocón in 1993, and an additional 39% of Edesur in 1995, becoming the controlling shareholder, and another additional 10% of Edesur in 2001 (Argentina).
Annex III
Examples of real cases that prove the ability to create value through synergies and new efficiencies transforming the acquired companies in modern and efficient companies.
· Taking control of the Peruvian distribution company, Edelnor, required transforming the company: During the first years managed by Enersis, losses were reduced from 18.8% in 1994 to 9.8% in 1999, the interruptions were reduced 63% in terms of frequency and 80% in time length and the EBITDA/Revenues ratio went from 5% to 28%.
· In Brazil, taking control of the distributor Ampla was also a historic event. From 1996 to 2001, losses were reduced from 29.3% to 22.7%, interruptions were reduced 43% in terms of frequency and 56% in time length and the EBITDA/Revenues ratio went from -23% to +38%.
· Similarly, the Colombian distribution company experienced an amazing transformation after taking over control: losses were reduced from 18.8% in 1998 to 10.2% in 2003, the frequency and duration of interruptions fell 86% and 48% respectively and EBITDA went from representing 27% of revenues to 33%.
· Outstanding improvements have been achieved in the availability of power plants as well, for example , in Chile, they went from 89% before takeover of Endesa Chile by Enersis to 96% by the end of 2011 and the capacity rebooting of Celta, Cartagena and Guavio, in Chile and Colombia, allowed obtaining an additional 140 MW of capacity.
· The stakes in the Peruvian subsidiaries Edegel and Edelnor that were acquired from Endesa in 2009 have significantly increased its value. The current market value of the USD 375 million and USD 128 million investment required to purchase 29.35% of the generator and 24% of the distributor is USD 568 million and USD 267 million respectively.
· The distribution business of our Argentina company Edesur also presented a successful performance after being acquired by Enersis: losses were reduced from 20.9% in 1993 to 9.9% in 1998, and the quality indexes improved substantially with a 58% reduction in frequency interruptions and 78% in duration. In financial terms, the EBITDA/Revenues ratio increased 10 times during that period, going from 3% to 33%. An d in generation, rebooting the capacity of Endesa Costanera’s steam turbines carried out from 1992 to 1996 allowed capacity to increase from 350 to 1.138 MW.
Annex IV
a. Generation projects developed by Enersis
o Expansion of Santa Rosa with a new 123 MW gas turbine in Peru, which began operations in 1996.
o GasAtacama, 780 MW combined cycle in Chile that began operations from 1999 to 2002. The Enersis Group has 50% share of
o Yanango and Chimay, hydroelectric plants with 194MW of installed capacity in Peru which began operations in 2000.
o Tal Tal, 245 MW thermal gas power plant in Chile that began operations in the year 2000.
o Expansion of Endesa Costanera in Argentina, taking advantage of the steam turbines to install a 320 MW combined cycle (+223 MW) which began operations in 1997 and the installation of a second 851 MW combined cycle that began operations in 1998.
o Ralco, 690 MW hydroelectric power plant in Chile that began operations in 2004 contributing 10% of the electricity of the Central Interconnected System.
o Central Térmica Fortaleza, 322 MW combined cycle, in Brazil, began operations in 2003, with the capacity to serve one third of the State of Ceará.
o San Isidro II,399 MW combined cycle, in Chile, began operations in open cycle in 2007 and as a fuel oil combined cycle in 2008, and as a gas combined cycle in 2009
o TG Quintero, 257 MW open cycle gas power plant in Chile, began operations in 2009.
o 200 MW expansion of Santa Rosa (total 429 MW in open cycle), in Peru, began operations in 2009.
o .
o Palmucho, 32 MW hydroelectric plant in Chile, began operations in 2007.
o Canela, 18 MW wind farm in Chile, began operations in 2007. First of its kind to inject electricity into the Central Interconnected System
o Ojos de Agua, 9 MW mini hydroelectric plant in Chile, began operations in 2008.
o Canela II, 60 MW wind farm in Chile, began operations in 2009.
o Bocamina II, 370 MW coal thermal power plant in Chile, commercial operations began this past October 20.
o 400 MW Quimbo Hydroelectric power plant in Colombia currently under construction.
o Additionally, Enersis was critical in the promotion of the construction of the Quintero LNG regasification terminal, participating with a 20% share, that is fundamental to the supply of gas to the central region of the country and that supplies fuel to the San Isidro II power plant and to the TG Quintero power plant, among other installations. The terminal began its fast track operations in 2010, reaching a total processing capacity of 9.6 million m3 per day by the beginning of year 2011
b. Main distribution projects developed by Enersis
o During the last 10 years Chilectra has increased its customer base in 350.000 and its electricity distribution in 4.1 TWh which has required increasing its lines 1,975 kilometers.
o In Brazil, Ampla and Coelce have added 2.3 million customers and
o 7 TWh of electricity distributed within the same period adding 75,985 kilometers of lines.
o In Colombia, Codensa has increased its customer base in 645.000 and its electricity distribution in 3.9 TWh which has increased its lines 5.112 kilometers.
o In Peru, Edelnor has increased its customer base in 277.000 and its electricity distribution in 2.9 TWh which has required increasing its lines 4.902 kilometers.
o Finally, in Argentina, Edesur has added 292.000 customers and 4.2 TWh of electricity distributed needing to add 1.083 kilometers of lines.
Annex V
The valuation of some analyst of some of the assets contributed, showing the great dispersion among certain valuations.
|
USD million |
|
Jul – 30 |
Jul – 30 |
Jul – 27 |
Jul – 27 |
Jul – 26 |
|
Company |
ELA (%) |
GS |
LV |
Sant |
BoA |
Citi |
|
Dock Sud |
40.0% |
|
|
|
|
|
|
Fortaleza |
28.5% |
587 |
|
665 |
527 |
1,059 |
|
Cachoeira |
28.4% |
1,267 |
1,883 |
1,419 |
1,418 |
1,778 |
|
CIEN |
28.5% |
502 |
|
1,162 |
579 |
603 |
|
Ampla |
21.1% |
1,745 |
1,016 |
1,519 |
1,408 |
2,204 |
|
Coelce |
15.2% |
1,846 |
2,373 |
1,510 |
1,463 |
2,111 |
|
San Isidro |
4.4% |
|
|
|
576 |
|
|
Pangue |
4.4% |
|
|
|
710 |
|
|
Emgesa |
21.6% |
4,008 |
3,854 |
4,827 |
5,155 |
3,942 |
|
Codensa |
26.7% |
5,070 |
3,568 |
3,318 |
3,263 |
4,050 |
|
Edelnor |
18.0% |
907 |
1,068 |
1,194 |
1,068 |
746 |
|
Piura |
96.5% |
|
|
|
79 |
266 |
Annex VI:
Enersis’ portfolio of generation projects
o In Chile:
· 826 MW in conceptual development
· 1,343 MW in pre-feasibility (120 MW with environmental approval)
· 1,133 MW in pre-feasibility (8 MW with environmental approval)
· 2,140 MW in basic engineering (1,641 MW with environmental approvals)
o In Colombia:
· 409 MW in pre-feasibility
· 623 MW in feasibility
o In Peru:
· 50 MW in conceptual development
· 1,220 MW in pre-feasibility
· 157 MW in feasibility
· 188 MW in basic engineering (with environmental approvals)
o In Brazil:
· 500 MW in conceptual development
· 412 MW in pre-feasibility (350 MW with environmental approvals)
· 2,409 MW in feasibility
DISCLAIMMER: THE ENGLISH VERSION OF THIS OPINION WAS TRANSLATED FOR THE CONVENIENCE OF THE READER. THIS TRANSLATION HAS NOT BEEN REVIEWED OR APPROVED BY MR. RAFAEL MIRANDA.
Madrid, October 30, 2012
Mr. Pablo Yrarrázaval V.
Chairman of the Board of Directors of Enersis S.A.
Santiago
Ref: Pronouncement on Capital Increase of Enersis S.A.
Dear Sir,
I am pleased to send you my individual pronouncement, as director of the publicly held limited liability stock company Enersis S.A. (“Enersis” or the “Company”), domiciled in Santiago, Chile and registered with the Superinrtendence of Securities and Insurance (“SVS”) under No.175/1983, in relation to the ongoing capital increase of Enersis (the “Operation”) on the following terms and conditions:
I. BACKGROUND
1. On June 18, 2012, the controlling shareholder in Enersis, the Spanish company Endesa, S.A. (“Endesa Spain”), through its subsidiary Endesa Latinoamérica S.A., sent a letter to you proposing a capital increase of Enersis which, in general terms, would be structured as follows:
(i) Endesa Spain could contribute to Enersis the whole issued capital of a Spanish company called Cono Sur Participaciones S.L. (“Cono Sur”), free of liabilities and whose only assets would be all the company participations that the Endesa Spain Group has in South America and which are separate from those held by Enersis directly or indirectly.
(ii) Enersis’ shareholders could participate in the capital increase by paying pro rata in cash .
2. On August 3, 2012, the SVS, by its Official Letter 18,684, considered that the capital increase proposed for Enersis, governed by articles 15 and 67 of the Chilean Companies Act 18,046 (“LSA”, in its Spanish acronym), should be complemented by the regulations contained in Chapter XVI of the LSA. The SVS considered the Operation had to be treated as an operation between related parties in which, under this interpretation, the parties contracting would be Endesa Spain and Enersis.
3. On August 6, 2012, the Board of Directors of Enersis, despite disagreeing with the interpretation of the SVS, resolved to submit voluntarily to this interpretation in order to proceed with the Operation already on course and avoid the adverse consequences to Enersis from its temporary interruption.
4. Article 147 No.5 of the LSA states that each director of a publicly held limited liability stock company should give their opinion on a transaction between related parties with respect to the convenience to the best interest of the Operation, which should be made available to the shareholders.
II. DECLARATIONS ON POSITION OF A DIRECTOR OF ENERSIS S.A. AND THE RELATIONSHIP WITH THE PARENT COMPANY
1. I declare that I have been a director of Enersis since April 30, 1999 and vice-chairman of this Company from July 29, 1999 to July 29, 2009. At the Company’s Ordinary Shareholders’ Meeting held on April 22, 2010, which renewed the whole of the Board of Directors, I was appointed director with the votes of the controlling shareholder Endesa Latinoamérica S.A. I also declare that these votes were determinant in being elected director.
2. I declare that I have been, from July 1987 to February 1997, the General Director of Endesa Spain and from this latter date until June 30, 2009, the Chief Executive Officer of that company, upon which date my professional relationship as an executive of the company terminated.
I am currently president of the foundation of Endesa Spain and I am also a shareholder of Endesa Spain.
3. I declare therefore that I have an interest in the Operation in accordance with the interpretation made by the SVS through its Official Letter 21,001 of August 29, 2012, in its section III.1, which makes applicable to the Operation that resolved by the SVS in its Official Letter 9,914 of April 18, 2012 addressed to the company Enjoy S.A..
4. Such declaration of interest was repeated formally at the company’s Board of Directors meeting of September 5, 2012.
III. ACTIONS TAKEN BY THE DIRECTORS AND RESOLUTIONS ADOPTED BY THE BOARD OF DIRECTORS THAT AFFECT THE ANALYSIS OF THIS OPERATION
I confirm that the Board of Directors of the Company has acted at all times with dedication and due diligence, in accord with the importance of the operation submitted for the approval of Enersis’ shareholders .
The Board of Directors has carried out all the pertinent actions, has held all the necessary meetings and has adopted all the resolutions established under the legislation that rule the Operation, as well as the instructions and interpretations of the SVS, not only to comply with them but to do what is necessary in favor of the best corporate interest.
In particular, it has instructed the management to give the greatest transparency and diligence to the independent valuators so they could make their analysis in the most efficient possible way. It also gave instructions with respect to the sending of the information necessary to the Directors’ Committee so that corporate body could issue its prescriptive report.
IV. DECLARATIONS ABOUT THE RECEIVED REPORTS
I have analyzed the three independent reports made available to the directors and the shareholders: the two requested by the Board of Directors directly, the appraisal of Mr. Walker, and the report of the independent valuator IM Trust, and that of the independent valuator appointed by the Director’s Committee, Claro y Asociados.
I have also analyzed the report issued by the Directors’ Committee.
IV.1 General characteristics of the reports of the expert appraisal and valuators
I consider that, although with some nuances, they all have some common general characteristics, as follows:
1. Capacity and independence
I consider that the expert appraisal and the two valuing firms have a proven capacity for performing the work entrusted, and that they have accredited their independence sufficiently.
2. Available information
They all had broad access to all the details of the Operation, as well as to all sources of information both of Enersis and of the companies subject to valuation, provided to them through a data room created for the purpose, of all the information available and requested. For example, among other things, they had access to the financial statements, projections of fundamental variables, details of assets and liabilities with related parties, summary of the principal contracts of the companies with third parties and information on current sector regulations.
The expert appraisal and the two valuators, according to their own information and criteria, made revisions of the data and the projections made by Enersis and its companies in their analysis, as well as modifications to the assumptions used by them. All these modifications have been made by applying conservative criteria which, had it not been used, would have resulted in a higher valuation of the assets.
3. General methodology used
The expert appraisal produces a report that establishes the economic value of the contribution to Enersis. The two valuators, with various nuances and denominations, cover the market value of Conosur, the use of proceeds of the cash contribution and the strategic sense of the proposed operation. They also include some reflections and calculations of the impact of the proposed operation on the results of Enersis.
Market valuation of Conosur
The general method employed by the three in calculating the market value of Conosur is the traditional one and reflects practices generally accepted in the market by valuing according to the discounted cash flows (DCF) of each of the companies or participations of Conosur, each establishing different particularities.
In the three cases, in one way or another, other additional methods, also generally accepted, have been taken into consideration. For example, the expert appraisal calculates some multiples that permit the comparison of his valuations with the market values of other companies. IM Trust, on the other hand, values Conosur in terms related to the DCF value of Enersis, making later tests of consistency with respect to the values obtained by multiples of comparable companies and also taking into account the market consensus and opinions of financial analysts.
In the case of Claro y Asociados, it weights the DCF valuation (80%) with the valuation by market multiples of other companies of similar characteristics (15%) and a valuation by multiples of recent comparable transactions (5%).
As is well known, the results of the valuation are largely determined by the assumptions made with respect to cash flows, how the discount rate (WACC) to be applied is calculated, how terminal values are determined, whether other sources of value are taken into account, e.g. expansion projects of both an organic and inorganic character (M&A), possible tax advantages, etc.
Both the appraisal of Mr. Walker and the reports of the independent valuators IM Trust and Claro y Asociados have generally applied conservative criteria, in general reasonable for this type of study, but which had they not been applied would have resulted in a higher valuation of the assets analyzed.
Use of proceeds of the cash contribution
In a general way, both the expert and the two independent valuators consider that following this Operation, Enersis will have ample growth opportunities for the use of its financial capacity.
However, for the purposes of the market valuation, none of the valuators considers as an additional source of value either the organic development projects or the M&A opportunities.
Only IM Trust considers as a possible source of value the purchase of minority shares in Coelce, Edegel, Edelnor and Endesa Chile, subject to the established criteria for price, probability of success and contribution to the earnings of Enersis are reasonable. Regarding the use of proceeds of the cash remaining contribution, it assumes that the balance not used in the purchase of minorities is held in cash, earning 1% annually before tax, which appears a very conservative criterion.
On the other hand, Claro y Asociados states that the information revised accredits potential projects whose amount is consistent with the size of the amount in cash of the capital increase. However, it mentions that the borrowing capacity would end up being under-utilized temporarily and also identifies uncertainty of price and term in the execution of the M&A opportunities and purchase of minority shares.
Strategic sense of the proposed operation
The two independent valuators, IM Trust and Claro y Asociados, state that the proposed operation has strategic sense for Enersis and would produce positive effects for the Company.
They also indicate that assuming that the strategic, economic and the established equivalences are substantially respected or, put another way, carried out on fair exchange terms, acquiring determined declared commitments by the parent company, the Operation would contribute to the best interest of Enersis and be positive for all its shareholders.
IV.2 Conclusions of the reports
Having looked at the general characteristics of the reports analyzed, I now proceed to analyze the conclusions of the three reports, giving my opinion based on those matters I consider relevant.
IV.2.1 Conclusions of the appraisal of Mr. Eduardo Walker H.
Mr. Walker makes his appraisal report with the sole purpose of establishing an economic value of the contribution to Enersis of the assets of Conosur.
He establishes that the total value of the contributions as of December 31, 2011 is USD 4,742 million. Updating the figure as of June 30, 2012, he establishes that the total economic value of the contributions is USD 4,862 million.
I consider that the appraisal of Mr. Walker has been done rigorously and with the due methodology, that he makes assumptions with conservative criteria that can be considered as prudent and acceptable for this type of analysis and that the economic value assigned to the contributions is a reference value to be considered. However, given the limitations of the scope of his analysis, it is coherent to admit that that reference value has a lower weight than any other analysis that has been made with a broader objective and scope.
IV.2.2 Conclusions of the report of the independent valuator appointed by the Board of Directors: IM Trust
IM Trust makes a report with a broader objective and scope with respect to the proposed operation, which has the following elements:
- An analysis of the effects and potential impact for Enersis, i.e. if it contributes to the best interest and if it meets in price, terms and conditions those prevailing in the market.
- An analysis that includes an estimate of the range of market value of the Contributed Assets, a comparison of the contribution of assets by some shareholders and the contributions in cash by others, and an analysis of the destination and use of the proceeds of the cash contributions of the shareholders other than those contributing the participations.
The conclusions of IM Trust’s report establish, as already mentioned, the strategic sense of the Operation and its contribution to the best interest of Enersis and of its shareholders, provided determined strategic, economic and of equivalence aspects are respected. Therefore, the truly relevant to analyze here are the rest of the conclusions referring to aspects of value and the use of the proceeds.
Regarding the value, IM Trust estimates that the market value of the contribution of Conosur within the proposed Operation is equivalent to a participation in Enersis which is in a range of 30.9% to 32.5% of its market capitalization, calculated prior to the capital increase, using the share price at which it is subscribed.
The DCF valuation of Conosur and of Enersis that determines the mid point of the exchange relationship is USD 4,709 million and USD 14,836 million, respectively.
On October 23, 2012, the date of issue of the report, the market value of Conosur would be between USD 3,445 million and USD 3,621 million.
In its conclusions, IM Trust considers that, given that there are no relevant synergies in the combination of Enersis and the participations, it is unjustifiable to pay premiums or values above their market value to absorb/acquire the participations grouped in Conosur.
Regarding the use of the proceeds, and as already said, the analysis does not include the organic development projects and acquisition M&A opportunities, but does consider, assuming that part of the cash is invested in purchases of minority shares amounting to between USD 1,764 million and USD 1,898 million and the remainder held in cash earning 1% before tax, the operation is around neutral in 2013 and accretive in 2014 and 2015 in terms of earnings per share of Enersis.
Regarding the value assigned by IM Trust, I consider that the methodology used should be considered as a “relative or equivalence method” and which is, in this case, acceptable for the two reasons set out in its report, which are that Enersis is the best comparison with Conosur and that the absorption of Conosur is paid with Enersis shares.
The assumptions made for calculating the DCF are even more conservative than in the case of the appraisal and while some may be arguable, I believe they are prudent and acceptable for an analysis of these characteristics.
However, I do not think an exchange ratio alone can be accepted for setting the amount of the capital increase as it could produce damage to one or the other party depending on the timing and could be subject to potential speculative movements in the Enersis share price by traders.
I do believe that the relative relationship or exchange ratio can serve to value Conosur if it is established what the equitable market or fair value is for carrying out the capital increase.
Regarding the assignment made by IM Trust to the use of the proceeds, I consider that provided the purchase of minority shares is made at a suitable price, it will generate value for Enersis. I also believe that there are organic projects in the pipeline sufficiently developed by Enersis that could be considered as a source of additional value and that, not having considered it, it should be noted that they are a source of value that will be shared by all the shareholders.
With respect to inorganic development, in which there will undoubtedly be opportunities, the uncertainty related to its start-up, the criterion established by the valuators, is acceptable.
IV.2.3 Conclusions of the report of the independent valuator appointed by the Directors’ Committee: Claro y Asociados
As in the case of the valuator appointed by the Board of Directors, Claro y Asociados makes a report with a broader objective and scope with respect to the proposed Operation, concentrating on its effects and potential impact, attending the perspective of the Company and its shareholders, and responding to the question of how to compare the contribution of assets by some shareholders with the cash contribution of other shareholders, which implies a pronouncement on possible risks of dilution.
7
The conclusions of the report of Claro y Asociados, as in the previous case and as said in point IV.1 , establish that the transaction is a strategic opportunity, always provided it includes a strong agreement between Enersis and Endesa Spain that guarantees it. The report also considers that it would be positive for all the shareholders if it is made on fair exchange terms and important commitments are made like the non-distribution of extraordinary dividends or other forms of distribution to the majority shareholder. As in the earlier case, it is therefore important now to analyze the conclusions that refer to aspects of value and the use of the proceeds.
Regarding the value, Claro y Asociados defines two alternative methods for determining the value of the contributes assetes in order to eliminate the risk of dilution; I consider the first of these alternatives to be the more important. This values Enersis by the DCF method with the weightings described in point IV.1, and determines the differential with respect to its market capitalization, to then value the contributed assets by DCF with weightings using comparable parameters and applying the differential of Enersis with respect to the market to obtain the fair price.
By applying this method, the result shows a DCF for Enersis of USD 13,231 million which, compared to the market capitalization of USD 11,065 million on October 22, 2012, shows an implicit differential with the market of 19.58% (the “Discount”). The DCF of the contributed assets is USD 4,627 million which, by applying the “Discount”, provides a result of USD 3,870 million.
The valuator thus considers that the value of the contributed assets is around USD3,870 million, which, measured as a percentage of the market capitalization of Enersis, is 34.97%.
Claro y Asociados emphasizes that the definition of the number and price of the shares is fundamental for carrying out the Operation and could affect the relationship of exchange terms.
Regarding the use of the proceeds, it concludes that there are potential projects whose amount is consistent with the amount of the capital increase, but warns that the borrowing capacity would end up being under-utilized temporarily and identifies uncertainty of price and term in the execution of M&A opportunities and purchases of minority shares, although it recognizes that the management of Enersis states having the capacity to manage demanding investment plans.
Regarding the value assigned by Claro y Asociados which, as in the previous case, uses a “relative or equivalence method”, and, while not explaining why, weights the DCF by that defined in the report, I consider that the methodology is acceptable for the same reason that the valuator itself establishes in its study by stating that Enersis is the best benchmark for valuing the contributed assets, despite its heavy concentration of Chilean assets and other differences.
For the same reasons described in the previous case, I consider that en exchange ratio alone cannot be accepted for setting the amount of the capital increase. The valuator itself seems to warn about this when it says that the definition of the number and price of the shares is a fundamental matter.
If it were established what the equitable or fair value of Enersis is for making the capital increase, then the exchange ratio could serve.
Regarding the use of the proceeds, I coincide with the valuator that there are potential projects whose amount is consistent with the size of the Operation and also that Enersis has accredited its capacity to manage those existing investment plans, which undoubtedly reduces the risk of under-utilized borrowing capacity.
IV.4 Conclusions of the Report of the Directors’ Committee
The Directors’ Committee issued its report On October 29, 2012 in which it presents its collective pronouncement and the individual opinions of some of its members in relation to the described Operation. I analyze below its conclusions, giving my opinion based on those matters I consider relevant.
I coincide with the Committee in its statement that it would be positive for Enersis to carry out the Operation from a strategic and business point of view, provided it is done at a suitable transfer price, terms and conditions and therefore that the proposed Operation does contribute to the best interest. I generally share in all the reasons given.
It also appears reasonable that at the time of setting the market price and other terms and conditions, the opinion of independent experts should be taken as a reference and in particular those used by the Board of Directors and the Directors’ Committee which have perfectly accredited their capacity and independence. I do not agree with the opinion of Mr. Fernandez, repeatedly stated throughout the report, that the discount to be applied to Conosur should be greater than that which the market applies to Enersis and this basically for the same reasons that I admit that no premium should be conceded to Conosur by the Operation. As I see it, the conservative assumptions that have been used in the calculations suppose a source of potential revaluation that in itself supposes an implicit premium that will be shared by all the shareholders.
Regarding the values assigned by the Committee members, I share the conclusion of the independent valuators of linking the market value of Conosur to the market value of Enersis, and the fact that the ratio should be 1:1 and thus with no discount being applied. Regarding the concrete values established, I return to that which I argued in the corresponding chapter of this report where I established what I consider to be the market value of the contributed assets.
I accept the criteria of the Committee with certain minor differences, so I refer to the terms and conditions other than price.
Regarding the use of the proceeds, and as I have said in analyzing the conclusions of the independent valuators in this respect, I consider that there are numerous opportunities in the future, through the purchase of participations in companies which Enersis already consolidates, strategic acquisitions in the region and the development of new projects that Enersis is going to be able to take on, given its proven experience and capacity in this field.
In line with Mr. Hernan Somerville, I consider having a healthy and comfortable financial structure, managed efficiently, can result in benefits rather than risks.
V. DECLARATION ABOUT THE CONVENIENCE OF THE OPERATION FOR THE BEST INTEREST
Taking into account all the above information, my own knowledge of Enersis and business in the region, and the previously-made analyses, I consider that the Operation proposed by Endesa Latinoamérica S.A. is a clear strategic opportunity for Enersis and have clear positive effects for it.
I also declare, for the sole purpose of article 147 of the LSA, that the Operation described, made on the correct economic terms of the transaction and those later defined, is an Operation that is very convenient for the best interest of Enersis, apart from the high strategic and operative exchange it has.
The fundamental reasons supporting these statements are as follows:
· It is a unique opportunity to acquire assets in the region without increasing the operational risk or the need for additional management resources, as Enersis already manages the assets to be contributed by Endesa Latinoamérica S.A.
· The diversification is further improved of the present portfolio of Enersis, increasing its presence in the markets of greatest potential, particularly Brazil and Colombia.
· Enersis will become the only investment vehicle of Endesa Spain and Enel in the region (with the exception of Enel Green Power).
· It finally transforms the advantageous assignment of policy rights made in the past, thus eliminating the uncertainty of the renewal of the Strategic Alliance.
· It increases the net income of Enersis by around USD 356 million which implies an increase from 43% to 63% in attributable earnings.
· It will provide dividends to Enersis of around USD 237 million, an increase of 52% over those received in 2011.
· It permits the simplification of the present corporate structure, increasing the visibility of the cash flows of the contributed assets and understanding of the businesses from the outside, which is expected to result in a higher valuation of the shares of Enersis.
· The Operation will significantly improve the liquidity of the share, increasing the capital float by around 50%-60% (depending on the percentage of subscription), which could result in an increase in the shares traded on the Stock Exchange in Chile and the ADRs on the New York Stock Exchange.
· The proceeds of the Operation plus its leverage capacity could be used to grow in three principal pillars: organic growth with expansion projects in generation and distribution, the acquisition of other minority shares in controlled companies, and taking advantage of M&A opportunities deriving from the consolidation of the region’s markets.
VI. MARKET PRICE
As has been established through the report, it is essential to determine what is the “market price” at which the Operation should be carried out, defined as a range of value that we consider balanced, reasonable and equitable.
Without any doubt, and given the valuation provided for us by the independent valuators, we should consider its criteria at the moment of establishing the “range of value”.
I believe that the following concepts should be taken into account in establishing what should be the fair market price:
· Setting of the price of the Enersis share linked to a period of time sufficient to reflect a fair stable price. I consider that that period could be the average quotation of Enersis over the last six months.
For establishing a range of value, I consider the establishment of one of the limits as the average of the six months up to yesterday, which implies a value of Ch$ 172/share, and the other limit the average of the six-month period prior to the day foreseen for the announcement of the Operation, which suggests a value of Ch$ 189/share.
· The second element is to choose a methodology or exchange ratio. In this case, I consider the most acceptable to be that of the independent valuator appointed by the Board of Directors, IM Trust. This is based on two fundamental reasons: firstly, due to the explicit conservative criteria applied in the calculation of the DCF, which I think is reasonable and acceptable in this kind of calculation and permits the thought that there is a potential of revaluation, or upside, that would benefit all shareholders, and secondly, because the calculation resulting from contrasting multiples is more coherent. Based on this, we would apply to Enersis’ capitalization, calculated at the previously-described prices, a percentage of 30.9% for the lower limit and 32.5% for the upper limit, to establish the market value of the contribution of Conosur.
The range of market value of the contribution of Conosur that I consider to be balanced would be between USD 3,600 million and USD 4,138 million.
Use of the proceeds
I consider that the proven experience of Enersis in managing growth plans and its accredited capacity to manage challenging investment plans ensures that the proceeds obtained from the Operation will be used efficiently and create value, taking advantage of the three pillars of growth at this time:
· Acquisition of other minority shares in companies controlled by Enersis.
· Organic development with expansion projects in generation and distribution.
· Taking advantage of M&A opportunities following the consolidation of the markets where Enersis operates.
The acquisition of minority shares has been a constant practice in the history of Enersis. Made at the right price, it has a clear strategic match and is a source of generation of value, as this does not increase the risk profile of Enersis, increases its economic interest in companies it already controls and operates, and also helps to further simplify the corporate structure, this simplification being most evident in the markets, and resolves a historic problem of penalty of the value of Enersis due to the lack of clarity in its corporate structure.
Enersis is a clear example of a company that has known-how to take advantage of organic growth with expansion projects in its markets. There is today in both the generation and distribution businesses a large number of projects under development in very different stages, which I have no doubt that a company like Enersis with “sufficient fire power”, which is going to give to this Operation, would take advantage of it.
As a result of this Operation, Enersis is going to be able to develop a growth strategy based on M&A opportunities that follow from the consolidation taking place in the region. Although it is very difficult to complete projects and opportunities at this moment, the history of Enersis in this field should not be forgotten, the construction of Enersis itself was an exercise in inorganic growth with a great creation of value, and also its capacity shown in the past to handle these processes.
In this process, present market players are opportunist buyers who base their creation of value on the acquisition at a good price and benefit from the great financial capacity they have (European and American investment funds).
Having a healthy financial capacity can therefore be a very important differentiating plus in being successful in this process.
Other terms and conditions
With respect to the terms and conditions other than price, I think it fair to assume with certain adjustments those set out by the Committee in its report, i.e. that the contribution of Conosur should be regulated through contracts between Enersis and Endesa Spain that contemplate the following elements:
· Declarations and warranties normal for company acquisitions, with respect to companies in which Enersis has no current shareholding, i.e. Piura, Yacylec and Central Dock Sud, and an indemnity in the event that such declarations and warranties prove to be incorrect, taking into account that being companies managed by Enersis, it knows them very well.
· Express commitment that Enersis be the only investment vehicle in South America of Endesa Spain and Enel in conventional energies (except for Enel Green Power).
· Commitment to hold Enersis free from possible tax contingencies deriving from the structure of the Operation, following an in-depth study.
· Clarification of the mechanism of conditionality of the capital increase.
VII. CONCLUSIONS
· The Board of Directors of Enersis has worked at all times with the dedication and due diligence in complying with the legislation that governs the Operation, as well as the instructions or interpretations of the SVS , doing so always in favor of the best interest of the Company and its shareholders.
· For the analysis of the Operation, the appraisal of the expert, Mr. Walker, and the reports of the independent valuators IM Trust and Claro y Asociados, the latter appointed by the Directors’ Committee, have been made available, as well as the report of the Directors´ Committee itself.
· In my loyal understanding, the Operation proposed by Endesa Latinoamérica presents a clear strategic opportunity for Enersis, promising clear positive effects for it.
I also consider that the described Operation carried out in the correct economic terms of the Operation is a very convenient opportunity for the best interest of Enersis.
· The range of market value of the contribution of Conosur that I consider to be balanced is between USD 3,600 million and USD 4,138 million.
· I consider that Enersis has innumerable opportunities for the use of the proceeds, creating value for its shareholders, and that the risk of maintaining an inefficient financial structure is minimal.
· Regarding the establishment of terms and conditions other than price, I believe it reasonable to accept with certain adjustments those set out in the report of the Directors’ Committee.
|
Rafael Miranda Director of Enersis ID No. 48.070.966-7
|
DISCLAIMMER: THE ENGLISH VERSION OF THIS REPORT WAS TRANSLATED FOR THE CONVENIENCE OF THE READER. THIS TRANSLATION HAS NOT BEEN REVIEWED OR APPROVED BY THE DIRECTORS’ COMMITTEE.
Santiago, October 29, 2012
Mr. Pablo Yrarrázaval V.
Chairman of the Board of Directors
Enersis S.A.
SANTIAGO
Ref.: Pronouncement on capital increase Enersis S.A.
Dear Sir,
In accordance with article 50 bis of the Chilean Companies Act 18,046 (“LSA”, in its Spanish acronym), and in the name of the Directors’ Committee (“Committee”) of Enersis S.A. (“Enersis”) consisting of Hernán Somerville S., Leonidas Vial E. and Rafael Fernández M., we hereby report to you with respect to the proposed capital increase of Endesa, S.A (“Endesa Spain”).
I. Introduction.
On June 18, 2012, by letter addressed to the chairman of Enersis Board of Directors, the controller of Enersis, Endesa Spain, proposed a transaction implying a capital increase of Enersis with a defined structure and requested that this be submitted to an Extraordinary Shareholders Meeting. This capital increase would be carried out along the following terms: Endesa Spain would participate of the capital increase contributing all the capital of a Spanish company called Cono Sur Participaciones S.L. (“Cono Sur”) whose assets would be all the corporate participations of the Endesa Spain Group in South America. The other shareholders of Enersis could take part in the capital increase by paying pro rata in cash. A transaction of this kind could be structured in different ways but the proposal has been presented as a specific transaction, not subject to modifications, on which this Committee will pronounce on the transaction on the terms that have been presented, even though making an individual analysis of its different components, , while examining it in depth.
On August 3, 2012, the Superintendence of Securities and Insurance (“SVS”), by its Official Letter 18,684, considered that the capital increase of Enersis, in the terms stated in the previous paragraph, should comply with the regulations set out in Chapter XVI of the LSA.
This interpretation requires that the Committee, in compliance with the mandate established in article 50 bis of the LSA, should issue a report that examines “the background information related to the operations referred to in Chapter XVI”.
Note: At the request of the Committee member, Mr. Rafael Fernández M., it is acknowledged that in his opinion, the proposed transaction always should be subject to the regulations of Chapter XVI and has made this known to the Directors’ Committee and the Board of Directors at various meetings and through different communications.
1
By letters dated August 8 and 28, 2012, addressed to the chairman of the Board of Directors, Endesa Spain confirmed its interest in proceeding with the proposed capital increase and ratified its request to call a Shareholders Meeting of Enersis in order for it to consider this transaction.
II. Characteristics of the operation.
According to information supplied by Endesa Spain, the direct or indirect participations it would contribute are in different companies in Argentina, Brazil, Chile, Colombia and Peru, a detail of which is added to this report as Appendix 1.
Regarding the terms and conditions of the proposed operation, these would be the following:
- Endesa Spain would contribute to Enersis all the capital of a Spanish company called Cono Sur, free of liabilities and whose only assets would be all the corporate participations that Endesa Spain has in South America and which are different to those which Enersis has directly or indirectly.
- The other shareholders of Enersis may only participate in the capital increase by paying pro rata in cash .
III. Information Revised by the Directors' Committee.
In addition to the letters from Endesa Spain mentioned above, the Committee took into account the following reports:
1. Expert appraisal report dated July 23, 2012 issued by Mr. Eduardo Walker H.
2. Report of independent dated October 24, 2012 issued by IM Trust Asesorías Financieras S.A. (hereinafter “IM Trustâ€).
3. Report of independent valuators dated October 24, 2012 issued by Claro y Asociados Limitada (hereinafter "IM TRUST").
In the opinion of this Committee, both the expert appraiser Mr. Walker and the independent valuators IM Trust and CyA have the due independence and have received the information and reasonable times for carrying out their tasks, being their reports available to all the shareholders.
It is acknowledged that despite referring to the same proposed transaction, the nature of the employment of the expert appraiser Mr. Walker and of the independent valuators IM Trust and CyA is different. In the case of Mr. Walker it is an "expert appraisal" in accordance with article 15 of the LSA, a regulation that does not establish a specific valuation criteria. In the cases of IM Trust and CyA, these are reports of "independent valuators" in the terms of article 147 of the LSA, a regulation that establishes that in their report, independent valuators should inform shareholders with respect to the conditions of the transaction (specifically whether its object is to contribute to the best interest and whether it meets price, terms and conditions similar to those prevailing in the market at the time of their approval), their effects and their potential impact on the Company, as well as pronounce on the matters that the Directors' Committee or its members have expressly requested to be evaluated.
2
Note: At the request of the Committee member, Mr. Rafael Fernández M., it is acknowledged that in his opinion, given the conditions in which it was requested, carried out and issued, the expert appraisal report of Mr. Walker and its conclusions lack validity. This was noted in the board minutes of August and October when the relevance of that appraisal was debated. Mr Walker, in his letter dated October 18 responding to a consultation, stated that "it is important to bear mind that this question (that made to him) is not necessarily identical to the question of whether such capital contribution is convenient for the shareholders of Enersis, which I understand is something that the new valuators are attempting.", thus ratifying the position of the director Rafael Fernández M. with respect to the report.
With respect to this export appraisal report concerning an estimation of non-monetary contributions, prepared by Mr. Eduardo Walker, dated July 23, Mrs. Hernán Somerville S. and Leonidas Vial E. insisted on the relevance of the expert appraisal report for the following reasons: (i) The appraisal by Mr. Walker had been requested unanimously by the Board of Directors of Enersis as being a highly-regarded professional with great experience in the matter, he performed his duties with complete independence of the Board of Directors and with total professionalism, abiding by the conditions usually applied in cases of this kind; (ii) Nothing in the expert appraisal indicates obsolescence, since there has been no substantial change or of magnitude in the market assumptions or the daily business of the companies referred to in the expert appraisal report; and (iii) It is inappropriate to declare the obsolescence of the appraisal for supposed market reactions, which should not be confused with fluctuations in public opinion. They therefore believe that the report remains relevant since there are currently no reasons that justify its updating. It should be added that valuations obtained by appraisers using the same methodology are similar.
a. Expert Appraisal Report Prepared by Eduardo Walker H.
On July 23, 2012, the expert appraiser issued the report which values the companies that Endesa Spain would contribute to the capital increase at that date, in USD 4,862 million.
The methodology used by the expert appraiser consisted of a valuation by sum of the parts of the businesses of the participations to be contributed, according to the discounted cash-flow method. The economic equity value of each productive company was determined by deducting from the value of the discounted cash flows, including a terminal value, the economic value of the debt, net of cash and contingencies.
b. Report of the Independent Valuators IMTrust.
On October 24, 2012, the independent valuator IMTrust, appointed by the Board of Directors of Enersis, issued a report for estimating the market value of the companies to be contributed by Endesa Spain, stating that such contribution is equivalent to a participation in Enersis in the range of 30.9% to 32.5% of its market capitalization, calculated prior to the capital increase, using the share price of the subscription, percentages which on Tuesday, October 23, 2012, were the equivalent of USD 3,445 million and USD 3,621 million respectively.
The method used consisted of calculating the discounted cash flows of the participations to be contributed by Endesa Spain and of Enersis, obtaining amounts of USD 4,709 million and USD 14,836 million respectively. With this, it was concluded that the value of the shareholdings to be contributed is in the range of 30.9% to 32.5% of the value of Enersis.
3
c. Report of Independent Valuator Claro y Asociados.
On October 24, 2012, the independent valuator Claro y Asociados, appointed by the Directors’ Committee of Enersis, issued a report for valuing the participations to be contributed by Endesa Spain in the range of USD 3,870 million and USD 3,912 million.
This firm used two methods in reaching this range of values: (i) the first consisted of calculating the discounted cash flows of the participations to be contributed by Endesa Spain and of Enersis, obtaining amounts of USD 4,627 million and USD 13,231 million respectively. The discounted cash-flow valuation of Enersis was then compared with its market capitalization on October 22 and a discount of 19.58% was obtained. This same discount rate was applied to the value of the participations to be contributed, concluding that the market referential value was USD 3,870 million. (ii) the second consisted of calculating the value of the contribution based on the multiple EV1 /EBITDA2 of Enersis and applying this to the sum of the proportional EBITDAs to be contributed, obtaining a value of USD 3,912 million.
Finally, CyA states that presenting these amounts as percentages of the market capitalization of Enersis results in a range of 34.97% to 35.35%.
IV. Pronouncement.
As stated above, article 147 of the LSA established the criteria for approving a transaction with a related party, this being that the transaction contributes to the best interest and meets in price, terms and conditions those that prevail in the market at the time of their approval.
We refer now to both points.
We repeat that the acquisition of the participations of Endesa Spain could be structured in different ways. However, in this report we refer only to the capital increase proposal received from Endesa Spain, as it has been presented as the one option, not subject to modifications. Therefore, even though making an individual analysis of its different components, this Committee will pronounce on the transaction on the terms that have been presented, while examining it in depth.
a. Contribution to the best interests.
This Committee believes that for Enersis it would be positive from a strategic and business point of view to acquire the participations that Endesa Spain proposes to contribute, subject to this being done at a suitable transfer price, terms and conditions, a point we will refer to in the following section. We therefore believe that the proposed transaction does contribute to the best interests insofar as the contribution of the participations is concerned.
The Committee points out that for the proposed transaction to contribute to the best interest it has to provide for the creation of value and that the conditions and terms are equitable to all the shareholders, as well as matching the strategic and business interests as mentioned above.
1 EV: Enterprise Value
2EBITDA: Earnings before interest, taxes, depreciation and amortization
4
We mention below the principal reasons why we believe that the proposed transaction contributes to the best interest of Enersis, from a strategic and business perspective:
i. All the participations with a significant value within the assets contributed, except Piura (EEPSA), Yacylec and Central Dock Sud, relate to assets (i) in which Enersis already has a participation, (ii) that Enersis already manages from an operating point of view, and (iii) that Enersis already consolidates in its financial statements. Piura is a thermal-generating unit in Peru which would permit Enersis to increase its presence in that market.
ii. The contribution of the assets in the Colombian companies would permit Enersis to ensure their control and consolidation, possible today through a shareholders' agreement in which Endesa Spain cedes its controller rights to Enersis, which currently consolidates Codensa and Emgesa under an assignment made by Endesa Internacional, today Endesa Latinoamérica, S.A. ("ELA"), in favor of Enersis and Endesa Chile respectively, at no cost, of the right to appoint the majority of the directors of those companies, an assignment made for an indefinite period subject however to ELA being able to terminate the assignment unilaterally by giving prior notice to Enersis or Endesa Chile, as the case may be, at least three years prior to the desired termination date. The Colombian companies represented 25% of Enersis' EBITDA in 2011.
iii. The fact that Endesa Spain and Enel S.p.A have no direct participation in South America (except for Enel Green Power) would consolidate Enersis as the only investment vehicle for the region. This point seems to us of particular relevance as it eliminates potential conflicts of interest between Enersis and its parent, which best permits facing growth opportunities in South America. This of course assumes that such commitment is formalized in a way to ensure its effectiveness.
iv. The contribution of the participations has the advantage that Enersis begins to receive benefits as soon as the contribution is made.
v. Enersis manages the vast majority of these assets but only receives part of the earnings. In 2011, just 43% of the earnings reported corresponded to the shareholders of Enersis and the remaining 57% corresponded to other shareholders. If this transaction were carried out, part of the earnings generated by the subsidiaries would reach Enersis directly, reducing the portion that is not currently received by Enersis. This is particularly relevant in the development of future projects as, by Enersis increasing its participation today in these companies, it could capture a larger part of the potential creation of value associated with the execution of projects in portfolio.
vi. From an ownership structure point of view, Enersis currently has minority interests in many of its subsidiaries which gives rise to complexity when analyzing it financially, both from a credit and a market valuation perspective. The proposed transaction would permit a one-time increase in the proportional participation of Enersis in these companies, thus significantly reducing the minority interest, which we believe is positive for Enersis.
vii. The decrease in the minority interest could reduce the potential holding discount that the market might be applying to Enersis.
5
viii. The proposed transaction would permit the achievement of this result, on a large scale, in one operation, comparing favorably with having to carry out multiple separate smaller transactions.
b. Market price and other terms and conditions.
Given that, as mentioned in the previous section, the acquisition of the contributed assets would have positive effects for Enersis from a strategic point of view, the "market price" criteria appears sufficient to justify the transaction.
Benchmark market prices generally correspond either to the take-over of companies that are not controlled or consolidated, or the purchase of financial minority shares in exchange-listed companies.
On the other hand, in this transaction, in which various assets of different kinds are acquired in just one operation, it is difficult to determine what the "market price" is if we take the same above-mentioned parameters. It therefore seems prudent to consider the opinion of independent expert valuators, which qualification we believe both IM Trust and CyA meet.
We agree with the criteria of the reports of both valuators of linking the value or market price of the non-monetary contribution of Endesa Spain to the market capitalization of Enersis, as there is a relatively similar business between Enersis and the combination of the contributed assets, thus making Enersis itself a good basis for comparison with respect to Cono Sur.
Note: At the request of the Committee member, Mr. Rafael Fernández M., it is acknowledged that in his opinion, the discount to apply to Cono Sur should be greater than the discount applied by the market to Enersis, since the latter has control or jointly control over all the significant companies in which it participates while in Cono Sur all the assets are non-controller with the exception of Piura, Dock Sud and Cemsa.
6
i. Price
The following is a summary of the estimated values or market prices made by IM Trust and CyA.
|
|
Date |
Value |
Methodology |
|
IM Trust |
October 24, 2012 |
30.9% to 32.5% of the value of Enersis (USD 3,445 M to USD 3,621 M) |
Range of values resulting from the calculation of the discounted cash flow of Cono Sur adjusted for the relation between the market value of Enersis on October 23, 2012 and the discounted cash flow of Enersis calculated in a similar way. |
|
Claro & Asociados |
October 24, 2012 |
34.97% to 35.35% of the value of Enersis (USD 3,870 M to USD 3,912 M) |
Range of values whose floor is determined through a discounted cash flow of Cono Sur adjusted for the relation between the market value of Enersis on October 23, 2012 and the discounted cash flow of Enersis calculated in a similar way. Its ceiling is calculated through the EV/EBITDA multiple of Enersis applied to the EBITDA that Cono Sur would contribute. |
In addition, to contrast the values reached by the independent valuators, the following two tables are presented with valuations published by market analysts of reputable local and international stockbroker firms, both before the announcement of the transaction and afterwards.
- Reports of analysts prior to the announcement of the capital increase:
-
| Broker | Credit Suisse | IM Trust | Santander | G. Sachs | Citi | |
| Reporting Date | 02/16/2011 | 02/28/2012 | 04/09/2012 | 05/04/2012 | 07/05/2012 | AVERAGE |
| Endesa Brasil | ||||||
| Ampla | 2,339 | 1,345 | 1,516 | 1,745 | 2,204 | 1,830 |
| Fortaleza | 856 | 866 | 665 | 587 | 1,059 | 807 |
| Cachoeira | 1,055 | 1,067 | 1,419 | 1,267 | 1,778 | 1,317 |
| Cien | 620 | 1,160 | 502 | 603 | 721 | |
| Coelce | 1,963 | 1,334 | 1,057 | 1,846 | 2,111 | 1,662 |
| Edesur | 138 | (207) | 110 | (367) | (115) | (88) |
| Emgesa | 4,278 | 5,523 | 4,828 | 4,008 | 3,942 | 4,516 |
| Codensa | 4,756 | 4,405 | 3,315 | 5,070 | 4,050 | 4,319 |
| Edelnor | 1,324 | 1,344 | 1,193 | 907 | 746 | 1,103 |
| Piura (EEPSA) | ||||||
| Others | ||||||
| TOTAL ADJUSTED BY PARTICIPATION | 3,773 | 3,809 | 3,551 | 3,676 | 3,822 | 3,726 |
Does not include reports of Morgan Stanley of July 11, 2012 or of JPMorgan of April 28, 2011 as the first does not make a sum of the parts and the second contains few companies of Cono Sur.
7
- Reports of analysts after the announcement of the capital increase:
| Broker Reporting Date |
Citi 09/27/2012 |
Citi 07/26/2012 |
BofA 07/27/2012 |
Credit Suisse 07/26/2012 |
Itau 09/06/2012 |
Santander 08/02/2012 |
AVERAGE |
| Endesa Brasil | 45 | 43 | 44 | ||||
| Ampla | 2,161 | 2,204 | 1,408 | 1,857 | 2,726 | 1,519 | 1,979 |
| Fortaleza | 871 | 1,059 | 527 | 594 | 549 | 665 | 711 |
| Cachoeira | 1,249 | 1,778 | 1,418 | 1,708 | 1,581 | 1,419 | 1,525 |
| Cien | 310 | 603 | 579 | 532 | 494 | 1,162 | 613 |
| Coelce | 2,417 | 2,111 | 1,463 | 2,208 | 3,240 | 1,510 | 2,158 |
| Edesur | (307) | (115) | 117 | 257 | 0 | 110 | 10 |
| Emgesa | 4,907 | 3,942 | 5,155 | 6,684 | 4,827 | 5,103 | |
| Codensa | 4,205 | 4,050 | 3,263 | 5,154 | 3,532 | 3,318 | 3,920 |
| Edelnor | 758 | 746 | 1,068 | 1,401 | 928 | 1,194 | 1,016 |
| Piura (EEPSA) | 266 | 266 | |||||
| Others | 164 | 92 | 128 | ||||
| TOTAL ADJUSTED BY PARTICIPATION | 4,233 | 3,822 | 3,511 | 4,618 | 3,622 | 3,961 |
Does not include the report of Itaú in the total average as there is no valuation of Emgesa, thus altering the value of Cono Sur significantly.
There is no agreement between the members of the Directors’ Committee with respect to what should be the value or range of market values for the non-monetary contribution of Endesa Spain. We therefore transcribe below the individual opinions of each of the Director’s Committee members:
All the Committee members share the conclusion of both independent valuators with reference to linking the market value of Cono Sur to the market value of Enersis. The difference therefore does not apply to the methodology but as to whether such link or ratio should be 1:1 or to whether the value of Cono Sur should have an additional discount with respect to the market value of Enersis, and what should be the share price of Enersis to be taken into account for translating this ratio into an amount of money.
For the Committee members Mrs. Leonidas Vial and Hernán Somerville, the ratio should be 1:1 as the independent valuators sustain, i.e. the same discount rate should be applied to Cono Sur that the market applies to Enersis.
On the other hand, the Committee member Mr. Rafael Fernández believes that to determine the market value of Cono Sur, a greater discount should be applied than that the market applies to Enersis as it concerns non-controller assets in the case of Cono Sur while Enersis controls or jointly controls all its investments, as explained above.
For the Committee member Mr. Leonidas Vial, the market value of the contributed assets should be between USD 3,555 million and USD 3,700 million, a range corresponding to 32.5% of Enersis, using a closing market share price of Ch$ 164.8 per share and an exchange rate of Ch$482/USD, plus/less 2%, a range that should be adjusted according to the variation in Enersis’ share price and future exchange rates, considering that Enersis’ market share price, due to its high liquidity, is representative of the “market value” of Enersis at all times.
For the Committee member Mr. Hernán Somerville, the market value of Cono Sur should be the mid point between 30.9% and 32.5%, i.e. 31.7% of the market value of Enersis. With respect to what market price of Enersis to use for expressing these percentages in an amount of money, Mr. Somerville considered a price range between Ch$ 164.8 per share (being the closing share price of Enersis as of the date of this report) and Ch$ 183.3 per share (being the closing share price of Enersis prior to the announcement of the transaction, i.e. Ch$ 187 per share, less 2%), which gives a range of value for Cono Sur between USD 3,538 million and USD 3,935 million, using an exchange rate of Ch$482/USD. Mr Somerville notes that, given that the share price that determines the floor of the range was fixed as a function of the share price of Enersis as of the date of this report, this price should be adjusted according to the variation in the Enersis share price and the future exchange rate, as previously explained.
8
For the Committee member Mr. Rafael Fernández M., given the control that Enersis has over its investments, Enersis’ shares should have a lower discount rate with respect to their estimated value according to the discounted cash flow of Cono Sur since the latter has mainly non-controller assets (see “Value of Control†of Aswath Damodaram). An empirical reference of this observation is the price gap between shares with voting rights and those without or with restricted rights (the case of series A and B shares in various Chilean companies), as well as the premium gap over the market value paid when a public offering is made to acquire minority shares (minority “buy-insâ€) versus the premium paid when the offer is made to control the company. In his opinion, in this case in particular, a gap of around 10% should be sufficient to compensate this difference.
Consistent with the above, given the participations in Codensa and Emgesa (which represent 61.5% of the value of Cono Sur according to the estimates of the independent valuators), these would give Enersis complete control and it would appropriate to recognize a premium for their control. However, as this in fact it is a jointly control (these shares alone do not permit control Codensa or Emgesa) and this jointly control is today assigned to Enersis in the terms described above, the premium for control corresponding to these investments should be lower than would be the case without these considerations. Mr. Fernández believes that it should recognized just a half of a premium for full control.
According to the above, in the opinion of Mr. Fernández, the discount of 10% previously referred should be reduced by 3 percentage points (10% x 50% x 61.5%). You then arrive at a total discount of 7% to be applied to Cono Sur with respect to the equity value of Enersis measured according to the market.
Mr. Fernández believes that the estimated market price of Cono Sur should be such that its contribution to Enersis generates creation of value for all the company’s shareholders.
Thus, taking as reference Enersis’ share price on October 23, 2012 (the date taken by the independent valuators) and the estimated value of the independent valuators (average of both), the resulting amount after applying the additional discount of 7% would be USD 3,452 million, considering the same exchange rate as that used by the independent valuators (Ch$475.7/USD). In the opinion of Mr. Fernández, this should be the maximum price that could be recognized by Endesa Spain for their contribution of Cono Sur.
9
The following shows the estimated results according to the different methodologies:
|
Figures in USD million |
IM Trust |
CyA |
E. Walker |
|
DCF |
4,709 |
4,627 |
4,862 |
|
Comparable company multiples |
4,165 |
4,179 |
|
|
Comparable transaction multiples |
|
4,914 |
|
|
Market analyst consensus |
3,827 |
|
|
|
Valuation at Ch$162 per share3 |
3,533 |
3,891 |
|
|
Valuation at Ch$187 per share |
4,074 |
4,4914 |
|
Source: Respective reports. Note: values in estimated USD according to exchange rate of each report
ii. Other terms and conditions
Regarding the terms and conditions other than price, this Committee notes that, in order to adjust the terms and conditions prevailing in the market, the contribution of Cono Sur should be governed by one or more contracts between Enersis and Endesa Spain that contemplate at least the following elements:
a) Usual declarations and warranties for company acquisition transactions with respect to those companies in which Enersis has no current shareholding, e.g. Piura, Yacylec and Central Dock Sud, and an indemnity should such declarations and warranties prove to be incorrect.
b) An express commitment by Endesa Spain and Enel that Enersis is going to be the sole investment vehicle in South America of both companies in conventional energies, with the exception of that which Enel already has through its subsidiary Enel Green Power.
c) A commitment to maintain Enersis free from all possible taxation contingencies deriving from the structure of the transaction.
In addition, the Committee notes that, while a possible mechanism of conditionality of the capital increase has been considered (such as the share subscription not resulting in Endesa Spain exceeding its limit of 65% as established in the Company’s bylaws), the final terms of such conditionality are not known at this time.
Neither are two important elements known as of this date like the mechanism for setting the subscription price of the new shares to be issued and potential discounts, if any, to be applied in determining such price, matters that should be resolved by the shareholders at the respective meeting.
c. Use of funds
This point is especially difficult to analyze as it requires anticipating future events that do not depend on Enersis. However, the following can be estimated based on currently available information:
3 Reference used by Mr. Rafael Fernandez: The average of both is USD 3,712 million
4 Value implicit in the report of CyA
10
i. Enersis has investment opportunities of a strategic nature of significant amounts in the short and long terms. For reasons of confidentiality and precisely to protect the best interest, these have to remain confidential.
ii. Each of these growth opportunities has to be analyzed and approved by the Board of Directors of Enersis, in detail, on their own merits and at the time the investment is made, approving just those believed to be beneficial to the Company. There is a risk that these will not be carried out.
iii. Over and above determining whether there are sufficient potential investments today, it seems relevant to analyze what would be the impact for Enersis of maintaining a higher-than-expected cash surplus over time.
The three uses of proceeds identified by Endesa Spain in its presentations warrant the following comments:
i. Purchase of shares in companies which Enersis already consolidates
- Having additional funds would enable Enersis to start a systematic process of buying these shares which, if carried out on satisfactory economic terms, would be a positive contribution for Enersis for the reasons mentioned above.
- However, the size and timing of these investments depends on the willingness to sell of those currently holding such shares, so there is no certainty that these can be carried out.
- IM Trust believes that the use of proceeds associated with purchase of shares in subsidiaries of Enersis could be between USD 1,764 million and USD 1,898 million.
Note: At the request of the Committee member Mr. Rafael Fernández M., it is acknowledged that he assigns no strategic value to the purchase of minority shares in companies which Enersis already consolidates.
ii. Strategic acquisitions in the region
- Due to its size, geographical diversification and composition of its asset base, Enersis is in a privileged position to be an important player in a process of regional consolidation of the electricity industry, which has been very active in recent times, with operations like CPFL in renewable energies in Brazil, Iberdrola in the purchase of Elektro for over USD 5 billion, and others.
- As in the case of the purchase of shares, the magnitude and timing of these operations depend on factors that Enersis does not control, so there is no certainty that these will be carried out, at least over a defined time horizon.
- In the current financial context, having funds to quickly take advantage of strategic opportunities is a competitive advantage. Betting on when to make a significant acquisition without the available resources (or those obtainable at reasonable cost) carries an important risk.
Note: At the request of the Committee member Mr. Rafael Fernández M., it is acknowledged that he believes that new acquisitions is not a specific attribute of the proposed transaction as Enersis can always carry out this type of transaction.
11
iii. Development of new projects
- As the new projects are developed in the subsidiaries and not directly by Enersis, the use of proceeds of an Enersis capital increase associated with new projects assumes that Enersis passes these funds to the respective subsidiary, whether as a capital contribution or inter-company loans. Both alternatives seem viable to us.
- In this context, also to be considered are not only the projects to be developed but the capital structure of each of the subsidiaries that are going to carry out these projects and their possible sources of funds.
- Considering its subsidiaries, Enersis currently has an ample pipeline of investment projects in different stages of development, which include not only those that have been announced. However, we are unaware of any unsatisfied financing need.
Note: At the request of the Committee member Mr. Hernán Somerville, it is acknowledged that he considers that having the resources in advance reduces the risk of future financing.
The following can therefore be concluded with respect to the in money contribution that the proposed capital increase implies:
- It is difficult to determine a priori the amount and timing in which the proceeds of the capital increase might be used as this depends on the willingness to sell of third parties and the economic terms on which such negotiations are concluded.
- Nevertheless, it is reasonable to conclude that Enersis could use an important part of the new funds generated in the purchase of shares in companies in which Enersis already participates.
- There is no certainty that all the funds generated are going to be invested in the short or medium term, with the risk that Enersis might remain with excess cash for a time.
- As the money would be invested temporarily in low-risk negotiable instruments, this implies that the return on these resources will be lower than the average that Enersis obtains on its operating assets. This would change the capital structure of Enersis, generating a de-leveraging that would make the Company’s debt/equity structure inefficient.
Note: At the request of the Committee member Mr. Hernán Somerville S., it is acknowledged that having fresh funds today, while this could affect the returns of Enersis in the short term, significantly reduces the risk in carrying out an expansion plan as proposed (acquisition of minority shares and inorganic growth), as there would be the certainty of being able to finance such plan without dependence on external factors like new financial crises, credit restrictions or even the financial position of the parent company, without affecting the distribution of dividends to shareholders.
- The reports of both independent valuators include estimates of the impact on Enersis, in terms of earnings per share, using different assumptions both of the number of shares issued and the amount and timing of the new resources obtained, of maintaining excess cash. In IM Trust’s report, pages 61 and 62, as well as pages 58 and 59 of CyA’s report, a detailed analysis is made of the impact of potential excess cash.
12
- As can be appreciated from these estimates, the maintenance of excess cash without its investment in assets that generate a return in line with the present average return of Enersis brings the risk of a reduction in earnings per share of Enersis.
- On the other hand, the timely investment of these resources can lead to an increase in earnings per share of Enersis.
- The proposed operating structure is an important variable. The situation of shareholders might improve or worsen according to its shape. An excessive de-leveraging of Enersis should be avoided, making the Company’s debt/equity structure inefficient.
Note: At the request of the Committee member Mr. Hernán Somerville, it is acknowledged that both valuators, taking into account the same assumptions of the evaluation of Cono Sur, state that the purchase of minority shares in itself makes the operation accretive. In addition, Enersis has also shown its capacity to make investments for obtaining the corresponding returns.
d. Conclusions
We reiterate that mentioned above in that a transaction of this kind could be structured in different ways but the capital increase proposal received from Endesa Spain has been presented as a whole and not subject to modifications. Therefore, even though making an individual analysis of its different components, this Committee will pronounce on the transaction on the terms that have been presented, while examining it in depth.
Having said this, it is concluded that:
- In the opinion of this Directors’ Committee, it would be positive for Enersis from a strategic and business point of view to acquire the assets that Endesa Spain proposes to contribute, subject to this being done at an appropriate transfer price, terms and conditions.
Note: At the request of the Committee member Mr. Rafael Fernández M., it is acknowledged that with respect to whether it is in the best interests of all the shareholders, the public controversy that has been generated by the announcement of this transaction is a clear sign that there is a large group of minority shareholders that consider that they do not benefit neither from the value of the originally-proposed transaction nor its structure.
Regarding the note of Mr. Rafael Fernández M, the Committee members Mr. Hernán Somerville and Mr. Leonidas Vial believe that his opinion is mistaken in stating that there has been no proposed price. The expert appraisal report of Mr. Walker contemplates an independent valuators and not a price. Enersis’ Board of Directors has not proposed any price as the calling of a meeting made unanimously by the directors shows an implicit range whose ceiling was an expert appraisal report. This range was included in the calling of the meeting in order that shareholders could properly define the price of the capital increase.
13
- Regarding the value of the contribution of Cono Sur, given the specific nature of the proposed transaction, it seems reasonable to consider the different sources that have estimated a range of value or market price for the shares and among these especially the estimate of range of value or market price based on the value of the market capitalization of Enersis, made by the independent valuators chosen by the Board and by the Directors’ Committee as these were selected as such for their independence and have access to detailed information about Cono Sur.
- In the opinion of the Committee member Mr. Hernán Somerville, the range of values on market conditions should be situated approximately between USD 3,538 million and USD 3,935 million. In the opinion of the Committee member Mr. Leonidas Vial, the range of values on market conditions should be situated approximately between USD 3,555 million and USD 3,700 million. Finally, in the opinion of the Committee member Mr. Rafael Fernandez M., the range of values on market conditions should be situated below USD 3,452 million. It should be noted that these values refer to market prices of Enersis which are obtained from certain share prices and exchange rates.
|
Director |
Price of Enersis |
Minimum |
Maximum |
|
In Chilean pesos |
USD M |
USD M |
|
|
Mr. Hernán Somerville S. |
164.8 - 183.3 |
3,539 |
3,935 |
|
170 - 183.3 |
3,650 |
3,935 |
|
|
Mr. Leonidas Vial E. |
164.8 |
3,555 |
3,700 |
|
170 |
3,668 |
3,817 |
|
|
Mr. Rafael Fernández M. |
162 |
- |
3,452 |
|
170 |
- |
3,622 |
- Regarding the in cash contribution and its possible use, it is difficult to pronounce on this point today as these effects are going to depend finally on identified investment opportunities being carried out, which do not exclusively depend on Enersis, or on new opportunities arising. However, the Company’s solid track record in carrying out its expansion plans and the existence of opportunities in the region could lead one to think that it will be able to find and carry out investment opportunities and expansion.
- What can be concluded with respect to this last point, in a scenario of possible credit restrictions, is that having the resources for taking advantage of the opportunities that may arise is a competitive advantage that can increase the probability of success of an investment plan. This benefit should be weighed against the cost to Enersis of the negative “carry” associated with this cash during the time it remains un-invested, and the opportunity cost for the minority shareholders of Enersis.
14
- Finally, this transaction consolidates Enersis as the investment vehicle of Endesa Spain and Enel S.p.A for the region (except for Enel Green Power). This supposes that this commitment should be formalized in order to ensure its effectiveness over the long term.
- For these reasons, the incorporation of the participations does contribute to the best interest.
|
Hernán Somerville Senn ID No. 4.132.185-7 Chairman of the Directors´Committee |
Leonidas Vial Echeverría ID No. 5.719.922-9 Financial Expert |
Rafael Fernández Morandé ID No. 6.429.250-1 |
15
Appendix 1: Summarized description of the assets to be contributed
Argentina
a. Edesur
Edesur is the second largest distribution company in Argentina in terms of energy purchases, after Edenor, an unrelated company. Edesur operates in a concession area of 3,309 square kilometers and distributes electricity in the center-south part of the metropolitan area of the greater Buenos Aires. It provides services to the principal business district of Buenos Aires and various residential areas of the south of the city. As of December 31, 2011, Edesur distributed energy to 2.4 million customers. Residential, commercial, industrial and other customers, mainly public and municipal, represented 42%, 26%, 8% and 24% respectively of Edesur’s total energy sales.
b. Yacylec
The Yacylec transmission system comprises:
- Three 500 kV transmission lines, each 4 km in length, from the Yacyretá hydroelectric power plant to the "Rincón de Santa María” transformer station.
- "Rincón de Santa María” transformer station of 500 kV in the province of Corrientes
- 500 kV transmission line, 269 km in length, from the "Rincón de Santa María" transformer station to the "Resistencia” transformer station. Expansion of the "Resistencia" transformer station in the province of Chaco
- Communications system
c. Cemsa
The principal business of Endesa CEMSA is the wholesale purchase and sale of electricity produced by third parties and consumed by third parties, including the import and export of electricity and the trading of royalties, plus the provision of related services, all acting for its own account and/or mandated and/or on behalf of third parties and/or associated with third parties; trading in natural gas and/or its transportation, including the import and export of natural gas and the trading of royalties and natural gas, all acting for its own account and/or on behalf of third parties and/or associated with third parties, and trading of fuel oil.
Endesa CEMSA has signed agreements with Argentine electricity power plants as a back-up to its supply contracts. The generating power plants that back up the electricity supply contracts of Endesa CEMSA are: Central Costanera S.A., Central Térmica Dock Sud S.A., Centrales Térmicas del Noroeste Argentino and Hidroeléctrica El Chocón S.A.
d. Dock Sud
In the generation business, Endesa Spain has a controlling interest of 69.99 % in Central Dock Sud, an installation that has two groups with a combined capacity of 870 MW.
Central Dock Sud has 4 gas turbines and a steam turbine. The combination of two of the gas turbines and the steam turbine make up a combined cycle.
The investments in the Central Dock Sud project were made mainly prior to 2001 when the combined cycle started operating, designed to supply the electricity needs of the Argentine electricity grid and to use any potential idle capacity for export to neighboring countries.
16
Brazil
a. Ampla
This is the second largest electricity distribution company in the state of Río de Janeiro in terms of number of customers and annual energy sales. Ampla is mainly dedicated to the distribution of electricity to 66 municipalities in the state and serves 2.6 million customers in a concession area of 32,615 square kilometers, with an estimated population of 8 million. As of December 2011, residential, commercial, industrial and other customers represented 38%, 18%, 12% and 32% respectively of the total sales of Ampla, of 10,223 GWh.
b. Coelce
Coelce is the only electricity distributor in the state of Ceará, in the north-east of Brazil. As of the close of December 2011, it serves 3.2 million customers in a concession area of 148,825 square kilometers. Coelce’s sales in 2011 were 8,970 GWh. At the end of 2011, residential, commercial, industrial and other customers represented 34%, 19%, 14% and 33% respectively of Coelce’s total energy sales.
c. Endesa Brasil
Endesa Brasil was formed in 2005 to administer all the generation, transmission and distribution assets that Endesa Latinoamérica, a subsidiary of Endesa Spain, had, together with Enersis, Endesa Chile and Chilectra, in Brazil.
d. Fortaleza
Located in the municipality of Caucaia, 50 kilometers from the capital of the state of Ceará, Fortaleza is a 322 MW combined-cycle plant which uses natural gas, with a generating capacity for meeting a third of the energy requirements of Ceará, with a population of 8.2 million.
e. Cachoeira
Located in the state of Goias, 240 kilometers to the south of Goiania, Cachoeira is a hydro run-of-the-river plant using the flows from the Paranaiba river, with 10 generating units totaling 665 MW of installed capacity. Cachoeira started operations in 1997.
f. Cien
Compañía de Interconexión Energética S.A. (CIEN) is a Brazilian energy transmission company. It has two frequency conversion stations, Garabi I and Garabi II, which convert in both directions the frequencies of Brazil (60 Hertz) and Argentina (50 Hertz), and the transmission lines. On the Argentine side, they are managed by two subsidiaries: Compañía de Transmisión del Mercosur S.A. (CTM) and Transportadora de Energía S.A. (TESA), in which Cien is a 99.99% shareholder. The interconnection system consists of two transmission lines with a total length of 1,000 kilometers, and the Garabi conversion station.
Chile
a. San Isidro
This company, initially wholly-owned by Endesa Chile, was incorporated in Chile in 1996 to build and operate a 379 MW combined-cycle thermal plant in Quillota, in the Valparaíso region. The plant began its commercial operations in 1998. A 220 kV transmission line of 9 kilometers was built to connect this thermal plant to the SIC (the Chilean central interconnected electric system). This transmission system is managed by Transmisora Eléctrica de Quillota Ltda (Transquilota) in which San Isidro has a 50% interest. The merger of Pangue into San Isidro resulted in a percentage of its ownership being held indirectly by Endesa Spain.
17
b. Pangue
Pangue is located in the Biobío region, 100 km to the east of Los Angeles. Its installed capacity of 467 MW is reservoir hydroelectric, using the flows of the Biobío river. Enersis has a 57% interest.
The company’s net energy generation in 2011 was 1,713 GWh and its energy sales were 1,798 GWh.
Pangue was merged into San Isidro in the first half of 2012.
Colombia
a. Codensa
Codensa is a Colombian electricity distribution company with a concession area of 18,217 square kilometers in Bogotá and another 96 municipalities in the department of Cundinamarca, Tolima and Boyacá, serving approximately 2.6 million customers.
b. Emgesa
Emgesa has an installed generating capacity of 2,914 MW of which 85% are hydroelectric power plants and the remaining to thermoelectric power plants. In September 2007 Central Hidroeléctrica Betania ESP and Emgesa S.A. ESP were merged into Betania, adopting the name of Emgesa S.A. ESP.
c. Empresa de Energía de Cundinamarca S.A (EEC)
This is a company dedicated to the trading and distribution of energy in the department of Cundinamarca. It has a customer base of 247 thousand with sales of 622 GWh in 2011
Peru
a. Edelnor
This is a Peruvian distribution company which operates in a concession area of 2,440 square kilometers. It has an exclusive concession to distribute electricity in the northern part of the Lima metropolitan area, covering the departments of Huaral, Huaura, Barranca and Oyón, and an adjoining province in Callao. It was distributing electricity to around 1.1 million customers at the end of 2011.
b. Piura
Empresa Eléctrica de Piura (Eepsa), with 133 MW, is an electricity-generating company with two thermal plants, Malacas and Malacas 2, located in the province of Talara-Piura, which operates with local natural gas.
Piura is working on the construction of an open-cycle thermal power plant of 200 MW, called Reserva Fría. It is expected to be ready for generation in March 2013.
18
DISCLAIMMER: THE ENGLISH VERSION OF THIS OPINION WAS TRANSLATED FOR THE CONVENIENCE OF THE READER. THIS TRANSLATION HAS NOT BEEN REVIEWED OR APPROVED BY MR. LEONIDAS VIAL.
Santiago, October 30, 2012
To the Shareholders
Enersis S.A.
SANTIAGO
Ref: Pronouncement on the Capital Increase of Enersis S.A.
Dear Sir,
In accordance with article 50 bis of the Chilean Companies Act 18,046 (“LSA”, in its Spanish acronym), I hereby report on the proposed capital increase of Endesa, S.A. (“Endesa Spain”).
As a member of the Directors’ Committee of Enersis, I prepared and signed the report dated October 29, 2012 that the Committee issued in relation to the proposed operation, and which is available to shareholders on the company’s website.
As the matters and content of this Committee report substantially coincide with the matters and content of the pronouncement to be made in my position as director, I shall follow a similar scheme to that followed in the Committee report.
I. Declarations on the position of director of Enersis S.A. and relationship with the controller:
1. I declare that I have been a director of Enersis S.A. since April 22, 2010, on which date the company’s ordinary shareholders meeting was held on which renewed the whole of the Board of Directors. I was appointed director with the votes of the controlling shareholder Endesa Latinoamérica S.A. I also declare that these votes were determinant for being elected director.
2. I declare that I have an interest in the Operation according to the interpretation of the Superintendence of Securities and Insurance (“SVS”) in its Official Letter 21,001 of August 29, 2012, section III.1., which makes applicable to the Operation the SVS resolution in Letter 9,914 of April 18, 2012 addressed to the company Enjoy S.A. Such declaration of interest was formally reiterated to the Company at its board meeting held on September 5, 2012.
3. I declare being a direct/indirect shareholder of Enersis S.A. and Endesa Chile S.A..
II. Introduction
On June 18, 2012, by a letter addressed to the chairman of the Board of Directors of Enersis, the controller of Enersis, Endesa Spain, proposed an operation which implied a capital increase of Enersis with a defined structure and requested that it be submitted to an Extraordinary Shareholders Meeting. This capital increase would be carried out in the following terms: Endesa Spain would participate in the capital increase with the contribution of all the issued capital of a Spanish company called Cono Sur Participaciones S.L. (“Cono Sur”) whose assets would be all the participations that the Endesa Spain Group has in South America. The other shareholders of Enersis could participate in the capital increase by paying pro rata in cash . An operation of this kind could be structured in several ways but the proposal has been presented as a specific transaction, not subject to modifications, , on which this Committee will pronounce on the operation on the terms that have been presented, even though making an individual analysis of its different components, while examining it in depth.
On August 3, 2012, the SVS, by its Official Letter 18,684, considered that the capital increase of Enersis in the terms stated in the previous paragraph should comply with the regulations set out in Chapter XVI of the LSA..
By letters dated August 8 and 28, 2012, addressed to the chairman of the Board of Directors, Endesa Spain confirmed its interest in proceeding with the proposed capital increase and ratified its request for an Extraordinary Shareholders Meeting of Enersis in order for it to consider this transaction..
III. Characteristics of the operation
According to information provided by Endesa Spain, the direct or indirect participations it would contribute are in different companies in Argentina, Brazil, Chile, Colombia and Peru, a detail of which is added as Appendix 1 to the Committee’s report.
With respect to the terms and conditions of the proposed operation, I subscribe to that stated in the Committee’s report.
IV. Information Revised by the Directors’ Committee
In addition to the letters from Endesa Spain mentioned above, I have taken into account the following reports:
1. Expert appraisal report dated July 23, 2012 of the expert appraiser Mr. Eduardo Walker H.
2. Independent valuator report dated October 24, 2012 of IM Trust Asesorías Financieras S.A. (hereinafter “IM Trust”).
3. Independent valuator report dated October 24, 2012 of Claro y Asociados Limitada (hereinafter “CyA”).
In my opinion, both the expert appraiser Mr. Walker and the independent valuators IM Trust and CyA have the due independence and have receive the information and a reasonable times for carrying out their task, being their reports available to all the shareholders.
As indicated in the Committee’s report, despite referring to the same proposed operation, the nature of the tasks of the expert appraiser Mr. Walker and of the independent valuators IM Trust and CyA is different. In the case of Mr. Walker, he is an “expert appraisal” in accordance with article 15 of the LSA, which does not set any specific valuation criteria. In the case of IM Trust and CyA, these are reports of “independent valuators” in terms of article 147 of the LSA, a regulation stating that such a report should inform shareholders about the conditions of the operation (specifically whether it contributes to the best interest and whether it meets the price, terms and conditions prevailing in the market at the time of its approval), its effects and potential impact for the company, and to pronounce on the points that the Directors’ Committee and its members have expressly requested to be evaluated.
a. Expert Appraisal Report Prepared by Eduardo Walker H.
On July 23, 2012, the expert appraiser issued the report which values the companies that Endesa Spain would contribute to the capital increase at that date, in USD 4,862 million.
The methodology used by the expert appraiser consisted of a valuation by sum of the parts of the businesses or the participations to be contributed, according to the discounted cash flow method. The economic equity value of each productive company was determined by deducting the discounted cash flows from the value, including a terminal value, the economic value of the debt, net of cash and contingencies.
b. Report of the Independent Valuators IM Trust
On October 24, 2012, the independent valuator IM Trust, appointed by the Board of Directors of Enersis, issued a report that estimates the market value of the companies to be contributed by Endesa Spain, stating that such contribution is equivalent to a participation in Enersis in the range of between 30.9% and 32.5% of its market capitalization, calculated prior to the capital increase, using the share price of the subscription, which percentage on Tuesday October 23 were the equivalent of USD 3,445 million and USD 3,621 million.
The methodology used consisted of calculating a discounted cash flow of the participations to be contributed by Endesa Spain and of Enersis, obtaining values of USD 4,709 million and USD 14,836 million respectively. With this, it was concluded that the value of the participations to be contributed is in the range of 30.9% to 32.5% of the value of Enersis.
c. Report of the Independent Appraiser Claro y Asociados
On October 24, 2012, the independent valuator Claro y Asociados, appointed by the Directors’ Committee of Enersis, issued a report that values the participations to be contributed by Endesa Spain in the range of USD 3,870 million to USD 3,912 million.
This firm used two methodologies to arrive at this range of values: (i) the first consisted of calculating a discounted cash flow of the participations to be contributed by Endesa Spain and of Enersis, obtaining values of USD 4,627 million and USD 13,231 million respectively. The discounted cash flow valuation of Enersis was then compared with its market capitalization on October 22 and a discount of 19.58% was obtained. This same discount rate was applied to the value of the participations to be contributed, concluding that the reference market value was USD 3,870 million; (ii) the second consisted of calculating the value of the contribution based on the multiple EV1/EBITDA2of Enersis and applying the same multiple to the sum of the proportional EBITDAs to be contributed, obtaining a value of USD 3,912 million.
Finally CyA states that presenting these values as percentages of the market capitalization of Enersis results in a range of 34.97% and 35.35%.
V. Pronouncement
As stated above, article 147 of the LSA establishes the criteria for approving an operation with a related party is that it contributes to the best interest and meets in terms of price, terms and conditions those prevailing in the market at the time of their approval.
I now refer to both points.
The acquisition of the participations of Endesa Spain could have been structured in several ways. However, in this report I shall refer only to the capital increase proposal received from Endesa Spain as it has been presented as the one option, not subject to modifications. Therefore, even though making an individual analysis of its different components, I will pronounce on the operation on the terms that have been presented, while examining it in depth.
a. Contribution to the best interest
I believe that for Enersis it would be positive from a strategic and business point of view to acquire the participations that Endesa Spain proposes to contribute, subject to this being done at a suitable transfer price, terms and conditions, a point I will refer to in the following section. I therefore believe that the proposed transaction does contribute to the best interests insofar as the contribution of the participations is concerned.
For the proposed transaction to contribute to the best interest it has to provide for the creation of value and that the conditions and terms are equitable to all the shareholders, as well as matching the strategic and business interests as mentioned above.
I mention below the principal reasons why I believe that the proposed transaction contributes to the best interest of Enersis, from a strategic and business perspective:
i. All the participations with a significant value within the assets contributed, except Piura (EEPSA), Yacylec and Central Dock Sud, relate to assets (i) in which Enersis already has a participation, (ii) that Enersis already manages from an operating point of view, and (iii) that Enersis already consolidates in its financial statements. Piura is a thermal-generating unit in Peru which would permit Enersis to increase its presence in that market.
ii. The contribution of the assets in the Colombian companies would also permit Enersis to ensure their control and consolidation, possible today through a shareholders’ agreement in which Endesa Spain cedes its controller rights to Enersis, which currently consolidates Codensa and Emgesa under an assignment made by Endesa Internacional, today Endesa Latinoamérica, S.A. (“ELA”), in favor of Enersis and Endesa Chile respectively, at no cost, of the right to appoint the majority of the directors of those companies, an assignment made for an indefinite period subject however to ELA being able to terminate the assignment unilaterally by giving prior notice to Enersis or Endesa Chile, as the case may be, at least three years prior to the desired termination date. The Colombian companies represented 25% of the Enersis’ EBITDA in 2011.
1EV (enterprise value): value of the company
2EBITDA: Earnings before interest, taxes, depreciation & amortization
iii. The fact that neither Endesa Spain and Enel S.p.A have no direct participation in South America (except for Enel Green Power) would consolidate Enersis as the only investment vehicle for the region. This point seems to me of particular relevance as it eliminates potential conflicts of interest between Enersis and its parent, which best permits facing growth opportunities in South America. This of course assumes that such commitment is formalized in a way to ensure its effectiveness.
iv. The contribution of the participations has the advantage that Enersis begins to receive benefits as soon as the contribution is made.
v. Enersis manages the vast majority of these assets but only receives part of the earnings. In 2011, just 43% of the earnings reported corresponded to the shareholders of Enersis and the remaining 57% corresponded to other shareholders. If this transaction were carried out, part of the earnings generated by the subsidiaries would reach Enersis directly, reducing the portion that is not currently received by Enersis. This is particularly relevant in the development of future projects as, by Enersis increasing its participation today in these companies, it could capture a larger part of the potential creation of value associated with the execution of projects in portfolio.
vi. From an ownership structure point of view, Enersis currently has minority interests in many of its subsidiaries which gives rise to complexity when analyzing it financially, both from a credit and a market valuation perspective. The proposed transaction would permit a one-time increase in the proportional participation of Enersis in these companies, thus significantly reducing the minority interest, which we believe is positive for Enersis.
vii. The reduction in the minority interest could reduce the potential “group” discount that the market might be applying to Enersis.
viii. The proposed transaction would permit the achievement of this result, on a large scale, in one operation, comparing favorably with having to carry out multiple separate smaller transactions.
b. Market price and other terms and conditions.
Given that, as mentioned in the previous section, the acquisition of the participations would have positive effects for Enersis from a strategic point of view, the “market price” criteria appear sufficient to justify the transaction.
Benchmark market prices generally correspond either to the take-over of companies that are not controlled or consolidated, or the purchase of financial minority holdings in exchange-listed companies.
On the other hand, in this transaction, in which various assets of different kinds are acquired in just one operation, it is difficult to determine what the “market price” is if we take the same above-mentioned parameters. It therefore seems prudent to consider the opinion of independent expert appraisers, which qualification we believe both IM Trust and CyA meet.
I agree with the criteria of the reports of both valuators of linking the value or market price of the non-monetary contribution of Endesa Spain to the market capitalization of Enersis, as there is a relatively similar business between Enersis and the combination of the contributed assets, thus making Enersis itself a good basis for comparison with respect to Cono Sur.
i. Price
The following is a summary of the estimated values or market prices made by IM Trust and CyA.
|
|
Date |
Value |
Methodology |
|
IM Trust |
October 24, 2012 |
30.9% to 32.5% of the value of Enersis (USD 3,445 M to USD 3,621 M) |
Range of values resulting from the calculation of the discounted cash flow of Cono Sur adjusted for the relation between the market value of Enersis on October 23, 2012 and the discounted cash flow of Enersis calculated in a similar way. |
|
Claro & Asociados |
October 24, 2012 |
34.97% to 35.35% of the value of Enersis (USD 3,870 M to USD 3,912 M) |
Range of values whose floor is determined through a discounted cash flow of Cono Sur adjusted for the relation between the market value of Enersis as of October 23, 2012 and the discounted cash flow of Enersis calculated in a similar way. Its ceiling is calculated through the EV/EBITDA multiple of Enersis applied to the EBITDA that Cono Sur would contribute. |
In addition, to contrast the values reached by the independent valuators, the following two tables are inserted with valuations published by market analysts of reputable local and international stockbroker firms, both before the announcement of the transaction and afterwards.
Reports of analysts prior to the announcement of the capital increase:
| Broker | Credit Suisse | IM Trust | Santander | G. Sachs | Citi | |
| Reporting Date | 02/16/2011 | 02/28/2012 | 04/09/2012 | 05/04/2012 | 07/05/2012 | AVERAGE |
| Endesa Brasil | ||||||
| Ampla | 2,339 | 1,345 | 1,516 | 1,745 | 2,204 | 1,830 |
| Fortaleza | 856 | 866 | 665 | 587 | 1,059 | 807 |
| Cachoeira | 1,055 | 1,067 | 1,419 | 1,267 | 1,778 | 1,317 |
| Cien | 620 | 1,160 | 502 | 603 | 721 | |
| Coelce | 1,963 | 1,334 | 1,057 | 1,846 | 2,111 | 1,662 |
| Edesur | 138 | (207) | 110 | (367) | (115) | (88) |
| Emgesa | 4,278 | 5,523 | 4,828 | 4,008 | 3,942 | 4,516 |
| Codensa | 4,756 | 4,405 | 3,315 | 5,070 | 4,050 | 4,319 |
| Edelnor | 1,324 | 1,344 | 1,193 | 907 | 746 | 1,103 |
| Piura (EEPSA) | ||||||
| Others | ||||||
| TOTAL ADJUSTED BY PARTICIPATION | 3,773 | 3,809 | 3,551 | 3,676 | 3,822 | 3,726 |
Does not include reports of Morgan Stanley of July 11, 2012 or of JPMorgan of April 28, 2011 as the first does not make a sum of the parts and the second contains very few companies of Cono Sur.
Reports of analysts after the announcement of the capital increase:
| Broker | Citi | Citi | BofA | Credit Suisse | Itau | Santander | |
| Reporting Date | 09/27/2012 | 07/26/2012 | 07/27/2012 | 07/26/2012 | 09/06/2012 | 08/02/2012 | AVERAGE |
| Endesa Brasil | 45 | 43 | 44 | ||||
| Ampla | 2,161 | 2,204 | 1,408 | 1,857 | 2,726 | 1,519 | 1,979 |
| Fortaleza | 871 | 1,059 | 527 | 594 | 549 | 665 | 711 |
| Cachoeira | 1,249 | 1,778 | 1,418 | 1,708 | 1,581 | 1,419 | 1,525 |
| Cien | 310 | 603 | 579 | 532 | 494 | 1,162 | 613 |
| Coelce | 2,417 | 2,111 | 1,463 | 2,208 | 3,240 | 1,510 | 2,158 |
| Edesur | (307) | (115) | 117 | 257 | 0 | 110 | 10 |
| Emgesa | 4,907 | 3,942 | 5,155 | 6,684 | 4,827 | 5,103 | |
| Codensa | 4,205 | 4,050 | 3,263 | 5,154 | 3,532 | 3,318 | 3,920 |
| Edelnor | 758 | 746 | 1,068 | 1,401 | 928 | 1,194 | 1,016 |
| Piura (EEPSA) | 266 | 266 | |||||
| Others | 164 | 92 | 128 | ||||
| TOTAL ADJUSTED BY PARTICIPATION | 4,233 | 3,822 | 3,511 | 4,618 | 3,622 | 3,961 |
Does not include the report of Itaú in the total average as there is no valuation of Emgesa, thus altering the value of Cono Sur significantly.
I share the conclusion of both independent valuators with reference to linking the market value of Cono Sur to the market value of Enersis. The difference therefore does not refer to the methodology but as to whether such link or ratio should be 1:1 or to whether the value of Cono Sur should have an additional discount with respect to the market value of Enersis, and what should be the share price of Enersis to be taken into account for translating this ratio into an amount of money.
In my opinion, the ratio should be 1:1 as the independent valuators sustain, i.e. the same discount rate should be applied to Cono Sur that the market applies to Enersis.
I believe that the market value of the contributed assets should be between USD 3,555 million and USD 3,700 million, a range corresponding to 32.5% of Enersis, using a closing market share price of Ch$ 164.8 per share and an exchange rate of Ch$482/USD, plus/less 2%, a range that should be adjusted according to the variation in the Enersis’ share price and future exchange rates, considering that the Enersis’ market share price, due to its high liquidity, is representative of the “market value” of Enersis at all times.
The following shows the estimated results according to the different methodologies:
|
Figures USD million |
IM Trust |
CyA |
E. Walker |
|
DCF |
4,709 |
4,627 |
4,862 |
|
Comparable company multiples |
4,165 |
4,179 |
|
|
Comparable transaction multiples |
|
4,914 |
|
|
Market analyst consensus |
3,827 |
|
|
|
Valuation at Ch$162/share3 |
3,533 |
3,891 |
|
|
Valuation at Ch$187/share |
4,074 |
4,4914 |
|
Source: Respective reports. Note: values in estimated USD according to exchange rate of each report
ii. Other terms and conditions
Regarding the terms and conditions other than price, I note that, in order to adjust to terms and conditions prevailing in the market, the contribution of Cono Sur should be governed by one or more contracts between Enersis and Endesa Spain that contemplate at least the following elements:
a) Usual declarations and warranties for company acquisition transactions with respect to those companies in which Enersis has no current shareholding, e.g. Piura, Yacylec and Central Dock Sud, and an indemnity should such declarations and warranties prove to be incorrect.
b) An express commitment by Endesa Spain and Enel that Enersis is going to be the sole investment vehicle in South America of both companies in conventional energies, with the exception of that which Enel already has through its subsidiary Enel Green Power.
c) A commitment to maintain Enersis free from all possible taxation contingencies deriving from the structure of the transaction.
In addition, I should point out that, while a possible mechanism of conditionality of the capital increase has been considered (such as the share subscription not resulting in Endesa Spain exceeding its limit of 65% as established in the Company’s bylaws), the final terms of such conditionality are not known at this time.
Neither are two important elements known as of this date like the mechanism for setting the subscription price of the new shares to be issued and potential discounts, if any, to be applied in determining such price, matters that should be resolved by the shareholders at the respective meeting.
4 Value implicit in the report of CyA
c. Use of funds
- It is difficult to determine a priori the amount and timing in which the proceeds of the capital increase might be used as this depends on the willingness to sell of third parties and the economic terms on which such negotiations are concluded.
- Nevertheless, it is reasonable to conclude that Enersis could use an important part of the new funds generated in the purchase of shares in companies in which Enersis already participates.
- There is no certainty that all the funds generated are going to be invested in the short or medium term, with the risk that Enersis might remain with excess cash for a time.
- As the money would be invested temporarily in low-risk negotiable instruments, this implies that the return on these resources will be lower than the average that Enersis obtains on its operating assets. This would change the capital structure of Enersis, generating a de-leveraging that would make the Company’s debt/equity structure inefficient.
- The reports of both independent valuators, include estimates of the impact on Enersis, in terms of earnings per share, using different assumptions both of the number of shares issued and the amount and timing of the new resources obtained, state that maintaining excess cash produces uncertain results.
- As can be appreciated from these estimates, the maintenance of excess cash without its investment in assets that generate a return in line with the present average return of Enersis brings the risk of a reduction in earnings per share of Enersis.
- On the other hand, the timely investment of these resources can lead to an increase in earnings per share of Enersis.
- The proposed operating structure is an important variable. The situation of shareholders might improve or worsen according to its shape. An excessive de-leveraging of Enersis should be avoided, making the Company’s debt/equity structure inefficient.
d. Conclusions
I reiterate that mentioned above in that a transaction of this kind could be structured in a more efficient way but the capital increase proposal received from Endesa Spain has been presented as a whole and not subject to modifications. Therefore, even though making an individual analysis of its different components, this director will pronounce on the transaction on the terms that have been presented.
Having said this, I conclude that:
1. In my opinion, it would be positive for Enersis from a strategic and business point of view to acquire the assets that Endesa Spain proposes to contribute, subject to this being done at an appropriate transfer price, terms and conditions.
2. Regarding the value of the contribution of Cono Sur, given the specific nature of the proposed transaction, it seems reasonable to consider the different sources that have estimated a range of value or market price for the shares and among these especially the estimate of range of value or market price based on the value of the market capitalization of Enersis, made by the independent valuators chosen by the Board and by the Directors’ Committee as these were selected as such for their independence and have access to detailed information about Cono Sur.
3. In my opinion, the market value of the assets should be between USD 3,555 million and USD 3.700 million, a range that corresponds to 32.5% of Enersis using the share price at the close of the market of Ch$ 164.8 per share and an exchange rate of Ch$482/USD, plus/less 2%, a range of value that should be adjusted according to the variation in Enersis’ share price and the future exchange rate, considering that the market price of the Enersis share, due to its high liquidity, is representative of the “market value” of Enersis at alle times.
4. Regarding the in cash contribution and its possible use, it is difficult to pronounce on this point today as these effects are going to depend finally on identified investment opportunities being carried out, which do not exclusively depend on Enersis, or on new opportunities arising. However, the Company’s solid track record in carrying out its expansion plans and the existence of opportunities in the region could lead one to think that it will be able to find and carry out investment opportunities and expansion.
5. What can be concluded with respect to this last point, in a scenario of possible credit restrictions, is that having the resources for taking advantage of the opportunities that may arise is a competitive advantage that can increase the probability of success of an investment plan. This benefit should be weighed against the cost to Enersis of the negative “carry” associated with this cash during the time it remains un-invested.
6. Finally, this transaction consolidates Enersis as the investment vehicle of Endesa Spain and Enel S.p.A for the region (except for Enel Green Power). This supposes that this commitment should be formalized in order to ensure its effectiveness over the long term.
7. For these reasons, the incorporation of the participations does contribute to the best interest.
|
Leonidas Vial E. ID No. 5.719.922-9 Director |
DISCLAIMMER: THE ENGLISH VERSION OF THIS OPINION WAS TRANSLATED FOR THE CONVENIENCE OF THE READER. THIS TRANSLATION HAS NOT BEEN REVIEWED OR APPROVED BY MR. HERNAN SOMERVILLE.
Santiago, October 31, 2012
To the Shareholders of Enersis S.A.
SANTIAGO
Ref: Pronouncement on the Capital Increase of Enersis S.A.
Dear Sir,
I hereby give my individual pronouncement as a director of the publicly held limited liability stock company Enersis S.A. (“Enersis” or the “Company”), which corporate purpose are investments, domiciled in the Republic of Chile and registered with the Superintendence of Securities and Insurance (“SVS”) under No.17/1983, in relation to the capital increase of Enersis (the “Operation“) under the following terms and conditions:
I. Background
1. On June 18, 2012, the controller of the Company, Endesa S.A (Endesa Spain) sent a letter to the chairman of the Board of Directors of Enersis, proposing a capital increase. This capital increase would be carried out, according to the letter and other information sent later by the controller, on the following terms:
(i) Endesa, S.A. would contribute to Enersis S.A. all the capital of a Spanish company called Conosur Participaciones, S.L. (“Conosur”) with no liabilities and whose only assets would be all the participations that the Endesa Spain Group has in South America and which are other than those held by Enersis, directly or indirectly. These participations are detailed in Appendix 1 to this document.
(ii) The shareholders of Enersis may participate in the capital increase by paying pro rata in cash .
2. On August 3, 2012, the SVS made an interpretation by its Official Letter 18,684, which considered with particular scope and ad hoc that the Enersis capital increase governed by articles 15 and 67 of the LSA should be complemented by the regulations contained in Chapter XVI of the LSA. Consequently and in order to support such complementation, the SVS considered that the Operation should be treated as one between related parties, in which the related parties involved are Endesa Spain and Enersis.
3. By letters dated August 8 and 28, 2012, addressed to the chairman of the Board of Directors, Endesa Spain confirmed its interest in proceeding with the proposed capital increase and ratified its request for an Extraordinary Shareholders Meeting of Enersis in order to it to approve the Operation.
4. On August 6, 2012 and by resolution 68/12 of the Board of Directors of Enersis it was agreed to submit voluntarily to the interpretation contained in the SVS Official Letter 18,684 in order to proceed with the Operation and avoid adverse consequences caused by an interruption to the process, despite disagreeing with the procedure and substance of that interpretation, as is recorded in the corresponding memo and particularly in the reply made by the Board of Directors to the letter.
5. Article 147 No.5 of Chapter XVI of the LSA states that all directors of an publicly held limited liability stock company involved in a transaction between related parties should give their opinion with respect to the convenience for the best interest of such transaction and make this available to the shareholders. This Chapter XVI was interpreted by the SVS to harmonize it with articles 15 and 67 of the LSA through Official Letter 21,001 of August 29, 2012. The Board of Directors of Enersis therefore voluntarily resolved to follow this interpretation, coherent with that stated in paragraphs 2 and 4 above.
II. DECLARATIONS ON THE POSITION OF DIRECTOR OF ENERSIS S.A AND RELATIONSHIP WITH THE CONTROLLER
1. I declare that I am a director of Enersis S.A. re-elected on April 22, 2010, and I was appointed director with the votes of the majority shareholder Endesa Latinoamérica S.A. I also declare that these votes were determinant for being elected director.
2. I declare that I was appointed as chairman of the Directors’ Committee by the Board of Directors on April 23, 2010.
3. I declare that I have an interest in the Operation in accordance with the interpretation made by the SVS in its Official Letter 21,001 of August 29, 2012, section III.1., which makes applicable to the Operation that resolved by the SVS in its Official Letter 9,914 of April 18, 2012 addressed to the company Enjoy S.A.
4. Such declaration of interest was reiterated formally at the Company’s Board of Directors meeting of September 5, 2012.
5. I declare that I am the holder of 2,500,000 shares in Enersis through the company Inversiones Santa Verónica Limitada, tax No. 79.880.230-5.
III. DECLARATIONS ON THE REPORTS RECEIVED
Apart from the letters from Endesa Spain mentioned above, I have taken into account the following reports:
1. Expert appraisal report dated July 23, 2012 of the expert Eduardo Walker H.
2. Independent valuator report dated October 24, 2012 of IM Trust Asesorías Financieras S.A. (“IM Trust”).
3. Independent valuator report dated October 24, 2012 of Claro y Asociados Limitada (“CyA”).
I consider that both the expert appraisal Mr. Walker and the independent valuators IM Trust and CyA are duly independent, have had access to the information and a reasonable time to perform their task, being their reports available to all the shareholders.
Despite referring to the same proposed operation, the nature of the tasks of the expert appraiser Mr. Walker and of the independent valuators IM Trust and CyA is different. In the case of Mr. Walker this is an “expert appraisal”, in accordance with article 15 of the LSA, which does not set any specific valuation criteria. In the case of IM Trust and CyA, these are reports of “independent valuators” in terms of article 147 of the LSA, a regulation stating that such a report should inform shareholders about the conditions of the operation (specifically whether it contributes to the best interest and whether it meets price, terms and conditions similar to those prevailing in the market at the time of its approval), its effects and potential impact for the company, and to pronounce on the points that the Directors’ Committee and its members have expressly requested to be evaluated.
III.1. Expert report prepared by Eduardo Walker H.
On July 23, 2012, the expert appraiser issued his report in which he values the companies that Endesa Spain would contribute to the capital increase at that date at USD 4,862 million.
The methodology used by the expert appraiser consisted of a valuation by sum of the parts of the businesses or the assets to be contributed, according to the discounted cash flow method. The economic value of each productive company was determined by deducting the discounted cash flows from the value, including the terminal value, the economic value of the debt, net of cash and contingencies. The results obtained were validated through a comparison of the EV1/EBITDA2 ratios.
This methodology is in line with that commonly used by financial sector analysts, with reasonable discount rates and assumption within those that might be expected.
The value of the discounted cash flow obtained by the expert appraiser Mr. Walker is in line with those obtained by the other valuators. However, a valuation through cash flows does not necessarily imply that it represent the market value due to the discount at which companies are traded with respect to this methodology.
III.2 Report of the independent valuator appointed by the Board of Directors: IM Trust
On October 24, 2012, the independent valuator IM Trust, appointed by the Board of Directors of Enersis, issued a report estimating the market value of the companies that Endesa Spain would contribute, stating that such contribution is equivalent to a participation in Enersis in the range of between 30.9% and 32.5% of its market capitalization, calculated prior to the capital increase, using the share price at which it is subscribed, which percentage on October 24 were the equivalent of USD 3,445 million and USD 3,621 million.
1 EV (enterprise value): value of the company
2 EBITDA: Earnings before interest, taxes, depreciation & amortization
The methodology used consisted of calculating a discounted cash flow of the assets to be contributed by Endesa Spain and Enersis, obtaining values of USD 4,709 million and USD 14,836 million respectively. It therefore concluded that the value of the participations to be contributed is in the range of 30.9% to 32.5% of the value of Enersis.
III.3. Report of the independent valuator appointed by the Directors’ Committee: Claro y Asociados
On October 24, 2012, the independent valuator Claro y Asociados, appointed by the Directors’ Committee of Enersis, issued a report that values the assets that Endesa Spain would contribute in the range of USD 3,870 million to USD 3,912 million.
This firm used two methodologies to arrive at this range: (i) the first consisted of calculating a discounted cash flow of the assets to be contributed by Endesa Spain and Enersis, obtaining values of USD 4,627 million and USD 13,231 million respectively. The discounted cash flow value of Enersis was then compared with a market capitalization on October 22 and a discount of 19.58% was obtained. This same discount was applied to the value of the assets to be contributed, concluding that the reference market value was USD 3,870 million; (ii) the second consisted of calculating the value of the contribution based on the multiple EV3/EBITDA4 of Enersis and applying the same multiple to the sum of the proportional EBITDAs to be contributed, obtaining a value of USD 3,912 million.
Finally CyA states that if these values are shown as percentages of the market capitalization of Enersis, a range of between 34.97% and 35.35% is obtained.
III.4. Report of the Directors’ Committee
As I belong to the Directors’ Committee, my opinion is already included in its report.
IV. DECLARATION ON THE CONVENIENCE OF THE OPERATION IN THE BEST INTEREST
As stated above, article 147 of the LSA states that the criteria for approving a transaction between related parties is that it contributes to the best interest and meets in price, terms and conditions those prevailing in the market at the time of its approval.
The acquisition of the participations of Endesa Spain could have been structured differently. However, I will only refer in this report to the capital increase proposal received from Endesa Spain as it has been presented as the one option, not subject to modifications.
IV.1. Contribution to the best interest
3 EV (enterprise value): value of the company
4 EBITDA: Earnings before interest, taxes, depreciation & amortization
In the light of the above and with the information available at this time, I declare for the purposes of article 147 of the LSA that for Enersis it would be positive from a strategic and business point of view to acquire the assets that Endesa Spain proposes to contribute, subject to this being done at a suitable transfer price, terms and conditions, a point I will refer to in the following section. I therefore believe that the proposed transaction does contribute to the best interests insofar as the contribution of the participations is concerned.
I pass now to detail the principal reasons why I believe that the proposed transaction contributes to the best interest of Enersis, from a strategic and business perspective:
i. All the participations with a significant value within the contributed assets, except Piura (EEPSA), Yacylec and Central Dock Sud, relate to assets (i) in which Enersis already has a participation, (ii) that Enersis already manages from an operating point of view, and (iii) that Enersis already consolidates in its financial statements. Piura is a thermal-generating unit in Peru which would permit Enersis to increase its presence in that market. The situation is a little more complex in the case of Central Dock Sud, not because of the type of assets, as they are good-quality thermal generation units, but due to the present situation in Argentina. However, this should be reflected in the transfer price and not in the willingness to take a participation in this asset as, over and above the present situation, in the long term a company like Enersis, which aspires to being a regional leader in the energy industry, it should have a presence in Argentina, and in this context the assets of Central Dock Sud are important.
ii. The contribution of the assets in the Colombian companies would also permit Enersis to ensure their control and consolidation, possible today through a shareholders’ agreement in which Endesa Spain cedes its controller rights to Enersis, which currently consolidates Codensa and Emgesa under an assignment made by Endesa Internacional, today Endesa Latinoamérica, S.A. (“ELA”), in favor of Enersis and Endesa Chile respectively, at no cost, of the right to appoint the majority of the directors of those companies, an assignment made for an indefinite period subject however to ELA being able to terminate the assignment unilaterally by giving prior notice to Enersis or Endesa Chile, as the case may be, at least three years prior to the desired termination date. The Colombian companies represented 25% of the Enersis’ EBITDA in 2011.
iii. The fact that neither Endesa Spain nor Enel S.p.A has any direct participation in South America (except for Enel Green Power) would consolidate Enersis as the only investment vehicle for the region. This point seems to me of particular relevance as it eliminates potential conflicts of interest between Enersis and its parent, which best permits facing growth opportunities in South America. This of course assumes that such commitment is formalized in a way to ensure its effectiveness.
iv. The contribution of the participations has the advantage that Enersis begins to receive benefits as soon as the contribution is made.
v. The cash resources that Enersis would receive would enable it to take advantage of market opportunities and maintain its leadership position in South America without any significant increase in its debt level.
vi. Enersis manages the vast majority of these assets but only receives part of the earnings. In 2011, just 43% of the earnings reported corresponded to the shareholders of Enersis and the remaining 57% corresponded to other shareholders. If this transaction were carried out, part of the earnings generated by the subsidiaries would reach Enersis directly, reducing the portion that is not currently received by Enersis. This is particularly relevant in the development of future projects as, by Enersis increasing its participation today in these companies, it could capture a larger part of the potential creation of value associated with the execution of projects in portfolio.
vii. From an ownership structure point of view, Enersis currently has minority interests in many of its subsidiaries which give rise to complexity when analyzing it financially, both from a credit and a market valuation perspective. The proposed transaction would permit a one-time increase in the proportional participation of Enersis in these companies, thus significantly reducing the minority interest, which we believe is positive for Enersis.
viii. The decrease in the minority interest could reduce the potential “group” discount that the market might be applying to Enersis.
ix. The proposed transaction would permit the achievement of this result, on a large scale, in one operation, comparing favorably with having to carry out multiple separate smaller transactions.
IV.2. Market price and other terms and conditions
Given that, as mentioned in the previous section, the acquisition of the contributed assets would have positive effects for Enersis from a strategic point of view, the “market price” criteria appear sufficient to justify the transaction. Benchmark market prices generally correspond either to the take-over of companies that are not controlled or consolidated, or the purchase of financial minority shares in exchange-listed companies.
In this transaction, on the other hand, in which various assets of different kinds are acquired in just one operation, it is difficult to determine what the “market price” is if we take the same above-mentioned parameters. It therefore seems prudent to consider the opinion of independent expert valuators, which qualification we believe both IM Trust and CyA meet.
I agree with the criteria of the reports of both valuators of linking the value or market price of the non-monetary contribution of Endesa Spain to the market capitalization of Enersis, as there is a relatively similar business between Enersis and the combination of the contributed assets, thus making Enersis itself a good basis for comparison with respect to Conosur.
It should be pointed out that it will be the duty of the shareholders at the respective extraordinary meeting to agree whether their pretensions are within the range set by the valuators.
The following is a summary of the estimated values or market prices made by IM Trust and CyA.
|
|
Date |
Value |
Methodology |
|
IM Trust |
October 24, 2012 |
30.9% to 32.5% of the value of Enersis (USD 3,445 M to USD 3,621 M5) |
Range of values resulting from the calculation of the discounted cash flow of Cono Sur adjusted for the relation between the market value of Enersis on October 23, 2012 and the discounted cash flow of Enersis calculated in a similar way. |
|
Claro & Asociados |
October 24, 2012 |
34.97% to 35.35% of the value of Enersis (USD 3,870 M to USD 3,912 M 6) |
Range of values whose floor is determined through a discounted cash flow of Cono Sur adjusted for the relation between the market value of Enersis on October 23, 2012 and the discounted cash flow of Enersis calculated in a similar way. Its ceiling is calculated through the EV/EBITDA multiple of Enersis applied to the EBITDA that Cono Sur would contribute. |
In addition, to contrast the values reached by the independent valuators, the following two tables are presented with valuations published by market analysts of reputable local and international stockbroker firms, both before the announcement of the transaction and afterwards.
Reports of analysts prior to the announcement of the capital increase:
| Broker | Credit Suisse | IM Trust | Santander | G. Sachs | Citi | |
| Reporting Date | 02/16/2011 | 02/28/2012 | 04/09/2012 | 05/04/2012 | 07/05/2012 | AVERAGE |
| Endesa Brasil | ||||||
| Ampla | 2,339 | 1,345 | 1,516 | 1,745 | 2,204 | 1,830 |
| Fortaleza | 856 | 866 | 665 | 587 | 1,059 | 807 |
| Cachoeira | 1,055 | 1,067 | 1,419 | 1,267 | 1,778 | 1,317 |
| Cien | 620 | 1,160 | 502 | 603 | 721 | |
| Coelce | 1,963 | 1,334 | 1,057 | 1,846 | 2,111 | 1,662 |
| Edesur | 138 | (207) | 110 | (367) | (115) | (88) |
| Emgesa | 4,278 | 5,523 | 4,828 | 4,008 | 3,942 | 4,516 |
| Codensa | 4,756 | 4,405 | 3,315 | 5,070 | 4,050 | 4,319 |
| Edelnor | 1,324 | 1,344 | 1,193 | 907 | 746 | 1,103 |
| Piura (EEPSA) | ||||||
| Others | ||||||
| TOTAL ADJUSTED BY PARTICIPATION | 3,773 | 3,809 | 3,551 | 3,676 | 3,822 | 3,726 |
Does not include reports of Morgan Stanley of July 11, 2012 or of JPMorgan of April 28, 2011 as the first does not make a sum of the parts and the second contains few companies of Cono Sur.
5 Reference value as of October 23, 2012
6Reference value as of October 23, 2012
Reports of analysts after the announcement of the capital increase:
| Broker | Citi | Citi | BofA | Credit Suisse | Itau | Santander | Larraín Vial | |
| Reporting Date | 09/27/2012 | 07/26/2012 | 07/27/2012 | 07/26/2012 | 09/06/2012 | 08/02/2012 | 07/30/2012 | AVERAGE |
| Endesa Brasil | 45 | 43 | 44 | |||||
| Ampla | 2.161 | 2.204 | 1.408 | 1.857 | 2.726 | 1.519 | 214 | 1.727 |
| Fortaleza | 871 | 1.059 | 527 | 594 | 549 | 665 | 711 | |
| Cachoeira | 1.249 | 1.778 | 1.418 | 1.708 | 1.581 | 1.419 | 534 | 1.384 |
| Cien | 310 | 603 | 579 | 532 | 494 | 1.162 | 613 | |
| Coelce | 2.417 | 2.111 | 1.463 | 2.208 | 3.240 | 1.510 | 361 | 1.902 |
| Edesur | (307) | (115) | 117 | 257 | 0 | 110 | (25) | 5 |
| Emgesa | 4.907 | 3.942 | 5.155 | 6.684 | 4.827 | 833 | 4.391 | |
| Codensa | 4.205 | 4.050 | 3.263 | 5.154 | 3.532 | 3.318 | 951 | 3.496 |
| Edelnor | 758 | 746 | 1.068 | 1.401 | 928 | 1.194 | 192 | 898 |
| Piura (EEPSA) | 266 | 266 | ||||||
| Others | 164 | 92 | 564 | 273 | ||||
| TOTAL ADJUSTED BY PARTICIPATION | 4.233 | 3.822 | 3.511 | 4.618 | 3.622 | 3.624 | 3.905 |
i. Price
I share the conclusion of both independent valuators with reference to linking the market value of Conosur to the market value of Enersis, where the ratio should be 1:1, i.e. The same discount should be applied to Conosur to that which the market applies to Enersis.
The market value of Conosur should be the midpoint between 30.9% and 32.5%, i.e. 31.7% of the market value of Enersis. Regarding what Enersis share market price to use to express these percentages in an amount of money, I consider a range of between Ch$ 164.8 per share (the closing price on the date of this report) and Ch$ 183.3 per share (the share price prior to the announcement of the Operation, i.e. Ch$ 187 per share less 2%), which gives a range of value of Conosur of between USD 3,538 million and USD 3,935 million, using an exchange rate of Ch$482/USD.
As the share price that determines the floor of the range was fixed as a function of the Enersis share price as of the date of this report, this price should be adjusted according to the variation in the Enersis share price and future exchange rates, for the reasons given above.
The following shows the estimated results according to the different methodologies:
|
Figures in USD million |
IM Trust |
CyA |
E. Walker |
|
DCF |
4,709 |
4,627 |
4,862 |
|
Comparable company multiples |
4,165 |
4,179 |
|
|
Comparable transaction multiples |
|
4,914 |
|
|
Market analyst consensus |
3,827 |
|
|
|
Valuation at Ch$162 per share 7 |
3,533 |
3,891 |
|
|
Valuation at Ch$187 per share |
4,074 |
4,491 8 |
|
Source: Respective reports. Note: values in estimated USD according to exchange rate of each report
8 Value implicit in the report of CyA
ii. Other terms and conditions
Regarding the other terms and conditions, I note that, in order to adjust to terms and conditions prevailing in the market, the contribution of Conosur should be governed by one or more contracts between Enersis and Endesa Spain that contemplate at least the following elements:
a) Usual declarations and warranties for company acquisition transactions with respect to those companies in which Enersis has no current shareholding, e.g. Piura, Yacylec and Central Dock Sud, and an indemnity should such declarations and warranties prove to be incorrect.
b) An express commitment by Endesa Spain and Enel that Enersis is going to be the sole investment vehicle in South America of both companies in conventional energies, with the exception of that which Enel already has through its subsidiary Enel Green Power.
c) A commitment to maintain Enersis free from all possible taxation contingencies deriving from the structure of the transaction.
In addition, I should point out that, while a possible mechanism of conditionality of the capital increase has been considered (such as the share subscription not resulting in Endesa Spain exceeding its limit of 65% as established in the Company’s bylaws), the final terms of such conditionality are not known at this time.
There are two important elements not known at this time like the mechanism for setting the subscription price of the new shares to be issued and potential discounts, if any, to be applied in determining such price, matters that should be resolved by the shareholders at the respective meeting.
IV.3 Use of the proceeds
This point is especially difficult to analyze since it requires the anticipation of future events that do not depend on Enersis. However, we can estimate the following based on the information available today:
i. Enersis has investment opportunities of a strategic nature of significant amounts in the short and medium term. For reasons of confidentiality and precisely to protect the best interest, these have to be kept confidential.
ii. Each of these growth opportunities has to be analyzed and approved by the Board of Directors of Enersis, in detail, on their own merit and at the time the investment is made, approving just those believed to be beneficial for the Company, so there is the risk, outside the control of Enersis, that they are not carried out.
iii. Over and above determining whether there are sufficient potential investments, therefore it seems relevant to analyze what would be impact on Enersis of maintaining excess cash over a greater-than-expected time.
Of the three uses of proceeds identified by Endesa Spain in its presentations, these merit the following comments:
i. Purchase of ashres in companies which Enersis already consolidates
- Having additional funds would enable Enersis to start a systematic process of buying these shares which, if carried out on satisfactory economic terms, would be a positive contribution for Enersis for the reasons mentioned above.
- However, the size and timing of these investments depends on the willingness to sell of those currently holding such shares, so there is no certainty that these can be carried out.
- IM Trust believes that the use of proceeds associated with purchase of shares in subsidiaries of Enersis could be between USD 1,764 million and USD 1,898 million.
ii. Strategic acquisitions in the region
- Due to its size, geographical diversification and composition of its asset base, Enersis is in a privileged position to be an important player in a process of regional consolidation of the electricity industry, which has been very active in recent times, with operations like CPFL in renewable energies in Brazil, Iberdrola in the purchase of Elektro for over USD 5 billion, and others.
- As in the case of the purchase of participations, the magnitude and timing of these operations depend on factors that Enersis does not control, so there is no certainty that these will be carried out, at least over a defined time horizon.
- In the current financial context, having funds to quickly take advantage of strategic opportunities is a competitive advantage. Betting on when to make a significant acquisition without the available resources (or those obtainable at reasonable cost) carries an important risk.
iii. Development of new projects
- As the new projects are developed in the subsidiaries and not directly by Enersis, the use of proceeds of an Enersis capital increase associated with new projects assumes that Enersis passes these funds to the respective subsidiary, whether as a capital contribution or inter-company loans. Both alternatives seem viable to me.
- In this context, also to be considered are not only the projects to be developed but the capital structure of each of the subsidiaries that are going to carry out these projects and their possible sources of funds.
- Considering its subsidiaries, Enersis currently has an ample pipeline of investment projects in different stages of development, which include not only those that have been announced. However, we are unaware of any unsatisfied financing need.
The following can therefore be concluded with respect to the in money contribution that the proposed capital increase implies:
- It is difficult to determine a priori the amount and timing in which the proceeds of the capital increase might be used as this depends on the willingness to sell of third parties and the economic terms on which such negotiations are concluded.
- Nevertheless, it is reasonable to conclude that Enersis could use an important part of the new funds generated in the purchase of shares in companies in which Enersis already participates.
- On the other hand, having fresh funds today significantly reduces the risk of completing the operation as there is a certainty that the plan can be financed regardless of external factors like possible new financial crises, credit restrictions or even the financial position of the parent company, without affecting the distribution of dividends to shareholders.
- There is no certainty that all the funds generated are going to be invested in the short or medium term, with the risk that Enersis might remain with excess cash for a time.
- As the money would be invested temporarily in low-risk negotiable instruments, this implies that the return on these resources will be lower than the average that Enersis obtains on its operating assets. While this should not result in a loss of value for Enersis, as the return obtained on these funds is appropriate for the risk of the investment, it could change the risk/return profile in the medium term. However, I believe that having funds today significantly reduces the risk of completing an expansion plan as proposed (acquisition of minority shares and inorganic growth) as there is a certainty that the plan can be financed regardless of external factors like possible new financial crises, credit restrictions or even the financial position of the parent company, without affecting the distribution of dividends to shareholders.
- Using the same assumptions of the valuation of Conosur, the purchase of minority shares alone makes the operation accretive. In addition, Enersis has shown it has the capacity to make investments that produce the corresponding returns.
- The reports of both independent valuators include estimates of the impact on Enersis, in terms of earnings per share, using different assumptions both of the number of shares issued and the amount and timing of the new resources obtained, of maintaining excess cash. In the report of IM Trust, pages 61 and 62, as well as pages 58 and 59 of CyA’s report, a detailed analysis is made of the impact of potential excess cash.
- As can be appreciated from these estimates, the maintenance of excess cash without its investment in assets that generate a return in line with the present average return of Enersis brings the risk of a reduction in earnings per share of Enersis.
- On the other hand, the timely investment of these resources can lead to an increase in earnings per share of Enersis.
IV.4. Conclusions
A transaction of this kind could be structured in different ways but the capital increase proposal received from Endesa Spain has been presented as a whole and not subject to modifications. Therefore, even though making an individual analysis of its different components, this Committee will pronounce on the transaction on the terms that have been presented and not others.
Having said this, it is concluded that:
- In my opinion, it would be positive for Enersis from a strategic and business point of view to acquire the assets that Endesa Spain proposes to contribute, subject to this being done at an appropriate transfer price, terms and conditions.
- Regarding the value of the contribution of the assets, given the specific nature of the proposed transaction, it seems reasonable to consider the different sources that have estimated a range of value or market price for the shares and among these especially the estimate of range of value or market price based on the value of the market capitalization of Enersis, made by the independent valuators chosen by the Board of Directors and by the Committee as these were selected as such for their independence and have access to detailed information about Conosur.
In my opinion, the range of values on market conditions should be situated approximately between USD 3,538 million and USD 3.935 million. It should be noted that these values refer to market prices of Enersis which are obtained from certain share prices and exchange rates.
- Regarding the in cash contribution in cash and its possible use, it is difficult to pronounce on this point today as these effects are going to depend finally on identified investment opportunities being carried out, which do not exclusively depend on Enersis, or on new opportunities arising. However, the Company’s solid track record in carrying out its expansion plans and the existence of opportunities in the region could lead one to think that it will be able to find and carry out investment opportunities and expansion. This is demonstrated by the more than USD 700 million invested in expansion between 2009 and 2011 in Brazil, Colombia and Peru, and the solid history of international growth that has enabled Enersis to be a leading player on the countries where it operates.
- What can be concluded with respect to this last point, in a scenario of possible credit restrictions, is that having the resources for taking advantage of the opportunities that may arise is a competitive advantage that can increase the probability of success of an investment plan. This benefit should be weighed against the cost to Enersis of the negative “carry” associated with this cash during the time it remains un-invested, and the opportunity cost for the minority shareholders of Enersis.
- Finally, this transaction consolidates Enersis as the investment vehicle of Endesa Spain and Enel S.p.A for the region (except for Enel Green Power). This supposes that this commitment should be formalized in order to ensure its effectiveness over the long term.
- For these reasons, the incorporation of the participations does contribute to the best interest.
|
Hernán Somerville Director Enersis S.A.
|
Appendix 1: Summarized description of the assets to be contributed
Argentina
a. Edesur
Edesur is the second largest distribution company in Argentina in terms of energy purchases, after Edenor, an unrelated company. Edesur operates in a concession area of 3,309 square kilometers and distributes electricity in the center-south part of the metropolitan area of the greater Buenos Aires. It provides services to the principal business district of Buenos Aires and various residential areas of the south of the city. As of December 31, 2011, Edesur distributed energy to 2.4 million customers. Residential, commercial, industrial and other customers, mainly public and municipal, represented 42%, 26%, 8% and 24% respectively of Edesur’s total energy sales.
b. Yacylec
The Yacylec transmission system comprises:
- Three 500 kV transmission lines, each 4 km in length, from the Yacyretá hydroelectric power plant to the "Rincón de Santa María” transformer station.
- "Rincón de Santa María” transformer station of 500 kV in the province of Corrientes
- 500 kV transmission line, 269 km in length, from the "Rincón de Santa María" transformer station to the "Resistencia” transformer station. Expansion of the "Resistencia" transformer station in the province of Chaco
- Communications system
c. Cemsa
The principal business of Endesa CEMSA is the wholesale purchase and sale of electricity produced by third parties and consumed by third parties, including the import and export of electricity and the trading of royalties, plus the provision of related services, all acting for its own account and/or mandated and/or on behalf of third parties and/or associated with third parties; trading in natural gas and/or its transportation, including the import and export of natural gas and the trading of royalties and natural gas, all acting for its own account and/or on behalf of third parties and/or associated with third parties, and trading of fuel oil.
Endesa CEMSA has signed agreements with Argentine electricity power plants as a back-up to supply contracts. The generating power plants that back up the electricity supply contracts of Endesa CEMSA are: Central Costanera S.A., Central Térmica Dock Sud S.A., Centrales Térmicas del Noroeste Argentino and Hidroeléctrica El Chocón S.A.
d. Dock Sud
In the generation business, Endesa Spain has a controlling interest of 69.99 % in Central Dock Sud, an installation that has two groups with a combined capacity of 870 MW.
Central Dock Sud has 4 gas turbines and a steam turbine. The combination of two of the gas turbines and the steam turbine make up a combined cycle.
The investments in the Central Dock Sud project were made mainly prior to 2001 when the combined cycle started operating, designed to supply the electricity needs of the Argentine electricity grid and to use any potential idle capacity for export to neighboring countries.
Brazil
a. Ampla
This is the second largest electricity distribution company in the state of Río de Janeiro in terms of number of customers and annual energy sales. Ampla is mainly dedicated to the distribution of electricity to 66 municipalities in the state and serves 2.6 million customers in a concession area of 32,615 square kilometers, with an estimated population of 8 million. As of December 2011, residential, commercial, industrial and other customers represented 38%, 18%, 12% and 32% respectively of the total sales of Ampla, of 10,223 GWh.
b. Coelce
Coelce is the only electricity distributor in the state of Ceará, in the north-east of Brazil. As of the close of December 2011, it serves 3.2 million customers in a concession area of 148,825 square kilometers. Coelce’s sales in 2011 were 8,970 GWh. At the end of 2011, residential, commercial, industrial and other customers represented 34%, 19%, 14% and 33% respectively of Coelce’s total energy sales.
c. Endesa Brasil
Endesa Brasil was formed in 2005 to administer all the generation, transmission and distribution assets that Endesa Latinoamérica, a subsidiary of Endesa Spain, had, together with Enersis, Endesa Chile and Chilectra, in Brazil.
d. Fortaleza
Located in the municipality of Caucaia, 50 kilometers from the capital of the state of Ceará, Fortaleza is a 322 MW combined-cycle plant which uses natural gas, with a generating capacity for meeting a third of the energy requirements of Ceará, with a population of 8.2 million.
a. Cachoeira
Located in the state of Goias, 240 kilometers to the south of Goiania, Cachoeira is a hyfro run-of-the-river plant using the flows of the Paranaiba river, with 10 generating units totaling 665 MW of installed capacity. Cachoeira started operations in 1997.
b. Cien
Compañía de Interconexión Energética S.A. (CIEN) is a Brazilian energy transmission company. It has two frequency conversion stations, Garabi I and Garabi II, which convert in both directions the frequencies of Brazil (60 Hertz) and Argentina (50 Hertz), and the transmission lines. On the Argentine side, they are managed by two subsidiaries: Compañía de Transmisión del Mercosur S.A. (CTM) and Transportadora de Energía S.A. (TESA), in which Cien is a 99.99% shareholder. The interconnection system consists of two transmission lines with a total length of 1,000 kilometers, and the Garabi conversion station.
Chile
a. San Isidro
This company initially wholly-owned by Endesa Chile, was incorporated in Chile in 1996 to build and operate a 379 MW combined-cycle thermal plant of in Quillota, in the Valparaíso region. The plant began its commercial operations in 1998. A 220 kV transmission line of 9-kilometer was built to connect this thermal plant to the SIC(the Chilean central interconnected electric system). This transmission system is managed by Transmisora Eléctrica de Quillota Ltda (Transquilota) in which San Isidro has a 50% interest. The merger of Pangue into San Isidro resulted in a percentage of its ownership being held indirectly by Endesa Spain.
b. Pangue
Pangue is located in the Biobío region, 100 km to the east of Los Angeles. Its installed capacity of 467 MW is reservoir hydroelectric, using the flows of the Biobío river. Enersis has a 57% interest.
The company’s net energy generation in 2011 was 1,713 GWh and its energy sales were 1,798 GWh.
Pangue was merged into San Isidro in the first half of 2012.
Colombia
a. Codensa
Codensa is a Colombian electricity distribution company with a concession area of 18,217 square kilometers in Bogotá and another 96 municipalities in the department of Cundinamarca, Tolima and Boyacá, serving approximately 2.6 million customers.
b. Emgesa
Emgesa has an installed generating capacity of 2,914 MW of which 85% are hydroelectric power plants and the remaining to thermoelectric power plants. In September 2007 Central Hidroeléctrica Betania ESP and Emgesa S.A. ESP were merged into Betania, adopting the name of Emgesa S.A. ESP.
c. Empresa de Energía de Cundinamarca S.A (EEC)
This is a company dedicated to the trading and distribution of energy in the department of Cundinamarca. It has a customer base of 247 thousand with sales of 622 GWh in 2011
Peru
a. Edelnor
This is a Peruvian distribution company which operates in a concession area of 2,440 square kilometers. It has an exclusive concession to distribute electricity in the northern part of the Lima metropolitan area, covering the departments of Huaral, Huaura, Barranca and Oyón, and an adjoining province in Callao. It was distributing electricity to around 1.1 million customers at the end of 2011.
b. Piura
Empresa Eléctrica de Piura (Eepsa), with 133 MW, is an electricity-generating company with two thermal plants, Malacas and Malacas 2, located in the province of Talara-Piura, which operates with local natural gas.
Piura is working on the construction of an open-cycle thermal power plant of 200 MW, called Reserva Fría. It is expected to be ready for generation in March 2013
DISCLAIMMER: THE ENGLISH VERSION OF THIS OPINION WAS TRANSLATED FOR THE CONVENIENCE OF THE READER. THIS TRANSLATION HAS NOT BEEN REVIEWED OR APPROVED BY MR. EUGENIO TIRONI.
Santiago, October 30, 2012
Shareholders of Enersis S.A.
SANTIAGO
Re: Pronouncement about Enersis S.A.’s Capital Increase
As Director of the publicly held limited liability stock company Enersis S.A. (hereinafter referred to as either “Enersis” or “the Company”), an investment company, with domicile in the Republic of Chile and registered with the Superintendence of Securities and Insurance (SVS) of that country under No. 175/1983, I hereby issue my individual pronouncement regarding Enersis S.A.’s capital increase (“the Operation”) currently in progress, in the following terms and considerations:
1. BACKGROUND INFORMATION
1. On June 18, 2012, Enersis S.A.’s controlling shareholder, Endesa S.A. (Endesa Spain), sent a letter to the Chairman of the Enersis S.A.’s Board of Directors requesting that the Board consider the feasibility of a capital increase in Enersis S.A. According to this letter and the information given verbally by the controlling shareholder, the capital increase would be carried out under the following terms:
a. Endesa S.A. would contribute to Enersis S.A. all of the capital issued of the Spanish corporation Cono Sur Participaciones S.L. (“Cono Sur”), which has no liabilities and whose only assets would be all of the equity interests that the Endesa Spain Group has in South America and that are different from those held directly or indirectly by Enersis S.A. These stakes are detailed in the Appendix to this document.
b. The other Enersis shareholders may participate in the capital increase, paying their contribution in cash.
a. If the proposed Operation is approved, Enersis S.A. will use the entire amount of the capital increase to make new investments in its line of business in Latin America.
b. If the capital increase is approved, no changes will be made to the Company’s dividend distribution policy in order to transfer earnings to shareholders.
c. If the capital increase is approved, Enersis S.A. will be the only investment vehicle used by Endesa S.A. and Enel S.A. in Latin America, except for Enel Green Power.
1. At its meeting held on June 22, 2012, the Board of Directors was informed of this letter from the controlling shareholder and proceeded, as required by law, to act following the procedures indicated in Articles 15 and 67 of the Chilean Corporate Act (“LSA”in its Spanish acronym from Ley de Sociedades Anónimas). Consequently, the Board deemed that, according to Article 15 of the LSA, an expert should be appointed to appraise the value of the non-monetary contributions that the controlling shareholder offers to participate in the capital increase. This expert must be qualified and independent, must be necessarily a natural person, and must be responsible, civilly and criminally, for the report he issues, which must be available at the Shareholders’ Meeting called to consider the capital increase.
2. At the same June 22, 2012 meeting, the Board analysed a list of professionals who have excelled as expert appraisers in this type of operations, and unanimously approved Director Rafael Fernández’s proposal to place Mr. Eduardo Walker at the head of the list of preferred experts; Mr. Walker accepted the appointment. He earned a degree in Business Administration from the Catholic University of Chile and holds a Ph.D. in Business Administration, with a major in Finance from the University of Berkeley, California, in the United States. Special consideration was given to the fact that Mr. Walker was a tenured full time at the Catholic University of Chile, a member of the Technical Investment Council of the Chilean social security system, a member of the Chilean Finance Ministry’s Financial Advisory Council, Director of the Catholic University’s Corporate Governance Center, and a member Oversight Committees for three investment funds. At the same June 22, 2012 meeting, the Board authorized the management to hire an investment bank in order to advise Enersis S.A. in this evaluation process, placing Deutsche Bank at the head of the list; this bank was hired for this purpose.
3. On August 3, 2012, the SVS issued an administrative interpretation in Official Letter No. 18,684, in which it considers that Enersis’ capital increase currently in process must also be governed by the regulations contained in Title XVI of the same law. To support this, the SVS deemed that the capital increase proposed by the controlling shareholder should be treated as an Operation among related parties.
4. On August 6, 2012, in agreement 68/12, despite its disagreement with the SVS’s interpretation as evidenced in the minutes of the meetings and, particularly, in the response it issued to SVS Official Letter No. 18,684, the Enersis Board of Directors decided to abide by this letter in order to continue with the Operation already in process and to avoid the negative consequences that could arise for the Company if the Operation were interrupted.
5. Title XVI of the LSA, in Article 147 No. 5, states that every Director of a publicly held corporation that is involved in an Operation between related parties must issue an opinion on whether the Operation is in the company’s interest and make that opinion available to the shareholders; my opinion is presented below.
II. DECLARATIONS ON STATUS AS DIRECTOR OF ENERSIS S.A. AND RELATIONSHIP WITH THE CONTROLLING SHAREHOLDER
1. I declare that I have been a Director of Enersis S.A. since April 2, 2001, and that at the Company’s last Ordinary Shareholders’ Meeting, held on April 22, 2010, at which the entire Board of Directors was renewed, I was designated as Director with the votes of the controlling shareholder, Endesa Latinoamérica S.A. I also declare that these votes were a determining factor in my being elected Director.
2. I declare that I have an interest in the Operation according to the SVS’s administrative interpretation as stated in Section III.1 of Ordinary Letter No. 21,001 of August 29, 2012, which applied to this Operation its resolution contained in Letter No. 9,914 of April 18, 2012, addressed to the company Enjoy S.A. This declaration of interest was formally reiterated to the Company at the Board of Directors Meeting held on September 5, 2012.
3. I declare that, through Inversiones El Canelo S.A., I own a total of 16,550 shares in the CFIMRV fund, which has a total of 2,100,685 shares issued. This fund, in turn, owns 16,250,000 shares of Enersis S.A. and 3,110,000 shares of Endesa Chile S.A., which amounts to 4% of the total fund. I have no influence in the investment decisions of this fund, either directly or indirectly.
III. ACTIONS TAKEN BY THE DIRECTORS AND DECISIONS MADE BY THE BOARD OF DIRECTORS THAT HAVE A BEARING ON THE ANALYSIS OF THIS OPERATION
1. The Operation proposed by the controlling shareholder has been rigorously analysed by the Company’s Board of Directors. I believe that the Board has acted with dedication and diligence, for the sole purpose of protecting the company’s interests and, to the best of its knowledge, in compliance with the laws governing this type of operation.
2. I, the undersigned, supported the decision taken in the Board Meeting held on June 22, 2012 to guide this Operation as stipulated in Articles 15 and 67 of the LSA. I would like to leave on record that the majority of the Board members approved this decision after analysing the recommendations of its legal advisors and the regulations as applied to similar cases in the recent past; no arguments or evidence that would lead to choosing another course of action were presented at that time.
3. Several market players have disagreed with the decision of the Board mentioned above and have asked that the SVS intervene, which is perfectly legitimate. The same can be said of the SVS’s prompt action, which took charge of the controversy in Official Letter No. 21,001 of 9 August 2012, mentioned above, which instructed that the Operation must comply with the stipulations of Title XVI of the LSA. Considering the interests of the Company, the Enersis Board decided to accept the SVS’s interpretation and to continue with the Operation proposed by the controlling shareholder, adjusting the procedures of the Operation to the terms of Title XVI.
4. In an August 8, 2012 letter addressed to the Chairman of Enersis, the Chairman of Endesa S.A., Mr. Borja Prado, declared the controlling company’s support for the decision taken by the Enersis S.A. Board to “maintain the capital increase proposal” under the terms stated in SVS’s Official Letter No. 18,684. Subsequently, in a letter dated July 30, 2012, and signed by Endesa S.A. executives Paolo Bondi and Borja Acha, Endesa formally ratified:
a. That Enersis S.A. will become the Group’s only “vehicle for investment”;
b. That “the funds obtained through the capital increase will be used to carry out projects in Latin America”;
c. That, “contrary to what has been published in some media, the purpose of the Operation is not to obtain funds to be distributed immediately as dividends or to repay shareholders’ contributions”.
5. The above information is needed to understand that the Company has followed a transparent process that complies with the legal and administrative regulations of Chile, with no incidents that can be considered to be anything other than natural legal differences of opinion.
6. Following the instructions of the SVS, the Board proceeded to hire an independent valuator. I would like to leave on record that:
a. The Board’s selection of an independent valuator was professionally done. It searched for the most highly qualified and independent appraiser, studied different options and unanimously selected the individual that most closely matched SVS requirements.
b. The function of valuator is different from that of appraiser, as stated correctly in the Directors’ Committee Report (p. 2).
7. The procedure indicated by the SVS in its Official Letter No. 21,001 of August 29, 2012, has allowed for a more extensive analysis of the Operation in at least two respects:
a. It has facilitated a new analysis by each Director of the proposed Operation and its effect on the Company, as we are required to issue an individual, well-grounded opinion as to its advisability in terms of the Company’s interests and whether it is in line with the prices, terms and conditions prevailing on the market. This is in line with the sound doctrine of strengthening the role of the Board of Directors as an independent body from the shareholders, whether majority or minority, with the sole responsibility of watching out for the interests of the Company and mediating, if necessary, between the varied and sometimes contradictory interests of the shareholders.
b. It has made studies done by independent valuators available to the Directors and to the Board. Unlike the expert appraiser’s report, which covers only the study and appraisal of the value of the package of companies that would comprise the non-monetary contribution of the controlling shareholder, the law provides that the independent evaluation must make a pronouncement on the conditions of the Operation and the effects and potential impact on Enersis; that is, it must assess the transaction as a whole to determine whether it actually contributes to the Company’s interests and is in line with market prices, terms and conditions.
c. The foregoing will certainly contribute to a more balanced assessment of the Operation by the market and will allay the concerns that have arisen due to the fact that the Operation was proposed by the controlling shareholder.
IV. DECLARATIONS ON THE REPORTS RECEIVED
IV.1. Report from Expert Appraiser Mr. Eduardo Walker
1. Mr. Walker submitted his report to the Board at its July 25, 2012 meeting. At that time, the expert appraiser left on record:
a. his complete independence from the Company that would make the non-monetary contribution, from the recipient of the contributions and from the economic groups to which they belong, as well as from the external auditors and intermediaries taking part in the Operation;
b. that he had thoroughly complied with the requirements and criteria for appraisal reports previously set forth in SVS Bulletin No. 1,698, including the methodology, details of the parameters used as reference, a detailed account of the assets and liabilities and the values assigned;
c. that he had had access to all of the necessary information, including financial statements, projections for key variables made by Enersis and the companies valued, details of assets and liabilities with related companies, a summary of the companies’ main contracts with third parties, and information on the regulations currently in force for the industry.
2. Using his own methodology and the information he had available, which came from the companies being valued, at the July 25, 2012 meeting, the expert appraiser reported to the Board that, in his opinion, the stakes that would be contributed to Enersis S.A. by the controlling shareholder were worth USD 4,862 million as of June 30, 2012. This means that the capital increase, considering 100% subscription and maintaining the current stakes, would be worth USD 8,020 million.
3. After a prima facie study, the Board deemed that Mr. Walker’s report complied with SVS requirements and applicable legislation. It also considered that it should not discuss the content of the report, or approve or reject its conclusions or valuation, since, according to Article 67, No. 6 of the LSA, this may only be done at the Shareholders’ Meeting. Therefore, the Board unanimously agreed to issue a Significant Event and make the appraisal report available to all shareholders so that they could evaluate it at an Extraordinary Shareholders’ Meeting to be held on September 13, 2012 in order to approve or reject a capital increase up to the equivalent of the amount stated in the appraisal report.
4. Due to the SVS’s subsequent statements in its Official Letter No. 18,684 of August 3, 2012, the Board adapted the capital increase Operation proposed by the controlling shareholder to meet the requirements of Articles 15 and 67, and Title XVI of the LSA. This required each Director to issue an opinion including a summary of the appraisal report, an indication of what he analysed, the methodology he used, an analysis of his conclusions, and the disagreement or agreement with each conclusion. In this respect, I would like to affirm the following:
a. The general methodology used by the expert appraiser consisted of assigning a value to the sum of the parts of the stakes to be contributed in the Operation. It determined the value of the productive companies’ equity using the DCF approach (discounted cash flow). Then, based on the information publicly available, expert appraiser Mr. Walker verified the orders of magnitude of the values obtained compared with the value of other companies in similar industries, primarily through the use of multiples, and financial and operating ratios. In some cases, holding companies were valued using the present value of their cash flows not generated from their investments in productive companies minus the net cash debt. In other cases, their assets, liabilities, expense levels, and possible contingencies were analysed.
b. The expert’s appraisal report is based on an analysis of the Operation for each company included, contrasting their consistency in the market context in which they operate, and excluding from the analysis these assets’ relation with the value of Enersis S.A. As will be seen below, and as the press has stated in recent days, using the same basis, Mr. Walker’s valuation does not differ greatly from those performed by the independent valuators before they applied market value restatement.
c. The Board had no contact whatsoever with Mr. Walker while he carried out his appraisal, and the members of this body had no knowledge of the results of his report at the time he submitted it.
5. It should be left on record that, in special meeting 12/2012 held on September 5, 2012, the Board agreed not to request an additional appraisal since, as of the date the report was issued, no macroeconomic, regulatory or operational changes had occurred that warranted another appraisal.
IV.2. Report from the Independent Evaluator Appointed by the Board of Directors: IM Trust
1. The methodology used to determine whether the proposed Operation is in line with the prevailing market price, terms and conditions included:
a. Discounted cash flows (DCF) at a company level
b. A market multiples analysis of comparable companies
c. A market consensus analysis
2. The methodology used to determine whether the proposed Operation is in line with market price, terms and conditions is based on the following criteria:
a. Enersis is the company most comparable with Cono Sur because it has similar business and market exposure, they are managed by the same administration and because Cono Sur is paid with Enersis shares;
b. Cono Sur’s market valuation must be consistent in relative terms with the valuation of Enersis;
c. The above valuation establishes a range for the percentage Cono Sur represents in Enersis’ market capitalization;
d. The Cono Sur’s DCF value is adjusted according to the premium/discount implicit in the price at which Enersis’ capital increase takes place with respect to Enersis’ DCF value:
i. If Enersis’ DCF is calculated at USD 14,836 million and the stock market value of Enersis used is that on the day that the potential transaction was announced, the discount is 13.5%;
ii. If the October 23, 2012 stock market value of Enersis used, the discount is 25.0%;
e. The same discounts are applied to the DCF of the USD 4,709 million stakes to obtain their implicit market value of USD 3,445 million – USD 3,621 million.
3. Based on the above, the value of Cono Sur’s stakes represents 30.9% to 32.5% of Enersis’ stock market value.
4. Regarding the use of funds, it involves the purchase of minority shareholders and the remainder is kept in cash, yielding an annual 1% before taxes.
5. In conclusion, the operation makes sense strategically and would be in the interest of Enersis and its shareholders, but it does not justify paying premiums above the market value.
6. Regarding the conclusions of the report issued by IM Trust, the independent valuator, my opinion is as follows:
a. I agree that the proposed Operation “makes sense strategically” and that, in general, it will have “positive effects” for the Company.
b. The fact that all of these assets will be placed within Enersis, a company whose corporate governance and qualified administration will be able to manage the assets well, results in synergy that must not be underestimated.
c. Notwithstanding the above, I agree that “paying a premium” for the assets to be contributed by the controlling shareholder (Cono Sur) is not justified.
d. I agree that taking ownership of assets known and managed by Enersis, most of which are located in countries where contributions to Enersis have increased most in the last two years and that constitute the company’s target markets, offers “business matching”.
e. I agree that the proposed Operation would allow for eliminating a potential conflict of interest between the controlling shareholder and Enersis, as observed by analysts and regulators.
f. I agree that the Operation “strengthens Enersis’ capital structure to handle possible opportunities for significant growth” in one of the world’s most dynamic electricity markets.
g. Although Enersis “has today a sound financial position and access to the capital market and banking”, its strengthening makes it less vulnerable to the world’s economic volatilities and better able to take advantage of opportunities.
h. I agree that the Operation “could increase the liquidity of Enersis shares”, which at least strengthens it as a large-cap company.
i. I believe that, from Enersis S.A.’s point of view, the Operation adds value to it as it simplifies, however slightly, the Company’s structure and network of subsidiaries.
IV.3. Report from the Independent Evaluator appointed by the Directors’ Committee: Claro y Asociados
1. The methodology used to determine whether the proposed Operation is in line with prevailing market price, terms and conditions used two different approaches: Enersis’ DCF vs. the stock market value and the EV/EBITDA multiple:
a. Enersis’ DCF vs. the stock market value:
i. values Enersis as the sum of parts, building a DCF for each component of the Company; this value is compared with Enersis’ stock market value, from which a 19.65% deduction is made.
ii. The same deduction is applied to the DCF corresponding to Cono Sur stakes in order to obtain the market value.
iii. The stakes’ DCF is USD 4,627 million; after applying the 19.65% deduction, a market value of USD 3,870 million is obtained.
iv. The above is used to determine what percentage the stakes should be of Enersis’ market capitalization; the figure reached is 34.97%.
b. EV/EBITDA multiple:
i. An EBITDA multiple of 5.64 times was obtained for Enersis over the last 12 months (Bloomberg).
ii. This multiple is multiplied by the sum of the stakes’ EBITDA, which gives a value of USD 3,912 million.
iii. The above is used to determine what percentage the stakes should be of Enersis’ market capitalization; the figure reached is 35.35%.
- The final result establishes a range of USD 3,870 million to USD 3,912 million for the market value of the stakes and presents the values as a percentage of the value market capitalization ranging from 34.97% to 35.35%.
- In analysing resource use, Claro y Asociados includes three potential uses: (i) greenfield projects, (ii) minority stake purchases, and (iii) M&A opportunities. Based on the information provided by Enersis, it has determined that a total of USD +/-5,200 million in resources may be used, of which USD 3,300 million would be in minority stake purchases and M&A. In addition, it was noted that there is a project portfolio of USD 22,000 million, with projects that are not included in the valuation due to their high degree of uncertainty.
- The independent valuator concludes that the transaction is a strategic opportunity for the Company to increase its stakeholding in subsidiaries in the region and to eliminate permanently the Company’s conflict of interest with its controlling shareholder. As long as the transaction is executed on fair terms of exchange and there is no extraordinary dividend distributed to the controlling shareholder, the transaction would be positive for all the shareholders.
- My opinion on the conclusions reached in the Claro y Asociados report is the following:
a. I agree that the Operation is “a strategic opportunity” since it allows for “increasing the stake held in a set of important subsidiaries in the region”.
b. I agree that the Operation “could permanently eliminate the conflict of interest existing between the Company and its controlling shareholder regarding future business in Latin America.”
c. I agree that the foregoing presumes that there is “a robust agreement between Enersis and Endesa S.A., which guarantees this”, and which must be incorporated into the Operation.
d. I agree with the need to incorporate into the Operation the formalization of the commitment that Endesa S.A. has already made regarding the “non-distribution of extraordinary dividends or other forms of distribution to the controlling shareholder” for the same reasons as in the previous point.
e. I agree that the size of the transaction should not be an impediment to the success of the operation.
f. I agree that the “money contribution to the capital increase” is “consistent” with the potential projects, and that Enersis’ management and corporate governance “has proven itself capable of administering demanding investment plans.”
IV.4. The Directors’ Committee Report
- The Directors’ Committee makes an extensive presentation on the process that began when Enersis’ controlling shareholder, Endesa Spain, proposed an operation involving an increase in Enersis capital with a defined structure and requested that it be submitted at an Extraordinary Shareholders’ Meeting.
- It goes on to describe the terms of the proposed Operation in the same terms described previously in this document and how the independent valuators summarized it.
- The Committee took charge of the turn this Operation took with Official Letter No. 18,684 from the Superintendence of Securities and Insurance (SVS) dated August 3, 2012, which stated that Enersis’ capital increase must be governed by the regulations in Title XVI of the LSA (Ley de Sociedades Anónimas, Chilean Corporate Act).
4. It notes that in letters dated August 8 and 28, 2012, addressed to the Chairman of the Board, Endesa Spain confirmed its interest in moving ahead with the proposed capital increase and confirmed its request that an Enersis Shareholders’ Meeting be called to submit the Operation for consideration.
5. The Directors’ Committee confirms that both Mr. Walker, the expert appraiser, and IM Trust and Claro y Asociados (CyA), the independent valuators, were duly independent and had both the information needed and a reasonable amount of time to carry out their task. At the same time, it notes that “the nature of the Mr. Walker’s task, as expert appraiser, is different from that of the independent valuators, IM Trust and CyA”.
6. Regarding the appraisal report prepared by Eduardo Walker, Director Fernández “leaves on record that, in his opinion, given the conditions under which it was requested, prepared and issued, Mr. Walker’s appraisal report and its conclusions lack validity.” In contrast, Directors Somerville and Vial find that the appraiser “fulfilled his task with complete independence from the Board of Directors and with full professionalism, adhering to the conditions usually applied in cases of this nature”, and they “find that the report is still valid since, as of this date, there are no reasons that justify its updating. Furthermore, the values obtained by the valuators, using the same methodology, are similar.”
7. Regarding the report of the independent evaluator IM Trust, the Directors’ Committee summarizes it, indicating that the report “estimates the market value of the companies that Endesa Spain would contribute (…) as equivalent to a 30.9% to 32.5% stake in Enersis’ market capitalization calculated before the capital increase and using the price per share at which the capital increase is subscribed; this percentage was valued at between USD 3,445 million and USD 3,621 million on Tuesday, October 23, 2012.” According to the methodology used (the discounted cash flow of the stakes to be contributed by Endesa Spain and of Enersis), the values are USD 4,709 million and USD 14,836 million, respectively, and the “value of the package to be contributed ranges from 30.9% to 32.5% of the value of Enersis.”
8. Regarding the report of the independent valuator Claro y Asociados, the Directors’ Committee concludes that the report values the stake that Endesa Spain would contribute to be in range of USD 3,870 million to USD 3,912 million,” based on two methodologies: the discounted cash flow of Enersis and of the stakes to be contributed by Endesa Spain, and the value of the contribution based on Enersis’ EV/EBITDA multiple, applying that multiple to the sum of the proportional EBITDAs to be contributed.” This means that “values are obtained, as percentages of the value of Enersis’ market capitalization, which range from 34.97% to 35.35%.”
9. The Directors’ Committee issued its opinion, indicating that “from an strategic and business viewpoint, it would be positive for Enersis to acquire the stakes that Endesa Spain proposes contributing, provided that it is done at the appropriate transfer price, terms and conditions.” The Committee adds that “the proposed operation, regarding the stakes to be contributed, is indeed in the interest of the company,” taking into account the value of the package contributed, the elimination of potential conflicts of interest between Enersis and its controller, and the possibility of better handling of growth opportunities in South America, among other reasons.
10. Regarding the market price and other terms and conditions, the Directors’ Committee finds that the “market price criterion” seems to be sufficient to justify the operation.
11. The Directors’ Committee declares that it agrees “with the criterion of the reports of both valuators to tie the value or market price of Endesa Spain’s non-monetary contribution to the value of Enersis’ market capitalization since Enersis and the group of stakes have relatively similar business profiles, which makes Enersis itself a good basis for comparison with Cono Sur.
12. Despite the foregoing, Director Fernández believes that, “in his opinion, the discount applied to Cono Sur should be greater than the discount the market applies to Enersis since the latter has control or co-control over all of the relevant companies in which it holds a stake.” In contrast, “Committee members Mr. Vial and Mr. Somerville believe that the ratio should be 1:1, as indicated by the independent valuators; that is, the same discount that the market applies to Enersis should also be applied to Cono Sur.”
13. Regarding the market value or range of values for Endesa S.A.’s non-monetary contribution, the Directors’ Committee does not share a common opinion.
14. Regarding the terms and conditions, the Directors’ Committee emphasizes that “the contribution of Cono Sur should be regulated in one or more contracts between Enersis and Endesa Spain that, in addition to the “usual representations and guarantees for operations involving the purchase of companies,” should also include “the express commitment on the part of Endesa Spain and Enel that Enersis will be the only vehicle by which both companies invest in conventional energies in South America” and that “Enersis will not be responsible for possible tax contingencies arising from the structure of the operation.”
15. Regarding the use of funds, the Directors’ Committee emphasizes that “Enersis has strategic investment opportunities for significant amounts in the short and medium term” that, when the appropriate time comes, must “be analysed and approved by the Enersis Board of Directors, in detail, on their own merit. When the time comes to invest, only those opportunities considered beneficial to the company should be approved.” Since “there is a risk that they may not materialize,” this could result in “holding an excess amount of cash for longer than expected.”
16. However, the Directors’ Committee concludes that “in the current financial context, it is a competitive advantage to have the funds available to be able to take advantage of strategic opportunities quickly. Counting on having the resources available (or that they will be available at a reasonable cost) when the time comes to make a significant acquisition brings with it a significant risk.” However, Director Fernández leaves on record that “in his opinion, making new acquisitions is not a specific attribute of the proposed operation since Enersis can always carry out this type of transaction.
17. The Directors’ Committee report concludes:
a. That “from the strategic and business viewpoint, it would be positive for Enersis to acquire the stakes that Endesa Spain proposes to contribute, provided that it is done at the appropriate transfer price, terms and conditions.”
b. That the value of the Cono Sur contribution must be based “on the value of Enersis’ market capitalization, determined by the independent valuators selected by the Board of Directors and by the Directors’ Committee, inasmuch as they were selected as such due to their independence and they had access to detailed information on Cono Sur.”
i. In the opinion of Directors’ Committee member Mr. Hernán Somerville, the range of values under market conditions should be approximately from USD 3,538 million to USD 3,935 million.
ii. In the opinion of Directors’ Committee member Mr. Leonidas Vial, the range of values under market conditions should be approximately from USD 3,555 million to USD 3,700 million.
iii. In the opinion of Directors’ Committee member Mr. Rafael Fernández, the range of values under market conditions should be below USD 3,452 million.
c. That “it is difficult to issue an opinion” on the use of the increased monetary contributions, but that “the Company’s solid track record in executing expansion plans and the existence of opportunities in the region could make one think that it will have the capacity to find and execute investment and expansion opportunities.
d. That the operation “consolidates Enersis as a vehicle for Endesa Spain’s and Enel S.p.A.’s investments in the region” provided that “this commitment is formalized in such a way as to guarantee its enforceability over the long term.”
e. That “due to all of the above, the incorporation of the stakes does indeed contribute to the company’s interests.”
18. This Director basically agrees with the conclusions reached in the Directors’ Committee report. I would only like to make the following comments and additions:
a. I agree that “in a scenario of possible credit restrictions, having the resources to take advantage of opportunities that may arise is a competitive advantage that can increase the probability of success in an investment plan.”
b. I agree with Director Somerville in that having the monetary contribution that comes with the proposed capital increase, “while it could affect Enersis’ returns in the short term, it significantly decreases the risk of executing an expansion plan such as that proposed (acquisition of minority stakes and inorganic growth) since it ensures that the plan can be financed regardless of external factors such as potential new financial crises, credit restrictions or even the financial situation of the parent company, without affecting dividend distribution to the shareholders.”
c. I disagree with the argument that there would be no “certainty that all of the money taken in would be invested in the short or even the medium term, with the risk that Enersis would hold an excess amount of cash for a time,” and that the “money would be temporarily invested in low-risk marketable securities,” which “implies that the return on these funds would be lower than the average earned by Enersis on its operating assets.” In this respect, it should be said that the matter of the use of company cash is solely the responsibility of its corporate governance, which, if it is not able to offer any better alternative than investing the funds in “low-risk marketable securities”, would be showing a distressing degree of incompetence.
d. I disagree with Director Fernández’s statement that “the public controversy generated by the announcement of this operation is a clear signal that there is large group of minority shareholders who believe that they do not benefit either from the value of the operation originally proposed or from the structure of the operation”. The company has its own corporate governance procedures and its own structure for taking decisions that best protect the company’s interests.
V. DECLARATION ON THE ADVISABILITY OF THE OPERATION FOR THE CORPORATE INTERESTS OF ENERSIS S.A.
1. The evaluation as to the advisability of the Operation for the corporate interests of Enersis S.A. will be carried out exclusively on the basis of the Directors’ Committee report and the reports requested of the independent valuators by the Board of Directors and the Directors’ Committee. The independent valuators’ qualifications and autonomy have been proven to me.
2. In my opinion, and in agreement with the independent valuators, I believe that the proposed Operation is an opportunity that makes sense strategically for Enersis S.A. This is based on the following considerations:
a. Enersis S.A. will take ownership of assets, 95% of which are already consolidated and managed by the company.
b. Most of these assets are located in markets whose contributions to Enersis S.A.’s earnings have grown the most in the last two years, and where it is in the company’s interest to expand.
c. The Operation strengthens Enersis S.A.’s presence in the most important countries in South America, one of the regions with the highest electricity consumption growth in the world. This has strategic value that goes beyond the regulatory contingencies that may temporarily affect the return on investment in some of these countries, as is the case in Argentina.
d. Enersis S.A. has highly qualified management that can manage these new assets well.
3. It can create value for Enersis S.A. by eliminating uncertainties observed by both regulators and by market players that subtract value from the company and its shareholders:
a. It eliminates uncertainties with respect to the “assignment of rights agreement” between Enersis S.A. and Endesa S.A. which allow the former to consolidate Colombian assets.
b. It eliminates a possible conflict of interest between Enersis S.A. and Endesa S.A. over projects and resources by making Enersis S.A. the only vehicle for Endesa S.A.’s investments in the region, without the need for a strategic alliance agreement to carry out the next investments.
c. However, the foregoing is contingent on these factors’ being incorporated into the Operation.
4. The proposed Operation “strengthens Enersis’ capital structure”, which is highly relevant for the following reasons:
a. It allows for addressing opportunities for significant growth in one of the world’s most dynamic electricity markets, competing with players with “high levels of liquidity and fluid access to the capital market and the banks” (IMTrust, p. 34).
b. It improves coverage ratios and rates, making Enersis S.A. less vulnerable to the volatilities of the international economy and, therefore, more competitive to take advantage of opportunities that may open up as a result of these same volatilities and to take on “large-scale projects while decreasing financing risk” (IM Trust, p. 34).
c. As indicated in the Directors’ Committee report, “in the current financial context, it is a competitive advantage to have the resources available to be able to take advantage of strategic opportunities rapidly. Betting on having the resources available (or that they will be available at reasonable cost) when the time comes to make a large-scale acquisition entails a relevant amount of risk.
5. The proposed Operation increases the liquidity of Enersis S.A. shares, which strengthens it as a large cap company and makes it a more attractive option as a long-term investment for Latin American workers’ pension funds which, in the case of Chile, still have considerable room to invest further.
6. The proposed Operation may mean that Enersis temporarily has larger amounts of cash than it currently holds. However, this should not be an impediment to the success of the Operation since:
a. Against the volumes managed by other market players, even under the conservative hypothesis that the capital increase is used only to purchase minority stakes, the cash remaining is not disproportionately high.
b. There are opportunities for purchasing minority stakes that have already been identified that, if they materialize, would generate value from day one.
c. While both valuators have been cautious and have avoided assigning a value to Enersis’ project portfolio, the company “can demonstrate the existence of a project pipeline in an investment range that is consistent” with the capital increase proposed (Claro y Asociados, p. 54).
d. Finally, it should not be doubted, at the risk of jeopardizing the company’s interests, that Enersis S.A. management has “proven itself capable of administering demanding investment plans (Claro y Asociados, p. 5); if this were not the case, any apprehensions should be directed towards the corporate governance rather than towards the specific terms of the proposed Operation.
7. The proposed Operation would turn Enersis S.A. into a larger-scale player, which would allow it to improve its relations with different stakeholders that are strategic to its development. The following are worth mentioning:
a. It could offer better career opportunities to its employees and executives, which would enable it to attract and retain talent and generate positive effects in the Chilean
19
and Latin American job markets.
b. It would be able to develop R&D programs that address the needs of the company and the countries where it operates, using its own capacities and those of the region’s scientific-technological ecosystem for this purpose.
c. By concentrating asset management in Santiago, Chile, it reaffirms this city as a Latin American business center and focuses the management of electrical power, a highly strategic element, in this region.
8. In order to obtain the benefits indicated, the proposed Operation must include a binding agreement between the shareholders in the terms suggested by the Directors Committee, specifically:
a. That Enersis be granted all of the representations and guarantees that are usual in this type of operation;
b. That Enersis S.A. become the only vehicle for Endesa S.A.’s investments in the region;
c. That there be a shareholders’ commitment not to use dividend distribution to the benefit of a shareholder and to the detriment of the company’s long-term interests; and
d. That Enersis be protected from possible tax contingencies that could result from the structure of the Operation.
9. In light of the arguments presented, and only for the purposes of Article 147 of the LSA, I declare that I believe that the Operation is advantageous for the corporate interests of Enersis S.A.
V.1. Regarding whether the Operation is in line with the prices, terms and conditions prevailing in the market at the time of this statement, my opinion is grounded in the following:
1. For the purposes of issuing this opinion, we will assume the following:
a. That the only information taken into consideration will be the Directors’ Committee report and the reports issued by the independent valuators appointed by the Board of Directors and the Directors’ Committee of Enersis S.A., that is, IM Trust and Claro y Asociados, respectively.
b. That the estimates of both independent valuators are equally valid since they are based on professional competencies and comparable methodologies.
c. That Enersis S.A. is the best point of comparison for the non-monetary assets that Endesa S.A. proposes to contribute, a criterion for which the Directors’ Committee is in agreement with what the two independent valuators have presented.
d. That the valuation of the assets to be contributed by the controlling shareholder (Cono Sur) must be carried out with the same assumption and adjustment criteria as those applied for Enersis S.A.
e. That the value of Cono Sur ranges from 30.9% to 35.53% of the value of Enersis S.A.
f. That, according to the valuators’ reports, the DCF value of Cono Sur is between USD 4,709 million (IM Trust) and USD 4,627 million (Claro y Asociados), an amount that is consistent with that assigned by expert appraiser Mr. Walker.
g. That the valuators used different market adjustment methods (multiples, market consensus and market capitalization) for the value of Endesa S.A.’s non-monetary contribution (Cono Sur).
h. That both valuators agree on applying the same discount to Cono Sur assets as was applied to Enersis S.A.; Directors’ Committee members Mr. Somerville and Mr. Vial also agree on this. I agree with this criterion: although they are actually non-controlling interests, for Enersis they have the value of automatically eliminating uncertainty factors such as the “assignment of rights agreement” between Enersis S.A. and Endesa S.A., which allows the former to consolidate the Colombian assets, and the possible conflict of interest between Enersis S.A. and Endesa S.A. over projects and resources.
i. That after the call for the Extraordinary Shareholders’ Meeting on July 25, 2012, Enersis S.A.’s market capitalization fell sharply due to factors that are difficult to weigh.
2. The mean of the IM Trust and Claro y Asociados valuations must be used, then, to determine the fair price of Cono Sur assets, considering: i) the value of the share on the day the Operation was announced (06/25/12), at one extreme, and ii) the value of the share on the day the valuators’ report was submitted (10/23/12) at the other. Therefore, for the Operation proposed by Endesa S.A. to be in line with prevailing market prices, terms and conditions and to benefit the business interests of Enersis and its shareholders, the value to be paid for its non-monetary contribution falls in a range between USD 4,282 million and USD 3,712 million. This does not include any discount to attract shareholders to subscribe the capital increase.
V.2. Advisability of the Operation:
If the proposed Operation is carried out under the price conditions, terms and conditions already suggested, it represents a strategic opportunity for Enersis since:
· It strengthens Enersis’ position in one of the world’s fastest growing electricity markets;
· It gives the Company access to assets that it knows and manages;
· It eliminates uncertainties regarding conflicts of interest and consolidations;
· It strengthens Enersis’ capital structure during a period of high international economic volatility;
· It provides access to funds for minority stake purchases and M&As;
· It strengthens the Company’s expansion process based on its own project pipeline and using its own management capacities;
· And it facilitates better relations with strategic stakeholders.
Sincerely yours,
|
EugenioTironi Barrios Director Enersis S.A. |
Appendix 1: Summarized description of the assets to be contributed
Argentina
a. Edesur
Edesur is the second largest distribution company in Argentina in terms of energy purchases, after Edenor, an unrelated company. Edesur operates in a concession area of 3,309 square kilometers and distributes electricity in the center-south part of the metropolitan area of the greater Buenos Aires. It provides services to the principal business district of Buenos Aires and various residential areas of the south of the city. As of December 31, 2011, Edesur distributed energy to 2.4 million customers. Residential, commercial, industrial and other customers, mainly public and municipal, represented 42%, 26%, 8% and 24% respectively of Edesur’s total energy sales.
b. Yacylec
The Yacylec transmission system comprises:
- Three 500 kV transmission lines, each 4 km in length, from the Yacyretá hydroelectric power plant to the "Rincón de Santa María” transformer station.
- "Rincón de Santa María” transformer station of 500 kV in the province of Corrientes
- 500 kV transmission line, 269 km in length, from the "Rincón de Santa María" transformer station to the "Resistencia” transformer station. Expansion of the "Resistencia" transformer station in the province of Chaco
- Communications system
c. Cemsa
The principal business of Endesa CEMSA is the wholesale purchase and sale of electricity produced by third parties and consumed by third parties, including the import and export of electricity and the trading of royalties, plus the provision of related services, all acting for its own account and/or mandated and/or on behalf of third parties and/or associated with third parties; trading in natural gas and/or its transportation, including the import and export of natural gas and the trading of royalties and natural gas, all acting for its own account and/or on behalf of third parties and/or associated with third parties, and trading of fuel oil.
Endesa CEMSA has signed agreements with Argentine electricity power plants as a back-up to supply contracts. The generating power plants that back up the electricity supply contracts of Endesa CEMSA are: Central Costanera S.A., Central Térmica Dock Sud S.A., Centrales Térmicas del Noroeste Argentino and Hidroeléctrica El Chocón S.A.
d. Dock Sud
In the generation business, Endesa Spain has a controlling interest of 69.99 % in Central Dock Sud, an installation that has two groups with a combined capacity of 870 MW.
Central Dock Sud has 4 gas turbines and a steam turbine. The combination of two of the gas turbines and the steam turbine make up a combined cycle.
The investments in the Central Dock Sud project were made mainly prior to 2001 when the combined cycle started operating, designed to supply the electricity needs of the Argentine electricity grid and to use any potential idle capacity for export to neighboring countries.
Brazil
- Ampla
This is the second largest electricity distribution company in the state of Río de Janeiro in terms of number of customers and annual energy sales. Ampla is mainly dedicated to the distribution of electricity to 66 municipalities in the state and serves 2.6 million customers in a concession area of 32,615 square kilometers, with an estimated population of 8 million. As of December 2011, residential, commercial, industrial and other customers represented 38%, 18%, 12% and 32% respectively of the total sales of Ampla, of 10,223 GWh.
- Coelce
Coelce is the only electricity distributor in the state of Ceará, in the north-east of Brazil. As of the close of December 2011, it serves 3.2 million customers in a concession area of 148,825 square kilometers. Coelce’s sales in 2011 were 8,970 GWh. At the end of 2011, residential, commercial, industrial and other customers represented 34%, 19%, 14% and 33% respectively of Coelce’s total energy sales.
- Endesa Brasil
Endesa Brasil was formed in 2005 to administer all the generation, transmission and distribution assets that Endesa Latinoamérica, a subsidiary of Endesa Spain, had, together with Enersis, Endesa Chile and Chilectra, in Brazil.
- Fortaleza
Located in the municipality of Caucaia, 50 kilometers from the capital of the state of Ceará, Fortaleza is a 322 MW combined-cycle plant which uses natural gas, with a generating capacity for meeting a third of the energy requirements of Ceará, with a population of 8.2 million.
- Cachoeira
Located in the state of Goias, 240 kilometers to the south of Goiania, Cachoeira is a hyfro run-of-the-river plant using the flows of the Paranaiba river, with 10 generating units totaling 665 MW of installed capacity. Cachoeira started operations in 1997.
- Cien
Compañía de Interconexión Energética S.A. (CIEN) is a Brazilian energy transmission company. It has two frequency conversion stations, Garabi I and Garabi II, which convert in both directions the frequencies of Brazil (60 Hertz) and Argentina (50 Hertz), and the transmission lines. On the Argentine side, they are managed by two subsidiaries: Compañía de Transmisión del Mercosur S.A. (CTM) and Transportadora de Energía S.A. (TESA), in which Cien is a 99.99% shareholder. The interconnection system consists of two transmission lines with a total length of 1,000 kilometers, and the Garabi conversion station.
Chile
- San Isidro
This company initially wholly-owned by Endesa Chile, was incorporated in Chile in 1996 to build and operate a 379 MW combined-cycle thermal plant of in Quillota, in the Valparaíso region. The plant began its commercial operations in 1998. A 220 kV transmission line of 9-kilometer was built to connect this thermal plant to the SIC(the Chilean central interconnected electric system). This transmission system is managed by Transmisora Eléctrica de Quillota Ltda (Transquilota) in which San Isidro has a 50% interest. The merger of Pangue into San Isidro resulted in a percentage of its ownership being held indirectly by Endesa Spain.
- Pangue
Pangue is located in the Biobío region, 100 km to the east of Los Angeles. Its installed capacity of 467 MW is reservoir hydroelectric, using the flows of the Biobío river. Enersis has a 57% interest.
The company’s net energy generation in 2011 was 1,713 GWh and its energy sales were 1,798 GWh.
Pangue was merged into San Isidro in the first half of 2012.
Colombia
- Codensa
Codensa is a Colombian electricity distribution company with a concession area of 18,217 square kilometers in Bogotá and another 96 municipalities in the department of Cundinamarca, Tolima and Boyacá, serving approximately 2.6 million customers.
- Emgesa
Emgesa has an installed generating capacity of 2,914 MW of which 85% are hydroelectric power plants and the remaining to thermoelectric power plants. In September 2007 Central Hidroeléctrica Betania ESP and Emgesa S.A. ESP were merged into Betania, adopting the name of Emgesa S.A. ESP.
- Empresa de Energía de Cundinamarca S.A (EEC)
This is a company dedicated to the trading and distribution of energy in the department of Cundinamarca. It has a customer base of 247 thousand with sales of 622 GWh in 2011
Peru
- Edelnor
This is a Peruvian distribution company which operates in a concession area of 2,440 square kilometers. It has an exclusive concession to distribute electricity in the northern part of the Lima metropolitan area, covering the departments of Huaral, Huaura, Barranca and Oyón, and an adjoining province in Callao. It was distributing electricity to around 1.1 million customers at the end of 2011.
- Piura
Empresa Eléctrica de Piura (Eepsa), with 133 MW, is an electricity-generating company with two thermal plants, Malacas and Malacas 2, located in the province of Talara-Piura, which operates with local natural gas.
Piura is working on the construction of an open-cycle thermal power plant of 200 MW, called Reserva Fría. It is expected to be ready for generation in March 2013
Santiago, October 30, 2012
Shareholders of Enersis S.A.
SANTIAGO
Re: Individual pronouncement as an independent Director who is not involved in the Related Party Operation that has arisen from the proposal of the company Endesa S.A. (Endesa Spain), the controlling shareholder of Enersis S.A.
To who it may concern:
It is my pleasure to present to the shareholders of the publicly held limited liability stock company Enersis S.A. (either “Enersis” or “the Company”) my individual opinion as an independent Director who is not involved in the Related Party Operation indicated in the reference line above (“the Operation”) under the terms set forth in Title XVI of Law 18,046, the Chilean Companies Act (“LSA” in its Spanish acronym):
BACKGROUND INFORMATION
(i) The Company’s controller, Endesa, S.A. (Endesa Spain) has expressed its interest in contributing to Enersis S.A. through a capital increase in the Company, all of the capital issued of a Spanish company called Cono Sur Participaciones, S.L. (“Cono Sur”), which has no liabilities and whose only assets are all of the stakes that the Endesa Spain Group owns in South America and that are different from those held directly or indirectly by Enersis S.A. The stakes are detailed in the Appendix to the Directors’ Committee report.
(ii) Enersis’ remaining shareholders would only take part in the capital increase by paying their pro rata share in money.
On August 3, 2012, the Superintendence of Securities and Insurance (“SVS”), in Official Letter No. 18,684, qualified the Operation as a related party operation and ordered the Enersis Board of Directors to treat it as stipulated in articles 15 and 67 and in the regulations of the LSA’s Title XVI, in which the related parties to the agreement would be Endesa, S.A. (Endesa from Spain) and Enersis S.A.
Title XVI of the LSA states in article 147, No. 5 that all directors of a publicly held limited liability stock company that takes part in a related party operation must issue an opinion regarding the advisability of the Operation for the best interests of the Company and then make this opinion available to the shareholders. This Title XVI was duly interpreted by the SVS in combination with articles 15 and 67 of the LSA in Official Letter No. 21,001 of August 29, 2012.
I would like to note that in the Directors’ Committee and Board of Directors meetings held last June and July, in letters addressed to the Chairmen of both corporate bodies on June 29, 2012, I warned that the Operation proposed by the controlling shareholder was a negotiation between related parties and, therefore, was also subject to Title XVI of the LSA; the regulating authority of Enersis S.A. later qualified the Operation in the same way. In addition, as an independent Director, I wrote to the Chairman of the Board of Directors, as evidenced in the letters dated July 19and August 3, both from 2012, reiterating my conviction regarding the nature of the Operation and its importance for the shareholders, who would be affected by the controlling shareholder’s proposal, and requesting that he call for a special meeting of the Board of Directors to discuss the issue.
DECLARATIONS ON STATUS AS DIRECTOR OF ENERSIS S.A. AND INDEPENDENCE FROM CONTROLLING SHAREHOLDER
1. I declare that I have been a Director of Enersis S.A. since April 22, 2010, and that I was elected Independent Director at the Company’s last Ordinary Shareholders’ Meeting, held on April 22, 2010 and at which the entire Board of Directors was re-elected. I also declare that I was elected without any votes from the controlling shareholder, Endesa Latinoamérica S.A., and that I have no relationship whatsoever with that company.
2. I declare that at the Enersis Board of Directors’ Meeting held on April 23, 2010 I was appointed member of the Company’s Directors’ Committee.
3. I declare that, as Independent Director, I have no conflict of interest whatsoever with the Operation proposed by the controlling shareholder.
4. I have endeavoured to be diligent and careful in fulfilling the mandate of the shareholders, conducting myself at all times in accordance with the legal, regulatory and administrative requirements governing the matter and watching out for the interests of the Company and of all Enersis S.A. shareholders.
Background Reviewed
a. Expert Appraisal Report Prepared by Mr. Eduardo Walker H.
The expert appraises the companies that Endesa Spain would contribute to the capital increase, at that date, at USD 4,862 million, calculated using the discounted cash flow method. He also declares that, “In the opinion of the expert appraiser signing this study, the above-mentioned value is the market value of the assets that Endesa Spain would eventually contribute directly and/or indirectly to Enersis.”
In my opinion, and expressly confirming Mr. Eduardo Walker H.’s professional qualifications, I believe that his expert report and its conclusions, given the conditions under which it was requested, carried out and issued, lack validity, as I stated in the Board of Directors’ meetings held in August and October of this year when the validity of the report was discussed. Therefore, it is my opinion that this expert appraisal report is insufficient to determine, on its own merit, if the contribution of non-monetary assets involved the Operation would be in the Company’s best interests. The accuracy of this affirmation was completely confirmed by the independent valuations subsequently performed by Claro y Asociados and IM Trust, who determined a difference of over one billion dollars in the market value of the assets Endesa has proposed contributing.
b. Report of the Independent Valuator IM Trust
The independent valuator IM Trust, appointed by the Board of Directors, estimates the market value of the companies that Endesa Spain would contribute, indicating that the contribution is equivalent to a 30.9% to 32.5% stake in Enersis’ market capitalization, calculated before the capital increase, using the share price at which the capital increase is subscribed; a percentage which on Tuesday, October 23, 2012, was equivalent to a range between USD 3,445 million and USD 3,621 million.
In my considerations and recommendations, I support the conclusions and objections of IM Trust.
c. Report of the Independent Valuator Claro y Asociados
The independent valuator Claro y Asociados, appointed by the Enersis Directors’ Committee, issued a report in which it estimated the market value of the stakes Endesa Spain would contribute to be in a range between USD 3,870 million and USD 3,912 million.
The firm used two methods to reach this range of values. Finally, it indicates that these values, presented as percentages of the value of Enersis’ market capitalization, would be in a range between 34.97% and 35.35%.
In my considerations and recommendations, I support the conclusions and objections of Claro y Asociados.
II. Opinion of the Independent Director
The criteria for approving an operation with a related party is: i) that the Operation be in the best interests of the company and all of the shareholders; ii) that the Operation be in line with the price, terms and conditions prevailing in the market at the time of approval.
The Directors’ Committee, in stating its opinion on the terms and conditions, had certain reservations that must be considered to determine whether the Operation is in line with the terms and conditions prevailing in the market; this opinion covers these reservations.
a. Contribution to the Best Interests
i) In my opinion, at the value I indicate below, from a strategic and business point of view it would be positive for Enersis to acquire the stakes that Endesa Spain proposes contributing, provided that the Operation is improved by incorporating the precautions and recommendations I indicate below. Therefore, the proposed Operation, in terms of the contribution of the stakes under those conditions, would contribute to the best interests of the Company and all of its shareholders. It is also my opinion that it is necessary to create value and that the conditions and terms must be equitable for all of the shareholders. The proposed Operation would contribute to the best interests of Enersis and all of its shareholders from a strategic and business perspective. I contributed this opinion to the Directors’ Committee report for the reasons that are fully stated in that report.
b. Market Price and Terms and Conditions Prevailing on the Market
Price
I agree with both valuators’ criterion of tying the market value or price of Endesa Spain’s non-monetary contribution to the value of Enersis’ market capitalization, considering that Enersis and the combined group of equity stakes have relatively similar business profiles despite the fact that Enersis has significant business interests in Chile, unlike Cono Sur. Cono Sur’s Colombian businesses account for 61.5% of its value and 25% of Enersis’ consolidated EBITDA.
As I stated on page 9 of the Directors’ Committee Report, an additional 7% discount should be applied to the value of Cono Sur with respect to the discount the market applies to Enersis’ cash flow since Enersis’ equity stakes have greater ownership rights than do those of Cono Sur. Numerous studies and empirical evidence support this discount.
In addition, I recommend that the market price estimate for Cono Sur be done at a price at which its contribution to Enersis creates value for all of the Company’s shareholders.
Thus, taking as a reference the Enersis share price on October 23, 2012 (the date considered by the independent valuators) and the value estimated by the independent valuators (the average of the two), when the additional 7% discount mentioned above is applied, the resulting Market Value Price is USD 3,452 million, using the same exchange rate used by the independent valuators (CLP475.7=USD1). This must be the maximum price recognized to Endesa Spain for its Cono Sur contributions, referred at that Enersis share price and at that USD/CLP exchange rate.
Terms and Conditions Prevailing in the Market
In order to be in line with the terms and conditions prevailing on the market, it is my opinion that at least the following precautionary conditions must be fulfilled:
a) An express, enforceable and guaranteed commitment from Endesa Spain and Enel stating that Enersis will be their only vehicle for investment in South America in conventional energy, except for what Enel already owns in Enel Green Power.
b) The usual representations and guarantees for company acquisition operations, and indemnity.
c) A commitment not to hold Enersis liable for possible tax contingencies that may arise as a result of the structure of the Operation.
d) To have established equitable terms for the conditionalities of the capital increase.
e) To have established a proposal for a mechanism for setting the subscription price for the new shares to be issued, and potential discounts.
f) To have an operation structure with greater consensus than that seen so far.
The Structure of the Proposed Operation and the Interests of All of the Shareholders
The structure of the proposed Operation is an important variable. Depending on the shape it takes, the situation of the shareholders could improve or worsen. Excessive deleveraging for Enersis must be avoided, as it would make the Company’s debt/equity structure inefficient.
As it is proposed, this Operation entails a significant money contribution from minority shareholders and a proposal for the use of proceeds.
Regarding the use of proceeds, the three fund uses identified by Endesa Spain in its presentations merit the following comments:
· They present clear potential economic and financial benefits, and identify risks in executing the Operation.
· The purchase of minority stakes in companies with which Enersis already consolidates has interesting business prospects, but I do not assign it a strategic value.
· Making new acquisitions is not a specific attribute of the proposed Operation since Enersis could always carry out this type of transaction.
· The Company has a significant plan for investment projects, but the Board of Directors are not aware of any unmet financing needs.
· It seems relevant to me that, because of the Operation and in order to benefit all of the shareholders affected by the controller’s proposal, their opinion of the Dividend Policy that will prevail if the Operation is approved at the Shareholders’ Meeting, should be taken into consideration. The controlling shareholder proposing the Operation must guarantee that the benefits of the Operation will not be fleeting, as an increase on the current dividend policy would be.
I believe that the structure of the proposed Operation could entail an asymmetry in its terms because “the risk of not achieving what was sought is borne by the party that contributes money, while the party contributing shares receives its full reward at the time the contribution is made”. See A. Rappaport/M. Sirower. In fact, by contributing shares from its stakes in Colombia, Endesa is transferring a potential tax contingency when it makes the contributions, and the other Enersis’ shareholders are taking on a potential contingency that may be significant, just as the Committee’s Valuator has stated.
These considerations inherent to the Operation proposed by Endesa Spain lead this Director to suggest to the shareholders that they look for ways to improve the Operation that eliminate any possible asymmetries and, at the same time, maximize returns to the benefit of best interests. The Company has over USD 200 million in immediately available cash and a debt capacity of USD 1,500 million without risking its credit rating.
Regarding the stakes in Cono Sur, I consider it advisable for Enersis and all of its shareholders that the stakes be incorporated into the Company’s equity at a price, terms and conditions that generate value.
ADVISABILITY OF THE OPERATION
In the opinion of this Director, the Operation is advisable for the best interests of the Company and all of its shareholders if the precautions and recommendations presented above are acted upon.
|
Rafael Fernández M. ID No.: 6.429.250-1 |
DISCLAIMMER: The English version of this report was translated for the convenience of the reader. This translation has not been reviewed or approved by the expert appraiser.
Expert appraisal report in connection with the valuation of ENDESA, S.A.’s capital contribution to ENERSIS S.A.
through its direct and/or indirect equity shareholdings in other Latin American companies
SWORN AFFIDAVIT
I, EDUARDO WALKER H., business administration professional, national identity card N° 7.081.424-2, legally domiciled in Av. Vicuña Mackenna N°4860, Santiago, Chile, hereby declare under oath as follows, for the purposes envisaged under Circular Letter No. 1,698 dated December 31, 2003 issued by the Superintendence for Securities and Insurance (Superintendencia de Valores y Seguros) regarding the Expert Appraisal Report dated July 23, 2012, entrusted upon me by Enersis S.A., in connection with the valuation of a potential capital contribution to Enersis S.A.
FIRST: I hereby declare to be independent of Enersis S.A., of Endesa, S.A. (Endesa Spain), of the corporate groups to which such companies belong, of their respective external auditors, and of their consultants and other intermediaries that participate in the operation covered by the above-indicated expert appraisal report.
SECOND: I declare to have none of the relationships described in article 100 of Law 18,045 of the Securities Market with respect to the persons indicated in the preceding number.
Santiago, Chile
July 23, 2012
Eduardo Walker H.
National Identity Card N° 7.081.424-2
1
To the shareholders of ENERSIS S.A.:
I. BACKGROUND
The present report was contracted by ENERSIS S.A., a holding company, RUT N° 94.271.000-3, duly represented for these purposes by Mr. Alfredo Ergas S., both of them legally domiciled in Avda. Santa Rosa No. 76, piso 17, Comuna de Santiago, Santiago, Chile.
ENERSIS S.A. (“Enersis”) contracted the undersigned, in his capacity as EXPERT APPRAISER, to prepare an expert corporate valuation (appraisal, assessment) of a group of companies legally domiciled in various South American countries, which include the following: Ampla Energía e Serviços S.A., Ampla Investimentos e Serviços S.A., Empresa Eléctrica Cabo Blanco S.A.C. (ELECSA), Endesa Cemsa S.A., Codensa S.A. ESP, Inversiones Distrilima S.A.C., Empresa Distribuidora Sur S.A. (EDESUR), Emgesa S.A ESP, Endesa Brazil S.A., Generalima SAC S.A., Inversora Dock Sud S.A., Compañía Eléctrica San Isidro S.A and Yacylec S.A. Some of these companies are, in turn, owners of equity in other companies; all of which is duly taken into consideration in their respective valuation.
Endesa, S.A., (“Endesa Spain”) is a direct and/or indirect equity holder of the aforementioned companies. The present expert appraiser report contains an estimate of the value of the contribution to be made to Enersis S.A., consisting in the shares of stock and equity described under Annex I (“The Equity Holdings”) in this same report.
Notwithstanding the foregoing, during the preparation of this expert report, the owner of the Equity Holdings declared that for purposes of a better implementation of the capital increase covered by this report, such Equity Holdings might perhaps be contributed as the sole assets and liabilities of a newly-incorporated company (“Vehicle Company”), in which case the assets to be contributed toward the capital increase concerning the present expert appraisal report would be the shares of stock of such Vehicle Company.
According to such assumption, and assuming that such Vehicle Company shall not have any significant liabilities or contingencies to alter the alluded estimate, the valuation of the total Equity Holdings shall be equivalent to the value of the Vehicle Company, which, perhaps would be contributed in the capital increase, in which case it would be irrelevant –for the purposes of the present expert appraisal report- that the contribution in kind be in the form of Equity Holdings or shares of stock of the Vehicle Company, since the estimate of both of these assets – according to the terms of this expert appraisal report- would coincide.
2
This expert report is prepared in order to be delivered to the Enersis’ Board of Directors for it to submit it before the company’s Extraordinary Shareholders’ Meeting, which may subsequently approve the corresponding capital increase which, in turn, must be issued pursuant to the requirements established under article 15 of Law 18,046, the Chilean Corporate Law, and article 22 of the Regulations of the Chilean Corporate Law. Therefore, this technical or expert report is issued personally by the undersigned expert, who is liable for the opinions contained herein.
II. AVAILABLE INFORMATION
In valuing the Equity Holdings that would be contributed in the capital increase, I had access to the information identified under Table 1. In summarized terms, I had access and consulted –among others- the following information:
· Financial statements audited as of December 31, 2011, and financial statements as of March 2012, which were the latest available as of the date of this report.
· Detailed information of the assets and liabilities with related parties
· The structure of the companies’ property ownership
· Projection of key assumptions prepared by ENERSIS and by the companies subject to valuation. Such assumptions include prices and quantities sold, fixed and variable costs, cost of raw materials, administrative expenses, capital expenditures for replenishment, maintenance and growth, tax rates and depreciation, among others.
· “Macroeconomic framework” supporting such projections – the same for all the companies examined.
· Summaries of the companies’ most important third-party contracts currently in effect.
· Sector regulations currently in effect in Argentina, Brazil, Chile and Peru for the generation, transmission and distribution of electricity – which were studied in the pertinent cases.
III. GENERAL METHODOLOGY
The general methodology applied here consists of a sum-of-the-parts valuation considering each business unit as a part to be valued separately. Those companies with investments in other companies are also valued through the sum of the estimated values of their respective equity holdings.
3
In order to value productive investments in each case, I determined the economic value of the assets (such as discounted cash flows) from which I subtracted the economic value of net cash debt: from here I obtained the equity value of each company. Subsequently, I valued the equity holdings in each company that Endesa Spain, directly and/or indirectly, would contribute to Enersis. Such value is the sum-of-the-parts, subtracting the corresponding equity holdings from the net debt (or adding equity holdings in other assets) of the holding companies. In the latter case, the present value of its expenses is valued separately.
I verified that using holding companies to invest in affiliates and subsidiaries has no significant adverse consequences that may impact the valuation by parts, additional to those effects already considered.
There are few cases where I could use a direct market value, either because it does not exist or because the traded amounts are too low. Whenever possible, however, pertinent comparisons are made.
The main difficulties in valuing via discounted cash flows relate, naturally, to determining the expected future operating cash flows and the discount rates. For the former case, the main source are the companies, albeit the expert appraisal report envisages reviews and, in some cases, modifies the assumptions applied by the companies.
A. Cash flows
As stated, the valuation is heavily based on Enersis’ own projections for its related companies and on those prepared by the companies themselves. Nevertheless, as much as possible, I also compared their assumptions and projections to other sources of information and analysis. In any case, the results of this study are subject to the same difficulties that might be faced by such projections; however, the direct information coming from the same companies valued in this study constitutes a source of information superior to what is normally available in the market.
I consider net cash flows of the assets, generated by the company’s normal operation, minus taxes, capital expenses (CAPEX), both of maintenance as well as of investment, and minus (plus) the increases (decreases) in the working capital required by the operation.
All company-projected flows are stated in each country’s local currency. Nevertheless, all projections are based on a common set of macroeconomic and financial assumptions. Consequently, in order to convert these flows into USD (Dollars of the United States of America), which is the functional currency used in the valuation, I apply the same foreign currency exchange assumptions considered by the companies upon projecting their respective flows. I do this in order to work using coherent assumptions . I also verified the local currency results and studied the impact of such assumptions.
4
B. Discount rates
Table 2 shows the capital cost rates used in the valuations.
In order to determine the discount rates, I consider a methodology that is in line with the state of the art in this respect. The discount rate used is each sector’s weighted average cost of capital in each country measured in nominal USD.
I obtain the weighted average of the cost of the debt and the equity. The formula used does not assume tax advantages for using debt, since I consider that it is not appropriate to do so in this context. However, since the formula that is commonly used indeed assumes such advantages, I verified that the resulting order of magnitude for the discount rates obtained was coherent with common market practices. As an additional verification method, upon obtaining the valuations from the USD cash flows, I calculated the IRR of the valued assets in local-currency and verified their implicit risk premiums with respect to local government bonds in local currency. If a bias were to remain in the discount rates applied in this study because of ignoring tax advantages for the debt, such would be an upward bias.
· Debt interest rates
For interest rates on debt related to each sector and country, I searched Bloomberg for recent trading of USD-denominated bonds of comparable companies. Given the lack of liquidity for longer terms, I used bond maturities in the range of 10-years.
· Equity cost
For the cost of equity, first I obtained -for each country- a list of comparable companies belonging to the same industry showing stock market trading. For each country and sector I obtained the estimated Equity “Beta” against the Bloomberg’s S&P 500index, using USD. In order to secure a representative Beta for each country-industry; first, I de-leveraged the Betas, I calculated a mean, and re-leveraged using the average financial structure of the industry in the country. The cost of the capital is a risk-free rate, plus the country risk, plus Beta times the market risk premium.
o Risk-free benchmark rate
5
As Risk-free rateI apply a 20-year interest rate from a curve estimated by the US Treasury Department.1 I use 20-year bond interest rates because their time period (from Macaulay) is more coherent with the investment horizon of the businesses under evaluation (mainly long term and electrical). The rate applied is an average of the first business days of the month of July and it amounts to 2.25%.
o Country risk
Given the low liquidity of certain issues, I took the average of 2 months of stripped spreads by country risk, according to EMBI+.
o Market risk premium
Market risk premiums are commonly estimated using Ibbotson & Asociados as source, who estimate a historic average for the United States since 1926. A review of the literature allows concluding that, in general, such historic premiums and, particularly those of Ibbotson for the United States, tend to by upward biased. Therefore, my source for estimating such premium in this case was a study of Dimson, Marsh & Staunton (DMS)2 that uses a larger sample of countries, a greater time horizon and, additionally, makes adjustments for certain sources of historic profitability not expected to be repeated in the future. Incorporating the last years to their sample does not significantly affect the results, since it begins in 1900. Its risk premium estimate with respect to long term securities ranges between 3.6% and 4.1% (on an arithmetic base). These premiums are coherent with real long-term average profitability scores ranging between 5.5% and 6%, with an average of 5.75%.
Given the current situation of historically low interest rates and generally negative real rates in the United States, a pertinent question arises as to whether it would be more appropriate to assume historical risk premiums or whether it would be more reasonable to assume that expected future returns remain in real terms. I favor the second alternative, an hypothesis that we will verify with another methodology, as explained below. According to the Consensus Forecast, the United States long-term inflation forecast is 2%, which implies that the profitability of the benchmark Treasury Bond is 0.25% in real terms. Therefore, the risk premium compared to the 20-year Treasury Bond would be 5.5%.
1Source: Treasury Department, http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
2Elroy Dimson, Paul Marsh, and Mike Staunton (2006), THE WORLDWIDE EQUITY PREMIUM: A SMALLER PUZZLE, London Business School.
6
In order to verify whether this result is reasonable, I applied Damodaran’s methodology for “Implied Equity Premium”.3 Using the more recent projections, I obtain a risk premium of around 6% for the S&P500, once again taking as a benchmark a 20-year rate .
The difference between both methods is that the second is “forward looking”, while the DMS is based on adjusted historic averages. Upon equally weighing these estimates, I obtain a premium with respect to the 20-year rate of 5.75%.
o Other premiums
In the case of the Brazilian services company, Pratil, which provides services related to the electric distribution industry, I observed that it practically has no fixed assets. Moreover, its history is quite scant. In order to discount the projected cash flows for the company, I considered for this case a risk premium, denominated “by size” in the summary table.
Additionally, I studied the pertinence of separately considering an illiquidity premium. One could think that the alternative of Endesa Spain to sell its stock package to Enersis is to sell it in the market, which will eventually imply a discount considering that, in general, these are minority equity holdings that in many cases are closely-held companies.
Against this argument, however, I should balance the following:
First, in the case liquidity is required, Endesa Spain does not need to sell this stock package to third parties at a discount because it owns other investments on corporations (for example, in Enersis) that it could sell more easily. Second, in certain cases (Emgesa, Codensa, Piura, Dock Sud and Cemsa), the additional equity holding permits consolidating control by Enersis, without the need to secure third-party votes. Others (Coelce, Edelnor) are corporations that trade their stock at stock exchange. Finally, in those cases where none of the two previous situations occur (Endesa Brazil, Edesur), the additional equity holding permits appointing at least one additional Board member, all of which strengthens corporate governance and the strategic plans established by Enersis.
Consequently, I disregarded incorporating an additional premium to discount rates due to this concept.
3Aswath Damodaran, Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2012 Edition Updated: March 2012, Stern School of Business.
7
C. Economic value of the equity
The economic value of the equity is obtained as the present value of the future free cash flows of assets, described in point a) above, discounted by the discount rates described in point b) minus the debt’s value net of cash, plus/minus other assets or liabilities. For this calculation, I take as benchmark the audited balance sheets as of the end of December 2011.
D. Updating the economic value of the equity
In order to update the economic value of the equity as of June 30, 2012, I made the following adjustments:
· I updated the USD-denominated values by each company’s equity discount rate, accruing 6-month profits.
· I subtracted all dividend payments out since the closing date of the 2011 Balance Sheets.
· I asked Enersis and Endesa Spain to provide a report about subsequent events that could have materially affected the values of the companies after the 2011 closing, such as for example, legal or tax contingencies. Based on such report, I conclude that there are no subsequent events that could materially affect the valuation.
IV. VALUATIONS AS OF DECEMBER 2011
Most of the valued companies are related to the electricity sector, either in electricity Generation, Distribution or Transmission. Therefore, in order to value them it is important to consider their overall regulatory framework. Table 3 summarizes such framework for each country.
In general terms, tariff regulations for distribution sector applies the approach of a normal returns for an efficient company to establish a regulatory returns over actually materialized investments. In the case of transmission, the regulation is similar. In generation, tariffs depend on the marginal cost of generating energy in the short, medium and long term. In all the countries, except Brazil, there is a payment for capacity.
Table 4 summarizes the specific characteristics of the companies to be valued. Part a) shows a general description, and Part b) shows accounting information. It is important to highlight that the last audited Balance Sheets as of December 31, 2011 were considered as benchmark.
8
A. A BRIEF DESCRIPTION OF THE COMPANIES
1. Argentina
a) Edesur
Edesur is Argentina’s second largest electricity distribution company in terms of energy purchases after Edenor, a non-related company. Edesur operates over a concession area of 3,309 Km2 distributing electricity throughout the south-central part of Buenos Aires metropolitan area. It services Buenos Aires’ main business district and several residential areas to the south of the city. As if December 31, 2011, Edesur distributed electricity to 2.4 million clients. Residential, commercial, industrial and other clients -mostly public and municipal clients- represented 42%, 26%, 8% and 24%, respectively, of Edesur’s total energy sales.
b) Yacylec
The transmission system Yacylec is comprised of:
• Three 500 kV transmission lines, 4 Km long each, from Hidroeléctrica Yacyretá power station up to "Rincón de Santa María” transformer station.
• A 500 kV transformer station and Beach "Rincón de Santa María”, in the province of Corrientes.
• A 500 kV and 269 Km long transmission line, from "Rincón de Santa María" transformer station up to “Resistencia” transformer station, and an expansion of the “Resistencia” transformer station, in the province of Chaco.
• Communications system
c) Cemsa
The main activity of Endesa CEMSA is the wholesale purchase and sale of electricity generated by third parties to be consumed by third parties, including import and exports of electricity and the commercialization of royalties, as well as providing and/or performing related services, all of it acting on its own behalf and/or by mandate and/or on behalf of or by order of third parties and/or associated to third parties; natural gas trading (purchase and/or sale) operations and/or its transportation, including import and export of natural gas and the commercialization of royalties and natural gas, acting on behalf of itself or on behalf of or by order of third parties and/or associated to third parties; and fuel oil trading (purchase and/or sale) operations.
Endesa CEMSA has executed several agreements with Argentine electricity power stations in support to its own supply contracts. Those Argentinean power stations that support Endesa CEMSA’s electricity supply contracts are: Central Costanera S.A., Central Térmica Dock Sud S.A., Centrales Térmicas del Noroeste Argentino, and Hidroeléctrica El Chocón S.A.
9
d) Dock Sud
In the generation business, Endesa Spain has a control participation of 69.99% in Dock Sud’s power station, a facility with two groups with a jointly capacity of 870 MW.
Dock Sud power station has 4 gas turbines and 1 steam turbine. The set comprised by 2 of the gas turbines and the steam turbine comprise a combined cycle.
The investments made in the Dock Sud power station project were mainly materialized until 2001, which the combined cycle was started up aiming to supply the electricity needs of Argentina’s interconnected system and allocate the eventual surplus capacity to be exported to neighboring countries.
2. Brazil
a) Ampla
Ampla is the second largest electricity distribution company in the State of Rio de Janeiro in terms of clients and annual energy sales. Ampla is mainly committed to distributing electricity to 66 municipalities throughout the State of Rio de Janeiro, serving 2.6 million clients over a concession area of 32.615 Km2 with an estimated population of 8 million inhabitants. As of December 2011, residential, commercial, industrial and other clients represented 38%, 18%, 12% and 32%, respectively, of Ampla’s total sales, totaling 10,223 GWh.
b) Coelce
Coelce is the sole distributor of electricity in the State of Ceará, in northeastern Brazil. As of December 2011, served over 3.2 million clients within a concession area of 148,825 Km2. During 2011, Coelce’s total sales amounted to 8,970 GWh. As of December 2011, residential commercial, industrial and other clients represented 34%, 19%, 14% and 33% respectively, of Coelce’s total energy sales.
c) Endesa Brazil
In 2005, Endesa Brazil was formed as a company to manage all generation, transmission and distribution assets that Endesa Latinoamérica –a subsidiary of Endesa Spain- held togetherwith Enersis, Endesa Chile and Chilectra in Brazil.
10
d) Fortaleza
Located in the municipality of Caucaia -50 Km away from the capital of the State of Ceará-, Fortaleza is a combined-cycle power plant of 322 MW that uses natural gas in its operation, with a capacity to generate a third of the electricity needed in Ceará, with a population of 8.2 million inhabitants.
e) Cachoeira
Located in the State of Goias -240 Km south of Goiana-, Cachoeira is a hydroelectricity power plant that use the flows from the Paranaiba River, with 10 generating units totaling an installed capacity of 665 MW. Cachoeira started operating in 1997.
f) Cien
Compañía de Interconexión Energética S.A. (CIEN) is a Brazilian electricity transmission company. Its complex is comprised of 2 frequency conversion stations, Garabi I and Garabi II, which operate a 2-way conversion of frequencies between Brazil (60 Hertz) and Argentina (50 Hertz), as well as their transmission lines. On the Argentinean side, they are operated by 2 subsidiaries: Compañía de Transmisión del Mercosur S.A. (CTM) and Transportadora de Energía S.A. (TESA); Cien controls 99.99% of their equity. The interconnection system consists of 2 transmission lines with an extension of 1,000 Km plus the Garabi Conversion Plant.
3. Chile
a) San Isidro
San Isidro is a company whose property was originally 100% owned by Endesa Chile, legally incorporated in Chile in order to build and operate a 379 MW combined cycle power plant in Quillota, in the region of Valparaiso. The plant started its commercial operations in 1998. A 220 Kv and 9 Km long transmission line was built in order to connect this thermal power plant with the Central Interconnected Grid (SIC). This transmission system is managed by Transmisora Eléctrica de Quillota Ltda. (Transquillota), which is 50% owned by San Isidro. As a consequence of the merger by absorption of Pangue in San Isidro, a percentage of San Isidro ownership remain indirectly in the hands of Endesa Spain.
b) Pangue
Pangue Is located in the region of Biobio, 100 Km east of Los Angeles. Its installed capacity amounts to 467 MW, and it is dam hydro power plant that uses the Biobio River water flows. Enersis owns 57% of its property.
11
In 2011, Pangue’s net energy generation amounted to 1,713 GWh and its energy sales totaled 1,798 GWh.
During the first half of 2012, Pangue was merged into San Isidro.
4. Colombia
a) Codensa
Codensa is an electricity distribution company in Colombia that serves a concession area of 18,217 Km2 in Bogota and 96 other municipalities in the departments of Cundinamarca, Tolima and Boyacá, serving approximately 2.6 million clients.
b) Emgesa
Emgesa has an installed generating capacity of 2,914 MW; of which, 85% corresponds to hydroelectric power plants and the rest to thermal power plants. In September 2007, Central Hidroeléctrica Betania ESP and Emgesa S.A. ESP absorbed Betania, company in which they adopted the name of Emgesa S.A. ESP.
c) Empresa de Energía de Cundinamarca S.A (EEC)
EEC is an electricity marketing & distribution company operating in the department of Cundinamarca. It serves 247 thousand clients and it sold 622 GWh during the year 2011.
5. Peru
a) Edelnor
Edelnor is a Peruvian distribution company that operates a 2,400 Km2 concession area. It has the exclusive concession to distribute electricity in the northern part of Lima’s metropolitan area, covering departments such as Huaral, Huaura, Barranca and Oyón, as well as a province adjacent in Callao. At the closing of the year 2011, it distributed electricity to approximately 1.1 million clients.
b) Piura
Empresa Eléctrica de Piura (Eepsa) has 133 MW and it is a company dedicated to the generation of electricity with 2 thermal plants: Malacas and Malacas 2, located in the province of Talara-Piura, which operate using the area’s own natural gas resources.
Piura is currently working on the construction of a 200 MW open-cycle thermal power plant, called Reserva Fría. It is expected to start operations by March 2013.
12
B. Specific methodologies applied in valuing the companies
Table 5 shows a summary of the methodologies used in valuing each company. In most cases I applied the present value of future free cash flows, based on Enersis’ projections, plus a terminal value which -with some exceptions- is determined as a perpetuity value. In most cases I assumed that such perpetuity does not grow in real terms.
C. Results
Table 6 summarizes the results of the valuations for each company. Part a) of such table shows the numeric results, while Part b) shows financial ratios or multiples, available for comparison with the references presented subsequently.
1. Productive companies
With the exception of Yacylec (Argentina) and Transquillota (part of San Isidro, Chile), whose equity were valued at book value, and of the holding companies, whose valuation is explained below, all companies were valued using the method of present value of future cash flows, with a residual or extended value of the concessions (see Table 5).
Among the Argentine companies, the one with the highest asset and equity value is Edesur. Dock Sud appears with a negative economic equity value. The manner in which to take this into account regarding the value of the capital contributions is discussed further on in this report.
In the case of Brazil, the largest companies in terms of assets and equity are the distribution companies Ampla and Coelce. The total value of assets and economic equity of the Brazilian companies totals 8,000 and 6,764 million USD, respectively.
The value of the assets and equity of the Chilean companies adds to approximately 1,900 million USD.
In the case of Colombia, the companies are those largest in size, in terms of the estimated economic value of their assets, which amounts to 13,000 million USD. The sum total of their equity amounts to 11,800 million USD.
Finally, in the case of the Peruvian companies, the value of their assets and equity amounts to approximately 1,800 and 1,400 million USD, respectively.
13
2. “Holding” companies
Holding companies Endesa Brasil, Ampla Investimentos, Investluz and Generalima were valued applying the present value of the future cash flows from other than their investments, which were valued separately. In other words, I took the future expenses associated with the holding’s operations. To such value I subtracted the net cash debt. Given the methodology applied, which excludes the value of their investments, it is not surprising that the economic value of the holding companies be shown as quite small or even negative in Table 6.
In the case of other holding companies (Inversiones Distrilima, Inversiones Dock Sud, DECSA and Eléctrica Cabo Blanco), I analyzed their assets, liabilities, expense levels and the eventual existence of contingencies. For all cases I concluded that the economic value of their equity is not significantly different than zero, for the purposes of this valuation.
D. Verifications and comparisons
The valuations presented in the preceding point were calculated in USD using discount rates in the same currency. A pertinent question refers to the importance of the assumptions regarding the future trend of foreign exchange rates. In order to check this particular point, I re-calculated the implicit capital cost rate in local currency. I calculated an IRR in local currency considering as initial investment the value of the assets of each company and its future cash flows also measured in its nominal local currency. Finally, I compared the order of magnitude of such IRR in nominal local currency against the benchmark interest rate for governmental notes. This check shows a premium with respect to local currency bonds, as summarized in Table 7.
The results show that there are reasonable premiums above the local benchmark interest rate, which already includes a country risk premium and a possible foreign exchange risk premium. The premiums shown are in addition to the previous ones. The foregoing is consistent with the Betas of assets with respect to the local electricity market sector ranging between 0.6 and 0.8; with a premium on account of the local securities (stock exchange) market above the local interest rate of around 4%, for example.
Also the orders of magnitude are indeed quite coherent between countries, with the sole exception of Argentina - a country and an industry currently undergoing a situation of instability.
Therefore, the results are not significantly affected by the assumptions regarding the future evolution of foreign exchange rates.
14
I also checked the orders of magnitude of the valuations obtained based on publicly-available studies, in some cases, with reference to market prices, in others, and also in contrast with the market value of other companies in comparable sectors, mainly through the use of multiples, financial and operational ratios. I submit some pertinent multiples and valuation references in Table 8.
It may be concluded that the multiples of the companies valued (see Table 6.b) are within the ranges of comparable companies.
· Argentina
In relative and absolute terms, the multiples for the Argentinean companies are low.
Edesur has a close benchmark in Edenor. The only comparable indicator is the company value per client. For Edesur it comes out significantly smaller, also with respect to Latin American average. The multiples over EBITDA are less than half.
CEMSA does not have any evident benchmarks, because there are no comparable companies aimed exclusively at marketing. In any case, its long-term multiple is similar to that of other Argentine companies.
Dock Sud is comparable to Pampa Energía. The multiples regarding their operating profits before interest, depreciation and taxes (EBITDA) are lower than those of the comparable company, just like the company value per installed capacity. A somewhat comparable transaction, albeit with reservations, is the acquisition of El Chocón. Its EBITDA multiple is 2, which is fully in line with the valuation found, despite the fact that the latter is a hydraulic company.
· Brazil
Fortaleza is a thermal power plant. It does not have any directly comparable benchmarks in Brazil. Its multiples tend to be smaller than those of the Brazilian generator companies – probably because of the expiration of its contract with COELCE, beyond which I have only assumed payments for capacity.
The multiples for Cachoeira (hydraulic plant) and its value per installed capacity are fully in line with those of its benchmark comparable companies.
15
Ampla and Coelce are distribution companies whose multiples are fully aligned with those of their benchmark companies. Their company value per client is also similar to those of their benchmarks.
The multiples for Cien are also comparable to those of other transmission companies in Brazil. Those for Prátil are greater than those of other service companies; however, oftentimes such other companies deal in services different than those offered by Prátil.
· Chile
The multiples for Pangue and San Isidro are entirely comparable to those of other benchmark companies. AES Gener and E-CL are benchmark for San Isidro, with lower multiples considering projections for 2013. Pangue has multiples similar to those of Colbún, although the value per installed capacity is greater; which is attributable to the strategic geographic location of this power plant.
· Colombia
Isagen is a benchmark for Emgesa, because of their similar characteristics. All the multiples for Emgesa are also similar or slightly lower than those for Isagen.
The distribution companies Codensa and Cundinamarca are compared with the average of the Latin-American companies. Cundinamarca has multiples similar to the average and Codensa higher than the average. When compared to Luz del Sur (in Peru) and with the results found in this study for Edelnor (Peru), the multiples are similar, but the client value is higher. This might be attributable to the greater efficiency of this company.
· Peru
Considering the EBITDA for 2013, the implicit multiples for Edelnor are 13% higher than those of its benchmark company, Luz del Sur. Nevertheless, the company value per client is 70% of the value for Luz del Sur. The foregoing does not give any indication of non-aligned values.
For Piura (thermal generator company), the closest benchmark companies are Enersur and Edegel, although these companies have a 50% and 60% hydraulic generation, respectively. The Piura multiples are 70% of such benchmarks and its value per installed capacity is 56% of the average benchmark.
16
E. Other possible value sources not quantified in this study
1. Projects and growth opportunities
I have been furnished information about investment projects with an estimated high probability of execution. Moreover, the information indicates that if such projects were not to be executed, others with similar characteristics might be carried out.
In this sense, the most probable of such projects -in the opinion of the companies- are the following:
· Jamanxim (Endesa Brasil)
Endesa Brasil’s objective is to increase its market share in Brazil through the development of large hydroelectric power projects, by winning contest awards of some 2,000 MW between 2012 and 2016. Jamanxim is precisely one of such projects, whose capacity would amount to 881 MW. The project requires investing some 1,400 million USD.
Project status: Prefeasibility study in progress. Environmental impact study not yet started.
· Guaicaramo (Emgesa)
This is a 467 MW hydroelectric power plant to be built in Colombia. The estimated investment amounts to 1,160 million USD. Its prefeasibility study was completed and it is now in the process of its environmental impact study.
· Marañón 1 (Generalima)
Marañon is a 407 MW hydroelectric power plant in Peru. The estimated investment totals 815 million USD. The project is still in its prefeasibility stage.
· Yacila (Generalima)
Yacila would be an 84 MW wind power plant to be located in the province of Piura, Peru, with an estimated investment totaling approximately 11 million USD. The project is currently in its feasibility stage and the environmental impact study is already in progress.
· Summary
All things considered, I estimate a net present value for all these projects that would amount to a significant percentage of the total value of the assets considered. Considering, however, that there are no specific proprietary rights involved that could be allocated to these assets; which, for example, could be sold to third parties, it is quite difficult to assign any value to them on grounds of a success probability, given their current state of progress. Consequently, applying a conservative criterion, I did not include these projects in the present valuation exercise.
17
2. Tax savings
The valuation performed here does not consider the eventual tax benefits to be derived from the losses incurred by the holding companies. Such eventual tax benefits have not been specified in the plans for the companies; for this reason, they have not been considered here.
At any rate, a top level mark for such eventual savings would be the present value of the expenses incurred by the holding companies multiplied by the country’s tax rate. Weighing such potential tax savings according to the respective equity holdings to be contributed to Enersis, one would obtain a non-significant amount in proportion to the total value of such capital contributions.
F. Economic value of the December 31, 2011 capital contribution
The economic value of the capital contribution corresponds to the sum of the economic values of the equity of the companies weighted by the equity share in the companies to be directly and/or indirectly transferred to Enersis.
It is worth noting that the value of some capital contributions is negative. In the case of “holding-type” companies (Ampla Investimentos and Investluz), this happens because I am valuing the non-consolidated assets of the companies; namely, this value does not consider the value of their investments. Nevertheless, in the case of Dock Sud, the equity value actually estimated is negative. Although these are limited liability companies whose equity may not, in theory, have a negative value, in this particular case there is a “reputation” problem associated with the economic group that controls the companies. Consequently, it is possible to think that there is not a real limitation of liability in this case, since the economic group would have to pay that debt. The results are shown in Table 9. The sum of all capital contributions as of December is estimated in 4,742 million USD.
G. Restatement of the capital contributions as of June 30 2012
Considering the companies that were valued according to the method of the present value of discounted future cash flows, in order to restate the value of the capital contribution around mid-2012, I did the following: first, I established the economic equity value as of the end of 2012. Then I accrued one-semester profits given the greater proximity of the future cash flows considered in the valuation, which is estimated as the capital cost rate of the equity multiplied by the initial economic value of the equity. Then we subtracted the dividends paid out by each company. These results are submitted in Table 10.
18
Upon weighting the corresponding equity holdings, the accrued increased value amounts to 205 million USD, while the value reduction on account of dividends amounts to 85 million USD, all of which implies a net value increase of approximately 120 million USD.
· The foregoing shows that the economic value of the capital contributions total 4,862 million USD.
· In the opinion of the undersigned Expert, the above-referred value corresponds to the market value of those equity holdings that Endesa Spain would, eventually -directly and/or indirectly- contribute to Enersis.
19
|
TABLE 1: Information Sources | ||
|
Information |
Source | |
|
1 |
Description of the markets in which each subsidiary operates |
Enersis S.A. |
|
2 |
Description of the country regulatory framework in which each subsidiary operates |
Enersis S.A. |
|
3 |
Companies Projected Cash Flows 2012-2021 |
Enersis S.A., fitted by the expert to reflect assumptions considered to be more suitable. |
|
4 |
Direct and Indirect ownership of Enersis Group |
Enersis S.A. |
|
5 |
Direct and Indirect ownership of Endesa Chile Group |
Enersis S.A. |
|
6 |
Direct and Indirect ownership of Endesa Brasil Group |
Enersis S.A. |
|
7 |
Direct and Indirect ownership of Endesa Latinoamerica Group |
Enersis S.A. |
|
8 |
Companies 2011 Annual Reports |
Enersis S.A. |
|
9 |
Companies Audited Financial Statements as of December 2011 |
Enersis S.A. |
|
9 |
Companies Financial Statements as of March 2012 |
Enersis S.A. |
|
10 |
Later adjustments to the FECU, such as dividends or equity distribution |
Enersis S.A. |
|
11 |
Macroeconomic framework with projections of exchange rate, interest rates, inflation, GDP, energy demand. |
Enersis S.A. |
|
12 |
Discount Rate |
Made by the expert, taking into consideration market interest rates as of the date of this report and its own statistical analysis. Sources: Bloomberg, JPMorgan and reports of the Central Banks of every country. |
|
13 |
Public valuation reports and reports with value reference |
Reports of financial institutions. In the case of Ampla Energía and Ampla Investimentos “Laudo de Avaliação” of PWC dated October 28, 2011, is included . In the case of San Isidro and Pangue valuation report is included, done by BICE in order to merger both companies, and the expert report related to the same operation. |
|
14 |
Financial variables information (Interest Rate and Exchange Rate) |
Several sources |
20
TABLA 2: Cost of Capital Rate (used)
|
Brazil |
Colombia |
Chile |
Peru |
Argentina | ||||||||
|
Generation |
Distribution |
Transmission |
Services |
Generation |
Distribution |
Generation |
Distribution |
Generation |
Distribution |
Generation |
Distribution | |
|
Cost of debt (Kd) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Cost of Debt (1) |
4.5% |
4.5% |
4.5% |
4.5% |
5.3% |
5.3% |
4.8% |
4.8% |
5.0% |
5.0% |
21.2% |
21.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kd (US$) |
4.50% |
4.50% |
4.50% |
4.50% |
5.25% |
5.25% |
4.75% |
4.75% |
5.00% |
5.00% |
21.19% |
21.19% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equity (Ke) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Free Rate Reference (2) |
2.25% |
2.25% |
2.25% |
2.25% |
2.25% |
2.25% |
2.25% |
2.25% |
2.25% |
2.25% |
2.25% |
2.25% |
|
Beta (median) of Peers |
0.63 |
0.67 |
0.48 |
1.00 |
0.66 |
0.65 |
0.66 |
0.65 |
0.66 |
0.65 |
0.66 |
0.65 |
|
Beta (leverage) |
0.77 |
0.88 |
0.63 |
1.00 |
0.75 |
0.83 |
0.77 |
0.88 |
0.76 |
0.85 |
0.75 |
0.83 |
|
Market Risk premium (3) |
5.75% |
5.75% |
5.75% |
5.75% |
5.75% |
5.75% |
5.75% |
5.75% |
5.75% |
5.75% |
5.75% |
5.75% |
|
Country Risk (4) |
2.2% |
2.2% |
2.2% |
2.2% |
1.7% |
1.7% |
1.8% |
1.8% |
1.9% |
1.9% |
18.0% |
18.0% |
|
Size Premium |
0.0% |
0.0% |
0.0% |
6.1% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
|
Ke (US$) |
8.89% |
9.48% |
8.04% |
16.29% |
8.32% |
8.79% |
8.44% |
9.06% |
8.47% |
9.00% |
24.54% |
25.03% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Cost of Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt / Assets |
25.9% |
31.8% |
26.7% |
0.0% |
17.3% |
30.4% |
17.3% |
30.4% |
17.3% |
30.4% |
17.3% |
30.4% |
|
Equity / Assets |
74.1% |
68.2% |
73.3% |
100.0% |
82.7% |
69.6% |
82.7% |
69.6% |
82.7% |
69.6% |
82.7% |
69.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of capital (WACC in US$) |
7.75% |
7.90% |
7.09% |
16.29% |
7.79% |
7.72% |
7.80% |
7.75% |
7.87% |
7.79% |
23.96% |
23.86% |
|
VERSUS DB |
0.36% |
0.39% |
0.47% |
-0.24% |
0.28% |
0.46% |
0.13% |
0.19% |
0.23% |
0.38% |
1.26% |
2.18% |
|
Spread Utility vs country |
1.26% |
0.74% |
0.88% |
0.96% |
||||||||
|
Notes: |
||||||||||||
|
(1): Based on 10 years bonds (or close to) in US$ of similar companies. Source: Bloomberg, June 26th, 2012 | ||||||||||||
|
(2): Risk free rate: US T-Bond 20 years, average July 2012 | ||||||||||||
|
(3): Market risk premium: Dimson, Marsh y Staunton (2006), adjusted at the valuation date | ||||||||||||
|
(4): EMBI+ last two month average , as of June 2012. | ||||||||||||
21
TABLE 3: General characteristics of the regulation in each country
|
|
|
Argentina |
Brazil |
Chile |
Peru |
Colombia |
|
Gx |
Market |
Spot/Audited Cost |
Exchange/ Offered Price | |||
|
Regulated |
Seasonal Price |
Bids 15 years T /30 years H |
Node Price Bids 15 years |
Bar Price Bids 20 years |
Bids 3/5 years | |
|
Power |
Peak demand contribution |
--- |
Peak demand contribution |
Firm energy contribution | ||
|
Tx |
Characteristics |
Public Service, Open Access, Regulated Tariffs, Only for Transmission Companies | ||||
|
Dx |
Rights |
Concession contracts |
Administrative Concession |
Operation Zone Authorization | ||
|
Term |
95 years |
30 years |
not defined | |||
|
VAD Revision |
5 years |
4/5 years |
4 years |
5 years | ||
|
Real profitability before tax (WACC) |
To be defined |
11.4% |
10.0% |
12.0% |
13.9% | |
|
Cx |
Free Clients |
> 0,03 MW |
> 0,5 MW |
> 0,5 MW |
> 0,2 MW |
> 0,1 MW |
|
Deregulated % |
≈20% |
≈25% |
≈30% |
≈45% |
≈30% | |
Source: Enersis
22
TABLE 4: Characteristics of the companies to be valued
a) General description (summary)
|
Country |
Company |
Industry |
Size (annual sales in GWh) |
Clients / |
|
Argentina |
Edesur |
Distribution |
17,233 |
2,389 thousand clients |
|
Yacylec |
Transmission |
500 kV transmission capacity | ||
|
Cemsa |
Trading |
|||
|
Inversora Dock Sud |
Holding |
|||
|
Dock Sud |
Generation |
5,229 |
870 MW installed capacity | |
|
Brazil |
Endesa Brasil |
Holding |
||
|
Pratil |
Services |
|||
|
Fortaleza |
Generation |
2,842 |
322 MW installed capacity | |
|
Cachoeira |
Generation |
3,986 |
665 MW installed capacity | |
|
Cien |
Transmission |
2,100 MW transmission capacity | ||
|
Ampla |
Distribution |
10,223 |
2,643 thousand clients | |
|
Ampla Investimentos |
Holding |
|||
|
Coelce |
Distribution |
8,970 |
3,224 thousand clients | |
|
Investluz |
Holding |
|||
|
Chile |
San Isidro |
Generation |
2,460 |
379 MW installed capacity |
|
Pangue |
Generation |
1,798 |
467MW installed capacity | |
|
Transquillota |
Generation |
220 kv transmission capacity |
23
|
Colombia |
Emgesa |
Generation |
15,112 |
2,914 MW installed capacity |
|
Codensa |
Distribution |
12,857 |
2,495 thousand clients | |
|
Cundinamarca |
Distribution |
6,229 |
247 thousand clients | |
|
Decsa |
Holding |
|||
|
Peru |
Edelnor |
Distribution |
6,572 |
1,144 thousand clients |
|
Piura |
Generation |
7,020 |
131 MW installed capacity | |
|
Generalima |
Holding |
|||
|
Distrilima |
Holding |
|||
|
Cabo Blanco |
Holding |
Source: Enersis
24
b) Financial Figures
|
Country |
Company |
Industry |
Currency |
BALANCE |
Income Statements |
Ratios | |||||||||||
|
Equity |
Liabilities |
Assets |
Financial Debt |
Cash |
Operating Income |
EBITDA |
NIAT |
Financial Debt /Equity |
EBITDA Margin |
Equity / Asset | |||||||
|
Third parties |
Rel. Co's |
Total |
|||||||||||||||
|
Argentina |
Edesur |
Distribution |
US$ million |
333 |
728 |
1,061 |
91 |
- |
91 |
21 |
575 |
- 57 |
- 112 |
27.4% |
-9.8% |
31.4% | |
|
Yacylec |
Transmission |
US$ million |
8 |
1 |
9 |
- |
- |
- |
0 |
5 |
2 |
1 |
0.0% |
33.4% |
88.0% | ||
|
Cemsa |
Trading |
US$ million |
14 |
68 |
82 |
- |
- |
- |
8 |
22 |
2 |
1 |
0.0% |
7.0% |
16.6% | ||
|
Inversora Dock Sud |
Holding |
US$ million |
61 |
0 |
61 |
- |
- |
- |
0 |
- |
- 0 |
15 |
0.0% |
- |
99.9% | ||
|
Dock Sud |
Generation |
US$ million |
54 |
275 |
328 |
201 |
- |
201 |
8 |
342 |
70 |
18 |
374.3% |
20.6% |
16.3% | ||
|
Brazil |
Endesa Brasil |
Holding |
US$ million |
2,314 |
32 |
2,346 |
- |
- 134 |
- 134 |
38 |
- |
- 15 |
521 |
0.0% |
- |
98.6% | |
|
Pratil |
Servicios |
US$ million |
2 |
3 |
5 |
- |
- |
- |
4 |
12 |
3 |
2 |
0.0% |
27.3% |
46.1% | ||
|
Fortaleza |
Generation |
US$ million |
323 |
148 |
471 |
83 |
- |
83 |
54 |
253 |
119 |
84 |
25.5% |
46.9% |
68.5% | ||
|
Cachoeira |
Generation |
US$ million |
599 |
113 |
712 |
- |
- |
- |
136 |
245 |
200 |
215 |
0.0% |
81.8% |
84.1% | ||
|
Cien |
Transmission |
US$ million |
246 |
371 |
617 |
107 |
98 |
205 |
2 |
166 |
123 |
41 |
83.5% |
74.0% |
39.8% | ||
|
Ampla |
Distribution |
US$ million |
872 |
1,611 |
2,483 |
753 |
- |
753 |
32 |
1,982 |
456 |
126 |
86.3% |
23.0% |
35.1% | ||
|
Ampla Investimentos |
Holding |
US$ million |
119 |
105 |
224 |
- |
115 |
115 |
2 |
- |
- 0 |
29 |
96.2% |
- |
53.2% | ||
|
Coelce |
Distribution |
US$ million |
784 |
1,003 |
1,787 |
584 |
- |
584 |
100 |
1,572 |
452 |
282 |
74.5% |
28.7% |
43.9% | ||
|
Investluz |
Holding |
US$ million |
423 |
15 |
438 |
- |
- |
- |
1 |
- |
- 11 |
76 |
0.0% |
- |
96.5% | ||
|
Chile |
San Isidro |
Generation |
US$ million |
130 |
157 |
288 |
- |
- |
- |
1 |
506 |
137 |
92 |
0.0% |
27.1% |
45.3% | |
|
Pangue |
Generation |
US$ million |
210 |
110 |
321 |
- |
- |
- |
0 |
246 |
215 |
162 |
0.0% |
87.4% |
65.6% | ||
|
Transquillota |
Generation |
US$ million |
21 |
2 |
23 |
- |
- |
- |
2 |
5 |
3 |
1 |
0.0% |
0.1% |
89.5% | ||
|
Colombia |
Emgesa |
Generation |
US$ million |
2,802 |
1,453 |
4,255 |
1,157 |
- |
1,157 |
263 |
1,028 |
679 |
362 |
41.3% |
66.1% |
65.8% | |
|
Codensa |
Distribution |
US$ million |
1,357 |
1,326 |
2,683 |
590 |
- |
590 |
253 |
1,617 |
529 |
248 |
43.5% |
32.7% |
50.6% | ||
|
Cundinamarca |
Distribution |
US$ million |
166 |
76 |
241 |
1 |
- |
1 |
2 |
142 |
29 |
17 |
0.6% |
20.1% |
68.7% | ||
|
Decsa |
Holding |
US$ million |
143 |
0 |
144 |
- |
- |
- |
0 |
1 |
0 |
14 |
0.0% |
71.6% |
100.0% | ||
|
Peru |
Edelnor |
Distribution |
US$ million |
371 |
605 |
976 |
350 |
- |
350 |
18 |
682 |
177 |
75 |
94.1% |
25.9% |
38.0% | |
|
Piura |
Generation |
US$ million |
71 |
94 |
165 |
75 |
- |
75 |
48 |
120 |
49 |
31 |
105.5% |
41.1% |
43.1% | ||
|
Generalima |
Holding |
US$ million |
57 |
1 |
58 |
- |
- |
- |
5 |
- |
- 3 |
- 3 |
0.0% |
- |
97.9% | ||
|
Distrilima |
Holding |
US$ million |
89 |
0 |
90 |
- |
- |
- |
0 |
- |
- 0 |
25 |
0.0% |
- |
99.8% | ||
|
Cabo Blanco |
Holding |
US$ million |
18 |
0 |
18 |
- |
- |
- |
0 |
- |
- 0 |
- 0 |
0.0% |
- |
99.9% | ||
Source: Audited Financial Statements for each company as of December 31st,2011.
25
TABLE 6: Valuation Results
a) Quantitative Results
|
(a) |
(b) |
(c) |
= (a) - (b) - (c) |
||||
|
Country |
Company |
Currency |
Assets |
Net Debt |
Other adjustments (1) |
Economic equity value |
|
|
Argentina |
Edesur |
US$ million |
281 |
50 |
0 |
230 |
|
|
Yacylec (2) |
US$ million |
|
|
|
8 |
||
|
Cemsa |
US$ million |
4 |
-12 |
0 |
16 |
||
|
Inversora Dock Sud (3) |
US$ million |
|
|
|
0 |
||
|
Dock Sud |
US$ million |
126 |
183 |
0 |
-57 |
||
|
Brazil |
Endesa Brasil |
US$ million |
-220 |
-65 |
-198 |
43 |
|
|
Pratil |
US$ million |
233 |
-4 |
0 |
238 |
||
|
Fortaleza |
US$ million |
514 |
-0 |
-54 |
569 |
||
|
Cachoeira |
US$ million |
1,493 |
-168 |
23 |
1,637 |
||
|
Cien |
US$ million |
684 |
204 |
-32 |
512 |
||
|
Ampla |
US$ million |
2,825 |
727 |
323 |
1,775 |
||
|
Ampla Investimentos |
US$ million |
-6 |
98 |
0 |
-104 |
||
|
Coelce |
US$ million |
2,514 |
413 |
-9 |
2,110 |
||
|
Investluz |
US$ million |
-5 |
-4 |
14 |
-15 |
||
|
Chile |
San Isidro |
US$ million |
204 |
-1 |
0 |
205 |
|
|
Pangue |
US$ million |
1,716 |
-0 |
0 |
1,716 |
||
|
Transquillota (2) |
US$ million |
|
|
|
21 |
||
|
Colombia |
Emgesa |
US$ million |
7,424 |
892 |
-69 |
6,601 |
|
|
Codensa |
US$ million |
5,402 |
337 |
0 |
5,065 |
||
|
Cundinamarca |
US$ million |
209 |
-1 |
0 |
210 |
||
|
Decsa (3) |
US$ million |
|
|
|
0 |
||
|
Peru |
Edelnor |
US$ million |
1,674 |
332 |
0 |
1,342 |
|
|
Piura |
US$ million |
122 |
27 |
0 |
94 |
||
|
Generalima |
US$ million |
-3 |
-5 |
0 |
2 |
||
|
Distrilima (3) |
US$ million |
|
|
|
0 |
||
|
Cabo Blanco (3) |
US$ million |
|
|
|
0 |
||
|
(1) Includes contingencies, tax benefits, dividends |
|||||||
|
(2) Valuation through the accounting of equity value; net debt |
|||||||
|
(3) Asumes zero value, because the only asset is the operative company already valued |
|||||||
28
b) Multiples and ratios
|
Country |
Company |
TEV / EBITDA 2012 E |
TEV / EBITDA 2013 E |
EXIT VALUE / EXIT EBITDA |
TEV / INST CAP (US$ thousand / MW) |
TEV / N° CLIENTS (US$) |
|
|
Argentina |
Edesur |
8.6 |
1.9 |
1.0 |
|
117 |
|
|
Yacylec |
|
|
|
|
|
||
|
Cemsa |
9.7 |
9.1 |
1.7 |
|
|
||
|
Inversora Dock Sud |
|
|
|
|
|
||
|
Dock Sud |
2.2 |
1.9 |
1.5 |
145 |
|
||
|
Brazil |
Endesa Brasil |
|
|
|
|
|
|
|
Pratil |
15.2 |
8.0 |
6.7 |
|
|
||
|
Fortaleza |
5.5 |
5.7 |
5.0 |
1,766 |
|
||
|
Cachoeira |
8.3 |
10.0 |
13.4 |
2,462 |
|
||
|
Cien |
6.3 |
6.2 |
|
|
|
||
|
Ampla |
5.1 |
4.6 |
17.0 |
|
672 |
||
|
Ampla Investimentos |
|
|
|
|
|
||
|
Coelce |
6.3 |
6.4 |
17.2 |
|
654 |
||
|
Investluz |
|
|
|
|
|
||
|
Chile |
San Isidro |
13.3 |
5.7 |
4.9 |
538 |
|
|
|
Pangue |
10.4 |
14.0 |
13.3 |
3,675 |
|
||
|
Transquillota |
|
|
|
|
|
||
|
Colombia |
Emgesa |
9.4 |
8.1 |
6.4 |
1,813 |
|
|
|
Codensa |
8.9 |
7.7 |
5.6 |
|
2,030 |
||
|
Cundinamarca |
5.3 |
4.4 |
3.6 |
|
820 |
||
|
Decsa |
|
|
|
|
|
||
|
Peru |
Edelnor |
8.5 |
7.8 |
5.3 |
|
1,405 |
|
|
Piura |
4.1 |
5.0 |
3.8 |
931 |
|
||
|
Generalima |
|
|
|
|
|
||
|
Distrilima |
|
|
|
|
|
||
|
Cabo Blanco |
|
|
|
|
|
||
|
TEV: Assets' economic value; EBITDA: earnings before depreciations, interests and taxes; EXIT VALUE / EXIT EBITDA: Assets' economic value starting on 2022 divided by the EBITDA of the year 2021 (Coelce and Ampla, Average EBITDA 2017-2021) |
|||||||
29
TABLE 7: Implicit IRR and premium in local currency
|
Country |
Company |
WACC (IRR) Local Currency |
Reference Rate (LC)* |
Premium |
|
|
Argentina |
Edesur |
31.0% |
15.0% |
16.0% |
|
|
Yacylec |
|
|
|
||
|
Cemsa |
31.6% |
15.0% |
16.6% |
||
|
Inversora Dock Sud |
|
|
|
||
|
Dock Sud |
30.7% |
15.0% |
15.7% |
||
|
Brazil |
Endesa Brasil |
|
|
|
|
|
Pratil |
19.1% |
7.0% |
12.1% |
||
|
Fortaleza |
10.3% |
7.0% |
3.4% |
||
|
Cachoeira |
10.2% |
7.0% |
3.2% |
||
|
Cien |
9.8% |
7.0% |
2.8% |
||
|
Ampla |
10.5% |
7.0% |
3.5% |
||
|
Ampla Investimentos |
|
|
|
||
|
Coelce |
10.5% |
7.0% |
3.5% |
||
|
Investluz |
|
|
|
||
|
Chile |
San Isidro |
8.1% |
5.2% |
2.9% |
|
|
Pangue |
8.2% |
5.2% |
3.0% |
||
|
Transquillota |
|
|
|
||
|
Colombia |
Emgesa |
8.5% |
5.7% |
2.8% |
|
|
Codensa |
8.4% |
5.7% |
2.7% |
||
|
Cundinamarca |
8.5% |
5.7% |
2.8% |
||
|
Decsa |
|
|
|
||
|
Peru |
Edelnor |
7.8% |
5.4% |
2.4% |
|
|
Piura |
7.8% |
5.4% |
2.5% |
||
|
Generalima |
|
|
|
||
|
Distrilima |
|
|
|
||
|
Cabo Blanco |
|
|
|
||
|
*Bloomberg; Chile: LVA Index |
|||||
30
b) Largest Transactions - Generation 5
|
|
|
|
Target business |
EV/LTM (x) |
EV(R$m)/MW(x) |
| |
|
Ann date |
Acquirer |
Target |
Country |
Sales |
EBITDA |
EBIT |
Capacity ($) |
|
Aug-11 |
Translead Emp. E Incorp. |
Share in Tangará Energia (Grupo Rede) |
Brazil - Hydro |
n.a |
n.a |
n.a |
2.9 |
|
Sep-19-10 |
Inkia Energy |
Edegel |
Peru |
2.9x |
5.8x |
9.3x |
0.7 |
|
Nov-09 |
GDF suez |
Codelco |
Chile |
n.a |
n.a |
n.a |
0.2 |
|
Oct-09 |
Endesa Chile |
Edegel |
Peru – Hydro/Thermal |
4.1x |
7.8x |
12.1x |
1.0 |
|
Feb-09 |
Termogas |
Termonorte |
Brazil - Thermal |
n.a |
n.a |
n.a |
1.5 |
|
Sep-08 |
Generalima |
Edegel |
Peru – Hydro/Thermal |
5.0x |
12.2x |
23.7x |
1.2 |
|
Jun-08 |
Energias do Brasil |
Rede Lajeado |
Brazil - Hydro |
n.a |
11.9x |
n.a |
4.4 |
|
Apr-08 |
Tractebel |
Ponte de Pedra |
Brazil - Hydro |
n.a |
n.a |
n.a |
5.0 |
|
Dec-07 |
Brookfield |
Itiquira |
Brazil - Hydro |
n.a |
n.a |
n.a |
4.2 |
|
Oct-07 |
Petrobras |
UTE Juiz de Fora |
Brazil - Thermal |
n.a |
n.a |
n.a |
2.4 |
|
Sep-07 |
Statkraft Norfund Power Invest |
Electroandes |
Peru – Hydro |
7.1x |
10.8x |
n.a |
2.2 |
|
Mar-07 |
Endesa SA |
Hidroelectrica El Chocon |
Argentina – Hydro |
1.4x |
2.0x |
2.4x |
0.4 |
|
Dec-06 |
Tractebel |
MAESA |
Brazil - Hydro |
n.a |
9.2x |
n.a |
1.6 |
|
Nov-06 |
Investor Group |
Hidroelectrica Piedra del Aguila |
Argentina – Hydro |
4.3x |
6.9x |
7.6x |
0.4 |
|
May-06 |
Petrobras |
Macaé |
Brazil - Thermal |
n.a |
n.a |
n.a |
0.7 |
|
Apr-06 |
Investor Group |
AES Gener |
Chile – Hydro/Thermal |
2.6x |
7.1x |
9.6x |
1.0 |
|
Feb-06 |
Copel |
UEG Araucaria |
Brazil - Thermal |
n.a |
n.a |
n.a |
1.4 |
|
Jul-05 |
Petrobras |
MPX Termoceará |
Brazil - Thermal |
n.a |
n.a |
n.a |
1.6 |
|
Apr-05 |
EDP Energias do Brasil |
Investimentos Energeticos |
Brazil – Hydro |
1.8x |
7.6x |
11.3x |
n.a. |
|
Apr-05 |
Petrobras |
Termoelétrica Eletrobolt |
Brazil - Thermal |
n.a |
n.a |
n.a |
1.0 |
|
Dec-04 |
Petrobras |
Fafen Power Station |
Brazil - Thermal |
n.a |
n.a |
n.a |
0.9 |
|
Oct-04 |
Guaraniana |
Termopernambuco |
Brazil - Thermal |
n.a |
n.a |
n.a |
1.3 |
|
Sep-04 |
Brennand |
Juba I / Juba II |
Brazil - Thermal |
n.a |
n.a |
n.a |
2.7 |
|
|
Average |
|
|
3.7x |
8.1x |
10.9x |
1.8 |
|
|
Median |
|
|
3.5x |
7.7x |
9.6x |
1.4 |
5 Source:FactSet July 12, 2012
33
c) Largest Transactions - Transmission 6
|
|
|
|
Target business |
EV/LTM (x) |
EV($m)/MW (x) |
| |
|
Ann date |
Acquirer |
Target |
Country |
Sales |
EBITDA |
EBIT |
Capacity ($) |
|
Apr-23-09 |
Cemig Geracao e Transmissao |
Terna Participacoes |
Brazil |
6.6x |
7.9x |
10.4x |
n.a. |
|
Sep-24-08 |
CEMIG |
TBE |
Brazil |
na |
8.9x |
na |
n.a. |
|
Jul-20-07 |
Investor Group |
Transener |
Argentina |
2.3x |
7.4x |
12.2x |
n.a. |
|
May-20-06 |
Angelini Group |
Colbun |
Chile |
4.9x |
9.3x |
12.8x |
n.a. |
|
Jan-10-07 |
Interconexion Electrica |
Cia. de Transmissao de Energia |
Brazil |
3.3x |
17.7x |
67.0x |
n.a. |
|
Jun-28-06 |
Interconexion Electrica |
Cia. de Transmissao de Energia |
Brazil |
4.2x |
9.4x |
12.1x |
n.a. |
|
Jun-16-06 |
Investor Group |
HQI Transelec Chile |
Chile |
7.5x |
8.6x |
11.1x |
n.a. |
|
|
Average |
|
4.8x |
9.9x |
20.9x |
||
|
Median |
4.6x |
8.9x |
12.2x |
||||
6 Source:FactSet July 12, 2012
34
d) Largest Transactions - Distribution 7
|
|
|
|
Target business |
EV/LTM (x) |
EV($m)/MW (x) |
| |
|
Ann date |
Acquirer |
Target |
Country |
Sales |
EBITDA |
EBIT |
Capacity ($) |
|
Jan-19-11 |
Sempra Pipelines and Storage |
Luz del Sur |
Peru |
2.0x |
6.6x |
7.6x |
na |
|
Jan-19-11 |
Iberdrola Energia do Brasil |
Elektro Eletricidade e Servico |
Brazil |
1.5x |
5.7x |
6.8x |
1.3 |
|
Jan-19-11 |
Pampa Energia |
EMDERSA |
Argentina |
1.1x |
4.2x |
5.5x |
na |
|
Jan-19-11 |
Sempra Pipelines & Storage |
Chilquinta Energia |
Chile |
1.7x |
9.0x |
10.8x |
na |
|
Mar-25-10 |
Cemig |
Light |
Brazil |
1.4x |
6.7x |
9.2x |
5.1 |
|
Dec-30-09 |
Cemig |
Light |
Brazil |
1.4x |
6.4x |
8.5x |
5.1 |
|
Oct-15-09 |
Enersis |
Edelnor |
Peru |
1.6x |
6.1x |
8.4x |
$1.3 |
|
Jun-18-08 |
Rede Energia |
Empresa Energetica de Mato Grosso |
Brazil |
1.8x |
nm |
nm |
na |
|
Oct-31-07 |
AEI |
Luz del sur |
Peru |
2.0x |
6.9x |
8.8x |
na |
|
Oct-31-07 |
AEI |
Chilquinta Energia |
Chile |
1.9x |
9.0x |
11.8x |
na |
|
Sep-12-07 |
CGE |
Empresas Emel SA |
Chile |
2.0x |
11.5x |
15.4x |
na |
|
Jun-22-07 |
Pampa Holding |
Edenor |
Argentina |
2.0x |
6.9x |
10.5x |
na |
|
May-10-06 |
CPFL Energia |
Rio Grande Energia |
Brazil |
0.8x |
5.1x |
7.7x |
na |
|
Mar-28-06 |
Rio Minas Energia |
Light |
Brazil |
0.8x |
5.1x |
8.9x |
2.1 |
|
Apr-7-05 |
EDP Energias do Brasil |
Escelsa |
Brazil |
2.0x |
7.5x |
10.0x |
7.4 |
|
Average |
1.6x |
6.9x |
9.3x |
3.7 | |||
|
Median |
1.7x |
6.7x |
8.9x |
3.6 | |||
7 Source:FactSet July 12, 2012
35
TABLE 9: Participation valuation as of December 31st, 2011
|
Country |
Participation |
Direct |
Indirect |
Total |
100% Equity (US$ million) |
Participation (US$ million) |
|
|
Argentina |
Edesur |
6.23% |
0.00% |
6.23% |
230 |
14 |
|
|
Yacylec |
22.22% |
0.00% |
22.22% |
8 |
2 |
||
|
Cemsa |
55.00% |
0.00% |
55.00% |
16 |
9 |
||
|
Inversora Dock Sud |
57.14% |
0.00% |
57.14% |
0 |
0 |
||
|
Dock Sud |
0.00% |
39.99% |
39.99% |
(57) |
(23) |
||
|
Brazil |
Endesa Brasil |
28.48% |
0.00% |
28.48% |
43 |
12 |
|
|
Pratil |
0.00% |
28.48% |
28.48% |
238 |
68 |
||
|
Fortaleza |
0.00% |
28.48% |
28.48% |
569 |
162 |
||
|
Cachoeira |
0.00% |
28.37% |
28.37% |
1637 |
464 |
||
|
Cien |
0.00% |
28.48% |
28.48% |
512 |
146 |
||
|
Ampla |
7.70% |
13.35% |
21.05% |
1775 |
374 |
||
|
Ampla Investimentos |
7.70% |
13.35% |
21.05% |
(104) |
(22) |
||
|
Coelce |
1.59% |
13.65% |
15.23% |
2110 |
321 |
||
|
Investluz |
0.00% |
22.97% |
22.97% |
(15) |
(3) |
||
|
Chile |
San Isidro |
4.38% |
0.00% |
4.38% |
205 |
9 |
|
|
Pangue |
4.38% |
0.00% |
4.38% |
1716 |
75 |
||
|
Transquillota |
0.00% |
2.19% |
2.19% |
21 |
0 |
||
|
Colombia |
Emgesa |
21.60% |
0.00% |
21.60% |
6601 |
1426 |
|
|
Codensa |
26.66% |
0.00% |
26.66% |
5065 |
1350 |
||
|
Cundinamarca |
0.00% |
10.76% |
10.76% |
210 |
23 |
||
|
Decsa |
0.00% |
13.06% |
13.06% |
0 |
0 |
||
|
Peru |
Edelnor |
0.00% |
18.00% |
18.00% |
1342 |
242 |
|
|
Piura |
0.00% |
96.50% |
96.50% |
94 |
91 |
||
|
Generalima |
100.00% |
0.00% |
100.00% |
2 |
2 |
||
|
Distrilima |
34.83% |
0.00% |
34.83% |
0 |
0 |
||
|
Cabo Blanco |
80.00% |
20.00% |
100.00% |
0 |
0 |
||
|
TOTAL |
22218 |
4742 |
36
Table 10: Assets values adjustment as of June 30th, 2012
|
Country |
Companies |
Stakes |
100% Equity (MMUS$) as of 12/31/11 |
Cost of equity |
Accrued |
Dividends paid |
Proportional adjustment as of June 2012 |
| |||
|
Accrued |
Dividends |
Total |
| ||||||||
|
Argentina |
Edesur |
6.23% |
230.2 |
25.03% |
27.2 |
0.0 |
1.7 |
0.0 |
1.7 |
| |
|
Yacylec |
22.22% |
8.0 |
0.00% |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
| ||
|
Cemsa |
55.00% |
15.5 |
25.03% |
1.8 |
0.0 |
1.0 |
0.0 |
1.0 |
| ||
|
Inversora Dock Sud |
57.14% |
0.0 |
0.00% |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
| ||
|
Dock Sud |
39.99% |
(56.9) |
24.54% |
(6.6) |
0.0 |
(2.6) |
0.0 |
(2.6) |
| ||
|
Brazil |
Endesa Brasil |
28.48% |
42.8 |
7.75% |
1.6 |
0.0 |
0.5 |
0.0 |
0.5 |
| |
|
Pratil |
28.48% |
237.5 |
16.29% |
18.6 |
0.0 |
5.3 |
0.0 |
5.3 |
| ||
|
Fortaleza |
28.48% |
568.6 |
8.89% |
24.7 |
0.0 |
7.0 |
0.0 |
7.0 |
| ||
|
Cachoeira |
28.37% |
1637.0 |
8.89% |
71.2 |
0.0 |
20.2 |
0.0 |
20.2 |
| ||
|
Cien |
28.48% |
512.1 |
8.04% |
20.2 |
0.0 |
5.7 |
0.0 |
5.7 |
| ||
|
Ampla |
21.05% |
1774.8 |
9.48% |
82.3 |
0.0 |
17.3 |
0.0 |
17.3 |
| ||
|
Ampla Investimentos |
21.05% |
(104.2) |
9.48% |
(4.8) |
0.0 |
(1.0) |
0.0 |
(1.0) |
| ||
|
Coelce |
15.23% |
2110.0 |
9.48% |
97.8 |
0.0 |
14.9 |
0.0 |
14.9 |
| ||
|
Investluz |
22.97% |
(14.5) |
9.48% |
(0.7) |
0.0 |
(0.2) |
0.0 |
(0.2) |
| ||
|
Chile |
San Isidro (1) |
4.38% |
204.7 |
8.32% |
78.7 |
(242.1) |
3.4 |
(10.6) |
(7.2) |
| |
|
Pangue |
4.38% |
1716.1 |
8.32% |
|
|
|
|
|
| ||
|
Transquillota |
2.19% |
20.7 |
0.00% |
|
|
|
|
|
| ||
|
Colombia |
Emgesa |
21.60% |
6601.4 |
8.32% |
269.1 |
(185.9) |
58.1 |
(40.2) |
18.0 |
| |
|
Codensa |
26.66% |
5065.2 |
8.79% |
218.0 |
(129.4) |
58.1 |
(34.5) |
23.6 |
| ||
|
Cundinamarca |
10.76% |
210.2 |
8.79% |
9.0 |
0.0 |
1.0 |
0.0 |
1.0 |
| ||
|
Decsa |
13.06% |
0.0 |
0.00% |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
| ||
|
Peru |
Edelnor |
18.00% |
1342.0 |
9.00% |
59.1 |
0.0 |
10.6 |
0.0 |
10.6 |
| |
|
Piura |
96.50% |
94.4 |
8.47% |
3.9 |
0.0 |
3.8 |
0.0 |
3.8 |
| ||
|
Generalima |
100.00% |
2.3 |
8.47% |
0.1 |
0.0 |
0.1 |
0.0 |
0.1 |
| ||
|
Distrilima |
34.83% |
0.0 |
0.00% |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
| ||
|
Cabo Blanco |
100.00% |
0.0 |
0.00% |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
| ||
|
(1) San Isidro is consider merged (includes Transquillota & Pangue) |
|||||||||||
|
TOTAL |
205 |
-85 |
120 |
||||||||
|
SHARE VALUE 12/31/11 |
4.3% |
-1.8% |
2.5% |
||||||||
37
ANNEX I
a) Participations to be transfer
|
|
INVESTMENTS OF: |
|
|
|
|
|
|
|
|
| |
|
EN: |
ELA |
END BRL |
Ampla Invest |
Investluz |
Inversora Dock Sud |
Codensa |
Deca |
Distrilima |
Edelnor |
Generalima |
Caboblanco |
|
END BRL |
28.48% |
|
|
|
|
|
|
|
|
|
|
|
Ampla Invest |
7.70% |
46.89% |
|
|
|
|
|
|
|
|
|
|
Investluz |
|
63.57% |
36.43% |
|
|
|
|
|
|
|
|
|
Pratil |
|
100.00% |
|
|
|
|
|
|
|
|
|
|
Fortaleza |
|
100.00% |
|
|
|
|
|
|
|
|
|
|
Cachoeira |
|
99.61% |
|
|
|
|
|
|
|
|
|
|
Cien |
|
100.00% |
|
|
|
|
|
|
|
|
|
|
Ampla Ener |
7.70% |
46.89% |
|
|
|
|
|
|
|
|
|
|
Coelce |
1.59% |
2.27% |
|
56.59% |
|
|
|
|
|
|
|
|
Edesur |
6.23% |
|
|
|
|
|
|
|
|
|
|
|
Yacilec |
22.22% |
|
|
|
|
|
|
|
|
|
|
|
Cemsa |
55.00% |
|
|
|
|
|
|
|
|
|
|
|
Inversora Dock Sud |
57.14% |
|
|
|
|
|
|
|
|
|
|
|
Dock Sud |
|
|
|
|
69.99% |
|
|
|
|
|
|
|
San Isidro |
4.38% |
|
|
|
|
|
|
|
|
|
|
|
Emgesa |
21.60% |
|
|
|
|
|
|
|
|
|
|
|
Codensa |
26.66% |
|
|
|
|
|
|
|
|
|
|
|
DECA |
|
|
|
|
|
49.00% |
|
|
|
|
|
|
Cundinamarca |
|
|
|
|
|
|
82.34% |
|
|
|
|
|
Distrilima |
34.83% |
|
|
|
|
|
|
|
|
|
|
|
Edelnor |
|
|
|
|
|
|
|
51.68% |
|
|
|
|
Generalima |
100.00% |
|
|
|
|
|
|
|
|
|
|
|
Caboblanco |
80.00% |
|
|
|
|
|
|
|
|
20.00% |
|
|
Piura |
|
|
|
|
|
|
|
|
|
36.50% |
60.00% |
38
b) Direct and Indirect Participations
|
Participation |
DIRECT |
INDIRECT |
TOTAL |
|
Endesa Brasil |
28.48% |
|
28.48% |
|
Ampla Invest |
7.70% |
13.35% |
21.05% |
|
Investluz |
|
22.97% |
22.97% |
|
Pratil |
|
28.48% |
28.48% |
|
Fortaleza |
|
28.48% |
28.48% |
|
Cachoeira |
|
28.37% |
28.37% |
|
Cien |
|
28.48% |
28.48% |
|
Ampla Energía |
7.70% |
13.35% |
21.05% |
|
Coelce |
1.59% |
13.65% |
15.23% |
|
Edesur |
6.23% |
|
6.23% |
|
Yacilec |
22.22% |
|
22.22% |
|
Cemsa |
55.00% |
|
55.00% |
|
Inversora Dock Sud |
57.14% |
|
57.14% |
|
Docksud |
0.00% |
39.99% |
39.99% |
|
San Isidro |
4.38% |
|
4.38% |
|
Emgesa |
21.60% |
|
21.60% |
|
Codensa |
26.66% |
|
26.66% |
|
DECA |
|
13.06% |
13.06% |
|
Cundinamarca |
|
10.76% |
10.76% |
|
Distrilima |
34.83% |
|
34.83% |
|
Edelnor |
|
18.00% |
18.00% |
|
Caboblanco |
80.00% |
20.00% |
100.00% |
|
Generalima |
100.00% |
|
100.00% |
|
Piura |
|
96.50% |
96.50% |
39
ANNEX II: Ownership Structure and Valuation perimeter
Valuation perimeter:
Endesa Latam’s Direct Participations
(1)San Isidro is the merger between San Isidro and Pangue (where Endesa Lam hold a 5.0%)
40
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ENERSIS S.A. | |
| By: /s/ Ignacio Antoñanzas Alvear | |
| -------------------------------------------------- | |
| Title: Chief Executive Officer |
Date: November 19, 2012