LATAM Airlines Group
Annual Report 2016

Plain-text annual report

Annual Report 1 INT003 OUR COMPANY SIG030 CORPORATE GOVERNANCE SIG008 OPERATIONS Welcome letter ........................................4 Business Strategy ....................................6 Our History ..............................................8 Fleet .......................................................17 Destinations ...........................................21 Our People ..............................................30 Company Information .............................36 Board of Directors ...................................39 Senior Management ................................43 Year 2016 ...............................................46 Corporate Governance Practices ..............49 Property ownership structure and main shareholders ...........................................56 Financial Policy .......................................67 International Passenger Operations.........71 Brazil ......................................................74 Argentina ................................................76 Chile .......................................................78 Colombia ................................................80 Ecuador ..................................................82 Peru ........................................................84 Cargo operation ......................................86 Customer Loyalty Programs ....................88 Property, Plant and Equipment ...............89 SIG110 MANAGEMENT 2016 SEC051 SUSTAINABILITY Industry Overview ...................................92 Regulatory Framework ............................94 Financial Results .....................................98 Awards and Recognitions .......................102 Material Facts ........................................103 Stock Market information ......................110 Risk factors ...........................................113 Additional information ...........................122 Investment Plan ....................................123 Sustainability Vision ..............................126 Sustainability Governance .....................128 Climate Change .....................................130 Corporate Citizenship .............................131 Relation with Groups of Interest ............133 UID003 FINANCIAL STATEMENTS Financial Statements .............................135 Subsidiaries and Affiliated Companies ...219 Analysis of the Financial Statements .....254 Sworn Statement ...................................261 INDEX 2 INT003 OUR COMPANY OUR COMPANY | Welcome letter Brazil is going through one of the biggest political crises in its history, with the consequences of the impeachment of the former President of the Republic amplified by an anti-corrup- tion action, Lava Jato operation. As a result, the private sector has adopted defensive strategies, postponing investments, in- creasing unemployment and reducing stock replenishment in factories, which contributed sharply to the persistence of the recession in 2016. Despite the poor performance of the Brazilian economy, it is important to note that government policies aimed at balanc- ing public finances and structural reforms were initiated, not only approved by the markets, but have also revised their pro- jections favorably for 2018. Therefore, we can say that Brazil is emerging from a serious turbulence to have a more stable flight, which aims at a GDP growth that although still modest, has a highly positive effect on the economy of the whole continent. One of the creative and renovating actions carried out by the Company during the year was the design of a new model to reduce the costs of passenger transportation. In it, customers can choose to fly by paying for additional services according to their needs. This initiative will put us in a more competi- tive position with any of our competitors, and may represent a 50% increase in the volume of passengers transported in the coming years. In the area of sustainability, whose adherence and improve- ment are necessary conditions for competition in the market, we are rapidly advancing in new practices and the improve- ment of old ones, in order to maintain a leading position and create the bases for its permanence. A stimulating recognition was our inclusion in the Dow Jones Sustainability Index for the third consecutive year as one of the leading companies in sustainability, based on economic, social and environmental criteria. Our long-term strategy has not changed. It can be mentioned in three cardinal points: a continent, a wide network of destinations and a brand. These three points are interconnected by common premises: being simpler, more efficient and more competitive. In LATAM, constant attention to reducing costs to replace pro- cesses and equipment that have become costly and unproduc- tive is an essential requirement. The restructuring of our fleet allowed a reduction of US$ 2.2 billion of our fleet assets pro- jected for 2018 during the last 12 months. In Brazil, where we are implementing changes due to the intense importance of that market for the company, the reduction of flight capacity reached 12% in 2016, preparing the way for a market recovery. All the setbacks that emerged in this very complex period for the economy of our continent, and in particular for the civil aviation sector, only reinforce my conviction that the union of TAM and LAN could not have been more successful. I am very proud to have participated in the construction of this great company, which represents a milestone in the history of avia- tion. I think it was the most important experience of my pro- fessional and business life. If not for the creation of LATAM, the wind of the crisis could have shaken the structure of the founding companies and divert them to other non-successful routes. In LATAM, my story had a new beginning. Starting with my friends and partners, the Cueto family, followed by executives and professionals from different areas, from TAM and LAN, or those who later joined us. They were enriching relationships from all angles - business, work and affection. I have learned a lot. I think I collaborated a lot too. I will always collaborate. But for LATAM, renewal is the first word of our informal nature, our conviction as shareholders and managers, the principle that governs the philosophy of the Company. Mauricio Rolim Amaro Chairman of the Board of LATAM Airlines Group 4 Dear shareholders, The year 2016 was characterized by a low growth period for the countries of Latin America and the Caribbean, which had a reduction of regional gross domestic product of the order of 1.1%, according to data from the Economic Commission for Latin America and the Caribbean (ECLAC). It should be noted that the region already came from a contraction of 0.4% in its economy. South America was the most affected sub-region, with an ex- pected decline of 2.5% of GDP in 2016. In the years 2015/2016 Brazil was responsible for the greatest negative impact on economic activity in the region. The country’s GDP fell 3.8% in 2015 - the biggest drop in history - and 3.6% in 2016, estab- lishing the largest wealth loss in Brazil’s history. We have continued to strengthen our network – despite mo- dest growth in the region – with the launch of 14 new routes in 2016 and the announcement of a further eight for this year; a record number for the group. Of these routes, we in- augurated four new destinations that improve connectivity both within the region and with the rest of the world: Puerto Natales, Jaén, Washington D.C., and Johannesburg. In doing so, we became the only Latin American airline to offer a di- rect service between Latin America and Africa. Furthermore, as part of our commitment to further expand our network of flights and connections in South America, we continue to make progress towards achieving our ‘Joint Bu- siness Agreements’ with IAG (the holding company of British Airways and Iberia) and American Airlines, so we can con- nect more people in Latin America with the rest of the world. We are convinced that these agreements will strengthen the connectivity of our region and deliver access to a wider des- tination network, more flights, better connecting times and lower prices as well as contribute to the development of tou- rism in the region with the arrival of more travelers from the USA and Europe. In 2016, we worked on one of the most significant changes for the company and our customers in our history with the renewal of the domestic flight model for the six countries in the region where we have national operations. The new mo- del, which is already being gradually implemented in some markets, will give our customers the flexibility to choose how they want to fly, by only paying for the additional services they use. As a result, we will be able to offer fares up to 30% cheaper, allowing more people to choose flight as a means of transport as well as helping those who already fly, to do so more often. All of this will be supported by a new digi- tal experience, where passengers can control their own flight experience using only their phone. In addition to the benefits for passengers, this change will allow us to better compe- te with the increasing number of low cost operators in the region. With the new travel model, we project to increase our passenger numbers for domestic flights by 50% by 2020, OUR COMPANY | Welcome letter helping to consolidate flight as a widely-accessible means of transport in the region and boost economic growth in the markets where the company operates. The last three years have been very challenging. However, thanks to the work over this time, we have seen a significant improvement in our profitability, achieving a 6% EBIT margin in 2016 and the first positive net profit in five years. This im- provement in profitability in a tough year showcases the re- silience of our business model and demonstrates that we are on the right path with the strategic initiatives we have put in place. These positive results, together with the restructuring of our fleet plan and the strengthening of our balance sheet, have also been recognized by the financial markets, as de- monstrated by the 53% recovery of the LATAM share in 2016. In conclusion, I would like to thank our teams for all their work this year. Without their commitment and dedication it would have not been possible to carry out these significant changes we are currently implementing. I would also like to especially thank our shareholders – both new and long-standing – for their patience during the challenges of recent years, for their support in this period of adjustment and for the faith they have placed in our project. Our challenge and what motivates us is to maintain our industry leadership, strengthen our fi- nancial position and secure our long-term sustainability. For this reason, I invite everyone in the LATAM family to maintain their trust in this project and to continue moving forward to- gether towards these objectives. Enrique Cueto CEO, LATAM Airlines Group 5 Dear shareholders, 2016 will be remembered as one of the most challenging years in our company’s history, with us continuing to adapt to the volatile environment of recent years. We initiated big changes and major projects, so we can better deal with the evolving airline industry landscape and the slowdown of Latin American economies. We seek to consolidate ourselves as the leading airlines group in the region, connecting the continent with an expan- sive network under a single brand. Guided by this long-term vision, we are proud to have successfully launched the uni- fied brand LATAM, which combines the best of LAN and TAM and provides the client with a single image. OUR COMPANY | Business Strategy The leading airline group in Latin America LATAM Airlines Group S.A. (hereinafter, without distinction “the Company”, “LATAM” or “LATAM Group”) is Latin Amer- ica’s largest air transport company, resulting from the as- sociation of a Chilean (LAN) and a Brazilian (TAM) airline. The Group has domestic operations in six South Ameri- can countries - Argentina, Brazil, Chile, Colombia, Ecuador, and Peru – an advantage that allows it to provide the best connectivity at the regional level, as well as from South America to the rest of the world and vice versa, reaching some 135 destinations points in 25 different countries. In addition, this allows it to have a geographically diversified passenger and cargo revenue base. At the end of April 2016, the Company formally submit- ted its unified LATAM brand, which started to be visible in the website, physical spaces and aircraft, among others, a brand under which we will continue along the leadership path started several decades ago by LAN, TAM and their respective subsidiaries. This change will allow us to pro- vide a better service and consistent across our network, strengthening our position in the region. During 2016, the Company went ahead in its process of becoming a more simple, lean and efficient organization to adapt to the changing dynamics of the industry and the needs of our customers. This process considers a change in organizational culture, which began to be executed with greater force in 2016 through our Twist Project at airports, contact centers and service on board. The objective of this project is to strengthen the organization with empowered teams pre- pared to respond to the needs of the passengers more quickly and easily, always considering the impact that their decisions may have on our clients. Company decisions always focus on customer satisfaction. This implies a constant work toward improving passenger experience throughout the different stages of the journey, while always looking for differentiation in terms of service. This is how in 2016 LATAM continued to invest in the de- velopment of digital tools at all points of contact with the customer, in order to simplify the travel experience and provide a personalized service. In is our permanent goal to incorporate best industry prac- tices and adapt to industry-wide trends. By the end of 2016 the Company announced the redesign of its travel model in the six domestic markets where it operates. This will be implemented on a country-by-country basis and in stages starting in the first half of 2017. Indeed, this has become one of our projects with greater breadth and scope and relevance toward ensuring the sustainability of LATAM over the long term. This new model seeks to meet the needs of today’s passengers who appreciate the trip to be simple, efficient, and expeditious and wish to be empow- ered to make their own decisions and have the tools to ac- tively influence and customize their own travel experience, thereby paying only for the services used. Passengers will be entitled to choose how to fly, paying for the additional services required and selecting the airfare that best suits their needs. Thanks to this new form of travel, LATAM Group estimates it will increase by 50% the number of passengers trans- ported in domestic markets by 2020, thereby consolidat- ing air travel as a means of mass transport in the region progressively increasing the number of people able to fly, and that those who already do so may fly even more. With respect to international operations, one of the year’s major milestones was the announcement of the execution of Joint Business Agreements (JBAs) with American Air- lines and the IAG Group (Iberia’s and British Airways’ par- ent company), aimed at providing greater connectivity to passengers. With these agreements, the Company seeks to provide access to a wider network of international des- 6 tinations, more flights, better connection times and better prices to destinations not flown by LATAM. The Group ex- pects the respective approval processes to make progress rapidly so as soon to become a reality, in order to connect more and more people from Latin America to the rest of the world and vice-versa. In its continuous effort to strengthen the network, in 2016 the Company opened 18 new routes – a historical record for LATAM. Noteworthy among them is the first flight from Brazil to Johannesburg, becoming the only Latin Ameri- can airline that now connects the region with the African continent. It should also be noted, moreover, that many of these new routes will help to further boost our main regional hubs, such as the Lima and Sao Paulo airports. LATAM reduced its fleet commitments through postpone- ments and cancellations, and will also reduce its current fleet assets returning additional aircraft as compared to last year’s fleet plan. With this, the Company will have achieved a reduction of $2.2 billion in fleet assets between 2016 and 2018, in line with previously announced plans to achieve a reduction of US$ 2.0 to $3.0 billion in our expected 2018 fleet assets. In line with the Company’s strategy to make its operation more efficient, during 2016 LATAM received 24 aircraft of the more large, modern and efficient models that allow transporting more passengers consuming less fuel, there- by adapting to current market conditions in a more ef- ficient manner. In line with the foregoing, LATAM keeps its commitment to offer its passengers the best fleet in Latin America. To that effect, in 2016 the company incorporated the first Airbus A320neo to its fleet; thus becoming the first airline in America to operate this ultra-efficient air- craft model, whose greater flying range does not only al- low it to operate its domestic but also its regional network. OUR COMPANY | Business Strategy Additionally, LATAM incorporated six Airbus A350 to its fleet, ending the year with a total of seven aircraft of this model; which stands out because of a CASK up to 25% lower than similar size aircraft. All things considered, in 2016 LATAM Group opened a new chapter in the history of world aviation. The new brand poses the challenge of delivering a unique and improved service experience, offering to the world the best of South America, while becoming a more efficient and productive group operating in simpler ways. The Company aspires to be among the best airlines in the world, and the initiatives that are currently underway indeed provide ample oppor- tunity to achieve this objective. 7 OUR HISTORY Under LATAM, we will continue the path of leadership initiated several decades ago OUR COMPANY | Our History 1929 Under LATAM, we will continue the path of leadership initiated several decades ago 1946 1956 1958 ► Linea Aerea Nacional de Chile (LAN) founded by Comandante Arturo Merino Benítez. ► First LAN international flight: Santiago-Buenos Aires. ► Start of LAN services to Lima. ► Start of LAN services to Miami. 8 OUR HISTORY OUR COMPANY | Our History 1961 1970 1975 1976 ► TAM-Taxi Aéreo Marília created by five charter flight pilots ► LAN begins flights to Europe. ► Foundation of TAM-Transportes Aéreos Regionais by Capitan Rolim Adolfo Amaro. ► Launch of TAM services in Brazilian cities, especially Mato Grosso and São Paulo. 9 OUR HISTORY OUR COMPANY | Our History 1983 1985 1986 1989 ► Constitution of Linea Aerea Nacional - Chile Limitada, through CORFO ► LAN becomes a joint stock company ► TAM acquired Brasil Central Linhas Aéreas-VOTEC, a regional airline that served the North and Central West regions of Brazil. ► Start of privatization of LAN: the Chilean government sells a 51% stake to local investors and Scandinavian Airlines System (SAS). 10 OUR HISTORY OUR COMPANY | Our History 1990 1993 1994 1996 ► Brasil Central renamed TAM- Transportes Aéreos Meridonais ► Launch by TAM of TAM Fidelidade, Brazil’s first frequent flyer program. ► Privatization of LAN completed with the acquisition of a 98.7% stake by its current controllers and other shareholders. ► Acquisition by TAM of Lapsa airline from the Paraguayan government and creation of TAM Mercosur; start of São Paulo ► Start of São Paulo – Asuncion flights 11 OUR HISTORY OUR COMPANY | Our History 1997 1998 1999 2000 ► LAN lists on the New York Stock Exchange, becoming the first Latin American airline to trade ADRs on this important market. ► Arrival of first A330; first TAM international flight from São Paulo to Miami. ► LAN’s expansion begins: start of operations of LAN Perú. ► LAN joins the oneworld alliance 12 OUR HISTORY OUR COMPANY | Our History 2001 2002 2003 2004 ► LAN Alliance with Iberia and inauguration of Miami cargo terminal. ► LAN Alliance with Qantas and Lufthansa Cargo ► LAN continues its expansion plan: start of operations of LAN Ecuador. ► Creation of TAM Technology Center and Service Academy in São Paulo. ► Launch of new corporate image as LAN Airlines S.A. ► Start of TAM flights to Santiago. ► Launch of the new executive class for flights to Paris and Miami. 13 OUR HISTORY OUR COMPANY | Our History 2005 2006 2007 2008 ► Further step in LAN’s regional expansion plan: start of operations of LAN Argentina ► TAM S.A. lists on the BOVESPA stock market. ► Start of flights to New York and Buenos Aires. ► Launch of new LAN Premium Business Class. ► Implementation of low-cost model in domestic markets. ► TAM S.A. lists on the NYSE ► Capital increase of US$320 million. ► Start of flights to London and, through agreement with Air France, to Zurich and Geneva ► Start of TAM flights to Milan and Córdoba; authorization from Brazil’s National Civil Aviation Agency (ANAC) to start flights to Madrid and Frankfurt. ► Completion of renewal of LAN’s short-haul fleet with aircraft from the Airbus A320 family. ► TAM receives its first Boeing 777-300ER. 14 OUR HISTORY OUR COMPANY | Our History 2009 2010 2011 2012 ► Start of cargo operations in Colombia and domestic passenger operations in Ecuador. ► Launch of Multiplus Fidelidade. ► Acquisition of Colombia’s Aires airline. ► TAM officially joins Star Alliance. ► LAN and TAM sign binding agreements related to the business combination of the two airlines. ► LATAM Airlines Group is born as a result of the business combination between LAN and TAM. ► Issuance of 2.9 million shares. 15 OUR HISTORY OUR COMPANY | Our History 2013 2014 2015 2016 ► Capital increase for US$ 940.5 million. ► TAM joins oneworld alliance, which becomes LATAM Airlines Group global alliance. ► LATAM is Born: The New Brand for LAN Airlines, TAM Airlines and Affiliates. ► Capital increase of US $ 608 million with which Qatar Airways acquires 10%* of the total of paid and subscribed shares of LATAM. ► LATAM launches its 2015- 2018 Strategic Plan. ► EETC structured bond issue for US $ 1,020MM: First in Latin America. * Qatar owns 9.999999918% of total issued shares of LATAM. 16 OUR COMPANY | Fleet Committed to provide the most advanced, efficient and comfortable fleet During the year 2016, the LATAM Group operated a fleet comprised of 329 aircraft averaging approximately 7 years old, standing out among the newest in South America and the world. One of this year’s milestones was the launching of the uni- fied LATAM Brand. As of December 2016, the Company had 43 aircraft already painted with the new logo; a progres- sive process expected to be completed in 2018, the year in which we project having the entire fleet designed with the new corporate logo. It is worth noting, however, that paint- ing each aircraft takes an average between 6-12 days and that this operation is performed during each aircraft’s rou- tine maintenance work in order to optimize the efficiency of the entire process. During this period, the Company continued to make prog- ress in its fleet renewal plan, incorporating larger and more modern aircraft, while gradually disposing of the older models. In total, 23 aircraft were withdrawn and 24 new and more efficient models were incorporated, allocating them as most appropriate for the respective markets in which they operate. In order to develop its short-range passenger operations (domestic and regional flights within South America), LA- TAM operated 243 aircraft, all of them of the Airbus A320 family. We received 11 Airbus A321 aircraft (the largest version of this family), totaling 47 aircraft of this operating as of this year’s closing. In the medium term, the Company is aiming at operating a short range fleet of only the A320 family, in its A320, A321 and A320neo versions. In 2016, we received the first two aircraft of the latter type, thus becoming the first A320neo operator in the American continent. With a seat capacity for 174 passengers and an Airbus Space-Flex cabin config- uration, LATAM expects to receive five additional such air- craft during 2017, from a total order portfolio of 34 aircraft. These aircraft incorporate state-of-the-art technology that includes new generation engines and sharklets (ad- vance technology devices installed on the wings, designed to reduce aerodynamic resistance), permitting fuel savings of up to 15% and a resulting reduction in annual emissions of about 3,600 tons of CO2 per aircraft. In order to service its long-range flights, the LATAM Group used a fleet comprised of 76 aircraft during 2016; note- worthy among which was the Boeing 787 Dreamline in its versions 8 and 9, in addition to the new Airbus A350-900. The wide-body fleet plan is aimed at a renewal in order to incorporate the best technology and become leaders in terms of efficiency, reducing the number of aircraft but increasing capacity through larger models. In effect, dur- ing this period we incorporated five Boeing 787-9 aircraft, among whose advantages stands out its greater capac- ity, both in terms of passengers (+27%) and cargo volume (+23%), as compared to the Boeing 787-8. Designed for 313 passengers (283 Economy seats and 30 Premium Business seats), the Boeing 787-9 burns up to 20% less fuel than similar aircraft dropping its CO2 emissions by up to 20%. As of December 2016, LATAM’s Boeing 787 Dreamliner fleet included 12 Boeing 787-9 and 10 Boeing 787-8 aircraft. Additionally, in 2016 the Company incorporated six Air- bus A350-900 aircraft, adding seven units of this model by the closing of the year. The Company received the first such aircraft in December 2015, then becoming the first airline in America to operate it and the fourth worldwide. Designed for 348 passengers, 318 in Economy and 30 in Business Premium, the Airbus A350 is a medium-sized high-technology product; noteworthy for having a 25% lower CASK, as compared to similarly sized aircraft, such as the Airbus A330, and an equivalent drop in CO2 emissions. 17 OUR COMPANY | Fleet It should be noted that during 2016, LATAM ceased to op- erate the Airbus A330, a model that was fully removed from the fleet. In the meantime, in order to develop its cargo operations, the Company closed the year with an operating fleet of 10 aircraft (one less than operated in 2015), comprised of eight Boeing 767-300F and two Boeing 777-200F; the latter being the most modern dedicated freighter of its type in the industry. Since the focus is now placed on op- timizing the bellies (storage space) of passenger aircraft, LATAM has been gradually reducing its dedicated freighter fleet. Along such lines, during 2016 the Company main- tained a lease contract for three of its Boeing 767-300F freighters and one Boeing 777-200F to cargo operators out of the region. Maintenance The Company’s major, line and component maintenance facilities are duly equipped and certified to look after its entire Airbus and Boeing fleet. With facilities in Brazil (Sao Carlos) and Chile (Santiago), the LATAM Group’s Maintenance, Repair and Revision Unit is responsible for major maintenance of the Group’s air- craft; occasionally, it also does maintenance to third par- ties. Both of them provide 76% of the Company’s total major maintenance requirements, while those that are not performed internally are contracted from among MRO’s (Maintenance & Repair Organization) vast worldwide mem- bership network. This unit is also responsible for the plan- ning and execution of aircraft returns. In response to the macroeconomic slowdown and the en- suing demand for air travel, LATAM continued to move for- ward in its plan to reduce the fleet, through postponements and sales of both its long as well as its short-range aircraft, with the main objective of adjusting its overall capacity to prevailing market conditions in the Latin American market. Within this context, in March 2016, the Company managed a US$ 2.9 billion drop in its fleet commitments for the pe- riod 2016-18; which represents a 37% drop in this respect during the last year. The Brazil MRO, which includes its own engineering and support capabilities and a full technical training center, is indeed prepared to look after up to eight aircraft simulta- neously, with a specially-dedicated extraction and painting hangar. This facility is also equipped with 22 technical com- ponent shops, including a full repair shop to check landing systems, hydraulic, electronic and pneumatic equipment, electroplating, composite materials, wheels and brakes, in- teriors and emergency equipment. Moreover, it has its own exclusive 1,720-meter runway. During 2016, the Company made significant progress in its plan to reduce total fleet assets and fleet commitments, reaching the lowest fleet commitment levels in the recent history of LATAM for 2017 and 2018. LATAM reduced its fleet commitments through deferrals and cancellations, and it will also reduce existing fleet assets by returning ad- ditional aircraft as compared to the previous year fleet plan. With this, the Company will have reached US$2.2 billion re- duction in fleet assets for 2016–2018, in line with our pre- viously announced plans to achieve a decrease of US$2.0 to US$3.0 billion in our expected fleet assets by 2018. The Santiago MRO, located in the vicinity of the Como- doro Arturo Benítez International Airport, is equipped with two hangars capable of simultaneously servicing one wide- body and two narrow-body aircraft. It is also equipped with eight workshops ready to provide support to the hangars, with the cabins, galleys, composite structures and materi- als, and also to adapt aircraft interiors, including IFE (In- flight entertainment) systems and winglets. On the other hand, our line maintenance network provides a range of full maintenance services to aircraft in order to 18 OUR COMPANY | Fleet ensure that the fleet is always operating safely and ac- cording to all local and international regulations. As of December 31, 2016 Off-Balance On-Balance Total LATAM strives to provide the best experience to its pas- sengers with the highest standards in terms of on-time- performance and cabin image. In 2016, our line maintenance network effectively used more than 2.1 million man-hours in both preventive as well as corrective tasks to LATAM’s fleet. The Company also re- sorts to certified third-party services that are economi- cally convenient; such as in Frankfurt, where its aircraft is looked after by Lufthansa Technik; in Milan, by Air France- KLM; and in Johannesburg, by South African Airways. It is worth highlighting that ever since the year 2010, LA- TAM’s maintenance has transformed production and sup- port processes by means of the LEAN Methodology, which has translated into an automation and integration of pro- cesses, improving both the levels of productivity of the technical teams as well as response times when confront- ing contingencies, in addition to simplifying and strengthen- ing the maintenance processes, making them more scalable and visible to the entire organization. Along with the development of these data-processing systems, in 2016 we handed out 300 iPads to the Brazil maintenance network, in addition to the other 300 iPads delivered to the Spanish-speaking countries during 2015, in order to improve maintenance connectivity in the field. The Company also has its own hangar (built in 2015) at the Miami International Airport. This city represents a strategic geographical advantage in order to secure sup- plies and services, as well as to gain access to a broader range of suppliers to cover more complex maintenance tasks. The hangar and the surrounding structures com- prise an area of over 66,000 square feet and involved a US$ 15 million investment. Passenger Aircraft Airbus A319-100 Airbus A320-200 Airbus A320- Neo Airbus A321-200 Airbus A330-200 Airbus A350-900 Boeing 767-300 Boeing 777-300 ER Boeing 787-8 Boeing 787-9 TOTAL Cargo Aircraft Boeing 777-200F Boeing 767-300F TOTAL 12 53 1 17 - 2 3 6 4 8 36 93 1 30 - 5 34 4 6 4 48 146 2 47 - 7 37 10 10 12 106 213 319 2 3 5 - 8 8 2 11 13 TOTAL FLEET 111 221 332 Note: This table includes three B767-300F that Latam is currently leasing to a third party, does not include two B777- 200F (one currently leasing to a third party), three A330 and one A320 that were reclassified from property plant and equipment to held for sale. 19 OUR COMPANY | Fleet AIRBUS A350 BOEING 787 NARROW BODY AIRBUS A319-100 Length 33.8 mts Width 34.1 mts Seats 144 Cruising Speed 830 km/h Maximum weight at taken-off 70,000 kg WIDE BODY AIRBUS A321-200 Length 44.5 mts Width 34.1 mts Seats 220 Cruising Speed 830 km/h Maximum weight at taken-off 89,000 kg BOEING 777-300 ER Length 73.9 mts Width 64.8 mts Seats 379 Cruising Speed 894 km/h Maximum weight at taken-off 346,500 kg AIRBUS A320-200 Length 37.6 mts Width 34.1 mts Seats 156-168–174 Cruising Speed 830 km/h Maximum weight at taken-off 77,000 kg AIRBUS A350-900 Length 66.8 mts Width 64.8 mts Seats 348 Cruising Speed 903 km/h Maximum weight at taken-off 186,880 kg AIRBUS A320-200 neo Length 37,6 mts Width 34,1 mts Seats 174 Cruising Speed 830 Km/hr Maximum weight at taken-off 77,000 kg BOEING 767-300 Length 54.9 mts Width 47.6 mts Seats 221 – 238 Cruising Speed 851 km/h Maximum weight at taken-off 186,880 kg BOEING 787-8 Length 56.7 mts Width 60.2 mts Seats 247 Cruising Speed 903 km/h Maximum weight at taken-off 227,900 kg BOEING 787-9 Length 62.8 mts Width 60.2 mts Seats 313 Cruising Speed 903 km/hr Maximum weight at taken-off 252,650 kg FREIGHTER BOEING 777-200F Length 63.7 mts Width 64.8 mts Cargo Volume 652.7 m3 Cruising Speed 894 km/h Maximum weight at taken-off 347,450 kg BOEING 767-300F Length 54.9 mts Width 47.6 mts Cargo Volume 445,3 m3 Cruising Speed 851 km/h Maximum weight at taken-off 186,880 kg 20 INTERNATIONAL 27 DESTINATIONS Build and ensure the best network in South America and its connection with the World OUR COMPANY | Destinations 21 21 ARGENTINA ARGENTINA 15 DESTINATIONS OUR COMPANY | Destinations 22 22 BRASIL 41 DESTINATIONS OUR COMPANY | Destinations 23 23 CHILE 16 DESTINATIONS + ISLA DE PASCUA OUR COMPANY | Destinations 24 24 COLOMBIA 14 DESTINATIONS OUR COMPANY | Destinations 25 25 ECUADOR 5 DESTINATIONS OUR COMPANY | Destinations 26 26 PERU 17 DESTINATIONS OUR COMPANY | Destinations 27 27 CODESHARES OUR COMPANY | Destinations 84 NORTH AMERICA DESTINATIONS 46 EUROPE DESTINATIONS 9 ASIA DESTINATIONS 4 AFRICA DESTINATIONS 22 AUSTRALASIA DESTINATIONS 28 28 CARGO 11 DESTINATIONS* OUR COMPANY | Destinations *Cargo exclusive 29 29 OUR COMPANY | Our People Generating a connection with our customers to create a distinctive experience The LATAM group is an airline that stands out because of the multiculturalism of its teams. This is keenly reflected in the diversity of nationalities -more than 60- of its person- nel and staff; which, by the end of the year totaled 45,916 persons distributed throughout 25 different countries. As of December 2016, the company had some 9 thousand persons working under the Twist model; including all em- ployees working at contact centers, airport hubs, half of Brazil’s airports, major non-hub airports, and Chile’s Wide Body fleet cabin crews. During 2015 we began to execute the so-called Twist Project at airports, contact centers and on-board services. We con- tinued to pursue this initiative during 2016 and it became the most relevant initiative in the area of persons, since it involves a new way of conceiving the delivery of services. The main objective of this initiative is to generate an emotional connection between company employees and customers and, consequently, to achieve a greater passenger loyalty. This objective will be achieved upon adapting the work of our human teams to the evolution of the industry, to the empowering clients and to the size now reached by the LATAM Group, granting them with a greater degree of autonomy to respond to our custom- ers’ diverse needs in the different places where we op- erate and with the capacity of providing flexible service responses to these realities. For example, at the Brasilia airport, 50% of the people us- ing this airport are there flying for the first time; while only 5% of those using Sao Paulo’s Guarulhos Airport are in that situation. This suggests that the way to inform and serve our customers in either one of these airports should be different in order to be successful. Consequently, our lo- cal teams must be empowered and trained to respond to customers in a customized way. We still have more than 50% of our customer-contact per- sonnel to be trained by Twist. This poses an additional chal- lenge to our company in order to change our way of work- ing by applying a model with proven results. LATAM now needs to adopt Twist fully in order to be among the world’s top airlines in the coming years On the other hand, during 2016 we trained 3,705 workers in homologating frequent flyer plans; they were joined by other 1,208 persons working in CTOs, call centers and air- ports in our “Favorite seat” Program (prioritizing the sale of seats; i.e. those with more leg space and located toward the front part of the cabin), and other 2,864 persons on indirect sales, CUS, CTOs, call centers and airports in sim- plifying and automating re-emission processes. Additionally, the company closed the year with more than 1,000 persons trained for on-board sales on domestic flights in Chile, Colombia, Argentina and Peru. In the Support Area, we developed a “Management of emo- tions” course aimed at those who work in direct contact with clients, providing them with tools for handling their own emotions and teaching them to apply such strategies in their handling of passenger emotions. This project was executed through 2016 in training over 90% of our staff at airports and LATAM channels. Through our Twist Program we teach and train our leaders how to get organized, motivate their teams and interact with our customers toward building a new relationship with each of them and enabling them to attain their own preferences. Concurrently, we introduced a Child Tracker System at air- ports, aimed at enabling parents to monitor their non-ac- companied traveling minors, permitting them to know their 30 location and thus “accompany” them throughout the trip. Toward these purposes we trained 2,200 passenger service agents in Argentina, Chile, Peru and Colombia. With respect to our Emergency Response Plan, the re- spective company department trained 2,391 persons in 11 subsidiaries (Chile, Brazil, Argentina, Peru, Colombia, Ecuador, United States, Paraguay, Spain, Mexico and the LATAM Office in Brazil) in how to respond in the event of a plane crash. In such case, the respective teams simulate an aircraft crash situation and must apply the procedures of the Emergency Response Plan in order to determine its effectiveness, level of coordination, eventual gaps and introduce the necessary corrections. On the other hand, during 2016 the company worked on the collaborative construction of a Leadership Model that would reflect the major challenges that confront all those who lead person teams. Participatory workshops were held with leaders at all levels and with the information thus obtained we designed a LATAM leadership model aimed at aligning, directing and making transparent what the organization needs and expects from each of its leaders. Among the practices suggested by this leadership model is the Barometer, which seeks to promote conversations and personal closeness between leaders and their team, supported by a survey. Moreover, during 2016 we offered 34 assertive Communi- cation Workshops among LATAM Group executives. These workshops were imparted to 362 company executives, in pairs of executives especially prepared to play this role. OUR COMPANY | Our People Finally, in order to acknowledge those who best represent LATAM’s guidelines of conduct (Safety, Attentiveness and Efficiency), during 2016 we launched the LATAM Apprecia- tion Platform, whereby persons who are part of the com- pany can acknowledge the merits of a partner and at the same time be acknowledged by others, regardless of the type of job performed or the country of location, in an attempt to have a cross-sectional acknowledgement of all those persons who represent LATAM’s spirit of service. 31 GENERAL 1) Total Employees / Nationality / Country Total Employees Total Nationalities Total Country 45916 64 25 OUR COMPANY | Our People 3. 2. 4. Proportion of Gross Salary by gender Executive level Medium level General role 1.37 times 1.10 times 0.98 times 32 DIVERSITY OF THE ORGANIZATION OUR COMPANY | Our People 5. 6. 33 OUR COMPANY | Our People DIVERSITY OF THE MANAGEMENT 7. By country and gender 9. By years in the Company Years in LATAM People Up to 3 years From 4 to 6 years From 7 to 9 years From 10 to 12 years More than 12 years 235 274 214 175 309 % 19% 23% 18% 14% 26% Total 1207 100% Country Argentina Brazil Chile Colombia Ecuador Peru USA Others Total 8. By age Age Up to 30 years From 31 to 40 years From 41 to 50 years From 51 to 60 years From 61 to 70 years 10 131 153 10 7 11 13 14 28 267 407 24 13 29 53 37 Total 38 398 560 34 20 40 66 51 349 858 1.207 People 79 643 331 133 21 % 7% 53% 27% 11% 2% Total 1207 100% 34 OUR COMPANY | Our People DIVERSITY OF BOARD OF DIRECTORS 10. By country and gender 12. By years in the Company Country Chile Brazil Spain United Kingdom Total - - - - 0 Total 5 2 1 1 9 5 2 1 1 9 Years in LATAM N° Directors Up to 3 years From 4 to 6 years From 7 to 9 years From 10 to 12 years More than 12 years Total 2 5 - - 2 9 % 22% 56% 0% 0% 22% 100% 11. By age Age Up to 30 years From 31 to 40 years From 41 to 50 years From 51 to 60 years From 61 to 70 years More than 70 years Total N° Directors - 1 1 3 3 1 9 % 0% 11% 11% 33% 33% 11% 100% 35 OUR COMPANY | Company Information LATAM AIRLINES GROUP S.A. Chilean Tax N° (RUT): 89.862.200-2 Residence: Santiago Fantasy names: “LATAM Airlines”, “LATAM Airlines Group”, “LATAM Group”, “LAN Airlines”, “LAN Group” y/o “LAN”. with the Superintendencia de Valores y Seguros (SVS), Chile’s stock market regulator, under Inscription N° 0306 of 22 January 1987. The corporate purpose is: a) The commerce of air and / or land transport in any of its forms, whether of passen- gers, cargo, mail and everything that has direct or indirect relation with said activity, inside and outside the coun- try, for own account or others; b) The provision of services related to the maintenance and repair of aircraft, own or third parties; c) The development and exploitation of oth- er activities derived from the corporate purpose and / or related, related, auxiliary or complementary to it; d) The commerce and development of activities related to travel, tourism and hotels; and e) Participation in societies of any type or kind that allow society to fulfill its purposes. Incorporation: Established as a limited liability company by public deed of 30 December 1983, extended by Public Notary Eduardo Avello Arellano, an extract of which was recorded at Folio 20,341 Nº 11,248 of 1983 of the Santia- go Business Register and published in the Official Gazette of 31 December 1983. By public deed of 20 August 1985, extended by Public No- tary Miguel Garay Figueroa, the company became a joint stock company under the name of Línea Aérea Nacional de Chile S.A. (now LATAM Airlines Group S.A.). As regards aeronautical and radio communication concessions, traffic rights and other administrative concessions, this company was expressly designated by Law N°18.400 as the legal continuation of the state company created in 1929 under the name of Línea Aérea Nacional de Chile. The Extraordinary Shareholders’ Meeting of LAN Chile S.A. held on 23 July 2004 agreed to change the company’s name to “LAN Airlines S.A.” and the Extraordinary Share- holders’ Meeting of LAN Airlines S.A. held on 21 December 2011 agreed to change the company’s name to “LATAM Airlines Group S.A.”, current corporate name of the Com- pany. An extract of the public deed corresponding to the Meeting’s minutes was recorded on the Business Register of the Real Estate Registry Office at Folio 4,238 Nº 2,921 of 2012 and was published in the Official Gazette of 14 January 2012. The change of name came into force on 22 June 2012. LATAM Airlines Group S.A. is subject to the regulation ap- plicable to listed joint stock companies and is registered 36 OUR COMPANY | Company Information CORPORATE HEADQUARTERS Avenida Presidente Riesco 5711, Piso 19 Las Condes, Santiago, Chile Tel: (56) (2) 2565 2525 MAINTENANCE CENTER Aeropuerto Arturo Merino Benítez Santiago, Chile Tel: (56) (2) 2565 2525 TICKER SYMBOL LAN- Santiago Stock Exchange LFL- New York Stock Exchange FINANCIAL INFORMATION Investor Relations LATAM Airlines Group S.A. Avenida Presidente Riesco 5711, 20th Floor Las Condes, Santiago, Chile Tel: (56) (2) 2565 3944 Email: InvestorRelations@latam.com SHAREHOLDER INQUIRIES Depósito Central de Valores Huérfanos 770, Piso 22 Santiago, Chile Tel: (56) (2) 2393 9003 Email: atencionaccionistas@dcv.cl DEPOSITARY BANK ADRS JPMorgan Chase Bank, N.A. P.O. Box 64504 St. Paul, MN 55164-0504 Tel: General (800) 990-1135 Tel: From outside (651) 453-2128 Tel: Global Invest Direct (800) 428-4237 Email: jpmorgan.adr@wellsfargo.com CUSTODIAN BANK ADRS Banco Santander Chile Bandera 140, Santiago Custody Department Tel: (56) (2) 2320 3320 EXTERNAL AUDITORS Pricewaterhouse Coopers Avenida Andrés Bello 2711, Piso 5 Santiago, Chile Tel: (56) (2) 2940 0000 WEBSITES Complete information about LATAM Airlines: www.latamairlinesgroup.net www.latam.com 37 SIG030 CORPORATE GOVERNANCE 38 BOARD OF DIRECTORS At the Ordinary Shareholders’ Meeting of 2017, the Company’s board of directors will be completely renewed The Board of Directors was elected during the Shareholder’s Meeting on April 28, 2015 for a period of two years. CORPORATE GOVERNANCE | Board of Directors Mauricio Rolim Amaro Chairman of the Board RUT: 48.143.165-4 Mr. Mauricio Rolim Amaro, has served as member of LA- TAM Airlines Group’s board of directors since June 2012. He was reelected to the board of directors of LATAM in April 2015 and has served as Chairman since September 2012. Mr. Amaro has previously held various positions in the TAM Group and served as a professional pilot at TAM Linhas Aéreas S.A. and TAM Aviação Executiva S.A. Mr. Amaro has been a member of the Board of TAM S.A. since 2004, and vice-chairman of the Board since April 2007. He is also an executive officer at TAM Empreendimentos e Participações S.A. and chairman of the boards of Mul- tiplus S.A. (subsidiary of TAM S.A.) and of TAM Aviação Executiva e Taxi Aéreo S.A. 39 CORPORATE GOVERNANCE | Board of Directors Henri Philippe Reichstul Director RUT: 48.175.668-5 Juan José Cueto Plaza Director RUT: 6.694.240-6 Georges de Bourguignon Director RUT: 7.269.147-4 Mr. Henri Philippe Reichstul, joined LATAM’s board of directors in April 2014. Mr. Reichstul has served as President of Petro- bras and the IPEA-Institute for Economic and Social Planning and Executive Vice President of Banco Inter American Express S.A. Currently, in addition to his roles as Administrative Board member of TAM and LATAM Group, he is also a member of the Board of Directors of Repsol YPF, Peugeot Citroen, AES Brasil, and SEMCO Partners, among others. Mr. Reichstul is an economist with an undergraduate degree from the Faculty of Economics and Administration, University of São Paulo, and postgraduate work degrees in the same discipline—Hertford College—Oxford University. Mr. Juan José Cueto Plaza, has served on LAN’s board of direc- tors since 1994 and was reelected to the board of directors of LATAM in April 2015. Mr. Cueto currently serves as Executive Vice President of Inversiones Costa Verde S.A., a position he has held since 1990, and serves on the boards of directors of Consorcio Maderero S.A., Inversiones del Buen Retiro S.A., Costa Verde Aeronáutica S.A., Sinergia Inmobiliaria S.A., Valle Escondido S.A., Fundación Colunga and Universidad San Se- bastián. Mr. Cueto is the brother of Messrs. Enrique and Igna- cio Cueto Plaza, LATAM Airlines Group Executive Vice-Presi- dent and LAN CEO, respectively. Mr. Cueto is a member of the Cueto Group (LATAM Airlines Group’s Controlling Shareholder). Mr. Georges de Bourguignon, has served on LATAM Airlines Group’s board of directors since September 2012 and was re- elected to the board of directors of LATAM in April 2015. Mr. de Bourguignon has been a partner and executive director of Asset Chile S.A., a Chilean investment bank, since 1993. He is currently member of the board of directors K+S Chile S.A. and Embotelladora Andina S.A. In the past he has served in several other boards of public and private companies, as well as of boards of non profit organizations. Between 1990 and 1993, he was manager of the Financial Institutions Group at Citibank S.A. in Chile, and was a professor of economics at the Catholic University of Chile. He is an economist from Catholic University of Chile and a graduate of Harvard Business School. 40 CORPORATE GOVERNANCE | Board of Directors Ramón Eblen Kadis Vice-president of the Board RUT: 4.346.062-5 Carlos Heller Solar Director RUT: 8.717.000-4 Gerardo Jofré Miranda Director RUT: 5.672.444-3 Mr. Ramón Eblen Kadis, has served on LAN’s board of directors since June 1994 and was reelected to the board of directors of LATAM in April 2015. Mr. Eblen has served as President of Comercial Los Lagos Ltda., Inversiones Santa Blanca S.A., In- versiones Andes SpA, Granja Marina Tornagaleones S.A. and TJC Chile S.A. Mr. Eblen is a member of the Eblen Group (a major shareholder of LATAM Airlines Group). Mr. Carlos Heller Solari, joined the board of LAN in May 2010 and was re-elected to the Board of Directors of LATAM in April 2015. Mr. Heller has vast experience in retail, communications, transport and agriculture industries. Mr. Heller is president of Bethia S.A. (“Bethia”) (parent company of Axxion S.A. and In- versiones HS SpA). He is also President of the Boards of Fa- labella Retail S.A., Red Televisiva Megavision S.A., Club Hípico de Santiago S.A., Sotraser S.A., Blue Express S.A., Aero Andi- na S.A. and “Azul Azul S.A.” concessionaire of the Corporación de Fútbol Profesional de la Universidad de Chile. He is also a member of the Board of Directors of S.A.C.I Falabella, Viña Indómita S.A., Viña Santa Alicia S.A. and Viña Dos Andes S.A. Mr. Heller is a member of the Bethia Group (a major sharehol- der of LATAM Airlines Group). Mr. Gerardo Jofré Miranda, joined LATAM Airlines’ Board of direc- tors on May 2010 and was reelected to the board of directors of LATAM in April 2015. Mr. Jofré is member of the board of directors of Codelco, Enel Chile and member of the Real Estate Investment Council of Santander Real Estate Funds. From 2010 to 2014 he served as president of the board of directors of Co- delco. From 2005 to 2010 he served as member of the boards of directors of Endesa Chile S.A., Viña San Pedro Tarapacá S.A., D&S S.A., Inmobiliaria Titanium S.A. Construmart S.A., Inmobi- liaria Playa Amarilla S.A. and Inmobiliaria Parque del Sendero S.A. and was President of Saber Más Foundation. Mr. Jofré was Director of Insurance for America for Santander Group of Spain between the years 2004 and 2005. From 1989 to 2004 he ser- ved on Santander Group in Chile, as Vice Chairman of the Group and as CEO, member of the boards of directors and Chairman of many of the Group’s companies. 41 CORPORATE GOVERNANCE | Board of Directors Giles Agutter Director Foreign Francisco Luzón López Director RUT: 48.171.119-3 Mr. Giles Agutter is the owner and Chief Executive Officer of Southern Sky Ltd, an airline consultant company specializing in airline strategy, fleet planning, aircraft acquisition and air- craft financing. Mr. Agutter has had vast experience in advising airlines, including Qatar Airways, on significant Merger and Ac- quisition projects within the airline industry. Mr Agutter has a degree in Aerospace Engineering from Manchester University and he currently resides in England. Mr. Francisco Luzón López, has served on LATAM Airlines Group’s board of directors since September 2012 and was reelected to the board of directors of LATAM in April 2015. He has ser- ved as a consultant of the Inter-American Development Bank (BID) and he has been Teacher “Visiting Leader” of the School of Business China-Europe (“CEIBS”) in Shanghai (2012-2013). He is currently a member of the board of La Haya Real Es- tate and served as Independent Director at Willis Group be- tween June 2013 and January 2016. Between 1999 and 2012, Mr. Luzon served as Executive Vice President for Latin Ameri- ca of Banco Santander. In this period, he was also Worldwide Vice President of Universia S.A. Between 1991 and 1996 he was Chairman and CEO of Argentaria Bank Group. Previously, in 1987, he was appointed Director and General Manager of Banco de Vizcaya and in 1988, Counselor and General Director of Banking Group at BBV. During his career Mr. Luzon has held positions on the boards of several companies, most recently participating in the council of the global textile company Indi- tex-Zara from 1997 until 2012. 42 CORPORATE GOVERNANCE | Senior Management SENIOR MANAGEMENT Our experience makes us unique Enrique Cueto Plaza CEO LATAM Airlines Group RUT: 6.694.239-2 Mr. Enrique Cueto Plaza, is LATAM Airlines Group’s Chief Executive Officer (“CEO”) and has been in this position since the combina- tion between LAN and TAM in June 2012. From 1983 to 1993, Mr. Cueto was Chief Executive Officer of Fast Air, a Chilean Car- go airline. From 1993 to 1994, Mr Cueto was a member of the board of LAN Airlines. Thereafter, Mr. Cueto held the position of CEO of LAN until June 2012. Mr. Cueto has in-depth knowledge of passenger and cargo airline management, both in commercial and operational aspects, gained during his 30 years in the airline industry. Mr. Cueto is an active member of the oneworld® Alliance Governing Board, the IATA (International Air Transport Association) Board of Governors. He is also member of the Board of the En- deavor foundation, an organization dedicated to the promotion of entrepreneurship in Chile, and president of the Latin American and Caribbean Air Transport Association (ALTA). 43 CORPORATE GOVERNANCE | Senior Management Ignacio Cueto Plaza CEO LAN RUT: 7.040.324-2 Armando Valdivieso Senior Commercial Vice President of LATAM RUT: 8.321.934-3 Claudia Sender CEO TAM President Foreign Mr. Ignacio Cueto Plaza, is LAN’s CEO. His career in the airline industry extends over 30 years. In 1985, Mr. Cueto assumed the position of Vice President of Sales at Fast Air Carrier, the biggest national cargo company of that time. In 1985, Mr. Cueto as- sumed as Service Manager and Commercial Manager for the Mi- ami sales office. Mr. Cueto later served on the board of directors of Ladeco (from 1994 to 1997) and LAN (from 1995 to 1997). Mr. Cueto served as President of LAN Cargo from 1995 to 1998, as Chief Executive Officer-Passenger Business from 1999 to 2005, and as President and Chief Operating Officer of LAN since 2005 until the combination with TAM in 2012. Mr. Cueto also led the establishment of the different affiliates that the Company has in South America, as well as the implementation of key al- liances with other airlines. Mr. Cueto is expected to leave the Company’s senior management team in mid-April 2017 and is applying to become a member of LATAM’s board of directors. Mr. Armando Valdivieso Montes, is Senior Commercial Vice President of LATAM since 2015. After the combination be- tween LAN and TAM in 2012, Mr. Valdivieso served as Gen- eral Manager of LAN, and from 2006 until 2012 he served as the General Manager-Passenger. Between 1997 and 2005 he served as Chief Executive Officer-Cargo Business of LAN. From 1995 to 1997, Mr. Valdivieso was President of Fast Air, and from 1991 to 1994, Mr. Valdivieso served as Vice Presi- dent, North America of Fast Air Miami. Mr. Valdivieso is a civil engineer and obtained an AMP (Advance Managements Pro- gram) from Harvard Business School. Mr. Valdivieso will leave the Company during August 2017 as was announced by the Company on March 16, 2017. Mrs. Claudia Sender Ramirez, has served as TAM Airlines’ Presi- dent since May 2013. Mrs. Sender joined the company in De- cember 2011, as Commercial and Marketing Vice-President. After June 2012, with the conclusion of TAM-LAN combina- tion and the creation of LATAM Airlines Group, she became the head of Brazil Domestic Business Unit, and her functions were expanded in order to include TAM’s entire Customer Service structure. Mrs. Prior to joining LATAM Airlines, she was Market- ing Vice-President at Whirlpool Latin America for seven years. She also worked as a consultant at Bain & Company, develop- ing projects for large companies in various industries, including TAM Airlines and other players of the global aviation sector. She has a bachelor’s degree in Chemical Engineering from the Polytechnic School at the University of São Paulo (“USP”) and a MBA from Harvard Business School. 44 CORPORATE GOVERNANCE | Senior Management Ramiro Alfonsín Chief Financial Officer Rut: 22.357.225-1 Juan Carlos Menció Senior Vice President of Legal Affairs RUT: 24.725.433-1 Emilio del Real Senior Vice President of Human Resources RUT: 9.908.112-0 Mr. Ramiro Alfonsín, is LATAM’s Chief Financial Officer (“CFO”), a position he holds since July 2016. Over the past 16 years, before joining LATAM, he worked for Endesa, a leading utility company, in Spain, Italy and Chile, having served as Deputy Chief Execu- tive Officer and Chief Financial Officer for their Latin American operations. Before joining the utility sector, he worked for 5 years in Corporate and Investment Banking in large European banks. Mr. Alfonsín holds a degree in business administration from Pontificia Universidad Católica de Argentina. Mr. Juan Carlos Mencio is Senior Vice President of Legal Affairs and Compliance for LATAM Airlines Group since September 1, 2014. Mr. Mencio had previously held the position of General Counsel for North America for LATAM Airlines Group and its related companies, as well as General Counsel for its world- wide Cargo Operations, both since 1998. Prior to joining LAN, he was in private practice in New York and Florida representing various international airlines. Mr. Mencio obtained his Bach- elor’s Degree in International Finance and Marketing from the School of Business at the University of Miami and his Juris Doctor Degree from Loyola University. Mr. Emilio del Real Sota, is LATAM’s HR Executive Vice-Presi- dent, a position he assumed (with LAN) in August 2005. Be- tween 2003 and 2005, Mr. del Real was the Human Resource Manager of D&S, a Chilean retail company. Between 1997 and 2003 Mr. del Real served in various positions in Unilever, in- cluding Human Resource Manager for Chile, and Training and Recruitment Manager and Management Development Man- ager for Latin America. Mr. del Real has a Psychology degree from Universidad Gabriela Mistral. 45 CORPORATE GOVERNANCE | Year 2016 Board Members’ Compensation 2016 Board members Position Board member’s Board member’s allowance (US$) Committee allowance (US$) Subcommittee allowance (US$) Total (US$) Mauricio Amaro President 25,029 Francisco Luzón López Board member 2,470 Juan José Cueto Plaza Board member Ramón Eblen Kadis Board member Juan Gerardo Jofré Miranda Board member Carlos Heller Solari Board member Georges Antoine de Bourguignon Arndt Board member 19,071 19,071 19,071 15,576 19,071 Ricardo J. Caballero Board member 6,212 Henri Philippe Reichstul Board member 13,774 - - - 25,555 25,555 - 25,555 - - 1,992 - 13,879 12,497 12,497 - 12,489 2,976 10,024 27,021 2,470 32,950 57,123 57,123 15,576 57,115 9,188 23,798 2015 Board members Position Board member’s Board member’s allowance (US$) Committee allowance (US$) Subcommittee allowance (US$) Total (US$) Mauricio Amaro President Francisco Luzón López Board member Juan José Cueto Plaza Board member Ramón Eblen Kadis Board member Juan Gerardo Jofré Miranda Board member Carlos Heller Solari Board member Georges Antoine de Bourguignon Arndt Board member Ricardo J. Caballero Board member Henri Philippe Reichstul Board member 38,315 15,333 21,106 21,106 21,106 15,349 21,106 15,360 21,106 - - - 23,150 28,282 - 28,282 - - 9,224 10,735 13,839 12,261 15,344 1,527 12,252 9,233 10,804 47,539 26,068 34,945 56,517 64,732 16,876 61,640 24,593 31,910 t should be noted that the compensations thus report- ed correspond to allowances for monthly attendance to Board of Directors’ Meetings and Directors’ Committee Meetings pursuant to the resolution approved by the Ordi- nary Shareholders Meeting of April 28, 2015. During the year 2016, neither the Board of Directors nor the Directors’ Committee incurred in any additional con- sulting service costs. 46 CORPORATE GOVERNANCE | Year 2016 Organizational chart During 2017, the Company will implement a new organiza- tional structure focused on four basic areas –Clients, Rev- enue, Operations and Fleet, and Finance– which will be the pillars of the Company’s business strategy and will report directly to the CEO LATAM. The new structure will be sim- pler, more efficient and more functional, and will enable the Company to face an increasingly competitive environment. With this reorganization that will focus on functions instead of business units, the Company expects to optimize its in- ternal synergies and strengthen its structure. The Clients area will be initially led by Claudia Sender. This area will focus on providing the client with a complete expe- rience. The Revenues area, focused on maximizing revenues for the Company, will be initially led by Roberto Alvo Mi- losawlewitsch, who will be LATAM’s Chief Commercial Of- ficer. The Operations and Fleet area will be initially led by Hernan Pasman, who will be responsible for the Operations and Fleet Vice-presidency. The Finance area will preserve its existing organization and structure, and will be led by Ramiro Alfonsín, the current Chief Financial Officer of the Company CEO LATAM LATAM Airlines Brazil LATAM Airlines Argentina LATAM Airlines Chile LATAM Airlines Colombia LATAM Airlines Ecuador LATAM Airlines Peru Customer Vice-presidency Operations and Fleet Vice-presidency Commercial Vice-presidency Finance Vice-presidency Legal Planning Technology Safety Corporate Affairs Human Resources Board of Directors Board of Committees Internal Audit 47 CORPORATE GOVERNANCE | Year 2016 (a.2) 2013 Compensation Plan At the Extraordinary Shareholders Meeting held on June 11, 2013, the Company’s shareholders approved a ca- pital increase and the allocation of 1,500,000 shares to compensation plans for employees of the Company pursuant to Article 24 of the Chilean Corporations Law. The Company has not defined a date for implementa- tion of this compensation plan yet. (b) The 2016-2018 Compensation Plan The Company implemented a long-term retention plan for executives, with an end date of December 2018 and a vesting period between October 2018 and March 2019. The plan contemplates an extraordinary bonus to be paid in cash, whose calculation formula based on the variation of the value of the Company’s shares over a certain period of time. For more information, please see note 34 Note to our con- solidated financial statements. During the year 2016, the LATAM Airlines Group paid to all its senior executives a total of US$ 40,194,453 and US$ 14,980,291 corresponding to performance incentives paid in March 2017. Consequently, the company paid to its se- nior executives a total gross remuneration amounting to US$ 55,174,744. On the other hand, during the year 2015, the LATAM Air- lines Group paid to all its senior executives a total of US$ 40,404,395, in addition to US$ 13,789,916 corresponding to performance incentives paid in March 2016. Conse- quently, the company paid to its senior executives a total gross remuneration amounting to US$ 54,194,311. Compensation plans (a) Capital increase Compensation Plans (a.1) 2011 Compensation Plan On December 21, 2016, the subscription and pay- ment period of the 4,800,000 shares corresponding to the compensation plan approved at the Extraordinary Shareholders Meeting held on December 21, 2011 (the “2011 Compensation Plan”), expired. Of the total shares allocated to the 2011 Compensation Plan, only 10,282 shares were subscribed and paid and were placed on the market in January 2014. At the expiration date, the 2011 Compensation Plan had a balance of 4,789,718 unsubscribed and unpaid shares, which was deducted from the authorized capital of the Company. 48 CORPORATE GOVERNANCE | Practices Corporate Governance Practices LATAM Airlines Group S.A. is a listed joint stock company registered with the Superintendencia de Valores y Segu- ros (SVS), Chile’s stock market regulator, under Inscription N°306. Its shares trade on the Santiago Stock Exchange, Chile’s Electronic Stock Exchange and the Valparaíso Stock Exchange as well as on the New York Stock Exchange (NYSE) as American Depositary Receipts (ADRs) LATAM Airlines Group’s corporate governance practices are regulated by Chile’s Securities Market Law (Nº 18.045) and its Corporations Law Nº 18.046 (“LSA”), including their as- sociated norms, as well as other norms issued by the SVS, the legislation and regulation of the United States and that country’s Securities and Exchange Commission (SEC) as they apply to the issue of ADRs. The corporate governance practices of LATAM Airlines Group are subject to constant review in order to ensure that its internal self-regulation processes are totally aligned with the regulation in force and the LATAM’s values. LATAM Airlines Group’s decisions and commercial activi- ties are underpinned by the ethical principles established in LATAM’s Code of Conduct. The main bodies responsible for LATAM Airlines Group’s corporate governance are its Board of Directors and the Directors’ Committee (which also fulfills the functions of the Audit Committee required under the Sarbanes- Oxley Act of the United States), together with the Strategy, Fi- nance, Leadership and Product, Brand and Frequent Flyer Program Committees created after the association be- tween LAN Airlines and TAM. The main functions of these bodies are set out below. BOARD OF DIRECTORS OF LATAM AIRLINES GROUP LATAM Airlines Group’s Board of Directors has nine mem- bers and is the body responsible for analyzing and defining LATAM’s strategic vision, thereby playing a fundamental role in its corporate governance. All the Board seats come up for election every two years and, under LATAM Airlines Group’s statutes, directors are elected through cumulative voting. Each shareholder has one vote per share and can use all his or her votes to support one candidate or divide them among any number of candidates. This arrangement ensures that a shareholder with more than a 10% stake can elect at least one director. The present Board of Directors was elected by the Ordinary Shareholders’ Meeting which took place on April 28th, 2015. LATAM Airlines Group’s Board holds ordinary monthly meetings and extraordinary meetings whenever the Com- pany’s affairs so require. Directors’ fees must be approved by vote at the Ordinary Shareholders’ Meeting. The Direc- tors’ Committee usually meets monthly and its functions and powers are those established by the applicable legis- lation and regulation. DIRECTORS’ COMMITTEE OF LATAM AIRLINES GROUP Under Chilean law, listed joint stock companies must ap- point at least one independent director and a Directors’ Committee when they have a market capitalization of at least 1,500,000 unidades de fomento (an inflation- indexed currency unit) and at least 12.5% of the voting shares are held by shareholders who individually control or possess less than 10% of these shares. Three of the nine Board members form a Directors’ Committee, which ful- fills both the functions required under Chile’s Corporations Law and those of the Audit Committee required under the Sarbanes-Oxley Act of the United States and the corre- sponding SEC norms. 49 CORPORATE GOVERNANCE | Practices The Directors’ and Audit Committee has the functions es- tablished in Article 50 bis of Chile’s Corporations Law and the other applicable regulation. These include: ► To examine the reports of LATAM Airlines Group’s exter- nal auditors, general balance sheets and other financial statements that LATAM Airlines Group’s administrators provide to shareholders and to express an opinion about these reports prior to their presentation for approval by shareholders. ► To put to the Board proposals as to the external auditors and credit rating agencies to be used. ► To examine internal control reports and any related com- plaints. Messrs. Ramón Eblen Kadis, Georges de Bourguignon Arndt and Juan Gerardo Jofré Miranda (chairman of the Committee). For the purposes of Chile’s Corporations Law (Nº 18.046), Ramón Eblen Kadis is not considered an inde- pendent director. Committee members have not changed in the last two years. DIRECTORS’ COMMITTEE ANNUAL REPORT In accordance with article 5°, subsection 8° of article 50 bis under the Corporations Law No. 18,046, the Directors’ Committee of LATAM Airlines Group S.A. issues the annual management for 2016. ► To examine and report on all matters regarding rela- I. Integration of the Directors’ Committee and Sessions ted-party transactions. ► To examine the pay scale of LATAM’s senior manage- ment. The requirements for directors’ independence are set out in Chile’s Corporations Law (Nº 18.046) and its subsequent modifications under Law Nº 19.705 on the relationship be- tween directors and LATAM’s controlling shareholders. A director is considered independent when he or she does not, in general, have ties, interests or economic, profession- al, credit or commercial dependence of a significant nature or size with or on the company, the other companies in the group of which it forms part, its controller or principal ex- ecutives or a family relationship with the latter or any of the other types of ties specified in Law Nº 18.046. Under US regulation, it is necessary to have an Audit Com- mittee, comprising at least three Board members, that ful- fills the independence requirements established under Rule 10A of the Exchange Act. The members of the Directors’ Committee of the Company are Messrs. Gerardo Jofré Miranda, Georges de Bourguignon Arndt and Ramón Eblen Kadis. Messrs. Jofré and De Bourgui- gnon are considered independent directors of the Company. Gerardo Jofré Miranda chairs the Directors’ Committee. The directors were appointed in the Ordinary Shareholders’ Meeting held on April 28, 2015, for a two-year period pursu- ant the bylaws of the Company. II. Report of the Committee’s Activities. During 2016, the Directors’ Committee held twenty-one sessions, in order to exercise its functions and fulfill its ob- ligations pursuant to article 50 Bis under the Corporations Law No. 18,046, and also to undertake those other issues that the Directors’ Committee decided to review, revise or evaluate. Please find below the main topics covered. Test and Review of the Balance Sheet and Financial Statements As of 31 December 2016, all the members of the Direc- tors’ Committee, who also act as part of the Audit Com- mittee, were independent directors as defined under Rule 10A of the Exchange Act. At that date, its members were The Directors’ Committee tested and reviewed the financial statements of the Company as of December 31, 2015, as well as the quarterly statements as of March 31, June 30 50 CORPORATE GOVERNANCE | Practices deterioration. This new methodological tool makes it possible to determine the need to perform in depth the proof of im- pairment of certain assets of the cash generating units. Systems of Compensation for Executives and Employees completed by the Company’s directors and executives. Ad- ditionally, the transactions that pursuant to the legal and accounting regulation applicable to the Company were re- viewed, which are considered operations with related parties, and was approved by the Committee. and September 30 of 2016, understanding the tests of the respective reports of external auditors of the Company. The External Auditor of the Company participated in their respec- tive sessions of the Committee, for the purpose of providing the opinion related to the audit and to inform the relevant is- sues of the review, the main aspects of internal control and communications required by the regulators of External Au- ditor, and including in every occasion the confirmation of (i) didn’t experience any difficulties to carry out the audit, (ii) didn’t have any difference of opinion with the Management, and (iii) didn’t came up any facts that represented a threat to its independence. Likewise, Ernst & Young (EY) in its capacity as external auditor of TAM S.A. and subsidiaries participated in the session of the Directors’ Committee held in September 30, 2016, with the purpose of presenting the main aspects of the external audit of TAM, the main focuses of its review process and internal control aspects. Review of the Cash Generating Units Impairment Reports In the session held on March 7, 2016, the Directors’ Committee examined and analyzed the impairment reports of the cash generating units of the Company for certain assets included in the Financial Statements as of December 31, 2015, in ac- cordance with the reports issued by the management of the Company and by Deloitte, acting as the consulting firm, hired for the purpose, being present at the session. In session held on January 25, 2016, the Directors’ Commit- tee examined the systems of remunerations and compensa- tion plans for managers, main executives and employees of the Company. This session examined the current remunera- tion policies and compensation plans of senior executives and the functioning of bonuses calculation. At the Directors’ Committee meeting held on September 30, 2016, the ac- counting treatment of the long-term incentive plan for ex- ecutives was reviewed. In session held on November 7, 2016, the Directors’ Com- mittee reviewed the main topics discussed in the Leader- ship Committee during the year, which comprise the main leadership initiatives planned to be developed by the Com- pany, the “Headcount Challenge” and the new LATAM Orga- nizational Structure. In compensation matters, short-term incentive agreements and the long-term bonus program for executives and the performance evaluation of top execu- tives were reviewed. Review of Background Related to Related Party Transac- tions and Approval of Control Policy for Related Party Transactions In session held on August 1, 2016, the Directors’ Committee examined and analyzed the impairment reports of the cash generating units of the Company for certain assets included in the Financial Statements as of June 30, 2016, in accordance with the reports issued by the management of the Company and by KPMG, acting as the consulting firm, hired for the pur- pose, being present at the session. In session held on July 4, 2016, Comptroller Area of LATAM presented to the Directors’ Committee a methodology devel- oped internally to carry out the early evaluation of signs of In sessions held on June 6, 2016 and June 29, 2016, the Di- rectors’ Committee reviewed and approved a proposal for a Control Policy for Related Party Transactions applicable to LATAM and its subsidiaries, which was recommended to and approved in the last instance by the Company’s Board of Directors. This Policy considers the legal and accounting regulations related to the control and report of operations with related parties, the general policy of ordinary course of operations approved by the Board of Directors and informed by material fact, the controls associated with this type of transactions and the related information form that must be Corporate Governance Practices. In order to comply with General Rule No. 385 of the Super- intendence of Securities and Insurance (“NCG 385”), in the sessions held on June 6, 2016, November 10, 2016, January 23, 2017 and March 6, 2017, the Directors’ Committee, ana- lyzed and examined the corporate governance practices of LATAM for 2015, according to the questionnaire provided in Addendum I of General Rule No. 385. In those sessions the Committee evaluated corporate improvements to corporate governance practices of the Company, some of which were recommended to the Board of Directors for their implementa- tion, such as training of Board members, annual planning and review of a plan for continuous improvement of the functions and organization of the Board of Directors, regular meetings with certain areas of the Company and implementation of procedures for the hiring of experts who advise the Board on specific matters. Contracting of Additional Services from External Auditors In the session held on April 1, 2016, the Directors’ Committee examined and evaluated the rules and guidelines for future se- lections of external audit services, since the tenders that have been made in the past, such as those carried out in the future, demonstrate the firm intention of LATAM Airlines Group to en- sure the independence of its external auditors and the willing- ness to proceed with its evaluation, change, replacement or rotation, to the extent deemed necessary for the purpose of securing an adequate performance over time of external audit services, without prejudice to the legal regulations in Chile and abroad that it applies to the Company, approving a Policy for the Selection of External Audit Services, which was recom- mended to and approved in the last instance by the Board of Directors of the Company. 51 CORPORATE GOVERNANCE | Practices Sustainability Policy Counseling, Ambassadors Program, Hotline and internal inves- tigations, risk assessment, certification and training. 5) Extraordinary Session N°44 30/03/2016 • Presentations of proposals for external audit services. In sessions held on June 6, 2016 and July 4, 2016, the Direc- tors’ Committee reviewed the Sustainability Policy proposed by the Management, which was recommended to and ap- proved by the Board of Directors of the Company. This Policy includes the objectives of LATAM in this area, the responsibili- ties assigned within the Administration to meet these objec- tives and the main guidelines, including international commit- ments, identification of stakeholders, goals and compliance. Recommendations of the Directors’ Committee 6) Ordinary Session N°164 01/04/2016 On the other hand, the Directors’ Committee made the rec- ommendations mentioned below to this annual management report, with the occasion of the appointment of external audi- tors of the Company and the private risk rating agencies for 2016. • Proposition of External Auditors and Private Rating Risk Agencies for 2016. • Policy for the selection of External Audit Services of LA- TAM and Subsidiaries. • Annual Management Report of the Directors’ Committee. • Annual Agenda of the Directors’ Committee. Internal Audit Activities by Session of the Directors’ Committee Report 7) Ordinary Session N°165 02/05/2016 In ordinary sessions held on May 2, 2016, September 5, 2016 and December 6, 2016, the Directors’ Committee examined and reviewed the audit and internal control reports issued by the internal auditor of LATAM. In these sessions the audit work performed in 2016 was approved, and throughout the year in- formed of its main results. In session held on June 6, 2016, the Directors’ Committee reviewed the most relevant internal audit reports of LATAM Airlines Brazil issued as of April 2016. Corporate Risk Management In session held on May 2, 2016, the Directors’ Committee re- ceived an update on the progress of the corporate risk man- agement plan in the Company, including the risks detected, the state of progress of the project in the LATAM Group countries, advances in the management of the “risk table” and in subsequent sessions of July 4, 2016 and November 7, 2016, specific risk analyzes were carried out as requested by the Committee. Compliance In ordinary sessions held on January 25, 2016 and August 1, 2016, the Directors’ Committee received training regarding the Compliance Program currently in force at the Company and its main contents, among which are the Code of Conduct, Policies and Procedures, Due Diligence of Third Party Intermediaries (TPIs), Crime Prevention Handbook, Continuing Compliance Notwithstanding the above, the Directors’ Committee met and held sessions in the opportunities mentioned below, where we present a summary of the matters discussed in each session. 1) Ordinary Session N°162 25/01/2016 • Deferred tax assets in TAM. • Presentation of the Compliance area. • Remuneration systems and compensation plan for LATAM Executives. • Response letter to the Chilean Superintendency of Securi- ties (SVS). 2) Ordinary Session N°163 07/03/2016 • Press release on financial results as of December 31, 2015 (“Press Release”). • Analysis of the “Impairment” test of certain assets in- cluded in Financial Statements as of December 31, 2015. • Deferred tax assets in TAM. • Reports of the Corporate Internal Audit. • Updating information on Corporate Risk Management. • Summary of requests made by the Directors’ Committee. 8) Extraordinary Session N°45 de fecha 11/05/2016 • Review of Financial Statements as of March 31, 2016. • Summary of requests made by the Directors’ Committee. 9) Ordinary Session N°166 06/06/2016 • Review of the status of pending issues requested by the Committee. • Presentation of the Internal Audit Reports on LATAM Air- lines Brazil. • Analysis of the proposal for presentation to the Board of Directors of the Corporate Risk Management. • Analysis of the topics in charge of the Legal department included in the list of pending issues. • Summary of requests made by the Directors’ Committee. • Bidding for external audit services in 2016. 10) Extraordinary Session N°46 29/06/2016 3) Sesión Extraordinaria N°42 15/03/2016 • Analysis of the document required by the general rule 385. 4) Extraordinary Session N°43 21/03/2016 • Review of Financial Statements as of December 31, 2015. • Analysis of the proposed control policy for transactions with related parties LATAM. 11) Ordinary Session N°167 04/07/2016 • Analysis of the proposed control policy for transactions with related parties LATAM. • Model of early evaluation of signs of deterioration. • SOX review, plan of the year. • Corporate risk management, risk analysis Olympic Games. 52 CORPORATE GOVERNANCE | Practices • Presentation on Sustainability and DJSI (Dow Jones Sus- tainability Index). • Summary of requests made by the Directors’ Committee. 12) Ordinary Session N°168 01/08/2016 • Analysis of the “Impairment” test of certain assets in- cluded in Financial Statements as of June 30, 2016. • Letter received from the External Auditors. • Presentation of the Revenue Accounting area. • Presentation of the Compliance area. • Summary of requests made by the Directors’ Committee. 13) Extraordinary Session N°47 04/08/2016 • Review of the investigation related to the notification to TAM Linhas Aéreas S.A. (“TAM”) by the Federal Revenue Secretariat of Brazil. 14) Extraordinary Session N°48 11/08/2016 • Review of Financial Statements as of June 30, 2016. • Summary of requests made by the Directors’ Committee. 15) Ordinary Session N°169 05/09/2016 • Internal Audit Plan. • PwC External Audit Plan year 2016. • Presentation on one aspect of the agreement with the SEC / DOJ. • Summary of requests made by the Directors’ Committee. 16) Ordinary Session N°170 30/09/2016 • Presentation of the firm of auditors EY on the revision of the Financial Statements of LATAM Airlines Brazil. • Accounting treatment of the long-term incentive plan for executives. • Compliance issues. • Summary of requests made by the Directors’ Committee. 17) Ordinary Session N°171 07/11/2016 • Tax issues. • Corporate Risk Management: LATAM Data Centers. • Compliance issues. • Leadership Committee. • Summary of requests made by the Directors’ Committee. IV. Recommendations of the Directors’ Committee. 18) Extraordinary Session N°49 10/11/2016 IV.1 Proposal of External Auditors’ Appointment. • Review of Financial Statements as of September 30, 2016. • Summary of requests made by the Directors’ Committee. 19) Extraordinary Session N°50 10/11/2016 • Analysis of the Corporate Governance practices of the Company under the general rule N ° 385. 20) Ordinary Session N°172 06/12/2016 • Internal Audit Reports. • Status of the “NOW” Project (LATAM Airlines Brazil). • Status of progress SOX 2016 Review and internal control statutes. • Letter received from the External Auditors. • Legal and Compliance Issues. • Summary of requests made by the Directors’ Committee. 21) Extraordinary Session N° 51 16/12/2016 • Review of Legal and Compliance issues III. Remunerations and Expenses of the Directors’ Committee. The Ordinary Shareholders Meeting of the Company, held on April 26, 2016, agreed that every member of the Committee receives a monthly allowance of the equivalent to 67 Unidades de Fomento for attending the Directors’ Committee sessions. For the operation of the Directors’ Committee and its advi- sors, Corporations Law established that the expense budget has to be at least the same as the annual remuneration of the Committees’ members, and therefore in the aforementioned Ordinary Shareholders Meeting a budget of 2,412 Unidades de Fomento for 2016 was approved. Therefore, the expenses of the Directors’ Committee are relat- ed with the monthly allowances for attendance to the sessions, without having any other expenses or outflows to inform. In session held on April 1, 2016, , In accordance with article 5°, subsection 8° of article 50 bis under the Corporations Law No. 18,046, the Directors’ Committee agreed to propose to the Board of Directors the external auditors that were suggested at the Ordinary Shareholders Meeting held on April 26, 2016. The above, having previously at the session of the Directors’ Committee dated March 30, 2016, reviewed the submissions of the audit firms participating in the tender process. In this regard, the Committee proposed to the Board of Directors the appointment of PriceWaterhouseCoopers Consultores, Audi- tores y Cía. Limitada (“PWC”) Ernst & Young Servicios Profe- sionales de Auditoría y Asesorías Limitada (“EY”) and KPMG Auditores Consultores Ltda (“KPMG”) as Auditors of the Com- pany, in this order of priority, but notwithstanding the recom- mendation to maintain PWC as the Audit Company for 2016. The Director’s Committee recommendation to maintain PWC as the external auditor of the Company for 2015 is based on the following reasons and fundamentals: (i) The Company has carried out a bidding process for the External Audit services for the years 2016, 2017 and 2018, which is subject for each calendar year to the de- cision of the respective LATAM Shareholders’ Meeting, all in accordance with article 5°, subsection 8° of article 50 bis under the Corporations Law No. 18,046. In this bidding process, the three firms mentioned above have participated. It is noted that for the aforementioned period, PWC was not asked to quote its external audit services for TAM S.A. and its subsidiaries. Only EY and KMPG were requested to make offers for external audit services for (a) LATAM Airlines Group S.A. and subsid- iaries (excluding TAM S.A.), (b) TAM S.A. and subsidiar- ies, and (c) LATAM Airlines Group S.A. and subsidiaries and TAM S.A. and subsidiaries. In the case of TAM S.A. The decision on the election of the external auditor for each financial year corresponds to its respective board of directors and the tender in question does not con- 53 CORPORATE GOVERNANCE | Practices template the possibility of PWC being elected as the external auditor of TAM S.A. and subsidiaries. (ii) Concerning fees and hours and resources available in relation to LATAM Airlines Group S.A. and subsidiaries (excluding TAM S.A. which has a different auditing firm), there are differences between the three audit firms suggested to the shareholders of the Company, with PWC being the lowest bid in respect of audit services for LATAM Airlines Group S.A. and subsidiaries (exclud- ing TAM S.A.). Likewise, it is considered that the profes- sional level of the auditors of the three firms would be equivalent. (iii) All three audit companies have internal control systems that make us assume an adequate and equivalent level of independence when providing an audit service. Due to the above, even though PWC has been the external auditor of LATAM Airlines Group S.A. for the last twen- ty-four years, the independence of this audit company is guaranteed through the policy defined by PriceWa- terhouseCoopers worldwide, with the change of the partner in charge each five years, which is in line with section f) of article 243 under the Securities Law No. 18,045. The current partner in charge of LATAM’s audit has been in the role for four years. (iv) The quality of services provided by PWC to LATAM Air- lines Group, doesn’t have had any observations or ob- jections from the Company’s management or its Board of Directors. (v) Since 2014, the external auditor of TAM S.A. and its subsidiaries is KPMG Auditores Independentes, being part of the KPMG global network. In this regard, TAM S.A. and subsidiaries represent an important portion of the balance sheet and financial statements of LATAM Airlines Group S.A., so there’s a second external audit firm, also among the most important worldwide, and in addition to PWC, would participate in the delivery of external audit services. (vi) The interaction and coordination between the two exter- nal audit companies PWC and KPMG for the period 2014 and 2015, as external auditors of LATAM Airlines Group and TAM S.A., respectively, has been evaluated as positive. ers’ agreement, each subcommittee will comprise two or more directors of LATAM Airlines Group and at least one of their members must be a director elected by TEP Chile S.A. (vii) On the other hand, and in accordance with the results of the aforementioned bidding process, the Board’s rec- ommendation, in accordance with the recommendation of the Directors’ Committee, to the Board of Directors of TAM S.A., consists in the designation of EY as the external auditor of TAM S.A. and subsidiaries, replacing KPMG. This in consideration of the economic offer of EY and that this would allow in the future there are three auditing firms perfectly qualified to take charge of the external audit of LATAM. IV.2 Proposal of Private Risk Rating Agencies. The Directors’ Committee in session held on April 1, 2016 and in accordance with article 2) subsection 8° of article 50 bis under the Corporations Law No. 18,046, agreed to pro- pose the Board of Directors the risk rating agencies to be suggested at the Ordinary Shareholders Meeting to be held on April 26, 2016. In this regard, the Committee agreed to propose the Board of Directors of the Company the appoint- ment of Fitch Chile Clasificadora de Riesgo Limitada and Feller-Rate Clasificadora de Riesgo Limitada. COMMITTEES OF THE BOARD OF DIRECTORS OF LATAM AIRLINES GROUP In accordance with the shareholders’ agreement of 25 Janu- ary 2012 between LATAM Airlines Group S.A. (previously LAN Airlines S.A.) and TEP Chile S.A., the Ordinary Board Session of August 3, 2012, established the following four committees to review, discuss and make recommendations to the Board about the issues related to their respective areas of responsibility: (i) Strategy Committee, (ii) Leadership Committee, (iii) Fi- nance Committee, and (iv) Brand, Product and Frequent Flyer Program Committee. In accordance with the said sharehold- The Strategy Committee will focus on corporate strategy, cur- rent strategic affairs and the three-year plans and budgets of the main business units and functional areas and high-level review strategies. The Leadership Committee will focus on areas that include group culture, high-level organizational structure, appoint- ment of the executive vice-president of LATAM Airlines Group (henceforth, “CEO of LATAM”) and those who report to this person, the philosophy of corporate compensations, struc- tures and levels of remunerations and objectives for the CEO of LATAM and other key staff, the succession or contingency plan for the CEO of LATAM and evaluation of the performance of the CEO of LATAM. The Finance Committee will focus on financial policies and strategy, capital structure, control of compliance policies, tax optimization strategy and the quality and reliability of finan- cial information. Finally, the Brand, Product and Frequent Flyer Program Com- mittee will focus on brand strategies and brand construction initiatives for corporate brands and those of the principal business units, the principal characteristics of products and services for each of the principal business units, the strategy of the Frequent Flyer Program and its key characteristics and regular auditing of the brand’s performance. In addition, by agreement of the Board of LATAM Airlines Group S.A., during the board of directors’ meeting No. 389 on June 10, 2014, a Risk Committee was formed with the pur- pose of supervising the implementation of the Risk manage- ment success factor, included in LATAM’s Strategic Plan, and particularly to oversee LATAM Airlines Group’s risk manage- ment of risks of LATAM Airlines Group and ensure a corporate risk matrix structuring. 54 CORPORATE GOVERNANCE | Practices RELATED-PARTY TRANSACTIONS PRINCIPLES OF GOOD CORPORATE GOVERNANCE On August 2, 2016, the Board of Directors of LATAM ap- proved a Related Party Transactions’ Control Policy applica- ble to LATAM and its subsidiaries, Under Chile’s Corporations Law, which establishes that all the operations of a publicly traded company with a related party must contribute to the social interest, be carried out under market conditions, in ad- dition to meeting certain requirements of prior examination by the directors’ committee, authorization by the board of directors or shareholders meeting and disclosure, which are different from those that apply to a non-listed company. This policy includes the definition by the Board of Directors of those operations that are considered habitual, which was approved in a board session dated December 29, 2009 and was informed on the same date to the SVS through material fact. Operations indicated as usual may be executed without the requirements of prior examination and approval by the Board of Directors or Shareholders Meeting. LATAM Airlines Group has carried out different transactions with its subsidiaries, including entities owned or controlled by some of its majority shareholders. In the normal course of LATAM’s business, different types of services have been provided to or received from related companies, including the rental and exchange of aircraft, cargo transportation and booking services. LATAM Airlines Group’s policy is not to carry out transactions with or for the benefit of any shareholder or Board member or with any entity controlled by these persons or in which they have a significant economic interest, except when the transaction is related to LATAM and the price and other terms are at least as favorable for the LATAM as those which could be obtained from a third party under market conditions. LATAM Airlines Group’s good corporate governance is the result of the interaction of different individuals and stakeholders. Although all employees share responsibility for compliance with the high standards of ethics and adherence to regulation established by LATAM Airlines Group’s Board of Directors, it is the Board, the Directors’ Committee and the Company’s principal executives who are primarily responsible for LATAM Airlines Group’s good corporate governance. In line with the above, LATAM Airlines Group is committed to transparency and compliance with the ethics and regulatory standards es- tablished for this purpose by its Board of Directors. PILLARS OF LATAM AIRLINES GROUP’S CORPORATE GOVERNANCE Notwithstanding the responsibilities of the Company’s Board of Directors and its Directors’ Committee, LATAM Airlines Group’s administration has also taken a number of measures to ensure due corporate governance. These include principally: 1. Publication of the Code of Conduct for LATAM Airlines Group, unique for all of the Company’s employees, which seeks to ensure that all employees adhere to the highest standards of ethics, transparency and compliance with regulation re- quired by LATAM Airlines Group. The LATAM Group has an Ethics Complaints Channel (www. etica-grupolatam.com). This facility provide employees with a direct and private online channel through which to report any concerns in the knowledge that these will be properly processed or investigated without any risk of re- prisal against the person reporting them. These transactions are summarized in the audited consoli- dated financial statements for the year ending on December 31, 2016. 2. Code of Ethics for Senior Financial Executives. This fosters honest and ethical conduct in the disclosure of financial information, compliance with regulation and avoidance of conflicts of interest. 3. Manual for Management of Market-Sensitive Information. This is required by the Superintendencia de Valores y Se- guros and, since Law Nº 20.382 on Corporate Governance came into force, also by Chilean securities market legisla- tion. LATAM Airlines Group, however, seeks to go further than these norms and regulates the criteria for disclosure of operations, periods of voluntary abstinence from the pur- chase and sale of LATAM’s shares, mechanisms for continu- ous disclosure of market-sensitive information and mecha- nisms for the protection of confidential information by the Company’s employees and executives. 4. Compliance Program. Managed by LATAM’s Compliance Area, which forms part of the Legal Vice-Presidency, in co- ordination with and under the supervision of the Board of Directors and its Directors’ Committee, this Program super- vises compliance with the laws and regulation applicable to LATAM Airlines Group’s businesses and activities in the dif- ferent countries in which it operates. CORPORATE GOVERNANCE PRACTICES On March 28, 2017, the Report on LATAM’s Corporate Practices which was approved by LATAM Airlines Group’s Board of Direc- tors and prepared in accordance with General Norm N° 385, previously N° 341, issued by the Superintendencia de Valores y Seguros (SVS) on June 8, 2015, was dispatched to this same organism. The information required under this norm is as of December 31 of each year and must be presented by March 31 of the subsequent year. The information submitted annually to the SVS shall refer to the following matters: • The functioning of the Board of Directors. • The relation between LATAM, its shareholders and the gen- eral public. • The replacement and compensation of main executives. • The definition, implementation and supervision of the com- pany internal control policies and procedures and risk man- agement. 55 CORPORATE GOVERNANCE | Property ownership structure and main shareholders Property ownership structure and main shareholders As of January 31, 2017, LATAM Airlines Group had a total of 1,585 shareholders on record and it is controlled by the Cueto Group. Table 1: January 31, 2017 Name or Business name Costa Verde Aeronautica SA 2. Qatar Airways Investments (Uk) Ltd 3. Costa Verde Aeronautica Tres SPA 4. Banco de Chile por Cuenta de Terceros No Residentes 5. J P Morgan Chase Bank 6. Inversiones Nueva Costa Verde Aeronautica Ltda 7. Banco Itau Corpbanca por Cta de Inversionistas Extranjeros 8. Axxion S.A. 9. Tep Chile S.A. 10. Inversiones Andes SPA 11. Inversiones HS SPA 12. Costa Verde Aeronautica SPA 31 de diciembre 2015 Name or Business name 1. Costa Verde Aeronautica SA 2. Tep Chile SA 3. Inversiones Nueva Costa Verde Aeronautica Ltda 4. Banco de Chile por Cuenta de Terceros No Residentes 5. J P Morgan Chase Bank 6. Banco Itau por Cuenta de Inversionistas Extranjeros 7. Axxion SA 8. Inversiones Andes SPA 9. Inversiones HS SPA 10. Larrain Vial S A Corredora de Bolsa 11. Banchile C de B S A 12. Costa Verde Aeronautica SPA Shares paid and subscribed Percentage as of Jan 31, 2017 90.427.620 60.837.452 35.300.000 28.809.081 27.608.310 23.578.077 21.481.918 18.473.333 18.342.913 17.146.529 14.894.024 12.000.000 14,9% 10,0%1 5,8% 4,8% 4,6% 3,9% 3,5% 3,0% 3,0% 2,8% 2,5% 2,0% Shares paid and subscribed Percentage as of Dec 31, 2015 90.427.620 65.554.075 23.578.077 22.557.207 21.339.756 18.653.574 18.473.333 17.146.529 14.894.024 12.986.050 12.416.588 12.000.000 16,6% 12,0% 4,3% 4,1% 3,9% 3,4% 3,4% 3,1% 2,7% 2,4% 2,3% 2,2% 1. Qatar owns 9.999999918% of total issued shares of LATAM. 56 CORPORATE GOVERNANCE | Property ownership structure and main shareholders January 31 2017 December 31 2015 Cueto Group 171.430.090 136.394.023 Qatar Airways 60.837.452 - Eblen Group 35.945.199 35.945.199 Bethia Group 33.367.357 33.367.357 Amaro Group 18.342.913 65.554.075 ADRs BDRs AFPs 27.608.310 21.339.756 - 2.418.235 117.687.316 102.265.164 Foreign Investors 61.700.947 51.909.593 Others Total 79.488.109 96.364.699 606.407.693 545.558.101 Cueto Group Qatar Airways Eblen Group Bethia Group Amaro Group ADRs BDRs AFPs Foreign Investors Others 31 enero 2017 28,3% 10,0%2 5,9% 5,5% 3,0% 4,6% 0,0% 19,4% 10,2% 13,1% 31 diciembre 2015 25,0% 0,0% 6,6% 6,1% 12,0% 3,9% 0,4% 18,7% 9,5% 17,7% 2. Qatar owns 9.999999918% of total issued shares of LATAM. Below we show the percentage controlled, directly or indirectly, by the controller and by each of its mem- bers; we also identify the natural persons that stand behind such legal persons. 1. The Cueto Group is LATAM’s controlling partner, whose property owners are: Messrs. Juan José Cue- to Plaza (one of our board members), Ignacio Cueto Plaza (LAN CEO), Enrique Cueto Plaza (LATAM CEO) and other members of this family. As of January 31, 2017 the Cueto Group owned 28.27% of LATAM’s ordinary shares of stock through the following com- panies (Table 1): Table 1 RUT Taxpayer ID N° Participant Current number of shares % 81.062.300-4 Costa Verde Aeronáutica S.A. 90.427.620 14,91% 76.116.741-3 Inversiones Nueva Costa Verde Aeronáutica Ltda. 23.578.077 76.213.859-K Costa Verde Aeronáutica SpA 76.237.329-7 Inversiones Caravia Dos y Cia. Ltda. 76.237.354-8 Inversiones Priesca Dos y Cía. Ltda. 76.237.343-2 Inversiones El Fano Dos y Cía. Ltda. 76.327.426-8 Inv. La Espasa Dos y Cia. Ltda. 76.809.120-K Inv. La Espasa Dos S.A. 96.625.340-1 Inv. Mineras del Cantabrico S.A. 12.000.000 3.553.344 3.568.352 2.704.533 252.097 32.324 13.743 76.592.181-3 Costa Verde Aeronáutica Tres SpA 35.300.000 3,89% 1,98% 0,59% 0,59% 0,45% 0,04% 0,01% 0,00% 5,82% Total GROUP 171.430.090 28,27% 57 CORPORATE GOVERNANCE | Property ownership structure and main shareholders 2. The shareholders of COSTA VERDE AERONÁUTICA S.A., are the following (Table 2): 4. The above-described INVERSIONES COSTA VERDE LIM- ITADA - LIMITED JOINT-STOCK PARTNERSHIP, (I in Table 3), has the following partnership structure (Table 4): Table 2 Shareholder Percentage Table 4 Inversiones Costa Verde Aeronáutica Limitada 77,96% Shareholder Percentage Main partner TEP Chile S.A. Inversiones Mineras del Cantábrico S.A. 21,88% 0,0001% Inversiones Costa Verde Limitada y CIA en C.P.A. 0,13% Accionistas minoritarios 0,0001% 3. In turn, the controlling company of the above-described Costa Verde Aeronáutica S.A., is COSTA VERDE AERONAU- TICS limited (A in Table 2), whose partnership structure is as follows (Table 3): Table 3 Shareholder Percentage Inversiones Costa Verde Limitada y CIA en C.P.A. 99,85% Inversiones Costa Verde y CIA Limitada Inversiones Costa Verde Limitada 0,131% 0,014% RUT Taxpayer ID N° Inmobiliaria e Inversiones El Fano Limitada Inmobiliaria e Inversiones Caravia Limitada Inmobiliaria e Inversiones Priesca Limitada Inmobiliaria e Inversiones La Espasa Limitada 8% 8% 8% 8% Inmobiliaria e Inversiones Puerto Claro Limitada 8% Inmobiliaria e Inversiones Colunga Limitada 30% Inversiones del Cantábrico Limitada 30% Enrique Miguel Cueto Plaza 6.694.239-2 Juan José Cueto Plaza Ignacio Javier Cueto Plaza Juan Jose Cueto Plaza Isidora Cueto, Felipe Cueto y María Emilia Cueto Mismos accionistas de Inv. Mineras del Cantábrico S.A. Mismos accionistas de Inv. Mineras del Cantábrico S.A. 6.694.240-6 7.040.324-2 7.040.325-0 18.391.071-K 76.180.199-6 76.006.936-1 5. With respect to INMOBILIARIA E INVERSIONES COLUN- GA LIMITADA e INVERSIONES DEL CANTÁBRICO LTDA. 100% owned by the Cueto Group, its final shareholders are Messrs.: (i) Juan José Cueto Plaza, previously identi- fied; (ii) Ignacio Javier Cueto Plaza, previously individual- ized; (i) Juan José Cueto Plaza, previously identified; (ii) Ignacio Javier Cueto Plaza, previously identified; (iii) En- rique Miguel Cueto Plaza, previously identified; (iv) María Esperanza Cueto Plaza, RUT taxpayer ID N° 7.040.325-0, (v) Isidora Cueto Cazes, RUT taxpayer ID N° 18.391.071- k; (vi) Felipe Jaime Cueto Ruiz-Tagle, RUT taxpayer ID N° 20.164.894-7 (vii) María Emilia Cueto Ruiz-Tagle, RUT taxpayer ID N° 20.694.332-7 (viii) Andrea Raquel Cueto Ventura, RUT taxpayer ID N° 16.098.115-6 (ix) Daniela Esperanza Cueto Ventura, 16.369.342-9; (x) Valentina Sara Cueto Ventura, RUT taxpayer ID N° 16.369.343-7 (xi) Alejandra Sonia Cueto Ventura, RUT taxpayer ID N° 17.700.406-5; (xii) Francisca María Cueto Ventura, RUT taxpayer ID N° 18.637.286-7; (xiii) Juan José Cueto Ven- tura, RUT taxpayer ID N° 18.637.287-5; (xiv) Manuela Cueto Sarquis, RUT taxpayer ID N° 19.078.071-6; (xv) Pedro Cueto Sarquis, RUT taxpayer ID N° 19.246.907-4; (xvi) Juan Cueto Sarquis, RUT taxpayer ID N° 19.639.220- 3; (xvii) Antonia Cueto Sarquis, RUT taxpayer ID N° 20.826.769-8 (xviii) Fernanda Cueto Délano, RUT tax- payer ID N° 18.395.657-4 (xix) Ignacio Cueto Délano, RUT taxpayer ID N° 19.077.273-k; (xx) Javier Cueto Délano, RUT taxpayer ID N° 20.086.836-6 (xxi) Pablo Cueto Délano, RUT taxpayer ID N° 20.086.837-4 (xxii) José Cueto Délano, RUT taxpayer ID N° 20.963.574-7; (xxiii) Nieves Isabel Alcaíno Cueto, RUT taxpayer ID N° 18.636.911-4; (xxiv) María Elisa Alcaíno Cueto, RUT tax- payer ID N° 19.567.835-9, and (xxv) María Esperanza Al- caíno Cueto, RUT taxpayer ID N° 17.701.730-2. 58 CORPORATE GOVERNANCE | Property ownership structure and main shareholders 6. The shareholder of Costa Verde Aeronáutica Tres SpA is 10. The partners of INVERSIONES CARAVIA DOS Y CIA. LTDA. (Table 5): Table 5 are the following (Table 9): Table 9 Shareholder Percentage Main partner Shareholder Costa Verde Aeronáutica S.A. 100% Inversiones Costa Verde Aeronáutica Limitada (77,96%) Juan José Cueto Others Percentage 99% 1% 7. The shareholders of INVERSIONES NUEVA COSTA VERDE 11. The partners of INVERSIONES EL FANO DOS Y CIA. LTDA. AERONÁUTICA LIMITADA are the following (Table 6): are the following (Table 10): Table 6 Partners Percentage Main partner Shareholder Table 10 Costa Verde Aeronáutica S.A. 99,99% Inversiones Costa Verde Aeronáutica Ltda (99,8%) Enrique Cueto Others Percentage 99% 1% Inversiones Costa Verde Aeronáutica Ltda 0,01% Inv. Costa Verde Ltda y Cia en C.P.A. 12. The partners of INVERSIONES LA ESPASA DOS Y CIA. LTDA. are the following (Table 11): 8. The shareholders of COSTA VERDE AERONÁUTICA SpA are the following (Table 7): Table 11 Partners Percentage Table 7 Shareholder Inversiones Nueva Costa Verde Aeronáutica Dos Limitada Percentage 100% 9. The partners of INVERSIONES PRIESCA DOS Y CIA. LTDA. are the following (Table 8): Inversiones La Espasa Dos S.A. María Esperanza Alcaíno Cueto Uno y Cia. Ltda. 99% 1% 13. The partners of INVERSIONES LA ESPASA DOS S.A. are the following Table 12): Table 12 Shareholder Percentage Table 8 Shareholder Ignacio Cueto Others Percentage Inmobiliaria e Inversiones La Espasa Limitada 99% 1% María Esperanza Alcaíno Cueto Uno y Compañía Limitada 99% 1% 59 INVERSIONES MINERAS DEL CANTÁBRICO LIMITADA, is a company 100% owned by the Cueto Group, and its final share- holders are the persons identified in paragraph 5 above. The rest of the shareholder base is composed of a diversity of institutional investors, legal entities and natural persons. As of January 31, 2017, 4.6% of LATAM’s property ownership was in the form of ADRs. Listed below are the controlling shareholders, other main shareholders and LATAM’s minority shareholders who, either in and by themselves or along with others with whom they have a standing joint action agreement, may designate at least one company board member, or weigh 10% or more of the com- pany’s voting shares. CORPORATE GOVERNANCE | Property ownership structure and main shareholders Shareholder Cueto Group3 Costa Verde Aeronáutica S.A. Costa Verde Aeronáutica Tres SpA Shareholding (as of January 31, 2017) Number of subscribed and paid shares 171.430.090 90.427.620 35.300.000 Inversiones Nueva Costa Verde Aeronáutica Ltda. 23.578.077 Costa Verde Aeronáutica SpA Others Qatar Airways QATAR Airways Investments (UK) LTD Amaro Group5 TEP Chile S.A. Eblen Group Inversiones Andes SpA Inversiones Andes II SpA Inversiones Pia SpA Comercial Las Vertientes SpA Bethia Grupo Axxion S.A. Inversiones HS SpA Other minority shareholders Total 12.000.000 10.124.393 60.837.452 60.837.452 18.342.913 18.342.913 35.945.199 17.146.529 8.000.000 5.403.804 5.394.866 33.367.357 18.473.333 14.894.024 286.484.682 286.484.682 Property ownership % over the subscribed and paid shares 28,3% 14,9% 5,8% 3,9% 2,0% 1,7% 10,0%4 10,0% 3,0% 3,0% 5,9% 2,8% 1,3% 0,9% 0,9% 5,5% 3,0% 2,5% 47,2% 47,2% 3 The Cueto Group, whom we also refer to as “LATAM’s Controlling Shareholders”, have executed a Shareholders’ Agreement with the controlling shareholders of LATAM, TEP Chile and TAM, whose terms and provisions are spelled out below. 4 Qatar owns 9.999999918% of total issued shares of LATAM. 5 The Amaro Group, whom we also refer to as “TAM’s Controlling Shareholders”, have executed a Shareholders’ Agreement with LATAM and its controlling shareholders, whose terms and provisions are spelled out below. 60 CORPORATE GOVERNANCE | Property ownership structure and main shareholders Following the combination with TAM in 2012, the Amaro Group, which includes the Chairman of the Board of Directors, Mauricio Amaro and the former board of directors María Clau- dia Amaro, among others, also became the principal share- holder of LATAM Airlines Group, through TEP Chile SA (Rut No. 76.152.798-3), a company wholly owned by the Amaro Group and through the majority ownership of Holdco I, which owns 100% of TAM’s common shares. During 2016, the Amaro Group decreased its stake in LATAM, being as of January 31, 2017, direct owner of 3.02% of LATAM Airlines Group common stock and 5.82% indirectly through 21.88 % ownership owned by Amaro Group in Costa Verde Aeronáutica SA, the main invest- ment vehicle of the Cueto Group in LATAM. Also in 2016, on the occasion of the capital increase approved at the Extraordinary Shareholders’ Meeting held on August 18, 2016, Qatar Airways entered the property of LATAM, holding at January 31, 2017, 10.0%6 of the total The subscribed and paid-in shares of LATAM Airlines Group through the company Qatar Airways Investments (UK) Ltd. Board’s total shares Georges de Bourguignon Arndt4 0 - Juan José Cueto Plaza5 171.430.090 28,27% N° of shares Percentage Ramón Eblen Kadis5 Carlos Heller Solari5 Juan Gerardo Jofré Maurício Rolim Amaro5 Francisco Luzón López Henri Philippe Reichstul Giles Agutter Executives’ total shares 35.945.199 33.367.357 81.882 18.342.913 0 0 0 5,93% 5,50% 0,01% 3,02% - - - Finally, we would like to point out that as of this date com- pany shareholders have not submitted any comments or pro- posals with respect to the company’s business affairs. Enrique Cueto Plaza e Ignacio Cueto Plaza5 171.430.090 28,27% Armando Valdivieso Montes 95.859 0,02% N° of shares Percentage The table below shows the number of subscribed and paid shares and the percentage shareholding in LATAM’s prop- erty ownership of each of the company’s board members and senior executives: Ramiro Alfonsín Claudia Sender Juan Carlos Menció Emilio del Real 0 0 0 0 - - - - 4. It should be noted that Georges de Bourguignon Arndt does not directly own any LATAM shares; but rather, that he is the Legal Representative of a company owned by his children that owns 3,153 LATAM shares. 5. It should be noted that Juan Jose Cueto Plaza, Enrique Cueto Plaza and Ignacio Cueto Plaza are part of the Cueto Group, Ramon Eblen Kadis is part of the Eblen Group, Car- los Heller Solari is part of the Bethia Group and Mauricio Rolim Amaro is part of the Amaro Group, since none of them own the above-mentioned shares on their own, but rather through the group in which they participate. 6 Qatar owns 9.999999918% of total issued shares of LATAM. 61 CORPORATE GOVERNANCE | Property ownership structure and main shareholders Shareholders’ Agreement Following the combination between LAN and TAM in June 2012, LAN Airlines S.A. was transformed into “LATAM Airlines Group S.A.” and TAM continues to exist as a subsidiary Hold- co I and LATAM. In order to execute this combination, TAM’s controlling shareholders created four new closely-held stock companies pursuant to Chilean law: TEP Chile, Holdco I, Hold- co II and Sister Holdco. Upon execution of the above-referred transaction, Holdco II and Sister Holdco ceased to exist. Prior to such business combination, LATAM Airlines Group and its controlling shareholders executed several shareholders’ agreements with TAM, its shareholders (acting through TEP Chile) and Holdco I, thus establishing agreements and restric- tions related to corporate governance in an attempt to bal- ance the interests of the LATAM Airlines Group, as the owner of substantially all economic rights in TAM, and TAM’s control- ling shareholders, as the continuing controlling shareholders of TAM pursuant to Brazilian law. In order to achieve these objectives, the various shareholders’ agreements prohibited undertaking certain actions and making important corporate decisions without the prior approval of a qualified majority of its shareholders and/or the Board of Directors of Holdco I or TAM. Moreover, these shareholders’ agreements also establish the parties’ covenants regarding the governance and manage- ment of the LATAM Airlines Group, subsequent to the combi- nation of LAN and TAM businesses. The LATAM Group’s governance and management Insofar as the governance and management of the LATAM Group is concerned, there are different shareholders’ agree- ments: 1. Shareholders’ agreement of the controlling group: execut- ed between the controlling shareholders of LATAM and TEP Chile, establishing agreements with respect to the corpo- rate governance, control and operation of LATAM, Holdco I, TAM and their respective subsidiaries. It also governs the votes and transfers of the ordinary shares of the LATAM Airlines Group and the voting shares of Holdco I owned by TEP Chile. 2. Shareholders’ agreement between the LATAM Airlines Group and TEP: executed between LATAM and TEP Chile; wherein, among other subject matters, it establishes agreements regarding the corporate governance, management and op- eration of LATAM. It also governs the relationships between LATAM and other LATAM Group members. 3. Shareholders’ agreement of Holdco I: executed between LATAM, Holdco I and TEP Chile establishing agreements with respect to the corporate governance, management and operation of Holdco I, as well as the votes and transfer of the voting shares of Holdco I. 4. Shareholders’ agreement of TAM: executed between LA- TAM, Holdco I, TAM and TEP Chile, establishing the agree- ments related to the corporate governance, management and operation of TAM and its subsidiaries. Following the combination of the business of LAN and TAM, the Holdco I and the TAM shareholders’ agreements establish the covenants between the parties with respect to the gover- nance and management of Holdco I, TAM and its subsidiaries (collectively, the “TAM Group”). Following are the key provisions of the Shareholders’ agree- ments referred to in paragraphs 1 and 2 above. It is impor- tant to note, however, that the rights and obligations of the members of the Controlling Group are indeed governed by the terms and conditions of such shareholders’ agreements and not by the summary of any of such agreements contained in this annual report. Board membership of the LATAM Airlines Group Mr. Mauricio Rolim Amaro was re-elected as board member of the LATAM Airlines Group in April of 2015. If Mr. Amaro abandons and leaves his position vacant for any reason whatsoever during the two-year period, TEP Chile has the right to appoint his replacement in order to complete the mentioned period. Subsequently, the Board of Directors of the LATAM Airlines Group shall appoint any of its members as Chairman thereof, in accordance with existing statutes. Maria Cláudia Oliveira Amaro was elected as board member of the LATAM Airlines Group in June 2012, and resigned her position in September 2014. On the same date, and pursu- ant to Chilean law, Henri Philippe Reichstul, was appointed by the Board to replace Maria Cláudia Oliveira Amaro until the next shareholders’ meeting that was held in Santiago, Chile on April 28, 2015, at which time he was confirmed as board member. Management of the LATAM Airlines Group In June 2012, Enrique Cueto Plaza became LATAM’s CEO (“LATAM CEO”). The position of LATAM CEO is the top-rank- ing position in the LATAM Airlines Group, who reports di- rectly to the LATAM’s Board of Directors. The LATAM CEO is in charge of overall supervision, direction and control of the LATAM Airlines Group’s business and certain other respon- sibilities set forth in the Shareholders’ Agreement of the LATAM Airlines Group and TEP. Upon the eventual depar- ture of LATAM’s current CEO, the LATAM Board of Directors will appoint his successor after receiving a recommendation from the Leadership Committee. In June 2012, Ignacio Cueto Plaza became LAN’s CEO (“LAN CEO”). The LAN CEO reports directly to the LATAM CEO and is responsible for the general supervision, direc- tion and control over the passenger and cargo operations of the LATAM Group, excluding those assumed by Holdco I, TAM and its subsidiaries, and those regarding the inter- 62 CORPORATE GOVERNANCE | Property ownership structure and main shareholders national passenger business of the LATAM Group. The LAN CEO, in conjunction with the TAM CEO, are responsible for recommending the LATAM CEO candidate to serve as head of the international passenger business of the LATAM Group (including long-haul and regional flights), who must report jointly with the LAN CEO and the TAM CEO. The key executives of the LATAM Group (in addition to the LATAM CEO and those of the TAM group) shall be appointed by and report directly or indirectly to the LATAM CEO. Ignacio Cueto is scheduled to leave his post as LAN CEO on April 15, 2017 in order to apply to LATAM’s Board of Directors and, in line with the strategy of building a simpler com- pany the position will not be replaced. The main headquarters of the LATAM Airlines Group are still located in Santiago, Chile. Following are the key provisions of the Shareholders’ agree- ments referred to in the preceding paragraphs 3 and 4. It is important to note, however, that the rights and obliga- tions of the members of the Controlling Group are indeed governed by the terms and conditions of such shareholders’ agreements and not by the summary of any of such agree- ments contained in this a. Board membership of Holdco I and TAM The shareholders’ agreement of Holdco I and the share- holders’ agreement of TAM provide, in general terms, identical board memberships and the same Holdco I and TAM CEO; whereupon LATAM appoints two board mem- bers and TAM appoints four board members (including the Chairman of the Board). Maria Cláudia Oliveira Amaro resigned from her position as board member on September 8, 2014 and in her re- placement, the Board appointed, Mr. Henri Philippe Reich- stul. TAM’s Board membership was totally renewed on April 2015. The shareholders’ agreement of the controlling group es- tablishes that the persons elected by or on behalf of LA- TAM’s controlling shareholders or TAM’s controlling share- holders, as board members of LATAM’s Board of Directors, will also serve as members of the Board of Directors of Holdco I and TAM. Management of Holdco I and TAM The affairs and day-to-day business of Holdco I shall be managed by the CEO of the TAM Group under the su- pervision of the Board of Directors of Holdco I. The af- fairs and day-to-day business of TAM will be managed by the Board of Directors of TAM under the supervision of the Board of Directors of TAM. The “TAM Board” shall be comprised of the TAM Group’s CEO, TAM’s CFO, TAM’s COO and TAM’s CCO. Currently, the position of TAM CEO is being performed by Ms. Claudia Sender. The TAM Group’s CEO will be in charge of overall supervision, direction and control over the business and operations of the TAM Group (on matters not related to the LATAM Group’s inter- national passenger business) and will perform all orders and resolutions issued by TAM board members. The initial TAM CEO, “CFO of TAM’S CFO” has been jointly appointed by LATAM and TEP Chile and any successor of the CFO shall be designated by TEP Chile from among three can- didates proposed by LATAM. The TAM COO, “TAM’s COO”, and the commercial manager of TAM, “TAM’s CCO”, shall be jointly appointed and recommended to TAM’s Board of Directors by the CEO of the TAM Group and TAM’s CFO; additionally, he/she must be approved by TAM’s Board of Directors. These shareholders’ agreements also gov- ern the composition of the board of directors of TAM’s subsidiaries. Following the combination, TAM still has its main headquar- ters located in São Paulo, Brazil. Actions requiring qualified majority votes Certain actions of Holdco I or TAM require approval by a quali- fied majority of the board or the shareholders of Holdco I or TAM; which, indeed require the approval of LATAM and TEP Chile before such actions can be carried out. Those actions requiring qualified majority votes by the boards of Holdco I or TAM are the following: ► approving the annual budget and business plan and the multi-year business (collectively known as the “Approved Plans”), and also the amendments to these plans; ► carrying out or agreeing to carry out any action that causes, or that may reasonably cause, individually or in aggregate form any capital, operational or other costs of any TAM company and its subsidiaries greater than (i) the lesser of 1% of revenues or 10% of the profits under the Approved Plans, with respect to actions affecting income statement items; or (ii) the lesser of 2% of assets or 10% of cash and cash equivalents (as defined by the IFRS) as established in the provisions of the Approved Plans and in effect, in rela- tion to actions affecting the cash flow statement; ► the creation, disposal or admission of new shareholders in one of the subsidiaries of the relevant company, except to the extent that it is expressly contemplated in the Ap- proved Plans; ► approving the acquisition, disposal, modification or en- cumbrance by any TAM company of any assets above $15 million or of any share value or securities convertible into shares of any TAM company or of the Company, except to the extent that it is expressly contemplated in the Ap- proved Plans; ► approving any investment in assets not related to the cor- porate purpose of any TAM company, except to the extent that it is expressly contemplated in the Approved Plans; ► executing any contract amount in excess of $15 million, ex- cept to the extent that it is expressly contemplated in the Approved Plans; 63 CORPORATE GOVERNANCE | Property ownership structure and main shareholders ► executing any contract related to the distribution of prof- its, company associations, business collaborations, alliance memberships, code-sharing agreements, with the excep- tion of those approved in the business plans and budget, except to the extent that they are expressly contemplated in the Approved Plans; ► setting, modifying or waiving any right or claim of a relevant company or its subsidiaries in excess of $15 million, except to the extent that it is expressly contemplated in the Ap- proved Plans; ► starting, participating in, committing or establishing any important action with respect to any litigation or legal pro- ceeding in excess of $15 million, related to the relevant company, except to the extent that it is expressly contem- plated in the Approved Plans; ► approving the execution, modification, termination or rati- fication of agreements with third parties, except to the ex- tent that they are expressly contemplated in the Approved Plans; ► approving any financial statement, modifications, or any accounting policy, regarding dividends or taxes relevant to the company; ► approving the granting of any interest of securities or guar- antees of third party obligations; ► appointing executives other than the CEO of Holdco I or the Board of Directors of TAM or re-electing TAM’s current CEO or CFO; and ► approving any voting of the relevant company or its subsid- (vi) the deadline; (vii) the change of the main headquarters of a relevant company; (viii) the composition, powers and commitments of the management of any relevant com- pany; and dividends and other distributions; Airlines Group any person designated by TEP Chile, unless TEP Chile owns enough ordinary shares of LATAM Airlines Group in order to directly elect two board members of the LATAM Airlines Group; ► approving the dissolution, settlement or liquidation of a rel- evant company; ► approving the transformation, merger, division or any type of corporate reorganization of a relevant company; ► paying or distributing dividends or any other type of distri- bution to shareholders; ► approving the issue, withdrawal or amortization of debt in- struments, shares or convertible securities; ► approving a disposal plan for the sale, encumbrance or oth- er involving 50% or more of the assets, as determined by the previous-year balance sheet of Holdco I; ► approving the disposal for the sale, encumbrance or other involving over 50% of the assets of a Holdco I subsidiary representing at least 20% of Holdco I or approving to sell, encumber or dispose of shares in a manner such that Hold- co I would lose control. ► approving the concession of interests over instruments of guarantees toward guaranteeing obligations in excess of 50% of the assets of a relevant company; and ► approving the execution, modification, terms or ratification of acts or agreements with related parties, but only in those cases in which the applicable law requires the approval of such matters. ► the parties agree to vote their ordinary LATAM Airlines Group shares to support the other parties in removing or re- placing board members or others designated by the Board of LATAM Airlines Group; ► the parties agree to consult among them and make use of their good faith efforts to achieve agreements and act jointly in all actions (except in those actions that require majority approval pursuant to the Chilean law) and be con- sidered by the Board of Directors of the LATAM Airlines Group or by the shareholders of the LATAM Airlines Group; ► the parties agree to maintain the size of the Board of Direc- tors of the LATAM Airlines Group at a total of nine (9) board members and maintain the quorum required by the major- ity of the Board of Directors of the LATAM Airlines Group; and ► in case that, after endeavoring in good faith efforts aimed at reaching an agreement with respect to any action requir- ing a qualified majority vote pursuant to the Chilean law and a period of mediation, the parties do not reach such agreement, then, TEP Chile has agreed to give its vote to the subject matter requiring a qualified majority vote as indicated by the controlling shareholders of the LATAM Air- lines Group; which we refer to as “direct vote”. iaries in their capacity as shareholders. Voting agreements, transfers and other agreements. Those actions requiring qualified majority votes by the share- holders are the following: The controlling group of LATAM and TEP Chile has agreed, in the Shareholders’ Agreement of the Controlling Group, to vote their respective ordinary LATAM Airlines Group shares as follows: The number of TEP Chile “exempt shares” means that the number of ordinary shares of the LATAM Airlines Group that TEP Chile owns immediately after the effective date in excess of 12.5% of the valid ordinary shares of LATAM Airlines Group shall be determined on the basis of a total dilution. ► approving any modification of the bylaws of any relevant company or its subsidiaries in relation to the following sub- ject matters: (i) corporate objectives; (ii) corporate equity capital; (iii) rights inherent to each class of shares and their shareholders; (iv) the powers of ordinary shareholder meet- ings or limitations to the powers of the board of directors; ► until that moment, TEP Chile sells any of its ordinary LAN shares (other than the exempt shares, as defined herein below, and owned by TEP Chile), the Controlling Group of LATAM Airlines Group will vote its ordinary LATAM Airlines Group shares to elect to the Board of Directors of LATAM The parties to the Holdco I Shareholders’ Agreement and to the TAM Shareholders’ Agreement have agreed to vote their Holdco I voting shares and TAM shares so as to make effective the agreements related to the above-discussed representa- tion of the Board of Directors of TAM. 64 CORPORATE GOVERNANCE | Property ownership structure and main shareholders Restrictions to the transfers. Pursuant to the Shareholders’ Agreement of the Controlling Group, the controlling shareholders of the LATAM Airlines Group and TEP Chile are subject to certain restrictions re- garding the sale, transfer and encumbrance of the ordinary shares of the LATAM Airlines Group and (only in the case of TEP Chile) the voting shares of Holdco I. With the excep- tion of a limited amount of the ordinary shares of the LATAM Airlines Group, neither the controlling shareholders of the LA- TAM Airlines Group nor those of TEP Chile are authorized to sell the ordinary shares of the LATAM Airlines Group, nor can TEP Chile sell its shareholding rights to Holdco I until June 2015. Subsequently, the sale of the ordinary shares of the LATAM Airlines Group by any of the parties shall be allowed, subject to (i) certain limitations of volume and frequency of such sale, and (ii) only in the case of TEP Chile, the latter company must meet certain minimum property ownership requirements. After June 2022, TEP Chile shall be entitled to sell all its shares of the LATAM Airlines Group and sharehold- ing rights over Holdco I in one block, subject to the follow- ing conditions: (i) LATAM Board’s approval of the assignee; (ii) that the sale does not have an adverse effect; and (iii) that the preferred purchase option be in favor of the control- ling shareholders of the LATAM Airlines Group; conditions to which we refer, collectively, as “block sale provisions”. An “adverse effect” is so defined in the Shareholders’ Agree- ment of the Controlling Group as a significant adverse effect in the capacity of Holdco I to receive the total benefits of the property ownership of TAM and its subsidiaries in order to operate the airline business worldwide. The controlling group of the LATAM Airlines Group has agreed to transfer all the voting shares of Holdco I acquired pursuant to LATAM’s preferred purchase option, for the same price paid for such shares. Additionally, TEP Chile is entitled to sell as of June 2015 all the ordinary shares of the LATAM Airlines Group and voting shares of Holdco I, subject to meeting the block sale clause, should a liberation event (as described previously) should oc- cur or if TEP Chile is required to exercise one or more direct- ed votes during any 24-month period in two (consecutive or not) shareholders’ meetings of the LATAM Airlines Group held at least 12 months apart, and if the LATAM Airlines Group would not have totally exercised the conversion of options described previously. A “disclosure event” will occur if: (i) there is a capital increase of the LATAM Airlines Group; (ii) TEP Chile does not exer- cise all its preferred rights granted pursuant to the applicable Chilean law with respect to the capital increase in relation to all of LATAM Airlines Group’s restricted ordinary shares; and, (iii) after completing the capital increase, the person desig- nated by TEP Chile for the voting of the Board of Directors of the LATAM Airlines Group with the collaboration of the Con- trolling Group of the LATAM Airlines Group, is not elected as board member of the LATAM Airlines Group. Additionally, after June 22, 2022 and before the capitaliza- tion date of the entire property (as described below under Section “Conversion option”), TEP Chile could sell all or part of its LATAM Airlines Group’s ordinary shares, subject to: (i) the preferred option right in favor of LATAM’s controlling shareholders; and (ii) the restrictions to the sale of ordinary shares of the LATAM Airlines Group more than once during a 12-month period. The Shareholders’ Agreement of the Controlling Group pro- vides certain exceptions to these transfer restrictions for certain pledged shares of the LATAM Airlines Group realized by the parties and for transfers to subsidiary companies, in each case open to certain limited circumstances. Additionally, TEP Chile accepted, in the Shareholders’ Agree- ment of Holdco I, not to vote its Holdco I voting shares, or take any action in support of any transfer on the part of Holdco I of shares or convertible securities into shares is- sued by them or by TAM or by any of its subsidiaries without LATAM’s prior written consent. Restrictions to TAM shares transfers In the Shareholders’ Agreement of Holdco I, LATAM agreed not to sell or transfer TAM shares to any person (other than our subsidiaries), for as long as TEP Chile owns Holdco I vot- ing shares. Without prejudice of the foregoing, LATAM shall be entitled to carry out such sales or transfers if, simultane- ously with such sales or transfers, LATAM (or its assignee) would acquire all of Holdco I’s voting shares owned by TEP Chile for an amount equal to TEP Chile’s then in effect tax- able base with respect to such shares and pay any cost in which TEP Chile might have to incur in order to carry out such sale or transfer. TEP Chile has irrevocable assigned to LATAM the assignable right to acquire all of Holdco I’s voting shares owned by TEP Chile related to such sale. Conversion option Pursuant to the Shareholders’ Agreement of the Controlling Group and the Shareholders’ Agreement of Holdco I, LATAM is unilaterally entitled to convert our non-voting Holdco I shares into Holdco I voting shares up to the maximum al- lowed by law, and to increase our representation in the Boards of Directors of both TAM and Holdco I as permitted by the Brazilian laws that govern foreign property owner- ships and by other applicable laws if the conversion would not have an adverse effect (as previously defined in the sec- tion on “Transfer Restrictions”). During or after June 2022, and after LATAM would have to- tally converted all its Holdco I non-voting shares into Hold I voting shares, as allowed by Brazilian laws and other appli- cable laws, LATAM shall be entitled to acquire all of Holdco I’s voting shares owned by TAM’s controlling shareholders for an amount equal to their taxable base with respect to such shares and pay any cost that might be incurred in order to materialize such sale; an amount to which we shall refer as “sale consideration”. If LATAM does not exercise its right to acquire such shares on a timely basis, or if, after June 2022 LATAM should be entitled, pursuant to Brazilian laws and other applicable laws, to convert all of Holdco I’s non-voting 65 CORPORATE GOVERNANCE | Property ownership structure and main shareholders Dividends In terms of dividends, the Company has established that they shall be equal to the minimum legally required; namely 30% of profits pursuant to current regulations. The foregoing is not inconsistent with the distribution of dividends over and above such mandatory minimum, in consideration of the pe- culiarities and circumstances of fact that might be perceived throughout the year. Going forward, the Company does not expect any changes in its dividend distribution policy. During the years 2014 and 2015, the Company did not show profits; consequently, no dividends were distributed. Dur- ing the year 2016, however, the Company provisioned US$ 20,766,119 associated to dividends to be payable during 2017. shares into Holdco I voting shares, and if such conversion would not have an adverse effect but we would not have ex- ercised such right fully and totally during a specific period of time, then, the controlling shareholders of TAM would be entitled to offer us their Holdco I voting shares for an amount equal to the sale price. Acquisition of TAM’s shares. The parties hereto have agreed that all acquisitions of TAM’s ordinary shares by the LATAM Airlines Group, Holdco I, TAM or any of their respective subsidiaries as of and after the effective date of business combination shall be carried out by Holdco I. Insofar as the main organs of Corporate Governance of the LATAM Airlines Group are concerned, they are: the Board of Directors and the Directors’ Committee (which, additionally, embodies the functions of Audit Committee for the pur- poses of the Sarbanes-Oxley Act of the United States of America), along with the Committees of Strategy, Finance, Leadership and Product, Brand and Frequent Flyer Program created following the association between LAN and TAM. The main powers of such corporate organs are specified below. 66 Financial Policy The Corporate Finance Department is responsible for man- aging the Company’s Financial Policy. This policy enables responding effectively to changes in conditions other than the normal business operating conditions and, thus, main- taining and anticipating a continuous flow of funds toward ensuring operational continuity. Additionally, the Finance Committee, integrated by the Ex- ecutive Vice-president’s Office and LATAM Board Members, meet periodically to review and propose to the Board of Directors the consideration and approval of topics not here- tofore regulated by such Financial Policy. The Financial Policy of the LATAM Airlines Group seeks to achieve the following objectives: ► To ensure a minimum level of operational liquidity. To preserve and maintain adequate cash flows in order to ensure operational requirements and growth. To maintain an adequate level of lines of credit with local and foreign banks in order to react before contingencies. ► To maintain an optimum level and profile of indebted- ness in a proportion considered reasonable as a function of operational growth, while bearing in mind the objec- tive of minimizing financing costs. ► To make cash surpluses yield profits, through financial investments that guarantee a risk and liquidity consis- tent with the Financial Investment Policy. ► To diminish impacts implying market risks such as fuel price changes, foreign exchange and interest rate fluc- tuations over the Company’s net margin. ► To reduce Counterpart Risks, by diversifying and limiting investments in counterpart operations. ► To maintain a visibility of the Company’s long-term fi- nancial projections, in order to anticipate situations of eventual breach of covenants (agreements), low liquid- ity, deterioration of financial ratios committed with rat- ing agencies, etc. CORPORATE GOVERNANCE | Financial Policy The Company’s Financial Policy issues guidelines and re- strictions for the handling of Liquidity and Financial In- vestment Operations, Financing Activities, and Market Risk Management. Liquidity and financial investment policy During 2016, the LATAM Airlines Group maintained ad- equate liquidity levels in order to hedge against eventual external shocks and the volatility and cycles inherent to the industry, closing as of December 2016 with a liquidity ratio of approximately 19 % over total sales. Additionally, as of the closing of the year 2016, the Company kept a commit- ted revolving line of credit for a total amount of US$ 325 million with both local as well as foreign financial institu- tions; which, by the year’s end were fully available. Additionally, during this year 2016, the Company continued to finance with its own corporate equity an important part of the advance payments associated to aircraft manufac- turing (pre-delivery payments) linked to the aircraft that LATA has ordered and will receive in the future, from both Boeing as Airbus; whose balance as of December 31, 2016 amounted to US$170 million in pre-delivery payments fi- nanced with corporate equity. During 2016, the Company managed to reduce its gross debt balance by approximately US$ 412 million, which is explained by the pre-payment of debt maturities totaling approximately US$ 1,816 million and the drawing new debt totaling US$ 1,404 million. Among the main financing ac- tivities carried out during the year 2016 is the issue of debt linked to the acquisition of aircraft and engines for approxi- mately US$ 903 million, and US$ 501 million of bank debt. With respect to the Company’s Financial Investment Policy, the objective is to centralize investment decisions so as to optimize profitability, corrected by currency risk and subject to maintaining an adequate level of safety and liquidity. 67 CORPORATE GOVERNANCE | Financial Policy Additionally, such policy seeks to manage risk through the diversification of counterparts, deadlines, currencies and instruments (securities). With respect to short-term financing, as of December 31, 2016, LATAM kept about 3% of its total debt in exporter and importer loans aimed at financing working capital re- quirements. Financing Policy The scope of LATAM’s Financing Policy is to centralize fi- nancing activities and offset the useful life of assets with the maturity of the debt. Most of the investments materialized by the LATAM Airlines Group correspond to fleet acquisition programs, which are generally financed through a combination of corporate eq- uity and long-term structured financial debt. Normally, LA- TAM finances between 80-85% of such programs with bank loans or bonds secured by export promotion agencies, while the remaining portion is usually financed with commercial loans and corporate equity. The payment terms of the different financing structures vary between 12-16 years, while the vast majority of them are at 12 years. Additionally, LATAM hires a significant per- centage of its fleet acquisition commitments through op- erational leases as an additional financial tool. With the objective of diversifying aircraft financing alter- natives, on May 29, 2015 LATAM issued and placed private debt securities denominated Enhanced Equipment Trust Cer- tificates (“EETC”) for an aggregate amount of US$ 1,020.8 million. The execution of this operation allowed financing the acquisition of eleven new Airbus A321-200, two Airbus A350-900 and four Boeing 787-9 that were delivered during 2015 and the first half of 2016. The total amount of debt securities issued during 2016 amounted to US$ 345 million. In addition, on May 18, 2016, the company executed com- mercial financing in the Senior and Junior formats for a total amount of US $ 456 million to finance the acquisition of three Airbus A350-900s and one Airbus A320neo. Another objective of the Company’s Financial Policy con- sists in ensuring a stable profile of debt and lease com- mitment maturities, including servicing the debt and paying fleet leases, which would be consistent with LATAM’s oper- ating cash flow. Market risks policy Given the nature of its operations, the LATAM Airlines Group is exposed to market risks, such as: (i) fuel price risks; (ii) rate of interest risks; and, (iii) foreign exchange rate risks. With the objective of hedging against these risks, either totally or partially, LATA operates with derivative instruments to fix or limit hikes in underlying assets. Market Risk Management is performed in an integral manner and considers the existing correlation of each exposure. In order to operate with each counterpart, the Company must have an approved line and a specific contract executed with the chosen counterpart. Such counterpart must have a Risk Classification, issued by an International Risk Classification Agency, equal or greater than an equivalent “A-“rating. i. Fuel price risks: Fuel price fluctuations significantly depend on: fuel supply and demand worldwide; the decisions adopted by the Orga- nization of Petroleum Exporting Countries (OPEP); refining capacity worldwide; maintained inventory levels; the occur- rence or lack of climactic phenomena; and, on geopolitical factors. LATAM purchases jet fuel denominated Grade 54 Jet Fuel. There is a reference index in the international mar- ket for this underlying asset; namely, the US Gulf Coast Jet 54, which was used by the LATAM Airlines Group for its 2016 hedging operations. 68 Our Fuel Hedging Policy restricts the minimum and maximum fuel range to hedge against, as a function of the capacity to pass these cost fluctuations onto prices and on the market scenario reflected in fuel prices. Additionally, it restricts the maximum hedging period and allows portfolio restructuring. With respect to fuel hedging instruments, our Policy allows contracting Swaps and Options combined. ii. Interest rate risks to the cash flow: Interest rate fluctuations depend heavily on the state of the world economy. An upward movement of long-term eco- nomic prospects pushes long-term rates upward, while an economic slowdown causes them to drop driven by market forces. However, if governmental intervention is considered, during economic contraction periods referential rates of- ten drop in order to boost aggregate demand upon making credit more available and, in turn, expanding production (in the same manner that such referential rates increase during economic expansion periods). The existing uncertainty as to how the market and govern- ments will behave and, consequently, as to how the rate of interest will fluctuate, represents a risk associated to LATAM’s variable interest rate debt and its investments. The rate of interest risk on the debt is equivalent to the risk of the future cash flows of the financial instruments, given the fluctuation of market interest rates. iii. Foreign exchange rate fluctuation risks: The functional currency used by the Parent Company is the United States Dollar (USD), in terms of the pricing of its ser- vices, the composition of its financial statement, and the ef- fects on its operating results. There are two types of foreign exchange rate risks: cash flow risks and balance sheet risks. The cash flow risk is generated as a consequence of the net position of non-USD revenue and costs. LATAM sells most of its services in USD, at prices equiva- lent to the USD and Brazilian Reals. Approximately 58% of the revenue is denominated in USD, while approximately 21% is denominated in Brazilian Reals. Most expenses are de- nominated in USD or USD equivalents, particularly fuel costs, aeronautic duties, aircraft leases, insurance, and aircraft parts and accessories. Payroll expenses are denominated in local currencies. The total percentage of USD-denominated costs is about 56%, while the approximate Brazilian-Real- denominated costs are 17%. The LATAM Airlines Group maintains the majority of its inter- national passenger and cargo business tariffs in USD. A portion of the tariffs of the international passenger business depends significantly from the Euro. In the domestic businesses, most fares are stated in local currency without any type of USD in- dexation. In the case of Ecuador’s domestic business, both its tariffs as well as its sales are stated in USD. As a result of the foregoing, LATAM is indeed exposed to the fluctuation of vari- ous currencies, mainly the Brazilian Real and the Euro. LATAM’s exposure to market interest rate fluctuation risks is mostly related to variable-rate long-term debt. In order to diminish the risk before eventual interest rate hikes, the LATAM Airlines Group maintains interest rate Swaps in effect. The LATAM Airlines Group has hedged against foreign ex- change exposure risks mainly using currency forward and option contracts. Thus, as of December 31, 2016, LATAM is mainly hedged against the Brazilian Real for US$ 60 million for the January-March 2017 period. The instruments approved by the Company’s Rate of Interest Hedging Policy are: interest rate Swaps and Call Options. On the other hand, the balance sheet risk presents itself when balance sheet entries are exposed to foreign exchange rate fluctuation risks, since such entries are stated in a monetary unit other than the functional currency. Although CORPORATE GOVERNANCE | Financial Policy LATAM is entitled to execute derivative hedging contracts against the impact of the eventual appreciation or depre- ciation of currencies with respect to the functional currency used by the parent company, during the year 2016 LATAM did not execute any hedging contract against such eventual balance sheet risk. The main mismatch factor here is generated in TAM S.A. since its functional currency is the Brazilian Real and a significant portion of its liabilities are stated in USD. At the closing of 2016, TAM entered into a derivative contract to partially hedge this balance sheet mismatch, whose net value on TAM’s bal- ance sheet amounted to approximately US$1,100 million. 69 OPERATIONS 70 OPERATIONS | International Passenger Operations Twelve new international routes during 2016 The international passenger operation considers regional flights within South America and The Caribbean, and the long-range ones between this subcontinent and the rest of the world. In 2016, the company served 50 destinations in 25 countries, with 29 regional (including four cities in the Caribbean) and 32 long-haul routes. During the year 2016, the international business continued to develop amidst a complex regional macroeconomic envi- ronment, characterized by the weak growth in the countries in which LATAM operates, added to Brazil’s second decline year, in addition to a significant devaluation of Latin Ameri- can currencies. During this period, moreover, the market was character- ized by a strong competitive pressure in the region, mostly attributable to the entry of new operators in international routes to/from Spanish-speaking countries, and by an in- creased supply in the industry in general, as a result of the adjustments introduced in Brazil and the subsequent real- location of such capacity. In order to mitigate the effects of this complex scenario, the LATAM Group intensified the downsizing of its supply of routes from Brazil to the United States, with reductions of up to 35% capacity toward the end of 2016. By contrast, it continued to boost its supply along those routes with greater demand, especially from Spanish-speaking countries, both for regional as well as long-haul flights, while also launching new routes to the United States, Europe and Africa. As a result of the reduced capacity applied by different op- erators in Brazil, added to the appreciation of currencies, mainly the Brazilian Real, market conditions indeed im- proved as of the second half of the year, which resulted in a recovery of average tariffs on international flights. Within this context, the LATAM Group remained the main operator in these regional flights, with 15 million passen- gers transported; i.e. 6.7% more than in the previous year. Of the total passengers transported in this period, 9.2 mil- lion corresponded to passengers flying regional routes and 5.9 million to passengers flying long-haul flights. Its consolidated traffic of passengers transported in inter- national flights (measured in RPK) increased 7.4% as com- pared to the previous year, while its capacity (measured in ASK) increased by 5.6%, thereby turning out a healthy oc- cupation factor of 82.6%; i.e. an increase of 1.4 percentage points in relation to 2015. The LATAM Group’s international operation has had a sig- nificant growth in recent years thanks to the delivery of a unique, improved and differentiating proposal and to the continued strengthening of the connections network; an at- tribute that is highly valued by the passengers in this type of operations. In line with its objective of consolidating its network lead- ership while offering the best connectivity to its passen- gers, in 2016 the Company opened up 12 new international routes, seven of which are regional and five long-hauls. Regional flights At the regional level, in 2016 we opened the Lima-Mon- tevideo routes, with five weekly flights; Lima-Rosario and Lima-Salta, with four and three weekly flights, respectively, thereby boosting the Peruvian capital as one of LATAM’s main hubs in the region. Along the same lines, the Com- pany announced the opening of the Lima-Cartagena de In- dias (Colombia) route as of January 2017, thus becoming the first industry operator to connect these two cities. With four weekly frequencies, this new route aims at strengthening the connectivity between Peru and Colombia; which, as of this date, has seven weekly frequencies along the Lima-Bogota route operated by LATAM Peru and 14 weekly frequencies along the Bogota-Lima route operated by LATAM Colombia. 71 OPERATIONS | International Passenger Operations Additionally, the Company announced the opening of the Lima-Mendoza (Argentina) route as of February 2017. Thus, LATAM Peru will have added nine new international destinations in just two years, expanding to 29 its network of flights and direct connections from the capital of Peru to the world. Other international routes inaugurated in 2016 are Bogota- Buenos Aires, Iquique-La Paz, Iquique-Santa Cruz and San- tiago-La Paz. On the other hand, the Company announced the beginning of direct flights between Santiago, Chile to Santa Cruz, Bolivia as of March 2017, with three weekly fre- quencies, also becoming the only airline to operate direct services between the two cities, offering greater comfort and faster travel times than any other operator. All things considered, in terms of regional routes, the Com- pany maintained its market leadership increasing its mar- ket share to 45%, measured in terms of capacity (ASK). Its main competitors on these routes are: Avianca, Aerolíneas Argentinas and GOL, which achieved a market rate of 23%, 11% and 9%, respectively, among others. Long-haul operations On long-distance routes, the Company covered 20 desti- nations as of December 2016; with the United States and Europe remaining the most relevant markets and, conse- quently, the most strategic for LATAM. During this year, the Company inaugurated five new routes, three of which are to the United States, prominent among which is a direct non-stop flight between Lima and Wash- ington. This is the only regional airline to directly connect (with three weekly frequencies) the capitals of Peru and the United States. Washington thus became the fifth destina- tion served by the LATAM Group in that country from Lima, adding to its operations in New York, Miami, Los Angeles and Orlando from where passengers can connect to over 60 cities within the United States, thanks to the agreements entered into with our partner airlines. The other two routes to the United States inaugurated during this year are: Reci- fe-Miami and Santiago-Los Angeles. Moreover, in December 2016, the Company opened a non- stop route between Lima and Barcelona, with three flights per week; an operation that complements the LATAM Group’s direct daily flights between Sao Paulo and Barce- lona, as well as its direct services from Lima, Sao Paulo, Santiago and Guayaquil (Ecuador) to Madrid, whose pas- sengers can make flight connections to/from Barcelona through Iberia, its OneWorld ally. Among the main milestones of the year stands out the opening in October of direct flights between Guarulhos (Sao Paulo) to Johannesburg, South Africa’s largest and most populated city, thus becoming the only Latin American airline connecting the region with a country of the African continent with its own flights and three weekly frequencies. With respect to flights to North America (which, in addition to the five US destinations include Cancun and Mexico City), LATAM positioned itself as the second market operator (measured in ASK) with a 20% market share, after American Airlines’ 21% and Copa’s 13%, among its main competitors. Regarding operations to Europe, the Company stood in third place, with a 13% market share (versus 12% in 2015) mea- sured in ASK; a market that is led by Air France-KLM and the IAG Group, with 21% and 19%, respectively. In terms of Oceania operations, on the other hand, LATAM consolidated itself as the main operator, expanding its market share to 44% (versus 43% in 2015), where it com- petes the Australia’s Quantas and Air New Zealand, which reached market shares of 36% and 20%, respectively. In this case, the Company flies to Auckland, Sydney, Papeete and Easter Island. It is worth noting that in 2016 LATAM announced a new direct flight between Santiago, Chile and Melbourne, Aus- tralia beginning in October 2017, thereby reinforcing its commitment to the Asia Pacific region, as well as the 72 OPERATIONS | International Passenger Operations connectivity between South America and Oceania. With a stretch of 11,000 kilometers and duration of 15 hours, this will become the longest flight in LATAM’s history. Moreover, it will become the first airline ever to link Latin American coun- tries non-stop to Melbourne, Australia’s second largest city with 4.5 million inhabitants. The Company is poised to oper- ate this route tree times per week, this becoming the second Australian city, along with Sydney, where LATAM operates (via Auckland in New Zealand). and better connection times, in addition to better prices to destinations never before flown by LATAM. These agreements deepen the relationship between the LATAM Group and the other members of OneWorld Alliance, reflecting a world- wide industry trend that took off some two decades ago. The Company expects the respective approval processes to make quick progress and soon become a reality in order to connect ever more persons from Latin America with the rest of the world and vice-versa. Additionally, in 2016 the Company continued to strengthen its commercial alliances with other Airlines, such as inter-line agreements, shared codes and its OneWorld Alliance mem- bership. In this realm, the shared code agreement entered into between LATAM Airlines Colombia and Iberia, aimed at strengthening non-stop flights to Europe, stands out. The routes offered via this agreement are: Bogota-Madrid, with seven weekly frequencies, Cali-Madrid and Medellin-Madrid, with three weekly frequencies, respectively. In this respect, however, LATAM’s most relevant and strate- gic project is its Joint Business Agreement (JBA) with Ameri- can Airlines and the International Airlines Group (for its Brit- ish Airways and Iberia airlines), which will permit to expand the Group’s international network to over 420 destinations in North America and Europe, principally, offering more flights Fleet In order to develop its international operations, in 2016 the Company used a fleet comprised of an average of 122 air- craft throughout the year. In order to serve its regional routes it operated aircraft of the Airbus A320 family. Whereas, for long-haul flights it used Boeing 767 and 787 aircraft (in their versions 8 and 9), in addition to the new Airbus A350 incor- porated to its fleet, which as of December 2016 totaled seven such units. The latter aircraft were mostly allocated to boost the routes from Sao Paulo to Miami and Orlando, in the USA, and from Sao Paulo to Madrid and Milan, in Europe. It is worth noting that in December we incorporated a third Boeing 767-300 to the fleet of LATAM Airlines Argentina (fol- lowing 10 years of work and commitment in the country), enabling it to expand its supply of flights along the Buenos Aires-Miami route, increasing such frequencies from 7 to 11 per week. In terms of service, in addition to offering flights using the most modern fleet of the continent, the Company continued to invest this year in technological platforms and/or solutions to optimize its passengers travel experience. In addition to the entertainment system which they can access using their own mobile devices during the flights, it is worth highlighting an application that affords them greater control over their trip, such as checking-in, selecting their seat, saving their boarding passes without the need to print them, checking the status of the flight and carrying a register of all their trips in their smartphones, among other options. Additionally, the LATAM Group made available to its clients yet another application permitting them to learn about the status of their flight and choose, via the airline’s website, the best rescheduling alternatives in case of delays or contin- gencies, speeding up the entire process and making it more effective. All of the above, in line with the objective of im- proving and progressively simplifying the travel experience of its passengers. 73 OPERATIONS | Brazil BRAZIL Improving connectivity from the main hubs: Sao Paulo and Brasilia With 210 million inhabitants, Brazil is by far the largest South American domestic market and the third worldwide, with more than 88 million passengers transported within the country during 2016. This is a market with low penetra- tion in air transportation and high growth potential, which is why it continues to be an opportunity for the LATAM Group. The year 2016 it was particularly complex for the trans- port of passengers in Brazil, with its economy undergoing a severe recession. As a result, the 2016 projections of the International Monetary Fund are for a 3.5% GDP slowdown, this being the first time that the country undergoes two consecutive years of economic contraction. In 2015, the drop in GDP was 3.8%, the worst performance since 1990. At the beginning of 2016 the U.S. dollar surpassed the level of R$ 4, the highest in the history of the Real Plan; how- ever, throughout the year it had a significant drop of 18%. Inflation, on the other hand, stood at 6.4%. This recession had a direct impact on commercial aviation, particularly affecting the demand for corporate passen- gers (persons travelling on business). For the LATAM Group, Brazil’s domestic operation represents approximately 43% of the total number of passengers transported; a number higher than the sum of all its local operations in the Span- ish-speaking countries where it operates. Key toward mitigating the impact of the country’s slow- down and especially the weakness of the real has been the Company’s supply discipline applied since entering Brazil in 2012; a market that is yet characterized by a situation of overcapacity. During 2016 the company continued focused on main- taining its strategic position within Brazil, enhancing con- nectivity from its major hubs, as are the Guarulhos and Brasilia terminals. In this context, during 2016 LATAM Airlines Brazil reduced its supply by 11.5%, measured in ASK (available seats per kilometer), which adds to the 2.5% decrease applied in 2015; from 1.4% in 2014 and 8.4% in 2013. On the other hand, demand decreased by 10.7% measured in RPK (rent- ed kilometers per passenger), resulting in a healthy total occupancy factor of 82.3% for the year, thus representing an advance of 0.8 percentage points when compared to the previous year. By December 2016 the company operated 44 airports, with approximately 580 daily domestic flights. With 29 million passengers transported in the year, representing a 9.7% decline when compared to 2015, the Company closed the year as the second major market operator in domestic routes -with a 35% market share, measured in RPK (pas- sengers transported per kilometer); namely, 1 percentage point less than the GOL airline; next came Blue with 17%, among the major competitors. In order to develop its domestic operations, the Company used an average fleet of 100 aircraft, which included 30 Airbus A321 -three more than in 2015- allowing it to more efficiently serve high density routes. It should be noted that the LATAM Group is currently the only operator of this type of aircraft in Brazil. Another important achievement of this year was adding the first A320neo aircraft of the Americas to the LATAM Airlines Brazil fleet, whose initial flight took place on September 19. 74 OPERATIONS | Brazil In 2016, and for the eighth consecutive year, TAM was the most recalled brand in the airlines category of the “Top of the Mind” ranking promoted by Folha de Sao Paulo newspa- per. Also for the eighth consecutive year, the company won the airline category of the 19th Edition of the ranking of the most admired companies in Brazil, in the survey carried out by Officina Sophia. Even amidst a challenging scenario, the company made great strides in the consolidation of its identity as LATAM Group; a brand that it used in its work as the official air- line of the 2016 Olympic Games (August) and the 2016 Rio Paralympics (September). The first aircraft with the new corporate image took off from Rio de Janeiro on May 2, bound for Geneva, Switzerland, to pick up the torch and convey it to the Brasilia terminal, the country’s most im- portant hub for flights to the interior of the country. Sub- sequently, the company transported the Olympic flame over eight thousand kilometers in 12 domestic flights, for 15 days, landing in 13 cities of the North, Northeast and Central-West Brazil regions, in a special operation con- ducted over an Airbus A319 aircraft. In order to meet the demand stemming from the Olympic Games, the network of flights was fitted with more than 140 additional flights, whereas during the month of August the Rio-São Paulo system operated with an occupancy factor of 81% (com- pared to 68% in same month of 2015). 75 ARGENTINA We serve 15 domestic destinations in the country With 11 years of operations in the country, LATAM Airlines Argentina has positioned itself as the second operator of that’ country’s domestic flights, in a market characterized by a strong dominance of Aerolíneas Argentinas, the state flag company, which concentrates 75% of the business. During the year 2016 the company transported 2.6 mil- lion passengers on domestic air routes, 7.0% more than in 2015, achieving a market share of 25%, with an increase of 0.6 percentage points over the previous year. The Compa- ny’s consolidated traffic, measured in passengers per kilo- meter (RPK) grew 7.2%, while its capacity (ASK) increased 5.5%, representing an occupation factor of 77.0% with an increase of 1.3 percentage points in relation to the previ- ous year. This achievement has been possible thanks to persistent work focused on providing a differentiated value proposal, incorporating the highest standards of security and quality of service. LATAM Airlines Argentina has 15 domestic destinations that connect Buenos Aires to/from the cities of Bahia Blanca, Bariloche, Comodoro Rivadavia, Cordoba, El Cala- fate, Iguazu, Mendoza, Neuquen, Río Gallegos, Rosario, Salta, San Juan, Tucuman and Ushuaia. Aiming to enhance connectivity to the interior of the country and respond to the demand, in 2016 the Company increased its daily flights from Buenos Aires to Córdoba from 5 to 6, reaching 40 weekly flights on this route; It also increased from 21 to 26 its weekly flights from Buenos Aires to Neuquén and boosted its flights to Tucumán, with three weekly flights. OPERATIONS | Argentina 76 OPERATIONS | Argentina In addition to strengthening the itineraries, check-in and preventive task processes were also strengthened to mini- mize delays, including the use aircraft access gateways (mangas) and the improvement in luggage delivery times at all airports of the country. In order to fly domestic routes, the Company used 15 Airbus aircraft of the A320 family, one more than in the previous year. These aircraft are considered the most ef- ficient in the industry for domestic operations, while offer- ing the most spacious and comfortable passenger cabin in the category. Moreover, they are all equipped with the new IFE Wireless Entertainment Service on board, allowing the traveler to access movies, music, games and information content through their own mobile devices, thus making their flying experience more enjoyable. Thanks to all these initiatives, the company was enshrined in 2016 as an aeronautical industry leader in terms of cus- tomer experience, according to the study that shows the percentage of “brand advocate persons”, which measures the relationship between customer loyalty and the cre- ation of value in the companies. LATAM Airlines Argentina operates from Buenos Aires at the Ministro Pistarini (Ezeiza) Airport and at the Aeroparque Jorge Newbery Airport, the country’s most important do- mestic terminal. The Company inaugurated its own hangar within that facility in November 2009. 77 OPERATIONS | Chile CHILE Record number of passengers transported during 2016 During the year 2016 air transport operations in Chile registered a dynamic behavior, which was reflected in the record number of passengers transported within the country, representing 10.6 million people and a growth of 9.4% (without considering Easter Island) when compared to the previous year, according to statistics prepared by the Civil Aeronautics Board (JAC, in its Spanish acronym). Although the local economy had a poor performance, with a GDP of 1.7% according to International Monetary Fund estimates, the sustained tariff reduction applied by the industry at large in recent years has been key in stimulating domestic air travel demand and, consequent- ly, increased domestic air traffic. Chile’s aero-commercial policies allow all companies to en- ter the market provided that they meet certain technical requirements, where each airline is free to develop its own business; a situation that has also allowed introducing new low-cost business models in the market, both for domestic as well as international routes. In this environment of increased competition, LATAM Air- lines Chile has remained the leading operator in domes- tic routes, thanks to its continuous efforts to offer com- petitive rates, while maintaining its differentiated service proposal focused on customer satisfaction. This is how in 2016 the company transported more than 7.8 million pas- sengers, 8.8% more than in 2015, reaching a market share of 73.1% measured in passengers carried, with a drop of 0.4 percentage points when compared to the previous year. On domestic routes it competes mainly against SKY Airlines, which this year raised its participation to 25.9%. The Company’s consolidated passenger traffic (RPK) grew 9.6% and its capacity increased 10.0% measured in ASK (seats per kilometer), as compared to the previous year; moreover, as a result of the foregoing, its average occu- pancy factor stood at 83.0%, similar to that obtained in 2015. LATAM Airlines Chile serves 16 domestic destinations (not considering Easter Island), covering the main cities from north to south such as Santiago, Arica, Iquique, Calama, Antofagasta, Copiapo, La Serena, Concepcion, Temuco, Valdivia, Osorno, Puerto Montt, Castro, Balmaceda, Puerto Natales and Punta Arenas. It should be noted that Puerto Natales, located in the southernmost part of the country, south of the Chilean Patagonia, was inaugurated in De- cember, initially with two weekly flights from Santiago and in January 2017 were expanded to four such weekly fre- quencies, which remained operational until February 2017. With the opening of this new route, the Company seeks to continue to contribute to the development of the nation and its regions, and to draw all passengers near to one of the world’s main tourist attractions, both national and in- ternational. According to National Geographic, Puerto Na- tales is the fifth most beautiful place on Earth, and more than five million people voted for it as “the eighth wonder of the world” in a survey conducted by the online travel guide Virtual Tourist. Likewise, in 2016 the company significantly increased tourist route opportunities (17% more seats than in the previous year), including flights to Arica, Iquique, Puerto Montt, Castro, Balmaceda, Puerto Natales and Punta Are- 78 OPERATIONS | Chile On its Easter Island route, on the other hand, the Company has been using its Boeing 787 Dreamliner since 2015. It should be noted that LATAM Airlines Chile’s entire fleet has been equipped with a modern on-board entertainment system upon installing, during the first quarter of the year, IFE Wireless technology in all its aircraft used to serve its domestic flights. nas. This was partly accomplished by increasing flight frequencies in these markets and also by using a greater percentage of A321 aircraft, with a capacity for 220 pas- sengers; 46 seats more than the A320. In the same vein, LATAM Airlines Chile modified its itinerary by offering a direct flight to the island of Chiloe (formerly with a stopover in Puerto Montt), reducing by more than one hour the time of travel to this island destination. In order to serve its domestic routes, the company used a fleet composed by 27 aircraft of the Airbus A320 fam- ily, two more than in the previous year. During this period, four A321 aircraft joined the fleet, completing a total of 12 aircraft of this model by the end of the year. The Airbus A321 is the largest and most modern aircraft of this fam- ily whose technology, materials and aerodynamics allow a more efficient operation, a strong reduction of CO2 emis- sions and lower fuel consumption. 79 OPERATIONS | Colombia COLOMBIA Colombia’s most punctual airline for the fourth consecutive year Colombia is Latin America’s third largest air traffic market, with a rate of 0.7 trips per capita per year; an indicator that although exceeds the average of the countries of the region where the company operates, is still quite distant from the rates experienced in developed countries such as United States and England, with two or more trips by person per year. The year 2016 posed significant challenges overall to the airline industry in Colombia, as a consequence of the in- creased value of the US dollar and of the economic slow- down in the country, compounded by an increasing com- petition that has been characterizing the market (at year’s end began to operate Wingo, a new low-cost airline owned by Copa Airlines). Even though rates have fallen 13%, the number of passengers carried on domestic flights grew 4.4 percent, evidencing a slowdown in the dynamism shown by domestic operations during the last decade, with aver- age expansion rates of 11% per year. In this scenario, LATAM Airlines Colombia continued to strengthen its value proposal focused on the client and, at the same time, on its own competitiveness and effi- ciency by reducing operating costs and passing them on to lower rates and thus maintaining sustainable levels of profitability over time. With five years of operation in the country, the Company remained during this year as the domestic market’s sec- ond airline, with 4.8 million passengers transported in domestic flights, 4.4% more than in 2015 and achieving a market share of 21.1%, measured in RPK, growing 0.7 percentage points in relation to the previous year. In domestic routes, the Company competes with the Co- lombian nation’s flag carrier, Avianca, the market leader with a market share of 58.1%, besides Viva Colombia (13.8%); Satena (3.0%); Easy Fly; and, Copa/Wingo with less than 2% each, among the top ones. LATAM Airlines Colombia serves 14 destinations in the local market, offering a wide connectivity from Bogotá and Me- dellin. In 2016, its consolidated air passenger traffic (RPK) grew 8.9% and its capacity increased by 6.8% (ASK); and, consequently its occupation factor stood at 80.3%, with an advance of 1.5 percentage points in relation to 2015. It should be highlighted that starting on July the company suspended the operation of the Cali-Medellin-Cali route that operated with two daily frequencies; however the connectivity between both cities was maintained without modifications from the city of Bogota. The decision to sus- pend this route was adopted considering the low level of passenger occupancy of these flights. Beginning in March 2017, the company will begin operating two new routes to the interior of the country, such as Cart- agena-San Andres and Medellin-Santa Marta, initially with four weekly flights in each case. In this manner, the LATAM Group seeks to strengthen the network of connections in Colombia and continue boosting demand for travelers to the North of the country, with flights connecting directly with cities other than Bogota, taking a new step toward decentralizing its domestic operations. To serve its domestic flights, in 2016 the Company used a fleet composed by 17 Airbus aircraft of the A320 family, two more than in the previous year; eight of which cor- respond to Airbus A320 and nine to Airbus A319; a model 80 OPERATIONS | Colombia that LATAM Airlines Colombia began to operate in October of 2016. All of these aircraft are equipped with a modern on-board wireless entertainment system that operates through a mobile application. In terms of service, one of the landmarks of the period is the consolidation of LATAM Airlines Colombia -for the fourth consecutive year- as the most punctual airline in the country on domestic flights, with 97.4% punctuality according to the latest airline compliance report prepared by Colombia’s civil aviation authority covering the first half of 2016. This recognition is due to the Company’s continu- ous effort toward promoting a culture of punctuality within the organization, by investing in training, technology and a modern fleet. For LATAM Airlines Colombia, punctuality is indeed an attribute that differentiates it before its clients. On the other hand, the District’s Environmental Secretariat (Secretaría Distrital de Medio Ambiente) distinguished LA- TAM Airlines Colombia as a leader in environmental man- agement and performance in Bogotá (District’s Program of Environmental Excellence – PREAD, in its Spanish acro- nym). Following a rigorous evaluation by over 100 compa- nies, the Company joined the “Environmental Excellence, generating sustainable development” level, comprised of those organizations that, in addition to complying with environmental regulations, have an environmental man- agement system in place based on continuous improve- ment permitting compliance with its environmental per- formance indicators. Along this line, and for the third consecutive year, LATAM Airlines Colombia offset the CO2 emissions of its 2015 land operations by acquiring 1,335 carbon bonds of the restoration project of degraded areas in Caceres, located in the northeast of Colombia in the Department of An- tioquia. In total, the company has offset 3,346 tons of carbon dioxide emissions that correspond to their land emissions from 2013 to 2015. 81 OPERATIONS | Ecuador ECUADOR About 1 million passengers transported During 2016, air operations in Ecuador developed in a com- plex economic environment derived mostly from the fall of petroleum prices (one of the country’s main sources of income), the valuation of the US dollar, currency devalua- tions in neighboring countries, and the devastating earth- quake that hit the country’s east coast in April. All of these shocks had a profound economic impact. Thus, the coun- try’s GDP closed the year with a 2.3% drop, according to International Monetary Fund estimates; the region’s worst economic performance after Brazil. Within this context, LATAM Airlines Ecuador transported nearly 1.0 million passengers along domestic routes; a drop of 8.3% when compared to 2015. Its consolidated traffic of passengers slowed down by 2.4%, as measured by RPK, whereas its average capacity, measured in ASK, dropped by 0.7% as compared to the previous year. Consequently, the country’s average occupation factor stood at 79.3%; a drop of 1.4 percentage points in relation to 2015. The Company began its domestic operations in Ecuador in 2009 and since then it has been progressively positioning itself as a relevant actor in the country’s domestic routes, thanks to continuous work aimed at giving its clients a dif- ferentiating value proposal in terms of service. In 2016, it achieved a market share of 30.5%, measured in ASK, with a slight increase of 0.2 percentage points with respect to the previous year. The Company’s main competitors include the country’s flag carrier, Tame, with 40.8% market share as of this closing, and Colombia’s Avianca with 28.7%. added the direct flight Quito-Baltra inaugurated in 2016, offering connectivity that seeks to promote tourism and national economic development. On the occasion of the strong earthquake that impacted the country, in April LATAM Airlines Ecuador and LATAM Airlines Cargo activated their Solidary Airplane Program which is triggered under emergency situations that require the urgent transportation of humanitarian aid. Thus, during one entire month the Company transported volunteers and more than 600 tons of humanitarian aid to earthquake- ridden zones. Moreover, the Company also activated soli- dary flights along the special Quito-Manta-Quito route for the transportation of donations and volunteers of the Quito Metropolitan District. On the other hand, the Company’s regular flights from/to Cuenca were affected toward the end of the month of April until mid-September because of the landing restriction on wet runway issued by the country’s aeronautic author- ity and by the subsequent closure of the Mariscal del Mar Airport, for one entire month, for runway repair work. This situation derived in the cancellation of nearly 149 flights, affecting LATAM and Tame; the two airlines serving Cuenca. During this period, LAM Airlines Ecuador maintained its cli- ents continuously informed and offered commercial facili- ties to affected passengers. The Company ultimately was able to renew its regular flight program on September 19, following the opening of the air terminal. LATAM Airlines Ecuador operates in five cities of the country, via the Quito-Guayaquil and Quito-Cuenca routes, Quito-Guayaquil toward the St. Christopher Islands and Baltra in the Galapagos Archipelago, to which must be Among the initiatives implemented to encourage tourism travel, the Company launched a new catalog in Alliance with national and international operators, with a broad range of tariff promotions available at travel agencies. Until December 2016 nine destinations were offered with 82 OPERATIONS | Ecuador 20 land service combinations, including lodging and routes provided by wholesale tour operators. In order to serve the domestic routes, LATAM Airlines Ec- uador used a fleet of three aircraft Airbus A319, without variations from the previous year. These aircraft are small- er in capacity, compared to the A320 and allow adapting to demand conditions in this market. Additionally, they are equipped with LATAM’s modern on-board entertain- ment system, which offers the best travel experience to passengers. In line with industry trends and the development of the digital experience at all stages of the trip, LATAM Airlines Ecuador transformed one of its commercial Quito offices into a kiosk, with three self-service modules. In each mod- ule the passengers can access www.latam.com to perform searches, book and pay tickets, manage LATAMPass ac- counts and inquire about products and services. In is worth highlighting that in 2016 LATAM Airlines Ecuador was distinguished with the eCommerce awards, as an elec- tronic commerce leader in the tourism category, an initia- tive of the eCommerce Institute co-organized by Ecuador’s Chamber of Electronic Commerce; and the eDay Award in the Large Corporations category, the latter of which is awarded by the Guayaquil Chamber of Commerce. Both distinctions confirm and consolidate the Company’s lead- ership in the field of electronic commerce. Additionally, in 2016 LATAM Airlines Ecuador became wor- thy of the Recognition for Operational Security Manage- ment awarded by Mariscal Sucre International Airport. Among others, the Company also received recognitions from Ecuador’s Red Cross and the Corps of Firefight- ers of Quito’s Metropolitan District Firefighters, both for transporting humanitarian aid to the areas affected by the earthquake as well as for transporting firefighter volunteer to such areas. 83 OPERATIONS | Peru PERU Leaders in one of the best performing economies in the region Peru once again on 2016 stood as one of the top perform- ing economies in the region, closing the year with a GDP growth of around 3.8% (versus 3.3% in 2015), according to estimates prepared by the International Monetary Fund (IMF). In this context, domestic market passenger air traffic continued to grow, reaching over 10 million persons trans- ported during the period. With its 17-year presence in Peru, the bargain air tariff model promoted by the LATAM Group as of the year 2006 has been decisive in the growth of its domestic market, which tripled during the last decade. With 6.6 million passengers transported in domestic flights (6.7% more than in 2015), LATAM Airlines Peru remained the main operator of these routes with a market share of 61.4%. Its main competitors are Peruvian Airlines and Avi- anca; which, during this period, reached market shares of 12.5% and 11.9%, respectively, followed by LC Peru with 8.4% and Star Peru with 4.5%. Its consolidated passenger traffic (RPK) grew 6.5% and its capacity (ASK) increased by 8.0% as compared to 2015; consequently, the occupation factor stood at 80.4%, with a drop of 1.2 percentage points with respect to the previ- ous year. LATAM Airlines Peru serves 17 destinations in the country, offering a varied range of daily flights aimed at meeting the demand and generating greater passenger traffic. For example, it offers 22 daily flights to Cusco, 10 to Arequipa, 6 to Piura, 5 to Iquitos, 4 to Chiclayo, Juliaca, Tarapoto and Trujillo, 3 to Tacna and Pucallpa, 2 to Ayacucho, Cajamarca, Puerto Maldonado, Tumbes and Talara. In September 2016, the Company opened up its domes- tic destination number 17 upon launching its new route to Jaen (Cajamarca province), with one daily flight from Lima. This was possible thanks to the improvements introduced by the Civil Aeronautics Board (DGAC, in its Spanish acro- nym) and Peru’s Corporation of Airports and Commercial Aviation (CORPAC, in its Spanish acronym) in this city’s air terminal located in Northeast Peru, whose touristic attrac- tion is the archaeological site of Kuelap. In this manner, the Company made progress in its objective to continue to im- prove domestic connectivity, offering more flight options to Peruvians, while contributing toward the country’s tour- ism and commercial development. In order to serve its domestic operations, it deployed a fleet of 18 Airbus aircraft of the A320 family, one more than in 2015. As part of its continued passenger service improve- ment, during this period LATAM Airlines Peru launched its projected fleet renewal plan incorporating, during the month of October, five modern Airbus A320 to replace an equal number of Airbus A319 that remained in operation to that date. With a 174-passenger seat capacity, versus 144 in the A319, these aircraft enables transporting more persons without increasing frequencies, while introducing significant advantages in terms of efficiency and passen- ger comfort. Among the most important milestones of the year, it is worth highlighting the acknowledgment obtained by LATAM Airlines Peru, for the second consecutive year, as one of “Peru’s most admired 2016 companies” (EMA, in its Spanish acronym), in its fifth edition, ranking 5th in the international ranking prepared by PwC Peru and Revista G de Gestión management journal, a distinction that corresponds to an evaluation made by 4,500 country executives (from 1,500 84 OPERATIONS | Peru companies) through a survey that determines corporate performance according to eight fundamental attributes in order to be considered of excellence. Additionally, the Com- pany was chosen among the country’s top 10 companies to work in and was ranked N°11 in the ranking of the 15 top 2016 Merco Preferred Employers (corporate reputation). Moreover, for the second consecutive year, LATAM Airlines Peru was distinguished with the award of Spain’s Co-re- sponsible Foundation (Fundación Corresponsables de Espa- ña) for its “Night Flights to Cusco with RNP (Required Navi- gation Performance) technology” project, within the scope of Corporate Social Responsibility (CSR). The RNP system applied to the Lima-Cusco route since September 2013 is an example of the Company’s ongoing revenue genera- tion practices. This technology uses advanced avionics (a discipline that studies the electronic techniques that are applied in air navigation) capacities and is supported via satellite guidance, permitting more precise routes while operating safely under low visibility conditions, avoiding flight delays and cancellations. On the other hand, for the third consecutive year, LATAM Airlines Peru became the only transportation company in the country and in South America to be distinguished as a Socially Responsible Company (ESR®), awarded by Peru’s 2021 Civil Association in Mexico’s Center for Philanthropy (CEMEFI, in its Spanish acronym). This recognition is given to companies that voluntarily and publicly undertake to apply socially-responsible management practices as part of their own corporate culture and business strategy. The company was also awarded first and second place in the Spot & Online Video category of the 2016 DIGI Awards for its “Christmas in airplane mode” and “I love you to the sky” campaigns, respectively. 85 OPERATIONS | Cargo operation CARGO We are the largest cargo operator in the region LATAM is Latin America’s largest cargo operator group, of- fering its clients the broadest connectivity between points in the region and around the world, with 139 destinations in 29 countries. The Company transports cargo in the holds (bellies) of 319 passenger aircraft and in 10 dedicated car- go aircraft (two Boeing 777-200F and eight Boeing 767- 300F, excluding aircraft leased to other operators). During the year 2016, the Company transported 944,000 tons; i.e. 6.4% less than in 2015. The supply, measured in available tons per kilometer (ATKs), dropped by 5.3% and its load factor hovered around 51.7%, with a 1.9 percent- age-point drop as compared to the previous year. These results occurred within a complex air cargo demand sce- nario worldwide, which for years now has been showing low rates of growth. In 2016, it increased by only 2.6% as com- pared to the previous year. Insofar as markets are concerned, the highly challenging economic and political conditions of the region continued to have a negative impact in the air cargo business. Al- though the flows from South America to the North benefit- ed from the strengthening of the United States’ economy, overall Latin America’s air cargo traffic dropped by 5.7%. Traffic within South America was the weakest (with an in- ter-annual contraction of 14%), with Brazil being the hard- est hit and where the amount of kilograms transported at the domestic level dropped by 12%. This impacted LATAM Cargo with a 3 percentage-point market share loss. In spite of this, the Company remained as the country’s leading op- erator in the business. structural flight supply of cargo aircraft from Europe and the United States to this South American destination, as well as in its domestic operations. With respect to Latin America’s export markets, since Chile’s salmon production was severely affected because of harmful algal blooms that increased fish mortality, this market dropped by 15% with respect to 2015. Fruit traf- fic from Chile and Argentina exhibited a healthy expansion and flowers from Colombia and Ecuador remained stable, albeit with a diminished LATAM share in such markets be- cause of changes in the Company’s strategy. The downward pressure on rates continued during this pe- riod, where yields at the global level were 4.1% lower than those in 2015, mostly as a result of the region’s oversup- ply of cargo fleet and passengers, in addition to low fuel prices. Although fuel prices increased by 48.5% throughout 2016, they remained at low levels if compared to those of the last years. The Company remained focused on strengthening its operational efficiency in order to achieve a more agile and simpler organizational structure, aimed at provid- ing a better experience to clients. Along these lines, we worked toward reducing and optimizing basic structural costs through a series of productivity initiatives, restruc- turing of the cargo fleet, third-party supplies and opera- tion support processes. In order to maximize the use of passenger aircraft holds (bellies), thereby yielding better asset profitability, LATAM Cargo continues adjusting its capacity. On the other hand, import markets continued to show weakness during 2016, mainly the cargo traffic into Brazil. In order to confront this situation, the Company reduced its During 2017, the Company will remove a Boeing 767F air- craft that was under lease, while also during the first quar- 86 OPERATIONS | Cargo operation ter of that same year it envisages removing another two Boeing 777-F cargo aircraft from its fleet. Additionally, during this period we managed to increase the productivity of our dedicated cargo fleet by leasing ser- vices to external operators, thereby improving their usage. In this same sense, the year 2016 was also successful with respect to special operations and charters, totaling 176, principally in the region. On the other hand, we developed LATAM Cargo’s new prod- uct portfolio, with an innovative proposal aligned with our clients’ needs, permitting us to deliver greater consistency and a clear promise to the market. Within this ambit, we made progress in transforming the Company’s internal pro- cesses aimed at guaranteeing compliance with our com- mitments to clients and created the Continuous Improve- ment Area in order to focus and follow up projects. At the same time, during the second half of the year we launched the Net Promoter Score (NPS) as an indicator to measure client loyalty; an initiative framed within the Company’s will to put clients and their preferences at the center of our decision-making process. All things considered, 2016 was indeed a challenging year for the LATAM Group’s cargo unit, and one in which we man- aged to ride a complex domestic and foreign context, while making progress in consolidating an integrated cargo and passenger network, strengthening connectivity, reinforcing our value proposal and portfolio of products for all clients, while continuing to optimize processes and costs in order to ensure the Company’s future competitiveness. 87 OPERATIONS | Customer Loyalty Programs CUSTOMER LOYALTY PROGRAMS More than 26 million registered members Frequent flyer programs are intended to acknowledge the loyalty of those passengers that fly the most by giving them various benefits and awards. This is a distinctive fea- ture of the LATAM Group airlines and one of the ways that companies have to thank their customer preference; one which is indeed highly valued by the passengers. was granted upon the closing of the flight and its confir- mation depended on the existence of available space). The members of LATAM Pass and LATAM Fidelidade that now have cabin upgrade coupons may access this benefit in all the flights of the Group’s airlines, regardless of the pro- gram to which they are affiliated. Within the framework of the unification process of the LATAM Brand, in 2016, the two loyalty programs offered by the Company adopted new names: LATAM Pass (for- merly, LAN Pass), and LATAM Fidelidade (formerly, TAM Fi- delidade), including improvements and more benefits that seek to contribute significantly to the LATAM Group travel experience. Additionally, current member categories were unified, leaving four unique categories for all of the Group’s affili- ates: Gold (formerly, Premium and formerly Blue); Platinum (formerly, Silver and formerly Vermelho); Black (formerly, Commodore and formerly Vermelho Plus) and Black Sig- nature (formerly Black in both programs). Moreover, these four categories retain their OneWorld equivalents; where Gold corresponds to Ruby, Platinum to Sapphire, while both Black and Black Signature correspond to Emerald. It is worth highlighting that the benefits of these four new categories will remain the same for passengers flying with the LATAM Group Airlines, as well as with the other One- World alliance members. The name change of the LATAM Group’s Frequent Flyer Program incorporates improvements, facilitates the pro- cesses of kilometer accumulation, and enables access to superior categories expanding the benefits to customers. One of the most important changes is that now members applying for a courtesy upgrade will receive confirmation of the benefit 12 hours before the flight (before, such benefit Insofar as the program’s currency is concerned, they remain unchanged; namely, LATAM Pass members will continue to accumulate kilometers while LATAM Fidelidade members will continue to accumulate points. As of the closing of the year 2016, the Company has more than 26 million registered members in its frequent flyer pro- grams; i.e. a 15.4% increase as compared to 2015; with 13.0 million members under LATAM Pass (1.9 million more than in the previous year), and 13.2 million members under LATAM Fidelidade (1.6 million more than in the previous year). In 2016, the LATAM Group had 2.3 million tickets redeemed; i.e. 31% more than the previous year. Members (million) Members (million) 88 OPERATIONS | Property, Plant and Equipment Properties, Plant and Equipment CHILE Venue BRAZIL Venue Our main facilities are located near the international Co- modoro Arturo Merino Benítez Airport. The complex in- cludes offices, conference rooms and training facilities, dining rooms and simulation cabins used for crew instruc- tion. Our corporate offices are located in a more central area of Santiago, Chile. Maintenance base Our Maintenance base is located in the grounds of the In- ternational Comodoro Arturo Merino Benítez Airport. These facilities include our aircraft hangar, warehouses, work- shops and offices, and parking space for parking up to 30 short-range aircraft or 10 long-range aircraft. Other facilities We have a flight training center right beside the Interna- tional Comodoro Arturo Merino Benítez Airport. We also developed a recreational facility for our employees, with the support of Airbus. The facility, denominated “LAN Park”, is located in an area of our property near the Inter- national Comodoro Arturo Merino Benítez Airport. TAM’s main facilities are located in São Paulo, in the han- gars located in and around the Congonhas Airport. At the Congonhas Airport, TAM leases hangars which belong to INFRAERO (Local Airport Administrator). The Services Academy is located approximately at 2.5 km from the Congonhas Airport; it is separate property owned by LA- TAM Airlines Brazil exclusively dedicated to the areas of selection, medical care, training and simulations. Maintenance base LATAM Airlines Brazil maintains offices and hangars at the Congonhas Airport, which also include the areas of aircraft maintenance and procurement and logistics of aeronauti- cal materials. In addition, LATAM Airlines Brazil has its air- craft maintenance facilities (MRO) in São Carlos (Brazil), which can serve up to eight aircraft simultaneously and comprises 22 technical component-workshops. Other facilities In Sao Paulo, LATAM Airlines Brazil has other facilities, such as the commercial center, the uniforms building, the Morumbi Office Tower and the call center building. Ad- ditionally, in São Paulo, LATAM Airlines Brazil has subsid- iaries’ offices owned by the group, such as Multiplus and LATAM Travel. 89 OTHER LOCATIONS LATAM has facilities at the Miami International Airport, rented out to them by the airport through a concession agreement. Such facilities include a corporate building of 4,150 m2, cargo holds (including a refrigeration area) of around 35,300 m2, and an aircraft parking platform of around 72,700 m2, as well as fully equipped offices. Addi- tionally, during 2015, the Company opened its first main- tenance hangar in Miami, with an area of 6,140 m2 for air- craft maintenance and adjacent infrastructure (workshop, stores and offices). The project entailed a final investment of US$ 16.4 million, funded 100% by the company. Moreover, LATAM keeps lease contracts through airport concessions, administrative and sale offices, hangars and areas of maintenance in Argentina, Colombia, Ecuador and Peru. OPERATIONS | Property, Plant and Equipment 90 MANAGEMENT 2016 91 MANAGEMENT 2016 | Industry Overview Emerging economies driving the industry During the year 2016, world economic growth was slightly lower that in 2015 due to slower growth in advanced econ- omies, mainly the United States and, to a lesser extent, the United Kingdom and the euro zone as a result of the uncertainty generated by the Brexit, while emerging econ- omies remain with growths similar to those of the pre- vious year. On the other hand, the global airline industry benefited from the fall in the fuel prices, which in January 2016 reached their lowest levels since 2003, and whose average stood at US$ 53.1/barrel (Jet Fuel), a 16.8% lower than the average price for the year 2015. In general, the year 2016 was a good year for the aeronau- tic industry, which is reflected in its 6.3% growth in pas- senger traffic during the period – surpassing the average growth of the last 10 years - while achieving historically high levels of occupancy factor, with 80.5% in 2016, which implied improvements in operational income and global industry profits, estimated at $35.6 billion (vs $35.3 bil- lion in 2015). At the domestic and regional level, we continue to see a trend toward low-cost models, where one can see a great- er segmentation of passengers according to their travel needs. Additionally, the trend toward deepening alliances and cooperation agreements between airlines around the world continues; thus enhancing passenger connectivity. With regard to the different geographical markets, the air- lines of North America are those that had the best results in terms of profits, as a result of low fuel prices, added to a strong domestic demand and the operator’s capacity discipline; all of which drove their occupation factors to the highest levels in the industry; with 83.5%. In Europe, the growth of the airline industry was hit by different terrorist attacks in the region. On the other hand, there was greater competitive pressure from regional and international airlines. Despite this, however, starting in the second half of the year, conditions improved along with better macroeconomic expectations and increases in con- sumer confidence levels; all of which led European airlines to secure profits similar to those of 2015. The Asia-Pacific region was the second region with the highest growth in terms of passenger traffic (after the Middle East), driven primarily by a higher regional traffic. The Asian airlines obtained profits lower than those of the year 2015, mainly because of the weakness of the cargo business, which began to stabilize during the second half of the year. In Latin America, during 2016, the largest economies of the region (Brazil and Argentina) showed contractions in their respective economies, which added to the weak- ness of other local markets and to the devaluation of the currencies of the region that impacted airline industry results during the year. On the other hand, starting on the second semester, a change of that trend began to be noticeable, with improvements in the results of the re- gional airlines, hand-in-hand with better macroeconomic perspectives and more appreciated currencies. Latin America was the most disciplined region in terms of ca- pacity increase (+ 1.9% YoY), mainly due to adjustments made in Brazil’s domestic and international markets. As a consequence of this, the airline industry obtained profits of $0.3 billion [thousand millions], as compared to a loss of $1.7 billion in 2015. As for the cargo business, traffic increased by 3.8%, higher than the 2.2% growth in 2015. From the second half of the year; however, the cargo business began to see an increase in demand, attributed mainly to the regions of Europe (+ 7.6%) and the Middle East (+ 6.9%) On the other hand, the cargo business in Latin America was the worst performer, showing a drop in traffic of 4.2% as a result of lower imports from Brazil. 92 MANAGEMENT 2016 | Industry Overview Given the current structure of the industry and the pros- pects of higher fuel prices, the International Air transport Association (IATA) expects a decline in profits for the global airline industry during the year 2017, reaching US$ 28.9 billion and an operating margin of 6.6% (- 1.7 per- centage points with respect to 2016). This drop would be explained by an increase in unit costs, in part by fuel prices higher than expected, and by demand growth that will fail to absorb the supply, pushing occupancy factors down. It is important to highlight that the drivers of global traffic growth in 2017 will continue to be the emerging econo- mies, mainly those of the Asia-Pacific, Middle East and Latin American regions. This trend is likely to continue for the next 20 years, due to economic growth projections in these regions and the low penetration of air transport in their countries. 93 MANAGEMENT 2016 | Regulatory Framework Regulatory Framework Below we provide a brief reference about the important ef- fects of aeronautic regulations, free competition and other type of regulations that apply in Chile. corporated into our country’s laws and regulations by the Chilean authorities. Chile’s Aeronautic Regulations Both the General Bureau of Civil Aviation (DGAC, in its Spanish acronym) as well as the Civil Aeronautics Board (JAC, in its Spanish acronym) supervise and regulate Chile’s aviation industry. The DGAC reports directly to the Chilean Air Force and is responsible for ensuring compliance of the country’s laws and regulations governing aviation. The JAC is Chile’s civil aviation authority. Primarily by virtue of Executive Order N° 2,564, that gov- erns civil aviation, the JAC regulates the allocation of do- mestic and international routes and the DGAC regulates flight operations, which include personnel, aircraft, security levels, air traffic control and airport management. We obtained and continue to have the authorization that is required by the Chilean Government to perform flight operations, including the JAC certificates and the DGAC operative and technical certificates, whose period of ef- fectiveness are subject to the continuous compliance with the statutes, rules and regulations that govern the aero- nautic industry, including any rule or regulation to be is- sued in the future. Chile is a signatory state as well as a permanent member of the International Civil Aviation Organization (ICAO), a United Nations organization established in 1947 aimed at assisting in the planning and development of international air transport. The ICAO establishes the international aeronautic indus- try’s technical guidelines; which, in turn, have been in- In the absence of an applicable Chilean standard related to security or maintenance matters, the DGAC has in- corporated most of OACI’s technical guidelines by way of references. We are certain to comply with all relevant technical guidelines. Routing Rights ► National routes Chilean Airlines are not required to obtain permits to trans- port passengers or cargo on domestic routes, but only to comply with the technical and insurance requirements es- tablished by the DGAC and the JAC, respectively. Never- theless, there are no regulatory barriers preventing foreign airlines to create a Chilean subsidiary company and en- ter the country’s domestic market via such subsidiary. On January 18, 2012, Chile’s Transportation Ministry and Eco- nomics Ministry announced that the country was adopting a unilateral open skies policy. The foregoing was subse- quently confirmed on November 2013 and remains in ef- fect to this date. ► International routes As an airline that provides services in international routes, LATAM Airlines is also subject to a number of bilateral international civil transportation agreements that estab- lish reciprocal air traffic rights between Chile and several other countries. Since there is no guarantee whatsoever that such currently existing bilateral agreements between Chile and those foreign governments will remain in effect, a modification, suspension or revocation of one or more of such international agreements could damage our opera- tions and financial results. 94 MANAGEMENT 2016 | Regulatory Framework International route rights, as well as their corresponding landing rights, are derived from a number of international transport agreements negotiated between Chile and other foreign governments. By virtue of such agreements, the government of one of such countries grants another gov- ernment the right to assign the operation of scheduled flight services between certain destinations of that coun- try to one or more of its domestic airlines. When Chile opens routes to and from foreign cities, any airline that meets the necessary requirements may bid for their use. If there is more than one bidder for a given route, then, the JAC awards it for a 5-year period via a public contest. The JAC awards grants the use of routes under the condition that the awarded bidding airline operate them continuously. Were an airline to cease to operate a given route during a 6-month period or more, the JAC is entitled to revoke its rights over such route. International routes can transfer their use without cost. In the past, generally, we have only paid nominal amounts for the right to use in- ternational routes awarded via public contests in which we were the only bidder. International Rate-Fixing Policy Chilean airlines are free to fix their own domestic and international rates without any government regulation whatsoever. In 1997, Resolution N° 496 issued by the Hon. Resolutory Commission (predecessor of the Hon. Free Competition Tribunal) approved a self-regulating tariff plan submitted by LATAM for its domestic operations in Chile. Said plan was submitted in compliance with what was ordered in 1995 by Resolution N° 445 of the Hon. Resolutory Com- mission. In general terms, according to this plan, we must ensure that the yields of routes classified as “non-com- petitive” by Resolution N° 445 do not exceed the yields of routes of a similar distance defined as “competitive” by the same resolution, and inform the JAC about tariff reduc- tions or increases in “non-competitive” and “competitive” routes, in the manner and within the deadlines indicated in the referred self-regulation plan. Aircraft Registration The Chilean Aeronautics code (CAC, in its Spanish acro- nym) governs the registration of aircraft in Chile. In order for an aircraft to be registered or remain registered in Chile, its owner must be: ► A natural person of Chilean nationality. ► A juridical person incorporated in Chile whose main legal domicile and its real and effective headquarters are in Chile, and whose majority capital is owned by natural or juridical Chilean persons, among other requirements established in article 38 of the CAC. ► The Aeronautic Code expressly entitles the DGAC to per- mit registering aircraft whose property owners are not natural or juridical Chilean persons, provided that they have a permanent commercial domicile in Chile. Aircraft owned by foreigners, but that are operated by Chileans or by an airline affiliated to a Chilean aviation entity may, likewise, be registered in Chile. The registration of any aircraft can be revoked in case of failure to comply with the registration requirements and, particularly, in the following cases: ► If its property ownership requirements are not met. ► It the aircraft does not meet any of the applicable safety requirements established by the DGAC. Prevention The DGAC requires that any aircraft operated by a Chil- ean airline is registered before the DGAC or before anoth- er equivalent entity empowered as supervisor in another 95 MANAGEMENT 2016 | Regulatory Framework country. Every aircraft must have its own airworthiness cer- tificate; whether issued by the DGAC or by another equiva- lent non-Chilean entity with supervising powers. Moreover, the DGAC does not issue a maintenance permit to a Chilean airline until the DGAC has evaluated that airline’s capacity to perform such maintenance. The DGAC renews maintenance permits annually and has in- deed approved our maintenance operations. Only such main- tenance facilities certified by the DGAC or by an equivalent non-Chilean entity with supervising powers in the country in which the aircraft is registered may perform maintenance and repair work to aircraft operating in Chile. Likewise, aircraft maintenance personnel working at such fa- cilities must be certified by the DGAC or by an equivalent non-Chilean entity with supervising powers before assuming any aircraft maintenance position. Safety The DGAC establishes and supervises the execution of safety standards and regulations in Chile’s commercial aeronautic industry. Such standards and regulations are based on the standards developed by international commercial aeronautic organiza- tions. Each of Chile’s airlines and airports must submit before the DGAC an air safety manual describing the safety proce- dures that they execute in their daily commercial aviation op- erations, as well as their personnel training procedures with respect to safety. LATAM has already submitted its air safety manual to the DGAC. Chilean airlines operating international routes must adopt safety measures pursuant to the appli- cable requirements of international bilateral agreements. Airport Policies The DGAC supervises and manages Chile’s domestic airports, including takeoff and landing charges. The DGAC proposes airport costs to be approved by the JAC, and the same are subsequently applied to all airports nationwide. Ever since the mid 90’s, a number of Chilean airports have been privatized, including Santiago’s Arturo Merino Benítez Interna- tional Airport. Airport Managers manage private airport facili- ties under the supervision of the DGAC and the JAC. Environmental and Noise Regulations There are no significant environmental standards or controls imposed on airlines applicable to aircraft nor that would af- fect us within Chile, except for the environmental laws and standards of general application. Currently, neither are there noise restriction standards applicable to aircraft within Chile. Nevertheless, Chilean authorities intend to issue environ- mental noise regulations to govern aircraft flying toward and within the country. The regulation that has been proposed will require such air- craft to meet specific noise restrictions, which the market nowadays refers to as Stage 3 Standards. Most of LATAM’s fleet already meets the proposed restric- tions; therefore, we consider that issuing such standards will not impose a significant burden to our operations. Antitrust Legislation Chile’s antitrust authority, to which we refer to as the Free Competition Defense Tribunal (formerly, the Antitrust Com- mission, and heretofore the “TDLC”), oversees antitrust affairs governed by Executive Order N° 211 of 1973 and its eventual subsequent amendments, or the Antitrust Law. The Antitrust Law forbids any entity to impede, restrict or distort free com- petition in any market or any sector of any market. The Antitrust Law forbids, additionally, any company having a dominant position in any market or that has dominates a substantial part of any market, to abuse its position. Any damaged person is entitled to file suit for damages result- ing from the non-compliance of the Antitrust Law and/or to file a claim before the Antitrust Tribunal so that the latter orders putting an end to such Antitrust Law infringement. The Antitrust Tribunal is empowered to impose a variety of sanctions to Antitrust Law violations, including the termina- tion of contracts that infringe the Antitrust Law, the dissolu- tion of companies and the imposition of penalties and daily sanctions to companies. The courts of justice may order the payment of indemnity for damages, as well as other relief measures (such as injunction) whenever appropriate. In Octo- ber 1997, the Antitrust Tribunal approved our self-regulating tariff plan. Ever since October 1997, LAN Airlines S.A. and LAN Express abide by a self-regulating plan that was amended and ap- proved by the Free Competition Tribunal in July 2005 and also in September 2011. In February 2010, the National Economic Affairs Investigation Bureau (FNE, in its Spanish Acronym) completed the investiga- tion initiated in 2007 with respect to our compliance with our self-regulating plan and no further observations were made. By virtue of Resolution N° 37/2011, issued on September 21, 2011 (the “Resolution”), Chile’s Hon. Free Competition De- fense Tribunal approved the association between LAN and TAM, imposing 14 mitigation measures to LATAM, whose scope and regulation is established in the Resolution, as sum- marized below by way of reference: 96 1. To exchange 4 pairs of daily slots at the Guarulhos Airport in Sao Paulo, to be used exclusively for servicing non-stop flights along the SCL-GRU route. 9. To express before air transport authorities their favorable opinion regarding Chile’s unilateral open skies policy for domestic air traffic by airlines of other States, without re- quiring reciprocity. between Sao Paulo and Santiago, Chile. The aforementioned conditions are consistent with the mitigation measures ad- opted in Chile by the TDLC. MANAGEMENT 2016 | Regulatory Framework 2. To extend for a 5-year period its frequent flyer program to those airlines that operate (or state their interest in op- erating) the Santiago-Sao Paulo, Santiago-Río de Janeiro, Santiago-Montevideo and Santiago-Asunción routes, that apply to LATAM for an extension of the referred program for such route(s). 3. To execute inter-line agreements along the Santiago-Sao Paulo, Santiago-Río de Janeiro, and/or Santiago-Asunción routes, with those airlines interested in operating such routes and that so request it. 4. To adhere to certain temporary capacity and supply re- strictions along the Santiago-Sao Paulo route. 5. To introduce and execute certain amendments into LA- TAM’s Self-regulatory Tariff Plan, applicable to its domes- tic operations. 6. To renounce, before June 22, 2014, to one of the two worldwide alliances that LAN and TAM belonged to prior to the date of the Resolution. 7. To adhere to certain restrictions in the execution and maintenance of code-sharing agreements (without prior consultation with the Free Competition Defense Tribunal) along certain routes and with member airlines or associ- ates of an alliance other than that to which LATAM be- longs. 8. To adhere to certain restrictions, in their future bidding contest bids, regarding 3rd, 4th and 5th freedom rights be- tween Santiago and Lima; and to renounce to four 5th free- dom frequencies to Lima. 10. To commit, in all pertinent matters, to promote the growth and normal operations of the airports of Guarulhos in São Paulo and Arturo Merino Benítez in Santiago. Additionally, the association between LAN and TAM was sub- mitted before the free competition authorities of Germany, Italy and Spain. All these jurisdictions granted their uncondi- tional approval of this operation. 11. To adhere to certain guidelines in the granting of incen- tives to travel agencies. 12. To temporarily maintain, except in cases of force majeure: i) at least 12 non-stop round-trip flights per week, direct- ly operated by LATAM, in the routes between Chile and the United States; and, ii) at least 7 non-stop round-trip flights per week, directly operated by LATAM, in the routes between Chile and Europe. 13. To adhere to certain restrictions: in the average price of passenger transport airfares, corresponding to the San- tiago-Sao Paulo and Santiago Río de Janeiro routes; and in the rates in effect and published, as of the date of the Resolution, for the transport of cargo in each of the routes between Chile and Brazil. 14. To hire an independent consultant, so that such third par- ty provides advice to the FNE for a 3-year period in the supervision of LATAM’s compliance with the Resolution. Brazil’s Administrative Council for Economic Defense (CADE, in its Portuguese acronym) unanimously approved the asso- ciation between LAN and TAM at its meeting on December 14, 2011, subject to the following conditions: (1) The new group (LATAM) must renounce to one of the two worldwide alliances in which it heretofore participated (Star Alliance or OneWorld); and, it must offer to exchange 2 pairs of slots at the Gaurulhos International Airport for them to be used by a third-party interested in offering direct non-stop flights 97 MANAGEMENT 2016 | Financial Results LATAM reports a net income of US$ 69.2 million The LATAM Airlines Group recorded an operating perfor- mance of US$ 567.9 million during 2016; an increase of 10.5% as compared to the operating performance of the year 2015. The operating margin reached 6.0%, repre- senting an increase of 0.9 percentage points with respect to the previous year. LATAM’s improved financial perfor- mance is mostly explained by a reduction of its operating costs as a result of a drop in fuel prices and cost savings initiatives carried out by LATAM. routes with less demand, such as the operations between Brazil and the United States. Moreover, the capacity of Spanish-speaking domestic markets expanded by 8.0%, boosted mostly by the Chilean and Peruvian markets. On the other hand, during 2016, we continued to downsize our operations in the Brazilian domestic market, reducing our supply for the fifth consecutive year, closing the year with a capacity 11.5% smaller than that of 2015 and leading the downsizing of capacities in that country. Total income for the year 2016 reached US$ 9,527.1 mil- lion, as compared to US$ 10,125.8 million in 2015. This 5.9% drop is explained by a 6.3% drop in passenger rev- enues and a 16.5% drop in cargo revenues, partially offset by a 39.7% increase in other revenues. Such revenue de- crease was mainly explained by a weaker macroeconomic scenario in Latin America and by the devaluation of Latin American currencies throughout the period, especially the 59% devaluation of the Argentinean Peso, the 11% de- valuation of the Colombian Peso, and 6% devaluation of the Peruvian Sol. In 2016, passenger and cargo income represented 82.7% and 11.7% of total operating revenues, respectively. The 6.3% decrease in passenger income during the year re- flects a 0.6% capacity increase, offset by a 6.9% decline in Revenue per Available Seat-Kilometer (RASK), in compari- son to 2015. The RASK reduction was the result of a 8.1% reduction in yields and an increase of 1.1 p.p. in load factor, reaching 84.2%. Yield performance continued to be affected by the weak macroeconomic scenario in South America. In terms of capacity, during the year 2016, LATAM ex- perienced a 0.6% increase, explained mostly by a 5.6% increase in the capacity of the international business, centered around strengthening the capacity of our inter- national hubs, from which we began operating new desti- nations, such as to Washington from Lima, and to Johan- nesburg from Sao Paulo, offset by a reduction of those Cargo revenues declined by 16.5% in 2016 as a result of an 8.7% decline in cargo demand and a 8.5% decrease in yields. Throughout the entire year, the demand for cargo services remained weak, especially in local markets and in Brazil’s international market, as a result of a decline in that country’s overall economic activity that directly impacted imports. To the latter, is added a drop in Chile’s exports as a result of the algae bloom affecting its salmon production. The foregoing, added to the drop in fuel prices, explains most of the downturn in the yields of the cargo business. Operating costs during the year 2016 reached US$ 8,959.2 million, a 6.8% reduction as compared to the operating costs of 2015, resulting in a 5.1% reduction in Cost of Available Seat-Kilometer (CASK) equivalent (including net financial expenses). Such cost reduction is mostly attrib- utable to the 16.8% drop in fuel prices, as well as to the re- sult of the cost reduction program driven by the Company. Fuel spending decreased by 22.4% reaching US$ 2,056.6 million, as compared to the US$ 2,651.7 million spent in 2015. Such fuel spending drop is attributable to the drop in fuel prices as well as to a 1.4% drop in fuel consumption per ASK-equivalent, as a result of the Company’s fuel ef- ficiency programs and an ever more efficient fleet. Additionally, the Company recognized a fuel hedge loss of US$ 48.1 million in 2016, as compared to the US$ 239.4 million fuel hedge loss incurred in 2015. In terms of for- 98 eign exchange hedges, the Company recognized a currency hedge loss of US$ 40.8 million in 2016, versus a gain of US$ 19.2 million in 2015. Wages and benefits declined by 5.9% in the year 2016, main- ly due to a reduction in the number of employees as com- pared to the year 2015, in line with the supply drop in Brazil, and the efficiency initiatives executed by the Company. As to its non-operating performance, the company showed a non-cash profit caused by foreign exchange rate differences amounting to US$ 121.7, mostly attributable to the appreciation of the Brazilian Real during the year, as compared to the US$ 467.9 million loss acknowledged in the previous fiscal year. In cumulative terms, LATAM recorded a net profit at- tributable to its controllers totaling US$ 69.2 million, as compared to the net loss of US$ 219.3 million incurred in 2015. The foregoing entails a positive net margin of 0.7%, which represents an increase of 2.9 percentage points, as compared to the net margin of the year 2015. REVENUE Passenger Cargo Other TOTAL OPERATING REVENUE EXPENSES Wages and Benefits Aircraft Fuel Comissions to Agents Depreciation and Amortization Other Rental and Landing Fees Passenger Services Aircraft Rentals Aircraft Maintenance Other Operating Expenses TOTAL OPERATING EXPENSES OPERATING INCOME Operating Margin Interest Income Interest Expense Other Income (Expense) INCOME BEFORE TAXES AND MINORITY INTEREST Income Taxes INCOME BEFORE MINORITY INTEREST Attributable to: Shareholders Minority Interest NET INCOME Net Margin Effective Tax Rate EBITDA EBITDA Margin EBITDAR EBITDAR Margin MANAGEMENT 2016 | Financial Results For the twelve month period ended December 31 2016 2015 % Change -6,3% -16,5% 39,7% -5,9% -5,9% -22,4% -11,1% 2,8% -2,9% -3,0% 8,3% -16,3% 10,9% -6,8% 10,5% 0,9 pp -0,2% 0,7% -108,9% -176,7% -191,5% -161,9% 7.877.715 1.110.625 538.748 8.410.614 1.329.431 385.781 9.527.088 10.125.826 -1.951.133 -2.072.805 -2.056.643 -2.651.067 -269.296 -960.328 -302.774 -934.406 -1.077.407 -1.109.826 -286.621 -568.979 -366.153 -295.439 -525.134 -437.235 -1.422.625 -1.283.221 -8.959.185 -9.611.907 513.919 5,1% 75.080 -413.357 -532.757 -357.115 178.383 -178.732 567.903 6,0% 74.949 -416.336 47.358 273.874 -163.204 110.670 69.220 41.450 69.220 0,7% -59,6% -219.274 -131,6% 40.542 2,2% -219.274 -131,6% -2,2% -50,0% 2,9 pp -9,6 pp 5,5% 1,7 pp. 6,3% 2,5 pp. 99 1.528.231 1.448.325 16,0% 14,3% 2.097.210 1.973.459 22,0% 19,5% SYSTEM ASKs-equivalent (millions) RPKs-equivalent (millions) Overall Load Factor (based on ASK-equivalent)% Break-Even Load Factor (based on ASK-equivalent)% Yield based on RPK-equiv (US Cent) Operating Revenues per ASK-equiv (US Cent) Costs per ASK-equivalent (US Cent) Costs per ASK-equivalent ex fuel (US Cents) Fuel Gallons Consumed (millions) Fuel Gallons Consumed per 1,000 ASKs-equivalent Fuel Price (with hedge) Fuel Price (without hedge) Average Trip Length (km) Total Number of Employees (average) Total Number of Employees (end of the period) PASSENGER ASKs (millions) RPKs (millions) Passengers Transported (thousands) Load Factor (based on ASKs) % Yield based on RPKs (US Cents) Revenues per ASK (US cents) CARGO ATKs (millions) RTKs (millions) Tons Transported (thousands) Load Factor (based on ATKs) % Yield based on RTKs (US Cents) Revenues per ATK (US Cents) MANAGEMENT 2016 | Financial Results For the twelve month period ended December 31 2016 2015 Var. % 205.538 150.110 208.723 151.478 73,0% 71,2% 6,0 4,4 4,52 3,52 72,6% 71,3% 6,4 4,7 4,77 3,50 1.185,5 1.221,1 5,8 1,7 1,6 1,7 49.619 45.916 134.968 113.627 66.960 84,2% 6,9 5,8 6.704 3.466 944 51,7% 32,0 16,6 5,9 2,2 2,0 1,6 52.887 50.413 134.167 111.510 67.835 83,1% 7,5 6,3 7.083 3.797 1.009 53,6% 35,0 18,8 -1,5% -0,9% 0,5 pp -0,1 pp -6,9% -6,3% -5,1% 0,8% -2,9% -1,4% -22,9% -17,6% 3,2% -6,2% -8,9% 0,6% 1,9% -1,3% 1,1 pp -8,1% -6,9% -5,3% -8,7% -6,4% -1,9 pp -8,5% -11,7% * Fuel Gallons Consumed per 1,000 ASKs-equivalent 100 MANAGEMENT 2016 | Financial Results Thousands of US$ Peru Argentina U.S.A Europe Colombia Brazil Ecuador Chile Asia Pacífico & Other Latin America For the twelve month period ended December 31 2016 2015 Var. % 627.215 1.030.973 933.130 714.436 343.001 681.340 979.324 1.025.475 723.062 353.007 2.974.234 3.464.297 198.171 238.500 1.512.570 1.575.519 654.610 699.521 -7,9% 5,3% -9,0% -1,2% -2,8% -14,1% -16,9% -4,0% -6,4% 101 MANAGEMENT 2016 | Awards and Recognitions Our most outstanding awards The companies that belong to the LATAM Airlines Group received around 20 awards in various fields: services, sus- tainability, and on-board entertainment, among others. The following are the most notable recognitions received by the LATAM Group during the year 2016: 2016 Corporate transparency report – IdN ► LATAM: First place in the “Most transparent company in the services sector” category for Open Stock Companies (corporations). ► LATAM: Third place in the “2016 Best practices” category SERVICE AWARDS World Line Airline Awards- Skytrax 2016: It is the most recognized award in the industry. ► LAN: First place in the “Best airline in South America” category. ► TAM: Fourth place in the “Best airline in South America” for Open Stock Companies (corporations). OTHER AWARDS Most admired companies (2016 EMA) – “G for Manage- ment” and PwC. ► LATAM: Outstanding commercial strategy. category ► LAN: Second place in the “Best service in South America” Merco companies and Leaders Chile – 7th Edition. ► LATAM: Second place in the “Best corporate reputation” category. category. ► TAM: Fourth place in the “Best service in South America” category. 2016 Global Traveler’s - Tested Reader Survey awards ► LATAM: First place in the “Best airline to South America” category (for the third consecutive year). SUSTAINABILITY AWARDS 2016 Dow Jones Sustainability Index: ► Third year in the “DJSI World” category. Alas20 (Wings 20) Company award: ► First place in the “Leader in sustainability” category. ► Second place in the “Leader in sustainability” category. IF Design Awards - World Design Guide: One of the most prestigious international design awards. ► LATAM and Interbrand: First place in the “New Brand Identity” category for the creation of the new LATAM Brand. E Commerce Awards 2015: The most important e-com- merce sector award. ► LAN CL: “e-Commerce leader in the tourism industry”. ► LAN PE: “e-Commerce leader in the tourism industry”. ► LAN EC: “e-Commerce leader in the tourism industry”. 2016 Fohla Top of Mind award (BR): ► TAM: Most recalled brand in the airline category (eighth consecutive occasion). Peru 2021 - Socially responsible company distinction- ► LATAM: distinguished for assuming a sustainable and re- sponsible competitiveness culture. Hall of Fame (Valora Group): Great Chilean Brand distinc- tion, because of its relevance abroad. Revista Capital ► Second place in the “ISC Corporate sustainability” index. 102 MANAGEMENT 2016 | Material Facts Material Facts JANUARY 15 / CONTRACT EXECUTION OR RENEWAL 1. LATAM announces to have executed two independent commercial agreements. On the one hand, with British Airways and Iberia airlines of the International Airlines Group S.A. (”IAG”) and, on the other hand, with American Airlines. These agreements represent an intensification of LATAM’s collaboration with the members of the One- World Alliance. 2. These agreements will bring about important benefits to passengers and clients upon expanding the number of destinations available, providing access to more conve- nient prices, improving the travel experience by delivering more itinerary options with reduced connection times, while increasing the potential of opening up new routes and more direct flights to new destinations or currently operated by the mentioned airlines. These new services and options will also be made available to LANPASS and TAM Fidelidade frequent passengers. These agreements will also benefit South America upon improving its con- nectivity to/from the region to the world, boosting tour- ism and business travel 3. The mentioned agreements follow a worldwide indus- try trend, consisting in deepening collaboration between inter-alliance airlines, which most of the world’s main Airlines have already executed. 4. The commercial agreement with British Airways and Iberia will include managing the operation of the routes between Europe and all the countries that operate these airlines in South America. 5. On the other hand, the agreement with American Air- lines will include the flights between the United States of America and Canada and six South American coun- tries; namely, Brazil, Chile, Colombia, Paraguay, Peru and Uruguay. 6. These two LATAM agreements with OneWorld members will allow, on the one hand, that the airlines that are part of the LATAM Airlines Group, British Airways and Iberia, manage the networks between South America and Eu- rope; and, in case that the same airlines of the LATAM Airlines Group and American Airlines manage certain routes between South America and the United States / Canada. 7. These agreements are of a commercial nature; they do not involve any shareholding in LATAM nor imply any management change whatsoever in any of the airlines that comprise the LATAM Group. After its execution, each airline maintains its brand and operations independently as well as their control over their own flights. 8. The execution of these commercial agreements is sub- ject to their approval by the pertinent authorities in the different countries in which the airlines that are part of such agreements operate; a process estimated to take anywhere between 12 to 18 months. Likewise, upon obtaining such approvals, each commercial agreement must be executed by their respective parties within the deadlines established to that effect and subject to completion of the commercial agreements in all pending aspects contemplated therein. MARCH 8 / OTHERS On this date, and without prejudice of the delivery of the corresponding financial statements within the applicable deadlines to that effect, the Directors’ Committee and the Board of Directors of LATAM Airlines Group S.A., has ap- proved the publication, by way of an Essential Fact, the financial information attached to this communication. This corresponds to a summary of the financial informa- tion taken from the company’s Financial Statement and the Consolidated Balance Sheet, which will also incorporate a qualitative analysis of the company’s operating perfor- 103 MANAGEMENT 2016 | Material Facts mance both during the year as during the fourth quarter of the year ended on December 31, 2015. LATAM Airlines Group S.A. is providing this financial infor- mation to its shareholders, investors and market in general in order to deliver truthful, sufficient and timely advance in- formation, prior to releasing the respective financial state- ments pursuant to the deadlines applicable to that effect. Finally, it is here stated for the record that this financial information does not in any way replace or modify the cor- responding financial statements of the company, which shall be released for the purposes of the year 2015 within the deadlines prescribed by the regulations issued by the Superintendence for Securities & Insurance. MARCH 21 / EXTRAORDINARY SHAREHOLDERS’ MEETING, SUMMONS, AGREEMENTS AND PROPOSALS. At the Ordinary Shareholders’ Meeting held on March 21, 2016, the Board of Directors of LATAM Airlines Group S.A. (hereinafter, the “Company”), Securities Register No. 306, agreed to summon to an Ordinary Shareholders’ Meeting to be held on April 26, 2016 at 10:00 hours, in order to discuss the following agenda: a) To approve the Company’s Balance Sheet and Financial Statements, corresponding to the year ended on Decem- ber 31, 2015; b) To determine the remuneration of the Company’s Board of Directors; c) To determine the remuneration of the Company’s Direc- tors’ Committee and its budget; d) To designate the Company’s external auditors; Risk Classification Agency; and, to report about those topics referred to under Title XVI of Law N° 18,046 on Corpo- rations. e) To inform about the cost of processing, printing and delivering the information referred to under Circular Letter N° 1.816 of the Superintendence for Securities & Insurance; f) To designate the newspaper in which to make the publi- cations of the Company; and, g) Other topics of corporate interest incumbent upon the Company’s Ordinary Shareholders’ Meeting. APRIL 5 / OTHERS a) The Securities Commission (CVM, in its Portuguese ac- ronym) of the Republic of Brazil, authorized on Febru- ary 2, 2016 via Official Memorandum N° 70/2016-CVM/ SRE/GER-2, the termination of the Brazilian Depositary Receipts (“BDRs”) program of the LATAM Airlines Group S.A., which is to be executed pursuant to the procedure approved by said authority in the above-cited Official Memorandum (hereinafter, the “Termination Procedure”). b) The Company reported on February 5, 2016, as market interest information, the CVM’ approval of the project under evaluation to discontinue the BDR program, noting that such project should in the future be subjected to the consideration of the Company’s Board of Directors. c) The Board of Directors of the LATAM Airlines Group S.A. approved as of this date to terminate the BDR program registered before the CVM, pursuant to the above-de- scribed Termination Procedure and, consequently the termination of its registration as foreign securities issuer before the CVM; all of it pursuant to the regulations of applicable in the Republic of Brazil. LATAM’s Board of Directors calls the attention to the fact that the forego- ing does not affect the LATAM Airlines Group’s long-term commitment with Brazil. d) It is here stated for the record that each such BDR cer- tificate represents one (1) common share (equity shares) 104 MANAGEMENT 2016 | Material Facts of the LATAM Airlines Group S.A. and that as of March 31, 2016 the BDR program represented 0.44% of all the shares of shares issued by the Company. e) Therefore, as of this date and for a 30-day period beginning on this date, BDR holders shall have the following options: i. To adhere to the so-called “Sale Facility” procedure; or, ii. To maintain their ownership title over LATAM Airlines Group S.A.’s common shares underlying the respective BDR. f) If a BDR holder does not state the option to which it ad- heres pursuant to the Procedure; then, for all purposes, it shall be understood to adhere to the so-called “Sale Facil- ity” procedure. g) The “Sale Facility” procedure is executed by selling the un- derlying BDR common shares (the “Common Shares”) at the Santiago Stock Exchange. Those BDR holders to manifest their intention to remain the property owners of the respec- tive Common Shares shall become shareholders of the LA- TAM Airlines Group S.A. by conveying such shares to a stock broker or custodian in Chile, pursuant to instruction to be executed subject to compliance with the terms and condi- tions set forth in the Cancellation Procedure. h) Attached is a copy of the free translation into Spanish of the corresponding Essential Fact (“Fato Relevante”) forward- ed to the CVM as of this same date. It is here stated for the record that the notification to BDR Holders reporting the cancellation of the BDR program of LATAM Airlines Group S.A. as well as the instructions, terms and conditions ap- plicable to the same, shall be communicated to the CVM on April 6 of the present year and published in Brazil by LATAM Airlines Group S.A. on April 7, 2016 in the Official Gazette of the State of Sao Paulo and in the LATAM website: http:// www.latamairlinesgroup.net . i) Finally, we hereby state for the record that BDR are foreign securities that are not registered with the Superintendence for Securities & Insurance. MAY 23 / OTHERS a) On April 5, 2016, LATAM reported, as an Essential Fact, the cancellation procedure of the Brazilian Depositary Receipts (BDR) program of the LATAM Airlines Group S.A., which must be executed according to the procedure approved and described in such communication (hereinafter, the “Cancel- lation Procedure”). b) According to the Cancellation Procedure, whose general terms were published by LATAM on April 7, 2016 in: the Offi- cial Gazette of the State of Sao Paulo, in Economic Value, and in LATAM’s website: http://latamairlinesgroup.net (herein- after, the “Notification”), May 9, 2016 was the deadline for BDR holders to state their option to keep the underlying common stock of such BDR (the “Shares”) and, on May 23, 016, BM&FBOVESPA blocked the respective balances of those BDR that opted in favor of adhering to the sale procedure of the Shares at the Santiago Stock Exchange, through the so-called Sale Facility. c) In tandem with such blockage, a theoretical sale value was attributed in Brazil to the sale of the Shares at the San- tiago Stock Exchange in the amount of $4,333,80 (four thousand three hundred and thirty three pesos and eighty cents, of Chile’s legal currency), corresponding to the mar- ket value of such Shares as of May 23, 2016, equivalent in Brazilian Reals to R$22,25 (Twenty-two reals and twenty- five cents, of Brazil’s legal currency) per Share, converted on the basis of the PTAX rate of foreign exchange, which is defined as the average foreign exchange sale rate in the foreign exchange market in effect on May 23, 2016; an average that is released electronically by Brazil’s Central Bank via the internet. d) Additional information and instructions regarding the Can- cellation Procedure may be obtained from the Essential Fact of last April 5 and the Notification. e) Finally, LATAM informs that the next Essential Fact regard- ing the Cancellation Procedure is scheduled to be published on June 9, 2016, in order to report about: the total amount of Shares sold in Chile according to the so-called Sale Facility; the average Chilean-peso price of each BDR; the payment date to BDR holders; and the final price in Reals (Brazil’s legal currency) payable for each BDR, among other relevant information with respect to the sale of the Shares. JUNE 7 / CHANGES IN MANAGEMENT On this date, the Board of Directors accepted the resignation submitted by Mr. Ricardo J. Caballero as Board Member, con- sidering that he has assumed new functions in his country of residence; namely, the United States of America, that prevent him from discharging his duties as LATAM Board Member. For the time being, the Board did not agree to appoint a replace- ment, which could take place during the next Board Meeting, Likewise, the entire Board of Directors must be renewed at the Company’s upcoming Ordinary Shareholders’ Meeting. JUNE 9 / OTHERS a) On April 5, 2016, LATAM reported, as an Essential Fact, the cancellation procedure of the Brazilian Depositary Receipts (BDR) program of the LATAM Airlines Group S.A., which must be executed according to the procedure approved and described in such communication (hereinafter, the “Cancel- lation Procedure”). b) According to the Cancellation Procedure, whose general terms were published by LATAM on April 7, 2016 in: the Offi- cial Gazette of the State of Sao Paulo, in Economic Value, and in LATAM’s website: http://latamairlinesgroup.net (herein- after, the “Notification”), May 9, 2016 was the deadline for BDR holders to state their option to keep the underlying common stock of such BDR (the “Shares”) and, on May 23, 016, BM&FBOVESPA blocked the respective balances of those BDR that opted in favor of adhering to the sale procedure of the Shares at the Santiago Stock Exchange, through the so-called Sale Facility. 105 MANAGEMENT 2016 | Material Facts c) On May 24, 2016, LATAM reported, as an Essential Fact, oc- curring last May 23, of the deadline for BDR holders to state their option to keep the Shares and of the blockage on that same date on the part of BM&FBOVESPA of the respective Share balances of those BDR holders that opted in favor of adhering to sell their Shares through the procedure so- called Sale Facility, assigning them to that effect a theoreti- cal sale value at the Santiago Stock Exchange. d) On this same date, we hereby report that BTG Pactual Chile S.A. Corredores de Bolsa stock brokerage company (“BTG Pactual Chile”), a Chilean institution contracted by the Com- pany to that effect, sold at the Santiago Stock Exchange the Shares of the respective holders who had adhered to the Sale Facility procedure. e) In that sense, on June 2, 2016, via an auction sale at the Santiago Stock Exchange, were sold 672,500 (six hundred seventy-two thousand five hundred) Shares at an average price of $4,150.038 (four thousand one hundred and fifty pesos and zero-thirty-eight cents, legal currency in Chile) per Shares, equivalent in reals to R$20.528003378 (twenty reals and five-two-eight-zero-zero-three-three-seven- eight cents, legal currency in Brazil) per Shares, converted on the basis of the purchasing rate of the foreign currency exchange market of June 8, 2016; that being the price per BDF payable by the respective holders. The payment shall be made on July 16, 2016, via a transfer from Itaú Corretora de Valores S.A. (“Itaú Corretora”) to BM&FBOVESPA (which, in turn, shall be responsible for transferring such funds to their respective property owners, via their custody agents. Those BDR holders keeping their title certificates directly in Itaú Corretora shall receive their funds directly from said institution. f) For additional information and instructions with respect to the Cancellation Procedure you may refer to the Essential Facts of last April 5 and May 23 and to the Notification. JULY 12 / OTHERS 1. Capital increase. At the next Ordinary Board of Directors’ Meeting, which is scheduled for no later than August 2, 2016, the Company will summon to an Extraordinary Share- holders’ Meeting (the “Shareholders’ Meeting”) with the purpose of proposing a capital increase of US$ 613,164,240 by issuing 61,316,424 new cash shares (the “Cash Shares”) at a price per share of US$ 10 (the “Subscription Price”). Because of the Shareholders’ Meeting to be held by no later than September 2, 2016, the equity capital of LATAM Airlines will increase from the current 551,847,819 shares to 613,164,243 shares; thus, following the capital increase such Cash Shares will represent 10% of all Company shares. 2. Investor. As of this date, Qatar Airways (the “Investor”) has undertaken to acquire up to 10% of LATAM Airlines shares. The investor undertook to subscribe and pay the Cash Shares permitted by the Assignment of Options (as defined in the following paragraph) prior to the expiration of the subscription option period, as well as to subscribe such non-subscribed shares that the Company may offer it im- mediately following the completion of such period (jointly, the “Subscriptions”). 3. Support. On this same date, each one of the shareholders of the Cueto groups: Amaro, Eblen and Bethia (the “Support Shareholders”); which represent 49.72% of LATAM Airlines currently subscribed and paid shares, has undertaken to attend the Shareholders’ Meeting and vote in favor of the subject matters to be proposed therein. Likewise, as soon as the Company launches the subscription option period for the Cash Shares, each Support Shareholder has undertaken to assign and transfer to the Investor its right to subscribe its corresponding prorated amount of Cash Shares, at a nominal value (jointly with the “Assignment of Options”). 4. Purchase Order. In the event that, upon materializing the Subscriptions, the shares to which the Investor is the prop- erty owner were below 10% of all the shares issued by the Company, the Investor undertook to issue an unconditional Purchase Order for a period of 20 days at the Santiago Stock Exchange for the balance, in a manner such as to reach 10% of the Company’s total shares, at a price per share equal to the Subscription Price (the “Purchase Order”). 5. Purchase from TEP. Only if upon materializing the Subscrip- tions and the Purchase Order, the shares of stock owned by the Investor were below 10% of all the shares issued by the Company, and with the sole purpose of facilitating the Investor reaching 10% of the Company’s total shares, the TEP Chile S.A. shareholder (a company owned by the Amaro Group) has undertaken to sell to the Investor, and the lat- ter has undertaken to purchase, at a price per share equal to the Subscription Price, the balance of shares required to reach such 10% (the “Purchase from TEP”); in the under- standing that such commitment does not extend beyond 2.5% of the total number of Company shares. 6. Market. In the event that, upon materializing the Subscrip- tions and the Purchase Order from TEP the shares of stock owned by the Investor were below 10% of all the shares issued by the Company, the Investor shall be entitled to purchase the remaining shares in Chile’s secondary market (shares traded at the stock exchange) and in New York (ADR at the New York Stock Exchange). 7. Transfers and Commitments. The Investor shall be free to transfer its stock ownership in the Company, after agreeing to certain registration rights aimed at an orderly secondary issue and other usual restrictions. Recognizing the relevance that the OneWorld® Alliance has for the company, the Investor has undertaken that a sale of its shares in the company at an airline outside such Alliance requires the prior consent of the Board or must be executed through a mechanism that would allow all Company share- holders to sell. In addition to the restrictions stated in the previous para- graph, in order not to cause major stock market disruptions, the Investor has undertaken not to sell, during the first year 106 MANAGEMENT 2016 | Material Facts following the last Subscription, shares representing over 2% of all Company shares, and not to exceed selling 5% of all Company shares within any 12-month period henceforth. During a 30-month period counted from the last Subscrip- tion, the Investor undertook not to increase its Company shareholding over and above 10% of all Company shares and not to propose revoking the Board of Directors elected by the shareholders, nor a transition aimed at causing a change of control of the Company. 8. Board of Directors. If a vacancy were to arise in the Board of Directors prior to the 2017 Ordinary Shareholders’ Meet- ing and the Investor owned at least a 7.4% shareholding of the total amount of shares issued by the Company; then, the Board shall nominate the person to be proposed by the Investor to replace such vacancy, provided it is acceptable to the Board. Likewise, if at the 2014 Ordinary Shareholders’ Meeting the Investor did not manage to elect a Board Member and, follow- ing such Shareholders’ Meeting there is a vacancy in the Board of Directors and provided that the Investor owns at least a 7.4% shareholding of the total amount of shares issued by the Company; then, the Board shall nominate the person to be proposed by the Investor to replace such vacancy, provided it is acceptable to the Board. As of this date, the communication reservation submitted as an Essential Fact on June 7, 2016, and whose content is refur- bished with the agreements depicted in the present commu- nication, is hereby removed. As of this date it is not possible to determine the financial effects that the topics reported hereunder may have over the Company’s assets, liabilities or income. It is estimated, how- ever, that the Subscriptions will be materialized within the fourth quarter of 2016. The Company shall keep that Superin- tendence duly apprised of any relevant development occurring in relation to the events reported hereunder. JULY 13 / OTHERS In addition to the Essential Fact reported to that Superinten- dence on July 12, 2016, we hereby inform that the funds to be obtained from the capital increase to be proposed will be allocated to preserve the Company’s balance sheet and pay short- term financial commitments (whose amount and defi- nition is under evaluation). The foregoing will mean an increase of cash available for the end of the year 2016, estimated at US$ 1,500 million, which, in turn will enable approaching LA- TAM’s strategic plans on a solid financial basis. At the time of publishing the first summons to the Sharehold- er Meeting we will upload, into to the Company’s internet web- site: www.latamairlinesgroup.net , the background information that supports the proposals to be voted upon. JULY 18 / EXTRAORDINARY SHAREHOLDERS’ MEETING, SUMMONS, AGREEMENTS AND PROPOSALS The Company’s Board of Directors has agreed to summon to an Extraordinary Shareholders’ Meeting to be held on August 18, 2016 in order to propose a capital increase to LATAM Air- lines totaling US$ 613,164,240 via the issue of 61,316,424 Cash Shares, all of them common stock, without any nominal value at an issue price of US$ 10 per share, thereby autho- rizing the Company to place the remaining non-subscribed shares following the subscription period to be subscribed by Qatar Airways. The notifications and summoning letters, as well as the back- ground information that support the proposals to be sub- mitted to a vote, shall be forwarded and made available to shareholders pursuant to the terms provide by the Law on Cor- porations (“Ley Sobre Sociedades Anónimas”). JULY 25 / OTHERS United States of America in effect as of this date, the contents of which are essentially similar to that depicted in the reserved Essential Fact submitted before that Superintendence on May 3, 2016, a copy of which is attached to this Essential Fact and is an integral part of same for all purposes. The amounts ulti- mately agreed to be paid are: US$ 12,750,000 to the DOJ and US$ 6,700,000 plus interest to the SEC. May3 / Essential and Reserved Fact 1. With respect to the investigation of the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”), both of them authorities of the Unit- ed States of America, regarding payments totaling US$ 1,150,000 made during 2006-2007 by LAN Airlines S.A. (“LAN”) to a consultant that provided professional advice with respect to labor affairs in Argentina; investigation with which LATAM has cooperated actively, this Board of Di- rectors hereby reports as an Essential and Reserved Fact that following an extensive exchange of opinions between LATAM lawyers with both SEC as well as DOJ representa- tives regarding the facts subject of that investigation and legal evaluation, the referred professional advisers arrived at the conclusion that the way available to put an end to it requires searching and executing agreements with such authorities that would consider the payment of fines and other provisions as described hereunder. 2. The purpose of the investigation was to inquire whether such payments infringed anticorruption regulations of the United States of America (“FCPA”); which: (i) bars the pay- ment of bribes to foreign government officials in order to obtain commercial advantage; and (ii) requires the com- panies governed by such regulations to keep adequate ac- counting records, as well as maintaining an adequate sys- tem of internal controls. The alluded FCPA indeed applies to LATAM because of its ADR program that is currently in effect in the North American securities market. LATAM informs that it executed agreements with the U.S. De- partment of Justice (“DOJ”) and with the U.S. Securities and Ex- change Commission (“SEC”), both of them authorities of the 3. Following an extensive investigation, the DOJ and the SEC concluded that there were no infringements of FCPA 107 MANAGEMENT 2016 | Material Facts regulations barring the payment of bribes, which is con- sistent with the results of LATAM’s own internal investiga- tion. Nevertheless, the DOJ and the SEC considered that LAN would have incorrectly registered the mentioned pay- ments in its accounting and, consequently, that it would have violated that part of the FCPA that requires com- panies to enter and maintain precise accounting records. Moreover, the referred authorities considered that LAN’s internal controls in place during 2006-2007 were indeed deficient; reason why LAN would have additionally vio- lated FCPA regulations requiring the maintenance of ad- equate internal controls. 4. Under these circumstances, LATAM lawyers held numer- ous and extended exchanges of opinions and conversa- tions with the DOJ and the SEC. On the basis of the infor- mation that about such exchanges and conversations was subsequently provided by LATAM lawyers, this Board of Directors has decided to seek and an agreement with both such US authorities. 5. In effect, LATAM lawyers recommended as of this date to this Board of Directors to reach an agreement with both such authorities that would consider the following terms and conditions: a) With respect to the DOJ, the agreement would primar- ily consider: (i) executing a contract denominated De- ferred Prosecution Agreement (“DPA”), which is a public contract by means of which the DOJ would publicly file charges alleging violation of the regulations regarding FCPA accounting records; LATAM would not be obligated to respond such charges, the DOJ would not prosecute such charges for a 3-year period and would dismiss the charges upon the expiration of such deadline assum- ing that LATAM met all DPA terms; the foregoing, in ex- change for LATAM’s admission of a number of negotiat- ed facts to be described in the DPA and that it agrees to pay the negotiated fine mentioned herein below as well as the other conditions mentioned in such agreement; (ii) clauses by means of which LATAM would admit that the accounting of the payments made to the consultant in Argentina was incorrect and that, at the time when such payments were made (years 2006-2007), it lacked adequate internal controls; (iii) the acceptance by LATAM of an external consultant, for 27 months, whose func- tion would be to monitor, evaluate and report to the DOJ about the efficacy of LATAM’s compliance program, and also the acceptance by LATAM to continue, for 9 months after completing the work of the external consultant, evaluating and directly informing the DOJ regarding the efficacy of the referred compliance program; and, (iv) pay an estimated fine of US$ 12,500,000 as it may be agreed to in the DPA. b) With respect to the SEC, the agreement would primarily consider: (i) executing a contract that would contain what is denominated a Cease and Desist Order, which is an SEC administrative resolution to close an investigation, by means of which LATAM would undertake certain obliga- tions and statement of facts that would be described in the document; (ii) a reproduction of the obligations with respect to the consultant mentioned under the preced- ing number 5(a)(iii); and, (iii) and to pay the approximate amount of US$ 6,500,000 plus interest. 6. The documents to be included in such agreements be- tween LATAM and the DOJ and the SEC are yet undergoing negotiations; and it is relevant, for the purpose of deter- mining whether or not final agreements will be executed, to review and agree each one of the facts to be described and the obligations to be undertaken in each of the documents that must be ultimately executed. 7. Considering that such negotiations are still pending, it is not possible at this time to state with certainty if final agreements will be eventually agreed to. Nevertheless, the Board has instructed the lawyers to continue their nego- tiations under the terms and conditions described in this instrument and to be kept duly apprised of same through the Company’s Legal Department. 8. It is estimated that the information regarding this Es- sential and Reserved Fact will remain so for an approximate period of 60 days. With the attendance of Board Members, Messrs. Henri Philippe Reichstul, Georges Antoine de Bourguignon Arndt, Ricardo J. Caballero Gibbons, Ramón Eblen Kadis, Carlos Alberto Heller Solari, Juan Gerardo Jofré Miranda and Juan José Cueto Plaza, the Board of Directors has instructed to issue this information in a reserved manner, since it refers to pending negotiations whose disclosure at this time might damage the interests of the Company, among other rea- sons, because the same US authorities that conduct the investigation have stated their objection to disclosing the contents of an eventual agreement for as long as negotia- tions remain pending. Finally, we hereby inform that the following persons have been apprised of the resolution of this Board of Directors reported hereunder: the above-mentioned LATAM Board Members are: LATAM’s General Manager, Mr. Enrique Miguel Cueto Plaza; the CEO of LAN Airlines S.A. Mr. Ignacio Cueto Plaza; LATAM’s Senior Vice-president of Finance, Mr. Andrés Osorio Hermansen; the Senior Board Member of Investor Re- lations, Ms. Gisela Escobar Koch; LATAM’s Vice-president for Corporate Affairs, Mr. Gonzalo Undurraga Pellegrini; LATAMs Senior Legal Vice-president Mr. Juan Carlos Menció; LATAM’s Legal Vice-president, Mr. Cristián Toro Cañas; and the exter- nal legal consultants, Messrs. Roger Witten, Claudio Salas, Cristóbal Eyzaguirre Baeza, José Miguel Huerta Molina, Juan Pablo Celis Morgan and Tomás Ignacio Kreft Carreño. OCTOBER 5 / PLACEMENT OF SECURITIES IN INTERNATIONAL AND/OR DOMESTIC MARKETS (a) LATAM Airlines Group S.A. (“LATAM” or the “Company”), has announced its intention to issue and place in the inter- national markets, non-guaranteed long-term bonds under the aegis of Norm 144-A and Regulation S of the securities laws of the United States of America (the “144-A Bonds” or the “Issue”) ; 108 (b) In order to materialized such bond Issue, a special invest- ment vehicle has been incorporated, denominated Latam Finance Limited (“LATAM Finance”), a legal entity incorpo- rated in the Cayman Islands 100% owned by LATAM, which shall be the issuer of the 144A Bonds and whose obliga- tions, assumed by virtue of the Issue, shall be guaranteed by LATAM, all of which has been duly approved by the Com- pany’s Board of Directors. (c) Citigroup Global Markets Inc. (the “Bidder”), by virtue of an Offer to Purchase drafted in English as of this same date (hereinafter, the “Bid”) and, in turn, in representation of LATAM Finance, TAM Capital Inc. (“TK”) and TAM Capital 3 Inc. (“TK3”) (these two latter companies being TAM S.A. subsidiaries, duly incorporated and existing pursuant to the laws of the Cayman Islands) has announced the buy- back, exchange and partial redemption of a portion to be determined of the remainder (balance) of TAM Capital Inc.’s bonds (“TK”) and TAM Capital 3 Inc. (“TK3”) (“Interme- diated Tender Offer”), which were placed in the market as follows: (i) TK in the year 2007 at a rate of 7.375% for an amount of US$ 300,000,000 with original expiration in the year 2017 (“TAM 2017”), and (ii) TK3 in the year 2011, at a rate of 8.375% for an amount of US$ 500,000,000 with original expiration in the year 2021 (“TAM 2021”). Both bond issues were materialized pursuant to Norm 144- A and Regulation S of the securities laws of the United States of America. It is the intention of the Bidder that all TAM 2021 Bonds and TAM 2017 Bonds to be acquired by virtue of the referred Bid be exchanged by the Bidder with LATAM Finance, for a por- tion of the 144-A Bonds issued and placed by LATAM Finance by virtue of the Issue. Therefore, the objective of placing the 144-Bonds shall be: (i) to finance in part the buy-back, ex- change and redemption of the TAM 2021 Bonds and TAM 2017 Bonds; and, (ii) should there be any remaining (residual) bonds, to finance other general corporate ends. Such buy-back, exchange and partial redemption Bid for the TAM 2021 Bonds and the TAM 2017 Bonds shall be executed in a staggered manner; the TAM 2021 Bonds first in a por- tion to be determined and decided by the Company, and, af- terwards, depending on the outcome of the Issue, the TAM 2021 Bonds in an amount to be determined and decided by the Company. Pursuant to the provisions of Circular Letter N° 988 of the Superintendence for Securities & Insurance, we hereby report to you that at this stage it is not possible to quantify the ef- fects that this operation will have on LATAM’s income position, should it be materialized. Finally, we hereby state for the record that LATAM Airlines Group S.A. will issue, as information of market interest, the press releases that are attached to the present Essential Fact in order to provide further background information with respect to the operations regarding the issuance of the 144-A Bonds and the buy-back, exchange and partial redemption of the TAM 2021 Bonds and TAM 2017, to be distributed in the relevant markets in which such operations are to take place. OCTOBER 6 / OTHERS In a manner complementary to the Essential Fact reported by LATAM to that Superintendence on October 5, 2016, we hereby attach the press releases issued by way of market interest information. OCTOBER 20 / PLACEMENT OF SECURITIES IN INTERNATIONAL AND/OR DOMESTIC MARKETS LATAM Airlines Group S.A. (the “Company”) has decided not to pursue the purchasing bid submitted via Citigroup Global Markets Inc. on October 5, 2016, denominated “Offer to Pur- chase”, whose objective was to buy-back, exchange and re- deem a portion of the remaining (residual) bonds issued by TAM Capital Inc. and TAM Capital 3 Inc., both of them subsid- iary companies of TAM S.A., legally incorporated pursuant to the laws of the Cayman Islands, whose expiration had been set for the years 2017 and 2021, respectively (hereinafter, MANAGEMENT 2016 | Material Facts the “Bid”), all of which was duly reported to this Superinten- dence last October 5. The referred Offer to Purchase included certain conditions in order to activate the Offer, one of which was indeed not met; which, in turn, led the Company to discontinue it and not go forward with its intention to issue and place non-guaranteed long-term bonds in the international market under the aegis of Norm 144-A and Regulation S of the securities laws of the United States of America, according to the terms and conditions set forth in the referred Essential Fact reported last October 5. 109 MANAGEMENT 2016 | Stock Market information Stock Market Information During 2016, the local share of LATAM Airlines Group showed a positive profitability of 51.6%. Likewise, its ADR (American Depositary Receipts) and BDR (Brazilian Deposi- tary Receipts) also showed a positive profitability of 51.8%. As of December 31, 2016, the Company’s stock market capitalization amounted to US$ 4,475.2 million. Through- out all of 2016, the share of LATAM Airlines Group showed a profitability higher than that of the IPSA (Select Share Price Index); an index that showed a positive profitability of 12.8% during such period. With respect to the trading of the stock at the Santiago Stock Exchange, the LATAM Airlines Group share had a stock market presence of 100%. VOLUMES TRADED PER QUARTER LOCAL SHARE (Santiago Stock Exchange, SSE) 2014 First Quarter Second Quarter Third Quarter Fourth Quarter 2015 First Quarter Second Quarter Third Quarter Fourth Quarter 2016 First Quarter Second Quarter Third Quarter Fourth Quarter N° of shares traded Average price (CLP) Total amount (CLP) 61,484,884 35,965,643 35,231,909 44,766,542 35,580,564 44,884,792 39,396,992 27,348,459 31,693,231 25,756,176 65,396,759 29,632,143 8,211 8,131 7,191 6,939 6,408 5,311 3,945 3,790 4,014 4,510 5,411 5,950 504,829,447,686 292,436,121,151 253,336,632,783 310,646,587,594 228,009,403,400 238,380,996,445 155,423,718,868 103,651,321,266 127,210,391,201 116,170,253,790 353,855,527,638 176,318,488,865 110 VOLUMES TRADED PER QUARTER ADR (New York Stock Exchange, NYSE) MANAGEMENT 2016 | Stock Market information 2014 First Quarter Second Quarter Third Quarter Fourth Quarter 2015 First Quarter Second Quarter Third Quarter Fourth Quarter 2016 First Quarter Second Quarter Third Quarter Fourth Quarter N° of shares traded Average price (USD) Total amount (USD) 39,001,153 37,203,364 39,309,163 35,321,250 50,592,157 58,290,119 40,747,698 27,744,021 32,739,012 33,327,301 42,231,494 30,197,724 14,9 14,7 12,4 11,6 10,2 8,5 5,8 5,5 5,8 6,6 8,2 8,9 580,445,848 545,714,297 487,095,808 409,025,594 515,359,910 497,760,607 236,597,688 152,171,620 189,108,047 220,309,082 347,459,617 268,457,766 VOLUMES TRADED PER QUARTER BDR (Sao Paulo Securities, Merchandise & Futures Exchange, BOVESPA) 2014 First Quarter Second Quarter Third Quarter Fourth Quarter 2015 First Quarter Second Quarter Third Quarter Fourth Quarter 2016 First Quarter Second Quarter Third Quarter Fourth Quarter N° of shares traded Average price (BRL) Total amount (BRL) 223,600 90,000 147,600 105,600 145,600 264,900 28,200 59,700 50,500 29,700 - - 34,7 33,1 26,9 28,5 28,3 26,1 19,9 21,4 21,7 21,3 - - 7,765,397 2,977,950 3,966,750 3,008,393 4,125,576 6,911,535 561,627 1,279,542 1,096,860 633,798 - - 111 Note: On July 18, 2016, LATAM received the approval of Brazil’s CVM (Securities Commission) for a discontinuation of the Level III Brazil Depositary Receipts (“BDR”) program, supported by the Company’s common shares and, consequently, of the Foreign Is- suer’s Register. MANAGEMENT 2016 | Stock Market information Local share (CLP) IPSA index 7.000 6.000 5.000 4.000 3.000 01-01-16 01-02-16 01-03-16 01-04-16 01-05-16 01-06-16 01-07-16 01-08-16 01-09-16 01-10-16 01-11-16 01-12-16 Local share (CLP) ADR (USD) 7.000 6.000 5.000 4.000 3.000 01-01-16 01-02-16 01-03-16 01-04-16 01-05-16 01-06-16 01-07-16 01-08-16 01-09-16 01-10-16 01-11-16 01-12-16 7.000 6.000 5.000 4.000 3.000 Local share (CLP) BDR (BRL) 01-01-16 01-02-16 01-03-16 01-04-16 01-05-16 01-06-16 01-07-16 01-08-16 01-09-16 01-10-16 01-11-16 01-12-16 6.000 5.000 4.000 3.000 12,0 9,0 6,0 3,0 30,0 25,0 20,0 15,0 10,0 112 MANAGEMENT 2016| Risk factors Risk Factors The following important factors, and those important fac- tors described in other reports we submit to or file with the Securities and Exchange Commission (“SEC”), could affect our actual results and could cause our actual results to differ materially from those expressed in any forward- looking statements made by us or on our behalf. In par- ticular, as we are a non-U.S. company, there are risks as- sociated with investing in our ADSs that are not typical for investments in the shares of U.S. companies. Prior to making an investment decision, you should carefully con- sider all of the information contained in this document, including the following risk factors. Risk Factors Relating to our Company LATAM does not control the voting shares or board of direc- tors of TAM Due to Brazilian law restrictions on foreign ownership of Brazilian airlines, LATAM does not control the voting shares or board of directors of TAM. As of January 31, 2017, the ownership structure of TAM is as follows: ► Holdco I owns 100% of the TAM common shares previ- ously outstanding; • the Amaro family (the “Amaro Group”) own approxi- mately 51% of the outstanding Holdco I voting shares through TEP Chile (a Chilean entity wholly owned by the TAM Controlling Shareholders) and LAN owns the remainder of the voting shares; • LATAM owns 100% of the outstanding Holdco I non- voting shares, entitling it to substantially all of the economic rights in respect of the TAM common shares held by Holdco I; and ► LATAM owns 100% of the TAM preferred shares previously outstanding. As a result of this ownership structure: ► The Amaro Group Controlling Shareholders retain voting and board control of TAM and each subsidiary of TAM; and ► LATAM is entitled to substantially all of the economic rights in TAM. LATAM Airlines Group and TEP Chile and other parties have entered into shareholders’ agreements that establish agreements and restrictions relating to corporate gover- nance with respect to TAM. Certain specified actions require supermajority approval, which in turn means they require the prior approval of both LATAM and TEP Chile. Examples of actions requiring supermajority approval by the board of directors of Holdco I or TAM include, among others, enter- ing into acquisitions or business collaborations, amending or approving budgets, business plans, financial statements and accounting policies, incurring indebtedness, encumber- ing assets, entering into certain agreements, making certain investments, modifying rights or claims, entering into set- tlements, appointing executives, creating security interests, issuing, redeeming or repurchasing securities and voting on matters as a shareholder of affiliates of TAM. Actions re- quiring supermajority shareholder approval of Holdco I or TAM include, among others, certain changes to the by-laws of Holdco I, TAM or TAM’s affiliates or any dissolution/liq- uidation, corporate reorganization, payment of dividends, issuance of securities, disposal or encumbrance of cer- tain assets, creation of security interests or entering into guarantees and agreements with related parties. For more information on the shareholders’ agreements, see “Item 7. Controlling Shareholders and Related Party Transactions— Shareholders’ Agreements.” Our assets include a significant amount of goodwill. Our assets included US$2,710.4 million of goodwill as of December 31, 2016, US$2,582.5 million of which results from the combination of LAN and TAM. Under IFRS, good- will is subject to an annual impairment test and may be required to be tested more frequently if events or circum- stances indicate a potential impairment. In 2016, mainly as a result of the appreciation of the Brazilian real against the 113 MANAGEMENT 2016 | Risk factors U.S. dollar, the value of our goodwill increased by 18.8% as compared with 2015. Any impairment could result in the recognition of a significant charge to earnings in our state- ment of income, which could materially and adversely im- pact our consolidated results for the period in which the impairment occurs. A failure to successfully implement our strategy or a fail- ure adjusting the strategy to the current economic situation would harm our business and the market value of our ADSs and common shares. We have developed a strategic plan with the goal of becom- ing one of the best airlines in the world and renewing our commitment to sustained profitability and superior returns to shareholders. Our strategy requires us to identify value propositions that are attractive to our clients, to find effi- ciencies in our daily operations, and to transform ourselves into a stronger and more risk-resilient company. A tenet of our strategic plan is the adoption of a new travel model for domestic services in the six countries where we have domes- tic operations to address the changing dynamics of custom- ers and the industry, and to increase our competitiveness. The new travel model is based on a continued reduction in air fares that makes air travel accessible to a wider audience, and in particular to those wish to fly more frequently. This model requires continued cost reduction efforts, and in order to achieve this the Company is implementing a series of ini- tiatives to reduce cost per ASK in all its domestic operations. Difficulties in implementing our strategy may adversely af- fect our business, results of operation and the market value of our ADSs and common shares. A failure to successfully transfer the value proposition of the LAN and TAM brands to a new single brand, may adversely affect our business and the market value of our ADSs and common shares. Following the combination in 2012, LAN and TAM contin- ued to operate with their original brands. During 2016, we began the transition of LAN and TAM into a single brand. LAN and TAM had different value propositions, and there can be no assurances that we will be able to fully trans- fer the value of the original LAN and TAM brands to our new single brand “LATAM”. Difficulties in implementing our single brand may prevent us from consolidating as a cus- tomer preferred carrier and may adversely affect our busi- ness and results of operations and the market value of our ADSs and common shares. It may take time to combine the frequent flyer programs of LAN and TAM. We have integrated the separate frequent flyer programs of LAN and TAM so that passengers can use frequent flyer miles earned with either LAN or TAM interchangeably. Dur- ing 2016, LAN and TAM announced their revamped frequent flyer programs, which have new names: LATAM Pass and LATAM Fidelidade, respectively. The change is part of the process of consolidating the airline group’s new brand iden- tity (LATAM) and the evolution of the programs, which en- hances existing benefits and introduces new benefits for program members. However, there is no guarantee that full integration of the two plans will be completed in the near term or at all. Even if the integration occurs, the successful integration of these programs will involve some time and expense. Moreover, during 2016, LATAM Pass and LATAM Fidelidade approved changes in their mileage earning policy which may impact the attractiveness of the programs to passengers. Until we effectively combine these programs, passengers may prefer frequent flyer programs offered by other airlines, which may adversely affect our business. Our financial results are exposed to foreign currency fluc- tuations. We prepare and present our consolidated financial state- ments in U.S. dollars. LATAM and its affiliates operate in numerous countries and face the risk of variation in foreign currency exchange rates against the U.S. dollar or between the currencies of these various countries. Changes in the 114 MANAGEMENT 2016 | Risk factors exchange rate between the U.S. dollar and the currencies in the countries in which we operate could adversely affect our business, financial condition and results of operations.. If the value of the Brazilian real, Chilean peso or other currencies in which revenues are denominated declines against the U.S. dollar, our results of operations and financial condition will be affected. The exchange rate of the Chilean peso, Brazilian real and other currencies against the U.S. dollar may fluctuate sig- nificantly in the future. Changes in Chilean, Brazilian and other governmental eco- nomic policies affecting foreign exchange rates could also adversely affect our business, financial condition, results of operations and the return to our shareholders on their com- mon shares or ADSs. We depend on strategic alliances or commercial relationships in many of the countries in which we operate, and our business may suffer if any of our strategic alliances or commercial rela- tionships terminates. We maintain a number of alliances and other commercial re- lationships in many of the jurisdictions in which LATAM and its affiliates operate. These alliances or commercial relationships allow us to enhance our network and, in some cases, to of- fer our customers services that we could not otherwise offer. If any of our strategic alliances or commercial relationships, deteriorates, or any of these agreements are terminated, our business, financial condition and results of operations could be adversely affected. Our business and results of operations may suffer if we fail to obtain and maintain routes, suitable airport access, slots and other operating permits. Our business depends upon our access to key routes and airports. Bilateral aviation agreements between countries, open skies laws and local aviation approvals frequently in- volve political and other considerations outside of our con- trol. Our operations could be constrained by any delay or inability to gain access to key routes or airports, including: • limitations on our ability to process more passengers; • the imposition of flight capacity restrictions; • the inability to secure or maintain route rights in local mar- cargo products are sensitive to foreign exchange rates and, therefore, traffic volumes could be impacted by the appre- ciation or depreciation of local currencies. kets or under bilateral agreements; or • the inability to maintain our existing slots and obtain ad- ditional slots. Our operations are subject to fluctuations in the supply and cost of jet fuel, which could adversely impact our business. We operate numerous international routes, subject to bilat- eral agreements, and also internal flights within Chile, Peru, Brazil, Argentina, Ecuador, Colombia and other countries, subject to local route and airport access approvals. See “Item 4. Information on the Company—B. Business Overview— Regulation.” There can be no assurance that existing bilateral agreements with the countries in which our companies are based and permits from foreign governments will continue. A modifica- tion, suspension or revocation of one or more bilateral agree- ments could have a material adverse effect on our business, financial condition and results of operations. The suspension of our permission to operate in certain airports, destinations or slots, or the imposition of other sanctions could also have a material adverse effect. A change in the administration of current laws and regulations or the adoption of new laws and regulations in any of the countries in which we operate that restrict our route, airport or other access may have a mate- rial adverse effect on our business, financial condition and results of operations. A significant portion of our cargo revenue comes from relatively few product types and may be impacted by events affecting their production, trade or demand. Our cargo demand, especially from Latin American export- ers, is concentrated in a small number of product categories, such as exports of fish, sea products and fruits from Chile, and asparagus from Peru, and exports of fresh flowers from Ecuador and Colombia. Events that adversely affect the pro- duction, trade or demand for these goods may adversely af- fect the volume of goods that we transport and may have a significant impact on our results of operations. Some of our Higher jet fuel prices could have a materially adverse effect on our business, financial condition and results of operations. Jet fuel costs have historically accounted for a significant amount of our operating expenses, and accounted for 23.0% of our op- erating expenses in 2016. Both the cost and availability of fuel are subject to many economic and political factors and events that we can neither control nor predict. We have entered into fuel hedging arrangements, but there can be no assurance that such arrangements will be adequate to protect us from an increase in fuel prices in the near future or in the long term. Also, while these hedging arrangements are designed to limit the effect of an increase in fuel prices, our hedging methods may also limit our ability to take advantage of any decrease in fuel prices, as was the case in 2015 and, to a lesser extent, in 2016. Although we have implemented measures to pass a portion of incremental fuel costs to our customers, our ability to lessen the impact of any increase in fuel costs using these types of mechanisms may be limited. We rely on maintaining a high aircraft utilization rate to in- crease our revenues and absorb our fixed costs, which makes us especially vulnerable to delays. A key element of our strategy is to maintain a high daily air- craft utilization rate, which measures the number of flight hours we use our aircraft per day. High daily aircraft utiliza- tion allows us to maximize the amount of revenue we gener- ate from our aircraft and absorb the fixed costs associated with our fleet and is achieved, in part, by reducing turnaround times at airports and developing schedules that enable us to increase the average hours flown per day. Our rate of aircraft utilization could be adversely affected by a number of differ- ent factors that are beyond our control, including air traffic and airport congestion, adverse weather conditions, unanticipated 115 MANAGEMENT 2016 | Risk factors maintenance and delays by third-party service providers re- lating to matters such as fueling and ground handling. If an aircraft falls behind schedule, the resulting delays could cause a disruption in our operating performance. We fly and depend upon Airbus and Boeing aircraft, and our business could suffer if we do not receive timely deliveries of aircraft, if aircraft from these companies becomes unavailable or if the public negatively perceives our aircraft. As our fleet has grown, our reliance on Airbus and Boeing has also grown. As of December 31, 2016, LATAM Airlines Group has a fleet of 250 Airbus and 82 Boeing aircraft. Risks relating to Airbus and Boeing include: • our failure or inability to obtain Airbus or Boeing aircraft, parts or related support services on a timely basis because of high demand or other factors; • the interruption of fleet service as a result of unscheduled or unanticipated maintenance requirements for these aircraft; • the issuance by the Chilean or other aviation authorities of other directives restricting or prohibiting the use of our Air- bus or Boeing aircraft, or requiring time-consuming inspec- tions and maintenance; • adverse public perception of a manufacturer as a result of an accident or other negative publicity; or • delays between the time we realize the need for new air- craft and the time it takes us to arrange for Airbus and Boe- ing or for a third-party provider to deliver this aircraft. The occurrence of any one or more of these factors could re- strict our ability to use aircraft to generate profits, respond to increased demands, or could otherwise limit our opera- tions and adversely affect our business. If we are unable to incorporate leased aircraft into our fleet at acceptable rates and terms in the future, our business could be adversely affected. A large portion of our aircraft fleet is subject to long-term op- erating leases. Our operating leases typically run from three to 12 years from the date of delivery. We may face more compe- tition for, or a limited supply of, leased aircraft, making it dif- ficult for us to negotiate on competitive terms upon expiration of our current operating leases or to lease additional capacity required for our targeted level of operations. If we are forced to pay higher lease rates in the future to maintain our capacity and the number of aircraft in our fleet, our profitability could be adversely affected. Our business may be adversely affected if we are unable to ser- vice our debt or meet our future financing requirements. We have a high degree of debt and payment obligations under our aircraft operating leases and financial debt arrangements. We require significant amounts of financing to meet our air- craft capital requirements and may require additional financ- ing to fund our other business needs. We cannot guarantee that we will have access to or be able to arrange for financing in the future on favorable terms. Following the combination of LAN and TAM, Fitch Ratings Inc. and Standard and Poor’s downgraded LATAM Airlines Group S.A.’s credit rating to levels that are below investment grade. Any further securities rating agencies downgrades could increase our financing costs. High- er financing costs could affect our ability to expand or renew our fleet, which in turn could adversely affect our business. In addition, the majority of our property and equipment is subject to liens securing our indebtedness. In the event that we fail to make payments on secured indebtedness, credi- tors’ enforcement of liens could limit or end our ability to use the affected property and equipment to fulfill our operational needs and thus generate revenue. Moreover, external conditions in the financial and credit mar- kets may limit the availability of funding at particular times or increase its costs, which could adversely affect our profit- ability, our competitive position and result in lower net inter- est margins, earnings and cash flows, as well as lower returns on shareholders’ equity and invested capital. Factors that may affect the availability of funding or cause an increase in our funding costs include global macro-economic crises, reduction of our credit rating, and other potential market disruptions. We have significant exposure to LIBOR and other floating inter- est rates; increases in interest rates will increase our financing costs and may have adverse effects on our financial condition and results of operations. We are exposed to the risk of interest rate variations, principal- ly in relation to the U.S. dollar London Interbank Offer Rate (“LI- BOR”). Many of our operating and financial leases are denomi- nated in U.S. dollars and bear interest at a floating rate. 36.9% of our outstanding consolidated debt as of December 31, 2016 bears interest at a floating rate after giving effect to interest rate hedging agreements. Volatility in LIBOR or other reference rates could increase our periodic interest and lease payments and have an adverse effect on our total financing costs. We may be unable to adequately adjust our prices to offset any increased financing costs, which would have an adverse effect on our revenues and our results of operations. Increases in insurance costs and/or significant reductions in cover- age could harm our financial condition and results of operations. Major events affecting the aviation insurance industry (such as terrorist attacks, hijackings or airline crashes) may result in significant increases of airlines’ insurance premiums or in sig- nificant decreases of insurance coverage, as occurred after the September 11, 2001 terrorist attacks. Increases in insurance costs and/or significant reductions in coverage could harm our financial condition and results of operations and increases the risk that we experience uncovered losses. Problems with air traffic control systems or other technical fail- ures could interrupt our operations and have a material adverse effect on our business. Our operations, including our ability to deliver customer ser- vice, are dependent on the effective operation of our equip- ment, including our aircraft, maintenance systems and res- ervation systems. Our operations are also dependent on the effective operation of domestic and international air traffic control systems and the air traffic control infrastructure by the corresponding authorities in the markets in which we op- 116 MANAGEMENT 2016 | Risk factors erate. Equipment failures, personnel shortages, air traffic con- trol problems and other factors that could interrupt operations could adversely affect our operations and financial results as well as our reputation. We depend on a limited number of suppliers for certain aircraft and engine parts. We depend on a limited number of suppliers for aircraft, air- craft engines and many aircraft and engine parts. As a result, we are vulnerable to any problems associated with the supply of those aircraft, parts and engines, including design defects, mechanical problems, contractual performance by the suppli- ers, or adverse perception by the public that would result in customer avoidance or in actions by the aviation authorities resulting in an inability to operate our aircraft. Our business relies extensively on third-party service providers. Failure of these parties to perform as expected, or interrup- tions in our relationships with these providers or their provision of services to us, could have an adverse effect on our financial position and results of operations. We have engaged a significant number of third-party service providers to perform a large number of functions that are integral to our business, including regional operations, opera- tion of customer service call centers, distribution and sale of airline seat inventory, provision of information technology infrastructure and services, provision of aircraft maintenance and repairs, catering, ground services, and provision of vari- ous utilities and performance of aircraft fueling operations, among other vital functions and services. We do not directly control these third-party service providers, although we do enter into agreements with many of them that define ex- pected service performance. Any of these third-party service providers, however, may materially fail to meet their service performance commitments, may suffer disruptions to their systems that could impact their services, or the agreements with such providers may be terminated. For example, flight reservations booked by customers and/or travel agencies via third-party GDSs (Global Distribution Systems) may be ad- versely affected by disruptions in our business relationships with GDS operators. Such disruptions, including a failure to agree upon acceptable contract terms when contracts expire or otherwise become subject to renegotiation, may cause the carriers’ flight information to be limited or unavailable for display, significantly increase fees for both us and GDS users, and impair our relationships with customers and travel agencies. The failure of any of our third-party service provid- ers to adequately perform their service obligations, or other interruptions of services, may reduce our revenues and in- crease our expenses or prevent us from operating our flights and providing other services to our customers. In addition, our business, financial performance and reputation could be materially harmed if our customers believe that our services are unreliable or unsatisfactory. tion of our business partners. The secure operation of the networks and systems on which this type of information is stored, processed and maintained is critical to our business operations and strategy. Unauthorized parties may attempt to gain access to our systems or information through fraud or deception. Hardware or software we develop or acquire may contain defects that could unexpectedly compromise infor- mation security. The compromise of our technology systems resulting in the loss, disclosure, misappropriation of, or ac- cess to, customers’, employees’ or business partners’ infor- mation could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disruption to our operations and dam- age to our reputation, any or all of which could adversely affect our business. Disruptions or security breaches of our information technology infrastructure or systems could interfere with our operations, compromise passenger or employee information, and expose us to liability, possibly causing our business and reputation to suffer. A serious internal technology error or failure impacting sys- tems hosted internally at our data centers or externally at third-party locations, or large-scale interruption in technol- ogy infrastructure we depend on, such as power, telecom- munications or the internet, may disrupt our technology net- work with potential impact on our operations. Our technology systems and related data may also be vulnerable to a variety of sources of interruption, including natural disasters, terror- ist attacks, telecommunications failures, computer viruses, hackers and other security issues. While we have in place, and continue to invest in, technology security initiatives and disaster recovery plans, these measures may not be ade- quate or implemented properly so as to prevent a business disruption and its adverse financial and reputational conse- quences to our business. In addition, as a part of our ordinary business operations, we collect and store sensitive data, including personal in- formation of our passengers and employees and informa- Increases in our labor costs, which constitute a substantial portion of our total operating expenses, could directly impact our earnings. Labor costs constitute a significant percentage of our total operating expenses (21.8% in 2016) and at times in our oper- ating history we have experienced pressure to increase wages and benefits for our employees. A significant increase in our labor costs could result in a material reduction in our earnings. Our business may experience adverse consequences if we are unable to reach satisfactory collective bargaining agreements with our unionized employees. As of December 31, 2016, approximately 72.9% of our em- ployees, including administrative personnel, cabin crew, flight attendants, pilots and maintenance technicians are members of unions and have contracts and collective bargaining agree- ments which expire on a regular basis. Our business, financial condition and results of operations could be materially ad- versely affected by a failure to reach agreement with any labor union representing such employees or by an agreement with a labor union that contains terms that are not in line with our expectations or that prevent us from competing effectively with other airlines. 117 MANAGEMENT 2016 | Risk factors Collective action by employees could cause operating disrup- tions and adversely impact our business. Certain employee groups such as pilots, flight attendants, mechanics and our airport personnel have highly specialized skills. As a consequence, actions by these groups, such as strikes, walk-outs or stoppages, could severely disrupt our operations and adversely impact our operating and financial performance, as well as our image. We may experience difficulty finding, training and retaining employees. Our business is labor intensive. We employ a large number of pilots, flight attendants, maintenance technicians and other operating and administrative personnel. The airline industry has, from time to time, experienced a shortage of qualified personnel, especially pilots and maintenance technicians. In addition, as is common with most of our competitors, we may, from time to time, face considerable turnover of our employees. Should the turnover of employees, particularly pilots and maintenance technicians, sharply increase, our training costs will be significantly higher. A failure to recruit, train and retain qualified employees at a reasonable cost could materially adversely affect our business, financial con- dition and results of operations. economic growth in Chile, recession in Brazil and Argentina and poor economic performance in certain emerging mar- ket countries in which we operate. The occurrence of simi- lar events in the future could adversely affect our business. We plan to continue to expand our operations based in Latin America and our performance will, therefore, continue to de- pend heavily on economic conditions in the region. Any of the following factors could adversely affect our busi- ness, financial condition and results of operations in the coun- tries in which we operate: • changes in economic or other governmental policies; • weak economic performance, including, but not limited to, low economic growth, low consumption and/or investment rates, and increased inflation rates; or • other political or economic developments over which we have no control. No assurance can be given that capacity reductions or other steps we may take in response to weakened demand will be adequate to offset any future reduction in our cargo and/or air travel demand in Brazil or in other markets in which we operate. Sustained weakened demand may adversely impact our revenues, results of operations or financial condition. Risks Related to the Airline Industry and the Countries in Which We Operate We are exposed to increases in landing fees and other airport service charges that could adversely affect our margin and competitive position. Our performance is heavily dependent on economic conditions in the countries in which we do business. Negative economic conditions in those countries could adversely impact our busi- ness and results of operations and cause the market price of our common shares and ADSs to decrease. Passenger and cargo demand is heavily cyclical and highly dependent on global and local economic growth, economic expectations and foreign exchange rate variations, among other things. In the past, our business has been adversely affected by global economic recessionary conditions, weak Airlines must pay fees to airport operators for the use of airport facilities. Passenger taxes and airport charges have increased substantially in recent years. We cannot assure you that the airports in which we operate will not increase or maintain high passenger taxes and service charges in the future. Any substantial increase in airport charges could have a material adverse impact on our results of operations. In addition, any increase in passenger taxes could negatively impact demand for air travel and affect our results. Our business is highly regulated and changes in the regulato- ry environment in which we operate may adversely affect our business and results of operations. Our business is highly regulated and depends substantially upon the regulatory environment in the countries in which we operate or intend to operate. For example, price controls on fares may limit our ability to effectively apply customer seg- mentation profit maximization techniques (“passenger rev- enue management”) and adjust prices to reflect cost pres- sures. High levels of government regulation may limit the scope of our operations and our growth plans. The possible failure of aviation authorities to maintain the required gov- ernmental authorizations or our failure to comply with ap- plicable regulations, may adversely affect our business and results of operations. Losses and liabilities in the event of an accident involving one or more of our aircraft could materially affect our business. We are exposed to potential catastrophic losses in the event of an aircraft accident, terrorist incident or any other similar event. There can be no assurance that, as a result of an aircraft accident or significant incident: • we will not need to increase our insurance coverage; • our insurance premiums will not increase significantly; • our insurance coverage will fully cover all of our liability; or • we will not be forced to bear substantial losses. Substantial claims resulting from an accident or significant in- cident in excess of our related insurance coverage could have a material adverse effect on our business, financial condition and results of operations. Moreover, any aircraft accident, even if fully insured, could cause the negative public perception that our aircraft are less safe or reliable than those operated by other airlines, which could have a material adverse effect on our business, financial condition and results of operations. Insurance premiums may also increase due to an accident or incident affecting one of our alliance partners or other airlines. 118 MANAGEMENT 2016 | Risk factors High levels of competition in the airline industry may adversely affect our level of operations. tions and financial results. In addition, failure to comply with these regulations could adversely affect us in a variety of ways, including adverse effects on our reputation. Our business, financial condition and results of operations could be adversely affected by high levels of competition within the industry, particularly the entrance of new compet- itors into the markets in which we operate. Airlines compete primarily over fare levels, frequency and dependability of service, brand recognition, passenger amenities (such as fre- quent flyer programs) and the availability and convenience of other passenger or cargo services. New and existing airlines (and companies providing ground cargo or passenger trans- portation) could enter our markets and compete with us on any of these bases, including by offering lower prices, more attractive services or increasing their route offerings in an ef- fort to gain greater market share. Some of our competitors may receive external support, which could adversely impact our competitive position. Some of our competitors may receive support from external sources, such as their national governments, which may be unavailable to us. Support may include, among others, subsi- dies, financial aid or tax waivers. This support could place us at a competitive disadvantage and adversely affect our opera- tions and financial performance. In 2016, the ICAO adopted a resolution creating the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), providing a framework for a global market-based measure to stabilize carbon dioxide (“CO2”) emissions in in- ternational civil aviation (i.e., civil aviation flights that depart in one country and arrive in a different country). The CORSIA will be implemented in phases, starting with the participation of ICAO member states on a voluntary basis during a pilot phase (from 2021 through 2023), followed by a first phase (from 2024 through 2026) and a second phase (from 2027). Current- ly, CORSIA focuses on defining standards for monitoring, re- porting and verification of emissions from air operators, as well as on defining steps to offset CO2 emissions after 2020. To the extent most of the countries in which we operate continue to be ICAO member states, in the future we may be affected by regulations adopted pursuant to the CORSIA framework. The proliferation of national regulations and taxes on CO2 emissions in the countries that we have domestic operations, including recent enviromental regulations that the airline in- dustry is facing in Colombia, may also affect our costs of op- erations and our margins. Our operations are subject to local, national and international environmental regulations; costs of compliance with applicable regulations, or the consequences of noncompliance, could ad- versely affect our results, our business or our reputation. Our business may be adversely affected by a downturn in the airline industry caused by exogenous events that affect travel behavior or increase costs, such as outbreak of disease, weather conditions and natural disasters, war or terrorist attacks. Our operations are covered by environmental regulations at local, national and international levels. These regulations cover, among other things, emissions to the atmosphere, disposal of solid waste and aqueous effluents, aircraft noise and other activities incident to our business. Future opera- tions and financial results may vary as a result of such regu- lations. Compliance with these regulations and new or exist- ing regulations that may be applicable to us in the future could increase our cost base and adversely affect our opera- Demand for air transportation may be adversely impacted by exogenous events, such as adverse weather conditions and natural disasters, epidemics (such as Ebola and Zika), terrorist attacks, war or political and social instability. Situations such as these in one or more of the markets in which we operate could have a material impact on our business, financial condi- tion and results of operations. Furthermore, these types of situations could have a prolonged effect on air transportation demand and on certain cost items. Revenues for airlines depend on the number of passengers carried, the fare paid by each passenger and service factors, such as the timeliness of flight departures and arrivals. During periods of fog, ice, low temperatures, storms or other adverse weather conditions, some or all of our flights may be cancelled or significantly delayed, reducing our revenues. In addition, fuel prices and supplies, which constitute a significant cost for us, may increase as a result of any future terrorist attacks, a general increase in hostilities or a reduction in output of fuel, voluntary or otherwise, by oil-producing countries. Such increases may result in both higher airline ticket prices and decreased demand for air travel generally, which could have an adverse effect on our revenues and results of operations. We are subject to risks related to litigation and administrative proceedings that could adversely affect our business and finan- cial performance in the event of an unfavorable ruling. The nature of our business exposes us to litigation relating to labor, insurance and safety matters, regulatory, tax and admin- istrative proceedings, governmental investigations, tort claims and contract disputes. Litigation is inherently costly and unpre- dictable, making it difficult to accurately estimate the outcome among other matters. Currently, as in the past, we are subject to proceedings or investigations of actual or potential litiga- tion. Although we establish provisions as we deem necessary, the amounts that we reserve could vary significantly from any amounts we actually pay due to the inherent uncertainties in the estimation process. We cannot assure you that these or other legal proceedings will not materially affect our business. We are subject to anti-corruption, anti-bribery, anti-money laundering and antitrust laws and regulations in Chile, the United States and in the various countries we operate. Viola- tions of any such laws or regulations could have a material adverse impact on our reputation and results of operations and financial condition. We are subject to anti-corruption, anti-bribery, anti-money laundering, antitrust and other international laws and regu- lations and are required to comply with the applicable laws 119 MANAGEMENT 2016 | Risk factors and regulations of Chile, the United States and certain other jurisdictions where we operate. In addition, we are subject to economic sanctions regulations that restrict our dealings with certain sanctioned countries, individuals and entities. There can be no assurance that our internal policies and procedures will be sufficient to prevent or detect all inappropriate prac- tices, fraud or violations of law by our affiliates, employees, directors, officers, partners, agents and service providers or that any such persons will not take actions in violation of our policies and procedures. Any violations by us of anti-bribery and anti-corruption laws or sanctions regulations could have a material adverse effect on our business, reputation, results of operations and financial condition. The Brazilian government has exercised, and may continue to exercise, significant influence over the Brazilian economy, which may have an adverse impact on our business, financial condition and results of operations. The Brazilian economy has been characterized by the sig- nificant involvement of the Brazilian government, which often changes monetary, credit, fiscal and other policies to influ- ence Brazil’s economy. The Brazilian government’s actions to control inflation and implement other policies have involved wage and price controls, depreciation of the real, controls over remittance of funds abroad, intervention by the Central Bank to affect base interest rates and other measures. We have no control over, and cannot predict what measures or policies the Brazilian government may take in the future. Risks Related to our Common Shares and ADSs Our major shareholders may have interests that differ from those of our other shareholders. One of our major shareholder groups, the Cueto Group (the “LATAM Controlling Shareholders”),which as of January 31, 2017, beneficially owned 28.27% of our common shares, is entitled to elect three of the nine members of our board of directors and is in a position to direct our management. In addition, the LATAM Controlling Shareholders have en- tered into a shareholders agreement with the Amaro Group, which as of January 31, 2017, held a 3.02% of LATAM shares through TEP Chile, in addition to the indirect stake they have through the 21.88% interest in Costa Verde Aeronáutica S.A., the main legal vehicle through which the Cueto Group holds LATAM shares, pursuant to which these two major share- holder groups have agreed to vote together to elect individu- als to our board of directors in accordance with their direct and indirect shareholder interest in LATAM. Pursuant to a shareholders’ agreement, the LATAM Controlling Sharehold- ers and the Amaro Group have also agreed to use their good faith efforts to reach an agreement and act jointly on all ac- tions to be taken by our board of directors or shareholders meeting, and if unable to reach to such agreement, to follow the proposal made by our board of directors. Decisions by the Company that require supermajority votes under Chilean law are also subject to voting arrangements by the LATAM Controlling Shareholders and theAmaro Group. In addition, another major shareholder, Qatar Airways Investments (UK) Ltd., which as of January 31, 2017, held 10.03%1 of paid and subscribed shares, is entitled to appoint one individual to our board of directors. The interests of our major shareholders may differ from those of our other shareholders. See “Item 7. Controlling Shareholders and Related Party Transactions—A. Major Shareholders.” Under the terms of the deposit agreement governing the ADSs, if holders of ADSs do not provide JP Morgan Chase Bank, N.A., in its capacity as depositary for the ADSs, with timely instructions on the voting of the common shares un- derlying their ADRs, the depositary will be deemed to have been instructed to give a person designated by the board of directors the discretionary right to vote those common shares. The person designated by the board of directors to exercise this discretionary voting right may have interests that are aligned with our controlling shareholders, which may differ from those of our other shareholders. Historically, our board of directors has designated its chairman, currently Mauricio Amaro, to serve in this role. 1. Qatar owns 9.999999918% of total issued shares of LATAM. Trading of our ADSs and common shares in the securities mar- kets is limited and could experience further illiquidity and price volatility. Our common shares are listed on the various Chilean stock exchanges. Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. In addition, Chilean securi- ties markets may be materially affected by developments in other emerging markets, particularly other countries in Latin America. Accordingly, although you are entitled to withdraw the common shares underlying the ADSs from the deposi- tary at any time, your ability to sell the common shares un- derlying ADSs in the amount and at the price and time of your choice may be substantially limited. This limited trading market may also increase the price volatility of the ADSs or the common shares underlying the ADSs. Holders of ADRs may be adversely affected by currency de- valuations and foreign exchange fluctuations. If the Chilean peso exchange rate falls relative to the U.S. dol- lar, the value of the ADSs and any distributions made thereon from the depositary could be adversely affected. Cash distri- butions made in respect of the ADSs are received by the de- positary (represented by the custodian bank in Chile) in pesos, converted by the custodian bank into U.S. dollars at the then- prevailing exchange rate and distributed by the depositary to the holders of the ADRs evidencing those ADSs. In addition, the depositary will incur foreign currency conversion costs (to be borne by the holders of the ADRs) in connection with the foreign currency conversion and subsequent distribution of dividends or other payments with respect to the ADSs. Future changes in Chilean foreign investment controls and with- holding taxes could negatively affect non-Chilean residents that invest in our shares. Equity investments in Chile by non-Chilean residents have been subject in the past to various exchange control regu- lations that govern investment repatriation and earnings 120 thereon. Although not currently in effect, regulations of the Central Bank of Chile have in the past required, and could again require, foreign investors acquiring securities in the secondary market in Chile to maintain a cash re- serve or to pay a fee upon conversion of foreign currency to purchase such securities. Furthermore, future changes in withholding taxes could negatively affect non-Chilean residents that invest in our shares. We cannot assure you that additional Chilean restrictions applicable to the holders of ADRs, the disposition of the common shares underlying ADSs or the repatriation of the proceeds from an acquisition, a disposition or a dividend payment, will not be imposed or required in the future, nor could we make an assessment as to the duration or impact, were any such restrictions to be imposed or re- quired. For further information, see “Item 10. Additional Information—D. Exchange Controls—Foreign Investment and Exchange Controls in Chile.” Our ADS holders may not be able to exercise preemptive rights in certain circumstances. The Chilean Corporation Law provides that preemptive rights shall be granted to all shareholders whenever a company issues new shares for cash, giving such hold- ers the right to purchase a sufficient number of shares to maintain their existing ownership percentage. We will not be able to offer shares to holders of ADSs and sharehold- ers located in the United States pursuant to the preemp- tive rights granted to shareholders in connection with any future issuance of shares unless a registration statement under the U.S. Securities Act of 1933, as amended, (the “Securities Act”), is effective with respect to such rights and shares, or an exemption from the registration require- ments of the Securities Act is available. At the time of any rights offering, we will evaluate the potential costs and liabilities associated with any such registration statement in light of any indirect benefit to us of enabling U.S. hold- ers of ADRs evidencing ADSs and shareholders located in the United States to exercise preemptive rights, as well as MANAGEMENT 2016 | Risk factors any other factors that may be considered appropriate at that time, and we will then make a decision as to whether we will file a registration statement. We cannot assure you that we will decide to file a registration statement or that such rights will be available to ADS holders and sharehold- ers located in the United States. We are not required to disclose as much information to in- vestors as a U.S. issuer is required to disclose and, as a result, you may receive less information about us than you would receive from a comparable U.S. company. The corporate disclosure requirements that apply to us may not be equivalent to the disclosure requirements that apply to a U.S. company and, as a result, you may receive less information about us than you would receive from a comparable U.S. company. We are subject to the report- ing requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The disclosure require- ments applicable to foreign issuers under the Exchange Act are more limited than the disclosure requirements applicable to U.S. issuers. Publicly available information about issuers of securities listed on Chilean stock ex- changes also provides less detail in certain respects than the information regularly published by listed companies in the United States or in certain other countries. Further- more, there is a lower level of regulation of the Chilean securities market and of the activities of investors in such markets as compared with the level of regulation of the securities markets in the United States and in certain oth- er developed countries. 121 MANAGEMENT 2016 | Additional information Additional information Suppliers General casualty insurance During the year 2016, and just like in previous years, the main suppliers of LATAM Airlines were the aircraft manu- facturers, Airbus and Boeing. Along with them, LATAM Air- lines has a number of other suppliers, primarily related to aircraft accessories, spare parts and components, such as: Pratt & Whitney, MTU Maintenance, Rolls-Royce, Pratt and Whitney Canada, CFM International, General Electric Com- ercial Aviation Services Ltd., General Electric Celma, Gen- eral Electric Engines Service, Honeywell, Israel Aerospace Industries, Air France/KLM (engines and APU); Zodiac Seats US, Recaro, Zodiac Seats UK (seats); Teledyne (TCS B787- 9); Honeywell y Rockwell Collins (Avionics); Air France/ KLM, LUFTHANSA Technik (MRO components); Panasonic, Thales (On-board entertainment); SAFRAN Landing Sys- tems (trains and brakes); UTC Aerospace (Nacelas). To these, we must be added our fuel suppliers, such as Raízen, World Fuel Services, YPF, Petrobras, Terpel, Repsol, Shell and Copec, among others. Insurance LATAM Airlines, in consideration of all those areas that in- volve a potential risk takes up insurance policies that can be classified in three main categories: Aviation Insurance, Hull and Legal Liabilities. These types of insurance cover all the risks inherent to commercial navigation such as air- craft, engines, spare parts and third-party civil liability in- surance: passenger, cargo, baggage, products, airports, etc. After the Association of LAN with TAM, the insurance poli- cies for both companies began to be purchased by the LA- TAM Airlines Group, generating increased trading volumes and resulting in lower operating costs. This insurance group permits covering all risks that may affect the company’s equity capital, particularly its physi- cal and financial assets; all of which are protected through multi-risk insurance policies (which includes risks of fire, theft, computer equipment failure, consignments of val- ues, crystals, and others based on a comprehensive cover- age), along with the traditional coverage of motor vehicles, air and maritime transport, corporate civil liability, etc. plus life and casualty insurance. This group of insurance policies covers all company personnel: i.e. executives, employees in general, and flight crews. Brands and patents The company and its subsidiaries use different trade- marks, which are duly registered with the competent agencies in the various countries in which they develop their operations or that constitute their origin and/or des- tination, with the purpose of differentiating and marketing their products and services in such country. Among the main brands are: LATAM Airlines, LATAM Airlines Argen- tina, LATAM Airlines Brazil, LATAM Airlines Chile, LATAM Airlines Colombia, LATAM Airlines Ecuador, LATAM Airlines Peru, LATAM Cargo, LATAM PASS, LATAM Fidelidade, LATAM Travel, among others. Customers The Company has no customers that individually represent more than 10% of sales. 122 MANAGEMENT 2016 | Investment Plan Adjusting our fleet commitments Such reductions will improve the Company’s balance sheet and allow a greater flexibility to better respond to market conditions in the coming years. The benefits of such reductions will be observed during the next couple of years through lower lease and capital expenses, along with lower financing needs, thus improving the genera- tion of the company’s cash flow and strengthening its balance sheet. Additionally, LATAM expects to have a non-fleet CAPEX (including intangible assets) of approximately US$ 500 million per year, including maintenance, investments in engines and spare parts and the cost of executing the new domestic business model, among others. In 2012, the LATAM Group announced the execution of a fleet renewal plan aimed at reducing the variety of aircraft currently operating and to gradually withdraw those deemed less efficient. As of December 2016, the airline’s plan continued to make progress, withdrawing a total of 23 aircraft during 2016, among which are the latest Airbus A330; a model that was completely eradi- cated from the fleet. Additionally, the company incor- porated 24 new larger and more efficient aircraft, such as the Airbus A321, Airbus A350, Boeing 787-9 and the first Airbus A320neo’s. During 2016, the company made significant progress in its plan to reduce the fleet’s total assets and com- mitments, reaching the lowest fleet commitment in LA- TAM’s recent history for 2017 and 2018. LATAM reduced its fleet commitments through postponements and can- cellations; moreover, it will also reduce its current fleet assets by returning additional aircraft as compared to last year’s fleet plan. With this, the company achieved a reduction of US$ 2.2 billion in fleet assets for the period between 2016-2018; all of it in line with its previously- announced plans to reduce its expected 2018 fleet as- sets by US$ 2.0 to US$ 3.0 billion 123 At year end PASSENGER AIRCRAFT Narrow Body Airbus A319-100 Airbus A320-200 Airbus A320 Neo Airbus A321-200 Airbus A321 Neo TOTAL Wide Body Airbus A330-200 Boeing 767-300 Airbus A350-900 Airbus A350-1000 Boeing 777-300 ER Boeing 787-8 Boeing 787-9 TOTAL CARGO AIRCRAFT Boeing 777-200F Boeing 767-300F TOTAL FLEET Subleases Airbus A320-200 Airbus A350-900 Boeing 787-8 Boeing 777-200F Boeing 767-300F TOTAL MANAGEMENT 2016 | Investment Plan 2015 2016 2017E 2018E 50 154 - 36 - 240 10 38 1 - 10 10 7 76 3 8 11 327 - - - 1 3 4 48 146 2 47 - 243 - 37 7 - 10 10 12 76 2 8 10 329 - - - 0 3 3 45 126 7 47 - 225 0 36 7 - 10 10 14 77 1 8 9 45 116 11 47 2 221 - 36 9 - 7 10 14 76 1 8 9 311 306 5 4 2 1 1 7 5 - 4 1 1 7 Fleet commitments (US$ million) 1.689 1.952 469 555 Note: This table does not include 4 A350-900 that will be sub- leased to Qatar for periods of between six and 12 months during 2017 and 2018. Does not include two B777-200F (one currently leased to a third party), three A330 and one A320 that were reclassified from property plant and equipment to hold for sale. 124 SUSTAINABILITY 125 SUSTAINABILITY | Sustainability Vision Our aspiration to be more LATAM’s commitment to the creation of shared value for shareholders, the market, employees, clients, suppliers and society at large, is an integral part of the company’s business strategy and decision-making guidelines. Sus- tainability advances, present through business practices, constitute an important thrust forward towards the aspi- ration of becoming one of the three largest airline groups in the world. In 2016, what had already become a reality in the compa- ny’s daily operations was then elevated to the category of company policy via the approval of LATAM’s Sustainability Policy. This document, which was validated by the compa- ny’s Board of Directors, the highest corporate governance body, establishes the main guidelines and principles to be adhered to in the development and articulation of sus- tainable development strategies and initiatives through- out the entire Group. From a long-term perspective, the company’s sustainabili- ty strategy is divided into three (3) dimensions: ► Sustainable governance: the company established a clear and transparent po- sition regarding its commitments and objectives, deci- sion-making structures, execution and follow-up of re- sults that support the application of such strategy; ► Climate change: to balance out a risk mitigation vision and search for new opportunities in managing the real and potential impacts of the business, with an emphasis on the re- duction of the carbon footprint and ecological actions; ► Corporate citizenship: to make of LATAM’s business and value network’s rela- tionships -with suppliers, employees, clients and soci- ety at large- socioeconomic catalyzers of the region’s environmental equilibrium via the development of its employees, its social investments, the promotion of tourism and good practices. These dimensions group the major development objec- tives, which are broken down into objectives and goals, helping to systematize the continuous improvement pro- cess and quantify the results. In order to put the focus on our efforts to improve perfor- mance, LATAM considers a structured process of the most relevant sustainability topics, including the real or potential impacts of the operation of its various stakeholders, the public’s expectations, the company’s future outlook and the commitments assumed, sector and international sus- tainability drivers and global trends. The following is the list of the organization’s most import- ant topics: ► Climate change mitigation: to continuously reduce the intensity of emissions and introduce the results of new energy technologies’ re- search; ► Efficient management: to achieve levels of excellence in the rational use of fuel and the management of resources; ► Noise reduction and other emissions: to control de emission of aircraft noise in communities near airports and the impact of emissions on air quality; ► Connectivity and customer relations: to pay attention to technological opportunities and trends and meet new client demands, investing in the quality of our services and in transparent and ethical communications; 126 ► Health and safety in the air and on the ground: to manage potential risks, including cyber risks and guarantee the highest standards of security to our cus- tomers, employees and the community; ► Talent and productivity management: to improve the management of performance and of the career in the different business units, aimed at profes- sional growth and the maintenance of a high-perfor- mance culture; ► Relations with the Government, healthy competi- tion and regulatory specifications: to pursue a continuous dialogue with governments, local authorities and representative industry organiza- tions, focusing on compliance and the creation of re- sponsible solutions. ► Value chain: to promote the suppliers’ good practices in terms of ethics, sustainability and the ecology and promote the development of those communities with which the company relates; ► Economic and financial sustainability: to look for synergies in managing costs and assets, the planning of current and future investments focusing on the creation of value for the company and its share- holders. SUSTAINABILITY | Sustainability Vision 127 SUSTAINABILITY | Sustainability Governance Our sustainability management LATAM’s sustainability policy, ap- proved in 2016, considered a num- ber of international references and commitments, which should serve as a guide for its activities (see ta- ble), and it explains the correlation between various aspects of the business’ sustainability and man- agement. The clearest example is risk management: a matrix that guides risk mitigation, including those of the environmental, labor and linked to the relationship and reputation of the company with its own public. Management is performed in an integrated man- ner with other types of risk, such as the financial and operational, among others. In order to ensure that information and the strategic view of the ad- ministration are indeed aligned to the objectives and progress of the company’s sustainability policy, the Management Council will an- nually monitor the data. The new stage of strategic validation com- plements the supervision that was already being carried out periodi- cally by the Council’s Commission. Additionally, whenever a member joins the company’s senior man- agement, he/she participates in immersion activities in the busi- ness strategy, where sustainability management is a focus of a specif- ic module of this process. International references In order to promote improvements in sustainability management, LATAM is guided by a set of rules, standards, references and international commitments, the most important of which are the following: ► The ISSO 26000 standard: the first international standard for Corporate So- cial Responsibility (CSR). ► The Global Compact: is an initiative of the United Nations (UN) to promote the adoption of social responsibility practices in the areas of human rights, human rights at work, in the environment and in fighting corruption. ► Sustainable Development Objectives: is a worldwide development program promoted by the UN that defines the objectives and goals related to the eradication of poverty, food security, health, education, gender equality, the reduction of inequalities, energy, water and sanitation, sustainable produc- tion and consumption patterns, climate change, sustainable cities, the sus- tainable protection and use of ecosystems and inclusive economic growth, among other topics. ► Business-oriented Principles and Human Rights: is a kind of guide, prepared by the Special Representative of the Secretary General of the United Na- tions, John Ruggie, which brings together the parameters and guidelines to ensure the protection, respect and repair of human rights in business affairs. ► The Tripartite Declaration of Principles concerning Multinational Companies and Social Policy: it was prepared by the International Labor Organization (ILO) and it is aimed at promoting the active participation of multinational companies to economic and social progress, while minimizing the negative effects of their activities. ► The Guidelines of the Organization for Cooperation and Economic Develo- pment (OECD) for multinational companies: brings together recommenda- tions for businesses and governments, and provides principles and voluntary standards for a business conduct consistent with applicable laws and inter- nationally-recognized best practices. ► The GRI methodology: is the main reference of the sustainability reports. It was developed by the Global Reporting Initiative (GRI), a multi-sectoral international organization that seeks to promote the standardization and continuous improvement of sustainability management and communica- tions in companies and organizations of different sizes and sectors around the world. 128 SUSTAINABILITY | Sustainability Governance Progress measurement The company’s performance in the Dow Jones Sustainabil- ity Index (DJSI, for its acronym in English) is the main crite- rion of this development. The DJSI is the main global economic, social and environ- mental performance reference of long-term value creation. The selection is based on a methodology known as Best in Class, which analyzes the performance of corporate gover- nance issues and the economic, social and environmental practices of leading public companies in different economic sectors. Only the leading companies make up the final list, which is published annually. The DJSI membership selection process is carried out by RobecoSAM, an investment con- sulting firm specializing in sustainability. LATAM is part of this index since its 2012 Edition, when it was selected in the Emerging Markets segment. Ever since the 2014 Edition, however, it is a member of the Global In- dex, which brings together the top 10% of the best compa- nies invited. In 2016, this index analyzed the 2,500 largest companies (according to Standard and Poor’s Broad Market Index) of 28 different countries, and 316 were selected. Only two airlines appear in that group. Transparency in the donation process By the end of 2016, the Board of Directors approved the LATAM Group’s donations policy. This policy applies to all company subsidiaries and it objectively sets out donation criteria as well as the stages and approval process, clearly defining the various roles and responsibilities. According to this document, company donations must only be of services (free transport of persons or cargo), species or money contributions. In line with the sustainability strategy of the group, do- nations must be aimed at projects that provoke positive social, environmental or cultural impacts and should be directed mainly to people of scarce resources or non-pro- fit foundations of the region. The donation approval process involves the Corporate, Legal and Compliance areas so as to ensure that they indeed meet the company’s principles of ethics, transpa- rency and abide by the pertinent legislation. Economic dimension Social dimension Environmental dimension Total sustainability 87 86 80 74 78 82 71 64 90 90 84 76 85 85 79 72 2015 2016 2015 2016 2015 2016 2015 2016 LATAM Performance Best in the industry 129 SUSTAINABILITY | Climate Change Our commitment to the environment The United Nations Framework Convention on Climate Change defines this phenomenon as a change in the cli- mate that alters the global atmosphere, generating signifi- cant adverse effects on the composition, resilience or pro- ductivity of natural ecosystems. Stabilizing and controlling the release of greenhouse gases is our primary objective to combat climate change. Aware as we are of the im- pacts generated by our industry (responsible for 2% of the greenhouse gas emissions attributable to human activity), we developed a climate change strategy that allows us to address initiatives in two areas: impact and profitability, with actions directly related to the impacts of our opera- tions, which are approached from the point of view of risk management, and monitored and mitigated through our management system; plus involvement and recognition, focusing on awareness-raising initiatives, the training of our employees and the dissemination of actions and good environmental practices. to participate and support the design, implementation and certification of the IATA Environmental Assessment (IEnvA) system. Consequently, in our international oper- ations in Chile we are now certified at the highest level of the system (Stage 2). 3. The Smart Fuel program allowed fuel savings of more than 41 million gallons. This means ceasing to emit more than 440 thousand tons of CO2, as well as noise reduction and local air quality improvement. 4. CORSIA: Our industry achieved a milestone in 2016, since the member states of the International Civil Avia- tion Organization (ICAO) ratified the industry’s commit- ment to limit the growth of CO2 emissions in interna- tional flights beginning on 2020, thus becoming the first industry worldwide to reach an agreement to regulate CO2 emissions. The LATAM Airlines Group’s Environmental Management System aligned to ISO 14001 standards for land operations and the IATA Environmental Assessment (IEnvA) developed jointly with IATA by and for the airlines, especially for man- aging their air operations, establishing efficiency programs with respect to significant environmental aspects such as operating controls, process optimization and the manage- ment of associated risks and operating emissions. In addition to in-flight fuel efficiency, we have on-land fuel efficiency initiatives in place. Added to that, ever since 2012 in Peru and 2014 in Colombia, we offset our land operating emissions through local reforestation programs. The strategic challenge of the LATAM Airlines Group is to become a worldwide leader in combating climate change, while contributing greater efficiency and competitiveness to the company. During 2016 we had the following milestones: 1. We were acknowledged as Climate Strategy leaders in the Dow Jones Sustainability Index; 2. We maintained the certification under the international ISO14.001 standard in our Miami facilities, in addition to making implementation progress in those coun- tries where the company runs major operations. We also want to emphasize that we were the first airline LATAM is firmly committed to promoting the development of alternative and sustainable energy sources. Since this is very important to the air transport industry, our com- pany is aligned with such efforts and will continue to work toward developing the future incorporation of sustainable alternative fuels. In turn, we call upon our region not to re- main behind in assuming these challenges. 130 SUSTAINABILITY | Corporate Citizenship Our commitment to the region Corporate citizenship seeks to enrich links with custom- ers, employees, communities, governments and suppliers building positive relationships which, in turn, contribute to the company, to society and to the destinations where we operate. It allows obtaining the “Social License” to oper- ate; namely, the vote of confidence of our stakeholders. Corporate citizenship includes philanthropy, but expands our framework of vision to include actions that improve social impact. In order to comply with this objective, LATAM relies on three pillars that guide behavior toward providing a memorable and differentiating service: ► Safety: at all times we guarantee our safety and security, and that of our team and of our customers; ► Courtesy: we care about the needs and emotions of per- sons and strive to solve their problems gently; Our 2015-2018 Corporate Sustainability Strategy defines four action objectives, involving both the communities where we operate as well as persons: ► Efficiency: We endeavor to improve ourselves continu- ously. 1. To support the company’s internal culture and the well-being of our collaborators; 2. To incorporate social and environmental variables in products and services that improve customer experience; 3. To contribute to the economic development of those destinations where we operate; and 4. To contribute to the preservation of the cultural and en- vironmental heritage of Latin America. This outlook is aligned with two strategic company pil- lars: “Brand and customer experience” and “Organizational strength”; both of them essential to foster a culture where each of our actions and decisions should consider their impact in a balanced way, not only to our bottom line but also over persons and customers. In order to ensure that the differentiating experience that LATAM seeks to deliv- er to its customers is indeed consistent over time –re- gardless of the county of operation- the company has a common purpose that provides direction, motivation and mobilizes the actions of the more than 45 thousand per- sons that comprise its human team. The delivery services of excellence and providing a differ- entiating experience to customers are key aspects that explain the business success of the LATAM Group, both in its passenger as well as in its cargo segments. We seek to transform the experience of a traditional trip into some- thing nimble, fast, with less waiting time at airports, less time between connections, more on-board entertainment options and more information in case of contingencies. The most important project related to customers experi- ence, is the Twist Project. Through Twist we seek that our teams know how to prioritize their agenda, review projects and customize the products or services that they deliver in order to generate a new rela- tionship with each of our customers, thereby gaining their preference. The project ranges from how to apply company policies to the distribution of roles and responsibilities; also adopting tools for real-time monitoring of customer satis- faction. A key element has been our increased collaborator commitment given a greater decision-making autonomy. By December 2016, the company ended up with approxi- mately 9 thousand people working under the Twist model, which includes all employees working in the contact cen- ters, the airports hubs, half of the airports in Brazil and large non-hub airports. 131 Since we operate in several countries of the region, the scope of our impact is quite broad; affecting all the com- munities that we operate through the connectivity generat- ed and the local impact of our operations. This is why we have defined, within the framework of our bond with the communities that we will seek to contribute to the eco- nomic development and the conservation of the cultural and environmental heritage of Latin America. We seek to contribute to the development of the region by promoting sustainable tourism and by positioning ourselves as region- al sustainability leaders. Within the framework of sustainable tourism, since 2009, LATAM has been carrying out the “I take care of my destina- tion” (CMD, in its Spanish acronym) program, adding Bra- zil to this initiative since 2015. Students and community members work together in the recovery of public spaces of touristic value, such as monuments or important buildings in each city. As part of such CMD Program, students and authorities receive training talks about tourist awareness, environment and local culture, thus promoting responsible tourism and the care of Latin America’s historical and cul- tural heritage. Since its inception, the program has devel- oped 66 times in 26 locations in Latin America, with the participation of more than 3,500 students and volunteers from the LATAM Airlines Group. Finally, through our operation we seek to support Social Investments; which we do via contributions to non-govern- mental organizations (NGO’s) whose work positively con- tributes toward the continent’s development, combating poverty, ensuring environmental preservation, citizenship participation and the protection of human rights. We also provide support by transporting volunteers or via direct do- nations. During 2016 were donated more than 3 thousand airline tickets and transported 672 tons of goods to provide support in disaster cases. SUSTAINABILITY | Corporate Citizenship 132 SUSTAINABILITY | Relation with Groups of Interest Relationships with stakeholders For LATAM, relationships with different social stakehold- ers represent an opportunity for joint construction and a steady growth. These categories were subdivided according to their potential impact to the company and their relative level of influence. Through its relationships with governmental bodies and sector entities in the different markets in which it oper- ates, LATAM keeps an active role on issues that have a direct or indirect bearing on its business strategy, which is always exercised in full compliance with the applicable legislation and with LATAM’s rules as set forth in its Code of Conduct and its internal policies. Over time, we have sought to strengthen our participation in trade or indus- try bodies representing the airline industry. We act globally through IATA, which is a key forum to discuss new tech- nologies, operational security and safety, as well as the current and future challenges of the aeronautic sector. At the regional level, we also participate in the Latin Amer- ican and Caribbean Air Transport Association (ALTA, in its Spanish acronym), where Mr. Enrique Cueto, CEO of the LATAM Airlines Group, assumed as President in 2015, a cir- cumstance that reinforces the commitment of the LATAM Airlines Group to the aviation industry. Always defending a legitimate and transparent dialogue, we look for joint solu- tions with a focus on efficiency and profitability. LATAM has teams responsible for monitoring and participating in such debates. In Chile and in other markets, we also work in studying routes and flights that would promote tourism, employment and profitability in locations where we do not currently operate, including the necessary coordination with the communities and their local governments. The main stakeholders of the LATAM Group were identified in a process carried out by the Vice President of Corpo- rate Affairs aimed at defining critical issues and system- atizing a management model of corporate relationships with stakeholders; identifying areas of bonding with each stakeholder group, including indicators and monitoring; establishing channels of communication and permanent bonding, coordinated, transparent and defined in order to achieve articulated and reliable relationships; and, final- ly, to generate joint actions that would permit identifying gaps and opportunities. The main stakeholders thus identified are: ► Academia ► Shareholders ► Trade unions ► Risk classification (rating) agencies and market analysts ► Cargo clients ► Passenger clients ► Collaborators ► Local communities ► Airport concessionaires ► Public and regulatory entities ► Sector specialists ► Industry ► Investors ► The communications media ► NGO’s / Foundations ► International organizations ► Primary suppliers ► Secondary suppliers ► Work unions ► Third parties and subcontractors 133 FINANCIAL STATEMENTS 134 FINANCIAL STATEMENTS | Financial Statements LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016 CONTENTS Consolidated Statement of Financial Position Consolidated Statement of Income by Function Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows - Direct Method Notes to the Consolidated Financial Statements CHILEAN PESO - - ARGENTINE PESO - UNITED STATES DOLLAR CLP ARS US$ THUS$ - COP - BRL/R$ - THR$ MXN - MEXICAN PESO VEF - STRONG BOLIVAR THOUSANDS OF UNITED STATES DOLLARS COLOMBIAN PESO BRAZILIAN REAL - THOUSANDS OF BRAZILIAN REAL 135 REPORT OF INDEPENDENT AUDITORS (Free translation from the original in Spanish) Santiago, March 15, 2017 To the Board of Directors and Shareholders Latam Airlines Group S.A. We have audited the accompanying consolidated financial statements of Latam Airlines Group S.A. and subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2016 and 2015 and the related statements of income, comprehensive income, changes in equity and cash flows for the years then ended, and the corresponding notes to the consolidated financial statements. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS). This responsibility includes the design, implementation and maintenance of a relevant internal control for the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Chilean generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. As a consequence we do not express that kind of opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. FINANCIAL STATEMENTS | Financial Statements Santiago, March 15, 2017 Latam Airlines Group S.A. 2 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects the financial position of Latam Airlines Group S.A. and subsidiaries as at December 31, 2016 and 2015, and the results of operations and cash flows for the years then ended in accordance with the International Financial Reporting Standards (IFRS). Jonathan Yeomans Gibbons RUT: 13.473.972-K 136 Contents of the notes to the consolidated financial statements of LATAM Airlines Group S.A. and Subsidiaries. Notes Page 1 - General information ....................................................................................................................... 1 2 - Summary of significant accounting policies .................................................................................. 7 2.1. Basis of Preparation ................................................................................................................. 7 2.2. Basis of Consolidation ........................................................................................................... 11 2.3. Foreign currency transactions ................................................................................................ 12 2.4. Property, plant and equipment ............................................................................................... 13 2.5. Intangible assets other than goodwill ..................................................................................... 13 2.6. Goodwill ................................................................................................................................. 14 2.7. Borrowing costs ..................................................................................................................... 14 2.8. Losses for impairment of non-financial assets ....................................................................... 14 2.9. Financial assets ....................................................................................................................... 15 2.10. Derivative financial instruments and hedging activities ...................................................... 15 2.11. Inventories ............................................................................................................................ 17 2.12. Trade and other accounts receivable .................................................................................... 17 2.13. Cash and cash equivalents .................................................................................................... 17 2.14. Capital .................................................................................................................................. 17 2.15. Trade and other accounts payables ....................................................................................... 17 2.16. Interest-bearing loans ........................................................................................................... 18 2.17. Current and deferred taxes ................................................................................................... 18 2.18. Employee benefits ................................................................................................................ 18 2.19. Provisions ............................................................................................................................. 19 2.20. Revenue recognition ............................................................................................................. 19 2.21. Leases ................................................................................................................................... 20 2.22. Non-current assets (or disposal groups) classified as held for sale ...................................... 20 2.23. Maintenance ......................................................................................................................... 20 2.24. Environmental costs ............................................................................................................. 21 3 - Financial risk management .......................................................................................................... 21 3.1. Financial risk factors .............................................................................................................. 21 3.2. Capital risk management ........................................................................................................ 35 3.3. Estimates of fair value ............................................................................................................ 35 4 - Accounting estimates and judgments ........................................................................................... 38 5 - Segmental information ................................................................................................................. 41 6 - Cash and cash equivalents ........................................................................................................... 43 7 - Financial instruments ................................................................................................................... 45 7.1. Financial instruments by category .......................................................................................... 45 7.2. Financial instruments by currency ......................................................................................... 47 8 - Trade, other accounts receivable and non-current accounts receivable ....................................... 48 9 - Accounts receivable from/payable to related entities .................................................................. 51 10 - Inventories ................................................................................................................................. 52 11 - Other financial assets ................................................................................................................. 53 12 - Other non-financial assets .......................................................................................................... 54 13 - Non-current assets and disposal group classified as held for sale ............................................. 55 14 - Investments in subsidiaries ........................................................................................................ 56 FINANCIAL STATEMENTS | Financial Statements 15 - Intangible assets other than goodwill ......................................................................................... 59 16 - Goodwill .................................................................................................................................... 60 17 - Property, plant and equipment ................................................................................................... 62 18 - Current and deferred tax ............................................................................................................ 68 19 - Other financial liabilities ............................................................................................................ 74 20 - Trade and other accounts payables ............................................................................................ 81 21 - Other provisions ......................................................................................................................... 83 22 - Other non-financial liabilities .................................................................................................... 85 23 - Employee benefits ...................................................................................................................... 86 24 - Accounts payable, non-current .................................................................................................. 88 25 - Equity ......................................................................................................................................... 88 26 - Revenue ..................................................................................................................................... 93 27 - Costs and expenses by nature .................................................................................................... 94 28 - Other income, by function ......................................................................................................... 95 29 - Foreign currency and exchange rate differences ........................................................................ 96 30 - Earnings per share .................................................................................................................... 104 31 - Contingencies ........................................................................................................................... 105 32 - Commitments ........................................................................................................................... 113 33 - Transactions with related parties ............................................................................................. 118 34 - Share based payments .............................................................................................................. 119 35 - Statement of cash flows ........................................................................................................... 123 36 - The environment ...................................................................................................................... 124 37 - Events subsequent to the date of the financial statements ....................................................... 125 137 FINANCIAL STATEMENTS | Financial Statements LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS Current assets Cash and cash equivalents Other financial assets Other non-financial assets Trade and other accounts receivable Accounts receivable from related entities Inventories Tax assets Total current assets other than non-current assets (or disposal groups) classified as held for sale or as held for distribution to owners Non-current assets (or disposal groups) classified as Note 6 - 7 7 - 11 12 7 - 8 7 - 9 10 18 As of As of December 31, December 31, 2016 ThUS$ 2015 ThUS$ 949,327 712,828 212,242 1,107,889 554 241,363 65,377 753,497 651,348 330,016 796,974 183 224,908 64,015 3,289,580 2,820,941 held for sale or as held for distribution to owners 13 337,195 1,960 Total current assets Non-current assets Other financial assets Other non-financial assets Accounts receivable Intangible assets other than goodwill Goodwill Property, plant and equipment Tax assets Deferred tax assets Total non-current assets Total assets 7 - 11 12 7 - 8 15 16 17 18 18 3,626,775 2,822,901 102,125 237,344 8,254 1,610,313 2,710,382 89,458 235,463 10,715 1,321,425 2,280,575 10,498,149 10,938,657 20,272 384,580 25,629 376,595 15,571,419 15,278,517 19,198,194 18,101,418 LIABILITIES AND EQUITY LIABILITIES Current liabilities Other financial liabilities Trade and other accounts payables Accounts payable to related entities Other provisions Tax liabilities Other non-financial liabilities Liabilities included in disposal groups classified as held for sale Total current liabilities Non-current liabilities Other financial liabilities Accounts payable Other provisions Deferred tax liabilities Employee benefits Other non-financial liabilities Total non-current liabilities Total liabilities EQUITY Share capital Retained earnings Treasury Shares Other reserves Parent's ownership interest Non-controlling interest Total equity Total liabilities and equity Note 7 - 19 7 - 20 7 - 9 21 18 22 7 - 19 7 - 24 21 18 23 22 25 25 25 14 As of As of December 31, December 31, 2016 ThUS$ 1,839,528 1,593,068 269 2,643 14,286 2015 ThUS$ 1,644,235 1,483,957 447 2,922 19,378 2,762,245 2,490,033 6,212,039 5,640,972 10,152 - 6,222,191 5,640,972 6,796,952 7,532,385 359,391 422,494 915,759 82,322 213,781 8,790,699 15,012,890 417,050 424,497 811,565 65,271 272,130 9,522,898 15,163,870 3,149,564 2,545,705 366,404 (178) 580,870 4,096,660 88,644 4,185,304 317,950 (178) (6,942) 2,856,535 81,013 2,937,548 19,198,194 18,101,418 The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements. The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements. 138 LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME BY FUNCTION Revenue Cost of sales Gross margin Other income Distribution costs Administrative expenses Other expenses Other gains/(losses) Income from operation activities Financial income Financial costs Share of profit of investments accounted for using the equity method Foreign exchange gains/(losses) Result of indexation units Income (loss) before taxes Income (loss) tax expense / benefit NET INCOM E (LOSS) FOR THE PERIOD Income (loss) attributable to owners of the parent Income (loss) attributable to non-controlling interest Net income (loss) for the year EARNINGS PER SHARE Basic earnings (losses) per share (US$) Diluted earnings (losses) per share (US$) Note For the period ended December 31, 2016 ThUS$ 2015 ThUS$ 26 28 27 29 18 14 30 30 8,988,340 (6,967,037) 9,740,045 (7,636,709) 2,021,303 2,103,336 538,748 (747,426) (872,954) (373,738) (72,634) 493,299 74,949 (416,336) - 121,651 311 273,874 (163,204) 385,781 (783,304) (878,006) (323,987) (55,280) 448,540 75,080 (413,357) 37 (467,896) 481 (357,115) 178,383 110,670 (178,732) 69,220 (219,274) 41,450 40,542 110,670 (178,732) 0.12665 0.12665 (0.40193) (0.40193) The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements. FINANCIAL STATEMENTS | Financial Statements LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME NET INCOME (LOSS) Components of other comprehensive income that will not be reclassified to income before taxes Other comprehensive income, before taxes, gains (losses) by new measurements on defined benefit plans T otal other comprehensive income Note For the period ended December 31, 2016 T hUS$ 110,670 2015 T hUS$ (178,732) 25 (3,105) (14,631) that will not be reclassified to income before taxes (3,105) (14,631) Components of other comprehensive income that will be reclassified to income before taxes Currency translation differences Gains (losses) on currency translation, before tax 29 494,362 (1,409,439) Other comprehensive income, before taxes, currency translation differences Cash flow hedges 494,362 (1,409,439) Gains (losses) on cash flow hedges before taxes 19 127,390 80,387 Other comprehensive income (losses), before taxes, cash flow hedges T otal other comprehensive income that will be reclassified to income before taxes Other components of other comprehensive income (loss), before taxes Income tax relating to other comprehensive income that will not be reclassified to income Income tax relating to new measurements on defined benefit plans Accumulate income tax relating to other comprehensive income that will not be reclassified to income Income tax relating to other comprehensive income that will be reclassified to income Income tax related to cash flow hedges in other comprehensive income Income taxes related to components of other comprehensive incomethat will be reclassified to income T otal Other comprehensive income T otal comprehensive income (loss) Comprehensive income (loss) attributable to owners of the parent Comprehensive income (loss) attributable to non-controlling interests T OT AL COMPREHENSIVE INCOME (LOSS) 127,390 80,387 621,752 (1,329,052) 618,647 (1,343,683) 18 921 3,911 921 3,911 (34,695) (21,103) (34,695) (21,103) 584,873 (1,360,875) 695,543 (1,539,607) 648,539 (1,551,331) 47,004 11,724 695,543 (1,539,607) The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements. 139 FINANCIAL STATEMENTS | Financial Statements LATAM AIRLINES GROUP S.A. Y FILIALES LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES ESTADO DE CAMBIOS EN EL PATRIMONIO CONSOLIDATED STATEMENT OF CHANGES IN EQUITY P a trim o nio a tribuible a la c o ntro la do ra C a m bio s e n o tra s re s e rva s Attributa ble to o wne rs o f the pa re nt R e s e rva s de C ha nge in o the r re s e rve s ga na nc ia s o pé rdida s Ac tua ria l ga ins o r a c tua ria le s e n lo s s e s o n de fine d pla ne s de be ne fit pla ns be ne fic io s de finido s R e s e rva s de pa go s ba s a do s S ha re s ba s e d e n pa ym e nts a c c io ne s re s e rve R e s e rva s de flujo de c o be rtura s de flujo de e fe c tivo re s e rve Ac c io ne s pro pia s C urre nc y e n tra ns la tio n c a rte ra re s e rve R e s e rva s de dife re nc ia s de c a m bio e n c o nve rs io ne s C a s h flo w he dging re s e rve C a pita l Tre a s ury s ha re s e m itido Otra s Othe r re s e rva s s undry va ria s re s e rve To ta l To ta l o tra s o the r re s e rva s re s e rve Ga na nc ia s R e ta ine d a c um ula da s e a rnings P a trim o nio a tribuible a lo s pro pie ta rio s P a re nt's de la o wne rs hip c o ntro la do ra inte re s t P a rtic ipa c io ne s No n- no c o ntro lling c o ntro la do ra s inte re s t P a trim o nio To ta l to ta l e quity ThUS $ M US $ ThUS $ M US $ ThUS $ M US $ M US $ ThUS $ M US $ ThUS $ M US $ ThUS $ M US $ ThUS $ M US $ ThUS $ M US $ ThUS $ M US $ ThUS $ M US $ ThUS $ M US $ No te S ha re c a pita l No ta ThUS $ Equity a s o f J a nua ry 1, 2016 P a trim o nio To ta l inc re a s e (de c re a s e ) in e quity 1 de e ne ro de 2016 C o m pre he ns ive inc o m e C a m bio s e n pa trim o nio 2,545,705 (178) (2,576,041) (90,510) (10,717) 35,647 2,634,679 (6,942) 317,950 2,856,535 81,013 2,937,548 2.545.705 (178) (2.576.041) (90.510) (10.717) 35.647 2.634.679 (6.942) 317.950 2.856.535 81.013 2.937.548 R e s ulta do inte gra l Ga in (lo s s e s ) Ga na nc ia (pé rdida ) Othe r c o m pre he ns ive inc o m e Otro re s ulta do inte gra l 25 To ta l c o m pre he ns ive inc o m e To ta l re s ulta do inte gra l Tra ns a c tio ns with s ha re ho lde rs Tra ns a c c io ne s c o n lo s a c c io nis ta s 25 - - - - - - Equity is s ue Em is ió n de pa trim o nio 25-34 25-34 608,496 608.496 Divide ns Divide ndo s Inc re m e nto (dis m inuc ió n) 25 25 - - Inc re a s e (de c re a s e ) thro ugh po r tra ns fe re nc ia s y o tro s c a m bio s , pa trim o nio tra ns fe rs a nd o the r c ha nge s , e quity 25-34 25-34 (4,637) To ta l tra ns a c c io ne s c o n lo s a c c io nis ta s To ta l tra ns a c tio ns with s ha re ho lde rs 603,859 (4.637) 603.859 - - - - - - - S a ldo s a l 31 de dic ie m bre de 2016 3.149.564 (178) - - 489,486 - - - 92,016 489.486 - 92.016 489,486 - 489.486 92,016 92.016 - - - - - - - - - - - - (2.086.555) - - - - - - - - 1.506 - - (2,183) (2.183) (2,183) (2.183) - - - - - - - - - - - - - - - - - - - - - - - - 579,319 579.319 69,220 69.220 69,220 69.220 - - 579,319 579.319 579,319 579.319 69.220 69,220 648,539 648.539 41,450 41.450 5,554 5.554 47,004 47.004 110,670 110.670 584,873 584.873 695,543 695.543 - - - - - - 608.496 608,496 (20.766) (20,766) (20.766) (20,766) - - - - 608.496 608,496 (20.766) (20,766) - - - - (12.900) 2.891 2,891 2.891 2,891 38.538 5.602 5,602 5.602 5,602 2.640.281 8.493 8,493 8.493 8,493 - - (20.766) (20,766) 3.856 3,856 591.586 591,586 580.870 366.404 4.096.660 (39.373) (39,373) (39.373) (39,373) 88.644 (35.517) (35,517) 552.213 552,213 4.185.304 C lo s ing ba la nc e a s o f De c e m be r 31, 2016 3,149,564 (178) (2,086,555) 1,506 (12,900) 38,538 2,640,281 580,870 366,404 4,096,660 88,644 4,185,304 Las Notas adjuntas números 1 a 37 forman parte integral de estos estados financieros consolidados. The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements. 140 FINANCIAL STATEMENTS | Financial Statements LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributa ble to o wne rs o f the pa re nt C ha nge in o the r re s e rve s No te S ha re c a pita l ThUS $ Tre a s ury s ha re s C urre nc y tra ns la tio n re s e rve C a s h flo w he dging re s e rve ThUS $ ThUS $ ThUS $ Ac tua ria l ga ins o r lo s s e s o n de fine d be ne fit pla ns re s e rve ThUS $ S ha re s ba s e d pa ym e nts re s e rve ThUS $ Othe r s undry re s e rve ThUS $ To ta l o the r re s e rve ThUS $ R e ta ine d e a rnings P a re nt's o wne rs hip inte re s t No n- c o ntro lling inte re s t ThUS $ ThUS $ ThUS $ To ta l e quity ThUS $ Equity a s o f J a nua ry 1, 2015 2,545,705 (178) (1,193,871) (151,340) To ta l inc re a s e (de c re a s e ) in e quity C o m pre he ns ive inc o m e Ga in (lo s s e s ) 25 Othe r c o m pre he ns ive inc o m e To ta l c o m pre he ns ive inc o m e Tra ns a c tio ns with s ha re ho lde rs Inc re a s e (de c re a s e ) thro ugh tra ns fe rs a nd o the r c ha nge s , e quity 25-34 To ta l tra ns a c tio ns with s ha re ho lde rs C lo s ing ba la nc e a s o f De c e m be r 31, 2015 - (1,382,170) (1,382,170) - 60,830 60,830 - - - - - - - - - - - - - - - - 6,005 6,005 (1,069) (1,069) 4,936 4,936 1,034 1,034 5,970 (32,510) (26,540) 5,970 (32,510) (26,540) 2,545,705 (178) (2,576,041) (90,510) (10,717) 35,647 2,634,679 (6,942) 317,950 2,856,535 81,013 2,937,548 - - (10,717) (10,717) 29,642 2,635,748 1,320,179 536,190 4,401,896 101,799 4,503,695 - - - - - - (219,274) (219,274) 40,542 (178,732) (1,332,057) - (1,332,057) (28,818) (1,360,875) (1,332,057) (219,274) (1,551,331) 11,724 (1,539,607) The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements. 141 FINANCIAL STATEMENTS | Financial Statements LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS DIRECT – METHOD Cash flows from operating activities Cash collection from operating activities Proceeds from sales of goods and services Other cash receipts from operating activities Payments for operating activities Payments to suppliers for goods and services Payments to and on behalf of employees Other payments for operating activities Interest received Income taxes refunded (paid) Other cash inflows (outflows) Net cash flows from operating activities Cash flows used in investing activities Other cash receipts from sales of equity or debt instruments of other entities Other payments to acquire equity or debt instruments of other entities Amounts raised from sale of property, plant and equipment Purchases of property, plant and equipment Amounts raised from sale of intangible assets Purchases of intangible assets Other cash inflows (outflows) Net cash flow from (used in) investing activities Cash flows from (used in) financing activities Amounts raised from issuance of shares Amounts raised from long-term loans Amounts raised from short-term loans Loans repayments Payments of finance lease liabilities Dividends paid Interest paid Other cash inflows (outflows) Net cash flows from (used in) financing activities Net increase (decrease) in cash and cash equivalents before effect of exchanges rate change Effects of variation in the exchange rate on cash and cash equivalents Net increase (decrease) in cash and cash equivalents CASH AND CASH EQUIVALENT S AT BEGINNING OF PERIOD CASH AND CASH EQUIVALENT S AT END OF PERIOD For the periods ended December 31, Note 2016 2015 T hUS$ T hUS$ 9,918,589 70,359 11,372,397 88,237 (6,756,121) (1,820,279) (162,839) 11,242 (59,556) (209,269) (7,029,582) (2,165,184) (351,177) 43,374 (57,963) (184,627) 992,126 1,715,475 2,969,731 519,460 (2,706,733) 76,084 (694,370) 1 (88,587) 843 (704,115) 57,117 (1,569,749) 91 (52,449) 10,576 (443,031) (1,739,069) 608,496 1,820,016 279,593 (2,121,130) (314,580) (41,223) (398,288) (229,163) - 1,791,484 205,000 (1,263,793) (342,614) (35,032) (383,648) (99,757) (396,279) (128,360) 152,816 43,014 195,830 753,497 949,327 (151,954) (83,945) (235,899) 989,396 753,497 35 35 35 35 35 6 The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2016 NOTE 1 - GENERAL INFORMATION LATAM Airlines Group S.A. (the “Company”) is a public company registered with the Chilean Superintendency of Securities and Insurance (SVS), under No.306, whose shares are quoted in Chile on the Stock Brokers - Stock Exchange (Valparaíso) - the Chilean Electronic Stock Exchange and the Santiago Stock Exchange; it is also quoted in the United States of America on the New York Stock Exchange (“NYSE”) in New York in the form of American Depositary Receipts (“ADRs”). Its principal business is passenger and cargo air transportation, both in the domestic markets of Chile, Peru, Argentina, Colombia, Ecuador and Brazil and in a developed series of regional and international routes in America, Europe and Oceania. These businesses are performed directly or through its subsidiaries in different countries. In addition, the Company has subsidiaries operating in the freight business in Mexico, Brazil and Colombia. The Company is located in Santiago, Chile, at Avenida Américo Vespucio Sur No. 901, commune of Renca. Corporate Governance practices of the Company are set in accordance with Securities Market Law the Corporations Law and its regulations, and the regulations of the SVS and the laws and regulations of the United States of America and the U.S. Securities and Exchange Commission (“SEC”) of that country, with respect to the issuance of ADRs. On July 18, 2016, LATAM received the approval by Comissão de Valores Mobiliários (“CVM”) for a discontinuation of Brazilian LATAM depositary receipts-BDRS level III ("BDRs"), supported by common shares of the Company and, consequently, our registration of the foreign issuer. On May 24, 2016, the Company reported as an Essential Fact the maturity date May 23, 2016 deadline for holders of BDRs to express their option to keep the shares and the blockade by BM&FBOVESPA with the same date of the respective balances of shares of the holders of BDRs who chose to adhere to the procedure for sale of shares through the procedure called Sale Facility and assigned for this purpose a theoretical value of sales in the Santiago Stock Exchange. On June 9, 2016, the Company reported that BTG Pactual Chile S.A. Stockbrokers ("BTG Pactual Chile"), a chilean institution contracted by the Company, made the sale on the Santiago Stock Exchange of the shares of the respective holders who adhered to Sale Facility procedure. As of December 31, 2015, the Company's subscribed and paid capital was represented by 545,558,101 commons shares, without par value. On August 18, 2016, the Company held an extraordinary shareholders' meeting in which it was approved to increase the capital by issuing 61,316,424 shares of payment, all of them commons shares, without par value. As of December 31, 2016, 60,849,592 shares, equivalent to this increase, had been placed, so at that date the number of shares subscribed and paid by the Company amounted to 606,407,693 shares. 142 FINANCIAL STATEMENTS | Financial Statements 2 5 At December 31, 2016, the Company's capital stock is represented by 608,374,525 shares, all common shares, without par value, which is divided into: (a) the 606,407,693 subscribed and paid shares mentioned above; And (b) 1,966,832 shares pending of subscription and payment, of which: (i) 1,500,000 shares are allocated to compensation stock option plan; And (ii) 466,832 correspond to the balance of shares pending of placement of the last capital increase. It should be noted that the Company's capital stock was expressed in 613,164,243 shares, all ordinary shares, without nominal value. However, on December 21, 2016, the deadline for the subscription and payment of 4,789,718 shares that were also destined to compensation plans for the workers expired, so the Company's capital stock was fully reduced to the already mentioned 608.374.525 shares. The Board of the Company is composed of nine members who are elected every two years by the ordinary shareholders' meeting. The Board meets in regular monthly sessions and in extraordinary sessions as the corporate needs demand. Of the nine board members, three form part of its Directors’ Committee which fulfills both the role foreseen in the Corporations Law and the functions of the Audit Committee required by the Sarbanes Oxley Law of the United States of America and the respective regulations of the SEC. The majority shareholder of the Company is the Cueto Group, which through Costa Verde Aeronáutica S.A., Costa Verde Aeronáutica SpA, Costa Verde Aeronáutica Tres SpA, Inversiones Nueva Costa Verde Aeronáutica Limitada, Inversiones Priesca Dos y Cía. Ltda., Inversiones Caravia Dos y Cía. Ltda., Inversiones El Fano Dos y Cía. Ltda., Inversiones La Espasa Dos S.A., Inversiones, Inversiones La Espasa Dos y Cía. Ltda. and Inversiones Mineras del Cantábrico S.A. owns 28.27% of the shares issued by the Company, and therefore is the controlling shareholder of the Company in accordance with the provisions of the letter b) of Article 97 and Article 99 of the Securities Market Law, given that there is a decisive influence on its administration. As of December 31, 2016, the Company had a total of 1,566 registered shareholders. At that date approximately 4.69 % of the Company’s share capital was in the form of ADRs. For the period ended December 31, 2016, the Company had an average of 48,336 employees, ending this period with a total of 45,916 employees, spread over 8,010 Administrative employees, 4,895 in Maintenance, 15,924 in Operations, 8,970 in Cabin Crew, 3,882 in Controls Crew, and 4,235 in Sales. The main subsidiaries included in these consolidated financial statements are as follows: a) Participation rate Tax No . Co mp any 9 6 .518 .8 6 0 -6 Latam Travel Chile S.A. and Sub s id ary (*) 9 6 .76 3 .9 0 0 -1 Inmo b iliaria Aero náutica S.A. 9 6 .9 6 9 .6 8 0 -0 Lan Pax Gro up S.A. and Sub s id iaries Co untry o f o rig in Chile Chile Chile Peru Fo reig n Fo reig n Lan Perú S.A. Lan Chile Inves tments Limited and Sub s id iary Cayman Ins land 9 3 .3 8 3 .0 0 0 -4 Lan Carg o S.A. Fo reig n Fo reig n Co nnecta Co rp o ratio n Prime Airp o rt Services Inc. and Sub s id ary 9 6 .9 51.2 8 0 -7 Trans p o rte Aéreo S.A. Fo reig n Aircraft Internatio nal Leas ing Limited 9 6 .6 3 1.52 0 -2 Fas t Air Almacenes d e Carg a S.A. Chile U.S.A. U.S.A. Chile U.S.A. Chile Fo reig n Fo reig n Las er Carg o S.R.L. Arg entina Lan Carg o Overs eas Limited and Sub s id iaries Bahamas 9 6 .9 6 9 .6 9 0 -8 Lan Carg o Invers io nes S.A. and Sub s id ary 9 6 .575.8 10 -0 Invers io nes Lan S.A. and Sub s id iaries 59 .0 6 8 .9 2 0 -3 Technical Trainning LATAM S.A. Fo reig n TAM S.A. and Sub s id iaries (**) Chile Chile Chile Brazil As Decemb er 3 1, 2 0 16 As Decemb er 3 1, 2 0 15 Functio nal Currency Direct Ind irect To tal Direct Ind irect To tal % % % % % % 9 9 .9 9 0 0 0 .0 10 0 10 0 .0 0 0 0 9 9 .9 9 0 0 0 .0 10 0 10 0 .0 0 0 0 9 9 .0 10 0 0 .9 9 0 0 10 0 .0 0 0 0 9 9 .0 10 0 0 .9 9 0 0 10 0 .0 0 0 0 9 9 .8 3 6 1 0 .16 3 9 10 0 .0 0 0 0 9 9 .8 3 6 1 0 .16 3 9 10 0 .0 0 0 0 4 9 .0 0 0 0 2 1.0 0 0 0 70 .0 0 0 0 4 9 .0 0 0 0 2 1.0 0 0 0 70 .0 0 0 0 0 .0 0 0 0 0 .0 0 0 0 0 .0 0 0 0 9 9 .9 9 0 0 0 .0 10 0 10 0 .0 0 0 0 9 9 .8 9 3 9 0 .0 0 4 1 9 9 .8 9 8 0 9 9 .8 9 3 9 0 .0 0 4 1 9 9 .8 9 8 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 0 .0 0 0 0 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 0 .0 0 0 0 10 0 .0 0 0 0 10 0 .0 0 0 0 9 9 .710 0 0 .2 9 0 0 10 0 .0 0 0 0 9 9 .710 0 0 .2 9 0 0 10 0 .0 0 0 0 9 9 .8 3 0 0 0 .170 0 10 0 .0 0 0 0 9 9 .8 3 0 0 0 .170 0 10 0 .0 0 0 0 US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ CLP ARS US$ US$ US$ CLP BRL 6 3 .0 9 0 1 3 6 .9 0 9 9 10 0 .0 0 0 0 6 3 .0 9 0 1 3 6 .9 0 9 9 10 0 .0 0 0 0 (*) Lantours Division de Servicios Terrestres S.A. changes its name to Latam Travel Chile S.A. (**) As of December 31, 2016, indirect ownership participation on TAM S.A and subsidiaries is from Holdco I S.A., LATAM is entitled to 99,9983% of the economic rights and 49% of the rights politicians product of provisional measure No. 714 of the Brazilian government that allows foreign capital to have up to 49% of the property. Thus, since April 2016, LATAM Airlines Group S.A. owns 901 voting shares of Holdco I S.A., equivalent to 49% of the total shares with voting rights of said company and TEP Chile S.A. owns 938 voting shares of Holdco I S.A., equivalent to 51% of the total voting shares of that company. 143 FINANCIAL STATEMENTS | Financial Statements 6 7 b) Statement of financial position S ta te m e nt o f fina nc ia l po s itio n Ne t Inc o m e As o f De c e m be r 31, 2016 As o f De c e m be r 31, 2015 F o r the pe rio ds e nde d De c e m be r 31, 2016 2015 Ta x No . C o m pa ny As s e ts Lia bilitie s Equity As s e ts Lia bilitie s Equity Ga in /(lo s s ) ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ 96.518.860-6 La ta m Tra ve l C hile S .A. a nd S ubs ida ry (*) 96.763.900-1 Inm o bilia ria Ae ro ná utic a S .A. 5,468 36,756 2,727 8,843 2,741 27,913 5,613 39,302 5,522 14,832 91 24,470 96.969.680-0 La n P a x Gro up S .A. a nd S ubs idia rie s (**) 475,763 1,045,761 (561,472) 519,663 1,049,232 (521,907) 306,111 294,912 11,199 255,691 240,938 14,753 2,650 3,443 (36,331) (2,164) 2,341 1,404 (35,187) 5,068 F o re ign F o re ign F o re ign La n P e rú S .A. La n C hile Inve s tm e nts Lim ite d a nd S ubs idia ry (**) - - - 2,015 13 2,002 23 (13) 93.383.000-4 La n C a rgo S .A. 480,908 239,728 241,180 483,033 217,037 265,966 (24,813) (74,408) F o re ign F o re ign C o nne c ta C o rpo ra tio n P rim e Airpo rt S e rvic e s Inc . a nd S ubs ida ry (**) 96.951.280-7 Tra ns po rte Aé re o S .A. F o re ign Airc ra ft Inte rna tio na l Le a s ing Lim ite d 96.631.520-2 F a s t Air Alm a c e ne s de C a rga S .A. F o re ign F o re ign La s e r C a rgo S .R .L. La n C a rgo Ove rs e a s Lim ite d a nd S ubs idia rie s (**) 96.969.690-8 La n C a rgo Inve rs io ne s S .A. a nd S ubs ida ry (**) 96.575.810-0 Inve rs io ne s La n S .A. a nd S ubs idia rie s (**) 59.068.920-3 Te c hnic a l Tra inning LATAM S .A. 31,981 7,385 23,525 11,294 340,940 124,805 - 10,023 21 54,092 80,644 10,971 1,745 - 3,645 32 35,178 95,747 6,452 284 8,456 (3,909) 216,135 - 6,378 (11) 15,737 (13,506) 4,452 1,461 37,070 6,683 331,117 - 8,985 27 62,406 54,179 16,512 1,527 38,298 11,180 (1,228) (4,497) 122,666 208,451 4 4,641 39 43,759 68,220 14,676 266 (4) 4,344 (12) 15,563 (12,601) 1,828 1,261 9,684 588 8,206 9 1,717 (1) 176 (910) 2,549 73 TAM S .A. a nd S ubs idia rie s (**) F o re ign (*) Lantours Division de Servicios Terrestres S.A. changes its name to Latam Travel Chile S.A. 5,287,286 4,969,553 4,710,308 4,199,223 495,562 423,190 2,107 194 279 5,878 (4) 1,811 69 3,344 113 2,772 (72) (183,581) (**) The Equity reported corresponds to Equity attributable to owners of the parent, does not include Non-controlling interest. Additionally, we have proceeded to consolidate the following special purpose entities: 1. JOL (Japanese Operating Lease) created in order to finance the purchase of certain aircraft; 2. Chercán Leasing Limited created to finance the pre-delivery payments on aircraft; 3. Guanay Finance Limited created to issue a bond collateralized with future credit card receivables; 4. Private investment funds and 5. Avoceta Leasing Limited created to finance the pre-delivery payments on aircraft. These companies have been consolidated as required by IFRS 10. All the entities controlled have been included in the consolidation. Changes in the scope of consolidation between January 1, 2015 and December 31, 2016, are detailed below: (1) Incorporation or acquisition of companies - On October 2015, Rampas Airport Services S.A., subsidiary of Lan Pax Group S.A. increases its capital and paid in the amount of ThUS$ 6,000 by issuing new shares, changing the property of the company as follows: Lan Pax Group S.A. increased its share to 99.99738%, Inversiones Lan S.A. decreased its stake to 0.00002% and Aerolane Líneas Aéreas Nacionales del Ecuador S.A. acquires stake for 0.0026%. - - - On January 2016 it was registered at the Public Registry of Commerce, the Increase in Share Capital and statutory modification for the purpose of creating a new class of shares of Lan Argentina S.A., subsidiary of Lan Pax Group S.A., for a total of 90,000,000 Class "C" shares registered non-endorsable and non-voting. Lan Pax Group S.A. participated in this capital increase, changing its ownership to 4.87%, consequently, the indirect participation of LATAM Airlines Group S.A. increases to 95.85660% On April 1, 2016, Multiplus Corretora de Seguros Ltda. was created, the ownership of which corresponds to 99.99% of Multiplus S.A. direct subsidiary of TAM S.A. During period 2016, Inversiones LAN S.A., subsidiary of LATAM Airlines Group S.A., acquired 4,767 shares of Aerovías de Integración Regional Aires S.A. a non-controlling shareholder, equivalent to 0.0914%, consequently, the indirect participation of LATAM Airlines Group S.A. increases to 99.19061% (2) Dissolution of companies - - In July 2015, the Company Ladeco Cargo S.A., subsidiary of Lan Cargo S.A., was dissolved. During the period 2016, Lan Chile Investments Limited, subsidiary of LATAM Airlines S.A.; and Aircraft International Leasing Limited, subsidiary of Lan Cargo S.A., were dissolved. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following describes the principal accounting policies adopted in the preparation of these consolidated financial statements. 2.1. Basis of Preparation The consolidated financial statements of LATAM Airlines Group S.A. for the period ended December 31, 2016, have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (“IASB”) incorporated therein and with the interpretations issued by the International Financial Reporting Standards Interpretations Committee (IFRIC). On October 17, 2014, the SVS issued Circular No. 856, instructing the audited entities to record in the year 2014, against equity the differences in assets and liabilities for deferred taxes produced by direct effect of the increase in the rate of First class taxes introduced by Law No. 20,780, which, considering that such treatment differs from those established by IAS 12, and, therefore, the preparation framework represented a change And presentation of financial information that had been adopted up to that date. Considering that what was expressed in the previous paragraph represented a specific and temporary diversion of IFRS, starting in 2016 and in accordance with paragraph 4A of IFRS 1, the Company has decided to retroactively apply IFRS, in accordance with IAS 8 "Accounting policies, changes in accounting estimates and errors" as if it had never failed to apply such IFRS. 144 FINANCIAL STATEMENTS | Financial Statements 8 9 As mentioned in the previous paragraph does not modify any of the accounts presented in the statements of financial position as of December 31, 2016 and 2015, as well as at December 31, 2015 and 2014, as expressed in paragraph 40A of IAS 1 "Presentation of Financial Statements", it is not necessary to present the statement of financial position as of January 1, 2015 (third column). The consolidated financial statements have been prepared under the historic-cost criterion, although modified by the valuation at fair value of certain financial instruments. The preparation of the consolidated financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to use its judgment in applying the Company’s accounting policies. Note 4 shows the areas that imply a greater degree of judgment or complexity or the areas where the assumptions and estimates are significant to the consolidated financial statements. During 2016 the Company recorded out of period adjustments resulting in an aggregate net decrease of US$ 18.2 million to "Net income (loss) for the period" for the year ended December 31, 2016. These adjustments include US$ 39.5 million (loss) resulting from an account reconciliation process initiated after the Company's afiliate TAM S.A. and its subsidiaries completed the implementation of the SAP system. A further US$ 11.0 million (loss) reflect adjustments related to foreign exchange differences, also relating to the Company's subsidiaries in Brazil. The balance of US$ 32.3 million (gain) includes principally the adjustment of unclaimed fees for expired tickets for the Company and its affiliates outside Brazil. Management of TAM S.A. has concluded that the out of period adjustments that have been identified are material to the 2015 financial statements of TAM S.A., which should therefore require a restatement in Brazil. However, Management of LATAM has evaluated the impact of all out of period adjustments, both individually and in the aggregate, and concluded that due to their relative size and to qualitative factors they are not material to the annual consolidated financial statements for 2016 of Latam Airlines Group S.A. or to any previously reported consolidated financial statements, therefore no restatement or revision is necessary. (a) Accounting pronouncements with implementation effective from January 1, 2016: (i) Standards and amendments Date of issue Mandatory Application: Annual periods beginning on or after Amendment to IFRS 11: Joint arrangements. May 2014 01/01/2016 Amendment to IAS 16: Property, plant and equipment, and IAS 38: Intangible assets. May 2014 01/01/2016 Amendment to IAS 27: Separate financial statements. August 2014 01/01/2016 Amendment IAS 1: Presentation of Financial Statements. December 2014 01/01/2016 Amendment to IFRS 10: Consolidated financial statements, IFRS 12: Disclosure of interests in other entities and IAS 28: Investments in associates and joint ventures. December 2014 01/01/2016 (ii) Improvements Date of issue Mandatory Application: Annual periods beginning on or after 01/01/2016 Improvements to International Financial Reporting Standards (2012-2014 cycle ): IFRS 5 Non-current assets held for sale and discontinued operations; instruments: Disclosures; IAS 19 Employee benefits and IAS 34 Interim financial reporting. IFRS 7 Financial September 2014 The application of standards, amendments, interpretations and improvements had no material impact on the consolidated financial statements of the Company. (b) on January 1, 2016 and which has not been effected early adoption Accounting pronouncements not yet force in for financial years beginning (i) Standards and amendments Date of issue Mandatory Application: Annual periods beginning on or after Amendment to IAS 7: Statement of Cash Flows. January 2016 01/01/2017 Amendment to IAS 12: Income Taxes. January 2016 01/01/2017 IFRS 9: Financial instruments. December 2009 01/01/2018 Amendment to IFRS 9: Financial instruments. November 2013 01/01/2018 IFRS 15: Revenue from contracts with customers (1). May 2014 01/01/2018 Amendment customers. to IFRS 15: Revenue from contracts with April 2016 01/01/2018 Amendment to IFRS 2: Share-based payments June 2016 01/01/2018 Amendment to IFRS 4: Insurance contracts. September 2016 01/01/2018 Amendment to IAS 40: Investment property December 2016 01/01/2018 IFRS 16: Leases (2). January 2016 01/01/2019 Amendment to IFRS 10: Consolidated financial statements and IAS 28 Investments in associates and joint ventures. September 2014 To be determined 145 FINANCIAL STATEMENTS | Financial Statements 10 11 (ii) Improvements Improvements to International Financial Reporting Standards. (cycle 2012-2014) IFRS 1: First-time adoption of international financial reporting standards; IFRS 12 Disclosure of interests in other entities and IAS 28 investments in associates and joint ventures. Date of issue December 2016 Mandatory Application: Annual periods beginning on or after 01/01/2017 (improvements IFRS 12) 01/01/2018 (improvements IFRS 1 and IAS 28) (iii) Interpretations IFRIC 22: Foreign currency consideration transactions and advance December 2016 01/01/2018 The Company’s management believes that the adoption of the standards, amendments and interpretations described above but not yet effective would not have a significant impact on the Company’s consolidated financial statements in the year of their first application, except for IFRS 15 and IFRS 16: (1) IFRS 15 Revenue from Contracts with Customers supersedes actual standard for revenue recognition that actually uses the Company, as IAS 18 Revenue and IFRIC 13 Customer Loyalty Programmes. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standards supersedes IFRS 15 supersedes, IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers; and SIC-31 Revenue - Barter Transactions Involving Advertising Services. We are currently evaluating how the adoption of the revenue recognition standard will impact our Consolidated Financial Statements. Interpretations are on-going and could have a significant impact on our implementation. We currently believe the adoption will not have a significant impact on passenger and cargo revenue recognition. However, the impact in revenue and liability for frequent flyer program are still being analyzed. (2) The IFRS 16 Leases add important changes in the accounting for lessees by introducing a similar treatment to financial leases for all operating leases with a term of more than 12 months. This mean, in general terms, that an asset should be recognized for the right to use the underlying leased assets and a liability representing its present value of payments associate to the agreement. Monthly leases payments will be replace by the asset depreciation and a financial cost in the income statement. We are currently evaluating how the adoption of the leases recognition standard will impact our Consolidated Financial Statements. Interpretations are on-going and could have a material impact on our implementation. Currently, we expect that the adoption of the new lease standard will have a material impact on our consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases. LATAM Airlines Group S.A. and subsidiaries are still assessing these standard to determinate the effect on their Financial Statements, covenants and other financial indicators. 2.2. Basis of Consolidation (a) Subsidiaries Subsidiaries are all the entities (including special-purpose entities) over which the Company has the power to control the financial and operating policies, which are generally accompanied by a holding of more than half of the voting rights. In evaluating whether the Company controls another entity, the existence and effect of potential voting rights that are currently exercisable or convertible at the date of the consolidated financial statements are considered. The subsidiaries are consolidated from the date on which control is passed to the Company and they are excluded from the consolidation on the date they cease to be so controlled. The results and flows are incorporated from the date of acquisition. Balances, transactions and unrealized gains on transactions between the Company’s entities are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment loss of the asset transferred. When necessary in order to ensure uniformity with the policies adopted by the Company, the accounting policies of the subsidiaries are modified. To account for and identify the financial information to be revealed when carrying out a business combination, such as the acquisition of an entity by the Company, shall apply the acquisition method provided for in IFRS 3: Business combination. (b) Transactions with non-controlling interests The Company applies the policy of considering transactions with non-controlling interests, when not related to loss of control, as equity transactions without an effect on income. (c) Sales of subsidiaries When a subsidiary is sold and a percentage of participation is not retained, the Company derecognizes assets and liabilities of the subsidiary, the non-controlling and other components of equity related to the subsidiary. Any gain or loss resulting from the loss of control is recognized in the consolidated income statement in Other gains (losses). If LATAM Airlines Group S.A. and Subsidiaries retain an ownership of participation in the sold subsidiary, and does not represent control, this is recognized at fair value on the date that control is lost, the amounts previously recognized in Other comprehensive income are accounted as if the Company had disposed directly from the assets and related liabilities, which can cause these amounts are reclassified to profit or loss. The percentage retained valued at fair value is subsequently accounted using the equity method. 146 FINANCIAL STATEMENTS | Financial Statements 12 13 (d) Investees or associates Investees or associates are all entities over which LATAM Airlines Group S.A. and Subsidiaries have significant influence but have no control. This usually arises from holding between 20% and 50% of the voting rights. Investments in associates are booked using the equity method and are initially recognized at their cost. 2.3. Foreign currency transactions (a) Presentation and functional currencies The items included in the financial statements of each of the entities of LATAM Airlines Group S.A. and Subsidiaries are valued using the currency of the main economic environment in which the entity operates (the functional currency). The functional currency of LATAM Airlines Group S.A. is the United States dollar which is also the presentation currency of the consolidated financial statements of LATAM Airlines Group S.A. and Subsidiaries. (b) Transactions and balances Foreign currency transactions are translated to the functional currency using the exchange rates on the transaction dates. Foreign currency gains and losses resulting from the liquidation of these transactions and from the translation at the closing exchange rates of the monetary assets and liabilities denominated in foreign currency are shown in the consolidated statement of income by function except when deferred in Other comprehensive income as qualifying cash flow hedges. (c) Group entities The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency other than the presentation currency are translated to the presentation currency as follows: Assets and liabilities of each consolidated statement of financial position presented are (i) translated at the closing exchange rate on the consolidated statement of financial position date; The revenues and expenses of each income statement account are translated at the exchange (ii) rates prevailing on the transaction dates, and All the resultant exchange differences by conversion are shown as a separate component in (iii) Other comprehensive income. The exchange rates used correspond to those fixed in the country where the subsidiary is located, whose functional currency is different to the U.S. dollar. Adjustments to the Goodwill and fair value arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the closing exchange rate or period informed. 2.4. Property, plant and equipment The land of LATAM Airlines Group S.A. and Subsidiaries is recognized at cost less any accumulated impairment loss. The rest of the Property, plant and equipment are registered, initially and subsequently, at historic cost less the corresponding depreciation and any impairment loss. The amounts of advance payments to aircraft manufacturers are capitalized by the Company under Construction in progress until receipt of the aircraft. Subsequent costs (replacement of components, improvements, extensions, etc.) are included in the value of the initial asset or shown as a separate asset only when it is probable that the future economic benefits associated with the elements of Property, plant and equipment are going to flow to the Company and the cost of the element can be determined reliably. The value of the component replaced is written off in the books at the time of replacement. The rest of the repairs and maintenance are charged to the results of the year in which they are incurred. Depreciation of Property, plant and equipment is calculated using the straight-line method over their estimated technical useful lives; except in the case of certain technical components which are depreciated on the basis of cycles and hours flown. The residual value and useful life of assets are reviewed, and adjusted if necessary, once per year. When the carrying amount of an asset is higher than its estimated recoverable amount, its value is reduced immediately to its recoverable amount (Note 2.8). Losses and gains on the sale of Property, plant and equipment are calculated by comparing the compensation with the book value and are included in the consolidated statement of income. 2.5. Intangible assets other than goodwill (a) Airport slots and Loyalty program Airport slots and the Coalition and Loyalty program are intangible assets of indefinite useful life and are subject to impairment tests annually as an integral part of each CGU, in accordance with the premises that are applicable, included as follows: Airport slots – Air transport CGU Loyalty program – Coalition and loyalty program Multiplus CGU (See Note 16) The airport slots correspond to an administrative authorization to carry out operations of arrival and departure of aircraft at a specific airport, within a specified period. The Loyalty program corresponds to the system of accumulation and redemption of points that has developed Multiplus S.A., subsidiary of TAM S.A. The Brands, airport Slots and Loyalty program were recognized in fair values determined in accordance with IFRS 3, as a consequence of the business combination with TAM and Subsidiaries. 147 FINANCIAL STATEMENTS | Financial Statements 14 15 (b) Computer software 2.9. Financial assets Licenses for computer software acquired are capitalized on the basis of the costs incurred in acquiring them and preparing them for using the specific software. These costs are amortized over their estimated useful between 3 and 10 years. the Company has been defined useful lives, for which lives Expenses related to the development or maintenance of computer software which do not qualify for capitalization, are shown as an expense when incurred. The personnel costs and others costs directly related to the production of unique and identifiable computer software controlled by the Company, are shown as intangible Assets others than Goodwill when they have met all the criteria for capitalization. (c) Brands The Brands were acquired in the business combination with TAM S.A. And Subsidiaries and recognized at fair value under IFRS. During the year 2016, the estimated useful life of the brands change from an indefinite useful life to a five-year period, the period in which the value of the brands will be amortized (See Note 15). 2.6. Goodwill Goodwill represents the excess of acquisition cost over the fair value of the Company’s participation in the net identifiable assets of the subsidiary or associate on the acquisition date. Goodwill related to acquisition of subsidiaries is not amortized but tested for impairment annually or each time that there is evidence of impairment. Gains and losses on the sale of an entity include the book amount of the goodwill related to the entity sold. 2.7. Borrowing costs Interest costs incurred for the construction of any qualified asset are capitalized over the time necessary for completing and preparing the asset for its intended use. Other interest costs are recognized in the consolidated income statement when they are accrued. 2.8. Losses for impairment of non-financial assets Intangible assets that have an indefinite useful life, and developing IT projects, are not subject to amortization and are subject to annual testing for impairment. Assets subject to amortization are subjected to impairment tests whenever any event or change in circumstances indicates that the book value of the assets may not be recoverable. An impairment loss is recorded when the book value is greater than the recoverable amount. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. In evaluating the impairment, the assets are grouped at the lowest level for which cash flows are separately identifiable (CGUs). Non-financial assets other than goodwill that have suffered an impairment loss are reviewed if there are indicators of reverse losses at each reporting date. The Company classifies its financial instruments in the following categories: financial assets at fair value through profit and loss and loans and receivables. The classification depends on the purpose for which the financial instruments were acquired. Management determines the classification of its financial instruments at the time of initial recognition, which occurs on the date of transaction. (a) Financial assets at fair value through profit and loss Financial assets at fair value through profit and loss are financial instruments held for trading and those which have been designated at fair value through profit or loss in their initial classification. A financial asset is classified in this category if acquired mainly for the purpose of being sold in the near future or when these assets are managed and measured using fair value. Derivatives are also classified as held for trading unless they are designated as hedges. The financial assets in this category and have been designated initial recognition through profit or loss, are classified as Cash and cash equivalents and Other current financial assets and those designated as instruments held for trading are classified as Other current and non-current financial assets. (b) Loans and receivables Loans and receivables are non-derivative financial instruments with fixed or determinable payments not traded on an active market. These items are classified in current assets except for those with maturity over 12 months from the date of the consolidated statement of financial position, which are classified as non-current assets. Loans and receivables are included in trade and other accounts receivable in the consolidated statement of financial position (Note 2.12). The regular purchases and sales of financial assets are recognized on the trade date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or losses are initially recognized at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. The financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest rate method. At the date of each consolidated statement of financial position, the Company assesses if there is objective evidence that a financial asset or group of financial assets may have suffered an impairment loss. 2.10. Derivative financial instruments and hedging activities Derivatives are booked initially at fair value on the date the derivative contracts are signed and later they continue to be valued at their fair value. The method for booking the resultant loss or gain depends on whether the derivative has been designated as a hedging instrument and if so, the nature of the item hedged. The Company designates certain derivatives as: (a) Hedge of the fair value of recognized assets (fair value hedge); 148 FINANCIAL STATEMENTS | Financial Statements 16 17 Hedge of an identified risk associated with a recognized liability or an expected (b) highly- Probable transaction (cash-flow hedge), or loss accumulated in the statement of other comprehensive income is taken immediately to the consolidated statement of income as “Other gains (losses)”. (c) Derivatives that do not qualify for hedge accounting. (c) Derivatives not booked as a hedge The Company documents, at the inception of each transaction, the relationship between the hedging instrument and the hedged item, as well as its objectives for managing risk and the strategy for carrying out various hedging transactions. The Company also documents its assessment, both at the beginning and on an ongoing basis, as to whether the derivatives used in the hedging transactions are highly effective in offsetting the changes in the fair value or cash flows of the items being hedged. The total fair value of the hedging derivatives is booked as Other non-current financial asset or liability if the remaining maturity of the item hedged is over 12 months, and as an other current financial asset or liability if the remaining term of the item hedged is less than 12 months. Derivatives not booked as hedges are classified as Other financial assets or liabilities. (a) Fair value hedges Changes in the fair value of designated derivatives that qualify as fair value hedges are shown in the consolidated statement of income, together with any change in the fair value of the asset or liability hedged that is attributable to the risk being hedged. (b) Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is shown in the statement of other comprehensive income. The loss or gain relating to the ineffective portion is recognized immediately in the consolidated statement of income under Other gains (losses). Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss. In case of variable interest-rate hedges, the amounts recognized in the statement of Other comprehensive income are reclassified to results within financial costs at the same time the associated debts accrue interest. For fuel price hedges, the amounts shown in the statement of Other comprehensive income are reclassified to results under the line item Cost of sales to the extent that the fuel subject to the hedge is used. For foreign currency hedges, the amounts recognized in the statement of Other comprehensive income are reclassified to income as deferred revenue resulting from the use of points, are recognized as Income. When hedging instruments mature or are sold or when they do not meet the requirements to be accounted for as hedges, any gain or loss accumulated in the statement of Other comprehensive income until that moment remains in the statement of other comprehensive income and is reclassified to the consolidated statement of income when the hedged transaction is finally recognized. When it is expected that the hedged transaction is no longer going to occur, the gain or The changes in fair value of any derivative instrument that is not booked as a hedge are shown immediately in the consolidated statement of income in “Other gains (losses)”. 2.11. Inventories Inventories, detailed in Note 10, are shown at the lower of cost and their net realizable value. The cost is determined on the basis of the weighted average cost method (WAC). The net realizable value is the estimated selling price in the normal course of business, less estimated costs necessary to make the sale. 2.12. Trade and other accounts receivable Trade accounts receivable are shown initially at their fair value and later at their amortized cost in accordance with the effective interest rate method, less the allowance for impairment losses. An allowance for impairment loss of trade accounts receivable is made when there is objective evidence that the Company will not be able to recover all the amounts due according to the original terms of the accounts receivable. The existence of significant financial difficulties on the part of the debtor, the probability that the debtor is entering bankruptcy or financial reorganization and the default or delay in making payments are considered indicators that the receivable has been impaired. The amount of the provision is the difference between the book value of the assets and the present value of the estimated future cash flows, discounted at the original effective interest rate. The book value of the asset is reduced by the amount of the allowance and the loss is shown in the consolidated statement of income in Cost of sales. When an account receivable is written off, it is charged to the allowance account for accounts receivable. 2.13. Cash and cash equivalents Cash and cash equivalents include cash and bank balances, time deposits in financial institutions, and other short-term and highly liquid investments. 2.14. Capital The common shares are classified as net equity. Incremental costs directly attributable to the issuance of new shares or options are shown in net equity as a deduction from the proceeds received from the placement of shares. 2.15. Trade and other accounts payables Trade payables and other accounts payable are initially recognized at fair value and subsequently at amortized cost. 149 FINANCIAL STATEMENTS | Financial Statements 18 19 2.16. Interest-bearing loans Financial liabilities are shown initially at their fair value, net of the costs incurred in the transaction. Later, these financial liabilities are valued at their amortized cost; any difference between the proceeds obtained (net of the necessary arrangement| costs) and the repayment value, is shown in the consolidated statement of income during the term of the debt, according to the effective interest rate method. Financial liabilities are classified in current and non-current liabilities according to the contractual payment dates of the nominal principal. they become irrevocable, for the plans considered as cash settled award the fair value, updated as of the closing date of each reporting period, is recorded as a liability with charge to remuneration. (c) Post-employment and other long-term benefits Provisions are made for these obligations by applying the method of the projected unit credit method, and taking into account estimates of future permanence, mortality rates and future wage increases determined on the basis of actuarial calculations. The discount rates are determined by reference to market interest-rate curves. Actuarial gains or losses are shown in other comprehensive income. 2.17. Current and deferred taxes (d) Incentives The expense by current tax is comprised of income and deferred taxes. The charge for current tax is calculated based on tax laws in force on the date of statement of financial position, in the countries in which the subsidiaries and associates operate and generate taxable income. Deferred taxes are calculated using the liability method, on the temporary differences arising between the tax bases of assets and liabilities and their book values. However, if the temporary differences arise from the initial recognition of a liability or an asset in a transaction different from a business combination that at the time of the transaction does not affect the accounting result or the tax gain or loss, they are not booked. The deferred tax is determined using the tax rates (and laws) that have been enacted or substantially enacted at the consolidated financial statements close, and are expected to apply when the related deferred tax asset is realized or the deferred tax liability discharged. Deferred tax assets are recognized when it is probable that there will be sufficient future tax earnings with which to compensate the temporary differences. The tax (current and deferred) is recognized in income by function, unless it relates to an item recognized in Other comprehensive income, directly in equity or from business combination. In that case the tax is also recognized in Other comprehensive income, directly in income by function or goodwill, respectively. 2.18. Employee benefits (a) Personnel vacations The Company recognizes the expense for personnel vacations on an accrual basis. (b) Share-based compensation The compensation plans implemented based on the shares of the Company are recognized in the consolidated financial statements in accordance with IFRS 2: Share-based payments, for plans based on the granting of options, the effect of fair value is recorded in equity with a charge to remuneration in a linear manner between the date of grant of said options and the date on which The Company has an annual incentives plan for its personnel for compliance with objectives and individual contribution to the results. The incentives eventually granted consist of a given number or portion of monthly remuneration and the provision is made on the basis of the amount estimated for distribution. 2.19. Provisions Provisions are recognized when: (i) The Company has a present legal or implicit obligation as a result of past events; (ii) It is probable that payment is going to be necessary to settle an obligation; and (iii) The amount has been reliably estimated. 2.20. Revenue recognition Revenues include the fair value of the proceeds received or to be received on sales of goods and rendering services in the ordinary course of the Company’s business. Revenues are shown net of refunds, rebates and discounts. (a) (i) Rendering of services Passenger and cargo transport The Company shows revenue from the transportation of passengers and cargo once the service has been provided. Consistent with the foregoing, the Company presents the deferred revenues, generated by anticipated sale of flight tickets and freight services, in heading Other non - financial liabilities in the Statement of Financial Position. (ii) Frequent flyer program The Company currently has a frequent flyer programs, whose objective is customer loyalty through the delivery of kilometers or points fly whenever the programs holders make certain flights, use the 150 FINANCIAL STATEMENTS | Financial Statements 20 21 services of entities registered with the program or make purchases with an associated credit card. The kilometers or points earned can be exchanged for flight tickets or other services of associated entities. The consolidated financial statements include liabilities for this concept (deferred income), according to the estimate of the valuation established for the kilometers or points accumulated pending use at that date, in accordance with IFRIC 13: Customer loyalty programs. (iii) Other revenues The Company records revenues for other services when these have been provided. (b) Dividend income Dividend income is booked when the right to receive the payment is established. 2.21. Leases In case of own aircraft or under financial leases, these maintenance cost are capitalized as Property, plant and equipment, while in the case of aircraft under operating leases, a liability is accrued based on the use of the main components is recognized, since a contractual obligation with the lessor to return the aircraft on agreed terms of maintenance levels exists. These are recognized as Cost of sales. Additionally, some leases establish the obligation of the lessee to make deposits to the lessor as a guarantee of compliance with the maintenance and return conditions. These deposits, often called maintenance reserves, accumulate until a major maintenance is performed, once made, the recovery is requested to the lessor. At the end of the contract period, there is comparison between the reserves that have been paid and required return conditions, and compensation between the parties are made if applicable. The unscheduled maintenance of aircraft and engines, as well as minor maintenance, are charged to results as incurred. (a) When the Company is the lessee – financial lease 2.24. Environmental costs The Company leases certain Property, plant and equipment in which it has substantially all the risk and benefits deriving from the ownership; they are therefore classified as financial leases. Financial leases are initially recorded at the lower of the fair value of the asset leased and the present value of the minimum lease payments. Every lease payment is separated between the liability component and the financial expenses so as to obtain a constant interest rate over the outstanding amount of the debt. The corresponding leasing obligations, net of financial charges, are included in Other financial liabilities. The element of interest in the financial cost is charged to the consolidated statement of income over the lease period so that it produces a constant periodic rate of interest on the remaining balance of the liability for each year. The asset acquired under a financial lease is depreciated over its useful life and is included in Property, plant and equipment. (b) When the Company is the lessee – operating lease Leases, in which the lessor retains an important part of the risks and benefits deriving from ownership, are classified as operating leases. Payments with respect to operating leases (net of any incentive received from the lessor) are charged in the consolidated statement of income on a straight-line basis over the term of the lease. 2.22. Non-current assets or disposal groups classified as held for sale Non-current assets (or disposal groups) classified as assets held for sale are shown at the lesser of their book value and the fair value less costs to sell. 2.23. Maintenance The costs incurred for scheduled heavy maintenance of the aircraft’s fuselage and engines are capitalized and depreciated until the next maintenance. The depreciation rate is determined on technical grounds, according to the use of the aircraft expressed in terms of cycles and flight hours. Disbursements related to environmental protection are charged to results when incurred. NOTE 3 - FINANCIAL RISK MANAGEMENT 3.1. Financial risk factors The Company is exposed to different financial risks: (a) market risk, (b) credit risk, and (c) liquidity risk. The program overall risk management of the Company aims to minimize the adverse effects of financial risks affecting the company. (a) Market risk Due to the nature of its operations, the Company is exposed to market factors such as: (i) fuel-price risk, (ii) exchange -rate risk, and (iii) interest -rate risk. The Company has developed policies and procedures for managing market risk, which aim to identify, quantify, monitor and mitigate the adverse effects of changes in market factors mentioned above. For this, the Administration monitors the evolution of price levels and rates, and quantifies their risk exposures (Value at Risk), and develops and implements hedging strategies. (i) Fuel-price risk: Exposition: For the execution of its operations the Company purchases a fuel called Jet Fuel grade 54 USGC, which is subject to the fluctuations of international fuel prices. 151 FINANCIAL STATEMENTS | Financial Statements 22 23 Mitigation: To cover the risk exposure fuel, the Company operates with derivative instruments (swaps and options) whose underlying assets may be different from Jet Fuel, being possible use West Texas Intermediate (“WTI”) crude, Brent (“BRENT”) crude and distillate Heating Oil (“HO”), which have a high correlation with Jet Fuel and are highly liquid. Fuel Hedging Results: the period ended at December 31, 2016, During of US$ 48.0 million on fuel derivative. During the same period of 2015, the Company recognized losses of US$ 239.4 million for the same reason. the Company recognized losses At December 31, 2016, the market value of its fuel positions amounted to US$ 8.1 million (positive). At December 31, 2015, this market value was US$ 56.4 million (negative). The following tables show the level of hedge for different periods: Positions as of December 31, 2016 (*) Maturities Q117 Q217 Percentage of the hedge of expected consumption value 21% 16% Total 18% (*) The volume shown in the table considers all the hedging instruments (swaps and options). Positions as of December 31, 2015 (*) Percentage of the hedge of expected consumption value Q116 63% Maturities Q216 27% Q316 Q416 27% 11% Total 32% (*) The volume shown in the table considers all the hedging instruments (swaps and options). Sensitivity analysis A drop in fuel price positively affects the Company through a reduction in costs. However, also negatively affects contracted positions as these are acquired to protect the Company against the risk of a rise in price. The policy therefore is to maintain a hedge-free percentage in order to be competitive in the event of a drop in price. The calculations were made considering a parallel movement of US$ 5 per barrel in the curve of the BRENT and JET crude futures benchmark price at the end of September 2016 and the end of December, 2015. Benchmark price (US$ per barrel) Positions as of December 31, 2016 effect on equity (millions of US$) Positions as of December 31, 2015 effect on equity (millions of US$) +5 -5 +3.12 - 4.78 +5.41 -2.78 Given the fuel hedge structure during the year 2016, which considers a hedge-free portion, a vertical fall by 5 dollars in the JET benchmark price (the monthly daily average), would have meant an impact of approximately US$ 116.3 million in the cost of total fuel consumption for the same period. For the year 2016, a vertical rise by 5 dollars in the JET benchmark price (the monthly daily average) would have meant an impact of approximately US$ 114.5 million of increased fuel costs. (ii) Foreign exchange rate risk: Exposition: The functional and presentation currency of the Financial Statements of the Parent Company is the United States dollar, so the risk of Transactional exchange rate and Conversion arises mainly from its own operating activities of the business, strategic and accounting of the Company are denominated in a different currency than the functional currency. LATAM Subsidiaries are also exposed to currency risk that impacts the consolidated results of the Company. Most currency exposure of LATAM comes from the concentration of business in Brazil, which are mostly denominated in Brazilian Real (BRL), being actively managed by the company. Additionally, the company manages the economic exposure to operating revenues in Pound Sterling (GBP). In lower concentrations the Company is therefore exposed to fluctuations in others currencies, such as: Euro, Australian Dollar, Colombian Peso, Chilean Peso, Argentine Peso, Paraguayan Guaraní, Mexican Peso, Peruvian Sol and New Zealand Dollar. The current hedge positions they are booked as cash flow hedge contracts, so a variation in the fuel price has an impact on the Company’s net equity. Mitigation: The following table shows the sensitivity analysis of the financial instruments according to reasonable changes in the fuel price and their effect on equity. The term of the projection was defined until the end of the last current fuel hedge contract, being the last business day of the last quarter of 2017. The Company mitigates currency risk exposures by contracting derivative instruments or through natural hedges or execution of internal operations. FX Hedging Results: With the aim of reducing exposure to exchange rate risk on operating cash flows in 2016 and 2017, and secure the operating margin, LATAM and TAM conduct hedging through FX derivatives. 152 FINANCIAL STATEMENTS | Financial Statements 24 25 At December 31, 2016, the market value of its FX positions amounted to US$ 1.1 million (negative). At end of December 2015 the market value was of US$ 8.0 million (positive). During the period ended at December 31, 2016 the Company recognized losses of US$ 40.3 million on hedging FX. During the same period of 2015 the Company recognized gains of US$ 19.0 million on hedging FX. At end of December 2016, the Company has contracted FX derivatives for US$ 60 million to BRL and US$ 10 million to GBP. At end of December 2015, the Company had contracted FX for US$ 270 million to BRL, US$ 30 million to EUR and US$ 15 million to GBP. Sensitivity analysis: A depreciation of exchange rate R$/ US$ and US$/GBP, affects negatively the Company for a rise of its costs in US$, however, it also affects positively the value of contracted derivate positions. The FX derivatives are registered for as hedges of cash flow, therefore, a variation in the exchange rate has an impact on the market value of derivatives, whose changes impact on the Company’s net equity. The following table presents the sensitivity of derivative FX Forward instruments agrees with reasonable changes to exchange rate and its effect on equity. The projection term was defined until the end of the last current contract hedge, being the last business day of the first quarter of 2017: Appreciation (depreciation)* of R$ /GBP Effect at December 31, 2016 Millions of US$ Effect at December 31, 2015 Millions of US$ -10% +10% -1.02 +3.44 -21.28 +16.71 In the case of TAM S.A. which operates with the Brazilian Real as its functional currency, a large proportion of the company’s assets liabilities are expressed in United States Dollars. Therefore, this subsidiary’s profit and loss varies when its financial assets and liabilities, and its accounts receivable listed in dollars are converted to Brazilian Reals. This impact on profit and loss is consolidated in the Company. In order to reduce the volatility on the financial statements of the Company caused by rises and falls in the R$/US$ exchange rate, the Company has contracted hedging derivatives has conducted transactions for to reduce the net US$ liabilities held by TAM S.A. The following table shows the variation of financial performance to appreciate or depreciate 10% exchange rate R$/US$: Appreciation (depreciation)* of R$/US$ Effect at December 31, 2016 Millons of US$ Effect at December 31, 2015 Millons of US$ -10% +10% +119.2 -119.2 +67.6 -67.6 (*) Appreciation (depreciation) of US$ regard to the covered currencies. Effects of exchange rate derivatives in the Financial Statements The profit or losses caused by changes in the fair value of hedging instruments are segregated between intrinsic value and temporary value. The intrinsic value is the actual percentage of cash flow covered, initially shown in equity and later transferred to income, while the hedge transaction is recorded in income. The temporary value corresponds to the ineffective portion of cash flow hedge which is recognized in the financial results of the Company (Note 19). Due to the functional currency of TAM S.A. and Subsidiaries is the Brazilian real, the Company presents the effects of the exchange rate fluctuations in Other comprehensive income by converting the Statement of financial position and Income statement of TAM S.A. and Subsidiaries from their functional currency to the U.S. dollar, which is the presentation currency of the consolidated financial statement of LATAM Airlines Group S.A. and Subsidiaries. The Goodwill generated in the Business combination is recognized as an asset of TAM S.A. and Subsidiaries in Brazilian real whose conversion to U.S. dollar also produces effects in Other comprehensive income. The following table shows the change in Other comprehensive income recognized in Total equity in the case of appreciate or depreciate 10% the exchange rate R$/US$: Appreciation (depreciation) of R$/US$ Effect at December 31, 2016 Millions of US$ Effect at December 31, 2015 Millions of US$ -10% +10% +351.04 -287.22 +296.41 -242.52 (iii) Interest -rate risk: Exposition: The Company is exposed to fluctuations in interest rates affecting the markets future cash flows of the assets, and current and future financial liabilities. The Company is exposed in one portion to the variations of London Inter-Bank Offer Rate (“LIBOR”) and other interest rates of less relevance are Brazilian Interbank Deposit Certificate ("ILC"), and the Interest Rate Term of Brazil ("TJLP"). 153 FINANCIAL STATEMENTS | Financial Statements 26 27 Mitigation: (b) Credit risk In order to reduce the risk of an eventual rise in interest rates, the Company has signed interest-rate swap and call option contracts. Currently a 63% (71% at December 31, 2015) of the debt is fixed to fluctuations in interest rate. Rate Hedging Results: At December 31, 2016, the market value of the positions of interest rate derivatives amounted to US$ 17.2 million US$ 39.8 million (negative). (negative). At end of December 2015 this market value was Sensitivity analysis: The following table shows the sensitivity of changes in financial obligations that are not hedged against interest-rate variations. These changes are considered reasonably possible, based on current market conditions each date. Increase (decrease) futures curve in libor 3 months Positions as of December 31, 2016 effect on profit or loss before tax (millions of US$) Positions as of December 31, 2015 effect on profit or loss before tax (millions of US$) +100 basis points -100 basis points -32.16 +32.16 -26.70 +26.70 Much of the current rate derivatives are registered for as hedges of cash flow, therefore, a variation in the exchange rate has an impact on the market value of derivatives, whose changes impact on the Company’s net equity. The calculations were made increasing (decreasing) vertically 100 basis points of the three-month Libor futures curve, being both reasonably possible scenarios according to historical market conditions. Increase (decrease) futures curve in libor 3 months Positions as of December 31, 2016 effect on equity (millions of US$) Positions as of December 31, 2015 effect on equity (millions of US$) +100 basis points -100 basis points +3.93 -4.03 +8.71 -9.02 The assumptions of sensitivity calculation must assume that forward curves of interest rates do not necessarily reflect the real value of the compensation flows. Moreover, the structure of interest rates is dynamic over time. During the periods presented, the Company has no registered amounts by ineffectiveness in consolidated statement of income for this kind of hedging. Credit risk occurs when the counterparty to a financial agreement or instrument fails to discharge an obligation due or financial instrument, leading to a loss in market value of a financial instrument (only financial assets, not liabilities). The Company is exposed to credit risk due to its operative and financial activities, including deposits with banks and financial institutions, investments in other kinds of instruments, exchange- rate transactions and the contracting of derivative instruments or options. To reduce the credit risk associated with operational activities, the Company has established credit limits to abridge the exposure of their debtors which are monitored permanently (mainly in case of operational activities in Brazil with travel agents). As a way to mitigate credit risk related to financial activities, the Company requires that the counterparty to the financial activities remain at least investment grade by major Risk Assessment Agencies. Additionally the company has established maximum limits for investments which are monitored regularly. (i) Financial activities Cash surpluses that remain after the financing of assets necessary for the operation are invested according to credit limits approved by the Company’s Board, mainly in time deposits with different financial institutions, private investment funds, short-term mutual funds, and easily-liquidated corporate and sovereign bonds with short remaining maturities. These investments are booked as Cash and cash equivalents and Other current financial assets. In order to reduce counterparty risk and to ensure that the risk assumed is known and managed by the Company, investments are diversified among different banking institutions (both local and international). The Company evaluates the credit standing of each counterparty and the levels of investment, based on (i) their credit rating, (ii) the equity size of the counterparty, and (iii) investment limits according to the Company’s level of liquidity. According to these three parameters, the Company chooses the most restrictive parameter of the previous three and based on this, establishes limits for operations with each counterparty. The Company has no guarantees to mitigate this exposure. (ii) Operational activities The Company has four large sales “clusters”: travel agencies, cargo agents, airlines and credit-card administrators. The first three are governed by International Air Transport Association, international (“IATA”) organization comprising most of the airlines that represent over 90% of scheduled commercial traffic and one of its main objectives is to regulate the financial transactions between airlines and travel agents and cargo. When an agency or airline does not pay their debt, they are excluded from operating with IATA’s member airlines. In the case of credit-card administrators, they are fully guaranteed by 100% by the issuing institutions. The exposure consists of the term granted, which fluctuates between 1 and 45 days. 154 28 One of the tools the Company uses for reducing credit risk is to participate in global entities related to the industry, such as IATA, Business Sales Processing (“BSP”), Cargo Account Settlement Systems (“CASS”), IATA Clearing House (“ICH”) and banks (credit cards). These institutions fulfill the role of collectors and distributors between airlines and travel and cargo agencies. In the case of the Clearing House, it acts as an offsetting entity between airlines for the services provided between them. A reduction in term and implementation of guarantees has been achieved through these entities. Currently the sales invoicing of TAM Linhas Aéreas S.A. related with travel agents and cargo agents for domestic transportation in Brazil is done directly by TAM Linhas Aéreas S.A. Credit quality of financial assets The external credit evaluation system used by the Company is provided by IATA. Internal systems are also used for particular evaluations or specific markets based on trade reports available on the local market. The internal classification system is complementary to the external one, i.e. for agencies or airlines not members of IATA, the internal demands are greater. To reduce the credit risk associated with operational activities, the Company has established credit limits to abridge the exposure of their debtors which are monitored permanently (mainly in case of operational activities of TAM Linhas Aéreas S.A. with travel agents).The bad-debt rate in the principal countries where the Company has a presence is insignificant. (c) Liquidity risk Liquidity risk represents the risk that the Company has no sufficient funds to meet its obligations. Because of the cyclical nature of the business, the operation, and its investment and financing needs related to the acquisition of new aircraft and renewal of its fleet, plus the financing needs, the Company requires liquid funds, defined as cash and cash equivalents plus other short term financial assets, to meet its payment obligations. The liquid funds, the future cash generation and the capacity to obtain additional funding, through bond issuance and banking loans, will allow the Company to obtain sufficient alternatives to face its investment and financing future commitments. The liquid funds balance as of December 31, 2016 is US$ 1,486 million (US$ 1,360 million at December 31, 2015), invested in short term instruments through financial high credit rating levels entities. In addition to the liquid funds, the Company has access to short term credit line. As of December 31, 2016, LATAM has working capital credit lines with multiple banks and additionally has a US$ 325 million undrawn committed credit line (US$ 130 million at December 31, 2015). FINANCIAL STATEMENTS | Financial Statements 155 FINANCIAL STATEMENTS | Financial Statements Amort iz a t ion At Expira t ion At Expira t ion At Expira t ion At Expira t ion At Expira t ion At Expira t ion Qua rt e rly S e mia nnua l Qua rt e rly Qua rt e rly Effe c t ive ra t e % Nomina l ra t e % 1.85 5.23 2.39 1.91 3.08 1.79 4.06 5.14 1.86 3.55 1.85 4.43 2.39 1.91 3.08 1.79 4.06 5.14 1.86 3.55 Clas s o f liab ility fo r the analys is o f liq uid ity ris k o rd ered b y d ate o f maturity as o f Decemb er 3 1, 2 0 16 Deb to r: LATAM Airlines Gro up S.A. and Sub s id iaries , Tax No . 8 9 .8 6 2 .2 0 0 -2 Chile. 29 Cre dit or c ount ry Curre nc y Up t o 90 da ys ThUS $ More t ha n 90 da ys t o one ye a r ThUS $ More t ha n one t o t hre e ye a rs ThUS $ More t ha n t hre e t o five ye a rs ThUS $ More t ha n five ye a rs ThUS $ Tot a l ThUS $ Nomina l va lue ThUS $ Ta x No. Cre dit or Lo ans to exp o rters 97.032.000-8 97.032.000-8 97.036.000-K 97.030.000-7 97.003.000-K 97.951.000-4 BBVA BBVA S ANTANDER ES TADO BANCO DO BRAS IL HS BC Ob lig atio ns with the p ub lic 97.023.000-9 0-E 0-E 97.036.000-K CORP BANCA BLADEX DVB BANK S E S ANTANDER Ob lig atio ns with the p ub lic 0-E BANK OF NEW YORK Guaranteed o b lig atio ns 0-E 0-E 0-E 0-E 0-E 97.036.000-K 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E CREDIT AGRICOLE BNP P ARIBAS WELLS FARGO WILMINGTON TRUS T COMP ANY CITIBANK S ANTANDER BTMU AP P LE BANK US BANK DEUTS CHE BANK NATIXIS P K AirFina nc e KFW IP EX-BANK AIRBUS FINANCIAL INVES TEC Ot he r gua ra nt e e d obliga t ions 0-E CREDIT AGRICOLE Financial leas es 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E ING CREDIT AGRICOLE CITIBANK P EFCO BNP P ARIBAS WELLS FARGO DVB BANK S E RRP F ENGINE Other lo ans 0-E 0-E BOEING CITIBANK (*) Hed g ing d erivatives - OTHERS Tot a l Chile Chile Chile Chile Chile Chile Chile U.S .A. U.S .A. Chile U.S .A. Fra nc e U.S .A. U.S .A. U.S .A. U.S .A. Chile U.S .A. U.S .A. U.S .A. U.S .A. Fra nc e U.S .A. Ge rma ny U.S .A. Engla nd Fra nc e U.S .A. Fra nc e U.S .A. U.S .A. U.S .A. U.S .A. U.S .A. Engla nd U.S .A. U.S .A. - US $ UF US $ US $ US $ US $ UF US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ 75,212 - 30,193 40,191 72,151 12,054 20,808 - 145 1,497 - 52,675 - - - - 61,112 14,579 199 4,308 - - - - - - - - - - - - 63,188 31,949 28,911 160,556 16,529 - - - - 36,250 72,500 518,125 - - - - - - - - - - - 75,212 52,675 30,193 40,191 72,151 12,054 161,637 46,528 29,255 166,361 75,000 50,381 30,000 40,000 70,000 12,000 153,355 42,500 28,911 158,194 626,875 500,000 At Expira t ion 7.77 7.25 11,728 13,805 35,896 25,833 20,224 5,857 3,163 1,551 18,563 6,147 14,779 2,265 2,503 1,982 1,880 30,916 56,324 107,830 79,043 61,020 17,697 9,568 4,712 55,592 18,599 44,826 6,980 7,587 5,972 10,703 65,008 142,178 287,878 206,952 164,077 47,519 25,752 12,693 147,357 31,640 116,809 19,836 18,772 16,056 25,369 33,062 141,965 288,338 200,674 166,165 48,024 26,117 12,891 146,045 31,833 96,087 25,610 9,178 7,766 25,569 3,760 376,894 411,076 733,080 184,053 26,448 27,270 13,857 230,747 48,197 206,036 3,153 - - 23,880 144,474 731,166 1,131,018 1,245,582 595,539 145,545 91,870 45,704 598,304 136,416 478,537 57,844 38,040 31,776 87,401 138,417 628,118 1,056,345 967,336 548,168 138,574 85,990 42,754 532,608 117,263 422,851 54,787 36,191 30,199 72,202 Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Mont hly Qua rt e rly Mont hly S e mia nnua l 2.21 2.97 2.37 4.25 2.72 1.98 2.31 2.29 3.99 3.86 2.60 2.40 2.55 2.49 5.67 1.81 2.96 1.68 4.25 1.96 1.44 1.72 1.69 2.81 3.86 2.57 2.40 2.55 2.49 5.67 1,501 4,892 268,922 - - 275,315 256,860 At Expira t ion 2.85 2.85 5,889 1,788 6,083 17,558 13,744 5,591 4,773 - 17,671 5,457 18,250 50,593 41,508 16,751 9,541 - 34,067 - 48,667 67,095 79,165 44,615 - 8,248 12,134 - 14,262 3,899 22,474 44,514 - 8,248 163 25,802 320 77,795 26,214 207,001 - 103,341 7,364 15,479 7,846 - - - - - - 1,880 - 12,716 - - - 69,761 7,245 87,262 139,145 156,891 113,351 14,314 29,212 26,697 413,939 63,698 7,157 78,249 130,811 149,119 103,326 14,127 25,274 Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Mont hly 26,214 370,389 At Expira t ion Qua rt e rly 5.62 1.85 6.40 5.39 3.69 3.98 2.57 2.35 2.35 6.00 4.96 1.85 5.67 4.79 3.26 3.54 2.57 2.35 2.35 6.00 30,689 - - - - 508,683 944,749 2,476,840 2,002,850 2,303,047 8,236,169 7,257,368 (*) Securitized b o nd with the future flo ws fro m the s ales with cred it card in United States and Canad a. 156 FINANCIAL STATEMENTS | Financial Statements 30 Cla ss of lia bilit y for t he a na lysis of liquidit y risk orde re d by da t e of ma t urit y a s of De c e mbe r 31, 2016 De bt or: TAM S .A. a nd S ubsidia rie s, Ta x No. 02.012.862/ 0001-60, Bra z il. Ta x No. Cre dit or Cre dit or c ount ry Curre nc y Ba nk loa ns 0-E 0-E NEDERLANDS CHE CREDIETVERZEKERING MAATS CHAP P IJ Holla nd CITIBANK U.S .A. Obliga t ion wit h t he public 0-E THE BANK OF NEW YORK U.S .A. Fina nc ia l le a se s 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E AFS INVES TMENT IX LLC DVB BANK S E GENERAL ELECTRIC CAP ITAL CORP ORATION KFW IP EX-BANK NATIXIS WACAP OU LEAS ING S .A. U.S .A. U.S .A. U.S .A. Ge rma ny Fra nc e Luxe mburg S OCIÉTÉ GÉNÉRALE MILAN BRANCH It a ly BANCO IBM S .A HP FINANCIAL S ERVICE S OCIÉTÉ GÉNÉRALE Tot a l Bra z il Bra z il Fra nc e US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ BRL BRL BRL Up t o 90 da ys ThUS $ More t ha n 90 da ys t o one ye a r ThUS $ More t ha n one t o t hre e ye a rs ThUS $ More t ha n t hre e t o five ye a rs ThUS $ More t ha n five ye a rs ThUS $ Tot a l ThUS $ Nomina l va lue ThUS $ Amort iz a t ion Effe c t ive ra t e % Nomina l ra t e % 179 1,528 493 203,150 1,315 - 1,314 - - 352,938 83,750 562,813 2,733 120 3,852 592 4,290 833 11,875 380 225 146 7,698 165 5,098 1,552 7,837 2,385 32,116 1,161 - 465 20,522 - - - 22,834 6,457 85,995 35 - 176 8,548 - - - 40,968 6,542 171,553 - - - 54 - - - - - - 41,834 - - - - - 3,355 204,678 2,882 200,000 Mont hly At Expira t ion 6.01 3.39 6.01 3.14 999,501 800,000 At Expira t ion 8.17 8.00 39,501 285 8,950 2,144 117,763 16,217 301,539 1,576 225 787 35,448 282 8,846 2,123 Mont hly Mont hly Mont hly Mont hly/ Qua rt e rly 107,443 Qua rt e rly/ S e mia nnua l 14,754 279,335 1,031 222 519 Qua rt e rly Qua rt e rly Mont hly Mont hly Mont hly 1.25 2.50 2.30 2.80 4.90 3.00 4.18 13.63 10.02 13.63 1.25 2.50 2.30 2.80 4.90 3.00 4.11 13.63 10.02 13.63 26,753 615,058 221,084 791,738 41,888 1,696,521 1,452,885 157 31 Clas s o f liab ility fo r the analys is o f liq uid ity ris k o rd ered b y d ate o f maturity as o f Decemb er 3 1, 2 0 16 Deb to r: LATAM Airlines Gro up S.A. and Sub s id iaries , Tax No . 8 9 .8 6 2 .2 0 0 -2 , Chile. Tax No . Cred ito r Trad e and o ther acco unts p ayab les Cred ito r co untry Currency Up to 9 0 d ays ThUS$ M o re than 9 0 d ays to o ne year ThUS$ M o re than o ne to three years ThUS$ M o re than three to five years ThUS$ M o re than five years ThUS$ - OTHERS OTHERS Co ns ulto ría Ad minis trativa Pro fes io nal S.A. d e C.V. M exico Acco unts p ayab le to related p arties currents 0 -E 78 .9 9 7.0 6 0 -2 Viajes Falab ella Ltd a. 0 -E 6 5.2 16 .0 0 0 -K Co munid ad M ujer 78 .59 1.3 70 -1 Bethia S.A. y Filiales 79 .773 .4 4 0 -3 Trans p o rtes San Felip e S:A. 0 -E Invers o ra Aero náutica Arg entina TAM Aviação Executiva e Taxi Aéreo S.A. Chile Brazil Chile Chile Chile Arg entina US$ CLP BRL Other currencies 54 9 ,8 9 7 4 8 ,8 4 2 3 4 6 ,0 3 7 14 0 ,4 71 2 1,2 15 (3 0 ) 2 7 11,4 6 7 M XN CLP BRL CLP CLP CLP US$ 170 4 6 2 8 13 6 4 2 - - - - - - - To tal 1,0 8 5,516 3 2 ,6 79 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - FINANCIAL STATEMENTS | Financial Statements To tal ThUS$ 571,112 4 8 ,8 12 3 4 6 ,0 6 4 151,9 3 8 170 4 6 2 8 13 6 4 2 No minal value ThUS$ Amo rtizatio n Effective No minal rate % rate % 571,112 4 8 ,8 12 3 4 6 ,0 6 4 151,9 3 8 170 4 6 2 8 13 6 4 2 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,118 ,19 5 1,118 ,19 5 To tal co ns o lid ated 1,6 2 0 ,9 52 1,59 2 ,4 8 6 2 ,6 9 7,9 2 4 2 ,79 4 ,58 8 2 ,3 4 4 ,9 3 5 11,0 50 ,8 8 5 9 ,8 2 8 ,4 4 8 158 FINANCIAL STATEMENTS | Financial Statements To tal ThUS$ 10 0 ,2 53 10 0 ,3 6 3 55,172 50 ,0 59 70 ,13 3 12 ,0 2 0 2 2 6 ,4 8 5 55,74 2 154 ,6 3 7 2 2 7,76 5 No minal value ThUS$ 10 0 ,0 0 0 10 0 ,0 0 0 55,0 0 0 50 ,0 0 0 70 ,0 0 0 12 ,0 0 0 2 11,13 5 50 ,0 0 0 153 ,514 2 2 6 ,712 Amo rtizatio n At Exp iratio n At Exp iratio n At Exp iratio n At Exp iratio n At Exp iratio n At Exp iratio n Quarterly Semiannual Quarterly Quarterly Effective rate % No minal rate % 1.0 0 1.4 4 1.0 5 1.4 2 1.18 0 .6 6 4 .18 4 .58 1.6 7 2 .2 4 1.0 0 1.4 4 1.0 5 1.4 2 1.18 0 .6 6 4 .18 4 .58 1.6 7 2 .2 4 6 6 3 ,12 5 50 0 ,0 0 0 At Exp iratio n 7.77 7.2 5 32 Clas s o f liab ility fo r the analys is o f liq uid ity ris k o rd ered b y d ate o f maturity as o f Decemb er 3 1, 2 0 15 Deb to r: LATAM Airlines Gro up S.A. and Sub s id iaries , Tax No . 8 9 .8 6 2 .2 0 0 -2 Chile. Tax No . Cred ito r Lo ans to exp o rters Cred ito r co untry Currency Up to 9 0 d ays ThUS$ M o re than 9 0 d ays to o ne year ThUS$ M o re than o ne to three years ThUS$ M o re than three to five years ThUS$ M o re than five years ThUS$ 10 0 ,2 53 10 0 ,3 6 3 55,172 50 ,0 59 70 ,13 3 12 ,0 2 0 19 ,8 73 - 14 6 1,0 53 - - - - - - - - - - - - - - - - - - 58 ,4 0 7 9 ,70 2 4 3 0 - 112 ,2 52 3 0 ,52 6 154 ,0 6 1 2 2 6 ,712 3 5,9 53 15,514 - - - 3 6 ,2 50 72 ,50 0 554 ,3 75 - - - - - - - - - - - BBVA 9 7.0 3 2 .0 0 0 -8 9 7.0 3 6 .0 0 0 -K SANTANDER 9 7.0 3 0 .0 0 0 -7 9 7.0 0 4 .0 0 0 -5 9 7.0 0 3 .0 0 0 -K BANCO DO BRASIL HSBC 9 7.9 51.0 0 0 -4 ESTADO BANCO DE CHILE Bank lo ans 9 7.0 2 3 .0 0 0 -9 0 -E 0 -E 9 7.0 3 6 .0 0 0 -K SANTANDER CORPBANCA BANCO BLADEX DVB BANK SE Ob lig atio ns with the p ub lic 0 -E BANK OF NEW YORK Guaranteed o b lig atio ns CREDIT AGRICOLE BNP PARIBAS WELLS FARGO WILM INGTON TRUST CITIBANK 0 -E 0 -E 0 -E 0 -E 0 -E 9 7.0 3 6 .0 0 0 -K SANTANDER 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E BTM U APPLE BANK US BANK DEUTSCHE BANK NATIXIS HSBC PK AirFinance KFW IPEX-BANK Other g uaranteed o b lig atio ns 0 -E DVB BANK SE Financial leas es 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E ING CREDIT AGRICOLE CITIBANK PEFCO BNP PARIBAS WELLS FARGO DVB BANK SE BANC OF AM ERICA Other lo ans 0 -E 0 -E Hed g ing d erivatives BOEING CITIBANK (*) - OTROS To tal Chile Chile Chile Chile Chile Chile Chile U.S.A. U.S.A. Chile U.S.A. Francia U.S.A. U.S.A. U.S.A. U.S.A. Chile U.S.A. U.S.A. U.S.A. U.S.A. France U.S.A. U.S.A. Germany U.S.A. U.S.A. France U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. - US$ US$ US$ US$ US$ US$ UF US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ 3 1,8 13 9 ,8 9 9 3 5,6 3 6 6 ,110 19 ,4 78 5,58 5 2 ,9 9 2 1,4 71 18 ,6 4 3 5,9 2 3 13 ,74 0 1,59 0 2 ,172 72 8 9 2 ,16 7 2 9 ,9 75 10 6 ,9 9 0 6 9 ,2 3 2 58 ,74 1 16 ,8 4 8 9 ,0 3 5 4 ,4 4 5 55,8 2 4 17,8 8 1 4 1,73 0 4 ,79 0 6 ,6 75 2 ,2 3 2 2 10 ,54 1 8 2 ,0 9 4 2 8 5,9 6 7 13 5,3 3 4 158 ,9 57 4 5,6 53 2 4 ,54 1 12 ,0 79 14 7,9 9 4 3 9 ,18 5 115,0 2 6 12 ,9 0 8 18 ,9 2 8 5,6 8 4 55,3 8 1 8 3 ,4 2 7 2 8 6 ,9 59 13 3 ,3 6 3 16 2 ,4 59 4 6 ,74 0 2 5,2 14 12 ,4 3 1 14 6 ,70 9 3 0 ,72 9 10 0 ,6 17 13 ,112 2 0 ,8 12 4 ,13 1 12 ,6 77 14 8 ,9 0 4 554 ,6 16 53 9 ,0 19 2 6 6 ,2 73 50 ,12 4 3 9 ,9 3 0 2 0 ,0 9 9 3 0 3 ,6 0 0 6 3 ,2 6 8 2 4 9 ,19 4 2 5,175 18 ,10 4 1,6 58 4 0 2 ,579 3 54 ,2 9 9 1,2 70 ,16 8 8 8 3 ,0 58 6 6 5,9 0 8 16 4 ,9 50 10 1,712 50 ,52 5 6 72 ,770 156 ,9 8 6 52 0 ,3 0 7 57,575 6 6 ,6 9 1 14 ,4 3 3 3 8 9 ,0 2 7 3 19 ,3 9 7 1,18 0 ,751 6 75,6 9 6 6 17,0 0 2 159 ,6 6 9 9 6 ,9 54 4 8 ,14 2 59 1,0 3 9 13 6 ,6 9 8 4 6 9 ,4 2 3 53 ,58 3 6 2 ,514 13 ,59 3 Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly M o nthly Quarterly 1.8 3 2 .2 9 2 .2 7 4 .2 5 2 .4 0 1.4 7 1.8 2 1.72 3 .9 9 3 .4 0 2 .0 8 2 .4 0 2 .0 4 2 .4 5 1.6 6 2 .2 2 1.57 4 .2 5 1.6 4 0 .9 3 1.2 2 1.12 2 .8 1 3 .4 0 2 .0 5 1.59 2 .0 4 2 .4 5 8 ,2 2 5 2 4 ,6 9 5 - - - 3 2 ,9 2 0 3 2 ,4 9 2 Quarterly 2 .3 2 2 .3 2 9 ,2 14 1,711 6 ,0 8 3 17,556 11,3 6 8 5,59 4 4 ,73 2 70 3 2 6 ,0 54 5,2 3 6 18 ,2 50 52 ,6 74 3 4 ,2 9 2 16 ,76 8 14 ,2 2 5 2 ,756 4 1,52 7 7,2 16 4 8 ,6 6 7 115,9 3 4 8 6 ,2 0 6 4 4 ,6 6 3 14 ,2 6 9 - 2 8 ,2 3 4 - 3 8 ,59 6 2 3 ,2 11 3 1,78 2 4 4 ,56 5 - - 6 55 2 5,8 2 0 53 3 77,8 50 151,3 6 2 2 0 7,19 0 - 2 0 6 ,74 9 12 ,2 3 2 3 3 ,0 6 1 4 0 ,9 8 6 3 ,6 8 8 - - - - - 2 4 ,12 5 - - - - 16 10 5,0 2 9 14 ,16 3 111,59 6 2 0 9 ,3 75 16 3 ,6 4 8 13 5,715 3 3 ,2 2 6 3 ,4 59 152 ,550 517,6 0 9 9 4 ,9 9 8 13 ,9 55 9 7,3 8 3 19 2 ,9 14 153 ,10 7 12 1,6 2 8 3 2 ,56 7 2 ,770 Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly M o nthly 151,3 6 2 4 50 ,0 0 0 At Exp iratio n Quarterly 5.13 1.2 8 6 .4 0 5.3 7 4 .0 8 3 .9 8 2 .0 6 1.4 1 1.8 0 6 .0 0 4 .57 1.2 8 5.6 7 4 .77 3 .6 4 3 .54 2 .0 6 1.4 1 1.8 0 6 .0 0 8 9 ,9 8 3 8 5,6 53 - - - 6 6 8 ,74 5 9 2 7,74 8 2 ,6 4 8 ,9 6 2 2 ,10 4 ,751 2 ,3 16 ,78 2 8 ,6 6 6 ,9 8 8 7,770 ,6 78 (*) Securitized b o nd with the future flo ws fro m the s ales with cred it card in United States and Canad a. 159 FINANCIAL STATEMENTS | Financial Statements Clas s o f liab ility fo r the analys is o f liq uid ity ris k o rd ered b y d ate o f maturity as o f Decemb er 3 1, 2 0 15 Deb to r: TAM S.A. and Sub s id iaries , Tax No . 0 2 .0 12 .8 6 2 /0 0 0 1-6 0 , Brazil. 33 Tax No . Cred ito r Bank lo ans 0 -E NEDERLANDSCHE CREDIETVERZEKERING M AATSCHAPPIJ Ob lig atio n with the p ub lic 0 -E BANK OF NEW YORK Financial leas es 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E 0 -E AFS INVESTM ENT IX LLC AIRBUS FINANCIAL CREDIT AGRICOLE -CIB DVB BANK SE GENERAL ELECTRIC CAPITAL CORPORATION KFW IPEX-BANK NATIXIS PK AIRFINANCE US, INC. WACAPOU LEASING S.A. SOCIÉTÉ GÉNÉRALE M ILAN BRANCH BANCO IBM S.A HP FINANCIAL SERVICE SOCIÉTÉ GÉNÉRALE To tal Cred ito r co untry Currency Up to 9 0 d ays ThUS$ M o re than 9 0 d ays to o ne year ThUS$ M o re than o ne to three years ThUS$ M o re than three to five years ThUS$ M o re than five years ThUS$ To tal ThUS$ No minal value ThUS$ Amo rtizatio n Effective rate % No minal rate % Ho lland U.S.A. U.S.A. U.S.A. France U.S.A. U.S.A. Germany France U.S.A. Luxemb urg Italy Brazil Brazil France US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ BRL BRL BRL 18 1 4 9 3 1,3 15 1,3 14 712 4 ,0 15 3 ,3 53 M o nthly 6 .0 1 6 .0 1 4 4 0 6 5,3 2 1 3 9 7,78 5 8 6 ,59 0 52 1,72 7 1,0 71,8 6 3 8 0 0 ,0 0 0 At Exp iratio n 8 .17 8 .0 0 2 ,771 3 ,715 4 ,54 2 12 3 3 ,8 3 4 3 ,3 4 5 4 ,3 3 8 1,4 2 8 52 0 11,9 9 3 2 6 7 18 8 10 4 7,70 0 11,0 54 - 3 6 1 11,4 3 7 6 ,8 79 7,8 12 2 1,9 9 2 1,3 8 6 3 1,8 74 8 4 6 56 4 3 3 0 2 0 ,52 7 2 1,8 3 0 - 2 8 4 9 ,0 50 15,9 73 2 2 ,6 3 5 - 3 ,19 8 8 5,6 9 5 1,2 3 0 18 8 6 2 6 18 ,8 0 8 15,73 0 - - - 12 ,4 2 9 2 3 ,0 3 0 - 14 ,56 7 2 14 ,6 12 - - - - - - - - - 70 ,9 2 5 - - - - - - 4 9 ,8 0 6 52 ,3 2 9 4 ,54 2 76 8 2 4 ,3 2 1 3 8 ,6 2 6 12 8 ,74 0 2 3 ,4 2 0 19 ,6 71 3 4 4 ,174 2 ,3 4 3 9 4 0 1,0 6 0 4 3 ,50 5 4 9 ,9 9 5 M o nthly M o nthly 4 ,50 0 Quarterly/Semiannual 755 M o nthly M o nthly M o nthly/Quarterly 2 3 ,76 1 3 6 ,8 9 9 115,0 2 0 Quarterly/Semiannual 2 3 ,0 4 5 18 ,3 6 8 3 12 ,4 8 6 1,72 8 8 8 2 775 M o nthly Quarterly Quarterly M o nthly M o nthly M o nthly 3 7,78 9 16 8 ,0 4 9 58 0 ,3 3 6 3 8 7,0 8 0 59 3 ,3 6 4 1,76 6 ,6 18 1,4 3 5,0 72 1.2 5 1.4 3 3 .2 5 1.6 4 1.2 5 1.72 3 .8 5 1.75 2 .0 0 3 .6 3 14 .14 10 .0 2 14 .14 1.2 5 1.4 3 3 .2 5 1.6 4 1.2 5 1.72 3 .8 5 1.75 2 .0 0 3 .55 14 .14 10 .0 2 14 .14 160 34 Clas s o f liab ility fo r the analys is o f liq uid ity ris k o rd ered b y d ate o f maturity as o f Decemb er 3 1, 2 0 15 Deb to r: LATAM Airlines Gro up S.A. and Sub s id iaries , Tax No . 8 9 .8 6 2 .2 0 0 -2 , Chile. Cred ito r co untry Currency Up to 9 0 d ays ThUS$ M o re than 9 0 d ays to o ne year ThUS$ M o re than o ne to three years ThUS$ M o re than three to five years ThUS$ M o re than five years ThUS$ Tax No . Cred ito r Trad e and o ther acco unts p ayab les - OTHERS OTHERS US$ CLP BRL Others currencies 4 4 2 ,3 2 0 3 9 ,8 2 3 3 0 1,56 9 2 18 ,3 4 7 14 ,3 6 9 114 16 9 ,0 16 Acco unts p ayab le to related p arties currents 6 5.2 16 .0 0 0 -K COM UNIDAD M UJ ER 78 .59 1.3 70 -1 BETHIA S.A. Y FILIALES 78 .9 9 7.0 6 0 -2 Viajes Falab ella Ltd a. 0 -E 0 -E Co ns ulto ría Ad minis trativa Pro fes io nal INVERSORA AERONÁUTICA ARGENTINA Chile Chile Chile M exico Arg entina CLP CLP CLP M XN US$ To tal To tal co ns o lid ated 10 5 6 8 3 4 2 2 2 - - - - 1,0 0 2 ,50 6 2 3 ,515 - - - - - - - - - - - - - - - - - - - - - - - - - - - FINANCIAL STATEMENTS | Financial Statements To tal ThUS$ 4 56 ,6 8 9 3 9 ,9 3 7 3 0 1,58 5 2 2 7,3 6 3 10 5 6 8 3 4 2 2 2 No minal value ThUS$ 4 56 ,6 8 9 3 9 ,9 3 7 3 0 1,58 5 2 2 7,3 6 3 10 5 6 8 3 4 2 2 2 1,0 2 6 ,0 2 1 1,0 2 6 ,0 2 1 Amo rtizatio n Effective No minal rate % rate % - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,70 9 ,0 4 0 1,119 ,3 12 3 ,2 2 9 ,2 9 8 2 ,4 9 1,8 3 1 2 ,9 10 ,14 6 11,4 59 ,6 2 7 10 ,2 3 1,771 161 FINANCIAL STATEMENTS | Financial Statements 35 36 The Company has fuel, interest rate and exchange rate hedging strategies involving derivatives contracts with different financial institutions. The Company has margin facilities with each financial institution in order to regulate the mutual exposure produced by changes in the market valuation of the derivatives. At the end of 2015, the Company provided US$ 49.6 million in derivative margin guarantees, for cash and stand-by letters of credit. At December 31, 2016, the Company had provided US$ 30.2 million in guarantees for Cash and cash equivalent and stand-by letters of credit. The decrease was due at: i) maturity of hedge contracts, ii) acquire of new fuel purchase contracts, and iii) changes in fuel prices, exchange rate and interest rates. 3.2. Capital risk management The Company’s objectives, with respect to the management of capital, are (i) to comply with the restrictions of minimum equity and (ii) to maintain an optimal capital structure. The Company monitors its contractual obligations and the regulatory limitations in the different countries where the entities of the group are domiciled to assure they meet the limit of minimum net equity, where the most restrictive limitation is to maintain a positive net equity. Additionally, the Company periodically monitors the short and long term cash flow projections to assure the Company has adequate sources of funding to generate the cash requirement to face its investment and funding future commitments. The Company international credit rating is the consequence of the Company capacity to face its long terms financing commitments. As of December 31, 2016 the Company has an international long term credit rating of BB- with negative outlook by Standard & Poor’s, a B+ rating with negative outlook by Fitch Ratings and a B1 rating with stable outlook by Moody’s. 3.3. Estimates of fair value. At December 31, 2016, the Company maintained financial instruments that should be recorded at fair value. These are grouped into two categories: 1. Hedge Instruments: This category includes the following instruments: - - Interest rate derivative contracts, Fuel derivative contracts, - Currency derivative contracts. 2. Financial Investments: This category includes the following instruments: - - Investments in short-term Mutual Funds (cash equivalent), Private investment funds. The Company has classified the fair value measurement using a hierarchy that reflects the level of information used in the assessment. This hierarchy consists of 3 levels (I) fair value based on quoted prices in active markets for identical assets or liabilities, (II) fair value calculated through valuation methods based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) and (III) fair value based on inputs for the asset or liability that are not based on observable market data. The fair value of financial instruments traded in active markets, such as investments acquired for trading, is based on quoted market prices at the close of the period using the current price of the buyer. The fair value of financial assets not traded in active markets (derivative contracts) is determined using valuation techniques that maximize use of available market information. Valuation techniques generally used by the Company are quoted market prices of similar instruments and / or estimating the present value of future cash flows using forward price curves of the market at period end. The following table shows the classification of financial instruments at fair value, depending on the level of information used in the assessment: As o f De c e m be r 31, 2016 F a ir va lue m e a s ure m e nts us ing va lue s c o ns ide re d a s Le ve l II Le ve l III Le ve l I F a ir va lue As o f De c e m be r 31, 2015 F a ir va lue m e a s ure m e nts us ing c o ns ide re d a s F a ir Le ve l I Le ve l II Le ve l III ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ As s e ts C a s h a nd c a s h e quiva le nts S ho rt-te rm m utua l funds Othe r fina nc ia l a s s e ts , c urre nt F a ir va lue o f fue l de riva tive s F a ir va lue o f fo re ign c urre nc y de riva tive s Inte re s t a c c rue d s inc e the la s t pa ym e nt da te o f C ro s s C urre nc y S wa p P riva te inve s tm e nt funds Do m e s tic a nd fo re ign bo nds Lia bilitie s Othe r fina nc ia l lia bilitie s , c urre nt F a ir va lue o f inte re s t ra te de riva tive s F a ir va lue o f fue l de riva tive s F a ir va lue o f fo re ign c urre nc y de riva tive s Inte re s t a c c rue d s inc e the la s t pa ym e nt da te o f C urre nc y S wa p Inte re s t ra te de riva tive s no t re c o gnize d a s a he dge Othe r fina nc ia l lia bilitie s , no n c urre nt F a ir va lue o f inte re s t ra te de riva tive s 15,522 15,522 548,402 10,088 1,259 64 536,991 - 24,881 9,579 - 13,155 2,147 - 6,679 6,679 15,522 15,522 536,991 - - - 536,991 - - - - - - - - - - - 11,411 10,088 1,259 64 - - 24,881 9,579 - 13,155 - - - - - - - - - - - - 26,600 26,600 622,963 6,293 9,888 397 448,810 157,575 134,089 33,518 39,818 56,424 2,147 - 4,329 - - 6,679 6,679 - - - 16,128 16,128 26,600 26,600 606,385 - - - 448,810 157,575 - - - - - - - - 16,578 6,293 9,888 397 - - 134,089 33,518 39,818 56,424 - - - - - - - - - - - 4,329 - - 16,128 16,128 - - 162 FINANCIAL STATEMENTS | Financial Statements 37 38 Additionally, at December 31, 2016, the Company has financial instruments which are not recorded at fair value. In order to meet the disclosure requirements of fair values, the Company has valued these instruments as shown in the table below: NOTE 4 - ACCOUNTING ESTIMATES AND JUDGMENTS As of December 31, 2016 As of December 31, 2015 Book value Fair value Book value Fair value ThUS$ ThUS$ ThUS$ ThUS$ 933,805 8,630 255,746 295,060 374,369 164,426 164,426 1,107,889 554 102,125 8,254 1,814,647 1,593,068 269 6,790,273 359,391 933,805 8,630 255,746 295,060 374,369 164,426 164,426 1,107,889 554 102,125 8,254 2,022,290 1,593,068 269 6,970,375 359,391 726,897 10,656 255,421 267,764 193,056 28,385 28,385 796,974 183 89,458 10,715 1,510,146 1,483,957 447 7,516,257 417,050 726,897 10,656 255,421 267,764 193,056 28,385 28,385 796,974 183 89,458 10,715 1,873,552 1,483,957 447 7,382,221 417,050 Cash and cash equivalents Cash on hand Bank balance Overnight Time deposits Other financial assets, current Other financial assets Trade and other accounts receivable current Accounts receivable from related entities Other financial assets, non current Accounts receivable Other financial liabilities, current Trade and other accounts payables Accounts payable to related entities Other financial liabilities, non current Accounts payable, non-current The book values of accounts receivable and payable are assumed to approximate their fair values, due to their short-term nature. In the case of cash on hand, bank balances, overnight, time deposits and accounts payable, non-current, fair value approximates their carrying values. The fair value of Other financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate for similar financial instruments (Level II). In the case of Other financial assets, the valuation was performed according to market prices at period end. The Company has used estimates to value and record certain assets, liabilities, revenue, expenditure, and commitments. Basically, these estimates relate to: (a) Evaluation of possible losses through impairment of goodwill and intangible assets with an indefinite useful life. As of December 31, 2016 goodwill amounted to ThUS$ 2,710,382 (ThUS$ 2,280,575 at December 31, 2015), while intangible assets with an indefinite useful life comprised airport slots for ThUS$ 978,849 (ThUS$ 816,987 at December 31, 2015), Loyalty Program for ThUS$ 326,262 (ThUS$ 272,312 at December 31, 2015) and Trademarks (*) for ThUS$ 52.981 at December 31, 2015. At least once per year the Company verifies whether goodwill and intangible assets with an indefinite useful life have suffered any losses through impairment. For the purposes of this evaluation, the Company has identified two cash-generating units (CGUs): “Air transport” and “Multiplus loyalty and coalition program.” The book value of goodwill assigned to each CGU as of December 31, 2016, amounted to ThUS$ 2,176,634 and ThUS$ 533,748 (ThUS$ 1,835,088 and ThUS$ 445,487 at December 31, 2015), which included intangible assets with undefined useful life: Air Transport CGU Coalition and loyalty Program Multiplus CGU As of December 31, 2016 ThUS$ As of December 31, 2015 ThUS$ As of December 31, 2016 ThUS$ As of December 31, 2015 ThUS$ Airport Slots Trade marks (*) Loyalty program 978,849 - - 816,987 52,981 - - - 326,262 - - 272,312 (*) At December 31, 2016, the Company has changed the estimated useful life of the brands from an indefinite useful life to a five-year period (See Note 15). The recoverable value of these cash-generating units (CGUs) has been determined based on calculations of their value in use. The principal assumptions used by the management include: growth rate, exchange rate, discount rate, fuel prices, and other economic assumptions. The estimation of these assumptions requires significant judgment by the management, as these variables feature inherent uncertainty; however, the assumptions used are consistent with Company’s internal planning. Therefore, management evaluates and updates the estimates on an annual basis, in light of conditions that affect these variables. The mainly assumptions used as well as, the corresponding sensitivity analyses are showed in Note 16. 163 FINANCIAL STATEMENTS | Financial Statements 39 40 (b) Useful life, residual value, and impairment of property, plant, and equipment The depreciation of assets is calculated based on the linear model, except for certain technical components depreciated on cycles and hours flown. These useful lives are reviewed on an annual basis according with the Company’s future economic benefits associated with them. Changes in circumstances such as: technological advances, business model, planned use of assets or capital strategy may render the useful life different to the lifespan estimated. When it is determined that the useful life of property, plant, and equipment must be reduced, as may occur in line with changes in planned usage of assets, the difference between the net book value and estimated recoverable value is depreciated, in accordance with the revised remaining useful life. Residual values are estimated in accordance with the market value that these assets will have at the end of their useful life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, once a year. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 2.8). (c) Recoverability of deferred tax assets Deferred taxes are calculated in accordance with the liability method, applied over temporary differences that arise between the fiscal based of assets and liabilities, and their book value. Deferred tax assets for tax losses are recognized to the extent that the realization of the related tax benefit through future taxable profits is probable. The Company makes tax and financial projections to evaluate the realization of deferred tax asset over the course of time. Additionally, these projections are ensured to be consistent with those used to measure other long term assets. As of December 31, 2016 the company recognized deferred tax assets amounting to ThUS$ 384,580 (ThUS$ 376,595 at December 31, 2015), and had ceased to recognize deferred tax assets for tax losses amounting to ThUS$ 115,801 (ThUS$ 15,513 at December 31, 2015) (Note 18). (d) Air tickets sold that are not actually used. The Company advance sales of tickets as deferred revenue. Revenue from ticket sales is recognized in the income statement when the service is provided or when the tickets expires unused, reducing the corresponding deferred revenue. The Company evaluates monthly the probability that tickets expiry unused, based on the history of used tickets. Changes in the exchange probability would have an impact our revenue in the year in which the change occurs and in future years. As of December 31, 2016, deferred revenue associated with air ThUS$ 1,535,229 (ThUS$ 1,223,886 as of December 31, 2015). An hypothetical change of 1% in passenger behavior regarding to the ticket usage, - that is, if during the next six months after sells probability of used were 89% rather than 90%, as we consider, it would lead to a change in the expiry period from six to seven months, which, as of December 31, 2016, would have an impact of up to ThUS$ 20,000. tickets sold amounted to (e) Valuation of loyalty points and kilometers granted to loyalty program members, pending usage. As of December 31, 2016 and December 31, 2015, the Company operated the following loyalty programs: LATAM Pass, LATAM Fidelidade and Multiplus, with the objective of enhancing customer loyalty by offering points or kilometers (see Note 22). When kilometers and points are redeemed for products and services other than the services provided by the Company, revenue is recognized immediately; when they are redeemed for air tickets on airlines from to LATAM Airlines Group S.A. and subsidiaries, revenue is deferred until the transport service is provided or the corresponding tickets expired. Deferred revenue from loyalty programs at the closing date corresponds to the valuation of points and kilometers granted to loyalty program members, pending of use, and the probability to be redeemed. According to IFRIC-13, kilometers and points value that the Company estimate are not likely to be redeemed (“breakage”), they recognize the associated value proportionally during the period in which the remaining kilometers or points are expected to be redeemed. The Company uses statistical models to estimate the breakage, based on historical redemption patterns Changes in the breakage would have a significant impact on our revenue in the year in which the change occurs and in future years. As of December 31, 2016, deferred revenue associated with the LATAM Pass loyalty program amounted to ThUS$ 896,190 (ThUS$ 973,264 at December 31, 2015). As of December 31, 2016 a hypothetical change of 1% in the probability of usage would result in an impact of approximately ThUS$ 30,632 and ThUS$ 30,000 at the same period of 2015. Meanwhile, deferred revenue associated with ThUS$ 392,107 (ThUS$ 452,264 at December 31, 2015). As of December 31, 2016 a hypothetical change of 2% in the probability of usage would result in an impact of approximately ThUS$ 14,639 and ThUS$ 11,755 at the same period of 2015. the LATAM Fidelidade and Multiplus loyalty programs amounted to The fair value of kilometers is determined by the Company based in its best estimate of the price at which they have been sold in the past. As of December 31, 2016 a hypothetical change of 1% in the fair value of the unused kilometers would result in an impact of approximately ThUS$ 8,400 and ThUS$ 8,800 at the same period of 2015. (f) Provisions needs, and their valuation when required Known contingencies are recognized when: the Company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. The Company applies professional judgment, experience, and knowledge to use available information to determine these values, in light of the specific characteristics of known risks. This process facilitates the early assessment and valuation of potential risks in individual cases or in the development of contingent eventualities. (g) Investment in subsidiary (TAM) The management has applied its judgment in determining that LATAM Airlines Group S.A. controls TAM S.A. and Subsidiaries, for accounting purposes, and has therefore consolidated the financial statements. 164 41 The grounds for this decision are that LATAM issued ordinary shares in exchange for the majority of circulating ordinary and preferential shares in TAM, except for those TAM shareholders who did not accept the exchange, which were subject to a squeeze out, entitling LATAM to substantially all economic benefits generated by the LATAM Group, and thus exposing it to substantially all risks relating to the operations of TAM. This exchange aligns the economic interests of LATAM and all of its shareholders, including the controlling shareholders of TAM, thus insuring that the shareholders and directors of TAM shall have no incentive to exercise their rights in a manner that would be beneficial to TAM but detrimental to LATAM. Furthermore, all significant actions necessary of the operation of the airlines require votes in favor by the controlling shareholders of both LATAM and TAM. Since the integration of LAN and TAM operations, the most critical airline operations in Brazil have been managed by the CEO of TAM while global activities have been managed by the CEO of LATAM, who is in charge of the operation of the LATAM Group as a whole and reports to the LATAM Board. The CEO of LATAM also evaluates the performance of LATAM Group executives and, together with the LATAM Board, determines compensation. Although Brazilian law currently imposes restrictions on the percentages of voting rights that may be held by foreign investors, LATAM believes that the economic basis of these agreements meets the requirements of accounting standards in force, and that the consolidation of the operations of LAN and LATAM is appropriate. These estimates were made based on the best information available relating to the matters analyzed. In any case, it is possible that events that may take place in the future could lead to their modification in future reporting periods, which would be made in a prospective manner. NOTE 5 - SEGMENTAL INFORMATION The Company has determined that it has two operating segments: the air transportation business and the coalition and loyalty program Multiplus. The Air transport segment corresponds to the route network for air transport and it is based on the way that the business is run and managed, according to the centralized nature of its operations, the ability to open and close routes and reallocate resources (aircraft, crew, staff, etc..) within the network, which is a functional relationship between all of them, making them inseparable. This segment definition is the most common level used by the global airline industry. The segment of loyalty coalition called Multiplus, unlike LATAM Pass and LATAM Fidelidade, is a frequent flyer programs which operate as a unilateral system of loyalty that offers a flexible coalition system, interrelated among its members, with 16.5 million of members, along with being a regulated entity with a separately business and not directly related to air transport. FINANCIAL STATEMENTS | Financial Statements 165 FINANCIAL STATEMENTS | Financial Statements 42 For the periods ended Income from ordinary activities from external customers (*) LAN passenger T AM passenger Freight Income from ordinary activities from transactions with other operating segments Other operating income Interest income Interest expense Air transportation At December 31, 2016 2015 Coalition and loyalty program Multiplus At December 31, 2015 2016 Eliminations At December 31, 2016 2015 T hUS$ T hUS$ T hUS$ T hUS$ T hUS$ T hUS$ Consolidated At December 31, 2016 T hUS$ 2015 T hUS$ 8,587,772 9,278,041 400,568 462,004 4,104,348 3,372,799 1,110,625 4,241,918 3,706,692 1,329,431 - 400,568 - - 462,004 - - - - - - - - - 8,988,340 9,740,045 4,104,348 3,773,367 1,110,625 4,241,918 4,168,696 1,329,431 400,568 364,551 27,287 (427,054) 462,004 65,969 67,826 (466,537) (529,830) - - 230,823 174,197 154,958 - - 538,748 385,781 21,818 (423,742) 58,380 - 63,647 - (10,718) 10,718 (10,385) 10,385 74,949 (416,336) 75,080 (413,357) T otal net interest expense (399,767) (401,924) 58,380 63,647 Depreciation and amortization (952,285) (923,311) (8,043) (11,095) Material non-cash items other than depreciation and amortization Disposal of fixed assets and inventory losses Doubtful accounts Exchange differences Result of indexation units 10,069 (507,921) (82,734) (29,674) 122,129 348 (20,932) (18,292) (469,178) 481 (991) - (476) (478) (37) 1,893 - 611 1,282 - Income (loss) atributable to owners of the parents (83,653) (356,039) 152,873 136,765 - - - - - - - - - - - - - - - - Participation of the entity in the income of associates Expenses for income tax Segment profit / (loss) Assets of segment Amount of non-current asset additions Property, plant and equipment Intangibles other than goodwill - (92,476) (42,203) 17,805,749 1,481,090 1,390,730 90,360 37 249,090 (315,497) 16,924,200 1,492,281 1,439,057 53,224 - (70,728) 152,873 1,400,432 - - (70,707) 136,765 1,182,111 - - - - - - - - (7,987) - - - - - - (4,893) - - - Segment liabilities Purchase of non-monetary assets of segment 14,469,505 782,957 14,700,072 1,622,198 572,065 - 490,076 - (28,680) - (26,278) - (341,387) (338,277) (960,328) (934,406) 9,078 (506,028) (82,734) (30,150) 121,651 311 69,220 - (163,204) 110,670 19,198,194 1,481,090 1,390,730 90,360 15,012,890 782,957 (20,932) (17,681) (467,896) 481 (219,274) 37 178,383 (178,732) 18,101,418 1,492,281 1,439,057 53,224 15,163,870 1,622,198 (*) The Company does not have any interest revenue that should be recognized as income from ordinary activities by interest. 166 FINANCIAL STATEMENTS | Financial Statements 43 44 The Company’s revenues by geographic area are as follows: Cash and cash equivalents are denominated in the following currencies: Currency Argentine peso Brazilian real Chilean peso Colombian peso Euro US Dollar Strong bolivar (*) Other currencies T otal As of December 31, 2016 T hUS$ As of December 31, 2015 T hUS$ 7,871 97,401 30,758 4,336 1,695 780,124 61 27,081 949,327 18,733 106,219 17,978 14,601 10,663 564,214 2,986 18,103 753,497 (*) At December 31, 2015, the Company reflected an exchange rate loss of ThUS$ 40,968 consequence change in the SICAD rate of Venezuela (13.5 VEF/US$) at the SIMADI rate equivalent to 198.70 VEF/US$. As of December 31, 2016, the DICOM rate, which replaces SIMADI (February 2016), and to this date is 673.76 VEF/US$, Applied to cash and cash equivalents in VEF, represented a balance of ThUS$ 61 (ThUS$ 2,986 at December 31, 2015) For the period ended At December 31, 2016 ThUS$ 627,215 1,030,973 933,130 714,436 343,001 2,974,234 198,171 1,512,570 654,610 8,988,340 538,748 2015 ThUS$ 681,340 979,324 1,025,475 723,062 353,007 3,464,297 238,500 1,575,519 699,521 9,740,045 385,781 Peru Argentina U.S.A. Europe Colombia Brazil Ecuador Chili Asia Pacific and rest of Latin America Income from ordinary activities Other operating income The Company allocates revenues by geographic area based on the point of sale of the passenger ticket or cargo. Assets are composed primarily of aircraft and aeronautical equipment, which are used throughout the different countries, so it is not possible to assign a geographic area. The Company has no customers that individually represent more than 10% of sales. NOTE 6 - CASH AND CASH EQUIVALENTS Cash on hand Bank balances Overnight T otal Cash Cash equivalents T ime deposits Mutual funds T otal cash equivalents T otal cash and cash equivalents As of December 31, 2016 T hUS$ As of December 31, 2015 T hUS$ 8,630 255,746 295,060 559,436 374,369 15,522 389,891 949,327 10,656 255,421 267,764 533,841 193,056 26,600 219,656 753,497 167 FINANCIAL STATEMENTS | Financial Statements 45 46 NOTE 7 - FINANCIAL INSTRUMENTS 7.1. Financial instruments by category As of December 31, 2016 Assets Cash and cash equivalents Other financial assets, current (*) Trade and others Loans and receivables ThUS$ 933,805 164,426 Hedge derivatives ThUS$ - 11,411 accounts receivable, current 1,107,889 Accounts receivable from related entities, current Other financial assets, non current (*) Accounts receivable, non current Total Liabilities 554 101,603 8,254 2,316,531 - - - - 11,411 Other liabilities, current Trade and others accounts payable, current Accounts payable to related entities, current Other financial liabilities, non-current Accounts payable, non-current Total Held for trading ThUS$ - - - - 522 - 522 Other financial liabilities ThUS$ 1,814,647 1,593,068 269 6,790,273 359,391 10,557,648 Initial designation as fair value through profit and loss ThUS$ 15,522 536,991 - - - - 552,513 Held Hedge derivatives ThUS$ 24,881 - - 6,679 - 31,560 Total ThUS$ 949,327 712,828 1,107,889 554 102,125 8,254 2,880,977 Total ThUS$ 1,839,528 1,593,068 269 6,796,952 359,391 10,589,208 (*) The value presented as initial designation as fair value through profit and loss, corresponds mainly to private investment funds; and loans and receivables corresponds to guarantees given. As of December 31, 2015 Assets Cash and cash equivalents Other financial assets, current (*) Trade and others accounts receivable, current Accounts receivable from related entities, current Other financial assets, non current (*) Accounts receivable, non current Total Liabilities Other liabilities, current Trade and others accounts payable, current Accounts payable to related entities, current Other financial liabilities, non-current Accounts payable, non-current Total Loans and receivables ThUS$ 726,897 28,385 796,974 183 88,820 10,715 1,651,974 Hedge derivatives ThUS$ - 16,578 - - Held for trading ThUS$ - 157,575 - - - - 16,578 638 - 158,213 Initial designation as fair value through profit and loss ThUS$ 26,600 448,810 - - - - 475,410 Held Hedge derivatives ThUS$ 134,089 - - 16,128 - 150,217 Total ThUS$ 753,497 651,348 796,974 183 89,458 10,715 2,302,175 Total ThUS$ 1,644,235 1,483,957 447 7,532,385 417,050 11,078,074 Other financial liabilities ThUS$ 1,510,146 1,483,957 447 7,516,257 417,050 10,927,857 (*) The value presented as initial designation as fair value through profit and loss, corresponds mainly to private investment funds; and loans and receivables corresponds to guarantees given. 168 FINANCIAL STATEMENTS | Financial Statements 47 48 7.2. Financial instruments by currency As o f As o f De c e m be r 31, De c e m be r 31, a) Assets C a s h a nd c a s h e quiva le nts Arge ntine pe s o B ra zilia n re a l C hile a n pe s o C o lo m bia n pe s o Euro US Do lla r S tro ng bo liva r Othe r c urre nc ie s Othe r fina nc ia l a s s e ts (c urre nt a nd no n-c urre nt) Arge ntine pe s o B ra zilia n re a l C hile a n pe s o C o lo m bia n pe s o Euro US Do lla r S tro ng bo liva r Othe r c urre nc ie s Tra de a nd o the r a c c o unts re c e iva ble , c urre nt Arge ntine pe s o B ra zilia n re a l C hile a n pe s o C o lo m bia n pe s o Euro US Do lla r S tro ng bo liva r Othe r c urre nc ie s (*) Ac c o unts re c e iva ble , no n-c urre nt B ra zilia n re a l C hile a n pe s o US Do lla r Othe r c urre nc ie s (*) Ac c o unts re c e iva ble fro m re la te d e ntitie s , c urre nt B ra zilia n re a l C hile a n pe s o To ta l a s s e ts Arge ntine pe s o B ra zilia n re a l C hile a n pe s o C o lo m bia n pe s o Euro US Do lla r S tro ng bo liva r Othe r c urre nc ie s 2016 ThUS $ 949,327 7,871 97,401 30,758 4,336 1,695 780,124 61 27,081 814,953 337 686,501 668 1,023 6,966 117,346 76 2,036 1,107,889 82,770 551,260 92,791 16,454 21,923 312,394 43 30,254 8,254 4 8,250 - - 554 - 554 2,880,977 90,978 1,335,166 133,021 21,813 30,584 1,209,864 180 59,371 2015 ThUS $ 753,497 18,733 106,219 17,978 14,601 10,663 564,214 2,986 18,103 740,806 157,281 449,934 640 1,670 614 128,620 22 2,025 796,974 71,438 191,037 57,755 13,208 30,006 344,153 7,225 82,152 10,715 521 5,041 5,000 153 183 2 181 2,302,175 247,452 747,713 81,595 29,479 41,283 1,041,987 10,233 102,433 See the composition of the others currencies in Note 8 Trade, other accounts receivable and (*) non-current accounts receivable. b) Liabilities Liabilities information is detailed in the table within Note 3 Financial risk management. NOTE 8 - TRADE AND OTHER ACCOUNTS RECEIVABLE CURRENT, AND NON-CURRENT ACCOUNTS RECEIVABLE Trade accounts receivable Other accounts receivable Total trade and other accounts receivable Less: Allowance for impairment loss Total net trade and accounts receivable Less: non-current portion – accounts receivable Trade and other accounts receivable, current As of As of December 31, December 31, 2016 ThUS$ 1,022,933 170,264 1,193,197 (77,054) 1,116,143 (8,254) 1,107,889 2015 ThUS$ 685,733 182,028 867,761 (60,072) 807,689 (10,715) 796,974 The fair value of trade and other accounts receivable does not differ significantly from the book value. The maturity of these accounts at the end of each period is as follows: Fully performing M atured accounts receivable, but not impaired Expired from 1 to 90 days Expired from 91 to 180 days M ore than 180 days overdue (*) Total matured accounts receivable, but not impaired M atured accounts receivable and impaired As of As of December 31, December 31, 2016 ThUS$ 2015 ThUS$ 896,040 577,902 38,969 9,303 1,567 49,839 28,717 10,995 8,047 47,759 Judicial, pre-judicial collection and protested documents 34,909 24,304 Debtor under pre-judicial collection process and portfolio sensitization Total matured accounts receivable and impaired Total 42,145 77,054 1,022,933 35,768 60,072 685,733 (*) Value of this segment corresponds primarily to accounts receivable that were evaluated in their ability to recover, therefore not requiring a provision. 169 FINANCIAL STATEMENTS | Financial Statements 49 50 Currency balances that make up the Trade and other accounts receivable and non-current accounts receivable are the following: Movement in the allowance for impairment loss of Trade and other accounts receivables are the following: Currency Argentine Peso Brazilian Real Chilean Peso Colombian peso Euro US Dollar Strong bolivar Other currency (*) Total (*) Other currencies Australian Dollar Chinese Yuan Danish Krone Pound Sterling Indian Rupee Japanese Yen Norwegian Kroner Swiss Franc Korean Won New Taiwanese Dollar Other currencies Total As of December 31, 2016 As of December 31, 2015 ThUS$ ThUS$ 82,770 551,264 101,041 16,454 21,923 312,394 43 30,254 1,116,143 5,487 271 151 3,904 303 2,601 184 1,512 4,241 662 10,938 30,254 71,438 191,558 62,796 13,208 30,006 349,153 7,225 82,305 807,689 26,185 4,282 164 7,228 3,070 4,343 221 1,919 4,462 3,690 26,741 82,305 Periods From January 1 to December 31, 2015 From January 1 to December 31, 2016 Opening balance T hUS$ (71,042) (60,072) Write-offs T hUS$ 10,120 20,910 (Increase) Decrease T hUS$ 850 (37,892) Closing balance T hUS$ (60,072) (77,054) Once pre-judicial and judicial collection efforts are exhausted, the assets are written off against the allowance. The Company only uses the allowance method rather than direct write-off, to ensure control. Historic and current re-negotiations are not relevant and the policy is to analyze case by case in order to classify them according to the existence of risk, determining whether it is appropriate to re- classify accounts to pre-judicial recovery. If such re-classification is justified, an allowance is made for the account, whether overdue or falling due. The maximum credit-risk exposure at the date of presentation of the information is the fair value of each one of the categories of accounts receivable indicated above. As of December 31, 2016 As of December 31, 2015 Gross exposure according to balance T hUS$ Gross impaired exposure T hUS$ Exposure net of risk concentrations Gross exposure according to balance T hUS$ T hUS$ Gross Impaired exposure T hUS$ Exposure net of risk concentrations T hUS$ T rade accounts receivable Other accounts receivable 1,022,933 (77,054) 945,879 685,733 (60,072) 625,661 170,264 - 170,264 182,028 - 182,028 The Company records allowances when there is evidence of impairment of trade receivables. The criteria used to determine that there is objective evidence of impairment losses are the maturity of the portfolio, specific acts of damage (default) and specific market signals. There are no relevant guarantees covering credit risk and these are valued when they are settled; no materially significant direct guarantees exist. Existing guarantees, if appropriate, are made through IATA. Maturity Judicial and pre-judicial collection assets Over 1 year Between 6 and 12 months Impairment 100% 100% 50% 170 FINANCIAL STATEMENTS | Financial Statements 51 52 NOTE 9 - ACCOUNTS RECEIVABLE FROM/PAYABLE TO RELATED ENTITIES NOTE 10 -INVENTORIES (a) Accounts Receivable T ax No. Related party Relationship of origin Currency 2016 2016 Country As of December 31, As of December 31, 78.591.370-1 Bethia S.A. and Subsidiaries Related director 87.752.000-5 Granja Marina T ornagaleones S.A. Common shareholder Chile Chile CLP CLP 96.810.370-9 Inversiones Costa Verde Ltda. y CPA. Controller Chile CLP Foreign T AM Aviação Executiva e T axi Aéreo S.A. Related director Brazil BRL T otal current assets (b) Accounts payable T hUS$ T hUS$ 538 14 2 - 554 167 14 - 2 183 T ax No. Related party Relationship of origin Currency 2016 2015 Country December 31, December 31, As of As of Foreign Consultoría Administrativa Profesional S.A. de C.V. Associate 65.216.000-K Viajes Falabella Ltda. Related director Mexico Chile MXN CLP 79.773.440-3 T AM Aviação Executiva e T axi Aéreo S.A. 65.216.000-K Comunidad Mujer 78.591.370-1 Bethia S.A. and Subsidiaries Related director Related director Related director 79.773.440-3 T ransportes San Felipe S.A Common property Brazil Chile Chile Chile Foreign Inversora Aeronaútica Argentina Related director Argentina BRL CLP CLP CLP US$ T hUS$ T hUS$ 170 46 28 13 6 4 2 342 68 - 10 5 - 22 T otal current liabilities 269 447 Transactions between related parties have been carried out on free-trade conditions between interested and duly-informed parties. The transaction times are between 30 and 45 days, and the nature of settlement of the transactions is monetary. The composition of Inventories is as follows: Technical stock Non-technical stock Total As of December 31, 2016 As of December 31, 2015 ThUS$ 191,864 49,499 241,363 ThUS$ 192,930 31,978 224,908 The items included in this heading are spare parts and materials that will be used mainly in consumption in in-flight and maintenance services provided to the Company and third parties, which are valued at average cost, net of provision for obsolescence, as per the following detail: Provision for obsolescence Technical stock Provision for obsolescenceNon-technical stock Total As of December 31, 2016 ThUS$ 31,647 3,429 35,076 As of December 31, 2015 ThUS$ 13,303 2,589 15,892 As of December 31, 2016, the Company recorded ThUS$ 167,365 (ThUS$ 160,030 at December 31, 2015) within the income statement, mainly due to in-flight consumption and maintenance, which forms part of Cost of sales. 171 FINANCIAL STATEMENTS | Financial Statements 53 54 NOTE 11 - OTHER FINANCIAL ASSETS The composition of Other financial assets is as follows: C urre nt As s e ts No n-c urre nt a s s e ts To ta l As s e ts As o f As o f As o f As o f As o f As o f De c e m be r 31, 2016 De c e m be r 31, 2015 De c e m be r 31, 2016 De c e m be r 31, 2015 De c e m be r 31, 2016 De c e m be r 31, 2015 ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ (a ) Othe r fina nc ia l a s s e ts P riva te inve s tm e nt funds De po s its in gua ra nte e (a irc ra ft) Gua ra nte e s fo r m a rgins o f de riva tive s Othe r inve s tm e nts Do m e s tic a nd fo re ign bo nds Othe r gua ra nte e s give n Othe r S ubto ta l o f o the r fina nc ia l a s s e ts (b) He dging a s s e ts Inte re s t a c c rue d s inc e the la s t pa ym e nt da te o f C ro s s c urre nc y s wa p F a ir va lue o f fo re ign c urre nc y de riva tive s (*) F a ir va lue o f fue l pric e de riva tive s S ubto ta l o f he dging a s s e ts To ta l Othe r F ina nc ia l As s e ts 536,991 16,819 939 - - 140,733 5,935 701,417 64 1,259 10,088 11,411 712,828 448,810 16,532 4,456 - 157,575 6,160 1,237 634,770 397 9,888 6,293 16,578 651,348 - 56,846 - 522 - 44,757 - 102,125 - - - - - 58,483 - 638 - 30,337 - 89,458 - - - - 536,991 73,665 939 522 - 185,490 5,935 448,810 75,015 4,456 638 157,575 36,497 1,237 803,542 724,228 64 1,259 10,088 11,411 397 9,888 6,293 16,578 102,125 89,458 814,953 740,806 (*) The foreign currency derivatives correspond to forward and combination of options. The types of derivative hedging contracts maintained by the Company at the end of each period are described in Note 19. NOTE 12 - OTHER NON-FINANCIAL ASSETS The composition of Other non-financial assets is as follows: C urre nt a s s e ts As o f As o f No n-c urre nt a s s e ts As o f As o f De c e m be r 31, De c e m be r 31, De c e m be r 31, De c e m be r 31, 2016 2015 2016 2015 To ta l As s e ts As o f De c e m be r 31, 2016 As o f De c e m be r 31, 2015 ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ (a ) Adva nc e pa ym e nts Airc ra ft le a s e s Airc ra ft ins ura nc e a nd o the r Othe rs S ubto ta l a dva nc e pa ym e nts (b) Othe r a s s e ts Airc ra ft m a inte na nc e re s e rve (*) S a le s ta x Othe r ta xe s C o ntributio ns to S o c ié té Inte rna tio na le de Té lé c o m m unic a tio ns Aé ro na utique s ("S ITA") J udic ia l de po s its Othe rs S ubto ta l o the r a s s e ts To ta l Othe r No n - F ina nc ia l As s e ts 37,560 14,717 4,521 56,798 51,576 102,351 500 406 - 611 155,444 212,242 33,305 12,408 16,256 61,969 99,112 158,134 4,295 505 - 6,001 268,047 330,016 14,065 - 1,573 15,638 90,175 40,232 - 591 90,604 104 221,706 237,344 22,569 - 33,781 56,350 64,366 45,061 - 547 67,980 1,159 179,113 235,463 51,625 14,717 6,094 72,436 141,751 142,583 500 997 90,604 715 377,150 449,586 55,874 12,408 50,037 118,319 163,478 203,195 4,295 1,052 67,980 7,160 447,160 565,479 (*) Aircraft maintenance reserves reflect prepayment deposits made by the group to lessors of certain aircraft under operating lease agreements in order to ensure that funds are available to support the scheduled heavy maintenance of the aircraft. These amounts are calculated based on performance measures, such as flight hours or cycles, are paid periodically (usually monthly) and are contractually required to be repaid to the lessee upon the completion of the required maintenance of the leased aircraft. At the end of the lease term, any unused maintenance reserves are either returned to the Company in cash or used to offset amounts that we may owe the lessor as a maintenance adjustment. In some cases (five lease agreements), if the maintenance cost incurred by LATAM is less than the corresponding maintenance reserves, the lessor is entitled to retain those excess amounts at the time the heavy maintenance is performed. The Company periodically reviews its maintenance reserves for each of its leased aircraft to ensure that they will be recovered, and recognizes an expense if any such amounts are less than probable of being returned. Since the acquisition of TAM in June 2012, the cost of aircraft maintenance has been higher than the related maintenance reserves for all aircraft. As of December 31, 2016, LATAM had ThUS$ 141,751 in maintenance reserves (ThUS$ 163,478 at December 31, 2015), corresponding to two aircraft with contracts that establish periodic payments and whose expiration date is in 2017 and 21 aircraft that maintains remaining balances, which will be liquidated in the next maintenance or return. Aircraft maintenance reserves are classified as current or non-current depending on the dates when the related maintenance is expected to be performed (Note 2.23) 172 FINANCIAL STATEMENTS | Financial Statements 55 56 NOTE 13 - NON-CURRENT ASSETS AND DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE The detail of fleet classified as non-current assets or groups of assets for disposal classified as held for sale is the following: Non-current assets and December 31, 2015 are detailed below: in disposal groups held for sale at December 31, 2016 and Current assets Aircraft Engines and rotables Other assets T otal Current liabilities Other liabilities T otal As of December 31, 2016 As of December 31, 2015 T hUS$ T hUS$ 281,158 29,083 26,954 337,195 10,152 10,152 263 1,697 - 1,960 - - The balances are presented at the lower of book value and fair value less cost to sell. The fair value of these assets were determined based on quoted prices in active markets for similar assets or liabilities. This is a level II measurement as per the fair value hierarchy set out in note 3.3 (2). There were no transfers between levels for recurring fair value measurements during the year. (a) Assets reclassified from Property, plant and equipment to Non-current assets or groups of assets for disposal classified as held for sale In the period ended December 31, 2016, two Airbus A319 aircraft, two Airbus A320 aircraft, six Airbus A330 aircraft, two Boeing 777 aircraft, eight A330 spare engines, A330 rotables and two buildings were reclassified from Property, plant and equipment to Non-current assets or groups of assets for disposal classified as held for sale. During the period ended December 31, 2016, two Airbus A319 aircraft, one Airbus A320 aircraft and two Airbus A330 aircraft were sold. Additionally an A330 spare engine and D200 rotables were sold. As a result, an adjustment of US $ 55 million was recorded to write down these assets to their net As of As of December 31, December 31, 2016 2015 Aircraft Boeing 777 Freighter Airbus A330-200 Airbus A320-200 ATR42-300 Total (*) 2 4 1 1 8 - - - 1 1 (*) One aircraft leased to DHL. NOTE 14 - INVESTMENTS IN SUBSIDIARIES" (a) Investments in subsidiaries The Company has investments in companies recognized as investments in subsidiaries. All the companies defined as subsidiaries have been consolidated within the financial statements of LATAM Airlines Group S.A. and Subsidiaries. The consolidation also includes special-purpose entities. Detail of significant subsidiaries and summarized financial information: Name of significant subsidiary Country of Functional incorporation currency Ownership As of December 31, As of December 31, 2016 % 2015 % Lan Perú S.A. Lan Cargo S.A. Lan Argentina S.A. T ransporte Aéreo S.A. Aerolane Líneas Aéreas Nacionales del Ecuador S.A. Aerovías de Integración Regional, AIRES S.A. T AM S.A. Peru Chile Argentina Chile Ecuador Colombia Brazil US$ US$ ARS US$ US$ COP BRL 70.00000 99.89803 95.85660 99.89804 100.00000 99.19056 99.99938 70.00000 99.89803 94.99055 99.89804 100.00000 99.01646 99.99938 The consolidated subsidiaries do not have significant restrictions for transferring funds to controller. 173 FINANCIAL STATEMENTS | Financial Statements 57 Summary financial information of significant subsidiaries Name of significant subsidiary Lan Perú S.A. Lan Cargo S.A. Lan Argentina S.A. T ransporte Aéreo S.A. Aerolane Líneas Aéreas Nacionales del Ecuador S.A. Aerovías de Integración Regional, AIRES S.A. T AM S.A. (*) Name of significant subsidiary Lan Perú S.A. Lan Cargo S.A. Lan Argentina S.A. T ransporte Aéreo S.A. Aerolane Líneas Aéreas Nacionales del Ecuador S.A. Aerovías de Integración Regional, AIRES S.A. T AM S.A. (*) Statement of financial position as of December 31, 2016 T otal Assets T hUS$ 306,111 480,908 216,331 340,940 Current Assets T hUS$ 283,691 144,309 194,306 36,986 Non-current Assets T otal Liabilities T hUS$ T hUS$ Current Liabilities T hUS$ Non-current Liabilities T hUS$ 22,420 336,599 22,025 303,954 294,912 239,728 200,172 124,805 293,602 211,395 197,330 59,668 1,310 28,333 2,842 65,137 Results for the period ended December 31, 2016 Revenue T hUS$ 967,787 266,296 371,896 297,247 Net Income T hUS$ (2,164) (24,813) (29,572) 8,206 89,667 56,064 33,603 81,101 75,985 5,116 219,676 (1,281) 129,734 5,287,286 55,132 1,794,189 74,602 3,493,097 85,288 4,710,308 74,160 2,837,620 11,128 1,872,688 277,503 4,145,951 (13,675) 2,107 Statement of financial position as of December 31, 2015 T otal Assets T hUS$ 255,691 483,033 195,756 331,117 Current Assets T hUS$ 232,547 159,294 180,558 41,756 Non-current Assets T otal Liabilities T hUS$ T hUS$ Current Liabilities T hUS$ Non-current Liabilities T hUS$ 23,144 323,739 15,198 289,361 240,938 217,037 170,384 122,666 239,521 147,423 168,126 44,495 1,417 69,614 2,258 78,171 Results for the period ended December 31, 2015 Revenue T hUS$ 1,078,992 278,117 443,317 324,464 Net Income T hUS$ 5,068 (74,408) 9,432 5,878 126,001 80,641 45,360 116,153 111,245 4,908 246,402 (1,278) 130,039 62,937 67,102 75,003 64,829 10,174 4,711,316 1,350,377 3,360,939 4,199,223 1,963,400 2,235,823 291,354 4,597,611 (34,079) (183,812) (*) Corresond to consolidated information of TAM S.A. and Subsidiaries. 174 FINANCIAL STATEMENTS | Financial Statements 58 (b) Non-controlling interest Equity Ta x No. Country of origin As of De c e mbe r 31, 2016 As of De c e mbe r 31, 2015 As of De c e mbe r 31, 2016 As of De c e mbe r 31, 2015 % % ThUS $ ThUS $ La n P e rú S .A La n Ca rgo S .A. a nd S ubs idia rie s P romotora Aé re a La tinoa me ric a na S .A. a nd S ubs idia rie s Inve rs ora Cordille ra S .A. a nd S ubs idia rie s La n Arge ntina S .A. Ame ric ons ult de Gua te ma la S .A. Ame ric ons ult Cos ta Ric a S .A. Line a Aé re a Ca rgue ra de Colombia na S .A. Ae rolíne a s Re giona le s de Inte gra c ión Aire s S .A. Tra ns porte s Ae re os de l Me rc os ur S .A. Multiplus S .A. 0- E 93.383.000- 4 0- E 0- E 0- E 0- E 0- E 0- E 0- E 0- E 0- E P e ru Chile Me xic o Arge ntina Arge ntina Gua te ma la Cos ta Ric a Colombia Colombia P a ra gua y Bra zil 30.00000 0.10196 51.00000 0.70422 0.13440 1.00000 1.00000 10.00000 0.80944 5.02000 27.26000 30.00000 0.10605 51.00000 0.70422 1.00000 1.00000 1.00000 10.00000 0.98307 5.02000 27.26000 Tota l Inc ome s Ta x No. Country of origin As of De c e mbe r 31, 2016 % As of De c e mbe r 31, 2015 % La n P e rú S .A La n Ca rgo S .A. a nd S ubs idia rie s P romotora Ae re a La tinoa me ric a na S .A. a nd S ubs idia rie s Inve rs ora Cordille ra S .A. a nd S ubs idia rie s La n Arge ntina S .A. Ame ric ons ult de Gua te ma la S .A. Ame ric ons ult Cos ta Ric a S .A. Line a Aé re a Ca rgue ra de Colombia na S .A. Ae rolíne a s Re giona le s de Inte gra c ión Aire s S .A. Tra ns porte s Ae re os de l Me rc os ur S .A. Multiplus S .A. 0- E 93.383.000- 4 0- E 0- E 0- E 0- E 0- E 0- E 0- E 0- E 0- E P e ru Chile Me xic o Arge ntina Arge ntina Gua te ma la Cos ta Ric a Colombia Colombia P a ra gua y Bra zil 30.00000 0.10196 51.00000 0.70422 0.13440 1.00000 1.00000 10.00000 0.80944 5.02000 27.26000 30.00000 0.10605 51.00000 0.70422 1.00000 1.00000 1.00000 10.00000 0.98307 5.02000 27.26000 Tota l 3,360 957 3,162 515 (311) 1 12 (905) 436 1,104 80,313 88,644 4,426 974 3,084 (1,386) 29 5 12 (811) 540 1,256 72,884 81,013 For the pe riod e nde d De c e mbe r 31, 2016 ThUS $ (649) (7) 96 364 77 (4) - (106) (140) 146 41,673 41,450 2015 ThUS $ 1,521 (69) 1,349 281 61 1 5 14 (335) 431 37,283 40,542 175 FINANCIAL STATEMENTS | Financial Statements 59 60 NOTE 15 - INTANGIBLE ASSETS OTHER THAN GOODWILL The details of intangible assets are as follows: The amortization of the period is shown in the consolidated statement of income in administrative expenses. The accumulated amortization of computer programs as of December 31, 2016 amounts to ThUS$ 270,041 (ThUS$ 220,593 at December 31, 2015). C la s s e s o f inta ngible a s s e ts (ne t) As o f De c e m be r 31, 2016 As o f De c e m be r 31, 2015 C la s s e s o f inta ngible a s s e ts (gro s s ) As o f De c e m be r 31, 2016 As o f De c e m be r 31, 2015 ThUS $ ThUS $ ThUS $ ThUS $ 978,849 326,262 157,016 91,053 57,133 - 1,610,313 816,987 272,312 104,258 74,887 52,981 - 978,849 326,262 419,652 91,053 63,730 808 816,987 272,312 324,043 74,887 52,981 808 1,321,425 1,880,354 1,542,018 Airpo rt s lo ts Lo ya lty pro gra m C o m pute r s o ftwa re De ve lo ping s o ftwa re Tra de m a rks (1) Othe r a s s e ts To ta l Movement in Intangible assets other than goodwill: Ope ning ba la nc e a s o f J a nua ry 1, 2015 Additio ns Withdra wa ls Tra ns fe r s o ftwa re F o re ing e xc ha nge Am o rtiza tio n C lo s ing ba la nc e a s o f De c e m be r 31, 2015 Ope ning ba la nc e a s o f J a nua ry 1, 2016 Additio ns Withdra wa ls Tra ns fe r s o ftwa re F o re ing e xc ha nge Am o rtiza tio n C lo s ing ba la nc e a s o f De c e m be r 31, 2016 C o m pute r s o ftwa re Ne t De ve lo ping s o ftwa re Airpo rt s lo ts (2) Tra de m a rks a nd lo ya lty pro gra m (1) (2) Othe r a s s e ts Ne t To ta l ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ 126,797 4,954 (4,612) 28,726 (14,871) (36,736) 74,050 48,270 (162) (30,426) (16,845) - 1,201,028 - - - (384,041) - 478,204 - (1) - (152,910) - 104,258 74,887 816,987 325,293 104,258 6,688 (736) 85,029 5,689 (43,912) 74,887 83,672 (191) (74,376) 7,061 - 816,987 - - - 161,862 - 325,293 - - - 64,447 (6,345) 157,016 91,053 978,849 383,395 - - - - - - - - - - - - - - 1,880,079 53,224 (4,775) (1,700) (568,667) (36,736) 1,321,425 1,321,425 90,360 (927) 10,653 239,059 (50,257) 1,610,313 (1) After the extensive integration work following the combination between LAN and TAM, during which there has been solid progress in the homologation of the optimization processes of its air connections, in addition to the restructuring and modernization of the fleet of aircraft, the Company has resolved adopt a unique name and identity, and announce that the brand of the group will be LATAM ", which would unite all companies under a single image. Given the above, we have proceeded to review the brands useful life, concluding that these should go from an indefinite to defined useful life. The estimated new useful life is 5 years, equivalent to the period for finishing all the image changes necessary. (2) See Note 2.5 NOTE 16 – GOODWILL The Goodwill amount at December 31, 2016 is ThUS$ 2,710,382 (ThUS$ 2,280,575 at December 31, 2015). Movement of Goodwill separated by CGU it includes the following: Movement of Goodwill, separated by CGU: Opening balance as of January 1, 2015 Increase (decrease) due to exchange rate differences Closing balance as of December 31, 2015 Opening balance as of January 1, 2016 Increase (decrease) due to exchange rate differences Others Closing balance as of December 31, 2016 Coalition and loyalty program Multiplus T hUS$ 654,898 (209,411) 445,487 445,487 88,261 - 533,748 Air T ransport T hUS$ 2,658,503 (823,415) 1,835,088 1,835,088 341,813 (267) 2,176,634 T otal T hUS$ 3,313,401 (1,032,826) 2,280,575 2,280,575 430,074 (267) 2,710,382 The Company has two cash- generating units (CGUs), “Air transportation” and, “Coalition and loyalty program Multiplus”. The CGU "Air transport" considers the transport of passengers and cargo, both in the domestic markets of Chile, Peru, Argentina, Colombia, Ecuador and Brazil, and in a developed series of regional and international routes in America, Europe and Oceania, while the CGU "Coalition and loyalty program Multiplus” works with an integrated network associated companies in Brazil. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of expected cash flows, 5 years after tax, which are based on the budget approved by the Board. Cash flows beyond the budget period are extrapolated using the estimated growth rates, which do not exceed the average rates of long-term growth. Management establish rates for annual growth, discount, inflation and exchange for each cash generating, as well as fuel prices, based on their key assumptions. The annual growth rate is based on past performance and management's expectations over market developments in each country where it operates. The discount rates used are in American Dollars for the CGU "Air transportation" and Brazilian Reals for CGU "Program coalition loyalty Multiplus", both of them before tax and reflect specific risks related to each country where the Company operates. Inflation and exchange rates are based on available data for each country and the information provided by the Central Bank of each country, and the fuel price is determined based on estimated production levels, competitive environment market in which they operate and its business strategy. 176 61 As of December 31, 2016 the recoverable values were determined using the following assumptions presented below: Annual growth rate (T erminal) Exchange rate (1) Discount rate based on the weighted average cost of capital (WACC) Discount rate based on cost of equity (Ke) Fuel Price from futures price curves Air transportation CGU Coalition and loyalty program Multiplus CGU (2) % R$/US$ % % 1.0 - 2.0 3.9 - 4.4 8.27 - 9.27 - 4.0 - 5.0 3.9 - 4.4 - 12.3 - 13.3 commodities markets US$/barril 61-76 - (1) In line with the expectations of the Central Bank of Brazil (2) T he flow, as well as annual growth rte and discount, are denominated in real. The result of the impairment test, which includes a sensitivity analysis of the main variables, showed that the estimated recoverable amount is higher than carrying value of the book value of net assets allocated to the cash generating unit, and therefore impairment was not detected. CGU´s are sensitive to rates for annual growth, discount and exchanges rates. The sensitivity analysis included the individual impact of changes in estimates critical in determining the recoverable amounts, namely: Air transportation CGU Coalition and loyalty program M ultiplus CGU Increase M aximum WACC % 9.27 - Increase M aximum Ke % - 13.3 Decrease M inimum terminal growth rate % 1.0 4.0 In none of the previous cases impairment in the cash- generating unit was presented. FINANCIAL STATEMENTS | Financial Statements 177 FINANCIAL STATEMENTS | Financial Statements 62 NOTE 17 - PROPERTY, PLANT AND EQUIPMENT The composition by category of Property, plant and equipment is as follows: Gross Book Value Acumulated depreciation Net Book Value As of As of As of As of As of As of December 31, December 31, December 31, December 31, December 31, December 31, 2016 ThUS$ 470,065 50,148 190,771 10,099,587 9,436,684 662,903 39,246 163,695 178,363 96,808 192,100 3,005,981 2,905,556 100,425 2015 ThUS$ 1,142,812 45,313 131,816 9,683,764 9,118,396 565,368 36,569 154,093 179,026 99,997 124,307 3,279,902 3,151,405 128,497 2016 ThUS$ 2015 ThUS$ - - (60,552) (2,350,045) (2,123,025) (227,020) (26,821) (123,981) (94,451) (67,855) (87,559) (1,177,351) (1,152,190) (25,161) - - (40,325) (2,392,463) (2,198,682) (193,781) (21,220) (110,204) (90,068) (64,047) (70,219) (1,150,396) (1,120,682) (29,714) 2016 ThUS$ 470,065 50,148 130,219 7,749,542 7,313,659 435,883 12,425 39,714 83,912 28,953 104,541 1,828,630 1,753,366 75,264 2015 ThUS$ 1,142,812 45,313 91,491 7,291,301 6,919,714 371,587 15,349 43,889 88,958 35,950 54,088 2,129,506 2,030,723 98,783 Construction in progress (*) Land Buildings Plant and equipment Own aircraft Other (**) M achinery Information technology equipment Fixed installations and accessories M otor vehicles Leasehold improvements Other property, plants and equipment Financial leasing aircraft Other Total 14,486,764 14,877,599 (3,988,615) (3,938,942) 10,498,149 10,938,657 (*) It includes pre-delivery payments to aircraft manufacturers for ThUS$ 434,250 (ThUS$ 1,016,007 as of December 31, 2015) (**) Mainly considers rotable and tools. 178 FINANCIAL STATEMENTS | Financial Statements (a) Movement in the different categories of Property, plant and equipment: 63 C o ns truc tio n in pro gre s s ThUS $ La nd ThUS $ B uildings ne t P la nt a nd e quipm e nt ne t Info rm a tio n te c hno lo gy e quipm e nt ne t F ixe d ins ta lla tio ns & a c c e s s o rie s ne t ThUS $ ThUS $ ThUS $ ThUS $ M o to r ve hic le s ne t ThUS $ Le a s e ho ld im pro ve m e nts ne t ThUS $ 937,279 39,711 - (1,262) - (932) 168,016 205,533 1,142,812 1,142,812 14,481 - (284) - 5,081 (692,025) (672,747) 470,065 57,988 - - - - (11,786) (889) (12,675) 45,313 45,313 - - - - 4,835 - 4,835 167,006 6,954,089 439 (500) (956) (7,161) (18,248) (49,089) (75,515) (1) 1,304,199 (76,675) (38,240) (521,688) (129,933) (150,677) 386,986 91,491 7,341,075 91,491 7,341,075 272 - (68) (6,234) 2,538 42,220 38,728 1,301,093 (16,918) (39,816) (562,131) 51,770 (285,198) 448,800 (2) (3) 50,148 130,219 7,789,875 51,009 15,322 (27) (104) (16,196) (6,126) 11 (7,120) 43,889 43,889 7,392 (59) (55) (14,909) 2,924 532 (4,175) 39,714 43,783 1,692 - (476) (11,649) (13,269) 68,877 45,175 88,958 88,958 292 - (1,258) (13,664) 9,384 200 (5,046) 83,912 1,965 280 (8) (4) (378) (638) 308 (440) 1,525 1,525 6 (32) - (293) 223 (384) (480) 1,045 56,523 13,188 - - (13,973) (1,659) 9 (2,435) 54,088 54,088 54,181 - - (23,283) 2,849 16,706 50,453 104,541 Othe r pro pe rty, pla nt a nd e quipm e nt ne t ThUS $ P ro pe rty, P la nt a nd e quipm e nt ne t ThUS $ 2,503,434 10,773,076 64,226 (11) (8,902) (174,474) (252,709) (2,058) (373,928) 2,129,506 2,129,506 13,013 (2,972) (2,604) (124,038) 93,383 (277,658) (300,876) 1,828,630 1,439,057 (77,221) (49,944) (745,519) (435,300) 34,508 165,581 10,938,657 10,938,657 1,390,730 (19,981) (44,085) (744,552) 172,987 (1,195,607) (440,508) 10,498,149 Ope ning ba la nc e a s o f J a nua ry 1, 2015 Additio ns Dis po s a ls R e tire m e nts De pre c ia tio n e xpe ns e s F o re ing e xc ha nge Othe r inc re a s e s (de c re a s e s ) C ha nge s , to ta l C lo s ing ba la nc e a s o f De c e m be r 31, 2015 Ope ning ba la nc e a s o f J a nua ry 1, 2016 Additio ns Dis po s a ls R e tire m e nts De pre c ia tio n e xpe ns e s F o re ing e xc ha nge Othe r inc re a s e s (de c re a s e s ) C ha nge s , to ta l C lo s ing ba la nc e a s o f De c e m be r 31, 2016 (1) During the first half of 2015 three Airbus A340 aircraft were sold. During the second half of 2015 seven Dash-200 aircraft were sold. During the second half of 2015 two Airbus A319 aircraft were sold. (2) During the first quarter of 2016 one Airbus A330 aircraft were sold. (3) During 2016 two Airbus A319 aircraft, two Airbus A320 aircraft, six Airbus A330 and two Boeing 777 aircraft were reclassified to non-current assets and disposal group classified as held for sale (See Note 13). 179 FINANCIAL STATEMENTS | Financial Statements 64 65 (b) Composition of the fleet: Airc ra ft inc lude d in P rope rty, pla nt a nd e quipme nt Ope ra ting le a s e s Tota l fle e t Airc ra ft Mode l De c e mbe r 31, De c e mbe r 31, De c e mbe r 31, De c e mbe r 31, De c e mbe r 31, De c e mbe r 31, As of As of As of As of As of As of 2016 2015 2016 2015 2016 2015 Boe ing 767 Boe ing 767 Boe ing 777 Boe ing 777 Boe ing 787 Boe ing 787 Airbus A319 Airbus A320 Airbus A320 Airbus A321 Airbus A330 Airbus A350 Tota l 300ER 300F 300ER Fre ighte r 800 900 100 200 NEO 200 200 900 (1) Thre e a irc ra ft le a s e d to FEDEX (2) One a irc ra ft le a s e d to DHL (1) 34 8 4 - 6 4 36 93 1 30 - 5 (1) (2 ) 34 8 4 2 6 3 38 95 - 26 8 1 221 225 3 3 6 2 4 8 12 53 1 17 - 2 111 4 3 6 2 4 4 12 59 - 10 2 - 106 (1) 37 11 10 2 10 12 48 146 2 47 - 7 332 (1) (2 ) 38 11 10 4 10 7 50 154 - 36 10 1 331 (c)Method used for the depreciation of Property, plant and equipment: Method Useful life (years) minimum maximum Buildings Plant and equipment Information technology equipment Fixed installations and accessories Motor vehicle Leasehold improvements Other property, plant and equipment Straight line without residual value Straight line with residual value of 20% in the short-haul fleet and 36% in the long-haul fleet. (*) Straight line without residual value Straight line without residual value Straight line without residual value Straight line without residual value Straight line with residual value of 20% in the short-haul fleet and 36% in the long-haul fleet. (*) 20 5 5 10 10 5 10 50 23 10 10 10 5 23 (*) Except for the Boeing 767 300ER and Boeing 767 300F fleets which consider a lower residual value due to the extension of their useful life to 22 and 23 years respectively. Additionally certain technical components, which are depreciated based on the basis of cycles and flight hours. The aircraft with remarketing clause (**) under modality of financial leasing, which are depreciated according to the duration of their contracts, between 12 and 18 years. Its residual values are estimated according to market value at the end of such contracts. (**) Aircraft with remarketing clause are those that are required to sell at the end of the contract. The depreciation charged to income in the period, which is included in the consolidated statement of income, amounts to ThUS$ 744,552 (ThUS$ 745,519 at December 31, 2015). Depreciation charges for the year are recognized in Cost of sales and administrative expenses in the consolidated statement of income. (d) Additional information regarding Property, plant and equipment: (i) Property, plant and equipment pledged as guarantee: In the period ended December 31, 2016, direct guarantees by five Airbus A319-100 aircraft, two Airbus A320-200 aircraft, one Airbus A320 NEO aircraft, four Airbus A321-200 aircraft, four Airbus A350-900 aircraft and one Boeing 787-9 aircraft were added. Description of Property, plant and equipment pledged as guarantee: C re dito r o f gua ra nte e As s e ts c o m m itte d F le e t Wilm ingto n Trus t C o m pa ny Airc ra ft a nd e ngine s Airbus A321 / A350 B o e ing 767 B o e ing 787 B a nc o S a nta nde r S .A. Airc ra ft a nd e ngine s B NP P a riba s Airc ra ft a nd e ngine s C re dit Agric o le Airc ra ft a nd e ngine s J P M o rga n We lls F a rgo B a nk o f Uta h Na tixis Airc ra ft a nd e ngine s Airc ra ft a nd e ngine s Airc ra ft a nd e ngine s C itiba nk N. A. Airc ra ft a nd e ngine s HS B C KfW IP EX-B a nk Airc ra ft a nd e ngine s Airc ra ft a nd e ngine s Airbus F ina nc ia l S e rvic e s Airc ra ft a nd e ngine s P K AirF ina nc e US , Inc . Airc ra ft a nd e ngine s B a nc o B B VA La nd a nd buildings Airbus A319 Airbus A320 Airbus A321 Airbus A319 Airbus A320 Airbus A319 Airbus A320 Airbus A321 B o e ing 777 Airbus A320 Airbus A320 Airbus A321 Airbus A320 Airbus A321 Airbus A320 Airbus A319 Airbus A320 Airbus A319 Airbus A320 Airc ra ft a nd e ngine s Airbus A320 / A350 As o f De c e m be r 31, 2016 As o f De c e m be r 31, 2015 Exis ting De bt ThUS $ B o o k Va lue ThUS $ Exis ting De bt ThUS $ B o o k Va lue ThUS $ 596,224 811,723 739,031 50,671 462,950 32,853 134,346 128,173 26,014 71,794 40,609 - - 252,428 670,826 45,748 377,104 111,243 42,867 - 7,494 28,696 30,199 54,786 50,381 722,979 1,164,364 899,445 91,889 709,788 44,227 228,384 181,838 37,389 144,157 93,110 - 333,419 709,280 66,738 514,625 166,370 70,166 - 6,360 36,066 33,823 46,341 69,498 374,619 907,356 712,059 58,527 524,682 36,334 154,828 145,506 37,755 115,339 50,591 215,265 279,478 240,094 56,223 413,201 127,135 49,464 53,583 - 13,593 - 62,514 - 478,667 1,220,541 834,567 95,387 749,192 45,380 229,798 192,957 84,129 214,726 97,257 - 263,366 348,271 312,573 81,355 542,594 172,918 73,122 64,241 - 16,838 - 48,691 - To ta l dire c t gua ra nte e 4,766,160 6,370,256 4,628,146 6,166,570 The amounts of existing debt are presented at nominal value. Book value corresponds to the carrying value of the goods provided as guarantees. Additionally, there are indirect guarantees related to assets recorded in Property, plant and equipment whose (ThUS$ 1,311,088 at December 31, 2015). The book value of assets with indirect guarantees as of December 31, 2016 amounts to ThUS$ 1,740,815 (ThUS$ 2,001,605 as of December 31, 2015). total debt at December 31, 2016 amounted to ThUS$ 913,494 180 FINANCIAL STATEMENTS | Financial Statements 66 67 (ii) Commitments and others The approximate amount, according to the manufacturer's price list, is ThUS$ 2,700,000. Fully depreciated assets and commitments for future purchases are as follows: (iii) Capitalized interest costs with respect to Property, plant and equipment. As of December 31, 2016 ThUS$ As of December 31, 2015 ThUS$ Gross book value of fully depreciated property, 116,386 129,766 plant and equipment still in use Commitments for the acquisition of aircraft (*) 15,100,000 19,800,000 (*) Acording to the manufacturer’s price list. Purchase commitment of aircraft For the periods ended December 31, 2016 2015 Average rate of capitalization of capitalized interest costs Costs of capitalized interest % ThUS$ 3.54 (696) 2.79 22,551 (iv) Financial leases The detail of the main financial leases is as follows: Manufacturer 2017 2018 Year of delivery 2020 2019 2021 2022 T otal Lessor Aircraft Model As of December 31, 2016 As of December 31, 2015 Airbus S.A.S. A320-NEO A321 A321-NEO A350-1000 A350-900 T he Boeing Company Boeing 777 Boeing 787-9 T otal 5 5 - - - 1 - 1 6 16 5 1 6 - 4 - - - 16 14 8 - 2 2 2 6 2 4 20 16 8 - 6 2 - 2 - 2 18 21 8 - 5 8 - 2 - 2 23 2 - - - 2 - - - - 2 74 34 1 19 14 6 11 2 9 85 In April 2015 the change of eight Boeing 787-8 aircraft for eight Boeing 787-8 aircraft was signed. In September 2015 the change of six Airbus A350-900 aircraft for six Airbus A350-1000 aircraft was signed. Additionally, in November 2015 the change of six Airbus A350-900 aircraft to six Airbus A350-1000 aircraft was signed. In April 2016 the change of four Airbus A320 NEO aircraft to four Airbus A321 NEO aircraft was signed. In August 2016 a cancellation of 12 Airbus A320 NEO aircraft and the change of two Airbus A350-900 to two Airbus A350-1000 were signed. As of December 31, 2016, as a result of the different aircraft purchase agreements signed with Airbus S.A.S., 54 aircraft Airbus A320 family, with deliveries between 2017 and 2021, and 20 Airbus aircraft A350 family with deliveries between 2017 and 2022 remain to be received. The approximate amount is ThUS$ 12,400,000, according to the manufacturer’s price list. Additionally, the Company has valid purchase options for 4 Airbus A350 aircraft. In May 2016 the change of four Boeing 787-8 aircraft for four Boeing 787-9 aircraft was signed. As of December 31, 2016, and as a result of different aircraft purchase contracts signed with The Boeing Company, a total of nine Boeing 787 Dreamliner aircraft, with delivery dates between 2017 and 2021, and two Boeing 777 with delivery expected for 2019 remain to be received. Agonandra Statutory T rust Airbus A320 Becacina Leasing LLC Boeing 767 Caiquen Leasing LLC Boeing 767 Cernicalo Leasing LLC Boeing 767 Chirihue Leasing T rust Boeing 767 Cisne Leasing LLC Boeing 767 Airbus A319 Codorniz Leasing Limited Airbus A320 Conure Leasing Limited Flamenco Leasing LLC Boeing 767 Boeing 777 FLYAFI 1 S.R.L. Boeing 777 FLYAFI 2 S.R.L. FLYAFI 3 S.R.L. Boeing 777 Forderum Holding B.V. (GECAS) Airbus A320 Garza Leasing LLC Boeing 767 Airbus A330 General Electric Capital Corporation Airbus A320 Intraelo BET A Corpotation (KFW) Juliana Leasing Limited Airbus A320 Loica Leasing Limited Airbus A319 Loica Leasing Limited Airbus A320 Mirlo Leasing LLC Boeing 767 NBB Rio de Janeiro Lease CO and Brasilia Lease LLC (BBAM) Airbus A320 NBB São Paulo Lease CO. Limited (BBAM) Airbus A321 Osprey Leasing Limited Airbus A319 Petrel Leasing LLC Boeing 767 Airbus A320 Pilpilen Leasing Limited Pochard Leasing LLC Boeing 767 Quetro Leasing LLC Boeing 767 Boeing 777 SG Infraestructure Italia S.R.L. Airbus A320 SL Alcyone LT D (Showa) Airbus A330 T MF Interlease Aviation B.V. Airbus A319 T MF Interlease Aviation II B.V. Airbus A320 T MF Interlease Aviation II B.V. T ricahue Leasing LLC Boeing 767 Wacapou Leasing S.A Airbus A320 200 300ER 300F 300F 300F 300ER 100 200 300ER 300ER 300ER 300ER 200 300ER 200 200 200 100 200 300ER 200 200 100 300ER 200 300ER 300ER 300ER 200 200 100 200 300ER 200 - 1 1 2 - 2 2 2 1 1 1 1 - 1 3 1 - 2 2 1 1 1 8 1 4 2 3 1 1 - - - 3 1 2 1 1 2 2 2 2 2 1 1 1 1 2 1 3 1 2 2 2 1 1 1 8 1 4 2 3 1 1 1 5 2 3 1 T otal 50 66 181 FINANCIAL STATEMENTS | Financial Statements 68 69 Financial leasing contracts where the Company acts as the lessee of aircrafts establish duration between 12 and 18 year terms and semi-annual, quarterly and monthly payments of obligations. Additionally, the lessee will have the obligation to contract and maintain active the insurance coverage for the aircrafts, perform maintenance on the aircrafts and update the airworthiness certificates at their own cost. Fixed assets acquired under financial leases are classified as Other property, plant and equipment. As of December 31, 2016 December 31, 2015). the Company had fifty aircrafts (sixty six aircraft as of As of December 31, 2016, as a result of the transfer plan fleet of TAM Linhas Aéreas S.A. to LATAM Airlines Group S.A., the Company declined its number of aircraft leasing in five Airbus A319-100, eight Airbus A320-200 and one Airbus A330-200 aircraft. The book value of assets under financial leases as of December 31, 2016 amounts to ThUS$ 1,753,366 (ThUS$ 2,030,723 at December 31, 2015). The minimum payments under financial leases are as follows: As o f De c e m be r 31, 2016 As o f De c e m be r 31, 2015 Gro s s Va lue ThUS $ Inte re s t ThUS $ P re s e nt Va lue ThUS $ Gro s s Va lue ThUS $ Inte re s t ThUS $ P re s e nt Va lue ThUS $ No la te r tha n o ne ye a r B e twe e n o ne a nd five ye a rs Ove r five ye a rs 285,168 (32,365) 252,803 360,862 (47,492) 313,370 704,822 (43,146) 43,713 (120) 661,676 43,593 1,003,237 (75,363) 927,874 95,050 (1,406) 93,644 To ta l 1,033,703 (75,631) 958,072 1,459,149 (124,261) 1,334,888 NOTE 18 - CURRENT AND DEFERRED TAXES In the period ended December 31, 2016, the income tax provision was calculated for such period, applying the rate of 24% for the business year 2016, in accordance with the Law No. 20,780 published in the Official Journal of the Republic of Chile on September 29, 2014. Among the main changes is the progressive increase of the First Category Tax which will reach 27% in 2018 if the "Partially Integrated Taxation System" is chosen. Alternatively, if the Company chooses the "Attributed Income Taxation System" the top rate would reach 25% in 2017. As LATAM Airlines Group S.A. is a public company, by default it must choose the "Partially Integrated Taxation System"(*), unless a future Extraordinary Meeting of Shareholders of the Company agrees, by a minimum of 2/3 of the votes, to choose the "Attributed Income Taxation System"(*). This decision was taken in the last quarter of 2016. On February 8, 2016, an amendment to the abovementioned Law was issued (as Law 20,899) stating, as its main amendments, that Companies such Latam Airlines Group S.A. had to mandatorily choose the "Partially Integrated Taxation System"(*) and could not elect to use the other system. Assets and deferred tax liabilities are offset if there is a legal right to offset the assets and liabilities, always correspond to the same entity and tax authority. (*) The Partially Integrated Taxation System is based on the taxation by the perception of profits and the Attributed Income Taxation System is based on the taxation by the accrual of profits. (a) Current taxes (a.1) The composition of the current tax assets is the following: Curre nt a s s e ts Non- c urre nt a s s e ts Tota l a s s e ts As of De c e mbe r 31, 2016 As of De c e mbe r 31, 2015 As of De c e mbe r 31, 2016 As of De c e mbe r 31, 2015 As of De c e mbe r 31, 2016 As of De c e mbe r 31, 2015 ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ P rovis iona l monthly pa yme nts (a dva nc e s ) Othe r re c ove ra ble c re dits Tota l a s s e ts by c urre nt ta x 43,821 21,556 65,377 43,935 20,080 64,015 - 20,272 20,272 - 25,629 25,629 43,821 41,828 85,649 43,935 45,709 89,644 (a.2) The composition of the current tax liabilities are as follows: Curre nt lia bilitie s As of De c e mbe r 31, 2016 As of De c e mbe r 31, 2015 Non- c urre nt lia bilitie s As of De c e mbe r 31, 2016 As of De c e mbe r 31, 2015 Tota l lia bilitie s As of De c e mbe r 31, 2016 As of De c e mbe r 31, 2015 ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ Inc ome ta x provis ion Additiona l ta x provis ion 9,632 4,654 Tota l lia bilitie s by c urre nt ta x 14,286 19,001 3 7 7 19,378 - - - - - - 9,632 4,654 14,286 19,001 3 7 7 19,378 182 FINANCIAL STATEMENTS | Financial Statements 70 71 (b) Deferred taxes The balances of deferred tax are the following: Concept Depreciation Leased assets Amortization Provisions Revaluation of financial instruments T ax losses Intangibles Others T otal Assets Liabilities As of December 31, 2016 As of December 31, 2015 As of December 31, 2016 As of December 31, 2015 T hUS$ T hUS$ T hUS$ T hUS$ 11,735 (35,922) (15,820) 222,253 - 202,536 - (202) 384,580 (14,243) (25,299) (5,748) 210,992 709 212,067 - (1,883) 376,595 1,387,760 203,836 61,660 (59,096) (3,223) (1,126,200) 430,705 20,317 915,759 1,116,748 226,003 65,416 (167,545) (7,575) (797,715) 364,314 11,919 811,565 The balance of deferred tax assets and liabilities are composed primarily of temporary differences to be reversed in the long term. Movements of Deferred tax assets and liabilities (a) From January 1 to December 31, 2015 Ope ning R e c o gnize d in R e c o gnize d in Exc ha nge ba la nc e c o ns o lida te d c o m pre he ns ive ra te Ending ba la nc e As s e ts /(lia bilitie s ) inc o m e ThUS $ (871,640) (185,775) (160,100) 351,077 12,806 722,749 (523,275) 9,587 ThUS $ (267,891) (73,330) 84,330 150,362 19,760 320,397 (8,362) 45,638 inc o m e ThUS $ va ria tio n Othe rs As s e t (lia bility) ThUS $ ThUS $ ThUS $ - - - 3,911 (21,103) - - - 8,540 7,803 4,606 (126,813) (3,179) (33,364) 167,323 (62,182) - - - - - - - (6,845) (1,130,991) (251,302) (71,164) 378,537 8,284 1,009,782 (364,314) (13,802) De pre c ia tio n Le a s e d a s s e ts Am o rtiza tio n P ro vis io ns R e va lua tio n o f fina nc ia l ins trum e nts Ta x lo s s e s (*) Inta ngible s Othe rs To ta l (644,571) 270,904 (17,192) (37,266) (6,845) (434,970) (b) From January 1 to December 31, 2016 Ope ning R e c o gnize d in R e c o gnize d in Exc ha nge ba la nc e c o ns o lida te d c o m pre he ns ive ra te Ending ba la nc e As s e ts /(lia bilitie s ) inc o m e ThUS $ ThUS $ inc o m e ThUS $ va ria tio n Othe rs As s e t (lia bility) ThUS $ ThUS $ ThUS $ De pre c ia tio n Le a s e d a s s e ts Am o rtiza tio n P ro vis io ns R e va lua tio n o f fina nc ia l ins trum e nts Ta x lo s s e s (*) Inta ngible s Othe rs (1,130,991) (251,302) (71,164) 378,537 8,284 1,009,782 (364,314) (13,802) (241,435) 14,833 (4,375) (149,969) 28,294 304,892 4,131 (30,185) - - - 921 (34,695) - - - (3,599) (3,289) (1,941) 53,448 1,340 14,062 (70,522) 22,234 - - - (1,568) - - - 1,214 (1,376,025) (239,758) (77,480) 281,369 3,223 1,328,736 (430,705) (20,539) To ta l (434,970) (73,814) (33,774) 11,733 (354) (531,179) Deferred tax assets not recognized: Tax losses Total Deferred tax assets not recognized As of December 31, 2016 As of December 31, 2015 ThUS$ ThUS$ 115,801 115,801 15,513 15,513 Deferred tax assets on tax loss, are recognized to the extent that it is likely probable the realization of future tax benefit By the above at December 31, 2016, the Company has not recognized deferred tax assets of ThUS$ 115,801 (ThUS$ 15,513 at December 31, 2015) according with a loss of ThUS$ 340,591 (ThUS$ 45,628 at December 31, 2015). 183 FINANCIAL STATEMENTS | Financial Statements 72 73 Deferred tax expense and current income taxes: Profit before tax by the legal tax rate in Chile (24% and 22.5% at December 31, 2016 and 2015, respectively) For the period ended December 31, 2016 ThUS$ 2015 ThUS$ 87,307 2,083 89,390 92,916 (395) 92,521 Current tax expense Current tax expense Adjustment to previous period’s current tax Total current tax expense, net Deferred tax expense Deferred expense for taxes related to the creation and reversal of temporary differences 73,814 (270,904) Total deferred tax expense, net 73,814 (270,904) Income tax expense 163,204 (178,383) Composition of income tax expense (income): Current tax expense, net, foreign Current tax expense, net, Chile Total current tax expense, net Deferred tax expense, net, foreign Deferred tax expense, net, Chile Deferred tax expense, net, total Income tax expense For the period ended December 31, 2016 ThUS$ 80,600 8,790 89,390 119,175 (45,361) 73,814 163,204 2015 ThUS$ 89,460 3,061 92,521 (280,445) 9,541 (270,904) (178,383) For the period ended December 31, For the period ended December 31, 2016 T hUS$ 2015 T hUS$ T ax expense using the legal rate (*) 65,449 (89,472) T ax effect of rates in other jurisdictions 16,333 (21,803) 2016 % 24.00 5.99 T ax effect of non-taxable operating revenues (62,419) (106,381) (22.89) T ax effect of disallowable expenses Other increases (decreases) in legal tax charge 132,469 11,372 38,677 596 T otal adjustments to tax expense using the legal rate 97,755 (88,911) T ax expense using the effective rate 163,204 (178,383) 48.58 4.17 35.85 59.85 2015 % 22.50 5.48 26.75 (9.73) (0.15) 22.35 44.85 (*) On September 29, 2014, Law No. 20,780 "Amendment to the system of income taxation and introduces various adjustments in the tax system." was published in the Official Journal of the Republic of Chile. Within major tax reforms that this law contains, the First- Category Tax rate is gradually modified from 2014 to 2018 and should be declared and paid in tax year 2015. Thus, at December 31, 2016 the Company presents the reconciliation of income tax expense and legal tax rate considering the rate increase. Deferred taxes related to items charged to net equity: Aggregate deferred taxation of components of other comprehensive income Aggregate deferred taxation related to items charged to net equity For the period ended December 31, 2016 ThUS$ 2015 ThUS$ (33,774) (17,192) (807) (992) 184 FINANCIAL STATEMENTS | Financial Statements 74 75 NOTE 19 - OTHER FINANCIAL LIABILITIES The composition of Other financial liabilities is as follows: Current (a) Interest bearing loans (b) Hedge derivatives Total current Non-current (a) Interest bearing loans (b) Hedge derivatives Total non-current (a) Interest bearing loans Obligations with credit institutions and debt instruments: Current Loans to exporters Bank loans (1) Guaranteed obligations Other guaranteed obligations Obligation with the public Financial leases Other loans T otal current Non-current Bank loans Guaranteed obligations Other guaranteed obligations Subtotal bank loans Obligation with the public (2) Financial leases Other loans T otal non-current T otal obligations with financial institutions As of December 31, 2016 ThUS$ As of December 31, 2015 ThUS$ 1,814,647 24,881 1,839,528 6,790,273 6,679 6,796,952 1,510,146 134,089 1,644,235 7,516,257 16,128 7,532,385 As of December 31, 2016 T hUS$ As of December 31, 2015 T hUS$ 278,164 290,810 578,014 1,908 387,409 80,188 591,148 32,513 312,043 268,040 85,668 10,999 324,859 83,030 1,814,647 1,510,146 294,477 4,180,538 254,512 4,729,527 997,302 754,321 309,123 6,790,273 8,604,920 564,128 4,122,995 - 4,687,123 1,294,882 1,015,779 518,473 7,516,257 9,026,403 Subtotal bank loans 1,148,896 1,091,258 (1) On September 29, 2016 TAM Linhas Aéreas S.A. obtained financing for US $ 200 million, guaranteed with 18% of the shares of Multiplus S.A., percentage adjustable depending on the shares price. Additionally, TAM obtained a Cross Currency Swap for the same amount and period, in order to convert the commitment currency from US$ to BRL. (2) On June 9, 2015 LATAM Airlines Group S.A. has issued and placed on the international market under Rule 144-A and Regulation S of the securities laws of the United States of America, unsecured long-term bonds in the amount of US$ 500,000,000, maturing 2020, interest rate of 7.25% per annum. As reported in the Essential Matter of May 20 and June 5, 2015, the Issuance and placement of the Bonds 144-A shall be: (i) finance the repurchase, conversion and redemption of secured long-term bonds issued by the company TAM Capital 2 Inc., under Rule 144-A and Regulation S of the securities laws of the United States of America, maturing 2020; (ii) in the event there is any remnant fund other general corporate purposes. The aforementioned bonds TAM Capital 2 Inc. were redeemed in whole (US$ 300,000,000) through a process of exchange for new bonds dated June 9, 2015 and then the remaining bonds were redeemed by running the prepay dated June 18, 2015. All interest-bearing liabilities are recorded using the effective interest rate method. Under IFRS, the effective interest rate for loans with a fixed interest rate does not vary throughout the loan, while in the case of loans with variable interest rates, the effective rate changes on each date of reprising of the loan. Currency balances that make the interest bearing loans: Currency Brazilian real Chilean peso (U.F.) US Dollar Total As of December 31, 2016 ThUS$ 1,253 203,194 8,400,473 8,604,920 As of December 31, 2015 ThUS$ 3,387 210,423 8,812,593 9,026,403 185 FINANCIAL STATEMENTS | Financial Statements To t al acco unt ing value ThUS$ Amo rt izat io n Effect ive rat e % No minal rat e % Int e r e st - be a r ing loa ns due in inst a llme nt s t o De c e mbe r 31, 2016 De bt or : LATAM Air line s Gr oup S .A. a nd S ubsidia r ie s, Ta x No. 89.862.200- 2, Chile . No minal values Acco unt ing values 76 Cred it o r co unt ry Currency Up t o 9 0 d ays M o re t hanM o re t han M o re t han o ne t o t hree years ThUS$ 9 0 d ays t o o ne year five years ThUS$ ThUS$ ThUS$ t hree t o M o re t han Up t o 9 0 d ays M o re t hanM o re t hanM o re t han o ne t o t hree years ThUS$ 9 0 d ays t o o ne year five years ThUS$ ThUS$ ThUS$ five years ThUS$ t hree t o M o re t han Tax No . Cred it o r Loa ns t o e xpor t e r s 97.032.000- 8 97.032.000- 8 97.036.000- K 97.030.000- 7 97.003.000- K 97.951.000- 4 Ba nk loa ns 97.023.000- 9 0- E 0- E 97.036.000- K BBVA BBVA S ANTANDER ES TADO BANCO DO BRAS IL HS BC CORP BANCA BLADEX DVB BANK S E S ANTANDER Obliga t ions wit h t he public Chile Chile Chile Chile Chile Chile Chile U.S .A. U.S .A. Chile US $ UF US $ US $ US $ US $ UF US $ US $ US $ 75,000 - 30,000 40,000 70,000 12,000 - 50,381 - - - - - - - - - - - - - - - - 19,229 - - - 57,686 12,500 - - 60,186 30,000 28,911 158,194 16,254 - - - 75,234 - 30,183 40,098 70,323 12,002 - 50,324 - - - - - - - - - - - - - - - - 19,819 - 3 542 57,686 12,667 - - 59,176 29,625 28,911 158,194 16,189 - - - - - - - - - - - - - 75,234 50,324 30,183 40,098 70,323 12,002 At Expir a t ion At Expir a t ion At Expir a t ion At Expir a t ion At Expir a t ion At Expir a t ion 152,870 42,292 28,914 158,736 Qua r t e r ly S e mia nnua l Qua r t e r ly Qua r t e r ly 1.85 5.23 2.39 1.91 3.08 1.79 4.06 5.14 1.86 3.55 1.85 4.43 2.39 1.91 3.08 1.79 4.06 5.14 1.86 3.55 five years ThUS$ - - - - - - - - - - To t al no minal value ThUS$ 75,000 50,381 30,000 40,000 70,000 12,000 153,355 42,500 28,911 158,194 0- E BANK OF NEW YORK U.S .A. US $ - - - 500,000 - 500,000 2,291 - - 489,885 - 492,176 At Expir a t ion 7.77 7.25 Gua r a nt e e d obliga t ions 0- E 0- E 0- E 0- E 0- E 97.036.000- K 0- E 0- E 0- E 0- E 0- E 0- E 0- E 0- E 0- E - CREDIT AGRICOLE BNP P ARIBAS WELLS FARGO WILMINGTON TRUS T CITIBANK S ANTANDER BTMU AP P LE BANK US BANK DEUTS CHE BANK NATIXIS P K AIRFINANCE KFW IP EX- BANK AIRBUS FINANCIAL INVES TEC S WAP Avione s lle ga dos Ot he r gua r a nt e e d obliga t ions Fr a nc e U.S .A. U.S .A. U.S .A. U.S .A. Chile U.S .A. U.S .A. U.S .A. U.S .A. Fr a nc e U.S .A. Ge r ma ny U.S .A. Engla nd - US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ 11,073 10,496 31,448 15,554 17,495 5,347 2,787 1,364 14,817 4,992 12,289 2,018 2,288 1,797 1,298 403 29,252 42,401 95,186 49,236 53,162 16,204 8,470 4,167 44,958 15,365 37,388 6,268 7,015 5,476 7,526 1,067 62,209 111,962 260,112 135,254 146,932 44,472 23,393 11,516 123,705 24,725 98,873 18,413 17,869 15,262 19,290 1,658 32,172 118,181 269,512 140,848 154,774 46,386 24,635 12,146 129,462 26,984 82,066 24,944 9,019 7,664 21,667 158 3,711 345,078 400,087 626,444 175,805 26,165 26,705 13,561 219,666 45,197 192,235 3,144 - - 22,421 - 138,417 628,118 1,056,345 967,336 548,168 138,574 85,990 42,754 532,608 117,263 422,851 54,787 36,191 30,199 72,202 3,286 11,454 12,792 35,211 20,997 19,059 5,680 3,001 1,538 17,298 5,570 13,038 2,071 2,319 1,841 1,771 403 29,252 43,023 95,186 49,236 53,162 16,204 8,470 4,166 44,958 15,365 37,388 6,269 7,015 5,477 7,733 1,067 60,781 108,271 233,012 130,792 138,257 42,707 22,132 10,889 104,709 24,023 97,469 18,412 17,869 15,261 18,533 1,658 31,221 116,067 257,387 138,455 150,891 45,815 24,149 11,902 120,509 26,515 81,130 24,944 9,019 7,664 21,368 158 3,631 341,481 391,253 622,153 172,087 26,063 26,519 13,464 211,895 44,522 190,048 3,144 - - 22,309 - 136,339 621,634 1,012,049 961,633 533,456 136,469 84,271 41,959 499,369 115,995 419,073 54,840 36,222 30,243 71,714 3,286 Qua r t e r ly Qua r t e r ly Qua r t e r ly Qua r t e r ly Qua r t e r ly Qua r t e r ly Qua r t e r ly Qua r t e r ly Qua r t e r ly Qua r t e r ly Qua r t e r ly Mont hly Qua r t e r ly Mont hly S e mia nnua l Qua r t e r ly 2.21 2.97 2.37 4.25 2.72 1.98 2.31 2.29 3.99 3.86 2.60 2.40 2.55 2.49 5.67 - 1.81 2.96 1.68 4.25 1.96 1.44 1.72 1.69 2.81 3.86 2.57 2.40 2.55 2.49 5.67 - 0- E CREDIT AGRICOLE Fr a nc e US $ - - 256,860 - - 256,860 1,908 - 254,512 - - 256,420 Qua r t e r ly 2.85 2.85 Fina nc ia l le a se s 0- E 0- E 0- E 0- E 0- E 0- E 0- E 0- E ING CREDIT AGRICOLE CITIBANK P EFCO BNP P ARIBAS WELLS FARGO DVB BANK S E RRP ENGINE Ot he r loa ns 0- E 0- E BOEING CITIBANK ( *) Tot a l U.S .A. Fr a nc e U.S .A. U.S .A. U.S .A. U.S .A. U.S .A. Engla nd U.S .A. U.S .A. US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ 5,089 1,754 4,956 15,979 12,520 4,678 4,680 15,653 5,403 15,312 47,048 38,494 14,261 9,447 - - 31,151 - 44,177 63,957 75,958 39,862 - 6,402 11,805 - 13,804 3,827 22,147 42,663 - 6,955 - - - - - 1,862 - 63,698 7,157 78,249 130,811 149,119 103,326 14,127 5,641 1,780 5,622 16,852 13,122 5,018 4,713 15,652 5,403 15,312 47,048 38,494 14,260 9,448 30,577 - 43,413 63,072 74,776 38,834 - 11,917 25,274 - - 6,402 11,771 - 13,762 3,819 22,079 42,430 - 6,955 - - - - - 1,861 - 63,641 7,183 78,109 130,791 148,471 102,403 14,161 Qua r t e r ly Qua r t e r ly Qua r t e r ly Qua r t e r ly Qua r t e r ly Qua r t e r ly Qua r t e r ly 11,917 25,274 Mont hly - 20,555 - 63,942 26,214 184,866 - 101,026 - - 26,214 370,389 185 21,541 - 63,942 26,214 182,043 - 100,866 - - 26,399 368,392 At Expir a t ion Qua r t e r ly 451,906 753,268 2,122,383 1,819,099 2,113,998 7,260,654 480,920 754,207 2,040,524 1,774,950 2,082,347 7,132,948 5.62 1.85 6.40 5.39 3.69 3.98 2.57 2.35 2.35 6.00 4.96 1.85 5.67 4.79 3.26 3.54 2.57 2.35 2.35 6.00 (*) Securit ized b o nd wit h t he fut ure flo ws fro m t he s ales wit h cred it card in Unit ed St at es and Canad a. 186 FINANCIAL STATEMENTS | Financial Statements 77 Int e re st -be a ring loa ns due in inst a llme nt s t o De c e mbe r 31, 2016 De bt or: TAM S .A. a nd S ubsidia rie s, Ta x No. 02.012.862/ 0001-60, Bra z il. Ta x No. Cre dit or Ba nk loa ns 0-E 0-E NEDERLANDS CHE CREDIETVERZEKERING MAATS CHAP P IJ CITIBANK Obliga t ion wit h t he public Nomina l va lue s Ac c ount ing va lue s More t ha n More t ha n More t ha n More t ha n More t ha n More t ha n Cre dit or c ount ry Curre nc y Up t o 90 da ys ThUS $ 90 da ys t o one ye a r ThUS $ one t o t hre e ye a rs ThUS $ t hre e t o More t ha n five ye a rs ThUS $ five ye a rs ThUS $ Tot a l nomina l va lue ThUS $ Up t o 90 da ys ThUS $ 90 da ys t o one ye a r ThUS $ one t o t hre e ye a rs ThUS $ t hre e t o five ye a rs ThUS $ More t ha n five ye a rs ThUS $ Tot a l a c c ount ing va lue ThUS $ Amort iz a t ion Effe c t ive Nomina l ra t e % ra t e % Holla nd U.S .A US $ US $ 122 - 378 200,000 1,094 - 1,234 - 54 - 2,882 200,000 137 (151) 378 199,729 1,094 - 1,233 - 55 - 2,897 199,578 Mont hly At Expira t ion 6.01 3.39 6.01 3.14 0-E THE BANK OF NEW YORK U.S .A US $ - 300,000 - 500,000 - 800,000 8,173 301,579 4,119 503,298 - 817,169 At Expira t ion 8.17 8.00 Fina nc ia l le a se s 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E U.S .A AFS INVES TMENT IX LLC DVB BANK S E U.S .A GENERAL ELECTRIC CAP ITAL CORP ORATION U.S .A KFW IP EX-BANK NATIXIS WACAP OU LEAS ING S .A. S OCIÉTÉ GÉNÉRALE MILAN BRANCH BANCO IBM S .A HP FINANCIAL S ERVICE S OCIETE GENERALE Ge rma ny Fra nc e Luxe mburg It a ly Bra z il Bra z il Fra nc e US $ US $ US $ US $ US $ US $ US $ BRL BRL BRL 2,086 118 3,771 579 2,675 668 8,547 260 222 102 6,437 164 5,075 1,544 5,732 2,038 26,275 749 - 307 18,556 - - - 18,485 5,768 74,783 22 - 110 8,369 - - - 38,820 6,280 169,730 - - - - - - - 41,731 - - - - - 35,448 282 8,846 2,123 107,443 14,754 279,335 1,031 222 519 2,253 119 3,794 583 3,533 709 9,779 260 222 102 6,437 164 5,075 1,544 5,732 2,038 26,275 749 - 307 18,556 - - - 18,485 5,768 74,783 21 - 110 8,369 - - - 38,820 6,280 169,730 - - - - - - - 41,731 - - - - - 35,615 283 8,869 2,127 Mont hly Mont hly Mont hly Mont hly/ Qua rt e rly 108,301 Qua rt e rly/ S e mia nnua l 14,795 280,567 1,030 222 519 Qua rt e rly Qua rt e rly Mont hly Mont hly Mont hly 1.25 2.50 2.30 2.80 4.90 3.00 4.18 13.63 10.02 13.63 1.25 2.50 2.30 2.80 4.90 3.00 4.11 13.63 10.02 13.63 Tot a l Tot a l c onsolida t e d 19,150 548,699 118,818 724,433 41,785 1,452,885 29,513 550,007 122,936 727,730 41,786 1,471,972 471,056 1,301,967 2,241,201 2,543,532 2,155,783 8,713,539 510,433 1,304,214 2,163,460 2,502,680 2,124,133 8,604,920 187 FINANCIAL STATEMENTS | Financial Statements M o re than five years ThUS$ To tal acco unting value ThUS$ Amo rtizatio n Effective No minal rate % rate % - - - - - - - - - - - 100,183 100,067 55,088 50,006 70,051 12,014 At Expira t ion At Expira t ion At Expira t ion At Expira t ion At Expira t ion At Expira t ion 210,422 49,634 153,528 227,362 Qua rt e rly S e mia nnua l Qua rt e rly Qua rt e rly 1.00 1.44 1.05 1.42 1.18 0.66 4.18 4.58 1.67 2.24 1.00 1.44 1.05 1.42 1.18 0.66 4.18 4.58 1.67 2.24 489,345 At Expira t ion 7.77 7.25 78 Int e re st -be a ring loa ns due in inst a llme nt s t o De c e mbe r 31, 2015 De bt or: LATAM Airline s Group S .A. a nd S ubsidia rie s, Ta x No. 89.862.200-2, Chile . No minal values Acco unting values M o re than M o re than M o re than o ne to three years ThUS$ 9 0 d ays to o ne year ThUS$ five years ThUS$ three to M o re than Up to 9 0 d ays ThUS$ 100,000 100,000 55,000 50,000 70,000 12,000 - - - - - - - - - - - - - - - - - - 17,631 - - - 52,893 7,500 - - 105,837 27,500 153,514 226,712 34,774 15,000 - - - - - 500,000 To tal no minal value ThUS$ 100,000 100,000 55,000 50,000 70,000 12,000 211,135 50,000 153,514 226,712 Up to 9 0 d ays ThUS$ 100,183 100,067 55,088 50,006 70,051 12,014 M o re than M o re than M o re than o ne to three years ThUS$ 9 0 d ays to o ne year ThUS$ three to five years ThUS$ - - - - - - - - - - - - - - - - - - 18,510 134 14 650 52,892 7,500 - - 104,385 27,125 153,514 226,712 34,635 14,875 - - 500,000 2,383 - - 486,962 five years ThUS$ - - - - - - - - - - - Tax No . Cred ito r Cred ito r co untry Currency Loa ns t o e xport e rs 97.032.000-8 97.036.000-K 97.030.000-7 97.004.000-5 97,003,000-K 97.951.000-4 BBVA S ANTANDER ES TADO CHILE BANCO DO BRAS IL HS BC Ba nk loa ns 97.023.000-9 0-E 0-E 97.036.000-K CORP BANCA BLADEX DVB BANK S E S ANTANDER Obliga t ions wit h t he public 0-E BANK OF YORK Gua ra nt e e d obliga t ions 0-E 0-E 0-E 0-E 0-E 97.036.000-K 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E - CREDIT AGRICOLE BNP P ARIBAS WELLS FARGO WILMINGTON TRUS T CITIBANK S ANTANDER BTMU AP P LE BANK US BANK DEUTS CHE BANK NATIXIS HS BC P K AIRFINANCE KFW IP EX-BANK S WAP Avione s lle ga dos Ot he r gua ra nt e e d obliga t ions 0-E DVB BANK S E Fina nc ia l le a se s 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E Ot he r loa ns 0-E 0-E ING CREDIT AGRICOLE CITIBANK P EFCO BNP P ARIBAS WELLS FARGO DVB BANK S E BANC OF AMERICA BOEING CITIBANK (*) Tot a l Chile Chile Chile Chile Chile Chile Chile U.S.A. U.S.A. Chile U.S.A. France U.S.A. U.S.A. U.S.A. U.S.A. Chile U.S.A. U.S.A. U.S.A. U.S.A. France U.S.A. U.S.A. Germany - U.S.A. U.S.A. France U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. US $ US $ US $ US $ US $ US $ UF US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ US $ 29,633 8,162 30,895 - 17,042 5,233 2,714 1,333 14,483 4,767 11,698 1,374 1,882 653 502 88,188 25,012 93,511 48,264 51,792 15,862 8,250 4,055 43,948 14,667 35,914 4,180 5,846 2,028 1,360 204,722 70,785 255,536 85,183 143,168 43,552 22,801 11,211 120,924 32,449 97,434 11,533 17,171 5,314 2,521 54,074 75,028 264,770 90,694 150,792 45,416 24,007 11,828 126,550 25,826 83,289 12,112 19,744 3,958 765 12,410 140,410 536,039 451,555 254,208 49,606 39,182 19,715 285,134 58,989 241,088 24,384 17,871 1,640 - 389,027 319,397 1,180,751 675,696 617,002 159,669 96,954 48,142 591,039 136,698 469,423 53,583 62,514 13,593 5,148 30,447 9,243 34,933 5,691 18,545 5,514 2,897 1,478 17,232 5,342 12,351 1,504 1,937 655 502 88,189 25,012 93,511 48,263 51,792 15,862 8,250 4,056 43,948 14,666 35,914 4,180 5,846 2,028 1,360 203,286 70,335 227,704 81,867 133,740 41,434 21,336 10,483 102,607 32,448 97,434 11,533 17,171 5,314 2,521 54,074 74,917 252,054 88,977 146,362 44,599 23,376 11,513 117,968 25,826 83,289 12,112 19,744 3,958 765 12,410 140,407 525,257 448,016 249,406 49,281 38,789 19,515 277,195 58,989 241,088 24,384 17,871 1,640 - 388,406 319,914 1,133,459 672,814 599,845 156,690 94,648 47,045 558,950 137,271 470,076 53,713 62,569 13,595 5,148 Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Mont hly Qua rt e rly Qua rt e rly 1.83 2.29 2.27 4.25 2.40 1.47 1.82 1.72 3.99 3.40 2.08 2.40 2.04 2.45 - 1.66 2.22 1.57 4.25 1.64 0.93 1.22 1.12 2.81 3.40 2.05 1.59 2.04 2.45 - 8,054 24,438 - - - 32,492 8,075 24,438 - - - 32,513 Qua rt e rly 2.32 2.32 8,108 1,666 4,687 15,246 9,956 4,519 4,567 674 23,191 5,131 14,447 46,858 30,678 13,784 13,873 2,096 36,868 7,158 41,726 108,403 81,373 38,531 14,127 - 26,831 - 36,523 22,407 31,100 41,238 - - - - - - - 23,556 - - 94,998 13,955 97,383 192,914 153,107 121,628 32,567 2,770 8,894 1,700 5,509 16,536 10,494 4,919 4,625 676 23,191 5,131 14,447 46,858 30,678 13,784 13,873 2,096 36,066 7,158 40,684 106,757 79,983 37,247 14,127 - 26,682 - 36,330 22,324 30,958 40,819 - - - - - - - 23,486 - - 94,833 13,989 96,970 192,475 152,113 120,255 32,625 2,772 Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Qua rt e rly Mont hly - 19,361 - 60,251 151,362 174,178 - 196,210 - - 151,362 450,000 2,294 20,485 - 60,251 151,363 174,178 - 192,932 - - 153,657 447,846 At Expira t ion Qua rt e rly 611,840 738,017 2,291,593 1,892,936 2,155,787 7,690,173 641,578 738,016 2,218,512 1,846,051 2,127,734 7,571,891 5.13 1.28 6.40 5.37 4.08 3.98 2.06 1.41 1.80 6.00 4.57 1.28 5.67 4.77 3.64 3.54 2.06 1.41 1.80 6.00 (*) Securitized b o nd with the future flo ws fro m the s ales with cred it card in United States and Canad a. 188 FINANCIAL STATEMENTS | Financial Statements 79 Int e re st -be a ring loa ns due in inst a llme nt s t o De c e mbe r 31, 2015 De bt or: TAM S .A. a nd S ubsidia rie s, Ta x No. 02.012.862/ 0001-60, Bra z il. Ta x No. Cre dit or Ba nk loa ns 0-E NEDERLANDS CHE CREDIETVERZEKERING MAATS CHAP P IJ Obliga t ions wit h t he public Nomina l va lue s Ac c ount ing va lue s Cre dit or c ount ry Curre nc y Up t o 90 da ys ThUS $ More t ha n More t ha n More t ha n t hre e t o one t o five t hre e ye a rs ye a rs ThUS $ ThUS $ 90 da ys t o one ye a r ThUS $ More t ha n five ye a rs ThUS $ Tot a l nomina l va lue ThUS $ Up t o 90 da ys ThUS $ More t ha n More t ha n More t ha n t hre e t o one t o five t hre e ye a rs ye a rs ThUS $ ThUS $ 90 da ys t o one ye a r ThUS $ More t ha n five ye a rs ThUS $ Tot a l a c c ount ing va lue ThUS $ Amort iz a t ion Effe c t ive Nomina l ra t e % ra t e % Holla nd US $ 115 356 1,031 1,162 689 3,353 132 356 1,031 1,162 689 3,370 Mont hly 6.01 6.01 0-E THE BANK OF NEW YORK U.S .A. US $ - - 300,000 - 500,000 800,000 7,506 1,110 301,722 5,171 501,027 816,536 At Expira t ion 8.17 8.00 Fina nc ia l le a se s 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E 0-E AFS INVES TMENT IX LLC U.S .A. US $ U.S .A. AIRBUS FINANCIAL U.S .A. CREDIT AGRICOLE-CIB DVB BANK S E U.S .A. GENERAL ELECTRIC CAP ITAL CORP ORATION U.S .A. KFW IP EX-BANK NATIXIS P K AIRFINANCE US , INC. WACAP OU LEAS ING S .A. S OCIÉTÉ GÉNÉRALE MILAN BRANCH BANCO IBM S .A HP FINANCIAL S ERVICE S OCIETE GENERALE US $ US $ US $ US $ US $ Ge rma ny US $ Fra nc e U.S .A. US $ Luxe mburg US $ US $ It a ly BRL Bra z il BRL Bra z il BRL Fra nc e 1,972 3,370 4,500 118 3,654 3,097 2,505 1,276 383 8,148 217 168 85 6,085 10,397 - 355 11,137 6,401 5,387 21,769 1,101 25,003 651 529 256 17,540 20,812 - 282 8,970 15,186 17,359 - 2,617 71,311 860 185 434 17,908 15,416 - - - 12,215 19,682 - 14,267 208,024 - - - - - - - - - 70,087 - - - - - - 43,505 49,995 4,500 755 23,761 36,899 115,020 23,045 18,368 312,486 1,728 882 775 2,176 3,461 4,528 120 3,697 3,163 3,476 1,316 418 9,552 217 169 85 6,085 10,396 - 355 11,137 6,401 5,387 21,769 1,101 25,003 651 529 256 17,540 20,813 - 282 8,970 15,186 17,360 - 2,617 71,311 860 185 434 17,908 15,416 - - - 12,215 19,682 - 14,267 208,024 - - - - - - - - - 70,088 - - - - - - 43,709 50,086 4,528 757 23,804 36,965 115,993 23,085 18,403 313,890 1,728 883 775 Mont hly Mont hly Qua rt e rly Mont hly Mont hly Mont hly/ Qua rt e rly Qua rt e rly/ S e mia nnua l Mont hly Qua rt e rly Qua rt e rly Mont hly Mont hly Mont hly 1.25 1.43 3.25 1.64 1.25 1.72 3.85 1.75 2.00 3.63 14.14 10.02 14.14 1.25 1.43 3.25 1.64 1.25 1.72 3.85 1.75 2.00 3.55 14.14 10.02 14.14 Tot a l Tot a l c onsolida t e d 29,608 89,427 456,587 288,674 570,776 1,435,072 40,016 90,536 458,311 293,845 571,804 1,454,512 641,448 827,444 2,748,180 2,181,610 2,726,563 9,125,245 681,594 828,552 2,676,823 2,139,896 2,699,538 9,026,403 189 FINANCIAL STATEMENTS | Financial Statements 80 81 (b) Hedge derivatives Curre nt lia bilitie s Non- c urre nt lia bilitie s Tota l he dge de riva tive s As of As of As of As of As of As of De c e mbe r 31, De c e mbe r 31, De c e mbe r 31, De c e mbe r 31, 2016 2015 De c e mbe r 31, 2016 De c e mbe r 31, 2015 Ac c rue d inte re s t from the la s t da te of inte re s t ra te s wa p Fa ir va lue of inte re s t ra te de riva tive s Fa ir va lue of fue l de riva tive s Fa ir va lue of fore ign c urre nc y de riva tive s Tota l he dge de riva tive s 2016 ThUS $ 2015 ThUS $ 2,148 9,578 - 13,155 24,881 4,329 33,518 56,424 39,818 134,089 ThUS $ ThUS $ ThUS $ ThUS $ - 6,679 - - - 16,128 - - 6,679 16,128 2,148 16,257 - 13,155 31,560 4,329 49,646 56,424 39,818 150,217 The foreign currency derivatives exchanges are FX forward and cross currency swap. Hedging operation The fair values of net assets/ (liabilities), by type of derivative, of the contracts held as hedging instruments are presented below: Cross currency swaps (CCS) (1) Interest rate swaps (2) Fuel options (3) Currency forward - options US$/GBP$ (4) Currency forward - options US$/EUR$ (4) Currency options R$/US$ (4) Currency options CLP/US$ (4) As of December 31, 2016 T hUS$ As of December 31, 2015 T hUS$ (12,286) (16,926) 10,088 618 109 (1,752) - (49,311) (44,085) (50,131) 7,432 1,438 933 85 (1) Covers the significant variations in cash flows associated with market risk implicit in the changes in the 3-month LIBOR interest rate and the exchange rate US$/UF and US$/BRL of bank loans. These contracts are recorded as cash flow hedges and fair value. (2) Covers the significant variations in cash flows associated with market risk implicit in the increases in the 3 months LIBOR interest rates for long-term loans incurred in the acquisition of aircraft and bank loans. These contracts are recorded as cash flow hedges. (3) Covers significant variations in cash flows associated with market risk implicit in the changes in the price of future fuel purchases. These contracts are recorded as cash flow hedges. (4) Covers the foreign exchange risk exposure of operating cash flows caused mainly by fluctuations in the exchange rate R$/US$ and US$/GBP. These contracts are recorded as cash flow hedges. During the periods presented, the Company only maintains cash flow hedges and fair value (in the case of CCS). In the case of fuel hedges, the cash flows subject to such hedges will impact results in the next six months from the consolidated statement of financial position date, meanwhile in the case of interest rate hedging, the hedges will impact results over the life of the related loans, which are valid initially for 12 years. The hedges on investments will impact results continuously throughout the life of the investment, while the cash flows occur at the maturity of the investment. In the case of currency hedges through a CCS, are generated two types of hedge accounting, a cash flow component by US$/UF and US$/BRL, and other fair value by US$ floating rate component. During the periods presented, no hedging operations of future highly probable transaction that have not been realized have occurred. Since none of the coverage resulted in the recognition of a non-financial asset, no portion of the result of the derivatives recognized in equity was transferred to the initial value of such assets. The amounts recognized in comprehensive income during the period and transferred from net equity to income are as follows: Debit (credit) recognized in comprehensive income during the period Debit (credit) transferred from net equity to income during the period For the period ended December 31, 2016 T hUS$ 2015 T hUS$ 127,390 80,387 (113,403) (151,244) NOTE 20 - TRADE AND OTHER ACCOUNTS PAYABLES The composition of Trade and other accounts payables is as follows: Current (a) Trade and other accounts payables (b) Accrued liabilities at the reporting date Total trade and other accounts payables As of As of December 31, December 31, 2016 ThUS$ 2015 ThUS$ 1,117,926 475,142 1,593,068 1,025,574 458,383 1,483,957 190 FINANCIAL STATEMENTS | Financial Statements 82 83 (a) Trade and other accounts payable: (b) Liabilities accrued: Trade creditors Leasing obligation Other accounts payable Total The details of Trade and other accounts payables are as follows: Aircraft Fuel Boarding Fee Airport charges and overflight Handling and ground handling Other personnel expenses Professional services and advisory Land services Marketing Services on board Leases, maintenance and IT services Suppliers' technical purchases Crew Maintenance Achievement of goals Distribution system Airlines Aircraft and engines leasing Aviation insurance Communications SEC agreement (*) Others As of December 31, 2016 ThUS$ 868,833 10,446 238,647 As of December 31, 2015 ThUS$ 758,783 18,784 248,007 1,117,926 1,025,574 As of As of December 31, December 31, 2016 T hUS$ 188,276 149,880 90,327 87,406 81,632 79,270 74,260 61,053 44,589 44,287 40,305 29,074 25,962 17,801 15,710 13,264 10,446 7,694 7,500 4,719 44,471 2015 T hUS$ 148,612 175,900 94,139 88,629 72,591 63,302 80,387 45,997 32,993 25,558 52,160 23,834 18,573 15,386 17,531 3,890 19,146 7,655 6,731 - 32,560 T otal trade and other accounts payables 1,117,926 1,025,574 (*) Provision made for payments of fines, on July 25, 2016 LATAM reached agreements with the U.S. Department of Justice ("DOJ") U.S. and the Securities and Exchange Commission ("SEC") both authorities of the United States of America, in force as of this date, regarding the investigation on payments by LAN Airlines S.A. made in 2006-2007 to a consultant who advised on the resolution of labor matters in Argentina. The amount to the SEC agreement is ThUS$ 6,744 plus interests of ThUS$ 2,694. As of December 31, the balance payable to the SEC is ThUS $ 4,719. As of December 31, 2016 As of December 31, 2015 T hUS$ T hUS$ 244,949 113,785 89,523 26,885 475,142 246,454 108,058 81,368 22,503 458,383 Aircraft and engine maintenance Accrued personnel expenses Accounts payable to personnel (*) Others accrued liabilities T otal accrued liabilities (*) Profits and bonds participation (Note 23 letter b) NOTE 21 - OTHER PROVISIONS Other provisions: Current liabilities Non-current liabilities T otal Liabilities As of As of As of As of December 31, December 31, December 31, December 31, 2016 T hUS$ 2015 T hUS$ 2016 T hUS$ 2015 T hUS$ As of December 31, 2016 As of December 31, 2015 T hUS$ T hUS$ Provision for contingencies (1) T ax contingencies Civil contingencies Labor contingencies Other Provision for European Commision investigation (2) T otal other provisions (3) 1,425 993 225 - - 2,643 1,297 1,476 149 - - 2,922 313,064 56,413 29,307 15,046 350,418 37,555 15,648 11,910 314,489 57,406 29,532 15,046 351,715 39,031 15,797 11,910 8,664 8,966 8,664 8,966 422,494 424,497 425,137 427,419 (1) Provisions for contingencies: The tax contingencies correspond to litigation and tax criteria related to the tax treatment applicable to direct and indirect taxes, which are found in both administrative and judicial stage. The civil contingencies correspond to different demands of civil order filed against the company. The labor contingencies correspond to different demands of labor order filed against the company. The Provisions are recognized in the consolidated income statement in administrative expenses or tax expenses, as appropriate. 191 FINANCIAL STATEMENTS | Financial Statements 84 85 (2) Provision made for proceedings brought by the European Commission for possible breaches of free competition in the freight market. (3) Total other provision at December 31, 2016, and at December 31, 2015, include the fair value correspond to those contingencies from the business combination with TAM S.A and subsidiaries, with a probability of loss under 50%, which are not provided for the normal application of IFRS enforcement and that only must be recognized in the context of a business combination in accordance with IFRS 3. Movement of provisions: Opening balance as of January 1, 2015 Increase in provisions Provision used Difference by subsidiaries conversion Reversal of provision Exchange difference Closing balance as of December 31, 2015 Opening balance as of January 1, 2016 Increase in provisions Provision used Difference by subsidiaries conversion Reversal of provision Exchange difference Closing balance as of December 31, 2016 Legal claims (1) European Commission Investigation (2) T hUS$ T hUS$ 705,552 54,675 (19,522) (220,266) (100,740) (1,246) 418,453 418,453 141,797 (21,997) 79,396 (201,425) 249 416,473 9,999 - - - - (1,033) 8,966 8,966 - - - - (302) 8,664 T otal T hUS$ 715,551 54,675 (19,522) (220,266) (100,740) (2,279) 427,419 427,419 141,797 (21,997) 79,396 (201,425) (53) 425,137 (1) The accumulated balance includes US$ 115 million as judicial deposit granted as guarantee, related to the “Fundo Aeroviário” (FA). This deposit was made with the purpose of suspending the application of the tax credit. The company is discussing over the Tribunal the constitutionality about the requirement made by FA in a legal action. Initially it was covered by the effects of a precautionary measure, meaning that, the company was not the obligation to collect the tax as long as there no judicial decision in this regard. However, the decision taken by a judge in the first instance was publicized in an unfavorable published, reversing the precautionary measure. As the legal claim is still in progress (TAM appealed this first decision), the company needed to make the judicial deposit for the suspension of the enforceability of the tax credit; it deposit was classified in this category deducting the existing provision for that purpose. Finally, if the final decision is favorable to the company, the deposit already made will return to TAM. On the other hand, if the tribunal confirms the first decision, such deposit will be converted in a definitive payment in favor of the Brazilian Government. The procedural stage at December 31, 2016 is disclosed in Note 31 in the case role N° 2001.51.01.012530-0. (2) European Commission Provision: This provision was established because of the investigation brought by the Directorate General for Competition of the European Commission against more than 25 cargo airlines, including Lan Cargo S.A., as part of a global investigation that began in December 2007 regarding possible unfair competition on the air cargo market. This was a joint investigation done by the European and U.S.A. authorities. The global investigation concluded when Lan Cargo S.A. and its subsidiary, Aerolíneas Brasileiras S.A. (“ABSA”) signed a Plea Agreement with the U.S.A. Department of Justice. The General Direction of Competition it imposed fines totaling € 799,445,000 (seven hundred and ninety nine million four hundred and forty-five thousand Euros) for infringement of European Union regulations on free competition against eleven (11) airlines, among which you can find LATAM A irlines Group S.A. and Lan Cargo S.A. Jointly, LATAM Airlines Group S.A. and Lan Cargo S.A., have been fined in the amount of € 8,220,000 (eight million two hundred twenty thousand Euros) for said infractions, which was provisioned in the financial statements of LATAM Airlines Group S.A. On January 24, 2011, LATAM Airlines Group S.A. and Lan Cargo S.A. appealed the decision before the Court of Justice of the European Union. On December 16, 2015 The European Commission does not appeal the sentence, but can issue a new decision correcting the failures specified in the Judgment and it has a period of 5 years which is fulfilled in 2021 the Court European resolved the appeal and annulled the European Commission. The procedural stage at December 31, 2016 is disclosed in Note 31, in (ii) lawsuits received by Latam Airlines Group S.A. and Subsidiaries. NOTE 22 - OTHER NON-FINANCIAL LIABILITIES Curre nt lia bilitie s Non- c urre nt lia bilitie s Tota l Lia bilitie s As of De c e mbe r 31, 2016 As of De c e mbe r 31, 2015 As of De c e mbe r 31, 2016 As of De c e mbe r 31, 2015 As of De c e mbe r 31, 2016 As of De c e mbe r 31, 2015 ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ ThUS $ (*) De fe rre d re ve nue s S a le s ta x Re te ntions Othe rs ta xe s Divide nds Othe r s undry lia bilitie s 2,655,086 19,402 45,542 7,465 25,518 9,232 Tota l othe r non- fina nc ia l lia bilitie s 2,762,245 2,423,703 10,379 33,125 11,211 3,980 7,635 2,490,033 213,781 - - - - - 213,781 272,130 - - - - - 272,130 2,868,867 19,402 45,542 7,465 25,518 9,232 2,976,026 2,695,833 10,379 33,125 11,211 3,980 7,635 2,762,163 (*) Note 2.20. The balance comprises, mainly, deferred income by services not yet rendered and programs such as: LATAM Pass, LATAM Fidelidade y Multiplus: LATAM Pass is the frequent flyer program created by LAN to reward the preference and loyalty of its customers with many benefits and privileges, by the accumulation of kilometers that can be exchanged for free flying tickets or a wide range of products and services. Customers accumulate LATAM Pass kilometers every time they fly with LAN, TAM, in companies that are members of oneworld® and other airlines associated with the program, as well as when they buy on the stores or use the services of a vast network of companies that have an agreement with the program around the world. 192 FINANCIAL STATEMENTS | Financial Statements 86 87 Thinking on people who travel constantly, TAM created the program LATAM Fidelidade, in order to improve the passenger attention and give recognition to those who choose the company. By using this program, customers accumulate points in a variety of programs loyalty in a single account and can redeem them at all TAM destinations and related airline companies, and even more, participate in the Red Multiplus Fidelidade. Multiplus is a coalition of loyalty programs, aiming to operate activities of accumulation and redemption of points. This program has an integrated network by associates including hotels, financial institutions, retail companies, supermarkets, vehicle rentals and magazines, among many other partners from different segments. NOTE 23 - EMPLOYEE BENEFITS Retirements payments Resignation payments Other obligations T otal liability for employee benefits As of December 31, 2016 As of December 31, 2015 T hUS$ T hUS$ 49,680 10,097 22,545 82,322 42,117 8,858 14,296 65,271 (a) The movement in retirements and resignation payments and other obligations: Opening balance T hUS$ Increase (decrease) current service provision Benefits paid Change of model Actuarial (gains) losses Currency translation T hUS$ T hUS$ T hUS$ T hUS$ T hUS$ Closing balance T hUS$ From January 1 to December 31, 2015 74,102 (13,609) (3,824) From January 1 to December 31, 2016 65,271 19,900 (4,536) - - 14,631 (6,029) 65,271 1,687 - 82,322 The principal assumptions used in the calculation to the provision in Chile are presented below: Assumptions 2016 2015 As of December 31, Discount rate Expected rate of salary increase Rate of turnover M ortality rate Inflation rate Retirement age of women Retirement age of men 4.54% 4.50% 6.16% RV-2009 2.86% 60 65 4.84% 4.50% 6.16% RV-2009 2.92% 60 65 The discount rate is determined by reference to free risk 20 years Central Bank of Chile BCP bond. Mortality table RV – 2009, established by Chilean Superintendency of Securities and Insurance and inflation rate performance curve of Central Bank of Chile instruments long term BCU and BCP. The obligation is determined based on the actuarial value of the accrued cost of the benefit and it is sensibility to main actuarial assumptions used for the calculation. The Following is a sensitivity analysis based on increased (decreased) on the discount rate, increased wages, rotation and inflation: Effect on the liability As of December 31, 2016 As of December 31, 2015 T hUS$ T hUS$ Discount rate Change in the accrued liability an closing for increase in 100 p.b. Change in the accrued liability an closing for decrease of 100 p.b. (5,665) 5,952 Rate of wage growth Change in the accrued liability an closing for increase in 100 p.b. Change in the accrued liability an closing for decrease of 100 p.b. 6,334 (5,644) (4,669) 5,345 5,309 (4,725) (b) The liability for short-term: As of As of December 31, December 31, 2016 T hUS$ 2015 T hUS$ Profit-sharing and bonuses (*) 89,523 81,368 (*) Accounts payables to employees (Note 20 letter b) 193 FINANCIAL STATEMENTS | Financial Statements 88 89 The participation in profits and bonuses correspond to an annual incentives plan for achievement of objectives. (*) Include a deduction for issuance costs ThUS$ 4,793 and adjustment by 10,282 placement shares for ThUS$ 156. (c) Employment expenses are detailed below: (b) Subscribed and paid shares Salaries and wages Short-term employee benefits T ermination benefits Other personnel expenses T otal For the periods ended December 31, 2016 T hUS$ 2015 T hUS$ 1,549,402 1,631,320 132,436 171,366 79,062 51,684 190,233 218,435 1,951,133 2,072,805 NOTE 24 - ACCOUNTS PAYABLE, NON-CURRENT Aircraft and engine maintenance Fleet financing (JOL) Provision for vacations and bonuses Other sundry liabilities Total accounts payable, non-current NOTE 25 - EQUITY (a) Capital As of As of December 31, December 31, 2016 ThUS$ 347,085 - 12,080 226 359,391 2015 ThUS$ 371,419 35,042 10,365 224 417,050 The Company’s objective is to maintain an appropriate level of capitalization that enables it to ensure access to the financial markets for carrying out its medium and long-term objectives, optimizing the return for its shareholders and maintaining a solid financial position. The Capital of the Company is managed and composed in the following form: The paid capital of the Company at December 31, 2016 amounts to ThUS$ 3,149,564 (*) divided into 606,407,693 common stock of a same series (ThUS$ 2,545,705, divided into 545,547,819 shares as of December 31, 2015), a single series nominative, ordinary character with no par value. There are no special series of shares and no privileges. The form of its stock certificates and their issuance, exchange, disablement, loss, replacement and other similar circumstances, as well as the transfer of the shares, is governed by the provisions of Corporations Law and its regulations. As of December 31, 2015, the Company's subscribed and paid-in capital was represented by 545,558,101 shares, all common shares, without par value. On August 18, 2016, the Company held an extraordinary meeting of shareholders in which it was approved to increase the capital by issuing 61,316,424 shares of payment, all ordinary shares, without par value. As of December 31, 2016, 60,849,592 shares had been placed against this increase, according to the following breakdown: (a) 30,499,685 shares subscribed and paid at the end of the preferred subscription period, which expired on, December 2016, raising the equivalent of US$ 304,996,850; And (b) 30,349,907 additional shares subscribed on December 28, 2016, earning the equivalent of US $ 303,499,070. As a result of the last placement, as of December 31, 2016, the number Company shares subscribed and paid amounts to 606,407,693. At December 31, 2016, the Company's capital stock is represented by 608,374,525 shares, all common shares, without no par value, which is divided into: (a) the 606,407,693 subscribed and paid shares mentioned above; And (b) 1,966,832 shares pending subscription and payment, of which: (i) 1,500,000 shares are allocated to compensation stock option plans; And (ii) 466,832 correspond to the balance of shares pending placement of the last capital increase. It should be noted that during the year the Company's capital stock was expressed in 613,164,243 shares, all ordinary shares, without nominal value, that is, 551,847,819 shares already authorized at the beginning of the year and 61,316,424 shares authorized in the last Capital increase dated August 18, 2016. However, on December 21, 2016, the deadline for the subscription and payment of 4,789,718 shares that were destined to compensation plans for workers expired, so that the Company's capital stock was reduced to 608,374,525 shares. The following table shows the movement of the authorized and fully paid shares described above: Movement of authorized shares Autorized shares as of January 1, 2015 No movement of autorized shares during 2015 Authorized shares as of December 31, 2015 Autorized shares as of January 1, 2016 Increase capital approved at Extraordinary Shareholders meeting dated August 18, 2016 Full capital decrease due to maturity of the subscription and payment period of the compensation plan 2011, December 21, 2016 (*) Authorized shares as of December 31, 2016 (*) See Note 34 (a.1) Nro. Of shares 551,847,819 - 551,847,819 551,847,819 61,316,424 (4,789,718) 608,374,525 194 FINANCIAL STATEMENTS | Financial Statements 90 91 Movement fully paid shares increase (decrease) through transfers and other changes N° of shares Movement value of shares (1) T hUS$ Cost of issuance and placement of shares (2) T hUS$ Paid- in Capital T hUS$ Paid shares as of January 1, 2015 No movement of paid shares during 2015 545,547,819 2,552,066 (6,361) 2,545,705 - - - - Paid shares as of December 31, 2015 545,547,819 2,552,066 (6,361) 2,545,705 Paid shares as of January 1, 2016 Placement capital increase Approved at Extraordinary Shereholders meeting dated August 18, 2016 Capital reserve Increase (decrease) by transfers and other changes (4) 545,547,819 2,552,066 (6,361) 2,545,705 60,849,592 - 608,496 - - (4,793) 608,496 (4,793) 10,282 156 - 156 Paid shares as of December 31, 2016 606,407,693 (3) 3,160,718 (11,154) 3,149,564 (1) Amounts reported represent only those arising from the payment of the shares subscribed. (2) Decrease of capital by capitalization of reserves for cost of issuance and placement of shares established according to Extraordinary Shareholder´s Meetings, where such decreases were authorized. (3) At December 31, 2016, the difference between authorized shares and fully paid shares are 1,966,832 shares, of which 1,500,000 correspond to compensation plans for executives of LATAM Airlines Group S.A. and subsidiaries (see Note 34(a.1)) and 466,832 correspond to the shares issued and unsubscribed from the capital increase approved at the Extraordinary Shareholders' Meeting held on August 18, 2016. In Janury 2014, these 10,282 shares were placed and charged to the Compensation (4) plan 2011 (See Note 34 (a.1)) (c) Treasury stock At December 31, 2016, the Company held no treasury stock, the remaining of ThUS$ (178) corresponds to the difference between the amount paid for the shares and their book value, at the time of the full right decrease of the shares which held in its portfolio. (d) Reserve of share- based payments Movement of Reserves of share- based payments: Periods Opening balance T hUS$ Stock option plan T hUS$ Deferred tax Net movement of the period T hUS$ T hUS$ From January 1 to December 31, 2015 From January 1 to December 31, 2016 29,642 35,647 8,924 3,698 (2,919) (807) 6,005 2,891 Closing balance T hUS$ 35,647 38,538 These reserves are related to the “Share-based payments” explained in Note 34. (e) Other sundry reserves Movement of Other sundry reserves: Periods Opening balance T hUS$ From January 1 to December 31, 2015 From January 1 to December 31, 2016 2,635,748 2,634,679 Legal reserves T hUS$ (1,069) 5,602 Closing balance T hUS$ 2,634,679 2,640,281 Balance of Other sundry reserves comprises the following: Higher value for TAM S.A. share exchange (1) Reserve for the adjustment to the value of fixed assets (2) Transactions with non-controlling interest (3) Cost of issuance and placement of shares Others As of As of December 31, 2016 December 31, 2015 ThUS$ ThUS$ 2,665,692 2,620 (25,911) 9 (2,129) 2,665,692 2,620 (25,891) (4,793) (2,949) Total 2,640,281 2,634,679 (1) Corresponds to the difference in the shares value of TAM S.A. acquired (under subscriptions) by Sister Holdco S.A. and Holdco II S.A. (under the Exchange Offer), as stipulated in the Declaration of Posting of Merger by Absorption and the fair value of these exchange shares of LATAM Airlines Group S.A. at June 22, 2012. (2) Corresponds to the technical revaluation of fixed assets authorized by the Superintendence of Securities and Insurance in 1979, in Circular N° 1529. The revaluation was optional and could be taken only once, the reserve is not distributable and can only be capitalized. (3) The balance at December 31, 2016, correspond to the loss generated by the participation of Lan Pax Group S.A. and Inversiones Lan S.A. in the acquisition of shares of Aerovías de Integración Regional Aires of ThUS$ (3,480) and ThUS$ (20), respectively; the acquisition 195 FINANCIAL STATEMENTS | Financial Statements 92 93 of TAM S.A. of the minority holding of Aerolinhas Brasileiras S.A. of ThUS$ (885) and the acquisition of minority interest of Aerolane S.A. by Lan Pax group S.A. through Holdco Ecuador S.A. for US$ (21,526). (f) Reserves with effect in other comprehensive income. Movement of Reserves with effect in other comprehensive income: Currency translation reserve ThUS$ Opening balance as of January 1, 2015 (1,193,871) Derivatives valuation gains (losses) Deferred tax Actuarial reserves by employee benefit plans Deferred tax actuarial IAS by employee benefit plans - - - - Difference by subsidiaries conversion (1,382,170) Cash flow hedging reserve ThUS$ (151,340) 82,730 (21,900) - - - Actuarial gain or loss on defined benefit plans reserve ThUS$ - - - Total ThUS$ (1,345,211) 82,730 (21,900) (14,627) (14,627) 3,910 - 3,910 (1,382,170) Opening balance as of January 1, 2016 (2,576,041) Derivatives valuation gains (losses) Deferred tax Actuarial reserves by employee benefit plans Deferred tax actuarial IAS by employee benefit plans - - - - Difference by subsidiaries conversion 489,486 (90,510) 126,360 (34,344) (10,717) (2,677,268) - - 126,360 (34,344) - - - (3,104) (3,104) 921 - 921 489,486 Closing balance as of December 31, 2016 (2,086,555) 1,506 (12,900) (2,097,949) (f.1) Currency translation reserve These originate from exchange differences arising from the translation of any investment in foreign entities (or Chilean investment with a functional currency different to that of the parent), and from loans and other instruments in foreign currency designated as hedges for such investments. When the investment (all or part) is sold or disposed and loss of control occurs, these reserves are shown in the consolidated statement of income as part of the loss or gain on the sale or disposal. If the sale does not involve loss of control, these reserves are transferred to non-controlling interests. Closing balance as of December 31, 2015 (2,576,041) (90,510) (10,717) (2,677,268) Description of dividend (f.2) Cash flow hedging reserve These originate from the fair value valuation at the end of each period of the outstanding derivative contracts that have been defined as cash flow hedges. When these contracts expire, these reserves should be adjusted and the corresponding results recognized. (g) Retained earnings Movement of Retained earnings: Periods From January 1 to December 31, 2015 From January 1 to December 31, 2016 (h) Dividends per share Date of dividend Amount of the dividend (ThUS$) Number of shares among which the dividend is distributed Dividend per share (US$) Opening balance ThUS$ 536,190 317,950 Result for the period ThUS$ Other increase (decreases) Dividends ThUS$ ThUS$ (219,274) 69,220 - (20,766) 1,034 - Closing balance ThUS$ 317,950 366,404 Minimum mandatory dividend 2016 Final dividend dividend 2015 12-31-2016 20,766 606,407,693 0.0342 12-31-2015 - 545,547,819 - As of December 31, 2016 and 2015, the Company has not been paid dividends. NOTE 26 - REVENUE The detail of revenues is as follows: Passengers LAN Passengers TAM Cargo Total For the periods ended December 31, 2016 ThUS$ 4,104,348 3,773,367 1,110,625 8,988,340 2015 ThUS$ 4,241,918 4,168,696 1,329,431 9,740,045 196 94 NOTE 27 - COSTS AND EXPENSES BY NATURE (a) Costs and operating expenses The main operating costs and administrative expenses are detailed below: Aircraft fuel Other rentals and landing fees Aircraft rentals Aircraft maintenance Comissions Passenger services Other operating expenses Total For the periods ended December 31, 2016 2015 ThUS$ ThUS$ 2,056,643 1,077,407 2,651,067 1,109,826 568,979 366,153 269,296 286,621 525,134 437,235 302,774 295,439 1,424,595 1,293,320 6,049,694 6,614,795 (b) Depreciation and amortization Depreciation and amortization are detailed below: Depreciation (*) Amortization Total For the period ended December 31, 2016 ThUS$ 910,071 50,257 960,328 2015 ThUS$ 897,670 36,736 934,406 (*) Include the depreciation of Property, plant and equipment and the maintenance cost of aircraft held under operating leases. The amount of maintenance cost included within the depreciation line item at December 31, 2016 is ThUS$ 345,651 and ThUS$ 345,192 for the same period of 2015. (c) Personnel expenses The costs for personnel expenses are disclosed in Note 23 liability for employee benefits. (d) Financial costs The detail of financial costs is as follows: FINANCIAL STATEMENTS | Financial Statements 95 For the period ended December 31, 2016 ThUS$ 352,405 32,573 31,358 416,336 2015 ThUS$ 331,511 42,855 38,991 413,357 Bank loan interest Financial leases Other financial instruments Total Costs and expenses by nature presented in this note plus the Employee expenses disclosed in Note 23, are equivalent to the sum of cost of sales, distribution costs, administrative expenses, other expenses and financing costs presented in the consolidated statement of income by function. (e) Restructuring Costs As part of the ongoing process of reviewing its fleet plan, in December 2015 the company recognized a negative impact on results of US$ 80 million before tax associated with the output of the rest of the A330 fleet, including engines and technical materials is recognized. These expenses are recognized at “Other Gain and Loses” of the Consolidated Statement of Income by Function. NOTE 28 - OTHER INCOME, BY FUNCTION Other income by function is as follows: Coalition and loyalty program M ultiplus Tours Aircraft leasing Customs and warehousing M aintenance Duty free Other miscellaneous income Total For the period ended December 31, 2016 ThUS$ 2015 ThUS$ 174,197 133,575 65,011 24,548 17,090 11,141 113,186 538,748 154,958 113,225 46,547 25,457 11,669 16,408 17,517 385,781 197 FINANCIAL STATEMENTS | Financial Statements 96 97 NOTE 29 - FOREIGN CURRENCY AND EXCHANGE RATE DIFFERENCES The functional currency of LATAM Airlines Group S.A. is the US dollar, also it has subsidiaries whose functional currency is different to the US dollar, such as the Chilean peso, Argentine peso, Colombian peso and Brazilian real. The functional currency is defined as the currency of the primary economic environment in which an entity operates and in each entity and all other currencies are defined as foreign currency. Considering the above, the balances by currency mentioned in this note correspond to the sum of foreign currency of each of the entities that make LATAM Airlines Group S.A. and Subsidiaries. (a) Foreign currency The foreign currency detail of balances of monetary items in current and non-current assets is as follows: Current assets Cash and cash equivalents Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Strong bolivar Other currency Other financial assets, current Argentine peso Brazilian real Chilean peso Colombian peso U.S. dollar Strong bolivar Other currency As of As of December 31, December 31, 2016 ThUS$ 201,416 4,438 9,705 30,221 1,137 1,695 128,694 61 25,465 14,573 12 734 585 - 12,879 76 287 2015 ThUS$ 182,089 11,611 8,810 17,739 1,829 10,663 112,422 2,986 16,029 124,042 108,592 1,263 563 1,167 12,128 22 307 Current assets Other non - financial assets, current Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Strong bolivar Other currency Trade and other accounts receivable, current Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Strong bolivar Other currency Accounts receivable from related entities, current Chilean peso Tax current assets Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Peruvian sol Other currency Total current assets Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. Dollar Strong bolivar Other currency As of As of December 31, December 31, 2016 ThUS$ 107,789 16,086 20,158 1,619 713 1,563 50,157 3 17,490 251,204 54,356 30,675 90,482 9,720 21,923 14,086 43 29,919 554 554 28,198 1,798 2,462 6,333 1,418 273 177 14,387 1,350 603,734 76,690 63,734 129,794 12,988 25,454 205,993 183 88,898 2015 ThUS$ 126,130 14,719 15,387 10,265 486 1,983 61,577 - 21,713 247,229 30,563 11,136 55,169 1,195 30,006 29,937 7,225 81,998 181 181 22,717 2,371 5 3,615 1,275 14 1,394 12,572 1,471 702,388 167,856 36,601 87,532 5,952 42,666 217,458 10,233 134,090 198 FINANCIAL STATEMENTS | Financial Statements 98 99 Non-current assets Other financial assets, non-current Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Other currency Other non - financial assets, non-current Argentine peso Brazilian real U.S. dollar Other currency Accounts receivable, non-current Chilean peso U.S. dollar Other currency Deferred tax assets Colombian peso Other currency Total non-current assets Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Other currency As of December 31, 2016 ThUS$ As of December 31, 2015 ThUS$ 26,772 - 2,769 83 285 6,966 14,920 1,749 19,069 142 6,029 8,309 4,589 7,356 7,356 - - 2,110 117 1,993 55,307 142 8,798 7,439 402 6,966 23,229 8,331 20,767 22 1,478 77 162 614 16,696 1,718 60,215 169 4,454 50,108 5,484 9,404 4,251 5,000 153 2,632 336 2,296 93,018 191 5,932 4,328 498 614 71,804 9,651 The foreign currency detail of balances of monetary items in current liabilities and non-current is as follows: Current liabilities Other financial liabilities, current Chilean peso U.S. dollar T rade and other accounts payables, current Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Strong bolivar Peruvian sol Mexican peso Pound sterling Uruguayan peso Other currency Accounts payable to related entities, current Chilean peso U.S. dollar Other currency Other provisions, current Chilean peso Other currency T ax liabilities, current Argentine peso Brazilian real Chilean peso U.S. dollar Other currency Up to 90 days 91 days to 1 year As of December 31, 2016 As of December 31, 2015 As of December 31, 2016 As of December 31, 2015 T hUS$ T hUS$ T hUS$ T hUS$ 287,175 55,962 231,213 585,149 20,838 40,740 60,701 9,049 23,445 374,431 761 33,701 1,535 1,769 6,899 11,280 220 23 8 189 - - - (145) - (3) - - (142) 94,199 54,655 39,544 482,402 20,772 37,572 40,219 5,271 5,275 310,565 2,627 28,293 15,248 7,819 6,005 2,736 447 83 22 342 - - - 36 - - - 27 9 455,086 108,010 347,076 (*) 141,992 52,892 89,100 16,097 907 27 12,255 578 5 962 - 1,093 - 246 - 24 - - - - 511 28 483 2,442 2,501 - (25) - (34) 14,981 2,072 16 10,951 155 618 839 - 87 225 - - 18 - - - - 457 21 436 9,037 9,036 - - - 1 199 100 Current liabilities December 31, December 31, December 31, December 31, Up to 90 days 91 days to 1 year As of As of As of As of 2016 ThUS$ 2015 ThUS$ 2016 ThUS$ 2015 ThUS$ Other non-financial liabilities, current Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Strong bolivar Other currency Total current liabilities Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Strong bolivar Other currency (*) See Note 19.a (2) 33,439 13,463 430 14,999 578 168 684 2 3,115 905,838 34,301 41,167 131,685 9,627 23,613 606,336 763 58,346 40,432 (2,387) 4,297 32,228 145 2,706 (3,238) 2,490 4,191 617,516 18,385 41,869 127,185 5,416 7,981 346,920 5,117 64,643 - - - - - - - - - 474,136 3,408 27 120,268 578 5 - - - - - - - - - 166,467 11,108 16 63,864 155 618 348,038 89,939 - 1,812 - 767 FINANCIAL STATEMENTS | Financial Statements 200 FINANCIAL STATEMENTS | Financial Statements 101 Non-current liabilities Other financial liabilities, non-current Chilean peso U.S. dollar Accounts payable, non-current Chilean peso U.S. dollar Other currency Other provisions, non-current Argentine peso Brazillian real Chilean peso Colombian peso Euro U.S. dollar Provisions for employees benefits, non-current Brazilian real Chilean peso U.S. dollar Other non-financial liabilities, non-current Colombian peso T otal non-current liabilities Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Other currency More than 1 to 3 years More than 3 to 5 years More than 5 years As of December 31, 2016 As of December 31, 2015 As of December 31, 2016 As of December 31, 2015 As of December 31, 2016 As of December 31, 2015 T hUS$ 178,793 59,177 119,616 195,333 10,178 183,904 1,251 39,513 635 23,541 38 569 8,664 6,066 68,774 28 68,380 366 3 3 482,416 635 23,569 137,773 572 8,664 309,952 1,251 T hUS$ 561,217 104,385 456,832 239,029 8,058 229,005 1,966 27,780 797 11,009 - 198 8,966 6,810 56,306 - 56,306 - - - 884,332 797 11,009 168,749 198 8,966 692,647 1,966 T hUS$ 747,218 16,189 731,029 268 268 - - T hUS$ 328,480 34,635 293,845 168 168 - - - - - - - - - - - - - - - - - - - - - - - - - - - - T hUS$ 41,785 - 41,785 T hUS$ 571,804 - 571,804 28 28 - - - - - - - - - - - - - - - 8 8 - - - - - - - - - - - - - - - 747,486 - - 16,457 - - 731,029 - 328,648 - - 34,803 - - 293,845 - 41,813 - - 28 - - 41,785 - 571,812 - - 8 - - 571,804 - 201 FINANCIAL STATEMENTS | Financial Statements 102 103 General summary of foreign currency: As of As of December 31, December 31, Total assets Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Strong bolivar Other currency 2016 ThUS$ 659,041 76,832 72,532 137,233 13,390 32,420 229,222 183 97,229 2015 ThUS$ 795,406 168,047 42,533 91,860 6,450 43,280 289,262 10,233 143,741 Total liabilities 2,651,689 2,568,775 Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Strong bolivar Other currency Net position Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Strong bolivar Other currency 38,344 64,763 406,211 10,777 32,282 30,290 52,894 394,609 5,769 17,565 2,037,140 1,995,155 763 61,409 38,488 7,769 (268,978) 2,613 138 5,117 67,376 137,757 (10,361) (302,749) 681 25,715 (1,807,918) (1,705,893) (580) 35,820 5,116 76,365 (b) Exchange differences Exchange differences recognized in the income statement, except for financial instruments measured at fair value through profit or loss, for the period ended December 31, 2016 and 2015, generated a debit of ThUS$ 121,651 and a charge ThUS$ 467,896, respectively. Exchange differences recognized in equity as reserves for currency translation differences for the period ended December 31, 2016 and 2015, represented a debit of ThUS$ 494,362 and a charge ThUS$ 1,409,439, respectively. The following shows the current exchange rates for the U.S. dollar, on the dates indicated: As of December 31, 2015 2014 2016 Argentine peso Brazilian real Chilean peso Colombian peso Euro Strong bolivar Australian dollar Boliviano Mexican peso New Zealand dollar Peruvian Sol Uruguayan peso 15.84 3.25 669.47 3,000.25 0.95 673.76 1.38 6.86 20.63 1.44 3.35 29.28 12.97 3.98 710.16 3,183.00 0.92 198.70 1.37 6.85 17.34 1.46 3.41 29.88 8.55 2.66 606.75 2,389.50 0.82 12.00 1.22 6.86 14.74 1.28 2.99 24.25 202 104 NOTE 30 - EARNINGS / (LOSS) PER SHARE Basic earnings / (loss) per share Earnings / (loss) attributable to For the period ended December 31, 2016 2015 owners of the parent (ThUS$) 69,220 (219,274) Weighted average number of shares, basic 546,559,599 545,547,819 Basic earnings / (loss) per share (US$) 0.12665 (0.40193) Diluted earnings / (loss) per share Earnings / (loss) attributable to For the period ended December 31, 2016 2015 owners of the parent (ThUS$) 69,220 (219,274) Weighted average number of shares, basic Weighted average number of shares, diluted 546,559,599 545,547,819 546,559,599 545,547,819 Diluted earnings / (loss) per share (US$) 0.12665 (0.40193) In the calculation of diluted earnings per share have not been considered the compensation plan disclosed in Note 33 (a.1), because the average market price is lower than the price of options. FINANCIAL STATEMENTS | Financial Statements 203 FINANCIAL STATEMENTS | Financial Statements NOTE 31 – CONTINGENCIES I. Lawsuits 1) Lawsuits filed by LATAM Airlines Group S.A. and Subsidiaries 105 Company Court Case Number Origin Stage of trial Atlantic Aviation Investments LLC (AAI). Supreme Court of the State of New York County of New York. 07-6022920 Lan Argentina S.A. National Administrative Court. 36337/13 Atlantic Aviation Investments LLC. ("AAI"), indirect subsidiary LATAM Airlines an Group S.A., incorporated under the laws of the State of Delaware, sued in August 29th , 2007 Varig Logistics S.A. ("Variglog") for non-payment of four documented loans in credit agreements governed by New York the contracts law. These acceleration of the loans in the event of sale of the original debtor, VRG Linhas Aéreas S.A. establish in Switzerland, implementation stage the embargo of Variglog In the conviction stated that Variglog should pay the principal, interest and costs in favor of AAI. It keeps in Switzerland with AAI. In Brazil a Settlement Agreement was signed and it is awaiting for approval from the Bankruptcy Court of that country and Variglog has asked Switzerland to recognize the judgment that declared the state of judicial recovery and subsequent bankruptcy. funds ORSNA Resolution No. 123 which directs Lan Argentina to vacate the hangar located in the Aeroparque Metropolitano Jorge Newberry, Argentina. Airport named The court agreed, so On February 25, 2016, Lan Argentina S.A. and ORSNA informed the Court of their decision to put an end to the lawsuit and guarantee use of the hangar by Lan. The parties agreed to maintain the precautionary measure in effect allowing Lan to use the hangar indefinitely until the parties reach a the final agreement. precautionary measure was extended indefinitely. Resolution 112/2016 of the National Airport Regulatory Agency (ORSNA) was published on December 30, 2016, which terminated the hangar dispute. the previous resolution, 123/16, that ordered vacation of the LAN hangar at AEP. Consequently, the legal structure created by the ORSNA through the 2012 Resolution was left without any effect in 2016. Apart from the matter now having been resolved both materially and judicially, this resolution puts a definitive end to the hangar dispute. latest resolution repealed This Amounts Committe d (*) ThUS$ 17,100 Plus interests and costs -0- 204 FINANCIAL STATEMENTS | Financial Statements 2) Lawsuits received by LATAM Airlines Group S.A. and Subsidiaries 106 Company Court Case Number Origin Stage of trial Amounts Committed (*) ThUS$ LATAM Airlines Group S.A. y Lan Cargo S.A. European Commission. - Investigation of alleged infringements to free competition of cargo airlines, especially fuel surcharge. On December 26th , 2007, the General Directorate for Competition of the European Commission notified Lan Cargo S.A. and LATAM Airlines Group S.A. the instruction process against twenty five cargo including Lan Cargo S.A., for airlines, alleged breaches of competition in the air cargo market the in Europe, especially alleged fixed fuel surcharge and freight. On April 14th, 2008, the notification of the 8,664 replied. four Commission was European The appeal was filed on January 24, 2011. On May 11, 2015, we attended a hearing at which we petitioned for the vacation of the Decision based on discrepancies in the Decision between the operating section, which mentions infringements (depending on the routes involved) but refers to LATAM in only one of those four routes; and the ruling section (which mentions one single conjoint infraction). On November 9th, 2010, the General Directorate for Competition of the European Commission notified Lan Cargo S.A. and LATAM Airlines Group S.A. the imposition of a fine in the amount of THUS$ 8,664. (8.220.000 Euros) This fine is being appealed by Lan Cargo S.A. and LATAM Airlines Group S.A. On December 16, 2015, the European Court of Justice revoked the Commission’s decision because of discrepancies. The European Commission did not appeal the resolution, but rather confirmed, on May 20, 2016, that it will issue a new decision curing the rulings specified in the Decision. It has a period of 5 years to do this, or until 2021. 205 FINANCIAL STATEMENTS | Financial Statements Company Court Case Number Lan Cargo S.A. y LATAM Airlines Group S.A. - In the High Court of Chancery Justice División (England) Ovre Romerike District y Court (Norway) Directie Juridische Zaken Afdeling Ceveil Recht (Netherlands) , Cologne Regional Court Köln (Landgerich Germany). Aerolinhas Brasileiras S.A. Federal Justice. 0008285- 53.2015.403.6105 107 Origin Lawsuits filed against European airlines by users of freight services in private lawsuits as a result of the investigation into alleged breaches of competition of cargo airlines, especially fuel surcharge. Lan Cargo S.A. and LATAM Airlines Group S.A., have been sued in court proceedings directly and/or in third party, based the Netherlands and Germany. in England, Norway, An action seeking to quash a decision and petioning for early protection in order to obgain a revocation of the penalty imposed by the Brazilian Competition Authority (CADE) in the investigation of cargo airlines alleged fair trade violations, in particular the fuel surcharge. Stage of trial Amounts Committed (*) ThUS$ Cases are in the uncovering evidence stage. -0- 10,438 This action was filed by presenting a guaranty – policy – in order to suspend the effects of the CADE’s decision regarding the payment of the following fines: (i) (ii) Norberto ABSA: ThUS$10,438; Jochmann: ThUS$201; (iii) Hernan Merino: ThUS$ 102; (iv) Felipe Meyer :ThUS$ 102. The action also deals with the affirmative obligation required by the CADE consisting of the duty to publish the condemnation in a widely circulating newspaper. This obligation had also been stayed by the court of federal justice in this process. Awaiting CADE’s statement. Aerolinhas Brasileiras S.A. Federal Justice. 0001872- 58.2014.4.03.6105 An annulment action with a motion for preliminary filed on injunction, was 28/02/2014, in order to cancel tax debts of PIS, CONFINS, IPI and II, connected with the process 10831.005704/2006.43. administrative We have been waiting since August 21, 2015 for a statement by Serasa on TAM’s letter of indemnity and a statement by the Union. The statement was authenticated on January 29, 2016. A petition on evidence and replications were filed on June 20, 2016. 11,140 206 FINANCIAL STATEMENTS | Financial Statements 108 Company Court Case Number Origin Stage of trial Tam Linhas Aéreas S.A. Department of Federal Revenue of Brazil 19515.722556/2012-21 Alleged irregularities in the SAT payments for the periods 01/2009 to 13/2009. A judgment by the Administrative Council of Tax Appeals (CARF) has been pending since February 27, 2015. Amounts Committed (*) ThUS$ 2,151 Tam Linhas Aéreas S.A. Department of Federal Revenue of Brazil 19515.721155/2014-15 Alleged irregularities in the SAT payments for the periods 01/2010 to 13/2010. A decision was rendered in favor of Tam Linhas Aéreas S.A. on August 22, 2016. The Attorney General has said it will not appeal. 25,515 Tam Linhas Aéreas S.A. Department of Federal Revenue of Brazil 19515.720476/2015-83 Tam Linhas Aéreas S.A. Court of the Second Region. 2001.51.01.012530-0 Alleged irregularities in the SAT payments for the periods 01/2011 to 12/2012 Ordinary judicial action brought for the purpose of declaring the nonexistence of legal relationship obligating the company to collect the Air Fund. A judgment by CARF is pending since 52,414 April 12, 2016. 115,265 in court decision Unfavorable first instance. Currently expecting the ruling on the appeal filed by the company. In order to suspend chargeability of Tax Credit a Guaranty Deposit to the Court was delivered for MUS$115. The court decision requesting that the Expert make all clarifications requested by the parties in a period of 30 days was published on March 29, 2016. The plaintiffs’ submitted a petition on June 21, 2016 requesting acceptance of the opinion of their consultant and an urgent ruling on the dispute. No amount additional to the deposit that has already been made is required if this case is lost. Tam Linhas Aéreas S.A. Administrative Council of Tax Appeals 19.515.002963/2009-12, 19515.722555/2012-86, 19515.721154/2014-71, 19515.720475/2015-39 Collection of contributions to the Aviation Fund for the periods from 01/2004 to 12/2004, from 12/2006 to to 12/2008, from 01/2009 to 12/2010, and from 01/2011 10/2012. A judgment is pending by CARF since 65,788 February 5, 2016. 207 FINANCIAL STATEMENTS | Financial Statements Company Court Case Number Origin Stage of trial 109 Tam Linhas Aéreas S.A. Internal Revenue Service of Brazil. 16643.000087/2009-36 Tam Linhas Aéreas S.A. Internal Revenue Service of Brazil. 10880.725950/2011-05 Aerovías de Integración Regional, AIRES S.A. United States Court of Appeals for the Eleventh Circuit, Florida, U.S.A. 2013-20319 CA 01 This is an administrative proceeding arising from an infraction notice issued on 15.12.2009, by which the authority aims to request social contribution on net income (CSL) on base periods 2004 to 2007, due to the deduction of expenses related to suspended taxes. Compensation credits of the Social Integration Program (PIS) and Contribution for Social Security Financing (COFINS) Declared on DCOMPs. The July 30th , 2012 LAN COLOMBIA AIRLINES initiated a legal process in Colombia against Regional One INC and Volvo Aero Services LLC, to declare that these companies are civilly liable for moral and material damages caused to LAN COLOMBIA AIRLINES arising from breach of contractual obligations of the aircraft HK-4107. The June 20th , 2013 AIRES SA And / Or LAN AIRLINES COLOMBIA was notified of the lawsuit filed in U.S. for Regional One INC and Dash 224 LLC for damages caused by the aircraft HK-4107 arguing failure of LAN COLOMBIA AIRLINES customs duty to obtain import declaration when the aircraft in April 2010 entered Colombia for maintenance required by Regional One. The appeal filed by the company was dismissed in 2010. In 2012 the voluntary appeal was also dismissed. Consequently, the special appeal filed by the company awaits judgment of admissibility, since 2012. objection (manifestação The de inconformidade) filed by the company was rejected, which is why the voluntary appeal was filed. The case was assigned to the 1st Ordinary Group of Brazil’s Administrative Council of Tax Appeals (CARF) on June 8, 2015. TAM’s appeal was included in the CARF session held August 25, 2016. This case is being heard by the 45th Civil Court of the Bogota Circuit. In an interim decree issued August 16, 2016, the hearing under article 101 was set for February 2, 2017, this hearing was postponed at request of the parties and the Judge must resolve on a new date. When a reconciliation will be attempted, facts of the case will be set, the parties will conduct depositions and evidence will be decreed. The Federal Court of the State of Florida decided on March 26, 2016 to approve Lan Colombia Airlines’s request to suspend the proceedings in the USA until the claim under way in Colombia is decided. The U.S. Court judge also closed the case administratively. The Federal Court of Appeal ratified the case closing in the U.S.A. on April 1, 2015. On October 1, 2015, Regional One petitioned that the U.S. court reopen the case. Lan Colombia Airlines presented its arguments and the Court sustained them on August 23, 2016, ratifying the closing of the case in the United States, so it continues to be closed. Amounts Committed (*) ThUS$ 22,225 43,341 12,443 208 FINANCIAL STATEMENTS | Financial Statements 110 Company Court Case Number Origin Stage of trial Tam Linhas Aéreas S.A. Internal Service of Brazil Revenue 10880.722.355/2014-52 On August 19th , 2014 the Federal Tax Service issued a notice of violation stating that compensation credits Program (PIS) and the Contribution for the Financing of Social Security COFINS by TAM are not directly related to the activity of air transport. An administrative objection was filed on September 17th, 2014. A first-instance ruling was rendered on June 1, 2016 that was partially favorable. The separate fine was revoked. A voluntary appeal was filed on June 30, 2016, which is pending a decision by CARF. Tam Viagens S.A. Department of Finance to the municipality of São Paulo. 67.168.795 / 67.168.833 / 67.168.884 / 67.168.906 / 67.168.914 / 67.168.965 A claim was filed alleging infraction and seeking a fine because of a deficient basis for calculation of the service tax (ISS) because the company supposedly made incorrect deductions. Tam Linhas Aéreas S.A. Labor Court of São Paulo. 0001734- 78.2014.5.02.0045 TAM S.A. Conselho Administrativo de Recursos Fiscais. 13855.720077/2014-02 Action filed by the Ministry of Labor, which compliance with legislation on breaks, extra hours and others. requires Notice of an alleged infringement presented by Secretaria da Receita Federal do Brasil requiring the payment of IRPJ and CSLL, taxes related to the income earned by TAM on March, 2011, in relation of the reduction of the statute capital of Multiplus S.A. We received notice of the petition on December 22, 2015. The objection was filed on January 19, 2016. The company was notified on November 23, 2016 of the decision that partially sustained the interim infringement ruling. An ordinary appeal was filed on December 19, 2016 before the Municipal Tax Council of Sao Paulo and a judgment is pending. Early stage. Eventually could affect the operations and control of working hours of employees. The company won in the first instance, but an appeal by the Union is expected. appeal the object of On January 12, 2014, it was filed an appeal against the notice of infringement. Currently, the company is waiting for the court judgment regarding the Conselho the Administrativo Fiscais (CARF) The case will be put into the system again for re-assignment for hearing and reporting because of the departure of Eduardo de Andrade, a CARF council member. de Recursos filed in Amounts Committed (*) ThUS$ 53,967 89,624 16,211 104,423 209 FINANCIAL STATEMENTS | Financial Statements Company Court Case Number Tam Linhas Aereas S.A. 1° Civil Court of Comarca of Bauru/SP. 0049304- 37.2009.8.26.0071/1 111 Origin Stage of trial Currently under the enforcement phase of the sentence. ThUS$4.770 in cash was deposited in guarantee. A procedural agreement was made for 23 million reals (ThUS$7,057) on September 23, 2016. is filed by That action the current complainants against the defendant, TAM Linhas Aéreas S / A, for receiving for material and moral compensation damages suffered as a result of an accident with one of its aircraft, which landed on adjacent the Bauru airport, impacting the vehicle of Ms. Savi Gisele Marie de Seixas Pinto and William Savi de Seixas Pinto, causing their death. The first was the the wife and mother of complainants and the second, son and brother, respectively. lands to Amounts Committed (*) ThUS$ 7,057 Aerolinhas Brasileiras S.A. Labor Court of Campinas. 0010498- 37.2014.5.15.0095 Lawsuit filed by the National Union of aeronauts, requiring weekly rest payment (DSR) scheduled stopovers, displacement and moral damage. An agreement for ThUS$2,732 was reached with the Union on August 2, 2016. Payment is now being made. TAM Linhas Aéreas S.A. Sao Paulo Labor Court, Sao Paulo 0000009- 45.2016.5.02.090 The Ministry of Labor filed an action seeking that the company adapt the ergonomics and comfort of seats. The case will be closed next month because the Ministry of Labor withdrew its complaint. 16.365 15,917 - In order to deal with any financial obligations arising from legal proceedings in effect at December 31, 2016, whether civil, tax, or labor, LATAM Airlines Group S.A. and Subsidiaries, has made provisions, which are included in Other non-current provisions that are disclosed in Note 21. - The Company has not disclosed the individual probability of success for each contingency in order to not negatively affect its outcome. (*) The Company has reported the amounts involved only for the lawsuits for which a reliable estimation can be made of the financial impacts and of the possibility of any recovery, pursuant to Paragraph 86 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. 210 FINANCIAL STATEMENTS | Financial Statements 112 113 II. Governmental Investigations. 1) On July 25, 2016, LATAM reached agreements with the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”) regarding the investigation of payments for US$1,150,000 by Lan Airlines S.A. in 2006-2007 to a consultant advising it in the resolution of labor matters in Argentina. The purpose of the investigation was to determine whether these payments violated the U.S. Foreign Corrupt Practices Act (“FCPA”) that: (i) forbids bribery of foreign government authorities in order to obtain a commercial advantage; and (ii) requires the companies that must abide by the FCPA to keep appropriate accounting records and implant an adequate internal control system. The FCPA is applicable to LATAM because of its ADR program in effect on the U.S. securities market. After an exhaustive investigation, the DOJ and SEC concluded that there was no violation of the bribery provisions of the FCPA, which is consistent with the results of LATAM’s internal investigation. However, the DOJ and SEC consider that LAN accounted for these payments incorrectly and, consequently, infringed the part of the FCPA requiring companies to keep accurate accounting records. These authorities also consider that LAN’s internal controls in 2006-2007 were weak, so LAN would have also violated the provisions in the FCPA requiring it to maintain an adequate internal control system. The agreements signed, included the following: (a) The agreement with the DOJ involves: (i) entering into a Deferred Prosecution Agreement (“DPA”), which is a public contract under which the DOJ files public charges alleging an infringement of the FCPA accounting regulations. LATAM is not obligated to answer these charges, the DOJ will not pursue them for a period of 3 years, and the DOJ will dismiss the charges after expiration of that 3-year period provided LATAM complies with all terms of the DPA. In exchange, LATAM admitted events described in the DOJ charges for infringement to the FCPA rules on accounting records and agreed to pay the negotiated fine explained below and abide by other terms stipulated in the agreement; (ii) clauses in which LATAM admits that the payments to the consultant in Argentina were incorrectly accounted for and that at the time those payments were made (2006-2007), it did not have adequate internal controls in place; (iii) LATAM’s agreement to have an outside consultant monitor, evaluate and report to the DOJ on the effectiveness of LATAM’s compliance program for a period of 27 months; and LATAM’s agreement to continue evaluating and reporting directly to the DOJ on the effectiveness of its compliance program for a period of 9 months after the consultant’s work concludes; and (iv) paying a fine estimated to total approximately ThUS$ 12,750. (b) The agreement with the SEC involves: (i) accepting a Cease and Desist Order, which is an administrative resolution of the SEC closing the investigation, in which LATAM will accept certain obligations and statements of fact that are described in the document; (ii) accepting the same obligations regarding the consultant mentioned above; and (iii) paying the sum of ThUS$ 6,744, plus interest of ThUS$ 2,694. As at December 31, 2016, a balance of ThUS$ 4,719 was payable to the SEC, as reported in Note 20 - Trade payables and other payables. 2) LATAM Airlines Ecuador was given notice on August 26, 2016 of an investigation of LATAM Airlines Ecuador and two other airlines begun, at its own initiative, by one of the Investigative Departments of the Ecuadoran Market Power Control Commission, limited to alleged signs of conscious parallelism in relation to specific fares on one domestic route in Ecuador from August 2012 to February 2013. The Investigative Department had 180 days (due February 21, 2017) extendable for another 180 days, to resolve on whether to close the investigation or file charges against two or more of the parties involved, only event in which a process will be opened. On February 21, 2017, the period of 180 days was extended for another 180 days requesting additional information. LATAM Airlines Ecuador is cooperating with the authority and has hired a law firm and an economist expert in the subject to advise the company during this process. 3) LATAM received two Information Requests from the Central-North Metropolitan Region Prosecutor’s Office, one on October 25, 2016 and November 11, 2016, requesting information relating to the investigation of payments made by Lan Airlines S.A. to a consultant advising it on the solution to labor matters in Argentina in the years 2006-2007. The information requested in both Requests has been provided. the other on NOTE 32 - COMMITMENTS (a) Loan covenants With respect to various loans signed by the Company for the financing of Boeing 767, 767F, 777F and 787 aircraft, which carry the guarantee of the United States Export–Import Bank, limits have been set on some of the Company’s financial indicators on a consolidated basis. Moreover, and related to these same contracts, restrictions are also in place on the Company’s management in terms of its ownership and disposal of assets. The Company and its subsidiaries do not maintain financial credit contracts with banks in Chile that indicate some limits on financial indicators of the Company or its subsidiaries. On March 30, 2016, LATAM structured a Revolving Credit Facility granted by with aircraft, engines, spare parts and supplies for a total amount available of US$ 325 million, this line includes restrictions minimum liquidity level as the consolidated company and individual level as for companies LATAM Airlines Group S.A. and TAM Linhas Aereas S.A. At December 31, 2016, the Company is in compliance with all indicators detailed above. 211 FINANCIAL STATEMENTS | Financial Statements 114 115 (b) Commitments under operating leases as lessee Details of the main operating leases are as follows: Lessor Aircraft 76B-26329 Inc. Aircraft 76B-27615 Inc. Aircraft 76B-28206 Inc. Aviación Centaurus, A.I.E. Aviación Centaurus, A.I.E. Aviación Real A.I.E. Aviación Real A.I.E. Aviación Tritón A.I.E. Avolon Aerospace AOE 19 Limited Avolon Aerospace AOE 20 Limited Avolon Aerospace AOE 6 Limited Avolon Aerospace AOE 62 Limited AWAS 5125 Trust AWAS 5178 Limited AWAS 5234 Trust Baker & Spice Aviation Limited Bank of America CIT Aerospace International ECAF I 1215 DAC ECAF I 2838 DAC ECAF I 40589 DAC Eden Irish Aircr Leasing M SN 1459 GECAS Sverige Aircraft Leasing Worldwide AB GFL Aircraft Leasing Netherlands B.V. IC Airlease One Limited International Lease Finance Corporation JSA Aircraft 38484, LLC JSA Aircraft 7126, LLC JSA Aircraft 7128, LLC JSA Aircraft 7239, LLC JSA Aircraft 7298, LLC M acquarie Aerospace Finance 5125-2 Trust M acquarie Aerospace Finance 5178 Limited M agix Airlease Limited M ASL Sweden (1) AB M ASL Sweden (2) AB Aircraft Boeing 767 Boeing 767 Boeing 767 Airbus A319 Airbus A321 Airbus A319 Airbus A320 Airbus A319 Airbus A320 Airbus A320 Airbus A320 Boeing 777 Airbus A320 Airbus A320 Airbus A320 Airbus A320 Airbus A321 Airbus A320 Airbus A320 Airbus A320 Boeing 777 Airbus A320 Airbus A320 Airbus A320 Airbus A321 Boeing 767 Boeing 787 Airbus A320 Airbus A321 Airbus A321 Airbus A321 Airbus A320 Airbus A320 Airbus A320 Airbus A320 Airbus A320 As of December 31, 2016 As of December 31, 2015 1 1 1 3 1 1 1 3 1 1 1 1 - - 1 1 2 2 1 1 1 1 1 1 1 - 1 1 1 1 1 1 1 1 - - 1 1 1 3 1 1 1 3 1 1 1 1 1 1 1 1 3 2 1 1 1 1 3 1 - 1 1 - - - - - - 2 1 1 Lessor MASL Sweden (7) AB MASL Sweden (8) AB Merlin Aviation Leasing (Ireland) 18 Limited NBB Cuckoo Co., Ltd NBB Grosbeak Co., Ltd NBB Redstart Co. Ltd NBB-6658 Lease Partnership NBB-6670 Lease Partnership Orix Aviation Systems Limited PAAL Aquila Company Limited PAAL Gemini Company Limited SASOF II (J) Aviation Ireland Limited Shenton Aircraft Leasing Limited SKY HIGH V LEASING COMPANY LIMIT ED Sky High XXIV Leasing Company Limited Sky High XXV Leasing Company Limited SMBC Aviation Capital Limited SMBC Aviation Capital Limited Sunflower Aircraft Leasing Limited T C-CIT Aviation Ireland Limited Volito Aviation August 2007 AB Volito Aviation November 2006 AB Volito November 2006 AB Wells Fargo Bank North National Association Wells Fargo Bank North National Association Wells Fargo Bank Northwest National Association Wells Fargo Bank Northwest National Association Wells Fargo Bank Northwest National Association Wells Fargo Bank Northwest National Association Wells Fargo Bank Northwest National Association Wells Fargo Bank Northwest National Association Wilmington T rust Company T otal Aircraft Airbus A320 Airbus A320 Airbus A320 Airbus A321 Airbus A321 Airbus A321 Airbus A321 Airbus A321 Airbus A320 Airbus A321 Airbus A321 Airbus A319 Airbus A320 Airbus A320 Airbus A320 Airbus A320 Airbus A320 Airbus A321 Airbus A320 Airbus A320 Airbus A320 Airbus A320 Airbus A320 Airbus A319 Airbus A320 Airbus A320 Airbus A330 Boeing 767 Boeing 777 Boeing 787 Airbus A350 Airbus A319 As of December 31, 2016 As of December 31, 2015 - 1 1 1 1 1 1 1 5 2 1 1 1 - 5 2 6 2 - 1 2 2 2 3 2 7 - 3 6 11 2 1 1 1 - 1 1 - 1 1 2 - - 1 1 1 5 2 7 2 2 1 2 2 2 3 2 7 2 3 6 7 - 1 111 106 The rentals are shown in results for the period for which they are incurred. 212 FINANCIAL STATEMENTS | Financial Statements 116 117 The minimum future lease payments not yet payable are the following: At December 31, 2016 the Company has existing letters of credit related to operating leasing as follows: No later than one year Between one and five years Over five years T otal As of As of December 31, December 31, 2016 T hUS$ 533,319 1,459,362 1,262,509 2015 T hUS$ 513,748 1,281,454 858,095 3,255,190 2,653,297 The minimum lease payments charged to income are the following: M inimum operating lease payments Total For the period ended December 31, 2016 ThUS$ 568,979 568,979 2015 ThUS$ 525,134 525,134 In the first quarter of 2015, two Boeing 787-9 aircraft were leased for a period of twelve years each. On the other hand, two Airbus A320-200 aircraft were returned. In the second quarter of 2015, two Airbus A321-200 aircraft and one Boeing 787-9 aircraft were leased for a period of twelve years each. On the other hand, one Airbus A320-200 aircraft and two Airbus A330-200 aircraft were returned. In the third quarter of 2015, five Airbus A321-200 aircraft and one Boeing 787-9 aircraft were leased for a period of twelve years each. On the other hand, one Airbus A330-200 aircraft was returned. In the fourth quarter of 2015, one Airbus A330-200 aircraft was returned. In the first quarter of 2016, two Boeing 787-9 aircraft were leased for a period of twelve years each. On the other hand and one Airbus A320-200 aircraft was returned. In the second quarter of 2016, three Airbus A321-200 aircraft were leased for a period of ten years each and two Boeing 787-9 aircraft were leased for a period of twelve years each. On the other hand, one Airbus A320-200 aircraft and one Boeing 767-300ER aircraft were returned. In the third quarter of 2016, three Airbus A321-200 aircraft and one Airbus A320- NEO aircraft were leased for a period of ten years each, and one Airbus A350-900 aircraft was leased for a period of twelve years. On the other hand and one Airbus A320-200 aircraft was returned. In the fourth quarter of 2016, one Airbus A350-900 aircraft was leased for a period of twelve years and one Airbus A321-200 aircraft was leased for a period of ten years. On the other hand, three Airbus A320-200 aircraft and two Airbus A330-200 aircraft were returned. The operating lease agreements signed by the Company and its subsidiaries state that maintenance of the aircraft should be done according to the manufacturer’s technical instructions and within the margins agreed in the leasing agreements, a cost that must be assumed by the lessee. The lessee should also contract insurance for each aircraft to cover associated risks and the amounts of these assets. Regarding rental payments, these are unrestricted and may not be netted against other accounts receivable or payable between the lessor and lessee. Creditor Guarantee Debtor T ype GE Capital Aviation Services Limited Wells Fargo Bank North N.A. Bank of America Engine Lease Finance Corporation GE Capital Aviation Services Ltd. International Lease Finance Corp ORIX Aviation Systems Limited SMBC Aviation Capital Ltd. Wells Fargo Bank CIT Aerospace International RBS Aerospace Limited Wells Fargo Bank North N.A. Lan Cargo S.A. Lan Cargo S.A. LAT AM Airlines Group S.A. LAT AM Airlines Group S.A. LAT AM Airlines Group S.A. LAT AM Airlines Group S.A. LAT AM Airlines Group S.A. LAT AM Airlines Group S.A. LAT AM Airlines Group S.A. T am Linhas Aéreas S.A. T am Linhas Aéreas S.A. T am Linhas Aéreas S.A. T wo letter of credit One letter of credit T hree letter of credit One letter of credit Eight letter of credit T hree letter of credit One letter of credit T wo letter of credit Nine letter of credit One letter of credit One letter of credit One letter of credit Value T hUS$ 7,530 5,000 1,044 4,750 34,665 1,450 3,255 13,569 15,160 6,000 13,096 5,500 111,019 Release date Sep 17, 2017 May 25, 2017 Jul 2, 2017 Oct 8, 2017 Feb 7, 2017 Feb 4, 2017 Aug 31, 2017 Aug 14, 2017 Feb 8, 2017 Oct 25, 2017 Jan 29, 2017 Jul 14, 2017 (c) Other commitments At December 31, 2016 the Company has existing letters of credit, certificates of deposits and warranty insurance policies as follows: Cre d ito r Gu a ra n te e De b to r Typ e Va lu e Th US $ Re le a s e d a te S e rvic io Na c io n a l d e Ad u a n a d e l Ec u a d o r Lín e a s Aé re a s Na c io n a le s d e l Ec u a d o r S .A. Fo u r le tte r o f c re d it 1,7 0 5 Au g 5 , 2 0 17 Co rp o ra c ió n P e ru a n a d e Ae ro p u e rto s y Avia c ió n Co me rc ia l Lima Airp o rt P a rtn e rs S .R.L. S u p e rin te n d e n c ia Na c io n a l d e Ad u a n a s y d e Ad min is tra c ió n Trib u ta ria Ae n a Ae ro p u e rto s S .A. Ame ric a n Alte rn a tive In s u ra n c e Co rp o ra tio n De u ts c h e Ba n k A.G. Dire c c ió n Ge n e ra l d e Ae ro n á u tic a Civil Emp re s a P ú b lic a d e Hid ro c a rb u ro s d e l Ec u a d o r EP P e tro e c u a d o r J P Mo rg a n Ch a s e Me tro p o lita n Da d e Co u n ty Th e Ro ya l Ba n k o f S c o tla n d p lc 4 ª Va ra Mis ta d e Ba ye u x 6 ª Va ra Fe d e ra l d a S u b s e ç ã o 8 ª Va ra Fe d e ra l d a S u b s e ç ã o d e Ca mp in a s S P Co n s e lh o Ad min is tra tivo d e Co n s e lh o s La n P e rú S .A. La n P e rú S .A. S ix le tte r o f c re d it Twe n ty two le tte r o f c re d it 3 ,8 13 3 ,8 0 5 J a n 3 1, 2 0 17 Ma r 3 , 2 0 17 La n P e rú S .A. LATAM Airlin e s Gro u p S .A. Fo u r le tte r o f c re d it Fo u r le tte r o f c re d it LATAM Airlin e s Gro u p S .A. LATAM Airlin e s Gro u p S .A. LATAM Airlin e s Gro u p S .A. S ix le tte r o f c re d it On e le tte r o f c re d it Fifty two le tte r o f c re d it LATAM Airlin e s Gro u p S .A. LATAM Airlin e s Gro u p S .A. LATAM Airlin e s Gro u p S .A. LATAM Airlin e s Gro u p S .A. Ta m Lin h a s Aé re a s S .A. Ta m Lin h a s Aé re a s S .A. On e le tte r o f c re d it On e le tte r o f c re d it Te n le tte r o f c re d it On e le tte r o f c re d it On e in s u ra n c e p o lic ie s g u a ra n te e Two in s u ra n c e p o lic ie s g u a ra n te e 3 3 ,5 0 0 2 ,0 14 3 ,4 9 0 3 0 ,0 0 0 18 ,4 7 7 5 ,5 0 0 10 ,0 0 0 2 ,5 5 3 5 ,0 0 0 1,0 6 0 2 4 ,9 6 9 Ma r 2 0 , 2 0 17 No v 15 , 2 0 17 Ap r 5 , 2 0 17 Ma r 3 1, 2 0 17 J a n 3 1, 2 0 17 J u n 17 , 2 0 17 J u n 17 , 2 0 17 Ma r 13 , 2 0 17 Ma y 2 0 , 2 0 17 Ma r 2 5 , 2 0 2 1 J a n 4 , 2 0 18 Ta m Lin h a s Aé re a s S .A. On e in s u ra n c e p o lic ie s g u a ra n te e 12 ,8 9 4 Ma y 19 , 2 0 2 0 Fe d e ra is Ta m Lin h a s Aé re a s S .A. On e in s u ra n c e p o lic ie s g u a ra n te e 6 ,7 0 4 Oc t 2 0 , 2 0 2 1 Fu n d a ç ã o d e P ro te ã o d e De fe s a d o Co n s u mid o r P ro c o n Un iã o Fe d e ra l Va ra Co ma rc a d e DF Un iã o Fe d e ra l Va ra Co ma rc a d e S P Ta m Lin h a s Aé re a s S .A. Ta m Lin h a s Aé re a s S .A. Ta m Lin h a s Aé re a s S .A. Two in s u ra n c e p o lic ie s g u a ra n te e Two in s u ra n c e p o lic ie s g u a ra n te e On e in s u ra n c e p o lic ie s g u a ra n te e 3 ,2 7 6 2 ,6 9 6 19 ,5 5 7 19 1,0 13 J a n 2 1, 2 0 2 1 No v 9 , 2 0 2 0 Fe b 2 2 , 2 0 2 1 213 FINANCIAL STATEMENTS | Financial Statements 118 NOTE 33 - TRANSACTIONS WITH RELATED PARTIES (a) Details of transactions with related parties as follows: T ax No. Related party 96.810.370-9 Inversiones Costa Verde Ltda. y CPA. 65.216.000-K Comunidad Mujer Nature of relationship with related parties Country of origin Nature of related parties transactions Related director Related director Chile Chile T ickets sales Services provided for advertising T ickets sales Currency CLP CLP CLP 78.591.370-1 Bethia S.A and subsidiaries Related director Chile Services received of cargo transport Services received from National and International CLP 65.216.000-K Viajes Falabella Ltda. Related director 79.773.440-3 T ransportes San Felipe S.A Related director Chile Chile Courier Services provided of cargo transport Sales commissions Services received of transfer of passengers T ickets sales 87.752.000-5 Granja Marina T ornagaleones Common shareholder Chile T ickets sales Foreign Consultoría Administrativa Profesional S.A. de C.V. Associate Mexico Professional counseling services received Foreign Inversora Aeronáutica Argentina Related director Argentina Foreign T AM Aviação Executiva e T axi Aéreo S/A Related director Brazil Leases as lessor Revenue billboard advertising maintaining Services provided by sale of tickets Services proviived of cargo transport Services received at airports CLP CLP CLP CLP CLP CLP MXN ARS US$ BRL BRL BRL T ransaction amount with related parties As of December 31, 2016 2015 T hUS$ T hUS$ 6 (12) 9 (394) (285) 192 (727) (84) 3 76 15 (10) 2 (259) (227) 30 (50) (127) 7 117 (2,563) (1,191) (264) - 2 (122) 7 (269) 1 2 (63) 5 214 FINANCIAL STATEMENTS | Financial Statements 119 120 The balances of Accounts receivable and accounts payable to related parties are disclosed in Note 9. Transactions between related parties have been carried out on free-trade conditions between interested and duly-informed parties. (b) Compensation of key management The Company has defined for these purposes that key management personnel are the executives who define the Company’s policies and major guidelines and who directly affect the results of the business, considering the levels of Vice-Presidents, Chief Executives and Directors (Senior). For the period ended December 31, 2016 ThUS$ 2015 ThUS$ 16,514 17,185 556 778 23,459 8,085 49,392 547 864 19,814 10,811 49,221 Remuneration M anagement fees Non-monetary benefits Short-term benefits Share-based payments Total NOTE 34 - SHARE-BASED PAYMENTS (a) Compensation plan for increase of capital Compensation plans implemented by providing options for the subscription and payment of shares that have been granted by LATAM Airlines Group S.A. to employees of the Company and its subsidiaries, are recognized in the financial statements in accordance with the provisions of IFRS 2 "Share-based Payment”, showing the effect of the fair value of the options granted under compensation in linear between the date of grant of such options and the date on which these irrevocable. (a.1) Compensation plan 2011 On December 21, 2016, the subscription and payment period of the 4,800,000 shares corresponding to the compensation plan approved at the Extraordinary Shareholders' Meeting held on December 21, 2011, expired. Of the total shares allocated to the 2011 Compensation Plan, only 10,282 shares were subscribed and paid, having been placed on the market in January 2014. In view of the above, at the expiration date, the 2011 Compensation Plan had a balance of 4,789,718 shares pending of subscription and payment, which was deducted from the authorized capital of the Company. Share options in agreements of share- based payments, as of January 1, 2015 Share options granted Share options cancelled Share options in agreements of share- based payments, as of December 31, 2015 Share options in agreements of share- based payments, as of January 1, 2016 Executives resinged options (*) Share options expired Share options in agreements of share- based payments, as of December 31, 2016 Number of share options 4,202,000 406,000 (90,000) 4,518,000 4,518,000 (4,172,000) (346,000) - These options was valued and recorded at fair value at the grant date, determined by the "Black- Scholes-Merton”. The effect on income to December 2016 corresponds to ThUS$ 2,989 (ThUS$ 10,811 at December 31, 2015). (a.2) Compensation plan 2013 At the Extraordinary Shareholders’ Meeting held on June 11, 2013, the Company’s shareholders approved motions including increasing corporate equity, of which 1,500,000 shares were allocated to compensation plans for employees of the Company and its subsidiaries, in conformity with the stipulations established in Article 24 of the Corporations Law. With regard to this compensation, a defined date for implementation does not exist. (b) Compensation plan 2016-2018 The company implemented a retention plan long-term for executives, which lasts until December 2018, with a vesting period between October 2018 and March 2019, which consists of an extraordinary bonus whose calculation formula is based on the variation the value to experience the action of LATAM Airlines Group S.A. for a period of time. This benefit is recognized in accordance with the provisions of IFRS 2 "Share-based Payments" and has been considered as cash settled award and therefore recorded at fair value as a liability, which is updated to the closing date of each financial statement with effect on profit or loss. Units bases, balance at December 31, 2016 Unit bases granted 4,719,720 215 FINANCIAL STATEMENTS | Financial Statements 121 122 The fair value has been determined on the basis of the best estimate of the future value of the Company share multiplied by the number of units granted bases. At December 31, 2016, the carrying amount of ThUS$ 4,442, is classified under "Administrative expenses" in the Consolidated Statement of Income by Function. (c) Subsidiaries compensation plans (c.1) Stock Options TAM Linhas Aereas S.A. and Multiplus S.A., both subsidiaries of TAM S.A., have outstanding stock options at December 31, 2016, which amounted to 96,675 shares and 394,698 shares, respectively (at December 31, 2015, the distribution of outstanding stock options amounted to 394,698 for Multiplus S.A. and 96,675 shares TAM Linhas Aéreas S.A.). T AM Linhas Aéreas S.A. Description 05-28-2010 T otal Outstanding option number as December 31, 2015 Outstanding option number as December 31, 2016 96,675 96,675 96,675 96,675 4th Grant Multiplus S.A. 3rd Grant 4th Grant 4nd Extraordinary Grant Description 03-21-2012 04-03-2013 11-20-2013 T otal Outstanding option number as December 31, 2015 102,621 Outstanding option number as December 31, 2016 84,249 255,995 173,399 159,891 518,507 137,050 394,698 The Options of TAM Linhas Aéreas S.A., under the plan's terms, are divided into three equal parts and employees can run a third of its options after three, four and five years respectively, as long as they remain employees of the company. The agreed term of the options is seven years. For Multiplus S.A., the plan's terms provide that the options granted to the usual prizes are divided into three equal parts and employees may exercise one-third of their two, three and four, options respectively, as long as they keep being employees of the company. The agreed term of the options is seven years after the grant of the option. The first extraordinary granting was divided into two equal parts, and only half of the options may be exercised after three years and half after four years. The second extraordinary granting was also divided into two equal parts, which may be exercised after one and two years respectively. Both companies have an option that contains a "service condition" in which the exercise of options depends exclusively on the delivery services by employees during a predetermined period. Terminated employees will be required to meet certain preconditions in order to maintain their right to the options. The acquisition of the share's rights, in both companies is as follows: Number of shares Accrued options Number of shares Non accrued options Company As of December 31, 2016 As of December 31, 2015 As of December 31, 2016 As of December 31, 2015 T AM Linhas Aéreas S.A. Multiplus S.A. - - - - 96,675 394,698 96,675 518,507 In accordance with IFRS 2 - Share-based payments, the fair value of the option must be recalculated and recorded as a liability of the Company once payment is made in cash (cash-settled). The fair value of these options was calculated using the “Black-Scholes-Merton” method, where the cases were updated with information LATAM Airlines Group S.A. There is no value recorded in liabilities and in income at December 31, 2016 (at December 31, 2015 not exist value recorded in liabilities and in incomes). (c.2) Payments based on restricted stock In May of 2014 the Management Council of Multiplus S.A. approved a plan to grant restricted stock, a total of 91,103 ordinary, registered book entry securities with no face value, issued by the Company to beneficiaries. The quantity of restricted stock units was calculated based on employees’ expected remunerations divided by the average price of shares in Multiplus S.A. traded on the BM&F Bovespa exchange in the month prior to issue, April of 2014. This benefits plan will only grant beneficiaries the right to the restricted stock when the following conditions have been met: Compliance with the performance goal defined by this Council as return on Capital a. Invested. The Beneficiary must remain as an administrator or employee of the Company for the b. period running from the date of issue to the following dates described, in order to obtain rights over the following fractions: (i) 1/3 (one third) after the 2nd year from the issue date; (ii) 1/3 (one third) after the 3rd year from the issue date; (iii) 1/3 (one third) after the 4th year from the issue date. 216 FINANCIAL STATEMENTS | Financial Statements 123 124 Number shares in circulation (c) Dividends: Opening balance Granted Exercised Not acquired due to breach of employment retention conditions Closing balance From January 1 to December 31, 2015 91,103 119,731 - (34,924) 175,910 From January 1 to December 31, 2016 175,910 138,282 (15,811) (60,525) 237,856 NOTE 35 - STATEMENT OF CASH FLOWS The Company has done significant non-cash transactions mainly with financial leases, (a) which are detailed in Note 17 letter (d), additional information in numeral (iv) Financial leases. (b) Other inflows (outflows) of cash: For the periods ended December 31, Guarantees Fuel hedge Currency hedge Court deposits Change reservation systems DOJ fine T ax paid on bank transaction Fuel derivatives premiums SEC agreement Bank commissions, taxes paid and other Hedging margin guarantees Others 2016 T hUS$ (51,559) (50,029) (39,534) (33,635) - (12,750) (10,668) (6,840) (4,719) (769) 1,184 50 T otal Other inflows (outflows) Operation flow (209,269) Recovery loans convertible into shares Certificate of bank deposits T ax paid on bank transaction Others 8,896 - (3,716) (4,337) 2015 T hUS$ (2,125) (243,587) 1,802 (6,314) 11,000 - (7,176) (20,932) - (5,137) 87,842 - (184,627) 20,000 3,497 (12,921) - T otal Other inflows (outflows) Investment flow 843 10,576 Aircraft Financing advances Loan guarantee Settlement of derivative contracts Credit card loan manager Early redemption of bonds T AM 2020 Guarantees bonds emission Others T otal Other inflows (outflows) Financing flow (125,149) (74,186) (29,828) - - - - (229,163) (28,144) - (35,891) 3,227 (15,328) (26,111) 2,490 (99,757) For the periods ended December 31, 2016 ThUS$ (40,823) (400) (41,223) 2015 ThUS$ (34,632) (400) (35,032) M ultiplus S.A Lan Perú S.A Total dividends paid (*) (*) Dividends paid to minority shareholders NOTE 36 - THE ENVIRONMENT LATAM Airlines Group S.A. manages environmental issues at the corporate level, centralized in Environmental Management. There is a commitment to the highest level to monitor the company and minimize their impact on the environment, where continuous improvement and contribute to the solution of global climate change problems, generating added value to the company and the region, are the pillars of his administration. One function of Environmental Management, in conjunction with the various areas of the Company, is to ensure environmental compliance, implementing a management system and environmental programs that meet the increasingly demanding requirements globally; well as continuous improvement programs in their internal processes that generate environmental and economic benefits and to join the currently completed. The Environment Strategy LATAM Airlines Group S.A. is called Climate Change Strategy and it is based on the aim of being a world leader in Climate Change and Eco-efficiency, which is implemented under the following pillars: i. Carbon Footprint ii. Eco-Efficiency iii. Sustainable Alternative Energy iv. Standards and Certifications For 2016, were established the following topics: 1. Advance in the implementation of an Environmental Management System; 2. Manage the Carbon Footprint of our emissions by ground operations; 3. Corporate Risk Management; 4. Corporate strategy to meet the global target of aviation to have a carbon neutral growth by 2020. Thus, during 2016, we have worked in the following initiatives: - Advance in the implementation of an Environmental Management System for main operations of the Company, with an emphasis on Santiago. It is highlighted that the company during 2016 has recertified a certified management system, under ISO 14.001 at its facility in Miami. 217 125 - Certification of stage 2 of IATA Environmental Assestment (IEnvA), the most advanced of - this certification, been the third airline in the world to achieve this certification. Preparation of the environmental chapter for reporting sustainability of the Company, to measure progress on environmental issues. - Answer to the Dow Jones Sustainability Index 2016 questionnaire, which the company responds annually. - Measurement and external verification of the Corporate Carbon Footprint. It is highlighted that in the 2016 LATAM Airlines Group maintained its selection in the index Dow Jones Sustainability in the global category, being the only two airlines that belong to this select group. NOTE 37 - EVENTS SUBSEQUENT TO THE DATE OF THE FINANCIAL STATEMENTS On January 18, 2017, the Company was notified of a civil suit filed by Inversiones Ranco Tres S.A., represented by Mr. Jorge Enrique Said Yarur against LATAM Airlines Group S.A., for supposed non-compliance of contractual obligations from the social contract of the Company, as well as the directors Ramón Eblen Kadiz, Jorge Awad Mehech, Juan Jose Cueto Plaza and main executives of the Company, Enrique Cueto Plaza and Ignacio Cueto Plaza, for the supposed noncompliance of their duties as directors and main executives of the Company. LATAM has hired specialist lawyers to answer the lawsuit. On March 10, 2017, the Court rejected the dilatory exceptions presented by LATAM. On March 8th, 2017, LATAM received a third Requirement of Information from the Central-North Metropolitan Region Prosecutor’s Office requesting information relating to the investigation of payments made by Lan Airlines S.A. to a consultant advising it on the solution to labor matters in Argentina in the years 2006-2007. Subsequent at December 31, 2016 until the date of issuance of these financial statements, there is no knowledge of financial facts or otherwise, that could significantly affect the balances or interpretation thereof. LATAM Airlines Group S.A. and Subsidiaries’ consolidated financial statements as at December 31, 2016, have been approved by the Board of Director’s in an extraordinary meeting held on March 15, 2017. FINANCIAL STATEMENTS | Financial Statements 218 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Filiales y Coligadas LATAM AIRLINES GROUP S.A Name: LATAM Airlines Group S.A., R.U.T. 89.862.200-2 of January 14, 2012. The effective date of the change of name was June 22, 2012. Legal incorporation: It is legally incorporated as a limited liability company, by virtue of public deed dated December 30, 1983, executed at the Notary Public’s Office of Eduardo Avello Arellano, having registered an abstract of it in the Santiago Register of Commerce on sheet 20,341 number 11,248 of the year 1983 and published in the Official Ga- zette of December 31, 1983. By public deed dated August 20, 1985, executed at the No- tary Public’s Office of Miguel Garay Figueroa, the company was transformed into a stock company (corporation), under the name of Línea Aérea Nacional Chile S.A. (nowadays, LATAM Airlines Group S.A.); which, by express provision of Law N°18,400, is the legal continuation of the public state company created in the year 1929 under the name of Línea Aérea Nacional de Chile, with respect to aeronautic con- cessions and radio communications, traffic rights and other administrative concessions. The Extraordinary Shareholders’ Meeting of Lan Chile S.A. held on July 23, 2004 agreed to change the company’s name to “Lan Airlines S.A.” An abstract of the public deed with the abridged Minutes of such Meeting was registered in the Register of Commerce of the Registrar of Lands on sheet 25,128, number 18,764 corresponding to the year 2004 and that was published in the Official Gazette of Au- gust 21, 2004. The effective date of the change of name was September 8, 2004. LATAM Airlines Group S.A. is governed by the regulations applicable to open stock companies, for which purposes it is registered under Nº 0306 of January 22, 1987 in the Se- curities Register of the Superintendence for Securities and Insurance Companies. Note: The financial statements of the subsidiaries are shown in this report in a summarized manner. The complete infor- mation is available to the public in our offices and at the Su- perintendence for Securities and Insurance Companies. TAM S.A. Y FILIALES Legal incorporation: Stock company incorporated in Brazil in Mayo of the year 1997. Object: To participate as shareholder in other companies, especially in companies that develop scheduled air transport services domestically and internationally and in other related ac- tivities either related or complementary to scheduled air transport services. Subscribed and paid capital: MUS$ 2,304,021 Year’s income: MUS$ 43,925 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 3.01% The Extraordinary Shareholders’ Meeting of Lan Airlines S.A. of December 21, 2011 agreed to change the com- pany name to “LATAM Airlines Group S.A.” An abstract of the public deed with the abridged Minutes of such Meeting was registered in the Register of Commerce of the Regis- trar of Lands on sheet 4,238 NUBER 2,921 corresponding to the year 2012 and was published in the Official Gazette Chairman of the board: Claudia Sender Ramirez Board members: Ruy Antonio Mendes Amparo Federico Herman Germani 219 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies TAM S.A.’s subsidiary companies ► TAM Linhas Aereas S.A. and subsidiaries ► ABSA: Aerolinhas Brasileiras S.A. and subsidiary ► Multiplus S.A. Identification: Stock company incorporated in Brazil. Identification: Stock company incorporated in Brazil Identification: Stock company incorporated in Brazil. Object: (a) development of scheduled air transport passen- gers services, cargo or mailbags, in accordance to the legis- lation in force; (b) development of complementary activities of air transport services for passengers, cargo and mailbags; (c) provision of maintenance services, aircraft repair, of own or third parties, engines, spare parts and pieces; (d) provision of hangarage (hangar space) for aircraft; (e) provision of patio and runway services, flight attendant services and cleaning of aircraft; (f) provision of engineering services, technical assis- tance and other activities related to the aeronautic industry; (g) conducting of education and training related to aeronauti- cal activities; (h) analysis and development of programs and systems; (i) the purchase and sale of parts, accessories and aircraft equipment; (j) development and implementation of other connected or complementary activities related to air transport, in addition to those expressly listed above; (k) im- port and export of finished lubricating oil; and (l) development of correspondent banking services. Subscribed and paid capital: MUS$ 1.839.233 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.49377% Chairman of the board: Cláudia Sender Ramirez Board members: Ruy Antonio Mendes Amparo Daniel Levy Object: (a) development of scheduled air transport services of passengers, cargo or postal bags, domestic or international, according to the legislation in force; (b) development of ancil- lary air transport activities, such as attendance, cleaning and towing of aircraft, cargo monitoring, flight dispatch, check-in and check-out, and other services contemplated in its own bylaws; (c) leasing and operating aircraft and chartering; (d) development of maintenance services and marketing of spare parts, aircraft parts and equipment; and (e) development and implementation of other connected or complementary ac- tivities related to air transport, in addition to those expressly listed above. Object: i. development and management of customer loyalty programs according related to the consumption of goods and services offered by the partners of the company; ii. the mar- keting of rights of redemption of awards under the customer loyalty program; iii. the creation of databases of individuals and legal entities; iv. the obtaining and processing of transac- tional information relating to consumption habits; v. the repre- sentation of other companies Brazilian or foreign companies; and vi. providing ancillary services to the trading of goods and products, including, but not limited to, imports and exports, in addition to the acquisition of items and related products, directly and indirectly, resulting from the activities described above. Subscribed and paid capital: MUS$ 62,752 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.15770% Chairman of the board: Luis Quintiliano Board members: Dario Matsuguma Daniel Levy Subscribed and paid capital: MUS$ 32,923 2016 Shareholding: 72.40% Year-to-year variation: 0.00% % over parent company’s assets: 1.11628% Chairman of the board: Roberto José Maris DE Medeiros Board members: Ronald Domingues Ricardo Gazetta Ricardo Birtel Mendes de Freitas 220 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies ► Transportes Aereos del Mercosur S.A. ► Corsair Participações Ltda Identification: Stock company incorporated in Paraguay Identification: Stock company incorporated in Brazil. Object: It has a broad business object that includes aeronau- tic, commercial, touristic, service, financing, representation and investment activities with an emphasis on scheduled and non-scheduled airline transportation services, domestic and international of persons, things and/or correspondence, among others, commercial and for delivering maintenance services and technical assistance for all types of aircraft, equipment, accessories and air navigation materials, among others. Subscribed and paid capital: MUS$ 17.251 2016 Shareholding: 94.98% Year-to-year variation: 0.00% % over parent company’s assets: 0.12835% Chairman of the board Gustavo Lopegui Board members Enrique Alcaide Hidalgo Darío Maciel Martínez Hernán Pablo Morosuk (Interim) Management: Enrique Alcaide Hidalgo Esteban Burt Artaza Hernan Pablo Morosuk Gabriela Terrazas Domaniczky Maria Emiliana Duarte León General manager Rosario Altgelt Object: (i) participating in other civil or commercial compa- nies, as shareholder or stockholder; and (ii) managing its own assets. Subscribed and paid capital: MUS$ 59 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.00135% Chairman of the board: Ruy Antonio Mendes Amparo Board members: Euzébio Angelotti Neto ► TP Franchising Limited Identification: Limited liability company incorporated in Bra- zil. Object: (a) the granting of franchises; (b) temporary assign- ments, free of charge or for valuable consideration, to its franchisees, of rights to use trademarks, systems, knowledge, methods, patents, technology and any other rights, interests or property, movable or immovable, tangible or intangible, of our company, that either is or will be a licensee, related to the development, execution, operation or management of the franchises to be granted; (c) the development of any activities necessary to ensure, as far as possible, the maintenance and continuous improvement of the standards of operation of its franchise network; (d) the development of models of execu- tion, operation and management of the network of franchises and its transmission to the franchisees; and (e) the distribu- tion, sale and marketing of airline tickets and related products, as well as of any related business or accessories toward its main objective, entitled to participate in other companies as a partner or shareholder, in Brazil or abroad, or in consortia, as well as undertaking its own projects, or join the projects of third parties, including those for the purpose of benefiting of tax incentives, in accordance with the legislation in force. Subscribed and paid capital: MUS$ 9 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.00478% Management: Cláudia Sender Ramirez Marcelo Eduardo Guzzi Dezem Daniel Levy ► TAM Capital Inc Identification: Stock company incorporated in Brazil. Object: The company is entitled to exercise any activity not contrary to the law. Subscribed and paid capital: MUS$ 133,139 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.0% Board members: José Zaidan Maluf, Bruno Macarenco Aléssio Euzébio Angelotti Neto 221 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies ► TAM Capital 2 Inc. LAN CARGO S.A AND SUBSIDIARIES Identification: Stock company incorporated in Brazil. Object: The company is entitled to exercise any activity not contrary to the law. Subscribed and paid capital: MUS$ 94,614 2016 Shareholding 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.0% Board members: José Zaidan Maluf, Bruno Macarenco Aléssio Euzébio Angelotti Neto ► TAM Capital 3 Inc. Identification: Stock company incorporated in Brazil. Object: The company is entitled to exercise any activity not contrary to the law. Subscribed and paid capital: MUS$ 213,734 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.96502% Board members: José Zaidan Maluf, Bruno Macarenco Aléssio Euzébio Angelotti Neto Legal incorporation: Incorporated as a closely-held stock company by virtue of public deed dated May 22, 1970, ex- ecuted before the Notary Public’s Office of Sergio Rodríguez Garcés; a legal incorporation that was materialized with the contribution of assets and liabilities of the company Línea Aérea del Cobre Limitada (Ladeco Limitada), in turn incorpo- rated on September 3, 1958 at the Public Notary’s Office of Jaime García Palazuelos. The company has experienced sever- al forms, the last of which is recorded in the public deed dated November 20, 1998, whose abstract was registered on sheet 30,091 number 24,117 of the Santiago Register of Commerce and published in the Official Gazette of December 3, 1998, by virtue of which Ladeco S.A. was merged by incorporation into the Lan Chile S.A. subsidiary denominated Fast Air Carrier S.A. Via public deed dated October 22, 2001 with the abridgement of the minutes of the Extraordinary Shareholders’ Meeting of Ladeco S.A. of such same date, the business name was changed to “Lan Chile Cargo S.A.” An abstract of such pub- lic deed was registered in the Register of Commerce of the Santiago Registrar of Lands on sheet 27,746 number 22,624 corresponding to the year 2001 and was published in the Of- ficial Gazette of November 5, 2001. The name change became effective on December 10, 2001. By virtue of the public deed August 23, 2004, into which were abridged the minutes of the Extraordinary Sharehold- ers’ Meeting of Lan Chile Cargo S.A. of August 17, 2004, the company’s business name was changed to “Lan Cargo S.A.” An abstract of such public deed was registered in the Register of Commerce of the Santiago Registrar of Lands on sheet 26.994 number 20.082 corresponding to the year 2004 and was pub- lished in the Official Gazette August 30, 2004. Object: To carry out and develop, either on its own or with third parties: the transport, in general and in any of its forms and, particularly, the air transport of passengers, cargo and cor- respondence, inside and outside the country; tourist and ho- tel industry activities and activities complementary to them, in any of their forms, inside and outside of the country; the purchase, sale, manufacture and/or integration, maintenance, lease or any other form of usufruct, either on its own or with third parties, of aircraft, aeronautic spare parts and equip- ment, and their development in any capacity whatsoever; to provide all kinds of services and consulting services related to transportation in general and, particularly, to air transport in any of its forms, whether of land support, maintenance, technical advisory or of another kind, inside and outside of the country, and all kinds of activities and services related to the tourist and hotel industry and other above-referred goods and services, inside and outside of the country. In compliance with the preceding objectives, the company may materialize investments or participate as partner in other companies, ei- ther acquiring shares or rights or interests in any other type of association, be that in existing ones or in those to be created in the future and, in general, to execute all acts and subscribe all contracts necessary and pertinent toward attaining the in- dicated objectives. Subscribed and paid capital: MUS$ 83,226 Year’s income: MUS$ (7,705) 2016 Shareholding: 99.898% Year-to-year variation: 0.00% % over parent company’s assets: 1.90% Board members: Juan José Cueto Plaza (Board Member LATAM) Cristián Ureta Larraín (Managers LATAM) Ignacio Cueto Plaza (Managers LATAM) Enrique Cueto Plaza (Managers LATAM) Ramiro Alfonsín Balza (Managers LATAM) General manager: Alvaro Carril Muñoz 222 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Subsidiary companies of Lan Cargo S.A ► Laser Cargo S.R.L. Identification: Limited liability company incorporated in Ar- gentina. Object: To provide, on its own or with third parties, services as agent of air and sea cargo, operate air and sea containers, control the loading and unloading of conventional aircraft, freight, conventional ships and container ships, consolida- tion and deconsolidation, operations and contracts with transportation companies, of distribution and promotion of air cargo, sea, river and land and related activities and ser- vices, imports and exports: such operations are to be car- ried out in the manner stipulated by the laws of the country and the regulations governing these professions and activi- ties, the customs provisions and regulations of Argentina’s Naval Prefecture (PNA), Argentina’s Air Force, as well as by entrusting third parties to carry out tasks assigned by the current legislation to freight forwarders; also, the deposit and transport by its own account and/or via third parties of fruit, products, basic products, merchandise in general and all type of documentation: the packing of goods or merchandise in general, on its own account and/or via third parties. In the performance of these functions, the company may register as maritime agent, air, importer and exporter, contractor and maritime and air supplier before the competent authorities. At the same time, it will develop postal activities aimed at the admission, classification, transportation, distribution and delivery of correspondence, letters, portals, parcel posts up to 50 kilograms all of it within the Republic of Argentina and to/from overseas destinations. This activity includes those developed by de so-called couriers or courier companies and any other assimilated or assimilable activities pursuant to Art. 4 of Executive Decree 1187/93. The company shall be also entitled to develop the logistics process consisting in the transfer, storage, assembly, fractioning, packing, preparation of merchandise in general for its subsequent transportation and distribution to the end customer jointly with the manag- ing of the information pertinent to the compliance with this objective; namely, from the logistics process of intaking raw materials from suppliers up to the delivery of the finished products to clients, including the regulation of information to guarantee the efficiency of this process. Board members: Juan José Cueto Plaza (Board Member LATAM) Ramiro Alfonsín Balza (Managers LATAM) Andrés del Valle Eitel (Managers LATAM) Enrique Elsaca Hirmas (Managers LATAM) Subscribed and paid capital: MUS$ 68 2016 Shareholding: 99.99% Year-to-year variation: 0.00% % over parent company’s assets: 0.0000% General manager: Javier Cáceres Celia Board members: Esteban Bojanich Management: Esteban Bojanich, Rosario Altgelt María Marta Forcada, Facundo Rocha Gonzalo Perez Corral Nicolás Obejero Norberto Díaz ► Fast Air Almacenes de Carga S.A. Identification: Stock company incorporated in Chile. ► Prime Airport Services Inc. and subsidiary Identification: Stock Company (corporation) legally incorpo- rated in the United States of America. Object: To carry out and develop the operation or manage- ment of stores or customs deposit facilities, in which to store any good or merchandise up until their they are picked up, for import, export or other custom destination, pursuant to the terms and conditions set forth in the Customs Ordinance, its regulations and other pertinent norms. Subscribed and paid capital: MUS$ 2 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.00000% Object: To carry out and develop the operation or manage- ment of stores or customs deposit facilities, in which to store any good or merchandise up until their they are picked up, for import, export or other custom destination, pursuant to the terms and conditions set forth in the Customs Ordinance, its regulations and other pertinent norms. Board members: Carlos Larraín General manager: Rene Pascua Subscribed and paid capital: MUS$ 6.741 2016 Shareholding: 99.89% Year-to-year variation: 0.00% % over parent company’s assets: 0.03322% 223 ► Lan Cargo Overseas Limited and subsidiaries Identification: Limited Liability Company incorporated in Ba- hamas. Object: To participate in any act or activity not expressly pro- hibited by any law currently in effect in The Bahamas. Subscribed and paid capital: MUS$ 1,183 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.08198% Board members: Andres del Valle Eitel (Managers LATAM) Cristian Toro (Managers LATAM) Management: Andres del Valle Eitel (Managers LATAM) Cristian Toro (Managers LATAM ► Transporte Aéreo S.A. Identification: Stock company incorporated in Chile. Object: To participate in any act or activity not expressly pro- hibited by any law currently in effect in The Bahamas. Board members: Esteban Bojanich Management: Esteban Bojanich FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Management: Ramiro Alfonsín Balza Roberto Alvo Milosawlewitsch Enrique Elsaca Hirmas participation in all kinds of investments, both in Chile as well as abroad, on subject matters directly or indirectly related to aeronautic affairs and/or to any of its other business objec- tives; and, e) the development and operation of any activity derived from the business objective and/or linked, connected, coadjuvating or complementary to the same. ► Consorcio Fast Air Almacenes de Carga S.A. - Laser Cargo S.R.L. Identification: Temporary union of companies legally incor- porated in Argentina. Subscribed and paid capital: MUS$ 125 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.00000% Object: To submit a bid before the National and International Bidding Contest N° 11/2000, aimed at awarding a Use Permit toward the installation and operation of a Fiscal Deposit Area at the Rosario International Airport. Board members: Ignacio Cueto Plaza (Managers LATAM) Ramiro Alfonsín Balza (Managers LATAM) Roberto Alvo Milosawlewitsch (Managers LATAM) Subscribed and paid capital: MUS$ 132 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.00021% ► Connecta Corporation Identification: Stock Company (corporation) legally incorpo- rated in the United States of America. Object: Property ownership, operating lease and subleasing of aircraft. Subscribed and paid capital: MUS$ 1 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.00000% Subscribed and paid capital: MUS$ 11,800 2016 Shareholding: 99.99% Year-to-year variation: 0.00% % over parent company’s assets: 1.12581% Board members: Ramiro Alfonsín Balza Roberto Alvo Milosawlewitsch Enrique Elsaca Hirmas General manager: Enrique Elsaca Hirmas ► Lan Cargo Inversiones S.A. y filial Identification: Stock company incorporated in Chile General manager: Ernesto Ramirez Object: a) To perform commercial air transportation activities in any of its forms, either of passengers, mail and/or cargo and everything that might be directly or indirectly related to such activity, inside or outside of the country, by its own ac- count or with third parties; b) to provide services related to the maintenance and repair of aircraft, of its own or of third par- ties; c) commerce and development of activities related to the travel, tourism and hotel business; d) the development and/or 224 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies ► Línea Aérea Carguera de Colombia (Subsidiary of LAN Car- go Inversiones) ► Mas Investment Limited (Subsidiary of LAN Overseas Lim- ited) Identification: Stock company incorporated in Colombia Identification: Limited Liability Company incorporated in Ba- hamas. Object: To provide public commercial air transport services of cargo and mail inside and outside of the territory of the Republic of Colombia, and to/from Colombia. As secondary objective, the company shall be entitled to provide mainte- nance services to itself and to third parties; run its own school of operations and provide practical and theoretical instruction services and training to aeronautic personnel of its own or of third parties in its different modalities and specialties; import for itself or for third parties any spare parts and pieces related to the aeronautic activity; provide airport services to third par- ties, represent or act as agent on behalf of national or foreign airlines for passengers or cargo and, in general, to any com- pany providing services in the aeronautic sector. Subscribed and paid capital: MUS$ 774 2016 Shareholding: 90.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.03758% Board members: Alberto Davila Suarez Pablo Canales Jaime Antonio Gongora Esguerra Fernando García Poitevin (Interim) Jorge Nicolas Cortazar Cardoso (Interim) Management: Jaime Antonio Gongora Esguerra Erika Zarante Bahamon (Interim) Object: To participate in any act or activity not expressly pro- hibited by any law currently in effect in The Bahamas and, spe- cifically, to own property (stakes) in other LAN subsidiaries. Subscribed and paid capital: MUS$1,446 2016 Shareholding: 100,000 Year-to-year variation: 0.00% % over parent company’s assets: 0.03482% Board members: J. Richard Evans Carlton Mortimer Charlene Y. Wels Geoffrey D. Andrews. ► Promotora Aérea Latinoamérica S.A and subsidiaries (Sub- sidiary of Mas Investment Limited) Identification: Variable Equity Stock Company incorporated in México. Object: To promote, incorporate, organize, operate and take participation in the capital and equity of all kinds of commer- cial companies, civilian, industrial associations or companies, commercial, of service or of any other nature, both domestic and foreign, as well as to participate in their management or liquidation. * The acquisition, sale and in general the negotiation with any type of shares, social (company) parties, and of any title or value permitted by law...* To provide or hire technical, consult- ing and advisory services, as well as to execute contracts or agreements toward the achievement of these objectives. Subscribed and paid capital: MUS$ 2,216 2016 Shareholding: 49.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.02456% Management: Luis Ignacio Sierra Arriola ► Inversiones Áreas S.A (Subsidiary of Mas Investment Limited) Identification: Stock company incorporated in Peru. Object: To promote, incorporate, organize, operate and take participation in the capital and equity of all kinds of commer- cial companies, civilian, industrial associations or companies, commercial, of service or of any other nature, both domestic and foreign, as well as to participate in their management or liquidation. * The acquisition, sale and in general the negotiation with any type of shares, social (company) parties, and of any title or value permitted by law...* To provide or hire technical, consult- ing and advisory services, as well as to execute contracts or agreements toward the achievement of these objectives. Subscribed and paid capital: MUS$ 428 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.02922% Board members: Andrés Enrique del Valle Eitel Cristian Eduardo Toro Cañas General manager: Carlos Schacht Rotter 225 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies ► Americonsul S.A de C.V. (Subsidiary of Promotora Aérea Latinoamérica S.A and subsidiaries) Board members: Carlos Fernando Pellecer Valenzuela LAN PERÚ S.A Identification: Variable Equity Stock Company incorporated in México. Management: Carlos Fernando Pellecer Valenzuela Object: To provide and receive all kinds of technical, manage- ment and advisory services to/from industrial, commercial and service companies; promote, organize, manage, supervise, is- sue and direct personnel training courses; to carry out all kinds of studies, plans, projects and research jobs; hire the neces- sary professional and technical personnel. ► Americonsult de Costa Rica S.A. (Subsidiary of Americonsul S.A de C.V) Legal incorporation: Stock company incorporated in Costa Rica. Object: General commerce in industry, agriculture and live- stock. Subscribed and paid capital: MUS$ 20 2016 Shareholding: 99.00% Year-to-year variation: 0.00% % over the parent company’s assets: 0.00615% Management: Luis Ignacio Sierra Arriola Treasurer: Alejandro Fernández Espinoza Luis Miguel Renguel López Tomás Nassar Pérez Marjorie Hernández Valverde. Subscribed and paid capital: MUS$ 5 2016 Shareholding: 49.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.00000% Management: Luis Ignacio Sierra Arriola ► Americonsult de Guatemala S.A. (Subsidiary of Americon- sul S.A de C.V) Identification: Stock company incorporated in Guatemala. Object: Powers to represent, intermediate, negotiate and commercialize; develop all kinds of commercial and industrial activities; all type of commerce, in general. Broad business objective that permits all kinds of operations in the country. Subscribed and paid capital: MUS$ 76 2016 Shareholding: 99.00% Year-to-year variation: 0.00% % over the parent company’s assets: 0.00068% Chairman of the board: Luis Ignacio Sierra Arriola Legal incorporation: Stock Company incorporated in Peru el February 14, 1997. Object: To provide air passenger transportation services, cargo and mail, at the national and international level, pursuant to the civil aeronautics legislation. Subscribed and paid capital: MUS$ 4,341 Year’s income: MUS$ (2,164) 2016 Shareholding: 70.00% Year-to-year variation: 0.00% % over the parent company’s assets: 0.06% Chairman of the board: Emilio Rodríguez Larraín Salinas Board members: César Emilio Rodríguez Larraín Salinas Ignacio Cueto Plaza (LATAM Executive) Enrique Cueto Plaza (LATAM Executive) Jorge Harten Costa Alejandro García Vargas Emilio Rodríguez Larraín Miró Quesada Armando Valdivieso Montes (LATAM Executive) General manager: Félix Antelo INVERSIONES LAN S.A Y FILIALES Legal incorporation: Incorporated as a closely-held stock company by virtue of public deed dated January 23, 1990, ex- ecuted at the Notary Public’s Office of Humberto Quezada M., registered in the Santiago Register of Commerce on fs. (sheet) 3,462 N° 1,833 of the year 1990 and published in the Official Gazette of February 2, 1990. 226 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Object: To invest in all kinds of assets, either movable (per- sonal) or immovable (real estate), tangible or intangible. Ad- ditionally, the company shall be entitled to form other type of companies, of any nature; acquire rights in already incorporat- ed companies, manage them amend them or liquidate them. Subscribed and paid capital: MUS$ 2 2016 Shareholding: 98.00% Year-to-year variation: 0.00% % over parent company’s assets: 0.01747% Subscribed and paid capital: MUS$ 458 Year’s income: MUS$ 2,607 2016 Shareholding: 100.00% Year-to-year variation: 0.0% % over the parent company’s assets: 0.02% Board members: Enrique Cueto Plaza (LATAM Executive) Ignacio Cueto Plaza (LATAM Executive) Ramiro Alfonsín Balza (LATAM Executive) Roberto Alvo Milosawlewitsch (LATAM Executive) Enrique Elsaca Hirmas (LATAM Executive) General manager: Juan Pablo Arias (LATAM Executive) Subsidiary companies of Inversiones Lan S.A. and sharehol- ding ► Andes Airport Services S.A. Identification: Stock company incorporated in Chile. Object: Comprehensive business consulting and services to third parties such as cargo, ground handling, staffing and any other as might be required. To that effect, the company will perform its functions via personnel especially-hired by the company or via third parties. In general, the company will be entitled to develop any activity directly or indirectly related to its specific business consulting and services objective. Board members: Enrique Cueto Plaza (LATAM Executive) Ignacio Cueto Plaza (LATAM Executive) Ramiro Alfonsín Balza (LATAM Executive) Roberto Alvo Milosawlewitsch (LATAM Executive) Enrique Elsaca Hirmas (LATAM Executive) INMOBILIARIA AERONAUTICA S.A Legal incorporation: Incorporated as a closely-held stock company by virtue of public deed dated August 1, 1995, ex- ecuted at the Notary Public’s Office of Gonzalo Cuadra Fabres and registered in the Santiago Register of Commerce on fs. (sheet) 2, .690 under N° 17,549 of the year 1995 and pub- lished in the Official Gazette of September 14, 1995. Object: To acquire and sell real estate properties and any rights over them; develop, plan, sell and build real estate prop- erties and real estate development projects; lease, manage and any other form of operating with real estate properties, either on its own behalf or on behalf of third parties. Subscribed and paid capital: MUS$ 1,147 Year’s income: MUS$ 3,443 2016 Shareholding: 100.00% Year-to-year variation: 0.0% % over the parent company’s assets: 0.15% Board members: Enrique Cueto Plaza (LATAM Executive) Ramiro Alfonsín Balza (LATAM Executive) Armando Valdivieso Montes (LATAM Executive) LATAM TRAVEL CHILE S.A Y FILIAL Legal incorporation: Incorporated as a closely-held stock company by virtue of public deed dated June 22, 1987, ex- ecuted at the Santiago Notary Public’s Office of Raúl Undur- raga Laso, registered in the Santiago Register of Commerce on fs. (sheet) 13,139 N°8,495 of the year 1987 and published in the Official Gazette of July 2, 1987. The company has un- dergone several reforms, the last of which is stated for the record in public deed dated August 24, 1999 executed at the Notary Public’s Office of Eduardo Pinto Peralta and registered in the Santiago Register of Commerce on fs. (sheet) 21.042 N°16.759 of the year 1999 and published in the Official Ga- zette of September 8, 1999. Object: The operation, management and representation of national or international companies engaged in hotel, shipping, airline, hotel and tourism activities; operating on behalf of it- self or on behalf of third parties, car leasing, imports, exports, production, marketing and distribution all by itself or with third parties, in national and international markets, of all kinds of merchandise, either raw materials, material ingredients (input) or finished products. Subscribed and paid capital: MUS$ 235 Year’s income: MUS$ 2,650 2016 Shareholding: 100.00% Year-to-year variation: 0.0% % over the parent company’s assets: 0.01% Board members: Andrés del Valle Eitel (LATAM Executive) Armando Valdivieso Montes (LATAM Executive) General manager: Sandra Espinoza Gerard 227 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Subsidiary company of Latam Travel Chile S.A. and share- holding LAN PAX GROUP S.A. Subsidiary companies of Lan Pax Group S.A. and shareholding ► Latam Travel Chile II S.A. Identification: Stock Company incorporated in Chile. Object: The operation, management and representation of companies or businesses, national or foreign, engaged in ship- ping, airlines, hotel and tourism activities; the intermediation of touristic services such as: (a) seat and ticket reservations in all kinds of means of transportation; (b) the reservation, acquisition and sale of accommodation and tourist services, tickets or passes to all kinds of events, museums, monuments and protected areas of the country; (c) the organization, pro- motion and sale of so-called tourist packages, understanding as such the set of tourist services (maintenance, transporta- tion, accommodation, customized or projected at the request of clients, at a pre-established price, for operation within the national territory; (d) air, land, sea and fluvial tourism trans- portation within the national territory; (e) leasing and charter- ing aircraft, ships, trains and other means of transportation in order to provide tourist services; (f) any other service directly or indirectly related to the delivery of the services previously described. Subscribed and paid capital: MUS$ 235 2016 Shareholding: 99.99% Year-to-year variation: 0.00% % over the parent company’s assets: 0.01428% Board members: Armando Valdivieso Montes (Managers LATAM) Andrés del Valle Eitel (Managers LATAM) General manager: Sandra Espinoza Gerard Legal incorporation: It was incorporated as a closely-held stock company by virtue of public deed dated September 27, 2001, executed before the Notary Public’s Office of Mr. Patri- cio Zaldivar Mackenna, registered in the Register of Commerce on fs. (sheet) 25,636 N° 20,794 of October 4, 2001 and pub- lished in the Official Gazette of October 6, 2001. Object: To invest in all kinds of assets, whether movable (personal) or immovable (real estate), tangible or intangible. Within the scope of its line of business, it shall be entitled to create all kinds of companies, of any nature whatsoever; ac- quire rights (stakes) in already-incorporated companies, man- age them, amend them or liquidate them. In general, it may acquire or sell any types of assets and develop them, either on its own behalf or on behalf of third parties, as well as perform all kinds of acts and execute all kinds of contracts conducive to its purposes. To develop and operate any other activity de- rived from the company’s business objective and/or linked, connected, coadjuvating or complementary to the same. ► Inversora Cordillera S.A. and subsidiaries Identification: Stock company incorporated in Argentina Object: To invest on its own account or on account of third par- ties or associated to third parties, in other companies for shares, whichever their object, incorporated or to be incorporated, inside or outside of the national territory of the Republic of Argentina, via the acquisition, legal incorporation or sale of shareholdings (participations, stakes), shares, quotas, bonds, options, nego- tiable obligations, convertible or not, other securities or other forms of investments permitted pursuant to the regulations currently in effect at that moment, whether that be with the purpose of keeping them in portfolio or to sell them totally or partially, as the case might be. To that effect, the company shall be entitled to perform all such operations not prohibited by law toward complying with its Object and it shall be legally empow- ered to acquire rights, undertake obligations and exercise acts not prohibited by the laws of by its own bylaws. Subscribed and paid capital: MUS$ 424 Year’s income: MUS$ (35,917) 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over the parent company’s assets: 0.00% Board members: Ignacio Cueto Plaza (LATAM Executive) Andrés del Valle (LATAM Executive) Enrique Elsaca Hirmas (LATAM Executive) General manager: Andrés del Valle Eitel (LATAM Executive) Subscribed and paid capital: MUS$ 136,703 2016 Shareholding: 95.78% Year-to-year variation: 0.00% % over the parent company’s assets: 0.07281% Board members: Manuel Maria Benites Jorge Luis Perez Alati Ignacio Cueto Plaza Management: Manuel María Benites Jorge Luis Perez Alati Rosario Altgelt María Marta Forcada Facundo Rocha Gonzalo Perez Corral Nicolás Obejero Norberto Díaz 228 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies ► Lantours S.A. Identification: Stock company incorporated in Argentina Object: To carry out on its own behalf or on behalf of third parties and/or in association with third parties, in the country and/or abroad, the following activities and operations: A) COMMERCIAL SERVICES: To carry out, intervene, develop or design all kinds of operations and activities that involve the sale of air, land, river or sea tickets for passengers, both na- tionally as well as internationally, or any other services related to the tourist industry in general. The above-mentioned ser- vices may be performed on account of and on behalf of third parties by mandate, commission, or via the employment of such systems or methods considered convenient to that ef- fect, whether such methods are manual, mechanic, electronic, telephonic, or the internet or of any other kind or technol- ogy deemed suitable to that effect. The company may carry out concurrent or connected activities toward the described object, such as buying and selling, importing, exporting, re- exporting, licensing and representing all types of goods, ser- vices, know-how and technology, linked directly or indirectly to the above-described object; market through any means or concept the technology that it might create or whose license or patent it might acquire or manage; develop, distribute, pro- mote and market all kinds of contents for any kind of com- munications media B) TOURISTIC SERVICES: By means of carrying out all kinds of activities linked to the tourist and hotel industries, as re- sponsible operator or third-party services operator or as travel agent. Via the preparation of exchange programs, tourism, ex- cursions and tours; the intermediation or reservation and loca- tion of services on any means of transportation in the country or abroad and the sale of tickets; intermediation in the hir- ing of hotel services in the country or abroad; reservations of hotels, motels, tourist apartments and other tourist facilities; organizing travels and tourism either for individuals or collec- tive groups, excursions or similar in the country or abroad; the reception and assistance of tourists during their trips and their permanence in the country, and providing tour guide services and baggage dispatch services to the same; the representa- tion of other travel and tourist agencies, companies, enterpris- es or tourist institutions both national as well as international in order to provide in their name any of such services. C) REPRESENTATION SERVICES: Via the acceptance, perfor- mance and granting of representations, concessions, commis- sions, agencies and mandates (powers of attorney) in general. D) CONSULTING SERVICES: To perform consulting services, advisory and management, in all matters related to the or- ganization, installation, attention, development, support and promotion of companies related to the aeronautic activity, without excluding the latter activity, in the fields of industrial, commercial, technical, and advertising management, all of which shall be provided, when the nature of the subject mat- ter so requires it, by competent and certified professionals according to the corresponding regulations, and the delivery of organizational and management systems of care, mainte- nance, vigilance and suitable and especially-prepared person- nel as might be required to perform such tasks. E) FINANCIAL SERVICES: Via the participation in other created or to-be-created companies, either by means of acquiring shares in incorporated companies or by means of the legal incorporation of companies, by means of granting and ob- taining credits, loans, money advances with or without real or personal guarantee; granting warranties or sureties in favor of third parties, gratuitously or at onerous title; placing funds in foreign currency, gold or currency or in bank deposits of any type. To that effect, the company is fully entitled to legally exercise all such acts that are not expressly forbidden by the laws or by its own bylaws, whereas it is also authorized to un- dertake borrowing operations in a public or private manner via the issuance of debentures or negotiable obligations and via the performance of all kinds of financial operations, with the exception of those comprised under Law 21,526 or any other that might require public tender. Subscribed and paid capital: MUS$ 891 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over the parent company’s assets: 0.00000% Board members: Nicolas Obejero Diego Alejandro Martínez Management: Rosario Altgelt María Marta Forcada Facundo Rocha Gonzalo Perez Corral Nicolás Obejero Norberto Díaz ► Atlantic Aviation Investments LLC Identification: Limited Liability Company incorporated in the United States of America. Object: Any licit business that the company is entitled to pur- sue. Subscribed and paid capital: MUS$ 1 2016 Shareholding: 99.00% Year-to-year variation: 0.00% % over the parent company’s assets: 0.05965% Board members: Andrés del Valle Eitel Management: Andrés del Valle (Managers LATAM) 229 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies ► Akemi Holdings S.A. ► Saipan Holdings S.A. ► Aerolane, Líneas Aéreas Nacionales del Ecuador S.A. Identification: Stock company incorporated in Panamá. Identification: Stock company incorporated in Panama. Identification: Stock company incorporated in Ecuador. Object: The business purposes toward which the company is organized are to establish, process and carry out the business affairs of an investor company anywhere in the world, buy- ing, selling and negotiating all kinds of consumer articles, eq- uity capital shares, bonds and securities of all kinds, buy, sell, lease or otherwise acquire or dispose of movable (personal) or immovable (real estate) properties, invest in industrial or commercial business either as the main shareholder, receiving and giving money on loan, with or without guarantee, covenant (agree), comply and perform all kinds of contracts, become the guarantor or guarantee compliance and observance of any and all contracts, engage in any licit business not forbidden to a stock company (corporation), and execute any of the pre- ceding acts as principals, agents or in any other representative capacity whatsoever. Object: The business purposes toward which the company is organized are to establish, process and carry out the business affairs of an investor company anywhere in the world, buy- ing, selling and negotiating all kinds of consumer articles, eq- uity capital shares, bonds and securities of all kinds, buy, sell, lease or otherwise acquire or dispose of movable (personal) or immovable (real estate) properties, invest in industrial or commercial business either as the main shareholder, receiving and giving money on loan, with or without guarantee, covenant (agree), comply and perform all kinds of contracts, become the guarantor or guarantee compliance and observance of any and all contracts, engage in any licit business not forbidden to a stock company (corporation), and execute any of the pre- ceding acts as principals, agents or in any other representative capacity whatsoever. Subscribed and paid capital: MUS$0 2016 Shareholding: 100.00% Year-to-year variation: 0.00% Subscribed and paid capital: MUS$0 2016 Shareholding: 100.00% Year-to-year variation: 0.00% % over the parent company’s assets: 0.00000% Object: Air transport of passengers, cargo and cargo in a com- bined manner. Subscribed and paid capital: MUS$ 1,000 2016 Shareholding: 55.00% Year-to-year variation: 0.00% % over the parent company’s assets: 0.04462% Board members: Antonio Stagg Manuel Van Oordt Mariana Villagómez General manager: Maximiliano Naranjo Management: Maximiliano Naranjo Javier Macías % over the parent company’s assets: 0.00000% ► Rampas Andes Airport Services S.A. and subsidiaries Board members: Edith O. de Bocanegra Barbara de Rodriguez Luis Alberto Rodriguez Management: Luis Alberto Rodriguez Barbara de Rodríguez Board members: Edith O. de Bocanegra Barbara de Rodriguez Luis Alberto Rodriguez Management: Luis Alberto Rodriguez Barbara de Rodríguez Identification: Stock company incorporated in Ecuador. Object: Air transport of passengers, cargo and cargo in a com- bined manner. Subscribed and paid capital: MUS$ 6,001 2016 Shareholding: 99.875% Year-to-year variation: 0.00% % over the parent company’s assets: 0.04168% Management: Ricardo Cadena 230 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies ► Hodco Ecuador S.A Identification: Stock company incorporated in Chile. Object: To make all kinds of investments with profitable ob- jectives in tangible or intangible, movable (personal) or im- movable (real estate) properties, whether in Chile or abroad. Subscribed and paid capital: MUS$ 450 2016 Shareholding: 99.999% Year-to-year variation: 0.0% % over the parent company’s assets: 0.00000% Board members: Antonio Stagg Manuel Van Oordt Mariana Villagómez General manager: Cristián Toro Cañas (LATAM Executive) ► Aerovias de Integración Regional, Aires SA. Identification: Stock company incorporated in Colombia. Object: The business purpose of the company shall be the development (operation) of commercial air transport services, national or international, in any of its types or modalities and, consequently, the subscription and execution of all kinds of contracts for the transport of passengers, things and baggage, mail and cargo in general, pursuant to the operating permits to that effect issued by the Special Administrative Unit (Unidad Administrativa Especial) of Civil Aeronautics or by the entity to take its stead in the future, fully adhering to the provisions of the Code of Commerce, Colombia’s Aeronautic Regulations and to any other regulation governing the pertinent subject mat- ter. Equally, to provide maintenance and adaptation services of equipment related to the operation of air transport services, inside or outside of the country. In developing this objective, the company shall be authorized to invest in third companies, national or foreign, with an equal, similar or complementary object to that of the company. Toward compliance with such business object, the company shall be entitled, among other things, to the following: (a) To perform reviews, inspections, maintenance and/or repair works of its own or of third-party aircraft, as well as to their spare parts and accessories, via the company’s Aeronautic Repair Workshop (Talleres de Repara- ciones Aeronáuticas), carrying out to that effect such person- nel training as deemed necessary to that end; (b) To organize, incorporate an invest in commercial transportation companies in Colombia or abroad, in order to develop (operate) either in- dustrially or commercially the economic activity that consti- tutes its business object; consequently, the company shall be entitled to acquire under any concept such aircraft, spare parts, pieces and accessories of all genres as deemed necessary for public air transportation operations and to sell them, and also to assemble and operate aircraft repair and maintenance work- shops; (c) To execute lease, freight, code sharing, location or any other type of contract regarding aircraft so as to carry out its business object; (d) To develop (operate) regular passenger, cargo, mail and securities transport airlines, as well as the ve- hicle to enable coordinating the development of such business objective; (e) To integrate with equal, similar or complementary companies in order to develop (operate) their activity; (f) To accept national or foreign representations of services of the same or complementary lines of business; (g) To acquire mov- able (personal) or immovable (real estate) properties toward developing its business objectives, erect these installations or constructions such as warehouses, depos, offices, etc. sell them or encumber them; (h) To carry out imports and exports, along with any foreign trade operations as might be required; (i) To take money at interest and issue personal, real and bank guarantees either for itself or for third parties; (j) To execute all kinds of securities operations, as well as buying/selling ob- ligations (liabilities) acquired by third parties when having a beneficial economic or equity benefit for the company, and to undertake borrowing operations via the issuance of bonds or debt notes representative of such obligations; (k) To contract third-party business management and operation services for those businesses that it may organize aimed at achieving its business objectives; (l) To execute company contracts and ac- quire shares or stakes in those already incorporated, whether national or foreign; to make contributions to either one of them; (m) To merge with other companies and associate with equal entities toward procuring the development of air trans- port or for other trade union purposes; (n) To promote, techni- cally assist, finance or manage companies or entities related to the company’s business object; (ñ) To subscribe or execute all genre of civil or commercial contracts, industrial or finan- cial that might be necessary or merely convenient toward the attainment of its purposes; (o) To subscribe businesses and comply with activities that procures clientele, and obtains from competent authorities such authorizations and licenses as might be necessary in order to delivery its services; (p) The development and operation of other activities derived from the company’s business object and/or linked, connected, coadju- vating or complementary to the same, including the delivery of tourist services in any form permitted by the law, such as travel agencies; (q) To endeavor in any business or licit activity, whether commercial or not, provided it is related to its busi- ness objective or that it would enable a more rational develop- ment (operation) of the public services that it provides; and(r) To make investments of any kind whatsoever and to employ the funds and reserves to be so established pursuant to the law and the company’s current bylaws (statutes). Subscribed and paid capital: MUS$ 3,388 2016 Shareholding: 99.017% Year-to-year variation: 0.00% % over the parent company’s assets: 0.22924% Board members: Jorge Nicolas Cortazar Cardoso Jaime Antonio Gongora Esguerra Fernando García Poitevin. Interim Jorgue Enrique Cortazar Garcia Alberto Davila Suarez Pablo Canales Management: Jorge Nicolas Cortazar Erika Zarante Bahamon Jaime Antonio Gongora Esguer 231 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies ► Lan Argentina S.A (Subsidiary of Inversora Cordillera S.A) TECHNICAL TRAINING LATAM S.A. Identification: Stock company incorporated in Argentina. Object: To make all kinds of investments with profitable objectives in tangible or intangible, movable (personal) or immovable (real estate) properties, whether in Chile or abroad. Legal incorporation: Incorporated as Stock Company (cor- poration) by virtue of public deed dated November 23, 1997 in Santiago, Chile and registered in the Santiago Register of Commerce on sheet 878 number 675 of the year 1998. Object: Its business objective is to deliver technical training and other services related to the above. Subscribed and paid capital: MUS$ 129,589 2016 Shareholding: 99.00% Year-to-year variation: 0.00% % over the parent company’s assets: 0.08579% Board members: Manuel Maria Benites Jorge Luis Perez Alati Ignacio Cueto Plaza (LATAM Executive) Management: Manuel María Benites Jorge Luis Perez Alati Rosario Altgelt María Marta Forcada Facundo Rocha Gonzalo Perez Corral Nicolás Obejero Norberto Díaz Subscribed and paid capital: MUS$ 753 Year’s income: MUS$ 73 Shareholding: 100.00% Year-to-year variation: 0.00% % over the parent company’s assets: 0.01% Board members: Enrique Elsaca (LATAM Executive) Sebastián Acuto (LATAM Executive Ramiro Alfonsín Balza (LATAM Executive) General manager: Alejandra Jara Hernández 232 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Parent Company’s Financial Statements TAM S.A. Statement of Classified and Consolidated Financial Position ASSETS Total current assets other than assets or groups of assets for disposal Classified as maintained for sale or to be distributed to property owners Non-current assets or asset groups for disposal Classified as maintained for sale or to be distributed to property owners Total current assets Total non-current assets TOTAL ASSETS EQUITY CAPITAL AND LIABILITIES LIABILITIES Total current liabilities Total non-current liabilities Total liabilities EQUITY CAPITAL Equity capital attributable to the controller’s property owners Non-controlled shareholdings Total equity capital TOTAL EQUITY CAPITAL AND LIABILITIES As of Dec. 31 2016 MUS$ As of Dec. 31 2015 MUS$ 1,761,049 1,335,337 33,140 1,794,189 3,493,097 5,287,286 2,837,619 1,872,688 4,710,307 495,563 81,416 576,979 5,287,286 277 1,335,614 3,360,939 4,696,553 1,963,400 2,235,823 4,199,223 423,190 74,140 497,330 4,696,553 233 Consolidated Income Statement, by function Income from ordinary activities Gross profit Profit (loss) before taxes Profit tax expenses YEAR’S PROFIT (LOSS) Year’s profit (loss) attributable to: The controller’s property owners Non-controlled shareholdings Year’s profit (loss) Consolidated Integral Income Statement YEAR’S PROFIT (LOSS) Other integral income Total integral income Integral income attributable to: The controller’s property owners Non-controlled shareholdings TOTAL INTEGRAL INCOME FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies For the years ended as of Dec. 31 2016 MUS$ 2015 MUS$ 4,145,951 519,223 220,677 (176,752) 43,925 2,107 41,818 43,925 4,597,612 599,784 (272,206) 126,008 (146,198) (183,912) 37,714 (146,198) For the years ended as of Dec. 31 2016 MUS$ 2015 MUS$ 43,925 69,724 113,649 88,049 25,600 113,649 (146,198) (347,490) (493,688) (528,218) 34,530 (493,688) 234 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Statement of changes in equity capital Equity Capital January 1, 2015 Total integral income Dividends Other equity capital increases (decreases) Year-end balances current year, as of Dec. 31 2015 Equity Capital January 1, 2016 Total integral income Dividends Other equity capital increases (decreases) Ending balances current year, as of Dec. 31, 2016 Consolidated Cash Flow Statement - Direct Method Net cash flows from (used in) operating activities Net cash flows from (used in) investment activities Net cash flows from (used in) financing activities Net cash and cash equivalent increase (decrease) before foreign exchange rate change effects Effects of foreign exchange rate variations on cash and cash equivalent Year-end cash and cash equivalent Equity Capital attributable to prop, owners of the controller MUS$ Non-controlling shareholdings MUS$ Equity Capital total MUS$ 912,639 (528,218) - 38,769 423,190 423,290 88,049 - (15,676) 495,563 95,530 34,530 (34,623) (21,297) 74,140 74,140 25,600 (40,823) 22,499 81,416 1,008,169 (493,688) (34,623) 17,472 497,330 497,330 113,649 (40,823) 6,823 576,979 For the years ended as of Dec. 31 2016 MUS$ 2015 MUS$ (35,085) 78,425 (109,240) 713,435 (244,750) (335,088) (65,900) 133,597 43,097 197,218 (49,381) 220,021 235 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies LAN CARGO S.A. (Closely held stock company) Consolidated Classified Financial Statement ASSETS Total current assets other than assets or groups of assets for disposal classified as maintained for sale or to be distributed to property owners Total non-current assets or groups of assets for disposal classified as maintained for sale or to be distributed to property owners Total current assets Total non-current assets TOTAL ASSETS EQUITY CAPITAL AND LIABILITIES LIABILITIES Total current assets other than assets or groups of assets for disposal classified as maintained for sale or to be distributed to property owners Total non-current assets or groups of assets for disposal classified as maintained for sale or to be distributed to property owners Total current liabilities Total non-current liabilities Total liabilities EQUITY CAPITAL Equity capital attributable to the controller’s property owners Non-controlled shareholdings Total equity capital TOTAL EQUITY CAPITAL AND LIABILITIES As of December 31 2016 MUS$ 2015 MUS$ 106,963 164,412 22,686 129,649 563,577 693,226 85 164,497 546,687 711,184 204,519 185,162 22,236 226,755 101,734 328,489 362,478 2,259 364,737 693,226 - 185,162 152,958 338,120 370,791 2,273 373,064 711,184 236 Consolidated Income Statement, by function Income from ordinary activities Gross profit Profit (loss) before taxes Profit tax expenses YEAR’S PROFIT (LOSS) Year’s profit (loss) attributable to: The controller’s property owners Non-controlled shareholdings Year’s profit (loss) Consolidated Integral Income Statement YEAR’S PROFIT (LOSS) Other integral income Total integral income Integral income attributable to: The controller’s property owners Non-controlled shareholdings TOTAL INTEGRAL INCOME FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies For the years ended as of Dec. 31 2016 MUS$ 689,153 (31,274) (6,696) 1,463 8,159 (8,145) (14) (8,159) 2015 MUS$ 788,019 (90,201) (88,244) 26,912 (61,332) (62,701) 1,369 (61,332) For the years ended as of Dec. 31 2016 MUS$ (8,159) (459) (8,618) (8,604) 14 (8,618) 2016 MUS$ (61,332) (2,935) (64,267) (65,636) 1,369 (64,267) 237 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Statement of Changes in Equity Capital Equity Capital January 1, 2015 Total integral income Other equity capital increases (decreases) Year-end balances current year, as of Dec. 31 2015 Equity Capital January 1, 2016 Total integral income Other equity capital increases (decreases) Ending balances current year, as of Dec. 31, 2016 Equity Capital attributable to prop, owners of the controller MUS$ Non-controlling shareholdings MUS$ Equity Capital total MUS$ 455,240 (65,636) (18,813) 370,791 370,791 (8,604) 291 362,478 903 1,369 1 2,273 2,273 (14 - 2,259 456,143 (64,267) (18,812) 373,064 373,064 (8,618) 291 364,737 Consolidated Cash Flow Statement - Direct Method Net cash flows from (used in) operating activities Net cash flows from (used in) investment activities Net cash flows from (used in) financing activities Net cash and cash equivalent increase (decrease) before foreign exchange rate change effects Effects of foreign exchange rate variations on cash and cash equivalent Year-end cash and cash equivalent For the years ended as of Dec. 31 2016 MUS$ 92,772 (34,003) (51,813) 6,956 76 24,678 2015 MUS$ 99,073 (50,264) (51,021) (2,212) (4) 17,646 238 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies LAN PERU S.A. (Closely held stock company) General Balance Sheet ASSETS Total current assets Total non-current assets TOTAL ASSETS EQUITY CAPITAL AND LIABILITIES LIABILITIES Total current liabilities Total non-current liabilities Total liabilities EQUITY CAPITAL Equity capital attributable to the controller’s property owners Non-controlled shareholdings Total equity capital TOTAL EQUITY CAPITAL AND LIABILITIES Consolidated Income Statement, by function Income from ordinary activities Gross profit Profit (loss) before taxes Profit tax expenses YEAR’S PROFIT (LOSS) As of December 31 2015 2016 MUS$ MUS$ 283,691 22,420 306,111 232,547 23,144 255,691 293,602 1,310 294,912 239,521 1,417 240,938 11,199 - 11,199 306,111 14,753 - 14,753 255,691 For the years ended as of Dec. 31 2016 MUS$ 967,787 148,635 1,289 (3,453) (2,164) 2015 MUS$ 1,078,992 180,829 7,237 (2,169) 5,068 239 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Statement of Changes in Equity Capital Equity Capital January 1, 2015 Total integral income Dividends Final balances previous year, as of Dec. 31, 2015 Equity Capital January 1, 2016 Total integral income Dividends Final balances previous year, as of Dec. 31, 2016 Issued capital MUS$ Legal reserve MUS$ Accumul. profit MUS$ Total eq. capital MUS$ 4,341 - - 4,341 4,341 - - 4,341 868 - - 868 868 - - 868 5,866 5,068 (1,390) 9,544 11,075 5,068 (1,390) 14,753 9,544 (2,164) (1,390) 5,990 14,753 (2,164) (1,390) 11,199 Cash Flow Statement - Direct Method Net cash flows from (used in) operating activities Net cash flows from (used in) investment activities Net cash flows from (used in) financing activities Net increase (decrease) in cash and cash equivalent Year-end cash and cash equivalent For the years ended as of Dec. 31 2016 MUS$ 2015 MUS$ (57,429) (943) 5,887 (52,485) 65,892 (7,044) (1,164) 9,099 891 118,377 240 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies INVERSIONES LAN S.A. (Closely held stock company) Consolidated Classified Statement of Financial Position ASSETS Total current assets other than assets or groups of assets for disposal classified as maintained for sale or to be distributed to property owners Total non-current assets or groups of assets for disposal classified as maintained for sale or to be distributed to property owners Total current assets Total non-current assets TOTAL ASSETS EQUITY CAPITAL AND LIABILITIES LIABILITIES Total current liabilities Total non-current liabilities Total liabilities EQUITY CAPITAL Equity capital attributable to the controller’s property owners Total equity capital TOTAL EQUITY CAPITAL AND LIABILITIES As of December 31 2015 MUS$ 2016 MUS$ 7,616 6,292 - 7,616 3,355 10,971 572 6,864 9,648 16,512 5,278 1,174 6,452 4,519 4,519 10,971 13,380 1,296 14,676 1,836 1,836 16,512 241 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Consolidated Income Statement, by function Income from ordinary activities Gross profit Profit (loss) before taxes Profit tax expenses YEAR’S PROFIT (LOSS) Year’s profit (loss) attributable to: The controller’s property owners Year’s profit (loss) Consolidated Integral Income Statement YEAR’S PROFIT (LOSS) Other integral income Total integral income Integral income attributable to: The controller’s property owners TOTAL INTEGRAL INCOME For the years ended as of Dec. 31 2016 MUS$ 34,059 7,406 3,526 (925) 2,601 2,601 2,601 2015 MUS$ 32,366 5,371 3,200 (402) 2,798 2,798 2,798 For the years ended as of Dec. 31 2016 MUS$ 2,601 218 2,819 2015 MUS$ 2,798 (177) 2,621 2,819 2,819 2,621 2,621 242 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Statement of Changes in Equity Capital Equity Capital January 1, 2015 Total integral income Other equity capital increases (decreases) Year-end balances current year, as of Dec. 31 2015 Equity Capital January 1, 2016 Total integral income Other equity capital increases (decreases) Ending balances current year, as of Dec. 31, 2016 Issued capital MUS$ Legal capital MUS$ Accumul. reserve MUS$ Total eq. capital MUS$ 458 - - 458 458 - (18) 440 594 (177) - 417 417 218 - 635 237 2,798 (2,074) 961 961 2,601 (1188) 3,444 1,289 2,621 (2,074) 1,836 1,836 2,819 (136) 4,519 Consolidated Cash Flow Statement - Direct Method Net cash flows from (used in) operating activities Net cash flows from (used in) investment activities Net cash flows from (used in) financing activities Net increase (decrease) in cash and cash equivalent Effects of foreign exchange rate variations on cash and cash equivalent Year-end cash and cash equivalent For the years ended as of Dec. 31 2016 MUS$ 2015 MUS$ (21) 1,469 (1,663) (215) 24 1,410 608 (41) 444 1,011 64 1,601 243 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies INMOBILIARIA AERONAUTICA S.A. (Closely held stock company) Statement of Classified Financial Position ASSETS Total current assets Total non-current assets TOTAL ASSETS EQUITY CAPITAL AND LIABILITIES LIABILITIES Total current liabilities Total non-current liabilities Total liabilities EQUITY CAPITAL Total equity capital TOTAL EQUITY CAPITAL AND LIABILITIES Income Statement, by function Income from ordinary activities Gross profit Profit (loss) before taxes Profit tax expenses YEAR’S PROFIT (LOSS) Statement of Integral Income YEAR’S PROFIT (LOSS) Total integral income As of December 31 2015 2016 MUS$ MUS$ 835 35,921 1,978 37,324 36,756 39,302 1,119 7,724 5,003 9,829 8,843 14,832 27,913 36,756 24,470 39,302 For the years ended as of Dec. 31 2016 MUS$ 4,007 1,877 1,453 1,990 3,443 2015 MUS$ 3,961 2,071 1,146 258 1,404 For the years ended as of Dec. 31 2016 MUS$ 3,443 3,443 2015 MUS$ 1,404 1,404 244 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Statement of Changes in Equity Capital Equity Capital January 1, 2015 Total integral income Year-end balances current year, as of Dec. 31 2015 Equity Capital January 1, 2016 Total integral income Ending balances current year, as of Dec. 31, 2016 Issued capital MUS$ 1,147 - 1,147 1,147 - 1,147 Accumul. profit MUS$ 21,919 1,404 23,323 23,323 3,443 26,766 Total eq. capital MUS$ 23,066 1,404 24,470 24,470 3,443 27,913 Cash Flow Statement - Direct Method Net cash flows from (used in) operating activities Net cash flows from (used in) investment activities Net cash flows from (used in) financing activities Net cash and cash equivalent increase (decrease) before foreign exchange rate change effects Effects of variation of foreign exchange rate on cash and cash equivalent Year-end cash and cash equivalent For the years ended as of Dec. 31 2016 MUS$ (201) - - (201) - 748 2016 MUS$ 3,596 (41) (2,586) 969 (20) 949 245 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies LATAM TRAVEL CHILE S.A. Y FILIAL (Closely held stock company) Statement of Classified Financial Position ASSETS Total current assets Total non-current assets TOTAL ASSETS EQUITY CAPITAL AND LIABILITIES LIABILITIES Total current liabilities Total non-current liabilities Total liabilities EQUITY CAPITAL Total equity capital TOTAL EQUITY CAPITAL AND LIABILITIES Income Statement, by function Income from ordinary activities Gross profit Profit (loss) before taxes Profit tax expenses YEAR’S PROFIT (LOSS) As of December 31 2016 MUS$ 5,347 111 5,458 2,724 3 2,727 2,731 5,458 2015 MUS$ 5,655 114 5,769 5,538 6 5,544 225 5,769 For the years ended as of Dec. 31 2016 MUS$ 11,675 7,294 3,500 (850) 2,650 2016 MUS$ 12,399 7,714 3,323 (1,004) 2,319 246 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Statement of changes in equity capital Equity Capital January 1, 2015 Total integral income Dividends Year-end balances current year, as of Dec. 31 2015 Equity Capital January 1, 2016 Total integral income Dividends Ending balances current year, as of Dec. 31, 2016 Issued capital MUS$ Accumul. profit MUS$ Total eq. capital MUS$ 225 - - 225 225 10 - 225 715 2,319 (3,034) - - 2,650 (144) 2,506 940 2,319 (3,034) 225 225 2,650 (144) 2,731 Cash Flow Statement - Direct Method Net cash flows from (used in) operating activities Net cash flows from (used in) investment activities Net cash flows from (used in) financing activities Net increase (decrease) in cash and cash equivalent Year-end cash and cash equivalent For the years ended as of Dec. 31 2016 MUS$ (2,483) (30) - (2,513) 1,066 2015 MUS$ 3,207 3,200 (3,200) 3,207 3,579 247 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies LAN PAX GROUP S.A. (Closely held stock company) Consolidated Classified Statement of Financial Position ASSETS Total current assets other than assets or groups of assets for disposal classified as maintained for sale or to be distributed to property owners Total non-current assets or groups of assets for disposal classified as maintained for sale or to be distributed to property owners Total current assets Total non-current assets TOTAL ASSETS EQUITY CAPITAL AND LIABILITIES LIABILITIES Total current liabilities other than liabilities included in asset groups for disposal classified asmaintained for sale Liabilities included in asset groups for disposal classified as maintained for sale Total current liabilities Total non-current liabilities Total liabilities EQUITY CAPITAL Equity capital attributable to the controller’s property owners Non-controlled shareholdings Total equity capital TOTAL EQUITY CAPITAL AND LIABILITIES As of December 31 2016 MUS$ 2015 MUS$ 252,060 8,988 261,048 214,715 475,763 301,887 417 302,304 217,359 519,663 344,970 352,056 2,556 347,526 698,235 1,045,761 (570,638) 640 (569,998) 475,763 - 352,056 697,176 1,049,232 (528,769) (800) (529,569) 519,663 248 Consolidated Income Statement, by function Income from ordinary activities Gross profit Profit (loss) before taxes Profit tax expenses YEAR’S PROFIT (LOSS) Year’s profit (loss) attributable to: The controller’s property owners Non-controlled shareholdings Year’s profit (loss) Consolidated Integral Income Statement YEAR’S PROFIT (LOSS) Other integral income Total integral income Integral income attributable to: The controller’s property owners Non-controlled shareholdings TOTAL INTEGRAL INCOME FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies For the years ended as of Dec. 31 2016 MUS$ 877,106 132,300 (41,945) 6,028 (35,917) 2015 MUS$ 988,081 168,193 (45,960) 10,779 (35,181) (36,223) 306 (35,917) (35,187) 6 (35,181) For the years ended as of Dec. 31 2016 MUS$ 2015 MUS$ (35,917) (7,118) (43,035) (35,181) (71,840) (107,021) (41,575) (1,460) (43,035) (104,941) (2,080) (107,021) 249 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Statement of changes in equity capital Equity Capital January 1, 2015 Total integral income Other equity capital increases (decreases) Year-end balances current year, as of Dec. 31 2015 Equity Capital January 1, 2016 Total integral income Other equity capital increases (decreases) Ending balances current year, as of Dec. 31, 2016 Equity Capital attributable to prop, owners of the controller MUS$ Non-controlling shareholdings MUS$ Total eq. capital MUS$ (426,016) (104,941) 2,188 (528,769) (528,769) (41,575) (294) (570,638) 879 (2,080) 401 (800) (800) (1,460) 2,900 640 (425,137) (107,021) 2,589 (529,569) (529,569) (43,035) 2,606 (569,998) Consolidated Cash Flow Statement - Direct Method Net cash flows from (used in) operating activities Net cash flows from (used in) investment activities Net cash flows from (used in) financing activities Net cash and cash equivalent increase (decrease) before foreign exchange rate change effects Effect of the variation of foreign exchange rates on cash and cash equivalent Year-end cash and cash equivalent For the years ended as of Dec. 31 2016 MUS$ 2015 MUS$ (60,254) 52,991 (10,978) 26,664 (108,757) 81,527 (18,241) (566) (181) 71,314 3,774 89,736 250 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies TECHNICAL TRAINING LATAM S.A. (Limited Partnership) Consolidated Classified Financial Statement ASSETS Total current assets Total non-current assets TOTAL ASSETS EQUITY CAPITAL AND LIABILITIES LIABILITIES Total current liabilities Total non-current liabilities Total liabilities EQUITY CAPITAL Equity capital attributable to the controller’s property owners Total equity capital TOTAL EQUITY CAPITAL AND LIABILITIES As of December 31 2016 MUS$ 1,597 148 1,745 284 - 284 1,461 1,461 1,745 2015 MUS$ 1,347 180 1,527 266 - 266 1,261 1,261 1,527 251 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Consolidated Income Statement, by function Income from ordinary activities Gross profit Profit (loss) before taxes Profit tax expenses YEAR’S PROFIT (LOSS) Year’s profit (loss) attributable to: The controller’s property owners Non-controlled shareholdings Year’s profit (loss) Statement of changes in equity capital Equity Capital Equity Capital January 1, 2015 Total integral income Other equity capital increases (decreases) Year-end balances current year, as of Dec. 31 2015 Equity Capital January 1, 2016 Total integral income Other equity capital increases (decreases) Ending balances current year, as of Dec. 31, 2016 For the years ended as of Dec. 31 2016 MUS$ 2015 MUS$ 1,784 100 103 (30) 73 73 - 73 1,626 1,866 (22) 50 (72) (72) - (72) Total eq. capital MUS$ 1,397 (72) (64) 1,261 1,261 73 127 1,461 252 FINANCIAL STATEMENTS | Subsidiaries and Affiliated Companies Consolidated Cash Flow Statement - Direct Method Net cash flows from (used in) operating activities Net cash flows from (used in) investment activities Net cash flows from (used in) financing activities Net increase (decrease) in cash and cash equivalent Effect of the variation of foreign exchange rates on cash and cash equivalent Beginning-of-year cash and cash equivalent Year-end cash and cash equivalent For the years ended as of Dec. 31 2016 MUS$ 2015 MUS$ 778 (14) - 764 (2) 479 1,241 89 - - 89 6 384 479 253 FINANCIAL STATEMENTS | Analysis of the Financial Statements Analysis of the Financial Statements Comparative analysis and explanation of the main trends: 1. Consolidated statement of financial position As of December 31, 2016, the company’s total assets amounted to MUS$ 19,198,194; which, compared to those as of December 31, 2015 represents an increase of MUS$ 1,096,776, equivalent to 6.1%. The company’s current assets increased by MUS$ 803,874 (28.5%), compared to the closing of the year 2015. The main increases appear in the following items: commer- cial debtors and other sundry accounts receivable of MUS$ 310,915 (39.0%); cash and cash equivalent of MUS$ 195,830 (26.0%); other current financial assets of MUS$ 61,480 (9.4%); current stock inventories of MUS$ 16,455 (7.3%); and non-current assets or group of assets for dis- posal classified as maintained for sale or maintained to be distributed to property owners of MUS$ 335,235. The above referred items were offset by a drop in other current non-financial assets of MUS$ 117,774 (35.7%). The company’s liquidity index shows an increase, from 0.50 times at the closing of the year 2015, to 0.58 times as of December 2016. Current assets and liabilities increased by 28.5% and 10.3%, respectively. One may also observe an increase in the acid test index, going from 0.13 times as of the closing of 2015, to 0.15 times by the closing of the present year. The company’s non-current assets increased by MUS$ 292,902 (1.9%) with respect to the closing of the year 2015. The main increases are in the following items: good- will of MUS$ 429,807 (18.8%), intangible assets other than goodwill of MUS$ 288,888 (21.9%) whose increases were mostly attributable to the monetary conversion of Bra- zilian reals to US dollars; other financial assets of MUS$ 12,667 (14.2%); assets on account of deferred taxes of MUS$ 7,985 (2.1%). All of the foregoing was offset by a re- duction in the following items: property, plant and equip- ment of MUS$ 440,508 (4.0%) originated by the sale of two Airbus A330 aircraft and the reclassification of two Airbus A319 aircraft, two Airbus A320, six Airbus A330 and two Boeing F-777 to the non-current assets item or group of assets for disposal classified as maintained for sale, depreciation expense corresponding as of December 31, 2016 of MUS$ 744,552 among other movements of the period, the negative effect is offset by the acquisition of a Boeing 787 aircraft, one Airbus A320 aircraft, four Airbus A321 aircraft, and four Airbus A350 aircraft, the adjust- ment of the conversion of the companies whose function- al currency is other than the US dollar of MUS$ 172,987 which corresponds mostly to TAM S.A. and Subsidiaries, and the payment of down payments (prepayments) for the acquisition of aircraft; and, finally, the drop in the item accounts payable of MUS$ 2,461 (23.0%). As of December 31, 2016, the company’s total liabilities amounted to MUS$ 15,012,890; which, when compared to the value as of December 31, 2015, shows a reduction of MUS$ 150,980 equivalent to 1.0%. The company’s current liabilities increased by MUS$ 581,219 (10.3%), with respect to the closing of the year 2015. The main increases appear in the following items: other non-financial liabilities of MUS$ 272,212 (10.9%); other financial liabilities of MUS$ 195,293 (11.9%); which is mostly explained by the financing in TAM Linhas Aéreas of US$ 200 million and the reclassification of MUS$ 300,000 in obligations with the public of TAM Capital Inc. to the short term, since its expiration is on April 25, 2017. All of the foregoing is affected by the net variation between the reduction of the passive positions of the hedging deriva- tives, the reduction of other guaranteed obligations and financial leasing; and commercial accounts payable and other accounts payable of MUS$ 109,111 (7.4%); which was slightly affected by the drop in: liabilities on account of current taxes of MUS$ 5,092. 254 FINANCIAL STATEMENTS | Analysis of the Financial Statements The indebtedness indicator of the company’s current liabilities shows a drop of 23.1%, going from 1.97 times as of the clos- ing of the year 2015, to 1.52 times as of the closing of 2016. The incidence of current liabilities over total debt increased by 4.18 percentage points going from 37.20% as of the closing of the year 2015 to 41.38% as of the closing of the current year. The company’s non-current liabilities dropped by MUS$ 732,199 (7.7%), as compared to the balance as of December 31, 2015. The main reductions appear in the following items: other financial liabilities of MUS$ 735,433 (9.8%), which is explained by the net effect of the reclassification of MUS$ 300,000 of obligations with the public of TAM Capital Inc. to the short term, the financing of the down payment for the purchase of the Airbus and Boeing aircraft; other non- financial liabilities of MUS$ 58,349 (21.4%); and accounts payable of MUS$ 57,659 (13.8%); the foregoing items were offset by increases in: deferred taxes of MUS$ 104,194 (12.8%), and provisions on account of employee benefits of MUS$ 17,051 (26.1%). The indicator of the company’s non-current liability indebt- edness shows a reduction of 35.6%, going from 3.33 times as of December 31, 2015 to 2.15 times as of the closing of 2016. The incidence of non-current liabilities over total debt dropped by 4.2 percentage points going from 62.80% as of the closing of the year 2015 to 58.55% as of December 2016. As of December 31, 2016, approximately 63% of the debt had rate-fixing instruments; according to the foregoing and con- sidering the debt such instruments, the average rate was 3.7%. The equity capital attributable to the controller’s proper- ty owners increased by MUS$ 1,240.125 going from MUS$ 2,856,535 as of December 31, 2015 to MUS$ 4,096,660 as of December 31, 2016. The main increases appear in: issued equity capital of MUS$ 603,859 (23.7%) corresponding to the capital increase approved at the Extraordinary Shareholders’ Meeting of August 18, 2016, having subscribed and paid as of December 31, 2016 a total of 60,849,592 shares, collect- ing MUS$ 608,496; additionally, share-issuing costs total- ing MUS$ 4,793 were capitalized. Other reserves of MUS$ 580,870, mostly originating from the positive effect of foreign exchange rate variations of conversion reserves amounting to MUS$ 489,486, mostly explained by the conversion adjust- ment originated by the acknowledged goodwill of the combi- nation of businesses with TAM and Subsidiaries, the reserves correspond to cash flow hedges totaling MUS$ 92,016. The variation of the accumulated result was positive, because of the profit generated as of December 31, 2016 attributable to the controller’s property owners of MUS$ 69,220; conse- quently, temporary dividends amounted to MUS$ 20,766. 2. Consolidated financial statement As of December 31, 2016 the controller recorded a profit of MUS$ 69,220, which represents an income increase of MUS$ 288,494 compared to the loss of MUS$ 219,274 of the previous year. The net margin increased from -2.2% to 0.7% during 2016. The operating income as of December 31, 2016 amounted to MUS$ 567,903; which, when compared to the year 2015 shows an increase of MUS$ 53,984, equivalent to 10.5%, while the operating margin reached 6.0%, showing an increase of 0.9 percentage points. The operating income as of December 31, 2016 diminished by 5.9% with respect to that of the year 2015, reaching MUS$ 9,527,088. The foregoing was due to a 6.3% drop in passenger income and a 16.5% drop in cargo income, partially offset by a 39.7% increase in the other income item. The impact of the depreciation of the Brazilian real represented a lower ordinary income of about US$ 121 million. Passenger income totaled MUS$ 7,877,715; which, when com- pared to the MUS$ 8,410,614 of the year 2015, represented a drop of 6.3%. This variation is mostly attributable to a 6.9% drop in the RASK as a result of an 8.1% drop in yields, which were impacted by an increasingly competitive environment in domestic markets, combined with the yet sluggish macroeco- nomic environment in South America and by the depreciation of local currencies (especially the Brazilian real, the Chilean peso and the Argentinean peso). All of the foregoing was partially offset by a 0.6% increase in ASK-measured capac- ity. Additionally, the occupation factor reached 84.2%, which represents an increase of 1.1 percentage points with respect to the previous year. As of December 31, 2016, cargo income totaled MUS$ 1,110,625, which represents a reduction of 16.5% with re- spect to the year 2015. This drop corresponds to an 8.5% drop in yields and 8.7% drop in RTK-measured traffic. Such drop in yields reflects the yet depressed cargo environment worldwide, the weakening of Brazil’s domestic and inter- national market, the sluggishness of imports from North America and Europe, and the negative impact of the de- preciation of the Brazilian real in the income from Brazil’s domestic market. Additionally, the ATK-measured capacity dropped by 5.3%. On the other hand, the Other Income item shows an increase of MUS$ 152,967 mostly attributable to income from land services associated to the 2016 Rio Olympic Games, the profit obtained from the sale of aircraft and greater income received on account of aircraft and land services. As of December 31, 2016, operating costs amounted to MUS$ 8,959,185; which, when compared to those of the previous year, represent lower costs of MUS$ 652,722, equivalent to a 6.8% drop, while the ASK-equivalent unit cost dropped by 7.0%. Additionally, the impact of the depreciation of the Bra- zilian real in this item represents lower costs of approximately US$ 101 million. The variations by item are explained as follows: a) Compensation and benefits dropped by MUS$ 121,672 mostly due to the depreciation of the Brazilian real, the Ar- gentinean peso and the Chilean peso by 4.8%, 60.7% y 4.2% respectively. Additionally, the average payroll during the period dropped by 9.3%, in line with Brazil’s reduced supply and the cost control initiatives promoted by the company. 255 b) Fuel dropped by 22.4%, the equivalent of MUS$ 594,424 of lower costs. Such drop is mostly attributable to a 16.6% drop on non-hedged prices and of 2.9% in consumption measured in gallons. During 2016, the company acknowl- edged a loss of MUS$ 48,094 on account of fuel hedg- ing, as compared to a loss of MUS$ 239,430 during the previous year; and a loss of MUS$ 40,772 on account of currency hedging. i) Other operating costs show an increase of MUS$ 139,404 mostly attributable to land service costs associated to the 2016 Rio Olympic Games, greater costs associated to the fair-value valuation of the stock inventory, as part of a sales plan promoted by inventory reduction initiatives. The foregoing was partially offset by the depreciation of the Brazilian real and the drop in associated marketing and advertising costs. c) Commissions show a drop of MUS$ 33,478, which is mostly owed to a drop in income from the sale of airline tickets and lower cargo operations. Financial income totaled MUS$ 74,949; which, when compared to the MUS$ 75,080 of the same period of 2015, represent a lower income of MUS$ 131. d) Depreciation and amortization increased by MUS$ 25,922. This variation is mostly explained by the incorporation to the fleet of 13 aircraft of the Airbus A320 family, 6 Airbus A350 and, 5 Boeing 787. The foregoing was partly offset by the depreciation of the Brazilian real, and by the exit of 9 Airbus of the A320 family, 10 Airbus A330 and 1 Boeing 767. e) Other leases and landing charges diminished by MUS$ 32,419, mostly due to lower aircraft leasing costs, as a re- sult of slowed-down operations and the depreciation of lo- cal currencies. f) Passenger services dropped by MUS$ 8,818; which repre- sents a 3.0% variation that is mostly explained by a lower average cost of on-board services, partially offset by in- creased passenger compensations. g) Aircraft leases increased by MUS$ 43,845, mostly because of the incorporation of 8 Airbus of the Airbus A320 family, 4 Boeing 787 and 2 Airbus A350. The foregoing was par- tially offset by the return of 7 Airbus aircraft of the A320 family, 2 Airbus A330 and 1 Boeing 767 The main items of the Consolidated Statement of Financial Position of TAM S.A. and Subsidiaries, which generated a profit of MUS$ 199,589 because of foreign exchange rate differences as of the fourth quarter of 2016, were the fol- lowing: Other financial liabilities, a profit of MUS$ 175,614 originated from US-dollars-denominated loans and finan- cial leasing operations toward the acquisition of the fleet and other items of net assets and liabilities, a profit of MUS$ 103,960 reduced by foreign exchange differences in accounts receivable to related companies, and a loss of MUS$ 79,985. Income of Multiplus S.A. h) Maintenance shows lower costs totaling MUS$ 71,082, equivalent to a 16.3% variation, mostly due to the de- preciation of the Brazilian real, lower costs associated to the return of aircraft and the efficiency gained by the fleet renewal. The net income of Multiplus as of December 31, 2016 amounted to a profit of MUS$ 152,873; which, when com- pared to the MUS$ 138,591 of the year 2015, represents an increase of 10.3%. FINANCIAL STATEMENTS | Analysis of the Financial Statements Income dropped by 6.4%, which is mostly explained by the ef- fect of the depreciation of the Brazilian real by 4.8% and by a drop of 9.1% from the redemption of outdated points with respect to the previous year. Additionally, there was a 10.2% drop of income on account of the redemption of outdated points from the previous year. Operating costs dropped by 11.7%, mostly because of the de- preciation of the Brazilian real, added to a 10.0% drop in the redemption of airline ticket points. Financial income/costs represented a profit of MUS$ 58,379, which corresponds to a positive variation of 275.3%, mostly attributable to the depreciation of the Brazilian real, partially offset by the placement of a part of the company’s cash on US-dollar linked currency hedges. The operating cash flow shows a negative variation of MUS$ 723,349, with respect to the same period of the previous year that is mostly attributable to a reduction in the follow- ing items: Collections on account of the sale of goods and the delivery of services totaling MUS$ 1,453,808; taxes to reimbursed profits of MUS$ 1,593; interest payments re- ceived of MUS$ 32,132 and other cash inflows (outflows) totaling MUS$ 24,642 because of increased cash inflows re- sulting from the movement of fuel byproducts contracted by the company, the establishment of guarantees for byproduct margins and payments to offset active and passive positions as of the dates of expiration of these contracts, net of dis- bursements made for establishing guarantees on account of judicial deposits and administrative proceedings carried out mostly in TAM S.A. and Subsidiaries; the foregoing was offset by positive variations in the following items: Supplier pay- ments for the supply of goods and services totaling MUS$ 273,461; net effect in Other collections and payments for op- erating activities totaling MUS$ 170,460 and Payments to and on behalf of employees totaling MUS$ 344,905. 256 Financial costs increased by 0.7%, totaling MUS$ 416,336 as of December 31, 2016, mostly due to greater fleet financing costs and other charges associated to credit card sales. Other income/costs recorded a positive result of MUS$ 47,358, mainly explained by income mostly acknowledged by TAM as a result of the appreciation of the Brazilian real during the year 2016. 3. Analysis and explanation of the Consolidated Net Cash Flow originated by the company’s operating, investment and financing activities. FINANCIAL STATEMENTS | Analysis of the Financial Statements The investment cash flow shows a positive variation of MUS$ 1,296,038 with respect to the same period of the previous year; which is explained by increases in the following items: net effect on Other collections and payments on account of the sale of capital equity or debt instruments of other entities totaling MUS$ 447,653, which acknowledge the movement of the investments materialized by TAM S.A. and Subsidiaries in private investment funds, real estate property acquisitions, plant and equipment of MUS$ 875,379, mostly because of a lower movement of down payments (prepayments) toward the acquisition of aircraft and other fixed-asset incorpora- tions. During the year 2016, the company acquired 1 Boeing 787 aircraft, 1 Airbus A320 aircraft, 4 Airbus A321 aircraft, and 4 Airbus A350 aircraft, as compared to the same period of the previous year, in which the company had acquired 8 Airbus A321, 3 Boeing 787 aircraft and 1 Airbus A350 air- craft; and proceeds from the sale of real estate properties, plant and equipment totaling MUS$ 18,967. The previously- described positive variation was offset by a reduction in the following items: Other cash inflows (outflows) totaling MUS$ 9,733 and the acquisition of intangible assets amounting to MUS$ 36,138. The financing cash flow shows a negative variation of MUS$ 267,919, with respect to the same period of the previous year; which is mostly explained by an increase in the following items: Loan payments totaling MUS$ 857,337, related to the payment of the financing of 10 Airbus A321 aircraft, 5 Air- bus A350 aircraft, 2 Boeing 787aircraft, 1 Airbus A320 aircraft, among other commercial loan payments; paid out interest to- taling MUS$ 14,640; paid out dividends totaling MUS$ 6,191 and other cash inflows (outflows) totaling MUS$ 129,406, because of lower PDP financing obtained from the Parent Company and disbursements made by TAM S.A. on account of the establishment of loan guarantees of MUS$ 74,186. The foregoing is offset by increased proceeds from the issue of shares totaling MUS$ 608,496 on account of the capital in- crease approved at the Extraordinary Shareholders’ Meeting held on August 18, 2016; proceeds from short and long-term loans totaling MUS$ 103,125 and lower liability payments on account of financial leasing operations totaling MUS$ 28,034. The above-depicted loan flows were affected by the following: months. This includes a total of 23 Airbus aircraft pro- jected to be delivered toward the end of 2018. a. During the month of March 2016, the company re- scheduled a Revolving Credit Facility (line of credit) guar- anteed by airplanes, engines, spare parts and supplies for a total available amount of US$ 275 million. In May of 2016, the referred credit facility was expanded by US$ 50 million. This facility includes minimum liquidity restrictions mea- sured at the level of the Consolidated Company and measured at the individual level for the companies: LA- TAM Airlines Group S.A. and TAM Linhas Aéreas S.A. During the month of December of the year 2016, the company prepaid the full amount withdrawn of US$ 315 million, maintaining a committed total of the RCF facility (line) of US$ 325 million. The facility will be available for future withdrawals until its date of expira- tion on March 2019. The assets (airplanes, engines and spare parts) given as collateral will be maintained as a security pledge. As compared to the same period of 2015, the Parent Company issued and placed a non-guaranteed long- term bond of MUS$ 500,0000, to expire in the year 2020, whose cash inflows were used to pay off the inter- company debt with Tam Capital 2 Inc. in the amount of MUS$ 300.000. In September 2016, TAM Linhas Aéreas S.A. obtained b. financing of US$ 200 million, with the guarantee of ap- proximately 18% of the shares of Multiplus S.A.; a per- centage subject to adjustment depending on the market value of the shares pledged in guarantee. c. Finally, additionally, in September 2016 the compa- ny obtained financing of down payments (prepayments) toward the acquisition of aircraft for an initial withdrawal of US$ 225 million (US$ 260 million is the line’s maxi- mum authorized amount) for a period of 2 years and 3 The company’s net cash flow as of December 31, 2016 shows a positive variation of MUS$ 195,829, with respect to the pre- vious year. 4. Analysis of the financial risks The company’s global risk management program’s objective is to minimize the adverse effects of the financial risks that af- fect the company. (a) Market risks Given the nature of its operations, the company is exposed to market factors such as: (i) fuel price risks; (ii) rate of in- terest risks; and (iii) local foreign exchange rate risks. (i) Fuel price risks In order to execute its operations, the company purchases Grade 54 USGC Jet Fuel, which is subject to the fluctuation of international fuel prices. In order to hedge against fuel risks, the company operates with derivative securities (swaps and options) whose under- lying objectives may be other than Jet Fuel. Thus, it is pos- sible to hedge against the West Texas Intermediate (“WTI”) oil, the Brent crude oil (“BRENT”) and distilled Heating Oil (“HO”), all of which have a high price correlation with Jet Fuel and are more liquid. As of December 31, 2016, the company acknowledged losses of MUS$ 48,034 on account of fuel hedges net of premiums. Part of the differences produced by the lower or greater market value of these contracts is acknowledged as hedge component reserves in the company’s net equity. As of December 31, 2016, the market value of the contracts currently in effect amounted to MUS$ 8,085 (positive). 257 FINANCIAL STATEMENTS | Analysis of the Financial Statements (ii) Foreign exchange risks The functional currency for the presentation of the par- ent company’s financial statements is the US dollar; rea- son why transaction and conversion exchange rate risks arise mostly from operating activities inherent to the line of business, the strategy and accounting practices of the company that are stated in a monetary units other than the functional currency. Likewise, TAM S.A. and the LATAM Subsidiaries are also ex- posed to foreign exchange risks, whose impact affects the company’s consolidated income. LATAM’s greater exposure to foreign exchange risks arises from the concentration of business in Brazil, which are mostly denominated in Brazilian reals (BRL); risks that are actively managed by the company. Additionally, the company manages exposure to operating income in UK Pound Sterling (GBP). The company mitigates its foreign exchange exposure by contracting derivative securities or through natural hedges or the execution of internal operations. As of December 31, 2016, the market value of FX positions amounted to MUS$ 1,645 (negative). The company has executed Cross Currency Swaps (CCS) with the purpose of dollarizing the cash flow of obligations contracted in Chilean UF (Unidades de Fomento – inflation index units), which accrue interest at a fixed rate. With this financial instrument the company manages to pay a variable interest rate that accrues interest at LIBOR plus a fixed spread. Likewise, the company through TAM S.A. has executed hedging contracts for its variable rate US-dollar- denominated debt with the objective of transforming it into fixed-rate Brazilian reals. As of December 31, 2016, the market value of the com- pany’s CCS positions amounted to MUS$ 12,338 (negative). (iii) Rate of interest risks The company is exposed to the fluctuations of the rates of interest of the markets, thereby affecting the future cash flows of the financial assets and liabilities currently in ef- fect and of those in the future. The company is mostly exposed to the London Inter Bank Offer Rate (“LIBOR”) and other less relevant rates of inter- est, such as Brazilian inter-bank deposit certificates (“CDI”) and Brazil’s long-term interest rate (“TJLP”). In order to diminish the risk of an eventual interest rate hike, the company executed interest-rate swap contracts. With respect to such contracts, the company pays, receives or merely receives –as the case might be- the difference between the agreed fixed rate of interest and the floating rate of interest calculated over each contract’s outstanding capital. On account of these contracts, the company ac- knowledged during the period a loss of MUS$ 22,533. Loss- es or gains on account of interest rate swaps are acknowl- edged as a component of the financial expenses based of the amortization of the loan being hedged. As of December 31, 2016, the market value of the interest rate swaps currently in effect amounted to MUS$ 17,183 (negative). As of December 31, 2016, approximately 63% of the debt is at a fixed rate or at a rate fixed against one of the above- mentioned instruments (securities). The average interest rate of the company’s debt is 3.7%. (a) Concentration of credit risks A high percentage of the Company’s accounts receivable come from airline ticket sales, cargo services to persons and various commercial companies that are economically and geographi- cally dispersed; albeit generally short-term. In line with the foregoing the company is not exposed to a significant risk of credit concentration. 5. Economic environment In order to analyze the economic environment in which the company operates, following is a brief summary of the situa- tion and evolution of the principal economies that affect both the domestic as well as the regional and world environment. The year 2016 showed a weak economic growth around the world despite the upturn as of the second half of the year. The economies that improved the most during the second half of the year were the advanced economies. On the other hand some emerging market economies experienced an economic slowdown. It is estimated that during 2016 the global econ- omy expanded by an average of 3.1%, slightly less than the 3.2% recorded in 2015. The growth of the European economy was about what was ex- pected in some countries like the United Kingdom and Spain, with a demand that turned out to be better than expected after the vote that decided the exit (Brexit) of United Kingdom of the European Union. During 2016, it is estimated that the Eurozone economies grew by 1.7% on the average (as com- pared to 2.0% in 2015). In United States the prospects for economic growth were re- vised downward after a weak first-half performance. However, starting in the second half, GDP growth exceeded market ex- pectations, evidencing that the economy continues to make progress, albeit at a slower rate. From 2017 onwards, however, it is expected that the fiscal stimulus policies announced by the new government will boost the country’s economic growth. An economic growth of 1.6% is now being projected for the year 2016 (as compared to 2.6% in 2015). In Latin America, growth prospects remain depressed and recovery from the second half of 2016 was weaker than ex- pected in the large economies of the region, such as Brazil and Argentina, although there is greater uncertainty about Mexico. On the other hand, we continue to see a continuous weakening of Venezuela’s economy, with a projected economic contrac- tion of 0.7% (as compared to a growth of 0.1% in 2015). 258 FINANCIAL STATEMENTS | Analysis of the Financial Statements Specifically in Brazil, some indicators, like consumer and busi- ness confidence, suggest that the economic recession may be coming to an end. However, the recovery during the second half of the year was lower than expected. Consequently, that country’s prospects for next year remain uncertain. Some of the country’s main challenges are the implementation of re- forms that will improve the country’s structural problems as well as the recovery of the political credibility. For the year 2016, the projection is for a 3.5% economic contraction (as opposed to- 3.8% in 2015). In Chile, economic growth has remained stable although at lower levels than in the last few years, mainly because of the lower dynamism of their counterparts in the region and the lower price of copper, among other factors. An economic recovery is expected during the coming years, as a result of projected stronger external demand for products and of more stable copper prices. The foregoing, however, might be offset by a low recovery of seen domestic demand and consumer confidence. A growth of 1.7% is projected for the year 2016 (as compared to 2.3% in 2015). In this economic environment, the flexibility of the business model implemented by the company is crucial to better con- front such projected economic fluctuations. a) The following are the main financial indices of the Consolidated Financial Statement: LIQUIDITY INDICES Current liquidity (times) (Current assets in operation/Current liabilities) Acid test (times) (Funds available/ Current liability) INDEBTEDNESS INDICES Debt ratio (times) (Current liabilities + Non-current Liabilities/Net equity) Current debt / Total debt (%) Non-current debt / Total debt (%) Hedging of financial expenses (R.A.I.I. / Financial expenses) ACTIVITY INDICES Total assets Investments Disposal of property (enajenación) 31-12-2016 31-12-2015 0,58 0,15 3,66 41,38 58,55 1,80 0,50 0,13 5,31 37,20 62,80 -0,06 19.198.194 3.401.103 3.046.658 18.101.418 1.533.637 587.153 Profitability indices The profitability indices were calculated over the equity capital and income attributable to the Majority Shareholders. 31-12-2016 31-12-2015 Return on equity (Net income / Average net income) Return on assets (Net income / average assets) Yield of operating assets (Net income / Average (**)operating assets 0.02 0.00 0.00 (**) Total assets minus deferred taxes, personnel current accounts, permanent and temporary investments, and goodwill. Income per share (Net income / N° of subscribed and paid shares) Dividend returns (Paid dividends / Market price) 0.11 0.00 -0.08 -0.01 -0.01 -0.40 0.00 259 b) The following are the main financial indices of the Consolidated Financial Statement: INCOME Passengers Cargo Others TOTAL OPERATING INCOME COSTS Compensation (Remuneraciones) Fuel Commissions Depreciation and amortization Other leases and Landing charges Services to passengers Aircraft leases Maintenance Other operating costs TOTAL OPERATING COSTS OPERATING INCOME Operating margin Financial income Financial expenses Financial income / Costs PROFIT BEFORE TAXES AND MINORITY INTEREST Taxes PROFIT BEFORE MINORITY INTEREST Attributable to: Parent company investors Minority interest NET PROFIT Net margin Effective rate of interest Total shares Net profit per share (US$) FINANCIAL STATEMENTS | Analysis of the Financial Statements For the 12 months ended on December 31 2016 2015 7,877,715 1,110,625 538,748 9,527,088 -1,951,133 -2,056,643 -269,296 -960,328 -1,077,407 -286,621 -568,979 -366,153 -1,422,625 -8,959,185 567,903 6.0% 74,949 -416,336 47,358 273,874 -163,204 110,670 69,220 41,450 69,220 0.7% -59.6% 8,410,614 1,329,431 385,781 10,125,826 -2,072,805 -2,651,067 -302,774 -934,406 -1,109,826 -295,439 -525,134 -437,235 -1,283,221 -9,611,907 513,919 5.1% 75,080 -413,357 -532,757 -357,115 178,383 -178,732 -219,274 40,542 -219,274 -2.2% -50.0% 606,497,693 0.11415 545,547,819 -0.40193 260 Sworn Statement As Directors and Chief Financial Officer of LATAM Airlines Group, we declare under our responsibility on the veracity of the information contain in the Annual Report 2016. FINANCIAL STATEMENTS | Sworn Statement 261 Annual Report 262 

Continue reading text version or see original annual report in PDF format above