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 CLP - CHILEAN PESO ARS - ARGENTINE PESO US$ - UNITED STATES DOLLAR THUS$ - THOUSANDS OF UNITED STATES DOLLARS COP - COLOMBIAN PESO BRL/R$ - BRAZILIAN REAL THR$ - THOUSANDS OF BRAZILIAN REAL MXN - MEXICAN PESO VEF - STRONG BOLIVAR 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. 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 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 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 LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS As of As of December 31, December 31, Note 2016 2015 ThUS$ ThUS$ Current assets Cash and cash equivalents 6 - 7 949,327 753,497 Other financial assets 7 - 11 712,828 651,348 Other non-financial assets 12 212,242 330,016 Trade and other accounts receivable 7 - 8 1,107,889 796,974 Accounts receivable from related entities 7 - 9 554 183 Inventories 10 241,363 224,908 Tax assets 18 65,377 64,015 Total current assets other than non-current assets (ordisposalgroups)classifiedasheldforsaleorasheldfor distribution to owners 3,289,580 2,820,941 Non-current assets (or disposal groups) classified as held for sale or as held for distribution to owners 13 337,195 1,960 Total current assets 3,626,775 2,822,901 Non-current assets Other financial assets 7 - 11 102,125 89,458 Other non-financial assets 12 237,344 235,463 Accounts receivable 7 - 8 8,254 10,715 Intangible assets other than goodwill 15 1,610,313 1,321,425 Goodwill 16 2,710,382 2,280,575 Property, plant and equipment 17 10,498,149 10,938,657 Tax assets 18 20,272 25,629 Deferred tax assets 18 384,580 376,595 Total non-current assets 15,571,419 15,278,517 Total assets 19,198,194 18,101,418 The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements. LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION LIABILITIES AND EQUITY As of As of December 31, December 31, LIABILITIES Note 2016 2015 ThUS$ ThUS$ Current liabilities Other financial liabilities 7 - 19 1,839,528 1,644,235 Trade and other accounts payables 7 - 20 1,593,068 1,483,957 Accounts payable to related entities 7 - 9 269 447 Other provisions 21 2,643 2,922 Tax liabilities 18 14,286 19,378 Other non-financial liabilities 22 2,762,245 2,490,033 6,212,039 5,640,972 Liabilities included in disposal groups classified as held for sale 10,152 - Total current liabilities 6,222,191 5,640,972 Non-current liabilities Other financial liabilities 7 - 19 6,796,952 7,532,385 Accounts payable 7 - 24 359,391 417,050 Other provisions 21 422,494 424,497 Deferred tax liabilities 18 915,759 811,565 Employee benefits 23 82,322 65,271 Other non-financial liabilities 22 213,781 272,130 Total non-current liabilities 8,790,699 9,522,898 Total liabilities 15,012,890 15,163,870 EQUITY Share capital 25 3,149,564 2,545,705 Retained earnings 25 366,404 317,950 Treasury Shares 25 (178) (178) Other reserves 580,870 (6,942) Parent's ownership interest 4,096,660 2,856,535 Non-controlling interest 14 88,644 81,013 Total equity 4,185,304 2,937,548 Total liabilities and equity 19,198,194 18,101,418 The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements. LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME BY FUNCTION For the period ended December 31, Note 2016 2015 ThUS$ ThUS$ Revenue 26 8,988,340 9,740,045 Cost of sales (6,967,037) (7,636,709) Gross margin 2,021,303 2,103,336 Other income 28 538,748 385,781 Distribution costs (747,426) (783,304) Administrative expenses (872,954) (878,006) Other expenses (373,738) (323,987) Other gains/(losses) (72,634) (55,280) Income from operation activities 493,299 448,540 Financial income 74,949 75,080 Financial costs 27 (416,336) (413,357) Share of profit of investments accounted for using the equity method - 37 Foreign exchange gains/(losses) 29 121,651 (467,896) Result of indexation units 311 481 Income (loss) before taxes 273,874 (357,115) Income (loss) tax expense / benefit 18 (163,204) 178,383 NET INCOME (LOSS) FOR THE PERIOD 110,670 (178,732) Income (loss) attributable to owners of the parent 69,220 (219,274) Income (loss) attributable to non-controlling interest 14 41,450 40,542 Net income (loss) for the year 110,670 (178,732) EARNINGS PER SHARE Basic earnings (losses) per share (US$) 30 0.12665 (0.40193) Diluted earnings (losses) per share (US$) 30 0.12665 (0.40193) The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements. LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the period ended December 31, Note 2016 2015 ThUS$ ThUS$ NET INCOME (LOSS) 110,670 (178,732) 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 25 (3,105) (14,631) Total other comprehensive income 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 494,362 (1,409,439) Cash flow hedges Gains (losses) on cash flow hedges before taxes 19 127,390 80,387 Other comprehensive income (losses), before taxes, cash flow hedges 127,390 80,387 Total other comprehensive income that will be reclassified to income before taxes 621,752 (1,329,052) Other components of other comprehensive income (loss), before taxes 618,647 (1,343,683) Income tax relating to other comprehensive income that will not be reclassified to income Income tax relating to new measurements on defined benefit plans 18 921 3,911 Accumulate income tax relating to other comprehensive income that will not be reclassified to income 921 3,911 Income tax relating to other comprehensive income that will be reclassified to income Income tax related to cash flow hedges in other comprehensive income (34,695) (21,103) Income taxes related to components of other comprehensive incomethat will be reclassified to income (34,695) (21,103) Total Other comprehensive income 584,873 (1,360,875) Total comprehensive income (loss) 695,543 (1,539,607) Comprehensive income (loss) attributable to owners of the parent 648,539 (1,551,331) Comprehensive income (loss) attributable to non-controlling interests 47,004 11,724 TOTAL COMPREHENSIVE INCOME (LOSS) 695,543 (1,539,607) The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements. LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to owners of the parent Change in other reserves Currency Cash flow Actuarial gains or losses Shares based Other Total Parent's Non- Share Treasury translation hedging on defined benefit plans payments sundry other Retained ownership controlling Total Note capital shares reserve reserve reserve reserve reserve reserve earnings interest interest equity ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$ Equity as of January 1, 2016 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 Total increase (decrease) in equity Comprehensive income Gain (losses) 25 - - - - - - - - 69,220 69,220 41,450 110,670 Other comprehensive income - - 489,486 92,016 (2,183) - 579,319 - 579,319 5,554 584,873 Total comprehensive income - - 489,486 92,016 (2,183) - - 579,319 69,220 648,539 47,004 695,543 Transactions with shareholders Equity issue 25-34 608,496 - - - - - - - - 608,496 - 608,496 Dividens 25 - - - - - - - - (20,766) (20,766) - (20,766) Increase (decrease) through transfers and other changes, equity 25-34 (4,637) - - - - 2,891 5,602 8,493 - 3,856 (39,373) (35,517) Total transactions with shareholders 603,859 - - - - 2,891 5,602 8,493 (20,766) 591,586 (39,373) 552,213 Closing balance as of December 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 The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements.