Naturgy, whose shares jumped 5.9% after the announcement, said it expected to book a pre-tax capital gain of about 400 million euros on the sale.
Its earnings have suffered as the COVID-19 pandemic sapped energy demand, weighing on gas prices that were already low because of oversupply. Even after Friday's bounce, shares were still down around 13% on the year.
Selling the Chilean unit is in line with its aim to become "a less volatile company, a more predictable company, a bit more boring, if you will," Chief Executive Francisco Reynes told reporters on a conference call.
Despite the windfall, "we are not in a hurry to invest what we are going to generate," he added.
Formerly known as Gas Natural, Naturgy reshuffled management in 2018, cut costs and moved out of several countries, and now intends to focus on renewable energy and electricity grids in countries with stable regulation and macroeconomic conditions.
The all-cash transaction, which is expected to be concluded by the end of February, comes as Chinese firms have increasingly invested in Chilean industries, from salmon farming to lithium production. China is Chile's top trade partner.
China's increasing influence throughout Latin America has repeatedly angered the United States. On a visit this week, a U.S. official warned Chile and Brazil against investing in Chinese 5G telecommunications technology because of fears of surveillance.
China has strongly rejected those claims.
Spanish banks Santander and BBVA advise State Grid, while Naturgy has hired Citi.
(Reporting by Inti Landauro and Isla Binnie; additional reporting by Dave Sherwood in Santiago; editing by Andrei Khalip and Barbara Lewis)