State Grid: Internationalization is first class

State Grid Overseas Assets 22.1 billion U.S. Dollars

Reporter: How was the distribution of the former National Grid's overseas investment?

Cheng Mengrong: At present, our overseas assets are mainly in Brazil, Portugal, Australia, the Philippines and Hong Kong. In early 2009, State Grid International Development Co., Ltd. took a stake in the Philippine National Grid Corporation, which accounted for 40% of the equity. It successfully took over the Philippine national power grid and began a 25-year franchise operation. At the end of 2010, the international company once again successfully acquired 7 transmission concession companies in Brazil sold by Spanish shareholders, and obtained 16 500kV transmission lines and other assets with a total length of 3173 kilometers. The franchise period is 30 years. In addition, we have set up offices in Russia, Europe, the United States, Venezuela, and Africa to understand the local market and conduct preliminary analysis.

Reporter: What are the latest capital operations overseas during the past year or what projects are there in the project?

Cheng Mengrong: Last year did a good job. In Ethiopia, we received a general contracting project for the construction of a domestic 500 kilovolt trunk line with a transmission distance of 1,136 kilometers and a total contracting contract of 1,460 million U.S. dollars. In addition, the state-owned enterprise Henan Pinggao Electric [5.42% Funds Research] Group has invested in another transmission line project in Poland. The total contract value is approximately RMB 150 million.

Reporter: What is your current total overseas investment and total assets? What is the percentage of overseas assets in the total assets of the State Grid?

Cheng Mengrong: So far, the total overseas investment is 11 billion U.S. dollars, and the scale of overseas assets is 22.1 billion U.S. dollars. Overseas assets account for 5% of the total assets of the national grid, and the proportion is still small. Because the domestic plate is too large, the total assets of the national grid exceed US$420 billion.

Reporter: What are the main directions of overseas investment by State Grid?

Cheng Mengrong: The direction of investment is mainly transmission grid assets, because foreign energy companies are usually bundled together for gas transmission and distribution. For example, Portugal is called Energy Network Corporation. Besides transmission lines, there are gas pipelines. Therefore, in addition to the transmission grid, there is a small amount of gas distribution and gas transmission.

Reporter: Do you also do gas pipelines?

Cheng Mengrong: We do not directly provide technical support, but it does not affect our investment. Gas transmission, transmission, and gas distribution all belong to the state's regulatory assets. The asset return of regulatory assets is approved by the government and guaranteed by law. The return is adjusted with the inflation index. Although it does not make much money, it is stable. Since the financial crisis, many venture capital companies have entered this area one after another because the earnings of this industry are very stable.

Reporter: What is the return rate of foreign government monitoring assets?

Cheng Mengrong: In terms of the countries we voted for, the return on investment is double-digit, but it will not be as high as 20 or 30 or even more than ten. Among them, developing countries, such as the Philippines and Brazil, are slightly higher, and Europe is relatively low, but the European investment environment is stable. In any case, it is higher than the domestic rate of return. The rate of return is three to five times that of China.

Reporter: Our country has so many foreign exchange reserves. It has always been buying US government bonds. Why can't we invest in these government-monitored assets?

Cheng Mengrong: I think this problem is very good. When we were doing these projects, including in the government's approval process, we encountered some different voices. The point of view was: "The domestic power grid is not yet built, why should we build a foreign power grid?" We believe that from the company's point of view, we must invest in foreign countries. Investment should be profitable, not public welfare. Furthermore, from the national point of view, direct access to resources can easily cause resentment among local people.

We provide high-quality universal services to the local government and receive legitimate and reasonable benefits from supervision. This is also a good complement to China’s local social image. The positioning of the national grid in overseas markets is a long-term strategic investor, not a financial investor. Our foothold is long-term stable operation and income.

Reporter: Are the incomes of foreign companies repatriating or staying in local companies?

Cheng Mengrong: In different situations, generally speaking, we need to look at the company's needs. However, the company did not say that it must have taken this profit back home.

Brazil Project Expected Rate of Return 18%

Reporter: What is the specific situation of the UHV power transmission project awarded by the State Grid in Brazil?



Cheng Mengrong: We have prepared a three-year time for Brazil’s “Beautiful Mountain” hydropower UHV transmission project. The total length of the transmission lines is more than 2,000 kilometers. In fact, Brazil used the ±600 kV DC transmission technology very early and once had the AC/DC parallel network (±600 kV DC transmission and 750 kV AC transmission) with the highest operating voltage in the world. When we were preparing to build the Three Gorges transmission line, we sent a number of technical inspection missions to study.

In constructing the beautiful mountain project in Brazil, Brazil first wanted to use the ±600 kilovolt DC transmission technology. We learned about the total length of its transmission lines, and considered that ±800 kV DC has a technical advantage over ±600 kV – large transmission capacity. More efficient and low line loss.

So from July 2010, we have made four rounds of technical recommendations. During this period, two Brazilian energy ministers and the general manager of Brazil Power visited the U.S. high-pressure project several times in China. After returning, Brazil built a UHV experimental base. At the end of 2012, the Pakistani side established that the transmission project of Mt. Miyama used ±800 kV technology and submitted it to the government as the only alternative. Afterwards, we formed a joint venture with Brazil Electric Power Company to bid for the Meishan Power Transmission Project. On February 7, this year, the joint venture won the bid. President Rossev called us to congratulate us at the first time.

Reporter: At that time, how many people participated in the bidding?

Cheng Mengrong: There are three in total, one of which is a local power company and the other is an engineering company in Spain. It should be said that according to the requirements of the project, both companies can do it. However, from a global perspective, the State Grid Corporation of China is the only company with experience in design, construction, construction, operation and maintenance of UHV AC and DC. Especially in terms of operation and maintenance, it is unique, so it is very sure; plus we have found a local partner, Brazil Electric Power Company is also a national power company, no problem in terms of technical strength and management capabilities. "21st Century": Does the Commonwealth establish a new company?

Cheng Mengrong: Yes. The CEO and CFO of this new company are our people, which will facilitate the implementation of the entire project.

Reporter: What is the investment structure of the company's equity and how much investment is needed for the entire project?

Cheng Mengrong: We have a share of 51%, and Brazilian electricity is 49%. If the converted U.S. dollar is about 1.8 billion U.S. dollars, according to 51:49, we are about 1 billion U.S. dollars. Because of the use of investment leverage, we do not have much equity capital. On the one hand, loans from local development banks are used, and more are low-cost financing from the market.

Reporter: Is it financing in the international market? Will Brazil's local development bank also make loans?

Cheng Mengrong: We have issued a portion of equity capital, and the other part has been financed from the international market. The Brazilian National Bank for Economic and Social Development (BNDES) also provides loans. Our financing in the capital market last year worked well, because the company’s bond rating and the company’s own rating are all national sovereign credit ratings (Sovereign rating). The multiples of investor subscriptions are very high, so the five-year period, ten-year period and thirty-year period The interest rates for the years are very competitive.

Reporter: What is the general concept of return on investment in the transmission grid?

Cheng Mengrong: The situation in various countries is not exactly the same. In Brazil, for example, it is a fixed regulatory return. More precisely, it is based on a reasonable return and a price index. As far as the beautiful mountain project is concerned, the maximum line given by the Brazilian Electricity Regulatory Authority cannot exceed R$ 5 billion, or about US$ 2.2 billion. We won the bid of 1.8 billion U.S. dollars. This price guarantees a reasonable return. Brazil's savings rate is above 10%, investment projects must be higher than the savings rate, otherwise there is no need to invest in projects. The expected rate of return is around 18%.

Reporter: Is there a Chinese company, especially an electrical manufacturing company, winning the bid in this project?

Cheng Mengrong: Yes. Shandong Power Construction Company hit two packages in seven packages. Electrician-made equipment We will do our best to promote. Since this project is a greenfield project, the use of BNDES loans is conditional on a 60% localization rate. Unfortunately, at present, no Chinese manufacturing company has a joint venture plant in Brazil, so it can only export some high-end equipment that Brazil cannot produce. Of course, the so-called localization rate, even if the last line of the assembly line is made in Brazil, is also considered localized. This is the same as our practice in the 1980s. We hope to open up the development of industrial manufacturing.

Grasping the Opportunity of State-owned Assets Privatization

Reporter: In addition to the Brazilian UHV project, everyone is still paying attention to your project in 2007 to bid for 25 years of operation rights of the Philippine national power grid. From a general sense of understanding, all network operations involve national security. How do you achieve success?

Cheng Mengrong: In fact, it is also well understood that if a country’s government finances are not at a time when they are at a dead end, they will not privatize state-owned assets. When the Thatcher government privatized railways, electricity, water supply, and coal mines, the government had no money. However, the opening of the market does not mean that the government has no regulatory means, such as price mechanisms, laws and regulations, and so on. We have seized the opportunity in their privatization to bid. At that time, the bidding for the Philippines project was also very fierce because everyone knew that this return would be very good. "21st Century": Are there any twists and turns in the bidding process? How did you pass the deliberation of the Diet?

Cheng Mengrong: Held four hearings at that time. Successfully benefited from the large political background at that time. At that time, China-Philippines relationship was not bad. Of course, due to procedural due diligence, the State-owned Assets Bureau of the Philippines and the transmission grid company recognized the performance of the State Grid and management technology capabilities. There was no hearing stage. There was a clear resistance and the overall situation was relatively smooth.

Reporter: What is the fixed regulatory return rate of the Philippine national grid in the last five years?

Cheng Mengrong: It's about 16%-18%. Like this kind of country's so-called high risk, it has high yield. The political risk in the Philippines is high.

Reporter: Portugal is relatively stable?

Cheng Mengrong: Yes. We voted for the Portuguese national energy network company, including gas transmission and transmission. According to the agreement, the State Grid Corporation of China acquired 257 million euros (approximately US$ 510 million) for a 25% stake in Portugal National Energy Network. This is the first time that Chinese companies have acquired state-level grid companies in Europe.

Reporter: Obtain 25% of the shares, ranking first?

Cheng Mengrong: We are the largest shareholder, and Oman Oil Company obtained 15% equity. This is also due to the privatization of state-owned assets. Three years ago, the European debt crisis led to the real economic crisis. The first place was Portugal. The government debt crisis had no money to pay the debt. Only state-owned assets could be privatized. The first batch of privatization lists included power generation companies. What we entered was Energy Network Company and National Grid have seized a good opportunity to go global. As a strategic investor, we not only sent technicians to provide technical support, but also sent CTOs to the chief technology officer. We also participated in the financial department and project development department.

No international talk about world-class

Reporter: What is the driving force for the State Grid to go out and do international projects? Is it just responding to the call of the central government?

Cheng Mengrong: The response to the call is affirmative. This is a major premise. If the government does not support us, it cannot be done. In the past few years, we have had more in-depth exchanges with many multinational corporations. We have deeply realized that the prerequisite for a world-class enterprise is to develop internationally. The vision of going abroad is always the “landlord”. Vision, not an eye of globalization of capital. Without international development, talk about world-class companies. After 2006, State Grid proposed the goal of building a world-class company.

Reporter: The State Grid Corporation is already a Fortune 500 company. In your eyes, what are the standards of world-class companies?

Cheng Mengrong: The State Grid is now ranked seventh in the world's top 500, but there are still gaps from world-class companies. We feel that the development of internationalization is a prerequisite for world-class companies. If there are no assets in foreign countries, how can we call ourselves a world-class enterprise?

Reporter: International power grid companies, from the assets to the scale which can be compared with yours?

Cheng Mengrong: No one can compare with us. However, we believe that the company is not only big but also strong.

The National Grid has several important indicators: The first is the company's assets of 2.5602 billion yuan (about US$420 billion), and the second is the safe operation. Since 1997, there has not been a large-scale power outage in the national grid. This is a record that no other major power grid company in the world has ever recorded. The United States had a major power outage in 2002, and Europe, India, Brazil, and Japan all happened. The third is innovation and advanced technology. Innovation capability is not only reflected in UHV, we are also leading the development of smart grids. For example, the Italian power company, which has millions of smart meters installed, feels "very proud" and we will have tens of millions of pieces a year. By 2015, there will be 300 million smart meters. "21st Century": In the world's top 500 companies, your peer ranking is what?

Cheng Mengrong: ENEL ranked 52nd, EDF ranked 77th, RWE ranked 139th, Spain IBERDROLA ranked 234th Bit. Others such as AEP and RusHydro have not entered the top 500.

However, it is very important that both French and Italian power companies have a large share of their overseas assets. For example, the Italian power company's overseas assets account for nearly 50% of the total assets, and the French power company also accounts for about 40%. We actually lacked the leg of overseas assets.

Reporter: There are many American companies among the top 500 companies in the world. Why is the grid company unnamed?

Cheng Mengrong: American Electric Power (American Electric Power) had previously invested more overseas and had also invested in projects in China. After the new CEO took office, the investment strategy was adjusted to domestic convergence. Then there was the Enron Corporation, which was once the world's largest power, natural gas, and telecommunications company. Before its investment overseas, it was very aggressive, but Enron went bankrupt in 2001. In fact, U.S. power grid companies have few overseas investment projects, and even large ones do not. Because U.S. power grid companies are regional and fragmented grid systems, U.S. power companies are neither doing much nor doing well.

Reporter: How do your peers, such as members of the International Large Grid Organization (CIGRE), evaluate the State Grid of China?

Cheng Mengrong: In general, the power companies in the world are very powerful, especially those companies that have integrated transmission and distribution, and they are all very satisfied with the achievements of the State Grid in recent years. In June last year, the Wall Street Journal reported that the central point was that our investment was aggressive in the market. At that time I was meeting in Washington and met Nick Akins, chairman of the American Power Company. He had different perspectives from our understanding of this article. He said that this article lists all these things you have done in the past few years. Here is our list. How many years American companies can do cannot be achieved.

0% of Overseas Assets in 2020

Reporter: In the coming period of time, it is unlikely that the Italian counterparts will achieve 50% of their overseas assets.

Cheng Mengrong: Impossible. Because the scale of domestic assets is too large, it is still in the stage of financial crisis. The global fund has a high interest in the supervision of asset projects and the competition is becoming more and more fierce.

Reporter: In your mid- and long-term plan, overseas assets will reach 10% of the total assets by 2020. It is necessary to consider domestic development. Is it possible to achieve this?

Cheng Mengrong: Now that overseas assets account for 5% of the total assets of the State Grid, the problem is that domestic investment has grown rapidly. At present, China's total assets are 2.5602 trillion yuan, and overseas total assets are only 137 billion yuan (approximately 22.1 billion US dollars). During the "Twelfth Five-Year Plan" period, the National Grid will invest about 300 billion yuan each year. We feel pressure is not small.

Reporter: What are your peers' comments on the UHV grid?

Cheng Mengrong: It is generally considered a good technical solution. When Comrade Liu Zhenya visited the U.S. Department of Energy, when he introduced China’s UHV transmission grid, Zhu Xiwen (US Secretary of Energy) used the word “Jealousy”, which can be understood as envy. In the second year, he and the then Secretary of Commerce Gary Locke went to visit the company. Two members of the cabinet of the United States visited a company at the same time. This is not the case in the history of the United States.

Reporter: Does Brazil's UHV transmission project have radiation effects on South America in the future?

Cheng Mengrong: It is possible. This depends on the demand for economic development. The economy is currently in a downturn. We have been tracking the Chilean economy and its level of development exceeds that of Brazil, but in the short term there is no demand for long-distance transmission lines, but it does not affect our tracking of other 500-kV projects. Another possibility is to do network between countries, which may be the place where UHV AC/DC can play a role.

In addition, Europe has been talking about the development of desert solar energy in North Africa over the past few years. It has been sent to European hinterland via UHV DC, and the total length of transmission lines is more than 2,000 kilometers. We have been focusing on the North African desert solar project and participated in the pre-research.

Reporter: Who is leading? EU?

Cheng Mengrong: Some German companies are spontaneous, including funds, manufacturing companies, and power companies. This is due to the Merkel government's "abandonment schedule," and Germany's 17 nuclear power stations will be closed by the end of 2022 at the latest. Finding alternatives has become their top priority. At present, Germany requires all thermal power plants to be zero-emissions and the cost is too high. Another alternative is the introduction of wind power from the North Sea in northern Germany. The investment is also huge. At present, several technical feasibility studies are in progress. We also conducted preliminary studies. In addition to North Africa, from the Central Asian region, including the western part of Xinjiang, to Germany via long-distance transmission lines is technically feasible, but this does not include geopolitical factors.

Reporter: What kind of energy is Xinjiang?

Cheng Mengrong: Xinjiang is a coal-fired power plant, and there may be wind power and solar energy in the future. Including some clean energy in Central Asia is likely to be sent to Europe. When the plan becomes possible, it is necessary to rely on UHV transmission technology. Energy assets in some European countries are also very good, because the funds are willing to invest in stable income areas, so the competition is fierce.

Reporter: To achieve the 10% goal, what new projects will be achieved this year?

Cheng Mengrong: There is no problem with the project. There is still a lot of uncertainty in the future. However, the focus of work is in Europe. We are concerned about countries and regions with relatively stable political and economic returns, and optimistic about the more mature market mechanisms. Of course, it does not rule out further development of new projects in Brazil. However, despite the high economic growth in Brazil, there are still certain risks.