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SGID to become major player in Chilean electricity market
Chilquinta deal, valued at US$2.23 billion, is latest move by Chinese electricity companies in South America
Michael Marray 17 Jun 2020

CHINA'S State Grid International Development Limited (SGID) is about to become a major player in the Chilean electricity market, with the previously announced deal to acquire assets from California based Sempra Energy expected to close on June 24. The all cash deal is valued at US$2.23 billion.

Chilquinta Energia is the third largest distributor of electricity in Chile, providing electricity to approximately 2 million people in the central regions of Valparaiso and Maule. It is also active in the development and operation of electric transmission lines.

The Chilquinta deal is the latest move by Chinese electricity companies in South America, where China has become the dominant foreign investor. In April, Sempra Energy also announced the completion of the sale of its Peruvian businesses, including its 83.6% interest in Luz del Sur, to an affiliate of China Yangtze Power International (Hongkong), for US$3.6 billion in cash.

China is also a major force in the Brazilian electricity sector, where State Grid Corporation has become the largest foreign investor in power generation, transmission and distribution. Last October Phase II of the Brazilian Belo Monte Hydropower 800kV Ultra High Voltage transmission project signed its operational licence, and is now transmitting electricity 2,000 kilometres from hydro facilities in the north to population centres in the southeast.

In Chile and Peru, the decision by San Diego, California based Sempra Energy to sell off its South American assets, and concentrate on the US market, presented Chinese firms with an opportunity to gain immediate access to new markets.

Sempra is listed on the New York Stock Exchange. The completion of the Chilean transactions will conclude Sempra Energy's planned sale of its South American businesses, with proceeds from the sales used to further strengthen the company's balance sheet and liquidity position.

In addition to Valparaiso-based Chilquinta Energia, Sempra Energy is also selling a 100% interest in Tecnored S.A., which provides electric construction and infrastructure services to Chilquinta Energia and third parties, as well as 100% ownership of Eletrans S.A., which owns, constructs, operates, and maintains power transmission facilities.

On June 9, Sempra Energy and SGID jointly announced that both companies remain firmly committed to completing the sale of the Chilean businesses. "We expect confirmation on the last remaining filing in China with the National Development and Reform Commission very soon," says Hu Yuhai, chairman of SGID.

"We have received all the necessary approvals for the sale of our Chilean investments from the required governmental agencies in Chile and we plan to proceed with the closing with a target date of June 24," adds Dennis V Arriola, executive vice president and group president of Sempra Energy.

SGID is a wholly owned subsidiary of State Grid Corporation of China (SGCC), and is incorporated in Hong Kong as a limited liability company. It pursues investment opportunities worldwide, and currently has investments in the Philippines, Brazil, Portugal, Australia, Hong Kong SAR, Italy, Greece, and Oman.

Beijing headquartered SGCC is the world's largest power utility corporation, and has extensive experience in constructing and operating electricity transmission and distribution networks. Some of SGCC's biggest overseas projects have been in Brazil, which has major hydropower facilities in the Amazon region in the north, while its two biggest cities Sao Paulo and Rio de Janeiro are around 2,000 kilometres to the south.

The situation is similar to China, as both have a vast territory with energy consumption centres far from hydro resources. China built its first UHV transmission line in 2007, aiming to ease energy pressure on the country's commercial centre Shanghai and Xiangjiaba, a remote city in southwestern China along the Yangtze River.

In 2013, the company introduced two transmission projects to Brazil using China's ultra-high voltage power transmission technology, which can transmit a large capacity of electricity over long distances with low losses. In October 2019, the Brazilian Ministry of Energy and Mines and State Grid Corporation of China signed the operation license of Phase II of the Brazilian Belo Monte Hydropower 800kV UHV DC Transmission Project. Construction began in September 2017.

The signing was witnessed by Chinese President Xi Jinping and Brazilian President Jair Bolsonaro, during a state visit to Beijing. The tranmission line begins at the Belo Monte Hydropower Plant, running through 81 cities in five states before reaching Rio de Janeiro. It has a total length of 2,539 kilometres, making it the longest 800kV UHV DC project in the world.

Electricity generation and transmission has become one of the key targets of the Belt & Road Initiative in Brazil in recent years, as part of a broader energy cooperation between China and Brazil. China State Grid owns CPFL Energia, the third largest Brazilian utility after Electrobras and Energisa. On June 5, CPFL Energia SA fixed the share price for an upcoming delisting offer of renewables subsidiary CFPL Renovaveis.

Brazil is also currently looking for a partner to help complete its troubled Angra 3 nuclear reactor. On June 11, the government approved a plan for Eletronuclear, an Eletrobras subsidiary that already runs two nuclear plants, to complete the 1,400MW Angra 3 project. The government would like a private partner to come in as a minority shareholder, the Investment Partnership Program council announced. Chinese, Russian, French, and South Korean companies are all viewed as possible partners on the troubled project, where US$1.8 billion has already been spent.

In Peru, Sempra Energy sold its equity interests in its Peruvian businesses, including its 83.6% stake in Luz del Sur S.A.A. (Luz del Sur), to China Yangtze Power International (Hongkong) (CYP). This deal closed on April 24. Luz del Sur is the largest listed power company in Peru. The deal also includes Sempra Energy’s interest in Tecsur S.A., which provides electric construction and infrastructure services to Luz del Sur and third parties, and Inland Energy SAC, Luz del Sur’s generation business.

Baker McKenzie, Tian Yuan Law Firm, Muniz, Olaya, Melendez, Castro, Ono & Herrera, White & Case, and Rodrigo, Elias & Medrano advised on the deal. This US$3.59 billion all cash acquisition was the largest overseas deal closed by a Chinese company during 2019. BofA Merrill Lynch and Lazard were financial advisors to Sempra Energy on the sale, and White & Case was legal advisor.

At the time the deal was announced last September, Sempra Energy also said that its subsidiary Sempra LNG has entered into a memorandum of understanding with China Three Gorges Corporation, the ultimate parent company of CYP, regarding potential cooperation in supplying liquefied natural gas to support demand growth in China, including the growth of natural gas power generation.

Victor Cheung
Victor Cheung
director, ETF investment strategist
Mirae Asset Global Investments
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Alexander Chan
Alexander Chan
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