Sunday 24 March 2019

Hyflux Tuaspring Saga- White Knight Becomes Fleeting White Clouds

Since PUB served notice on Hyflux with regard to the defaults in the Water Purchase Agreement ("WPA"), it leads to more questions rather than answers.  If Hyflux does not cure all defaults by April 5, 2019, PUB can elect to terminate the WPA and take over the operations of the desalination plant. The white knight Salim Medco group, in turn, responded with a threat to walk out of the rescue deal if Hyflux management does not cure the operational and financial defaults of Tuaspring by April 1st, 2019. As we all know, Hyflux is already facing a "one leg in the grave" situation. It is thus almost a mission impossible to muster adequate resources in its current state to cure the defaults unless Olivia Lum is able to get PUB to waive the default notice or alternatively, get Salim to pump in cash immediately. The white knight has quickly turned into fleeting white clouds.

There are a few mind-boggling questions here as listed below:

1. Did PUB get its timing wrong to come out on March 5th, 2019 to serve the default notice?
Personally, I think that the serving of the 1-month notice on March 5th, 2019 seems to be throwing the gauntlet on the creditors as an ultimatum. It is too much of a coincidence that the end of the one month notice falls exactly on April 5th, 2019 which is the upcoming creditors restructuring vote. 

While the notice served was to protect Singapore water supply and vital, PUB seems to have been caught off guard that the White Knight decided to pull out of the rescue deal. It quickly issued a statement on March 21st, 2019 that Salim Medco should not use PUB as an excuse to pull out of the Hyflux deal. I believe that the souring of the deal has very much negative political impact given that the general election may be coming up by the end of 2019 or 2020. There are a lot of angry Singaporeans who are going to be losing all their investments in Hyflux. It appears that the government is not keen to bail out Hylfux and is actually hoping that the Salim Medco rescue package will get through.

There is no doubt that whatever was its original intention, PUB had single-handedly smashed the only rescue deal on the table. Keeping my fingers crossed that either PUB or Salim Medco will reconsider their current stand and craft out something mutually acceptable for the restructuring to proceed.  

2. Why did Hyflux not build in a safety mechanism in its contract with PUB during the tender for the building of plant and WPA?
I am not sure why the Hyflux team did not request for a minimum rate to cover their basic cost of building the plant and basic maintenance into the contract. My personal thoughts are this would have reduced the huge losses with running the plant. In my current industry, we will build in a minimum volume or rates in our tender for business contracts. Please see point 3 below on the aggressive water tariff rate submitted by Hyflux.

Alternatively, I think that Hyflux could have proposed a simple cost-plus model to the government agencies given that this is their first major venture into a long term concessionary service agreement. An open book for incurred cost and an agreed markup is definitely a safer option while building up invaluable experience and also financial data for future contracts. This is a similar model used in many commercial contracts.

3. If another operator- other than Hyflux- were to run Tuaspring, will it be profitable?
Hyflux may have been overzealous in its business strategy to derive more stable recurring income by entering into a long term concessionary agreement with an overly optimistic water tariff rates. It seems that in 2010, Hyflux bid for the water contract at a first-year price that was the lowest compared to any desalination plants in Singapore that had been or was being built.

Other operators may have bid using a much higher water tariff rate. PUB had made a statement that it cannot allow Hyflux to revise upwards the tariffs stipulated in the signed agreement given that this would not be fair for the other operators which have also tendered for the contract for the desalination plant during the request for quotation stage in 2010.

4. Do the Hyflux accountant preparing the financial statements and the auditor of Hyflux have access to the WPA? Or is it so confidential such that a lot of vital accounting entries for liabilities and asset valuation were not captured in its financial statement disclosure?
PUB made a statement that there were numerous breaches in the WPA with regard to the volume of daily treated water KPI of 70 million gallons since early 2017. It has also waived off compensation claim of 3 digit million amount. This is a staggering amount. Does this not constitute a legal provision way back in 2017 for breach of agreement?

In addition, I am shocked that PUB had publicly stated that the valuation of the desalination plant is actually negative based on the WPA. Surely, the WPA is a very critical piece of contract for Hyflux that spells out its contractual liabilities as well as Tuaspring valuation. The latest revelation by PUB put another huge dent in the valuation of Tuaspring which would have made the S$916Mil recently announced impairment by Hyflux grossly inadequate.

Please see my last posting on the valuation and impairment of S$916Mil for Tuaspring here.

5. Will the Hyflux saga end with the vote on April 5th, 2019 or will there be lawsuits- David vs Goliath?
From the recent spate of revelations and dividends payout despite poor operating cash flow, it does seem that there are certain contentious areas with regard to the financial statement preparation as well as the contentious issue of fiduciary duties to shareholders that will be up for dispute. I do hope that things turn out well for all retail investors and holders of perpetual securities and all issues settled amicably.


  1. From its lack of action for many years despite supposedly TPL not meeting WPA agreement terms, PUB seemed to have close 1 eye -- maybe hoping TPL & Hyflux to eventually right itself. No govt agency or ministry will want to take over & run a high maintenance & large facility --- even if PUB take over, they will still have to go thru many tenders to get 3rd party subcontractors to help manage & operate. Now with the restructuring saga & high chance of failure, PUB purposely come in to issue ultimatum, with the hope that the restructuring is smooth & enough injection of $$$$$$$$$$$$$$$$$$ to keep operations going.

    From PUB's language, it seems that they will only take over the Desalination Plant (which they portray as strategic national asset), and not the Power Generation Plant (which is heavily loss making & not strategic). This means that PUB will only take the part that is not heavily loss-making, while leaving the big stone still hanging around Hyflux's neck. Obviously if PUB takes away the Desalination Plant, it's as good as liquidation for Hyflux.

    SMI now has to consider even if it pumps in the $$$$$$$$$$$$$$$ & do massive restructuring & costs reduction, whether TPL can meet the WPA agreement? If cannot, then PUB will still come in later to take over. With this liability over TPL's head made known to everybody now, it will be even harder to sell Tuaspring off to another party. And whether it makes sense for SMI (or anybody else) to invest in Hyflux.

  2. PUB's decision is music to my ears.

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