SINGAPORE: Costing more than S$1 billion to build, the Tuaspring Integrated Water and Power Plant was the landmark project that marked water treatment icon Hyflux’s foray into the energy business in 2011.
Hailed as the first water plant in Asia to be integrated with a power generator, it was expected to boost efficiency levels and reduce desalination costs among other things.
But for all the ambitions that it embodied, the Tuaspring project struggled to turn a profit and according to some market observers, eventually became the “noose” around Hyflux’s neck.
With the company under a court-supervised process to reorganise its liabilities and business, the need to divest a part or the entire stake in its single largest asset has become even more pressing.
At the court hearing on Jun 19 for its application of a six-month moratorium, Hyflux’s lawyers from WongPartnership stressed that Tuaspring still holds “significant value” and time was what the company needed to seal a deal for no less than a book value of S$1.3 billion.
This would help pay off secured project finance lender Maybank in full and leave about S$900 million for other debt and project investments, said Hyflux founder-CEO Olivia Lum in a Jun 14 affidavit.
However, with Tuaspring being placed on the market since last February and scheduled for a separate court hearing next month on its moratorium request, the question one might ask is: Can a buyer be found and if yes, at what price?
BLEEDING ON WEAK ELECTRICITY PRICES
To be sure, the Tuaspring desalination plant – the largest in Singapore – is a critical asset supplying 70 million gallons of desalinated water a day under a 25-year service concession agreement signed with PUB. The concession period expires in 2038.
However, the on-site gas turbine power plant, which produces electricity for the desalination plant and sells the excess to the national grid, has no such supply contracts. With an oversupply in the local power market weighing down electricity prices, Hyflux’s plan for “profits generated from the energy production facilities of the Tuaspring IWPP to comprise the bulk of the operating revenue” fizzled.
“With negative spark prices enduring across 2016 and 2017 except certain irregular spikes, the Tuaspring IWPP’s revenue was not able to cover its operating costs, much less the financing costs in relation to the Tuaspring loan,” said Ms Lum in the affidavit submitted to court.
The difference has been met by drawing from Hyflux Group’s cash, which in turn caused cash flow issues for other projects, according to another affidavit dated May 22.
For the full year ended Dec 31, 2017, Tuaspring registered a net loss of S$81.9 million and contributed in a big way to the company’s first annual loss since listing in 2001. As of April 30, 2018, its total liabilities amounted to S$537 million.
Being mired in the red will likely have dampened investor interest in the integrated plant and even if there were, bids may have been way lower than what Hyflux was willing to accept, observers said.
“If your asset is loss-making, you won’t get optimal pricing for it,” said investment specialist S. Nallakaruppan. “Given how Tuaspring has been a noose around their neck, a divestment would have helped a lot so I’d be surprised if they rejected bids that were marginally below what they wanted.”
But things could be in for a change, at least according to Ms Lum.
Spark spreads, which refer to the difference between the price received for electricity produced and the cost of natural gas needed to produce that electricity, have increased to a positive amount since February and have stabilised through May unlike previous spikes, she said in her affidavit.
Though still unable to cover financing costs, Tuaspring has been generating sufficient revenue to cover short-run marginal costs since March.
Ms Lum described the positive movement of spark spreads as an “encouraging development”, alongside projections for growing electricity demand and decreasing supply with the retirement of steam plants here.
With that, she wrote that she is confident “the Tuaspring IWPP can be divested at a price around or above its present S$1.3 billion book value to a suitable purchaser” if given sufficient time.
Hyflux is currently in talks with four parties on a private and confidential basis, she added.
This optimism, however, is not shared by analysts Channel NewsAsia spoke to.
Describing book value as “backward-looking”, Associate Professor Mak Yuen Teen said Hyflux needs to be “realistic” and should “maintain some flexibility” with its expectations.
“The company has been so firm on divesting at book value… which does not take into account factors like the losses of Tuaspring, market conditions and uncertainty in electricity prices,” said the accounting professor from the National University of Singapore (NUS). “Perhaps a re-evaluation could open up more potential buyers.”
Echoing that, Assoc Prof Lawrence Loh from the NUS Business School said: “The proposed sale of Tuaspring will determine the recovery values for Hyflux’s stakeholders but for the bidders, it’s not going to be a charity show.”
That said, Tuaspring, with its value as a strategic water asset, is not without suitors.
“Logical guesses”, according to Assoc Prof Loh, would include foreign and local companies that can “derive synergy and extract value” from the purchase. In Singapore, this could be Sembcorp and Keppel which have dipped their toes into the water and energy industries.
The other scenario is a holding company, such as state investment firm Temasek Holdings, stepping in to make the purchase. Given that Hyflux is involved in the strategic water sector, Assoc Prof Loh said “that option cannot be ruled out” though it should not send the “wrong signal of a bailout”.
“We cannot send the message that if you are in a strategic industry, you can by all means go and take high risks and if things go down, there will be a sugar daddy to bail you out. That is not how businesses are run in Singapore.”
MORE FUNDAMENTAL ISSUES
Beyond Tuaspring, Hyflux has also been trying to sell the smaller Tianjin Dagang Desalination Plant in China. It is similarly working to secure a S$200 million cash injection that would help fund construction for its ongoing TuasOne and Qurayyat projects.
But while asset divestments and seeking new sources of liquidity would help to fix Hyflux’s cash crunch, the fundamental problem that it needs to deal with ahead lies in its business model.
Assoc Prof Loh said the company has been “burning (itself) through a very highly-leveraged approach towards running the business”.
“The liquidity is not at all well-managed,” he said, citing how Hyflux has a debt burden that is way more than its available cash position.
In Ms Lum’s Jun 14 affidavit, she mentioned that the total bank debt for the entire Hyflux Group stands at about S$1.84 billion with subordinated debt of S$900 million. This excludes S$265 million of medium-term notes.
On the other hand, Hyflux and its four subsidiaries placed under moratorium hold a cash balance of S$18.6 million as of Jun 4, 2018.
Agreeing, iFast’s senior fixed income analyst Ang Chung Yuh cited how the former star company has been operating in a negative operating cash flow situation since 2010.
“After all these years of running huge cash outflows, it is probably clear that their business model of building up assets then monetising them is not profitable,” he said. “This will be something that they need to rethink if they can implement their restructuring.”
For Assoc Prof Mak, Hyflux would also need to “pick and choose” when it comes to its involvements in future projects and overseas markets.
Citing the design-build-own-operate (DBOO) model of Tuaspring, he explained: “Hyflux tends to be involved in all parts of the value chain but moving forward, they can look at where their strengths are and focus on that. You don’t necessarily have to be involved in the entire supply chain.”
Having expanded overseas aggressively, Hyflux will also need to start scrutinising its risk management practices, which ties in with the adequacy of corporate governance, added Prof Mak.
The corporate governance hawk said “red flags” include the practice of giving share options to independent directors and having former employees sitting on the board. Some independent directors have also “stayed for far too long”.
“All these tell us of a board that the founder is very comfortable with and not people with different viewpoints. But boards need people who will challenge decisions constructively.”
Prof Mak also questioned if Ms Lum, who is also executive chairman and heads the board’s investment committee, has taken on too many hats.
“Sometimes, founders find it difficult to let go. By all accounts, Ms Lum is a brilliant entrepreneur and has been recognised for her engineering acumen but you can’t be good at everything,” the NUS professor told Channel NewsAsia.
“Maybe moving forward, she will need to rethink her role in the company. Instead of taking on so many roles, she can focus on what she is really good at.”