Olivia Lum and other ex-Hyflux leaders go on trial over omissions to SGX about Tuaspring project

SINGAPORE: Four years after the High Court ordered the once-celebrated homegrown water treatment firm Hyflux to wind up, its leaders are going on trial over alleged omissions in communications to investors and the Singapore Exchange (SGX) regarding the Tuaspring project.

The Tuaspring project was pitched to the market as Hyflux's second and largest seawater desalination plant in Tuas. But the company did not reveal at the time that it would fund the sale of water at a very low price to national water agency PUB, with a new business of selling electricity from a power plant it would build.

The unsuccessful foray into Singapore's power market contributed to the company's collapse and millions in losses for investors.

Company founder Olivia Lum Ooi Lin, 64, and five others went on trial on Monday (Aug 11). The others are Cho Wee Peng, 56, former Hyflux chief financial officer; as well as former independent directors of Hyflux Gay Chee Cheong, 68; Teo Kiang Kok, 69; Murugasu Christopher, 66; and Lee Joo Hai, 69.

A seventh person in the case, former Hyflux independent director Rajsekar Kuppuswami Mitta, was fined S$90,000 (about US$70,000) last week after pleading guilty.

Of the six, ex-CEO Lum faces the most charges, with the prosecution proceeding on two charges under the Securities and Futures Act: For making an offer of S$200 million worth of securities to the public with omissions about the electricity sales, and for consenting, as CEO, to Hyflux's intentional failure to notify the securities exchange about information relating to the electricity sales.

Another four charges are stood down or set aside while this trial goes ahead.

Cho is on trial for one charge - for conniving in his capacity as CFO for Hyflux to intentionally fail to notify the securities exchange about the information related to the electricity sales.

The remaining four former independent directors face two similar charges each: For the same omission of information in an April 2011 offer information statement, and for their alleged neglect as directors, such that Hyflux intentionally failed to notify the securities exchange about the electricity sales.

THE PROSECUTION'S CASE

The prosecution said in their opening statement that Hyflux was Singapore's first publicly listed water treatment and seawater desalination company.

"The collapse resulted in significant losses to investors, including about 34,000 investors holding perpetual securities and preference shares who were owed a total of S$900 million," the prosecution said.

Hyflux's collapse can be traced to the Tuaspring project, a project to design, build, own and operate Singapore's second and largest seawater reverse osmosis desalination plant in Tuas for a concession period of 25 years, with an on-site power plant providing electricity to the desalination plant.

Hyflux successfully bid for the project in 2011, in response to a tender conducted by the Public Utilities Board, now known as PUB.

Investors were led to believe that Tuaspring Project was primarily a desalination project, with Hyflux's announcement in March 2011 giving the impression that the power plant was to be built to supply power to the desalination plant.

But in reality, the financial viability of the Tuaspring Project depended entirely on the sale of electricity, said the prosecutors.

This meant that the Tuaspring Project exposed Hyflux to electricity market risks in what was a brand-new business for the company, said the prosecution.

These material facts were allegedly not disclosed to the investing public, and the omission was purportedly repeated when the offer information statement was released to raise funds from the public.

The prosecution is pursuing charges under the Securities and Futures Act (SFA) linked to two key public statements by Hyflux that contained material non-disclosures: The March 2011 announcement, forming the basis of certain charges against all six Hyflux ex-leaders, and the April 2011 offer information statement, which forms the basis of certain charges against five of them.

Both documents allegedly failed to disclose the following: That the Tuaspring Project was Hyflux's expansion into a new business of selling electricity, that revenue from the sale of electricity from Tuaspring Project's power plant was projected to make up the significant majority of the project's revenue, and that the profitability of the project was contingent on revenue from the sale of electricity from the power plant.

HYFLUX'S STRATEGY

Deputy Chief Prosecutor Christopher Ong told the court that the strategy underlying Hyflux's bid was to sell water at a very low price to PUB, in order to secure the tender.

At this price, the desalination plant would operate at a loss. To make the project financially viable, and to fulfil PUB's requirement to produce electricity for the plant at Hyflux's cost, Hyflux intended for its power plant to supply electricity to the desalination plant, while actually selling the vast majority of the power that it generated to the national grid.

"It was only from such sale of electricity that Hyflux would be able to obtain sufficient revenue to make up for the losses from the desalination plant and to make the project profitable," said Mr Ong, who is a senior counsel.

At the time in 2011, Hyflux had no prior experience in power generation, much less selling electricity, he said. The Tuaspring Project would be the first time Hyflux entered the electricity market.

Earlier drafts of the March 2011 announcement included more details about the electricity sale plans, but these references were removed following input from Lum and Cho, said Mr Ong.

The draft announcement, which Hyflux eventually sent to PUB for vetting, made no mention at all about the sale of electricity.

The only line that specifically mentioned the sale in the final draft of the March 2011 announcement - "excess power will be sold to the grid" - was added only after PUB requested that Hyflux include a clarification, said Mr Ong.

This was to avoid the mistaken impression that the desalination plant would consume all the electricity that the power plant could produce.

The final draft of the March 2011 announcement was approved by Lum and Cho and circulated to the four former independent directors by email for their comments.

They replied, but none raised objections about the announcement or queried Hyflux's management whether it was adequate, said Mr Ong.

During the tender stage in 2010 and early 2011, Hyflux estimated the Tuaspring Project costs to be S$890 million. This was later increased to S$1.05 billion in July 2012.

To finance the construction of the project, Hyflux sought loans from banks. Six banks later signed in-principle commitment letters indicating their willingness to finance the project, but they did not know about the power strategy.

BANKS RAISED CONCERNS

In November 2010, when the banks found out about it, they raised serious concerns, meeting with Hyflux representatives, including Lum and Cho, to discuss the additional risks arising from its strategy of using the sale of electricity to subsidise the sale of water to PUB.

"The banks took the risks of Hyflux's power business plan so seriously that in January 2011, they jointly issued a side letter to Hyflux stating that they could not lend money to Hyflux on the same terms that had previously been indicated in the October 2010 in-principle commitment letters," said Mr Ong. 

None of the six banks eventually funded the construction of the power plant and, by extension, the entire Tuaspring Project.

In July 2011, only three of the original six banks - DBS, Mizuho Corporate Bank and Sumitomo Mitsui Banking Corporation - extended financing of S$150 million for the construction of the desalination plant.

This financing was eventually terminated by Hyflux, and the Tuaspring Project was ultimately financed by a shareholder's loan of S$840.4 million by Hyflux to Tuaspring in October 2011. This was, in turn, refinanced with Maybank Singapore and Maybank Kim Eng Securities in September 2013.

In January 2011, while negotiating with the banks, Hyflux's management began to contemplate the issuance of preference shares to raise funds.

The board was informed of the need to issue preference shares to "increase our funding options" for "several new major projects" Hyflux was expected to win in 2011, but the money was really meant to fund the Tuaspring Project because of the challenges Hyflux was facing in obtaining financing from banks.

Hyflux engaged DBS as the lead manager and bookrunner for the issuance of preference shares in February 2011 and lodged the April 2011 offer information statement with the Monetary Authority of Singapore (MAS). This was for the issuance of up to S$200 million in 6 per cent cumulative non-convertible, non-voting, perpetual Class A preference shares.

These shares were oversubscribed, and the offer amount was increased, with Hyflux ultimately raising S$400 million from the issuance.

In the April 2011 offer information statement, the only mention of electricity sales was the following two sentences that also had appeared in the March 2011 announcement: "Hyflux will also be constructing a 411MW combined cycle gas turbine power plant to supply electricity to the desalination plant. Excess power will be sold to the power grid."

Mr Ong charged that Lum knew about the omitted information on the electricity sales but wanted to downplay the project's significant exposure to the electricity market in the March 2011 announcement and the April 2011 offer information statement.

As CFO, Cho was also aware of the omissions and connived in the decision not to disclose, said Mr Ong.

LUM "DETERMINED" FOR HYFLUX TO WIN BID

Mr Ong said that Lum was "determined that Hyflux had to win the bid and cement its status as a global leader in the water treatment and desalination industry".

"Hyflux was facing setbacks in its Middle Eastern ventures and winning the Tuaspring bid was critical for strengthening the company’s order book. She did not want to detract from the positive news of winning a landmark water project, by revealing the Tuaspring Project’s reliance on electricity sales, and the fact that the low tariff price – the key to winning the tender – was only viable because of such electricity sales," he said.

"Second, Lum was well aware of the negative reactions from the banks regarding the power plant component of the project and feared that full disclosure might deter investors and compromise Hyflux's ability to raise funds through the planned preference shares. This, in turn, could jeopardise financial close for the project and potentially result in losing the bid," said Mr Ong.

THE FALL OF HYFLUX

The desalination plant of the Tuaspring Project became operational in September 2013, but the power plant followed suit only around August 2015. It began selling electricity commercially in February 2016.

In the month of March 2011, the average Uniform Singapore Energy Price (USEP) was around S$187 per MWh. By February 2016, the USEP had fallen to around S$49.10 per MWh.

As the profitability of Tuaspring depended on electricity sales, this fall in electricity prices hit Hyflux hard, said Mr Ong.

In its 2017 annual report, Hyflux reported a S$115,560,000 after-tax loss for 2017. 

The report said that the weak power market in Singapore drove losses for the first time in Hyflux's history, with the Tuaspring Project accounting for the majority of the losses. 

On May 21 2018, Hyflux suspended trading of its shares. The next day, Hyflux announced that it had applied to seek court protection for debt reorganisation.

In May 2019, PUB took over the Tuaspring desalination plant, while a wholly owned subsidiary of Malaysia-based YTL Power International, YTL Powerseraya, completed its acquisition of the Tuaspring power plant in June 2022.

Hyflux entered judicial management by Nov 16, 2020, and entered liquidation on Jul 21, 2021.

The witnesses to be called by the prosecution include: Former Hyflux employees involved in drafting the key announcements, Hyflux's former external legal counsel, as well as representatives from banks, SGX and PUB.

The prosecution will also be using documentary evidence such as internal email correspondences, drafts, financial models, minutes of board meetings and investor decks.

According to court records, a total of 57 days has been slated for the trial over two tranches between August and October and November and January.

The trial is presided over by Principal District Judge Toh Han Li.

Lum is defended by lawyers from Davinder Singh Chambers, Cho is defended by a team from Rajah & Tann, while Shook Lin & Bok represents the four former independent directors.

If convicted of consenting to Hyflux's intentional failure to disclose the electricity sale information to the securities exchange, Lum can be jailed for up to seven years, fined up to S$250,000, or both.

For making an offer of securities to the public with omissions about the electricity sales, she can be jailed up to two years, fined up to S$150,000, or both.

The former independent directors face similar penalties for each of their respective charges.

If convicted of conniving in how Hyflux failed to notify the securities exchange about the electricity sales, Cho could be jailed for up to seven years, fined up to S$250,000, or both.