HYFLUX SAGA

PUB gives Hyflux's Tuaspring till April 30 to cure defaults

But water contract is non-negotiable to avoid unhealthy precedent, says national water agency

Singapore

NATIONAL water agency PUB said on Friday that it has acceded to the request of Hyflux subsidiary Tuaspring Pte Ltd (TPL) for more time to cure its defaults. The default notice period has been extended from April 5 to April 30, subject to conditions.

PUB said TPL had written to it on Wednesday, requesting for the deadline to be pushed to the end of April.

The national water agency said in a statement on Friday: "TPL noted that it is currently loss-making and will require financial support from Hyflux. However, Hyflux's ability to provide financial support will depend on whether it is able to complete its restructuring and to obtain the investment from SM Investments."

The extension will be rescinded if the rescue deal is terminated, or if the court does not sanction any of the schemes of arrangement, for instance.

SM Investments (SMI), the Indonesian investor group led by billionaire Anthoni Salim, had agreed last October to give Hyflux a S$530 million lifeline in exchange for a controlling stake in the company once all its debts are settled.

Hyflux creditors are scheduled to vote on this rescue plan on April 5, although SMI said on Thursday that the deal no longer has its endorsement.

One point of dispute arises from PUB's default notice. On March 5, PUB served a default notice to TPL, seeking remedy for both operational and financial defaults.

SMI has taken the position that PUB's default notice constitutes a "prescribed occurrence" that allows it to call off the rescue deal.

On the other hand, Hyflux has argued that a prescribed occurrence would take place only if PUB terminates its water purchase agreement (WPA) with the Tuaspring desalination plant.

Such an event has not yet taken place, and the earliest that PUB can exercise its right to terminate the water contract - if Tuaspring's defaults are not remedied - is on April 6, Hyflux said. (With the extension, that date is now May 1.)

Now that PUB has agreed to give TPL more time to cure its defaults, the ball is in SMI's court.

Without a cash injection from SMI, Hyflux is insolvent and has no money to replace poor-performing membranes in the desalination plant, or to restore it to a reliably operational level.

PUB chief executive Ng Joo Hee said on Friday: "The Tuaspring desalination plant has been operational since 2013, and is now at a stage where major renewal works are required."

If SMI does not step up and TPL's defaults are not cured by April 30, PUB has the right to take the Tuaspring desalination plant off TPL's hands for zero dollars, leaving Hyflux to own and run the Tuaspring power plant, which sits on the same site.

Some Hyflux investors have expressed their dismay with this scenario.

David Gerald, president of the Securities Investors Association (Singapore), has argued that PUB should pay a price equivalent to the replacement cost of building an equivalent plant.

PUB's Mr Ng, addressing the outcry on Friday, said: "The purchase price for the desalination plant will be determined by an independent valuer in accordance with the WPA. Based on the current valuation, the purchase price is negative and TPL will hence have to pay PUB a compensation sum.

"TPL itself has stated that there is a high likelihood for this. The desalination plant has been losing and will likely continue to lose money for the next few years. In addition, PUB will have to incur costs to make good the plant and ensure that it operates reliably for its remaining lifespan."

He added: "We note Hyflux has stated that, in the event the WPA is terminated and PUB purchases the Tuaspring desalination plant, there is a high likelihood that TPL would have to pay PUB a compensation sum under the WPA."

PUB is willing to waive any such compensation sum and purchase the water plant for zero dollars. Hyflux itself has noted that such a transaction would improve its value, added Mr Ng.

So, if PUB purchases the water plant for zero dollars, this action "is beneficial to all stakeholders, including about 50,000 retail investors and about 3,000 CPF (Central Provident Fund) members who used their monies to purchase Hyflux ordinary and preference shares."

Earlier this month, Hyflux took a S$824 million impairment on TPL, which it had held at a book value of S$1.47 billion as recently as a year ago.

The impairment reflects weaker prospects for the loss-making power plant, Hyflux said.

The desalination plant is also loss-making, as Hyflux had offered to supply water to PUB at a loss to undercut its competition and win the project in an open tender in 2011.

Mr Ng said on Friday: "If PUB were to allow any successful tenderer to renegotiate the rates indicated in its tender proposal after being awarded the tender, it would be unfair to other companies that had also responded to the tender. It would also set an unhealthy precedent by encouraging companies to request to renegotiate contracts for other PPP (public-private-partnership) projects. Clearly, doing so would put all parties in a situation of moral hazard."