HYFLUX has been forced into a bind, and its fate could well be sealed without creditors having any say in the matter after all.
In a surprise turn of events, the team of potential investors led by Indonesian billionaire Anthoni Salim has asserted its right to back out of a proposed rescue deal that Hyflux is leaning on to cure its insolvency.
The move by Salim-Medco comes two weeks after national water agency PUB warned that it will seize control of Hyflux's Tuaspring plant unless it sees financial proof that the plant is able to keep running for the next six months, among other things.
But Salim-Medco won't release any cash to Hyflux until Tuaspring's operational and financial defaults are remedied.
Talks are ongoing, a person close to the deal said: "It looks challenging to resolve the defaults unless PUB withdraws its demands or the investor elects not to terminate the investment agreement."
Some have questioned why Mr Salim is getting cold feet now. Five months have passed since he shook hands on a deal with Hyflux chief Olivia Lum last October.
In this period, very little has changed with Hyflux's situation that Mr Salim could not have anticipated. PUB's default notice was really a formalisation of known occurrences, they say.
There is also the question of what Mr Salim was eyeing in the fallen water treatment firm in the first place. He was not Ms Lum's most obvious suitor.
Perhaps unforseen developments outside of the public eye have altered Salim-Medco's calculations, causing the deal as it stands to lose its attraction.
What was the plan?
Salim-Medco told creditors in January that its short-term plan would be to re-establish Hyflux as a technology leader in water treatment and integrated water and power plants. It also wants to help Hyflux expand its power business, it said.
It's reasonable to guess that this would require a new revenue strategy for Tuaspring, the loss-making integrated water and power plant at the heart of Hyflux's troubles.
Since Salim-Medco's remarks in January, Hyflux has reported an S$824 million impairment on Tuaspring for the period ended Sept 30 last year, mainly to adjust for crucial electricity price assumptions used in 2016 that now seem unrealistic.
Ninety per cent of revenue at Hyflux's flagship Tuaspring integrated water and power plant is derived from selling electricity to the national power grid.
The plant also uses some of the power it generates to desalinate seawater, but water concessions account for only 10 per cent of total revenue, Hyflux chief Olivia Lum has said.
On the bright side, Tuaspring's losses narrowed in the first quarter last year, after electricity prices, which have languished below Tuaspring's fuel costs since 2016, overtook fuel costs in February 2018.
As a result, Tuaspring's spark spread, which reflects the extent to which electricity revenue covers fuel costs, flipped from negative to positive and was hovering close to S$10 per megawatt-hour (MWh) as of May last year, going by Ms Lum's court filings.
But even with wholesale electricity prices stabilising after falling to an all-time low in 2016, problems with the economics of Tuaspring persist, pundits told The Business Times.
Independent energy consultant Martin van der Lugt said: "When the spark spread is positive, it doesn't mean that the plant makes money. It only means that the price of power is enough to cover the costs of the fuel (natural gas).
"Tuaspring only becomes profitable when the spark spread is high enough to cover also the fixed costs and financing costs, et cetera. For that, you need a spark spread of around S$50 per MWh," he estimated.
Tuaspring Pte Ltd (TPL), a special-purpose vehicle (SPV), is not one of the entities that gets to swap its debt for equity under the Hyflux group's restructuring scheme.
Generally, the outlook for all gencos is dim amid an oversupply of power capacity, said IHS Markit analyst Chong Zhi Xin: "Most of these power plants are fairly new and electricity demand growth will be slow. It will take some time for electricity demand to catch up and for the wholesale power price to increase...
"(Even) if every power generation company renegotiates (its LNG contract when it expires) at similar rates, the playing field will still be level and profitability will continue to be challenged."
It is also unclear how Tuaspring might fit with the Salim Group, which already controls PacificLight Power, an 800 MW genco on Jurong Island.
Compared to Tuaspring, PacificLight is cashflow positive, generating US$8 million in earnings before interest, taxes, depreciation and amortisation last year. It is in a US$553 million net debt position with a negative interest coverage ratio of -0.6.
As recently as August last year, holding company First Pacific was trying to divest its stake in PacificLight, to limit further capital commitments.
Mr van der Lugt doesn't see a whole lot of synergies between Tuaspring and PacificLight: "Other than sharing personnel cost, there's a lack of scale economies."
He thinks Tuaspring is a long way away from viability, unless it exits the power market entirely to focus on water desalination: "For Tuaspring to continue as a plant, they (Salim-Medco) will probably have to kill off the power plant (mothball it) and raise the price of water."
In fact, Salim-Medco may have tried to renegotiate a better water contract with PUB, Mr van der Lugt suggested.
Would PUB renegotiate? The fact is that PUB was interested only in desalinated water when it handed out the contract. The power portion of the plant was volunteered by Hyflux as a strategy to subsidise the costs of desalination. That helped the company to clinch the deal, but it also means that Hyflux is understood to supply water at a loss.
PUB is not open to renegotiations.
A PUB spokesman told BT: "The Water Purchase Agreement (WPA) between PUB and TPL is a confidential document and we are unable to disclose the terms of the WPA. The tariff was submitted by TPL in its tender bid for the Tuaspring project and agreed on by both parties in the WPA.
"Allowing an adjustment of the tariff would be unfair to the other companies that submitted bids for the tender. It would also create an unhealthy precedent for companies to request for renegotiation of tariffs under other DBOO (Design, Build, Operate and Own) projects."
Do or die
To be sure, Hyflux has a footprint that goes further than Tuas.
Lee Seng Chee, capital projects and infrastructure partner, PwC Singapore, said: "For the Singapore market itself, whether there's going to be huge upside is very debatable. But I would imagine that the strategy goes beyond Singapore.
"I don't think one should associate Hyflux with just Tuaspring. There are other assets, projects they have done before."
For instance, Hyflux controls 30 per cent of SingSpring, with Keppel Infrastructure Trust holding the remaining 70 per cent.
Hyflux also kept a sizeable S$1.08 billion worth of service concession receivables on its books at the end of September last year.
These receivables are recognised when Hyflux expects to receive a minimum guaranteed sum from local offtakers for municipal projects in China, Oman and Singapore, such as the TuasOne waste-to-energy plant, in exchange for performing services like plant operations and maintenance (O&M).
Carey Wong, vice-president of portfolio management at Ascend Capital Group and a former analyst covering Hyflux, said: "It's safer to call them projected future cashflows rather than 'guaranteed', as the company did write off quite a bit of uncollectable receivables over the recent years."
Looking further out, Hyflux has also touted Salim-Medco as a long-term strategic investor that will give Hyflux a chance to explore synergies and opportunities.
A commitment on this front would be important, since Hyflux may encounter some difficulty winning new contracts in light of recent events.
If a third townhall meeting takes place, Salim-Medco needs to convince people that Hyflux has a solid revenue strategy that can support its equity value post-recapitalisation, and that it hasn't just been buying time.
What if Salim-Medco walks away, or the scheme doesn't pass?
A bailout of Hyflux is out of the question, said PwC's Mr Lee: "The structure of the WPA is supposed to prevent bailouts. PUB enters into contracts with SPVs.
"The idea is that these vehicles are meant to be bankruptcy-remote. Your parent company (Hyflux) can be bankrupt, that does not mean that the SPV (Tuaspring Pte Ltd) is bankrupt."