PUB says Salim-Medco should not use it as excuse to pull plug on Hyflux deal

HYFLUX's reluctant white knight should not use PUB as an excuse to back out of its investment agreement with the water company, the national water agency said on Thursday.

PUB clarified on Thursday that if Hyflux subsidiary Tuaspring Pte Ltd is unable to cure its defaults by April 5, PUB will only take control of Tuaspring's desalination plant, and not its 411 megawatt power plant which sits on the same site.

This transaction would occur at zero cost to Hyflux, even though the desalination plant is expected to have negative value based on calculations done in accordance with the Water Purchase Agreement (WPA). PUB is willing to waive the compensation sum, given Tuaspring's financial position.

PUB said in a statement on Thursday night: "Hyflux itself has noted that PUB's actions, in the event PUB elects to terminate the WPA, would be favourable to Tuaspring Pte Ltd, as this alleviates the pressure on the rest of the Hyflux Group, and also positively impacts Hyflux's value and hence the value of the Hyflux shares being offered.

"This will also increase the chances of Hyflux being successfully restructured. PUB's actions should therefore not be used as the basis for SMI's decision to withdraw from the restructuring agreement."

The desalination plant is determined to have negative value because PUB is entitled to recover the cost of restoring the plant to good operating conditions from the concession company. The projected costs also take into account the burden PUB has to take to maintain and run the plant.

In any case, PUB is waiving its compensation claim from Tuaspring Pte Ltd, which is understood to be a three-digit million figure, since it faces a low chance of recovery as an unsecured creditor.

Besides, even if PUB were to pay Hyflux anything for the desalination plant, the proceeds would go towards settling Maybank's S$518 million secured loan, leaving nothing for junior creditors.

PUB's statement comes after Salim-Medco, the Indonesian investor group led by billionaire Anthoni Salim, indicated on Monday that it is thinking about backing out of a deal to recapitalise Hyflux that it had tabled in October last year, in light of PUB's default notice.

On Wednesday, Tuaspring Pte Ltd wrote to PUB to clarify what happens if its defaults are not cured.

If the defaults are not cured, PUB will exercise its right to terminate the WPA, it said.

PUB also clarified that it will purchase and run the water desalination plant only: "PUB has the operational capabilities, experience and manpower to run the Tuaspring desalination plant."

A termination of the water contract "may entitle" Salim-Medco to terminate the rescue deal, Hyflux said.

Hyflux added on Thursday that it has reached out to the investor, though it is unclear if Salim-Medco is open to restructuring the original deal to account for the loss of asset.

"The company acknowledges... that there is no obligation on the investor to vary the restructuring agreement," Hyflux said.

On Thursday, PUB once again emphasised that it was guided by the need to safeguard Singapore's water security.

Under the water contract, Tuaspring is required to deliver up to 70 million gallons of desalinated water per day to PUB over a 25-year period from 2013 to 2038.

Its plant capacity is equivalent to 16 per cent of Singapore's daily water demand of 430 million gallons a day (mgd). Since early 2017, the plant has been facing operational issues.

It was unable to replace poor-performing membranes promptly, which affected the quantity and quality of of the water produced. It has failed to supply PUB with 70 mgd of desalinated water on numerous occasions.

Hyflux also lacks the necessary funds to resolve its operational issues, unless it gets a cash injection.

Salim-Medco had earlier agreed to throw Hyflux a S$530 million lifeline in exchange for a 60 per cent stake in the restructured company.

But it remains to be seen how Salim-Medco will react to the new developments.

Unlike the power-generation portion of Tuaspring, which is loss-making due to an oversupply of power capacity in Singapore, the desalination portion is loss-making by contract.

The desalination plant is expected to keep running at a loss unless the concession company is able to bargain with PUB for higher water tariffs.

This is because when Hyflux bid for the water contract in 2010, its business model was to use profits from its power plant's electricity sales to subsidise the operating costs of the desalination plant.

PUB said on Thursday: "Tuaspring Pte Ltd stated that the Tuaspring desalination plant has been and will continue losing money for the next few years. The power plant is also incurring losses and the market condition is not expected to significantly improve in the near future."

While PUB is optimistic that taking one loss-making plant off of Hyflux's hands without claiming a compensation sum sweetens the deal for Salim-Medco, industry observers are less sure.

Independent energy consultant Martin van der Lugt told The Business Times: "PUB taking over the desalination plant makes sense. However, the power-plant is still worth very little. I can't see the margins improving before 2023, and after 2023 it is yet to be seen that the situation improves. The fact remains that there is too much CCGT (combined cycle gas turbine) generation capacity competing for market share."

If Tuaspring does not cure its defaults by April 5, PUB has the right to terminate the WPA by giving written notice of not less than 30 days to Tuaspring.

PUB is expected to take over Tuaspring's desalination plant in early May if the contract is terminated.