Photo of TuasSpring power plant from Hyflux’s website

In a submission to TOC on Sun (31 Mar), a disgruntled Hyflux perpetual capital securities investor had shared what he deemed to be “very important information that was not revealed in the prospectus”, that is the firm’s failure to disclose Tuaspring’s status as “a genco with a minor portion of its revenue from water supply to PUB”.

He did not realise that Hyflux had transformed into a genco instead of strictly running its operations as a water treatment firm until he raised a question during the company’s previous town hall meeting as to why the largest seawater reverse osmosis plant – or desalination plant – in Israel “was charging US$0.60 versus Hyflux’s S$0.45/m3” (cubic metre).

He noted that “90 per cent” of Tuaspring’s revenue stems from electricity generation.

The investor also thought that Tuaspring was “a Sea Water Reverse Osmosis plant supplying water to PUB”, and that the plant “would generate a small profit after maintenance and operation to cover the capital and interest payment”, as “PUB would not demand a water rate that will affect its operation and maintenance”.

He added that it was likely that the S$0.45/m3water price rate at which Hyflux was supplying [water to] PUB for the first year “will likely be adjusted upward to prevent loss that will affect the desalination plant”.

This investor’s perception has been echoed by other investors, such as a 65-year-old man who told Nikkei Asian Review at the protest at Hong Lim Park last Sun (31 Mar) that he “never thought of danger because Hyflux is a water company” after having invested S$20,000 into the firm.

During a Q&A session at the second townhall meeting for holders of its perpetual capital securities and preference shares on 18 Jan this year, Hyflux said that its decision to tap into power generation despite originally being a water treatment firm is rooted in its need to “remain competitive” in the infrastructure sector where “track record is critical in securing new projects”.

Noting that the Tuaspring plant is its “first Integrated Water and Power Project”, Hyflux said that the addition of the plant to its “portfolio of landmark projects” allows the firm to “bid for other Integrated Water and Power Projects as well as independent power projects in other parts of the world”.

“As an example, the Ain Sokhna project in Egypt was awarded to Hyflux as it has the proven track record of Tuaspring,” Hyflux highlighted.

The company added that it did not anticipate the heavy losses as a result of the eventual overcapacity in the electricity market.

“When Hyflux first won the Tuaspring project bid in 2011, industry experts projected strong profitability from the sale of electricity in the Singapore power market, with electricity demand projected to grow significantly,” it said.

“The viability of the Tuaspring project was also independently supported by the banking community which enabled project financing to be arranged,” Hyflux added.

Prospectus “failed to provide forecast of” Hyflux’s financial position in following year; investors ought to have been told about expected inability of the Wholesale Electricity Price to recover due to “huge overcapacity”

However, the investor who wrote in to TOC had observed, based on his research on Hyflux’s electricity plant’s approved capacity and the Wholesale Electricity Market Price, that “the very low Wholesale Electricity Market Price from 2015 to 1Q 2016 would result in heavy losses selling electricity to the market”.

“By 2016 before the launch of the PCS, the parties involved would have known that the huge overcapacity would not enable the wholesale electricity price to recover,” he argued.

The investor highlighted that the prospectus had also “failed to provide a forecast of the financial position of the preceding year after its issue”, as illustrated in the screenshot below:

The investor then questioned: “Who are the parties responsible in drafting this prospectus by not revealing all the facts to provide a truth and fair accounts for investors to enable them to analyse the risk?

“Was there a deliberate attempt to hide the truths from the public the real financial situation of the company in incurring losses for years going forward because of the collapse of the wholesale electricity market prices?” he further probed.

He urged financial regulatory entities such as the Monetary Authority of Singapore, the Singapore Exchange and CPIB to conduct investigations into the matter.

“The consequences for not doing so will definitely damage the credibility” of the financial institutions involved and Singapore’s reputation “as a financial centre” overall, he warned.

When asked at the second townhall meeting on 18 Jan as to why Hyflux had issued “$500m perpetual capital securities in 2016 to retail investors” when the company was “fully aware that Hyflux was already in serious trouble”, the firm answered: “It was not apparent then that the weak electricity prices would persist and the group would be adversely impacted by the cash needs of Tuaspring resulting from the prolonged weak electricity market in Singapore.”

“When the perpetual capital securities were raised in May 2016, the Tuaspring Power Plant had just commenced operations.

“The perpetual capital securities were raised one month after Hyflux was awarded a contract for an Integrated Water and Power Project in Egypt worth USD500 million,” said Hyflux.

“Hyflux had also posted a net profit of S$7.3 million for its FY2016 first quarter results on 12 May 2016, right before the offer for the perpetual capital securities was made.

“Group revenue for 1QFY2016 rose to S$248.3 million from S$60.4 million in 1QFY2015,” said Hyflux.

The $500 million perpetual capital securities raised in May 2016, said Hyflux, were used for the repayment of the following:

  • the S$100 million in aggregate principal amount of 3.50% outstanding notes due 2016 issued under Hyflux’s S$1.5 billion multicurrency debt issuance programme; and
  • the S$175 million in aggregate principal amount of 4.80% outstanding perpetual capital securities, whilst the remaining were used for general corporate purposes, which includes the repayment and/or refinancing of existing borrowings, redemption of outstanding perpetual capital securities, financing of working capital and/or capital expenditure requirements of Hyflux or Hyflux Group.

“Such use and purpose of the funds sought to be raised by the perpetual capital securities in 2016 were fully explained in the offer document,” stressed Hyflux.

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