Hyflux’s current financial rut is a consequence of “its own commercial decisions”, with the company having “full knowledge of the gas supply situation and electricity generation market” at the time it carried out such moves, according to Director of the Market Development and Surveillance Department at the Energy Market Authority Dorcas Tan.
In a reply to Leong Mun Wai’s letter, published on The Business Times on Wed (3 Mar), Ms Tan added that it was thus “incorrect for Mr Leong to claim that Hyflux’s financial problems were caused by “an unexpected domestic policy change”.
She noted that the Energy Market Authority (EMA) had “offered the Liquefied Natural Gas (LNG) vesting scheme to power generation companies (gencos) as a voluntary option to encourage the uptake of LNG” 10 years ago in 2009, and that the gencos had “opted into the scheme based on their own commercial considerations”.
Ms Tan said that Hyflux does not have any LNG vesting contracts, and had only “decided to build its power plant after the LNG vesting contracts were awarded to the other gencos”.
“When Hyflux made this decision, information on the plans by other gencos to increase their generation capacity was publicly available,” she stressed, adding that there is “no justification for EMA to “render relief” to Hyflux using public resources, as Mr Leong had suggested”.
“While EMA only offered up to 1.2 million tonnes per annum of LNG under vesting contracts, the gencos decided to buy more than twice as much LNG and build additional generation capacity,” Ms Tan observed, adding that “wholesale electricity prices were high” then.
“The subsequent increase in generation capacity led to a decline in wholesale electricity prices in recent years,” she added.
Hyflux’s financial downfall “not a typical business failure”, EMA “did not render relief” to protect firm from sour repercussions of vesting contracts: Leong Mun Wai
Previously in a letter published on BT on 26 Mar, Mr Leong suggested that Hyflux’s financial downfall “is not a typical business failure”, and that while “the responsibility of the management led by Olivia Lum cannot be denied” due to the decision to venture into power generation instead of sticking to its original water treatment business, Hyflux’s investments were also “severely damaged by an unexpected domestic policy change”.
He attributed Hyflux’s failure to “the collapse of the wholesale electricity price”, which he deemed to be “the direct result of the vesting contracts given to the other gencos in return for their support to sign long term take-or-pay gas supply contracts from the LNG terminal, itself another national project”.
“As a result of the vesting contracts, the existing gencos expanded capacity rapidly, resulting in a reserved margin of 80 per cent instead of the normal 30 per cent, hence precipitating the price collapse,” he wrote.
Mr Leong had subsequently claimed that the EMA “also did not render relief to Hyflux at an early stage to buffer it from the unintended results of the vesting contracts”.
“As drastic change on both the demand and supply sides are unforseen because local power consumption growth has been steady, there is no way for Hyflux or any financial analyst to have anticipated the collapse in the electricity price to about S$50 per MWh in 2016, when Hyflux’s power plant started to sell its output,” he opined.
Hyflux had earlier arranged meetings with with its creditors as a part of its financial restructuring process to have them approve the proposed scheme of returns.
The meeting was meant for the two classes of creditors: Firstly, unsecured creditors, including medium-term noteholders and 29 banks; secondly, holders of perpetual securities and preference shares.
However, it announced on Thursday that the key investment deal with Indonesian white knight SM Investments (SMI) is now off the table, and cancelled the meetings on Friday and Monday.
Hyflux, drowning in S$2.7 billion in liabilities as of the end of Sep, stands to lose out on a “$380 million rescue package” from Salim, which was offered “in exchange for a 60% stake” in the water treatment company.
With Salim cancelling the agreement, Hyflux may end up being liquidated, unless it is able to secure a new sponsor “before the end of a debt moratorium granted by the court” at the end of this month.
Updated to reflect cancellation of deal between SIM and Hyflux.