Since PUB served notice on Hyflux with regard to the defaults in the Water Purchase Agreement (“WPA”), it leads to more questions rather than answers. If Hyflux does not cure all defaults by April 5, 2019, PUB can elect to terminate the WPA and take over the operations of the desalination plant. The white knight Salim Medco group, in turn, responded with a threat to walk out of the rescue deal if Hyflux management does not cure the operational and financial defaults of Tuaspring by April 1st, 2019. As we all know, Hyflux is already facing a “one leg in the grave” situation. It is thus almost a mission impossible to muster adequate resources in its current state to cure the defaults unless Olivia Lum is able to get PUB to waive the default notice or alternatively, get Salim to pump in cash immediately. The white knight has quickly turned into fleeting white clouds.
There is no doubt that whatever was its original intention, PUB had single-handedly smashed the only rescue deal on the table. Keeping my fingers crossed that either PUB or Salim Medco will reconsider their current stand and craft out something mutually acceptable for the restructuring to proceed.
Alternatively, I think that Hyflux could have proposed a simple cost-plus model to the government agencies given that this is their first major venture into a long term concessionary service agreement. An open book for incurred cost and an agreed markup is definitely a safer option while building up invaluable experience and also financial data for future contracts. This is a similar model used in many commercial contracts.
Hyflux may have been overzealous in its business strategy to derive more stable recurring income by entering into a long term concessionary agreement with an overly optimistic water tariff rates. It seems that in 2010, Hyflux bid for the water contract at a first-year price that was the lowest compared to any desalination plants in Singapore that had been or was being built.
Other operators may have bid using a much higher water tariff rate. PUB had made a statement that it cannot allow Hyflux to revise upwards the tariffs stipulated in the signed agreement given that this would not be fair for the other operators which have also tendered for the contract for the desalination plant during the request for quotation stage in 2010.
In addition, I am shocked that PUB had publicly stated that the valuation of the desalination plant is actually negative based on the WPA. Surely, the WPA is a very critical piece of contract for Hyflux that spells out its contractual liabilities as well as Tuaspring valuation. The latest revelation by PUB put another huge dent in the valuation of Tuaspring which would have made the S$916Mil recently announced impairment by Hyflux grossly inadequate.
Please see my last posting on the valuation and impairment of S$916Mil for Tuaspring here.
From the recent spate of revelations and dividends payout despite poor operating cash flow, it does seem that there are certain contentious areas with regard to the financial statement preparation as well as the contentious issue of fiduciary duties to shareholders that will be up for dispute. I do hope that things turn out well for all retail investors and holders of perpetual securities and all issues settled amicably.
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