Hyflux is still a proud Singapore brand

The predicament of Hyflux is a great disappointment for those of us who are watching for a home grown conglomerate to carry the Singapore flag into the global market. They seem to be doing well on the technology side. It is finance that sinks the ship. A cursory review of their short history shows heady expansion, not from organic growth, but high leverage. The era of cheap money tempts many corporations on a borrowing spree. Many took on debts just to buy back shares so their earnings ratio can look better and dividends higher, but which adds nothing to the business. Hyflux is no exception.

Tuaspring Energy and Desalination Integrated Plant is an innovative concept that tries to incorporate an embedded power generation plant at a desalination complex. The main play is the desalination plant. Power generation is secondary. A CCGT (combined cycle gas turbine) plant has a gas turbine and a steam turbine. Gas is used to fire the gas turbine to generate electricity. The waste heat from gas turbine is captured and used to produce steam which powers a steam turbine to generate additional electricity. This enables a CCGT plant to have a high efficiency of 60%. The innovative idea here is to use the same steam to warm the sea water feed , and power generated, for the desalination plant. Excess power generated is exported into the grid.

The desalination plant has the advantage of using heated sea water feed which reduces energy consumption in portable water production. Having an embedded power generation capability also means lower electricity cost since there is no transmission and other pass through costs. All-in, it means a lower cost of water production. Great idea.

What went wrong with Tuaspring has never been adequately explained.  Company officials have pinned their financial problem on the power generation part due to decrease in oil prices. The fact that the 'drop in oil price' line has been mentioned a few times the suggestion that Tuaspring got locked into a long term purchase contract at a time when oil prices were much higher.  The government moved to set up an LNG Terminal for fuel security reasons. To promote the viability of this project, EMA implemented a LNG Vesting Scheme. Under this scheme, new gas plants must purchase a certain quantity of degassified LNG from the LNG Terminal. This scheme runs from 2013 to 2023.  As early as 2011, Tuaspring seem to have entered into Purchase Agreements with LNG Terminal. But the idea about locking into a fixed price is incorrect.  It is a supply contract but prices will be at prevailing market rates. 

The actual reason is Tuaspring opened for business in 2016 and ran smack into an industry facing massive over capacity since 2013. This over capacity has depressed generation prices from 2013 to current times. The spark spread has been negative the last 6 years. This spark spread is basically the generation price (USEP) less fuel cost, a negative spread shows inability to cover non-fuel costs. Profitability is impossible under current conditions.

The burning question is whether Tuaspring is cognisant of the power generation market situation when it came onstream.  If it did'nt, then it's fair to assume it has moved out of it's core competency of water technology into a commodity market and at the start of a learning curve. Did it's confidence of the desalination play blind it to the complexities of the power generation play? If it indeed it was aware of the market situation, why was'nt the weakness in the power generation sector mentioned in the Offer Information Statement of the 2016 perpetual bond issue? It was not in compliance with the requirement to release all critical information relating to the bond issue. There was bad faith.

The Tuaspring project is a 25 year build and operate concession from PUB which has indicated it may exercise its right to take over the plants if Hyflux is unable to resolve its financial problems. If PUB takes over only the desalination plant, it will have to negotiate with the operator of the power plant for the steam generation and electricity supply which may make the cost of the water produced more expensive.  Given the over capacity of the market, it is impossible for Hyflux to dispose of the CCGT plant. The new owner may have to accept a CCGT plant with a slightly lower efficiency rate since some of the heat is used for heating the sea water feed of the desalination plant. If PUB is to take over the CCGT plant, then it runs into legislative obstacles as the mandate of the utility as specified in the PUB Act does not include power generation.

PUB action is simply a contractual consequence. It has nothing to do with water being of national security importance. Electricity is also a critical national resource but generation plants have since been divested to some foreign owners.

It seems Indonesia's Salim Group and Medco Group will end up acquiring 60% of Hyflux for S$400m.  Tuaspring is a huge problem and requires a big picture approach, or as our highly salaried ministers like to say, a helicopter view, to solve the problem. The Hyflux brand is still a very attractive name with good technology, and is slowly conquering the world. It is a crying shame that the many powerful men and women of Singapore do not see the long term value in the Hyflux brand. For that we will loose the one brand that has been carrying the Singapore flag overseas proudly. This is a game straight out of the books for Temasek to play, but the most powerful woman is nowhere in sight. While they are sleeping, Indonesian vulture capitalists are taking over Hyflux for peanuts.