Hyflux replies to Sias letter ahead of scheme announcement

HYFLUX chief executive Olivia Lum is "deeply saddened for the pain and loss" suffered by those who invested in or lent money to her now-insolvent company.

But she too will "suffer a significant loss - her personal net worth is tied inextricably to her stake in Hyflux", the Hyflux board wrote in an 18-page reply to stakeholders on Friday.

On Monday, David Gerald, president of the Securities Investors Association (Singapore) or Sias, wrote in an open letter that Ms Lum had received over S$60 million in dividends from her 34 per cent shareholding in Hyflux, "in the time that shareholders and bondholders have seen their entire investment destroyed".

The board clarified that Ms Lum did not receive any cash dividend for the 2017 financial year. However, the board failed to mention that in February 2018, Ms Lum received a dividend in specie, amounting to a 23.8 per cent stake in Hyflux's smaller consumer water business, Hyfluxshop.

The board, which is chaired by Ms Lum, added: "Over a period of 10 years from 2007 to 2016, she received about S$58 million in proportional cash dividends declared and paid to shareholders. During the same period (2007 to 2016), Hyflux recorded cumulative profit after tax and minority interests of S$527 million and total ordinary shareholders' dividends was S$186 million."

Mr Gerald had also asked why the Hyflux board was still paying annual dividends up to 2017, when the water-treatment firm's operating cash flow has been negative since 2009, while more debt was piled on.

The board pointed out that paying dividends out of non-cash profits is not against the law: "Prior to 2017, Hyflux had been recording net profits, thus resulting in significant retained earnings, allowing it to declare dividends on an annual basis. These dividends were reflective of the year's profit achieved."

Hyflux had also conducted share buybacks at prices above its net asset value per share up till November 2015, which many bondholders have found distasteful on hindsight.

In his open letter, Mr Gerald also questioned why "it appears to us ... that almost every Hyflux asset has material faults and defects". For instance, the Qurayyat and Magtaa projects cannot operate at or close to capacity, the Tuaspring and Tianjin Dagang plants are loss-making and cannot service their debt with cash flow from operations, Mr Gerald said.

The board replied: "As in all development projects, it is not uncommon for projects to experience operational issues."
In the case of Tianjin Dagang, the board blamed "local financial industry regulations which resulted in a mismatch of the loan tenure to the concession period".

In any case, Hyflux had regularly provided updates on its assets, the board argued.

The board asserted that the company's collapse was largely due to its investment in the Tuaspring Integrated Water and Power Project in Singapore. "When the Tuaspring project was first awarded in 2011, the outlook for the Singapore power market was very favourable. The Tuaspring power plant was projected to turn in profits from day one.

"At that time, new power generation plants were planned to support the country's projected electricity demand with a reserve margin of 30 per cent.

"Today, however, due to oversupply of gas in the market, the projection by the Electricity Market Authority showed an increase in reserve margin to 80 per cent in 2018.

"The average wholesale electricity price has dropped from about S$220 per MWh in 2011 when the Tuaspring project was awarded to an average of S$81 per MWh in 2017, resulting in significant losses from electricity generation."

The board did not address why it was unable to adjust its strategy given that projected outcomes did not turn out as planned.

Hyflux is expected to release a proposed restructuring plan to its creditors, including retail perpetual and preference shareholders, by Saturday.


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