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Hyflux's uphill task in selling down Tuaspring

AMID the massive overcapacity in Singapore's power generation industry, Hyflux's desire to partially divest its wholly-owned desalination and power plant Tuaspring seems akin to selling ice to Eskimos.

For Hyflux, which slipped into the red last year for the first time since its listing in 2001, this could make returning to the black a challenge.

Hyflux has been planning to divest up to 70 per cent of loss-making Tuaspring since February last year. The group holds the plant at a value of S$1.3 billion on its books, and has said it wants to sell its stake at book value.

Given the severe overcapacity in the power generation market that has pushed all but one generation company into the red - as reported by The Business Times on Monday - it is, however, quite unlikely that buyers will bite at this price.

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Tuaspring itself managed to narrow losses of S$114.5 million in 2016 to S$81.9 million last year. Despite the slight improvement, the Hyflux group still made a loss of S$116.4 million last year, compared to a restated profit of S$3.8 million in 2016.

Tuaspring's financial state today belies the big dreams on which it was built. At that time, the plant, which cost S$1.05 billion in all, was touted to be the first integrated water and power plant in Asia, with the in-house power plant helping to raise energy efficiency and cut costs.

It marked Hyflux's foray into the power business, a new business that the firm said would complement and enhance its competitiveness in the core water business. The Tuaspring project was also expected to help the group secure other projects in the global independent water and power project segment.

To be sure, Tuaspring - the largest desalination plant in Singapore with a capacity of 70 million gallons of water a day (mgd) - still remains a critical part of the country's water sector.

It has a 25-year water concession with national water agency PUB until 2038, after which ownership of the plant will be transferred to PUB.

Unlike the water portion, however, the electricity portion had no such long-term supply contracts; the water market in Singapore is structured differently from the electricity market, and power generation companies here compete to supply into the market.

This reportedly raised concerns among lenders as early as 2013, about the economic viability of the electricity portion.

The 411-megawatt power plant was meant to be ancillary to the desalination plant - it was to supply electricity to the desalination plant, with excess power fed to the national grid.

Aside from the lack of any long-term contract, the proliferation of new generating plants in Singapore during that period also meant Hyflux would enter into an already oversupplied electricity market, BT reported then.

In the end, however, project financing for the desalination and power plant was completed on competitive terms, Hyflux said in its 2013 annual report, adding that it signified "a strong endorsement on the bankability of the project and on Hyflux's branding".

Since the power plant started operations in early 2016 - three years after the desalination portion started - Tuaspring has been gradually expanding its share of the power generation market, from 3.1 per cent in 2016 to 4.1 per cent in 2017.

This, however, had been done at a loss, and Hyflux said in February last year it would partially divest the plant to free up capital for new projects and reduce the group's leverage. It had expected the partial sale to be completed by end-last year

Possible buyers

While the group said there were foreign buyers interested in the plant, none has materialised. It appears that buyers have wanted a cheaper price than what Hyflux was willing to accept.

Said chief executive and chairman Olivia Lum at its results briefing in late February: "The last thing we want is a fire sale. We believe that we have a good asset, we have a good track record, still have a brand name. Why are we cornered? We know what we are doing.

"We have no shortage of interested parties talking to us. So we have to be very careful not to divest Tuaspring at a low price."

A senior executive at another generation company, however, told BT that it will be "suicidal" for foreign players to enter the market at this point.

Another possibility would be existing generation companies in Singapore that are looking to expand their market share.

But here, the top three generation companies have their hands tied; Energy Market Authority (EMA) regulations do not allow them to further expand their capacity beyond 25 per cent of the market, or their current respective licensed capacity, whichever is higher.

This leaves Keppel and Sembcorp as potential buyers, say industry insiders; Keppel Merlimau Cogen and Sembcorp Cogen are established mid-sized players.

Still, at the end of the day, the low wholesale electricity prices are not enough to incentivise investors to purchase a plant, said Chong Zhi Xin, associate director at IHS Markit's power, gas, renewables and coal practice.

Fuel costs alone come close to S$75-80 per megawatt-hour (MWh), by his estimates. With the wholesale electricity price averaging S$81 per MWh last year, "it's tough to make a return on the plant", he said.

What does this mean for Hyflux? Unless the Singapore power market improves, it is likely to continue recording losses this year, as it has warned.

For now, Hyflux will have to ensure that it has enough of a cash hoard to tide through the famine years, until current gas contracts expire and the overcapacity situation improves.

Hyflux had a cash balance of S$314.2 million at the end of last year, and has said it can progressively draw down from about S$400 million worth of project finance loans as it achieves milestones in project construction.

Its balance sheet, however, is showing strain. Among other deteriorating credit ratios, its earnings before interest, taxes, depreciation and amortisation (Ebitda) was only 0.43 times the cash interest it paid in 2017, down from 3.31 times in 2013, according to Bloomberg data.

The group also has S$100 million worth of bonds maturing on Sept 7 this year.

Against this backdrop, the group now finds itself between a rock and a hard place: to sell Tuaspring at a discount to book value, or to continue bleeding until the Singapore power market turns for the better. Either way, its shareholders and bondholders will have to be prepared for further jolts ahead.