National water agency PUB has given Hyflux's subsidiary Tuaspring Private Limited (TPL) 30 days to remedy defaults that have arisen under a water purchase agreement signed in 2011.
PUB said yesterday that it will exercise its right to terminate the agreement and take control of the Tuaspring Integrated Water and Power Plant if the defaults are not resolved by April 5.
It told The Straits Times: "The water purchase agreement provides for PUB to take over the integrated plant as whole, or the desalination plant alone."
It added that TPL "has failed to provide the required plant capacity on multiple occasions".
"The defaults started since 2017. As much as possible, we have allowed (TPL) time to resolve its operational and financial defaults, but our concerns have been growing."
TPL is a wholly owned subsidiary of Hyflux, the troubled water treatment company that has spent the last 10 months trying to reorganise itself so it can continue in business.
The Tuaspring integrated plant is Hyflux's single largest asset. It is one of three desalination plants here.
Hit by power plant operations
Tuaspring Pte Ltd (TPL), a wholly owned subsidiary of Hyflux, developed the $1.05 billion Tuaspring Integrated Water and Power Plant under a design, build, own and operate model. The desalination plant has a capacity of 70 million gallons, or 318,500 cubic m of water a day.
PUB and TPL signed a 25-year agreement in April 2011 in which Tuaspring would deliver desalinated water from 2013 to 2038. The plant ownership would then be transferred to PUB.
The first-year price for the desalinated water would be 45 cents per cubic m. Construction of Tuaspring began in July 2011 and it opened in 2013, as Singapore's second desalination plant.
Hyflux intended that an on-site gas turbine power plant will supply electricity to the desalination plant, with excess power to be sold to the national grid. But Tuaspring has been a drag on earnings since its power plant operations started in March 2016, recording a net loss of $81.9 million in 2017.
Hyflux chief executive Olivia Lum blamed the losses on an oversupply of gas, which depressed electricity prices. "Because we were the smallest company in the power generation industry, we were not able to ride out the prolonged downturn. Tuaspring also represented a much more capital-intensive project, more than $1 billion capital outlay, compared with the $200 million and $500 million value of water projects," she said.
Hyflux and five of its units, including TPL, applied to the High Court last May to start a court-supervised process to reorganise their liabilities and businesses.
It told stakeholders then that it has "not escaped the impact of depressed electricity prices" in recent years.
PUB said in a statement yesterday that TPL has been unable to fulfil various contractual obligations under the water purchase agreement, in particular by failing to keep the plant reliably operational.
It has also been unable to produce financial evidence to demonstrate its ability to keep the plant running for the next six months.
Hyflux told the Singapore Exchange late last night: "The water purchase agreement provides a default cure period of 30 days from March 6 or such longer period as may be reasonable for TPL to consult with PUB as to the steps that need to be taken with a view of mitigating the consequences of, and curing, any defaults that are alleged to have occurred.
"If, after the default cure period, any breaches that have arisen are not remedied, PUB has the sole and absolute discretion to, among other things, terminate the water purchase agreement by giving written notice of not less than 30 days to TPL."
PUB signed a 25-year agreement with TPL in 2011. The agreement stipulated that TPL has to deliver up to 70 million gallons of desalinated water per day to PUB for a 25-year period from 2013 to 2038.
PUB said: "Given (its) current financial position, (TPL's) inability to fulfil its contractual obligations is unlikely to change in the immediate to longer term. PUB is taking steps to ensure that our water security is safeguarded."
It also noted that "Singapore's desalination plants are integral to our water security".
Hyflux has taken a $916 million impairment for the nine months ended Sept 30 to adjust for a fall in carrying value of the Tuaspring plant and other write-downs.
This figure was released last Saturday after Hyflux submitted its latest statement of financial position to the High Court.
The impairment has put the Hyflux group in a net liability position of $136 million, indicating that it is insolvent.
This comes after the company set out a restructuring plan last month that will see heavy losses for its investors while the bulk of Hyflux's share capital, about 60 per cent, will go to SM Investments, a consortium of Indonesian conglomerate Salim Group and energy giant Medco Group.
Hyflux added last night: "Under the restructuring agreement, a termination of the water purchase agreement may entitle SM Investments to assert a right to terminate the restructuring agreement.
"Hyflux and TPL are seeking legal advice on the matters asserted in the default notice, and will commence consultations with PUB immediately."
Mr David Gerald, president of the Securities Investors Association (Singapore), or Sias, said the PUB notice to Hyflux has huge implications for the restructuring scheme.
"The company is currently insolvent, and the only way it can comply with the default notice is to ensure restructuring is successful. Sias will meet with the Hyflux board as soon as possible to discuss the implications of the notice fully," he said.