Hyflux

In the Townhall meeting presented, it is interesting to note the book value of Tuasspring is $1.47 billion. It has concession rights until 2038.

Let's look at the facts about the Singapore's power industry. i) It is over supplied by about 60% capacity. ii) Installation of solar panels and at roof tops are coming up. iii) Singapore's demand for power is increasing on average of 2% per year and our population is slowing in its growth.

IMO, it is likely for the next 15 years, the power generation industry is still going to struggle and this means losses. Hyflux made losses of 70 Million last year. Even if it is capable to reduce the losses to 50 mil annually, it still means a potential book value loss of 750 million.

To put it simply, Tuasspring's s$1.47 billion book value is just numbers and is not tangible. The auditors should ask for an impairment to be done. Any company with the least common sense will definitely not pay $1.47 Billion in book value. If I were to put a good estimate, I would probably buy the plant at only s$500 Million book value. In fact optimistically, I would try to purchase at zero book value because it seems Tuasspring is going to make 70 million loss annually for the next 20 years. The auditors of Hyflux definitely has to exercise some common sense and due diligence when evaluating the worth of its PPE.

The next order of question is how much will a damage will a 1 billion impairment do to the balance sheet?

The answer is that all shareholders and perpetual holders will be wiped out. Bondholders and secured lenders will actually be spared and have a high chance of getting their principal back. If I am a noteholder, logically I will fight for the liquidation of Tuas spring at any price tag of 500 mil and above; perhaps even demanding for the liquidation of Hyflux's assets to pay me back. After all, the capital of bondholders is relatively small at only $265 million.

Townhall PowerPoint Link: http://infopub.sgx.com/FileOpen/Townhall...eID=517134

(21-07-2018, 01:04 PM)CY09 Wrote: In the Townhall meeting presented, it is interesting to note the book value of Tuasspring is $1.47 billion. It has concession rights until 2038.

Let's look at the facts about the Singapore's power industry. i) It is over supplied by about 60% capacity. ii) Installation of solar panels and at roof tops are coming up. iii) Singapore's demand for power is increasing on average of 2% per year and our population is slowing in its growth.

IMO, it is likely for the next 15 years, the power generation industry is still going to struggle and this means losses. Hyflux made losses of 70 Million last year. Even if it is capable to reduce the losses to 50 mil annually, it still means a potential book value loss of 750 million.

To put it simply, Tuasspring's s$1.47 billion book value is just numbers and is not tangible. The auditors should ask for an impairment to be done. Any company with the least common sense will definitely not pay $1.47 Billion in book value. If I were to put a good estimate, I would probably buy the plant at only s$500 Million book value. In fact optimistically, I would try to purchase at zero book value because it seems Tuasspring is going to make 70 million loss annually for the next 20 years. The auditors of Hyflux definitely has to exercise some common sense and due diligence when evaluating the worth of its PPE.

The next order of question is how much will a damage will a 1 billion impairment do to the balance sheet?

The answer is that all shareholders and perpetual holders will be wiped out. Bondholders and secured lenders will actually be spared and have a high chance of getting their principal back. If I am a noteholder, logically I will fight for the liquidation of Tuas spring at any price tag of 500 mil and above; perhaps even demanding for the liquidation of Hyflux's assets to pay me back. After all, the capital of bondholders is relatively small at only $265 million.

Townhall PowerPoint Link: http://infopub.sgx.com/FileOpen/Townhall...eID=517134

I was thinking about this scenario the other day where the banks will escape any meaningful losses in the scale of shareholders or PS. I am assuming that the banks already lend deep to Hyflux before Hyflux issuance of Preference shares to retailers. Will there be conflict of interests if one of the bank lend to hyflux earlier and subsequently manage Hyflux PS issuance or sold the product to their own bank customers thereby shifting their losses to retailers.

If MAS does not write it in any of its acts as a conflict of interest, there is no conflict of interest.

The banks are in it to make money and preserve their capital. They wont care about the risk transfer to customers. Otherwise, we wont be having investment products peddled to us.

For the Hyflux Shareholders and Perps, I think it is going to be a very painful financial episode. The only way the pain can be alleviated is for Keppel, Sembcorp or PUB to come in to bail Hyflux out. I do not think buying Tuaspring above 500 mil book value will make any financial sense, given how oversupplied the power generation sector is.

(21-07-2018, 01:04 PM)CY09 Wrote: In fact optimistically, I would try to purchase at zero book value because it seems Tuasspring is going to make 70 million loss annually for the next 20 years. 

TuaSpring made losses from 2 components:
a. selling electricity lower than what it costs 
b. fixed costs.

It cannot avoid b). but if it is losing money, the logical thing is to mothball part of the capacity and reduce a) to 0, i/o -ve.

The pblm is that it cannot.

Gencos have signed into long term take-or-pay agreements with the LNG aggregator to buy X amt of LNG @ X1 price for X2 no of yrs.
If i remember right, X2 lasts til 2020 or early 2020s. Under the agreement, even if the gencos dun want to burn the LNG, they also need to pay (and apparently they cannot sell it back either). So the only way out is for the whole industry to take the LNG contracted for, pay up and burn them to produce electricity noone wants, losing 1bio p.a. 

Unless there's a renegotiation (unlikely to me), they will need to do so until 2020.

So Hyflux will continue to lose 70-100mio p.a. until 2020, depending on USEP. If USEP goes down to 60-70, it loses 100mio p.a. If it goes to 80-90, it loses 70mio p.a.

Performing a regression of 3mth average USEP vs TuaSpring results, i guestimate breakeven @ ard 130. USEP has trended higher from lows in 2016 to ard 100+/-20 in 2018, so while it's still far from breakeven, it has climbed out of the trough. Numbers are volatile though as supply is certain while demand is fluctuating.

The good news for Hyflux is that unless it is forced to buy the same amt of LNG after the current agreement lapses, it can always do the sensible thing and mothball part of their capacity. So it is not likely to me that it loses 70mio p.a. forever.

The dynamics for the next 2-3 yrs should still be gloomy but the interesting thing is what happens after the take-or-pay agreement lapses.

Apparently, the gencos have agreed to buying a bunch of LNG and expanded their capacities in view of projections of a certain population target and power demand growth, which obviously did not materialise. It is likely that the industry all take a significantly lower amt of LNG and thus produce a significantly lower supply of electricity now that everyone is aware the initial exuberant projections were wrong. This should mean electricity prices will spike as noone will then produce electricity below costs. The price spike should be contained though - there is so much capacity that it is to each gencos interest to produce as much profitable unit of electricity as possible - in anycase EMA can always raise the vesting lvls to arrest cartel behaviour. The industry will then revert to one where the most efficient gencos (both technologically and capital structure wise) dominate. Currently it appears YTL, Senoko, TuasPower, Sembcorp might appear winners with a relatively healthy balance sheet. There prob will be enough scrap left for Keppel, Hyflux and PacLight.

So i am less pessimistic in that i don't think TuaSpring is anywhere near worthless, esp since it is new and so there should be some technical edge. After 2020 (and barring some regulations forcing them to resume the same amt of LNG intake), returns for TuaSpring might be +ve albeit far from the ROI projected during construction. A haircut on the 1.4bio book value is certain, but a complete writeoff is prob an overkill.

With a book value of 1.47B and a concession of roughly 20 years.. does it mean depreciation comes in at 70M per annum?

I mean, this 70M annual losses we're talking about here, is this including the depreciation resulting from an inflated book value?

Hi AQ,

Thanks for the detailed explanation behind the contracts of Genecos (especially LNG).

Just curious are you a professional working in this industry arising with such a thorough knoweldge you have? In addition were there articles which shows such LNG agreements?

(21-07-2018, 10:13 PM)slowandsteady Wrote: With a book value of 1.47B and a concession of roughly 20 years.. does it mean depreciation comes in at 70M per annum?

I mean, this 70M annual losses we're talking about here, is this including the depreciation resulting from an inflated book value?

The correct answer should be "The accounting losses include the amortisation, but it is not clear it is linear". It could well be linear i.e. 70mio p.a. but it's just not clear to me.

A clearer picture of Hyflux's (in particular TuaSpring) financial statements is as below.

Once the contract from PUB is granted, Hyflux starts construction. It is important to note that noone, including PUB, pays Hyflux a single cent of cash throughout construction. Hyflux has undertaken to build a plant for PUB, operate it for the concession period, derive all economic value from doing so, and then return the plant to PUB @ the end.

Yet Hyflux books a profit every year during construction i.e. the EPC period, where perversely no cash enters the books (since noone is paying). If Pritam Singh is to phrase it, he will probably say that hyflux is "ownself-pay-ownself".

At the end of construction, cumulative profits reported = X. Balance sheet wise, this reflects as X in retained earnings under equities, Y as debt under liabilities, and X+Y as intangibles (aka book value) under assets. Essentially cumulative profit of X is reported @ this pt where not a cent of cash appears. Assets of X+Y then represents the pv of all economic benefits that the plant is expected to derive over its effective life.

2 things can happen next:
A. TuaSpring is sold @ book. No profit is reported but X+Y in Intangibles become X+Y in cash. Happy days and time to move on to the next EPC.
B. A does not happen and Hyflux is stuck operating it. Amortisation of the book over the remaining life begins and the operating results net of amortisation becomes the P&L.
    Suppose amortisation is 70mio p.a., and TuaSpring manages to make 70mio by selling electricity > costs, then P&L=0.
    Essentially P&L during operating phase = Revenue from selling electricity and water - Costs - Amortisation.

     Balance sheet wise: if operating profit, Asset-wise X+Y in intangibles go down, cash go up,     Liabiltity wise debt go down, Equity wise retained earnings go up.
                                  if operating loss,   Asset-wise X+Y in intangibles go down, cash go down , Liabiltity wise debt go up,    Equity wise retained earnings go down.

All this is quite clear by looking at the statement of cashflows. Operating cashflows will always be -ve and the happening bits occur in financing (when borrowing $) and investment (when divesting)

Cool accounting isn't it?

(22-07-2018, 11:17 AM)CY09 Wrote: Hi AQ,

Thanks for the detailed explanation behind the contracts of Genecos (especially LNG).

Just curious are you a professional working in this industry arising with such a thorough knoweldge you have? In addition were there articles which shows such LNG agreements?

Nah. I am vested in the perps during the selloff so i did plenty of research prior. It took a while before I could understand both Hyflux's financial numbers and the underlying pblm behind TuaSpring's woes. 

The info is actually very freely available in the public domain, esp from EMA. 
Just google "Singapore LNG take-or-pay" and u can already find a link. There are also plenty of consultation papers on EMA's website, including the IFA done by Frontier over vesting lvls - the objections of the gencos etc are all summarised inside. EMA has conducted the business in a very transparent way i think.

https://www.ema.gov.sg/cmsmedia/Consulta...eport_.pdf

(22-07-2018, 11:41 AM)AQ. Wrote:

(21-07-2018, 10:13 PM)slowandsteady Wrote: With a book value of 1.47B and a concession of roughly 20 years.. does it mean depreciation comes in at 70M per annum?

I mean, this 70M annual losses we're talking about here, is this including the depreciation resulting from an inflated book value?

The correct answer should be "The accounting losses include the amortisation, but it is not clear it is linear". It could well be linear i.e. 70mio p.a. but it's just not clear to me.

A clearer picture of Hyflux's (in particular TuaSpring) financial statements is as below.

Once the contract from PUB is granted, Hyflux starts construction. It is important to note that noone, including PUB, pays Hyflux a single cent of cash throughout construction. Hyflux has undertaken to build a plant for PUB, operate it for the concession period, derive all economic value from doing so, and then return the plant to PUB @ the end.

Yet Hyflux books a profit every year during construction i.e. the EPC period, where perversely no cash enters the books (since noone is paying). If Pritam Singh is to phrase it, he will probably say that hyflux is "ownself-pay-ownself".

At the end of construction, cumulative profits reported = X. Balance sheet wise, this reflects as X in retained earnings under equities, Y as debt under liabilities, and X+Y as intangibles (aka book value) under assets. Essentially cumulative profit of X is reported @ this pt where not a cent of cash appears. Assets of X+Y then represents the pv of all economic benefits that the plant is expected to derive over its effective life.

2 things can happen next:
A. TuaSpring is sold @ book. No profit is reported but X+Y in Intangibles become X+Y in cash. Happy days and time to move on to the next EPC.
B. A does not happen and Hyflux is stuck operating it. Amortisation of the book over the remaining life begins and the operating results net of amortisation becomes the P&L.
    Suppose amortisation is 70mio p.a., and TuaSpring manages to make 70mio by selling electricity > costs, then P&L=0.
    Essentially P&L during operating phase = Revenue from selling electricity and water - Costs - Amortisation.

     Balance sheet wise: if operating profit, Asset-wise X+Y in intangibles go down, cash go up,     Liabiltity wise debt go down, Equity wise retained earnings go up.
                                  if operating loss,   Asset-wise X+Y in intangibles go down, cash go down , Liabiltity wise debt go up,    Equity wise retained earnings go down.

All this is quite clear by looking at the statement of cashflows. Operating cashflows will always be -ve and the happening bits occur in financing (when borrowing $) and investment (when divesting)

Cool accounting isn't it?

The main key is this 1.4 is mainly intangible and mostly concessions. And is guaranteed payment from pub(just pub? Idk) Even if it is operating at a loss.

So it is logical that the starting point of nego with any buyer is 1.4 +- projected earning and loss +- premium or discount.

(22-07-2018, 11:41 AM)AQ. Wrote:

(21-07-2018, 10:13 PM)slowandsteady Wrote: With a book value of 1.47B and a concession of roughly 20 years.. does it mean depreciation comes in at 70M per annum?

I mean, this 70M annual losses we're talking about here, is this including the depreciation resulting from an inflated book value?

The correct answer should be "The accounting losses include the amortisation, but it is not clear it is linear". It could well be linear i.e. 70mio p.a. but it's just not clear to me.

A clearer picture of Hyflux's (in particular TuaSpring) financial statements is as below.

Once the contract from PUB is granted, Hyflux starts construction. It is important to note that noone, including PUB, pays Hyflux a single cent of cash throughout construction. Hyflux has undertaken to build a plant for PUB, operate it for the concession period, derive all economic value from doing so, and then return the plant to PUB @ the end.

Yet Hyflux books a profit every year during construction i.e. the EPC period, where perversely no cash enters the books (since noone is paying). If Pritam Singh is to phrase it, he will probably say that hyflux is "ownself-pay-ownself".

At the end of construction, cumulative profits reported = X. Balance sheet wise, this reflects as X in retained earnings under equities, Y as debt under liabilities, and X+Y as intangibles (aka book value) under assets. Essentially cumulative profit of X is reported @ this pt where not a cent of cash appears. Assets of X+Y then represents the pv of all economic benefits that the plant is expected to derive over its effective life.

2 things can happen next:
A. TuaSpring is sold @ book. No profit is reported but X+Y in Intangibles become X+Y in cash. Happy days and time to move on to the next EPC.
B. A does not happen and Hyflux is stuck operating it. Amortisation of the book over the remaining life begins and the operating results net of amortisation becomes the P&L.
    Suppose amortisation is 70mio p.a., and TuaSpring manages to make 70mio by selling electricity > costs, then P&L=0.
    Essentially P&L during operating phase = Revenue from selling electricity and water - Costs - Amortisation.

     Balance sheet wise: if operating profit, Asset-wise X+Y in intangibles go down, cash go up,     Liabiltity wise debt go down, Equity wise retained earnings go up.
                                  if operating loss,   Asset-wise X+Y in intangibles go down, cash go down , Liabiltity wise debt go up,    Equity wise retained earnings go down.

All this is quite clear by looking at the statement of cashflows. Operating cashflows will always be -ve and the happening bits occur in financing (when borrowing $) and investment (when divesting)

Cool accounting isn't it?

Thanks AQ for the detailed explanation. Wouldn't this mean that if an investor buys TuasSpring at a lower price (and thus book it at the transacted price), then the losses will be instantly less? I mean, if P&L is roughly 70M per year currently, and amortization is roughly 70M, then it's really not losing any money at all, from an outside investor point of view.