The prosecution’s case is that the company allegedly hid the fact that it would fund the sale of water at a very low price to national water agency PUB with sales of electricity from a power plant it would build – its first foray into this business.
When the project ran into financial problems due to weak electricity sales, Hyflux suffered losses and eventually entered liquidation, with 34,000 investors owed S$900 million (US$700 million).
On Tuesday afternoon, Deputy Public Prosecutor Kevin Yong took Mr Nah through slides, emails and finance-related letters from 2010 and 2011.
He referred to an email from November 2010 copying in several people including Mr Nah, which set out considerations highlighted by six banks that Hyflux had approached for loans for the Tuaspring Project.
Commenting on the considerations, Mr Nah said that there was a price risk as in Singapore, the electricity market is based on a pool system, where all the power plants indicated and bid their prices into a pool.
A clearing mechanism will then decide the price. In other power markets in most other countries at the time of the alleged offences, there was a fixed power purchase equivalent, said Mr Nah.
Asked if the banks’ concerns were escalated higher up the management ranks of Hyflux, Mr Nah said he believed Lum would also have known of these concerns.
Mr Yong showed Mr Nah an email Lum sent in December 2010 where she wrote: “I feel that we may need to even show banks about our business strategy (full presentation) as we need to convince the banks also on the sustainability of this business.”
Mr Nah explained that the banks’ major concern at the time was the ability of the project to repay the banks’ loans.
Hyflux therefore had to show the banks that cashflow-wise, the projections were robust enough.
He said the banks at the time were not concerned about the revenue source coming from the water portion of the Tuaspring Project, but the power side.
“If you look at the financial model, the viability of the project, actually quite a fair bit of it is dependent on the power plant. Therefore if the power plant is doing well, then from the banks’ angle their loans will be paid,” said Mr Nah.
If the project did not do well, the cashflow would not be sufficient, and the bank loans may not be able to be paid, he added.
He said the senior management of Hyflux knew about these concerns.
Mr Yong showed the witness another email thread from early December 2010.
In it, Cho sent an email to Mr Nah, asking him to make arrangements to meet with representatives from DBS Bank, who wanted to better understand the power strategy.
Mr Nah said it was normal for DBS to want this, as power revenue was a very important part of the Tuaspring Project, so DBS wanted to be “assured and convinced” that the plant would be able to generate the kind of power revenue that was projected.
In reply to the email, Lum said: “Need to do a lot of convincing job in energy strategy to the banks. Apparently Island Power is still having financing challenge.”
In response to questions from the prosecutor, Mr Nah said if Island Power managed to build another new power plant at the time, it would add to the total generation capacity in Singapore. This could affect the prevailing electricity price.
Mr Yong then displayed a letter from January 2011 where the six banks estimated that the revenue from the water portion of the Tuaspring Project could support only around S$150 million to S$170 million of debt.
Mr Nah said this was the “worst-case scenario”, and that the banks wanted to understand more about the project. He said they were indicating that the sum of at least S$150 million to S$170 million would not be an issue.
In another email to Hyflux, the banks said the firm would need to “demonstrate the availability of internal or external funding sources to meet the total base and contingent equity commitment for the project”. They added that “such equity commitment could be higher than the equity contribution of S$363 million previously contemplated by (Hyflux).”
Asked what ways Hyflux could get equity, Mr Nah said there were three ways: Equity injections from Hyflux, shareholder loans and debt in the form of project financing loans.
The trial resumes on Wednesday morning, with Mr Yong wrapping up his questioning of Mr Nah.
After this, the defence lawyers for the various former Hyflux leaders are set to cross-examine Mr Nah.
If convicted of consenting to Hyflux’s intentional failure to disclose the electricity sale information to the securities exchange, Lum could be jailed for up to seven years, fined up to S$250,000 or both.
For making an offer of securities to the public with omissions about the electricity sales, she could be jailed for up to two years, fined up to S$150,000, or both.
