Description

Overview

Maxim Power is an independent power producer with an exclusive focus on Alberta opportunities where the power market has been transitioning away from coal-fired generation.  The company has undergone a transformation dating back to 2005 with operations significantly simplified.  

In 2020, a 204 MW simple cycle gas-fired turbine (SCGT) went into power production at their HR Milner location near Grande Cache, Alberta replacing legacy coal-fired generation.  This new plant (M2) is being converted to combined cycle gas-fired turbine (CCGT) operation boosting capacity to 300 MW with much improved heat recovery efficiency and reduced emissions.

M2 was on schedule to be converted to CCGT operation by the end of 2022; however, on Sept 30/22 they incurred a fire.  Fortunately no one was injured and the fire was contained to the air inlet filter house, but this has caused an extensive delay.  Compounding things is a complete shutdown of the M2 plant so the company is without operating cash flows at the moment.  The good news is they have insurance policies in place for both property damage and business interruption. 

The company’s best estimate to return M2 back to SCGT service is late July, 2023 with commissioning of the CCGT expansion to immediately follow.  Maxim’s balance sheet is in very good shape.  Assuming a reasonable insurance outcome and no further set-backs with M2, net debt should be eliminated within a few months of CCGT operation.  This assumes minimal growth expenditures and excludes a $29.5 million debenture outstanding. With a conversion price of $2.25, it’s highly likely this gets converted upon the Sept/26 maturity (bears interest at 12% in the meantime).   

The news regarding the fire caused a steep drop in stock price but it has mostly recovered.  However, it’s still very cheap - from company sensitivity projections I come up with ~3.3x EBITDA based on the current stock price and CCGT power generation of the plant later this year. I estimate free cash flow yielding 22%+.  These numbers are based on a fully diluted share count (anticipating full debenture conversion).  And this is very unlevered - besides the debenture, as mentioned above the company should be debt free within a few months of CCGT operation.

Maxim also owns legacy metallurgical coal mine lease assets.  A year ago they entered into a contract with an undisclosed party who will be paying for and advancing remaining approvals for construction and operation of the coal mine in exchange for the option to purchase.  A lot of uncertainty with this but if the outcome is positive, it represents a potential windfall. 

M2 - Expansion to CCGT

Two power generating units make up the overall facility.  M2 is a 204 MW SCGT that began operating in 2020.  Milner is the legacy 150 MW steam turbine.  Construction of the heat recovery technology to expand M2 into combined cycle gas-fired turbine operation is well underway and once completed will repower the legacy Milner steam turbine to generate 96 MW out of the 150 MW capacity. 

Below is a schematic of the operation of this facility.  The plant was 2-3 months away from full operation when the (previously mentioned) fire broke out in the air inlet filter house.  M2 has not been in operation since the fire and is expected to be out of commission until July/23 with hot commissioning of the CCGT expansion to immediately follow. 

Development Projects

A Resource assessment is underway at Buffalo Atlee (southern Alberta) for the potential of up to 200 MW of wind generation capacity.

At the Milner site they are  permitted to develop an additional 346 MW of Natural Gas Generation.  However, when M2 is operational in CCGT (at 300 MW) they will be maxed out on power export from this location.

Alberta Electricity Generation Market (by Category)

Alberta is nearing the end of a transition off coal fired electricity. Below is the current structure of Alberta’s power generation capacity:

Below are a couple of charts from the Alberta Electric System Operator (AESO).  AESO has made several future scenario projections in reports from 2019 & 2021.  For each of these respective reports, below are AESO’s charts involving scenarios making the strongest case for wind, solar, clean-tech (etc) costs coming down.  

Maxim describes the CCGT technology as being significantly more efficient and with lower fixed costs than the competing coal-to-gas fleet.  Peering to the furthest right in both these charts, the envisioned growth in the CCGT category rivals that of renewables.  It’s important to note that Alberta has a very limited amount of Hydro, therefore natural gas needs to be relied upon for base load.  CCGT is projected to be the most dominant natural gas category.  

2019 - Alternative Renewable Policy Scenario

2021 - Clean-Tech Scenario

Summit Coal Mine Lease Asset (potential windfall)

Summit Coal is a wholly owned subsidiary of Maxim that owns metallurgical coal leases as detailed below.

With the rising demand for met coal there have been several mine proposals in Alberta. Most controversial was the Grassy Mountain proposal in the Crowsnest Pass (southern Alberta).  It faced significant opposition and the project was eventually rejected.  Summit Coal is smaller in comparison, but has some potential advantages in getting final approval. Many important permits/approvals are already in place and there is an adjacent mine currently in operation. 

In February/22, Maxim entered into a contract with an undisclosed party who will be paying for and advancing the remaining required approvals in exchange for the option to purchase Summit Coal under pre-agreed terms and conditions.  The initial term under this contract is 12 months with a potential 12 month additional extension.  

The undisclosed potential buyer would seem to be Valory Resources - some select slides below are from a presentation this company made to the local MD of Greenview (obviously they are behind schedule with what is shown here). 

Valuation

Alberta power prices have recently spiked like most places; however, Alberta has also incurred volatility transitioning off coal the last several years.  The expectation (from the coal transition) is for the upward volatility to subside and power rates to decline and bottom out as more power projects come online (around 2024) and then trend upward more sustainably.  Supply chain issues (and perhaps M2’s delay) have added to the volatility.

Below are the projected power prices and natural gas costs along with Maxim’s EBITDA sensitivities. 

The above projections for power prices and natural gas costs relate to the province as a whole.  For whatever reason (northern location, marketing, hedging, etc), Maxim tends to fetch slightly higher power prices than the provincial average. It’s also possible due to their location (ie. heart of the Duvernay and Montney O&G plays) input natural gas costs are slightly lower.  However in my calculations I have assumed the averages apply, so hopefully some conservatism in the estimated numbers that follow.

Based on above, I come up with fully diluted EBITDA bottoming out at $1.35/share in 2024.  Then rising to $1.55 - $1.60 per share in 2030 .  This figures in carbon tax at $80 & $170 per tonne in 2024 and 2030 respectively.  

It should be noted that natural gas prices typically align with power prices but there is much volatility.  For all intents and purposes, I am figuring EBITDA bottoms out around $1.35 per share in 2024 and rises along with inflation thereafter.  Being a new plant facility with good upfront depreciation economics and low maintenance expense, I estimate $1.00+ per fully diluted share in free cash flow.  

Assuming no further set-backs or growth expenditures, one can reasonably assume the only debt remaining is the convertible debenture (within a few months of CCGT operation).  But again, I am assuming the outstanding debenture is converted to equity in the fully diluted share count but allowing for the interest cost in the free cash flow estimate (as added conservatism). 

Considering the unlevered balance sheet, the long life expectancy of the new CCGT plant - an 8x EBITDA multiple seems reasonable.  But that’s of course once the plant is operating and there is a few months of debt pay down once it is.  Within a year this could be worth almost $11.00/share.  

Based on this estimated worth (a year from now), translates to a free cash yield of 9% (growing with inflation).  Seems in the ballpark with some conservative assumptions.

None of this considers the windfall potential.  A lot of uncertainty in the value of these met coal lease assets - whatever the outcome, it’s over/above.  

Management & Ownership Structure

The CEO and Chairman is Bruce Chernoff who is well respected with a successful past history.  He does not take a salary and receives no options.  Management interests are very aligned with shareholders.

Bruce Chernoff holds half the outstanding debentures.  Including full conversion, Chernoff’s common share holdings would represent ~38.1% of totally diluted share count.

Director Brett Wilson is the other large shareholder.  He holds the other half of the outstanding debentures.  Including full conversion, Wilson’s holdings would represent ~38.0% of totally diluted share count.  (Wilson recently made a large insider purchase of ~578k shares included in these numbers)

Risks

Further set-backs to M2 and the expanded CCGT operation.

Only one operating cash flow source at present.

Power Prices not syncing with natural gas costs.

Future development projects.

Catalysts

Restart of SCGT and commissioning of CCGT plant.  Particularly news of stepped up timing in the schedule.

Met coal lease asset sale.

M&A transformation.

Possible buyout (two main insiders own 76% combined).

Catalyst

See Above