Maxim Power breaches financial covenants; sounds 'going concern' warning

 Maxim Power breaches financial covenants; sounds 'going concern' warning

Maxim Power Corp. (TSX:MXG) said in a May 5 financial report that as of March 31, it has breached various financial covenants in relation to its Canadian bank facilities.
 
Management obtained a waiver for these March 31 covenant breaches from the bank on May 5. Current Alberta power forward price curves suggest low power prices in the near term and under these low prices, Maxim said it would likely continue to breach certain financial covenants during the remainder of 2015. "In the absence of obtaining a waiver for the future periods if any covenant is not met, these facilities may become due on demand," the company noted. "As a result, significant doubt may exist with respect to the ability of the Corporation to continue as a going concern. MAXIM is currently in the process of pursuing various asset sales including the finalization of a smaller asset sale. ... The proceeds from these may in part be used to cash collateralize existing letters of credit under the Canadian credit facility and repay any draws on the revolver occurring in 2015, thereby mitigating the risk of covenant default and decreasing the Corporation’s debt service charges.
 
"Management continues to actively pursue other various smaller asset sales with counterparties and financing options with current and prospective lenders which would, in management’s view, enable the Corporation to achieve its business plans. No further agreements have been reached as of the date of this [this May 5 financial report] and there can be no assurance that such agreements will be reached."
 
Maxim's outlook is significantly impacted by Alberta electricity and fuel prices. Alberta electricity prices are a key revenue determinant for MAXIM’s coal-fired Milner Unit 1 (M1) facility. Alberta power prices fluctuate based on the supply of and demand for electricity within Alberta, the cost of key inputs such as natural gas, and other market factors. Commencing in 2014, Alberta power prices became more closely correlated to gas prices as new supply came on the system. This trend is expected to continue for the foreseeable future.
 
In the Northeast U.S., growing demand for natural gas as a fuel source for electricity generation, as well as constraints on existing gas pipeline infrastructure, have increased natural gas price volatility during periods of peak gas consumption. This volatility is expected to have a positive impact on MAXIM’s power plants in that region as energy margins are positively correlated to natural gas prices, resulting in higher margins at higher gas prices. Natural gas price volatility is expected to persist until natural gas supply constraints in the region are addressed. It is also expected that capacity revenue will increase as the market becomes more constrained with capacity shortcomings due to the retirement of generating facilities that do not have natural gas as an option for its fuel source.
 
On Feb. 4, the ISO New England announced the conclusion of its latest Forward Capacity Market auction. The amount paid to existing power system resources commencing in June 2018 will be US$9.55/kW per month for Maxim's CDECCA and Pittsfield power plants and US$11.08/kW per month for Pawtucket, which represents an increase of 198% and 245% respectively, from the current rate of US$3.209/kW per month. Based on MAXIM’s forecasted capacity, it anticipates that the locked-in capacity revenue earned in the ISO-NE market will increase from US$9.6 million for the twelve months ending May 31, 2015, to US$29.6 million for the twelve months ending May 31, 2019.
 
Several power and coal mining projects in the works
 
As for the company's in-development projects:
•Deerland - MAXIM received regulatory approvals in Alberta to construct and operate the Deerland peaker, a 190 MW natural gas-fired facility. MAXIM has entered into agreements to secure firm natural gas transportation service for the Deerland station. MAXIM expects that full-scale construction of the facility will commence pending commercial arrangements, which it is actively pursuing, and strengthening of prices in the Alberta power market.
•SUMMIT - SUMMIT is MAXIM’s development initiative located north of Grande Cache, Alberta, that owns metallurgical coal leases for Mine 14 (M14) and Mine 16S (M16S). M16S is located 30 kilometers northwest of M14. M14 is permitted for a run-of-mine production rate of up to 1,300,000 tonnes per year. MAXIM has also received approval from the Alberta Energy Regulator to construct and operate a Coal Beneficiation Plant. This wash plant, to be located on MAXIM’s existing M1 industrial complex, will bifurcate M14’s run-of-mine coal into an estimated annual production of 950,000 tonnes of high-quality, low-mid volatile and metallurgical coal for shipment to export markets. These approvals provide SUMMIT with all of the requisite government and regulatory approvals to construct and operate M14. In November 2014, MAXIM received delivery of five pieces of mine equipment including two continuous miners and three shuttle cars. The units are in storage awaiting development of SUMMIT. Maxim said it expects that the long-run average price forecast for metallurgical coal will allow for the economically viable development of SUMMIT.
•M2 - In June 2014, the Alberta Utilities Commission (AUC) approved MAXIM’s application to convert the fuel source for the Milner Unit 2 (M2) project from coal to natural gas and to increase the generating capacity of the proposed expansion from 500 MW to 520 MW. The M2 facility is to be located adjacent to the existing 150-MW M1 coal facility. The existing infrastructure at the M1 site allows MAXIM to leverage benefits including electrical connection, fuel delivery, water licenses, and a skilled operations team.
•M3 - MAXIM is proposing to enhance the M1 site energy output by building Milner Unit 3 (M3) which will be made up of two new gas-fired turbines located next to M1. M3 will increase generating capacity at the M1 site while reducing total greenhouse gases and air emissions. Exhaust energy from M3's gas turbines will be converted to steam and utilized to generate electricity in the existing M1 steam turbine, displacing coal-sourced steam. M3, before giving effect to the development of M2, will increase the nameplate capacity at the Milner site from 150 MW to 236 MW. On Feb. 12, MAXIM received approval from the AUC to construct and operate M3. MAXIM's construction and operation of M3 is now pending approval from Alberta Environment and Sustainable Resource Development, which is expected to be received in the second quarter of 2015.
•Forked River Expansion - MAXIM continues to advance an expansion initiative at the Forked River site in New Jersey. PJM Interconnection has confirmed sufficient local infrastructure to support a potential increase of 100 MW at the Forked River site. MAXIM has commenced the process of permitting of the project; configuration, size and timing are being evaluated to ensure the highest value for the expansion project. An expansion of the facility will provide additional capacity to participate in future capacity auctions and realize cost savings because this expansion project will be on the existing Forked River site.

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