Yahoo Finance
26. 02, 2024
Q3. 2023 Data
Price: $4.3. Shares: 50m, Cap: $218m.
1. Business
(1) History
(1) History
The company was founded in Jan. 2004, originally it was a partnership called Milner Power Limited Partnership (“MPLP”) which owns the old 150MW Milner coal power plant in Alberta. From Feb. 2004 to Sept. 2004, the Milner plant generated 616K MWh of electricity at $55/MWh and earned around $7m in net income. The major stakeholders of the MPLP are Bruce Chernoff(35%) and Brett Wilson(35%).
In Jan. 2005, MPLP reverse merged with publicly traded company Maxim Power Corp.(MXG). The merger valued the power plant at around $88m. The whole MXG was valued at $114m.
From 2005 to 2008, it bought several gas power plants in the US and some small power plants in France. The total cost is over $100m which is mainly funded by two share offerings in 2005 and 2008.
Those acquisitions did not work as expected. From 2005 to 2014, the company never generated more than $40m in annual operating cash. Almost the same amount of money was spent in CapX. Basically, it didn't generate any meaningful cash in these 10 years.
In June 2016, Bruce Chernoff took over the CEO role and started to devest its US and France assets. The company sold its France power plants for 47m Euro. In the same year, it sold all US power plants for US$83m. After that, only the Milner power plan was left.
Starting in 2015, caused by the low oil price, Alberta's power price dropped to an extremely low level of around $20/MWh in 2016 and 2017. It recovered to $50/MWh in 2018 and stayed at that level till 2020. The company cut its production in 2015 and even suspended it for some period from 2016 to 2018. The Milner plant resumed in June 2018 and stayed in production until it was shut down in 2020 as the newer plant replaced it. From 2015 to 2019, the coal plant lost over $50m in total.
In 2018, it started constructing the new 204MW single-circle gas plant("M2 SC") on the existing Milner plant. The total cost is around 145m. The plant was commissioned in June 2020 and generated 800k MWh of power in 2020. The company became profitable in 2020 but didn't make much money.
In 2021 and the first 3Q of 2022, as the power price rose to over $100/MWh, the company generated over $130m EBITDA in two years. At the same time, the company started to convert the M2 SC plant to a combined cycle gas turbine("CCGT") facility which will reuse the old Milner plant and increase the total M2 capacity to 300 MWh. Total cost is around $150m.
In early Sept. 2022, the M2 SC was taken offline for the finishing work of the new CCGT project. On Sept. 30th, a fire occurred in the plant which caused delaying of the CCGT project for around a year. In Aug 2023, the M2 CC was finally finished. It generated a small amount of power in Q3 2023. On Oct. 24th, it achieved 270MWh commercial production. In Jan. 2024, Chernoff retired from his CEO role. COO Robert Emmott was promoted as the new CEO.
By Q3 2023, it received 63m from the insurance claim for the fire incident. $23m for the property damage and $40m for profit loss.
(2) Product & Business
M2 Combined Cycle Gas Plant: The total cost of the 300 MWh power plant was around $300m which is around $1000/kWh. According to the company's presentation, the average cost to build a new CCGT plant is around $1800/kWh. Other online resources showed that the average cost to build a CCGT is around $1300-$1700/kWh. The cost of the M2 CC is cheaper because it is built on the old coal plant and reused the old generator.
Currently, the M2 CC has a heat rate of 8.1 which means it consumes 8.1 GJ of gas fuel to generate every MWh of electricity. It is equivalent to an efficiency rate of 44.4%. The average efficiency of an offshore CCGT is around 50%. There is still some room for the M2 CC to improve its efficiency.
The gas price has fluctuated from $2/GJ to $5/GJ in the last several years. Based on the 8.1 heat rate of the M2 CC, the cost is around $16/MWh to $40/MWh.
The current Carbon Tax for M2 CC is around $8/MWh. if the efficiency doesn't change, it will increase by around $2 annually until the year 2030 which should be around $20/MWh.
On a normal basis, it could run around 255 MWh capacity which could generate around 2.2m MWh per year. Currently, the fixed cost of running the M2 CC is around $25m/year. Also, there are around 10m annual SG&A. The company needs to generate a $18/KWh margin to cover the fixed cost. The current maintenance CapX of the M2 CC is around $10m per year. The company has to generate a $23/KWh margin to make it even.
(3) Industry
In 1996, the Alberta government started to deregulate the power generation market. It created an auction system that auctions off power generation by the minutes. It will pick the lowest price that satisfies the power load. The price will be the price paid to all generators for that minute.
It also created a government identity called the Electricity Balancing Pool. The pool buys electricity from the major power generators and sells it to the market. This is called the power purchase agreement (PPA). The PPAs lasted from 2001 to 2020. The profit it makes is credited back to electricity users. It seems that the Balancing Pool greatly affected the market power price. From 2015 to 2020, the power price dropped to as low as $20/MWh which is very unreasonable. In 2016, several power generators took legal action against the Alberta government to try to terminate the PPAs early. Since 2021, as the PPAs end, the power price has risen upward sharply to over $130/MWh. It went down since late 2023, currently, it stays around the $90 level.
The total power plant capacity in Alberta is around 21,000 KWh. The average Alberta Internal Load (AIL) is around 10,000 MWh. Both hydro and wind plants depend on weather and natural conditions. If running normally, M2 CC counts around 2.5% of total power production in Alberta.
Based on the 2022 number, Gas plants provide over 70% of total production. While coal plants and renewable plants each provided around 12.5%. Since 2010, more wind plants have been built and accounted for around 12% of total power production in 2023.
There are 40 cogeneration(power and heat) gas plants in Alberta. Total capacity is around 5300 MWh which is around 25% of total capacity.
There are a total of 9 combined cycle gas plants in Alberta ranging from 73 MWh to 848 MWh. Total capacity of 3000 MWh which counts around 15% of total capacity.
There are 31 single-cycle gas plants with 1400 MWh total capacity. They are less efficient and incur much higher carbon tax.
The cost of gas is decided by the AECO-C spot price. I found the company's cost of gas is around 10% higher than the AECO-C spot price. The AECO price is usually lower than the US gas index price. It reached $5 in 2022 but dropped to less than $3 in 2023 and now stays below the $2.5 level.
Notes: Milner plant line loss compensation issue with AESO:
The government body overseeing Albert's power generation is called AESO(Alberta Electric System Operator). In 2005, AESO changed the power line loss compensation formula which seems not fair to the Milner power plant. The company started a long process of legal action. Around 2016, the company won the battle which led to a $53m payment from AESO in 2020($6.4m) and 2021($46m).
(4) Employees
2. Management
(1) Management
(2) Ownership and Compensation
All major shareholders: over 70%.
Bruce Chernoff: 35%.
Brett Wilson: 35%.
Both will own 40% if the debt is converted.
3. Financial data
Notes: Convertible debt
In 2019, it established a $75m credit facility with Chernoff & Wilson to support the construction of the M2 plant. It carries a 12% annual interest and convertible at $2.25/share to the common share. It drew around $22m from the facility in 2019. By the end of 2020, the debt added to $29.4m. Currently, the annual interest is around $4m. The mature date of the debt is September 25, 2026.
Notes: Share History
Before the 2005 reverse merger, the publicly traded company Maxim Power Corp.(MXG) owns 20% of MPLP. Bruce Chernoff owns 35% and Brett Wilson owns 35%.
In Jan. 2005, MPLP reverse merged with MXG. MXG issued 220m shares at $0.32/share for the 80% of the MPLP it doesn't own. After the 2005 merger, it had 356m shares outstanding.
Both Bruce Chernoff & Brett Wilson owned 76m shares of MXG and both acquired an additional 25m shares of MXG for $8m($0.32/share) from another insider. Each of them owns 101m shares (28%) of the company. The company was valued at 356*0.32=$114m.
In Nov. 2005, the company issued 55m new shares for $35m($0.63/share). After the offering, it should have 410m shares outstanding. In 2006, it did a 10 for 1 reverse split which brought the total outstanding shares to 41m. In June 2008, it issued 10.2m shares for $66m($6.5/share). In 2008 AIF, it stated 54m shares outstanding. Both Chernoff and Wilson own around 11.5m shares(21%) each.
In 2018&2019, the company repurchased over 4m of its shares for around $2/share. After the repurchase, the total shares outstanding were reduced to around 50m.
Notes: Share Data
As for Q3 2023:
Shares: 50.5m shares outstanding.
Options: 2.7m. Price < $3.
Debt conversion: 13m shares potential.
4. Valuation and comments
(1) From 2005 to 2020, the company was doing very badly. To be fair, from 2015 to 2017 the low power price is the main reason for the loss. Still, the business was not doing very well in those years. With the $50m+ compensation from AESO, it is still just made even in those years.
(1) From 2005 to 2020, the company was doing very badly. To be fair, from 2015 to 2017 the low power price is the main reason for the loss. Still, the business was not doing very well in those years. With the $50m+ compensation from AESO, it is still just made even in those years.
(2) The M2 SC generated over $100m profit for the company in 2021 and 2022 which is a great investment. The M2 CC is also expected to be a good one as it reduces both the fuel cost and the carbon tax. However, it is unreasonable to expect that the power price will go back to the 2022 level.
(3) The $30m convertible debt provided by the management seems unfriendly to the shareholders. However, I do view it as fair because if not for the construction of the M2, the company probably have been shut down already. Once the debt is converted, there will be $4m in interest savings.
(4) If the $30m debt is converted, the market cap of MXG will be $280m based on the current $4.3 share price. The replacement cost of a similar plant is at least about $450m which is significantly higher than the current market price. This gives quite a good base valuation for the company.
(5) Currently, the power price is still around $100 which is very profitable for the company. If based on a $80/MWh price and $3/GJ gas price, the company can generate around $80m EBITDA per year which makes the $280m cap very acceptable.
5. Risk
(1) The power price is very volatile which could drop to a very low level. It is expected to drop in future years as some new gas plants will be online soon. However, with the end of the PPAs, it seems unlikely that the price will drop to a level that makes the combined-cycle plant unprofitable. But if it does go under $50/MWh while the gas price is over $3, combined with the new Carbon tax, it will lose money.
(1) The power price is very volatile which could drop to a very low level. It is expected to drop in future years as some new gas plants will be online soon. However, with the end of the PPAs, it seems unlikely that the price will drop to a level that makes the combined-cycle plant unprofitable. But if it does go under $50/MWh while the gas price is over $3, combined with the new Carbon tax, it will lose money.
(2) The fuel price fluctuation also affects its profitability. Although it seems the power price usually will be higher to cover the higher fuel cost.
(3) The Carbon Tax will reach $20/MWh for M2 CC in 2030 which will be a significant cost for the company. It has to face the tougher competition from renewable power plants such the wind and solar.
(4) There is very little growth opportunity for the company. It seems the management will keep the company as it is for now.
(5) There could be unexpected events that will cause the M2 CC plant to go offline.
6. Conclusion
The company is in a good state right now which could generate a lot of cash if the power price remains at the current level. The current share price is very cheap. However, by nature, it is a commodity type of business. The power price and fuel price should be monitored closely.
7. Links
