Thursday, 20 February 2014

Maxim Power Corp - Attractively Priced, but Regulatory Risk Remains

Description. MAXIM Power Group (“Maxim”) is an Independent Power Producer (“IPP”) engaged in the acquisition, development, and operations of power generation facilities. The company operates 804 megawatts (“MW”) of electric power in Canada, U.S., and France and 118 MW of thermal power solely in France. The forty-one electric facilities are split between thirty-seven gas fired plants (638 MW), three are LFG and waste heat recovery plants (16 MW), and one coal plant in Alberta (150 MW). The company also has three attractive development projects in its pipelines – a fully-permitted 18.9 MT met coal reserve, a 190 MW fully permitted nat-gas power project, and a proposed 520 MW nat-gas expansion to its existing coal plant.

History. Maxim checks off several boxes for a stock that could contain hidden value: i) small cap security with ~C$150 mln market cap; ii) illiquid stock – average volume traded is 70,000 shares, or C$200k daily; iii) major shareholders are looking for ways to maximize the company’s value and/or their return capital; and iv) a recent sales agreement that was terminated due to a FERC inquiry sent stock tumbling 25%, and currently trade at 0.6x book value.

The company is no stranger to idea-generation sites with multiple submissions on VIC and SumZero, however every time investors feel the company has found a way to unlock its value, something goes awry – in 2012 Alberta’s power prices fell despite steady economic activity and a new carbon emission legislation shortened the economic life of its coal plant; in 2013 a definitive sales agreement was terminated, while another expected agreement failed to materialize. Despite all the blunders, Maxim’s assets are performing better than ever, the balance sheet is as robust as ever, the company has a clear divestment strategy, and yet trades near all-time lows based on enterprise value.

Operations. In the past, the company’s split-persona between an operator and a developer caused the market to discount its operating assets (can’t distribute income to shareholders), and not give any value for its development projects (too small to develop its projects alone). Rightly so, in late-2012 major shareholders who have seen the value of their shares go nowhere over the last decade shifted the company’s focus to developing the Alberta plants while divesting the well-performing operating portfolio and coal reserve. The company has stated it will not develop the two nat-gas projects solo due to the binary nature of single project development, and will seek an off-take or JV.

Maxim’s poor share price performance is explained by its deteriorating return on capital (exhibit 1) – a function of peak market acquisitions and inconsistent performance from its assets. After five years of muddling through, Maxim is firing on all cylinders again with power prices in its key markets reaching 2007-2008 levels, boosting return on capital employed back into double digit territory. On a TTM basis Maxim has generated $53 mln in EBITDA.

Valuation. For simplicity sakes I’ve valued Maxim on a multiples basis, using 8x pre-tax CF (5x for Milner) while adjusting for cyclicality, debt and closure costs, and Summit’s NPV (exhibit 2). I’ve tried to be conservative in my valuation leaving room for upside – the multiples used maybe conservative for a predictable business; if the Alberta power market remains tight, Milner could add an additional $0.20/sh per year; and I’m only adding half of Summit’s NPV, which could provide another $0.78/sh. Whole, Maxim’s portfolio should be worth at least $4/sh for 40% upside.

Conclusion. While I would love to tell you that Maxim is a low-risk, high-uncertainty bet, I don’t think it falls into the category. The high-uncertainty is courtesy of a tight-lipped regulatory inquiry underway. The risk is provided by the fact that an acquirer with superior knowledge has walked away (perhaps just looking for an escape route), and fines that could be posed by a regulatory body set on sending a message (appendix B). The difference between legitimate operations and illegal manipulation in the eyes of FERC is centred on subjective notions of perspective and motivation. To be comfortable with such risk, one would have to be certain of adequate compliance procedures, proper incentives, and unquestionable integrity amongst Maxim’s leadership team. I cannot make that call, perhaps other investors are more familiar with the company’s culture are able to and take advantage of this opportunity.

The good news is that the market does not seem to be discounting a negative FERC decision scenario. Prior to the announcement of the sales agreement the stock was trading at $3.01, compared to $2.85 now. While I’m hoping for a clean sheet, if the market continues to overlook FERC related risk, investors should be able to pick up shares at an attractive price in any outcome. I would just wait for the final decision from FERC.


  1. Parry, in you're opinion do you see the FERC inquiry potentially leading to a fine of $ 50 million or greater?

  2. In my honest opinion, I have no idea. Very tough to say what will come out of this given the limited information the company has released. What we do know is that i) FERC doesn't just send out inquiries for fun, there is usually wrongdoing and a fine involved; and ii) the fines can be big, even for small companies. Best case scenario is that it is not a market manipulation case, and for the worst case, for some reason I have been using the $50 mln figure as well.

    I think an even bigger turnoff could be Mr. Bobenic saying that if it was up to him, they would be adding assets instead of divesting (confusion, which there is plenty of in the company's history). I like the story a lot better with management trying to divest the operating assets and then monetize the development projects.

  3. Thank you for the response. The reason I bring up a $50 million potential fine is because I think if it is anything less than that then there is still a lot of upside in regards to Maxim. The reason I believe this, and I dont think you mentioned it but in February of 2014 (two months after the sale fell through), Maxim became a major beneficiary of a Forward Capacity Market ("FCM") auction. Prior to the auction, Maxim’s powerplants received a rate of $2.95/kw per month. However, as a result of the auction, Maxim is
    locked in to receive $7.025/kw per month, or a 230% increase commencing in 2017. I think this can easily bump up MUSA free cash flow near $20 million per year. If so a fine of less than $50 million can be absorbed through selling non core projects and adding on some debt to existing plants.

  4. Great point, and that is a definite positive.

    I found it tough to value this additional CF since if I'm not mistaken (which is quite possible), these are still one year auctions. So you could see new capacity entering the market in the future that could lower this fixed-capacity rate, and new build pricing will definitely entice additional capacity.

    What this gives them is a golden opportunity. They are in a power market with tight supply. Adding capacity to the power market is usually a lengthy process and in the mean time existing capacity should be bid up. How much should that premium be? I don't think its that additional $10-$12 mln/year discounted back; but definitely more than the single year addition. What are your thoughts? How much of a premium do you think this adds to MUSA?

  5. Nice summary of MXG - you should post more often!

    Thoughts on latest MXG news?

    Btw, where did you pull the nifty flow chart for the FERC actions in 2013, where it broke out how many were settled, for how much, etc? This seems close but not sure it has enough info?