Maxim Power Corp. (TSX: MXG) has seen some positives and negatives, with the negatives mostly due to coal-fired power at its Milner power plant in Alberta, due to low natural gas prices lately, said the Canada-based company in a Nov. 8 earnings statement.
“Low natural gas prices have a positive impact on the Milner facility through fuel cost savings,” the company said. “Further savings are realized through lower environmental compliance costs and lower maintenance costs. Despite the low-priced natural gas environment, the market has seen a slight increase in natural gas prices during the third quarter. If this trend were to continue to the point where gas becomes less cost effective than coal the Milner facility would return to coal as a primary fuel source.”
The low natural gas price environment in the Northeast U.S., where the company has operations, is expected to have a neutral to slightly negative financial impact on MAXIM’s power plants. “MAXIM’s energy margins are positively correlated to natural gas prices and therefore are lower in a low gas price environment,” the company explained. “However, generation from coal fired power plants that do not have fuel switching capabilities will be displaced by natural gas power plants, such as those owned by MAXIM, which should translate into more frequent dispatches and generation for MAXIM’s power plants. In summary, MAXIM’s Northeast US facilities tend to produce more output, albeit at lower margins, during low gas price periods. More recently, gas prices have shown an increase in strength heading into the winter season. Should gas prices remain at their current levels or continue to strengthen, it is expected that coal fired generation displacement will erode, but will be offset by an increase in energy revenues and margins per megawatt hour produced.”
MAXIM currently owns and operates five plants in the U.S. producing 433 MW, which represents 53% of MAXIM’s nameplate capacity. That includes the 170-MW Pittsfield combined-cycle plant in Pittsfield, Mass, and the 64.6-MW Pawtucket combined-cycle plant in Pawtucket, Rhode Island.
MAXIM’s results in the third quarter were positively impacted by higher generation and pricing in the Northeast U.S., as well as higher prices realized at the Milner facility in Alberta when compared to the third quarter of 2011.
Alberta power prices averaged C$78.09 per MWh in the third quarter of 2012, representing an 18% decrease from the C$94.69 per MWh average price of the third quarter of 2011. However, Milner’s average realized price was C$134.70 per MWh during the third quarter of 2012, which is a 41% increase from the average realized price of C$95.41 per MWh in 2011. Milner was able to realize a higher average price than the Alberta pool price because it operated in a derated (low generation) mode during low priced periods. In the third quarter of 2012, Milner had 100% availability during all periods where the hourly Alberta pool price was above the average Alberta pool price for the quarter.
New federal CO2 regs put new Milner coal capacity in doubt
On Sept. 12, the government of Canada enacted regulations for coal-fired generation facilities that will limit CO2 emissions for both existing power plants upon realizing their economic life and new power plants commissioned after July 1, 2015. As a result these new regulatory requirements, MAXIM management is reviewing alternative strategies for its coal-fired Milner expansion project. In addition to this, the existing Milner facility will be required to operate at an annual capacity factor of 9% or less, which is approximately 113,500 MWh per year, effective Jan. 1, 2020, and discontinue operations by Dec. 31, 2029.
The coal-fired Milner Expansion (M2) project that is now in danger due to the new federal CO2 standards would be next to the existing 150-MW facility (M1). “MAXIM is examining ways to meet the new standards including development of a natural gas-fired facility,” the company said. “All aspects are presently being studied to determine the most viable and effective course of action.”
As previously reported, MAXIM received regulatory approvals to construct and operate the Deerland Peaking Station, a 190-MW natural gas-fired peaker. Deerland is the only permitted peaking development project in the province of Alberta at this point. On May 15, MAXIM entered into agreements to secure firm natural gas transportation service for the Deerland peaking station. MAXIM said it is pursuing commercial arrangements that would allow for the construction of the facility to commence during 2013.
The company advanced the development of its Mine 14 project, an underground coal mine to be located in Alberta near Milner, during the third quarter. On May 9, it acquired an additional three coal leases, two of which are adjacent to its existing Mine 14 lease. The company has contracted a third party to collect data and analyze the results of the exploration program in order to provide a revised Technical Report, which it anticipates issuing during the first quarter of 2013.
Mine 14 is located north of Grande Cache, Alberta. Current estimates, without factoring in the impact of a 2012 exploration program, are 18.7 million tonnes of coal reserves with a mine life of 14.4 years. This is a low-mid volatile metallurgical coal. The company previously entered into a ten-year terminal services agreement with Ridley Terminals Inc., commencing Jan. 1, 2015. This agreement provides it with firm terminal capacity on the West Coast of British Columbia and terminal processing services to enable the majority of Mine 14’s proposed coal production to access the seaborne coking coal market. In addition to this, the company has secured firm 2013 delivery dates for critical mining equipment.
“The Corporation considers the advancement of the Mine 14 development project strategic for MAXIM in part because of the value of metallurgical coal and in part due to Milner’s ability to utilize tailings, which are a byproduct of mining coal to produce electricity,” the company noted.