Canada-based independent power producer Maxim Power Corp. (TSX:MXG) in a May 12 earnings report sounded a “going concern” warning as its financial position deteriorates.
Based in Calgary, Alberta, MAXIM acquires or develops, owns and operates innovative and environmentally responsible power and power related projects. MAXIM currently owns and operates 39 power plants in Alberta, the United States and France, having 778 MW of electric generating capacity.
Said the company’s May 12 management and discussion report for the first quarter of this year: “MAXIM will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The unaudited condensed consolidated interim consolidated financial statements have been prepared on a going concern basis, which presumes that MAXIM will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
“As at March 31, 2016, MAXIM determined it will breach its debt service coverage ratio (“DSCR”), minimum equity and net funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) financial covenants in relation to its Canadian bank facilities. On May 9, 2016, management obtained a waiver for the DSCR, minimum equity and net funded debt to EBITDA covenant breach from the bank.
“This quarter is the fifth consecutive quarter the Corporation has breached at least one financial covenant related to its revolving credit facility. MAXIM has been able to procure waivers at each reporting date for the financial covenant breaches. However, current Alberta power forward price curves suggest low Alberta power prices in the near term and under these low prices, the Corporation will likely continue to breach the DSCR, minimum equity and net funded debt to EBITDA covenant and, commencing in the second quarter of 2016, also breach the interest coverage ratio covenant. There is no assurance that the Corporation will continue to receive a waiver for future financial covenant breaches. The current facility expires on August 31, 2016.
“At March 31, 2016, the Corporation had cash of [C]$10.0 million and a working capital surplus of $6.9 million. However, in the event that the Corporation is unable to monetize certain inventories in the next twelve months as a result of the dial-down of the Milner generating facility (“M1”), the Corporation would have a working capital surplus of [C]$1.3 million.
“Management has considered these circumstances and believes the going concern assumption is appropriate for these condensed consolidated interim financial statements but is contingent upon the successful raising of sufficient capital or sale of assets in the future, as required. There can be no assurance that the steps management is taking will be successful. This assumption will be reviewed on an ongoing basis by management and the Board of Directors.
“If the going concern assumption were not appropriate for these financial statements, adjustments would be necessary to the carrying value of assets and liabilities, reported revenues and expenses and the statement of financial position classifications used. There is, as a result of the above circumstances, a material uncertainty that may raise a significant doubt about the appropriateness of using the going concern assumption. In the absence of the contingencies in the preceding paragraph, the Corporation’s ability to continue as a going concern is dependent upon its ability to generate sufficient cash to settle its existing liabilities and commitments and fund its business plan without additional financing.”
On March 23, MAXIM temporarily suspended the generation of electricity at the 150-MW, coal-fired Milner Unit 1 (M1) facility in Alberta. The decision to dial down the operations at M1 was due to record low Alberta power prices, which have undermined profitability for a prolonged period. Dialing down the operations at M1 resulted in a temporary layoff of 75% of the plant staff for an undetermined period. MAXIM intends to maintain a smaller operating team to perform maintenance and plant modifications for an expected resumption of generation as power market conditions improve. A significant improvement in Alberta power prices, and/or cost reductions will be required to justify resuming operations. MAXIM will also consider:
- The estimated impact of the recent notices of intent to return several Power Purchase Arrangements (PPAs) to the Balancing Pool by the PPA holders, and the uncertain outcome of the Balancing Pool’s examination of its options, and;
- The phasing in of higher levies associated with the Specified Gas Emitters Regulation (SGER) which began on Jan. 1, 2016, and increase further on Jan. 1, 2017.
MAXIM said it will actively monitor the Alberta power market to determine the appropriate time to economically resume generation activities at M1 while continuing to advance its initiatives to convert M1 from coal to natural gas.
As for first quarter 2016 financial results:
- Canada – Revenue in first quarter of 2016 decreased C$2.4 million or 56% to C$1.9 million as compared to C$4.3 million in 2015. This decrease was largely due to lower Alberta power prices, which resulted in lower generation and ultimately the temporary suspension of operations at M1. The lower Alberta power prices were the result of excess supply driven by fewer reliability issues across Alberta, lower weather-based demand and lower natural gas prices.
- United States – Revenue in the first quarter of 2016 decreased from C$20.0 million in 2015 to C$13.2 million in 2016, which is a decrease of C$6.8 million or 34%. In the source currency, revenue in the first quarter of 2015 decreased from US$16.1 million to US$9.6 million in 2016, which is a decrease of US$6.5 million or 40%. This decrease was primarily due to lower realized prices as a result of reduced weather-based demand in the first quarter of 2016, partially offset by higher capacity revenues due to the Pawtucket plant taking on additional capacity supply obligations at higher capacity prices through reconfiguration auctions.
- France – Revenue in the first quarter of 2016 was C$23.2 million, which is comparable to the same period in 2015.