Midwest Energy Emissions (MEEC) – MATS Appears Intact with EPA’s Response

By Steven Ralston, CFA

OTC:MEEC

The EPA has responded to the Supreme Court ruling in the Michigan et al v. EPA case. The proposed supplemental finding considers costs of the emissions limits and determines that the agency’s requirements for compliance with MATS and the implementation timetable are achievable with power generators being able to absorb the anticipated compliance costs while remaining operational.

In late November 2015, the EPA proposed a notice supplementing the Mercury and Air Toxics Standards (MATS) which addresses the U.S. Supreme Court’s decision in Michigan et al v. EPA that was ruled upon on June 29, 2015. In the proposed supplemental finding, the EPA concludes that the inclusion of a consideration of cost does not alter its previous determination that it is appropriate to regulate air toxics (including mercury) from coal- and oil-fired electric utility steam generating units. The EPA is accepting comments for 45 days (or until January 15, 2016) on the supporting document (aka Legal Memorandum), which was published in the Federal Register on December 1, 2015.

Briefly, the EPA concludes that the agency is required to focus on potential hazards to public health and the environment, where cost is one of the several factors that must be considered, but not the predominant or overriding factor. In addition, while determining the appropriateness of regulating emissions from EGUs, “it is reasonable to focus on whether the power sector can reasonably absorb the cost of compliance with MATS,” and it is “important to account for the full range of benefits associated with the action.”

The EPA conveyed that, after the regulations were issued to reduce non-mercury metal, acid rain and organic hazardous air pollutants (HAP), significant research resulted in the development of more cost-effective pollutant controls, which is also likely in the effort to reduce the costs of compliance with MATS. The EPA specifically citied that the “new, more effective mercury sorbents and other control strategies have been developed prior to and during the MATS rulemaking process” further supporting the EPA’s expectation for a decrease in the cost of mercury controls in the future. The technology of Midwest Energy Emissions (MEEC) clearly fulfills the EPA’s conclusion.

After considering the power industry’s ability to comply with MATS and maintain its ability to generate, transmit and distribute electricity at reasonable costs to consumers, the EPA determined that the costs and impacts of MATS are reasonable and that the power sector can reduce mercury while continuing to provide affordable, reliable electricity. The EPA concludes that “this analysis indicates that the vast majority of the generation capacity in the power sector directly affected by the requirements of MATS would be able to absorb the anticipated compliance costs and remain operational.”

Janet McCabe, Acting Assistant Administrator for the Office of Air and Radiation of the EPA, noted in November 2015 that “the vast majority of power plants began making the pollution reductions needed to meet their MATS requirements in April of this year and the rest will begin doing so in April of 2016” and that “the steps that many plants across the country have already taken to reduce toxic air emissions and comply with the final standards show that the standards really are achievable.”

In December 2015, the U.S. Court of Appeals for the District of Columbia Circuit allowed MATS regulations to remain in place while the EPA responds to the Supreme Court’s ruling.

Midwest Energy is unique in that it 1) has a singular focus (the mercury emissions control market), 2) holds exclusive rights to patented processes, 3) has achieved market penetration through the commercialization of SEA Technology and 4) is positioned to take advantage of further opportunities afforded by the implementation of MATS. Midwest Energy Emissions should experience a dramatic increase in revenues over the next few years as the coal-fired plants, which have contract for Midwest Energy’s SEA Technology, ramp up their mercury emissions control efforts to become MATS-compliant.

The company holds exclusive rights to 30 patents and patents-pending related to mercury removal processes developed by the Energy & Environmental Research Center, including SEA™ Technology which provides an operationally-effective and cost-effective mercury emissions solution that is flexible to accommodate a broad range of configurations of coal-fired power plants fueled by varying coal types. SEA Technology has been successfully demonstrated over 40 times at large operating power plants across the United States and Canada. Midwest Energy Emissions achieved its first commercial installation of SEA Technology in late 2011 at a major West Coast utility. Management is maintaining its current timetable for the installation of mercury emissions control systems and continues to estimate that product sales, equipment installations and consulting services will generate over $110 million over the terms of existing contracts. Also, Midwest Energy Emissions has international blue sky market opportunities with the company holding exclusive rights to SEA Technology patents in Europe, Canada and China. Moreover, the Minamata Convention on Mercury should bolster international demand for the company’s mercury remediation solutions. Management plans to begin to host quarterly conference calls sometime in 2016 in order to review financial and operational results.

Comparable pollution control and value-added specialty chemical companies trade in a P/S valuation range between 2.6 and 0.6. Also, as a reference, Cytec Industries was recently acquired by Solvay SA at 2.66 times TTM revenues. Utilizing the top decile P/S ratio of 2.5 on projected 2016 sales of $17.98 million, our share price target is $1.00.

We continue to be optimistic about Midwest Energy Emissions. The company should experience a dramatic increase in revenues over the next few years as the coal-fired plants, which have contracted for Midwest Energy’s SEA Technology, ramp up their mercury emissions control efforts.

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