By Steven Ralston, CFA
READ THE FULL MEEC RESEARCH REPORT
Recent Contract Announcements
On October 11, 2018, Midwest Energy Emissions (MEEC) announced that the company’s largest current customer extended its supply contract for an additional three years. Under the multi-million dollar, Midwest Energy Emissions will continue supplying its proprietary Sorbent Enhancement Additive (SEA®) so that the customer can cost-effectively achieve the mercury capture requirements mandated by MATS.
On October 16, 2018, the company announced that a current customer has expanded the use of SEA® technologies to two additional coal-fired boilers (EGUs). Management expects that this expansion will generate multi-million dollars annually in revenue over the course of three years. The customer was described as “one of the largest utilities in North America and a long-term customer.”
View Exhibit I
European Potential Beginning in 2019
Midwest Energy Emissions has meaningful potential in Europe beginning in 2019 as a result of mercury control standards at coal-fired EGUs being fully enforced across Europe by mid-2020 with installation of equipment & testing starting in 2019. The company entered into a multi‐year European licensing agreement with Cabot Corp. to develop and market mercury removal solutions for coal-fired EGUs in Europe. In Europe, the barriers to entry should be significantly reduced since Cabot Corp. (with its established relationships) will be the sales point contact.
On April 17, 2018, Midwest Energy Emissions announced that the company has entered into a multi‐year European licensing agreement with Cabot Corp. Under the agreement, Cabot has exclusive access to Midwest Energy's patented SEA™ Technologies for the development of mercury removal solutions for coal-fired EGUs in Europe. Cabot will market and sell Midwest Energy's proven two‐part mercury capture technology and proprietary scrubber additive technology under the licensing agreement. Cabot has a strong presence in Europe and is expected to be a major player in the implementation of mercury emissions solutions that are required to achieve the European standards set forth by the Best Available Techniques (BAT) Reference Document (BREF) under the Industrial Emissions Directive. According to Midwest Energy Emissions, Europe’s coal market includes a total of 1,384 coal‐fired EGUs with 914 of those located in Eastern Europe.
View Exhibit II
Given the opportunities in Europe for Midwest Energy’s mercury emissions control technologies, management (John Pavlish, Senior VP and Chief Technology Officer) made a presentation as a featured speaker at the 13th Annual MEC Workshop in Krakow, Poland. The launch of the Midwest Energy Emissions-Cabot licensing arrangement in the European Union was jointly introduced at this meeting of international emission control experts. Midwest Energy Emissions has begun testing with major utilities across multiple EU member nations.
In October 10, 2013, 140 nations (including the US, Canada, China, Germany, Netherland and the U.K.) signed the Minamata Convention on mercury, an international treaty that recognized mercury is a chemical of global concern and addresses the reduction of emissions of mercury and mercury compounds. In Europe, under the Industrial Emissions Directive (IED) of 2010, a BAT (Best Available Technique) Reference (aka BREF) document has been published (the most recent in 2017) to cover the required emission prevention activities on installations rated 50 MW or more. The standards are expected to be fully in force across Europe by mid-2020 with demonstration activity beginning in 2018, installation of equipment & testing starting in 2019 and continuing until full implementation in mid-2020.
Despite the challenges reflected in the financial results reported for the first half of 2018, particularly price competition by chemical companies (which are desperate to retain sorbent sales), Midwest Energy Emissions is well positioned to benefit from the reduction of mercury emissions initiatives in the U.S, Canada and Europe. It is important to remember that:
• Midwest Energy Emissions continues to generate revenues from its operationally-effective and cost-effective mercury emissions technology.
• The company recently announced two multi-million dollar contracts
◦ A 3-year contract with its largest customer was renewed in October 2018
◦ A current customer expanded its contract to extent to two additional EGUs
• Despite recent challenges, the company has not issued any common shares.
• The company has meaningful potential in Europe beginning in 2019. The licensing agreement with Cabot Corp profoundly improves the competitiveness of the European initiative.
• In April 2018, Midwest Energy Emissions secured another order from the previously announced Canadian customer, this time to install SEA™ Technology at an EGU in Alberta.
• Vistra Energy awarded its Nexus Small Business Award
◦ Midwest Energy Emissions estimates that the use of SEA Technology has saved Vistra almost $15 million in operating costs over the past three years.
◦ Vistra Energy’s merger with Dynegy closed on April 9, 2018.
∙ The merger will add 13 coal-fired plants to Vistra’s portfolio.
∙ Despite retiring three (3) coal-fired plants, Vistra’s coal-fired capacity increases from 28% to 32% of its total portfolio after the merger.
∙ The current contract covers only 9 of the Vistra’s prospective coal-fired 25 EGUs. For the last three years, Midwest Energy Emissions has been the sole source of mercury capture technology for Vistra Energy.
∙ Midwest Energy Emissions entered into a licensing agreement with Cabot Corp. for the development of mercury removal solutions for coal-fired EGUs in Europe
• Despite the pipeline of prospective customer opportunities, the anticipated closing of new contracts this summer did not materialize due to an unexpected pricing response by incumbent suppliers of sorbent. The competitive pricing response also impacted pricing in contract renewals.
• Revenue from product (sorbent) deliveries declined over 60% in the first half of 2018.
◦ Company-initiated optimization efforts at each EGU have improved operating efficiencies resulting in less-than-expected product (sorbent) usage.
◦ In addition, some customers lowered capacity factors, reducing the amount of product needed to achieve MATS compliance.
◦ Some EGUs were shut down as a result of competitive disadvantages versus other EGUs in their service areas.
We are optimistic the ultimate success of Midwest Energy Emissions. The company should experience increases in revenues over the next few years as the coal-fired plants (both in North America and Europe) utilize Midwest Energy’s SEA Technology to control mercury emissions.
Comparable pollution control and value-added specialty chemical companies trade in a wide P/S valuation range between 4.3 and 0.8. Our indicated share price target is based on market-based comparative analysis that utilizes the valuation metric of Price/Sales. Utilizing an industry average P/S ratio of 2.32 on TTM sales through 2Q-2018 of $18.7 million, our share price target is $0.57.
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By Steven Ralston, CFA