By Steven Ralston, CFA
READ THE FULL MEEC REPORT HERE
Despite being buffeted by headwinds domestically during the first quarter, Midwest Energy Emissions (MEEC) is pursuing opportunities internationally. A contract is being fulfilled by a Canadian customer for the installation of SEA™ Technology at an EGU in Alberta, which has the strong potential of expanding to three EGUs. In addition, a licensing agreement with Cabot Corp. for the development of mercury removal solutions for coal-fired EGUs in Europe has the potential to create a significant revenue stream in the 2019-2020 timeframe. Domestically, we await Vistra Energy’s portfolio restructuring and Midwest Energy’s role in supplying mercury capture technology for Vistra’s residual coal-fired capacity.
• As demand for electricity from coal-fired EGUs seasonally increases during the warmer months, Midwest Energy Emissions operates profitably during the 2nd and 3rd quarters. The coal-fired fleet still provides about 30% of domestic power production.
• 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. Management expects the installation to be completed during the second quarter of 2018.
• Vistra Energy (VST) 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 (NYSE:DYN) is expected to close in early 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 increasing, 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 61% in the first quarter 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.
Despite the challenges, particularly price competition by chemical companies 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
European Licensing Agreement with Cabot Corporation
On April 17, 2018, Midwest Energy Emissions announced that the company has entered into a multi‐year European licensing agreement with Cabot Corp. (CBT). 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.
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.
First Quarter 2018 Financial Results
On May 21, 2018, Midwest Energy Emissions reported results for the first quarter ending March 31, 2018. The company reported revenues of $2,121,112, down 60.9% from $5,427,394, reported in comparable quarter last year. The revenue decline was primarily driven by a 61.0% decline in product (sorbent) deliveries due to a variety of factors, including the shutdown of some EGUs as a result of competitive disadvantages, the company’s optimization efforts with other customers and lower capacity factors at other customer sites.
Total operating expenses decreased 46.1% to $3.49 million versus $6.48 million in the first quarter of 2017, primarily attributable to the decline in sorbent sales. Cost of goods sold decreased 54.9% to $1.71 million. The direct product gross margin declined from 28.4% to 17.1%.
The company reported a net loss of $1,911,072 (or $0.03 per diluted share) versus a loss of $1,653,285 (or $0.02 per diluted share) in the first quarter of 2017. The net loss in the first quarter of 2018 was primarily due to the decline in sorbent sales.
Adjusted EBITDA was a negative $847,000 compared to a positive $152,000 in the first quarter of 2017. As of March 31, 2017, working capital was a negative $2,417,082, which deteriorated from negative $359.963 on December 31, 2017. Shares outstanding remained stable at 76,246,113 shares sequentially.
Amendment to Financing Agreement
On June 14, 2018, the Amended and Restated Financing Agreement between Midwest Energy Emissions and AC Midwest Energy LLC was amended whereby the principal balance of $521,686.10 due on June 15, 2018 would be paid in two installments: $250,000 on June 15, 2018 and the balance on or prior to September 1, 2018 with the balance incurring rate equal to the current interest rate on the note plus 3.0% per annum until the remaining principal balance is paid in full.
Recent Contract Announcements
On October 10, 2017, the company announced that a $700,000 purchase order had been secured with a Canadian customer for initial use in supplying the front-end of four (4) new EGUs. The PO represents the first expansion to a utility outside the U.S., growing the company’s geographic footprint in North America.
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. Management expects the installation to be completed during the second quarter of 2018. If successful, the customer may install SEA technology at up to 3 EGUs at this location. Midwest Energy has worked with this Canadian customer since 2011.
Nexus Small Business Award
In the first quarter of 2018, Midwest Energy Emissions received the Nexus Small Business Award by Vistra Energy at its Nexus Awards Recognition Reception. The Nexus Small Business Award is given to recognize excellent service and also for utilizing a diverse supply chain and workforce. Every year, Vistra Energy (the largest retailer and generator of electricity in Texas) recognizes companies that provide exceptional service to Vistra Energy and demonstrate a positive commitment to the community.
We continue to be optimistic about 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 in order to become compliant with the EPA’s mercury emissions reduction regulations.
Comparable pollution control and value-added specialty chemical companies trade in a wide P/S valuation range between 4.6 and 0.6. 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 3.46 on TTM sales through 1Q-2018 of $24.2 million, our share price target is $1.10.
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By Steven Ralston, CFA