By Steven Ralston, CFA
READ THE FULL MEEC RESEARCH REPORT
Over the last six months, the news flow from Midwest Energy Emissions (MEEC) has been significant and positive in regard to North American contracts and corporate initiatives. In terms of contracts, at least five additional EGUs are under supply contracts, one of which is a new customer brought on board through the Patent Strategy. The European initiative (through the licensing agreement with Cabot) is expected to gain traction during the summer months of 2019, and management anticipates that some European contracts will be announced in the fall. The Licensing initiative continues to be pursued and has already led to a new customer contract. Moreover, the company’s secured and unsecured debt held by AC Midwest Energy LLC was restructured in February 2019 with maturities being extended and the interest rate being reduced. Finally, despite the challenging industry dynamics, the company did not issue any shares during 2018.
Management expects to continue securing additional contracts for USA-based EGUs during 2018 and for European EGUs beginning in the fall of 2019. The licensing strategy, spearheaded by Caldwell Cassady & Curry’s efforts, has already led to one contract, which was announced on March 5, 2019. On the April 11th conference call, management provided guidance that EDITDA will be positive in 2019.
View Exhibit I
In March 2019, Midwest Energy Emissions made three announcements:
• On March 5th, the company announced that a new multi-year supply contract was secured with a US-based utility. Management expects the contract to generate revenues of over $1,000,000 annually.
• On March 12th, Midwest announced the signing of a multi-year contract renewal (with a long-term customer), which is expected to generate approximately $1,000,000 annually in product sales.
• On March 19th, the company expanded an existing customer agreement with its largest customer for two additional EGUs in North America. Under the three-year contract, management expects the incremental coal-fired boilers to generate revenues in excess of $2,000,000 annually.
The March 2019 contract announcements followed two press releases in October 2018:
• On October 11, 2018, Midwest Energy Emissions 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 the company’s largest 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.”
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. 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
Brief European Primer
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-2021 with testing activity beginning during mid-2019, the announcements of the initial contracts in the fall of 2019 and continuing until full implementation in mid-2021.
In November 2018, Midwest Energy Emissions’ licensing program was announced in an effort to capture revenues from the unauthorized use of the company’s patented SEA® technologies. Caldwell Cassady & Curry, P.C. was engaged, first to analyze and validate the company’s patent portfolio and second to seek fair compensation from the many coal-fired EGUs (the company believes over 100) that have adopted aspects of the patented methods of SEA® technologies, particularly the enhancement of sorbent with a halide-based substance. As an IP (Intellectual Property) law firm, Caldwell Cassady & Curry is now engaged in an effort to offer licenses and other commercial opportunities to these domestic coal-fired utility operations that are using aspects of SEA® technologies to be compliant with MATS. Potential resolutions include a licensing program with Midwest Energy Emissions or a supply contract by which Midwest would become the provider of the sorbent. A relationship with Midwest Energy Emissions also would provide certain other benefits. With a sophisticated understanding of mercury interactions with flue gas constituents and the knowledge of modifying the composition of sorbent based on coal type and the plant configuration, Midwest Energy has the expertise to further improve the operational efficiencies of these coal-fired systems.
On February 25, 2019, Midwest Energy Emissions announced that all the unsecured and secured debt obligations with Alterna Capital Partners, LLC had been restructured.
The $13.0 million Unsecured Note Financing Agreement due December 15, 2020 (3-month LIBOR plus 5.0%) was exchanged for a new $13,154,930 Unsecured Note due August 25, 2022 (zero cash interest rate) with a profit participation preference derived from a certain percentage of net litigation proceeds, net licensing revenue and adjusted free cash flow, subject to various considerations.
The maturity of the $271,686 Secured Note due December 15, 2018) was extended to August 25, 2022 and the minimum EBITDA covenant has been waived.
Despite the challenges reflected in the financial results reported for 2018, Midwest Energy Emissions remains 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 announced several million+ dollar contracts since October 2018.
• Despite recent challenges, the company did not issue any common shares during 2018, and currently management has no plans to seek capital through the issuance of equity.
• The company has meaningful potential in Europe beginning in the fall of 2019 as a result of mercury control standards at coal-fired EGUs being fully enforced across Europe by mid-2021 with installation of testing starting in the summer of 2019. In Europe, the barriers to entry should be significantly reduced since Cabot Corp. (with its established relationships) will be the sales point contact.
• The licensing model being pursued under management’s patent strategy could provide top-line and/or licensing revenues, both of which would enhance the company’s profitability.
We remain optimistic the ultimate success of Midwest Energy Emissions. The company should experience increases in revenues over the next few years as more coal-fired plants (both in North America and Europe) utilize Midwest Energy’s SEA Technology to control mercury emissions.
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By Steven Ralston, CFA