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MEEC Reports Another Operationally Profitable Quarter; delivery on Canadian PO to begin January 2018

By Steven Ralston, CFA


Summary of Third Quarter 2017 Results


•  3Q 2017 was another operationally profitable quarter (ex-change in value of warrant liability) for Midwest Energy Emissions.
• An initial purchase order for $700,000 of product has been secured for use in supplying the front-end of four (4) EGUs in Canada starting January 2018. 
• Midwest Energy Emissions presented at the ExPPERTS Environmental Conference in Wroclaw (Poland) on September 7th, increasing the company’s visibility within the global power generation industry.
• The company is developing a high-sulfur tolerant product line which is being designed to prevent scrubber reemission events in wet scrubbers at coal-fired EGUs. The new product continues to be tested at several large coal-burning power facilities. 
• Management does not anticipate the need for raising additional equity capital.
o Working capital improved from $1.97 million to $2.79 million sequentially.


• 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 has impacted pricing in contract renewals.
• In the third quarter, revenue from product (sorbent) deliveries decreased 29.5%.
o Company-initiated optimization efforts at each EGU have improved operating efficiencies resulting in less-than-expected product (sorbent) usage. 
o In addition, some customers lowered capacity factors, reducing the amount of product needed to achieve MATS compliance.
• The company’s largest customer (with 9 EGUs under contract) announced a major reorganization, including the closing of a number of EGUs. Management now anticipates this major customer will generate less than the previously estimated $25 million in revenue during the contract’s three-year term. A new estimate is anticipated to be announced by the end of the second quarter of 2018.


Third Quarter 2017 Results

On November 20, 2017, Midwest Energy Emissions reported results for the third quarter ending September 30, 2017. Total revenues declined 28.2% to $8,447,967 from $11,771,418 reported in comparable quarter last year as revenue from product (sorbent) deliveries decreased 29.5%. As the process at each specific EGU is fine-tuned, the company’s customers benefit from the optimization process and enjoy operating efficiencies (less sorbent usage). In addition, some customers lowered capacity factors, reducing the amount of product needed to achieve MATS compliance. Revenue from equipment sales declined 98% to $2,975 as no new front-end or back-end product injection systems were installed during the quarter. Revenue from demonstration & consulting services increased 111% to $369,482. 

Total operating expenses decreased 26.1% to $7.42 million versus $10.03 million in the third quarter of 2016, primarily attributable to cost of goods sold decreasing 29.6% to $5.51 million, which is associated with the decrease in revenues during the quarter. SG&A expenses decreased 13.7% to $1.91 million versus $2.21 million. Interest expense declined 44.3% to $541,855 versus $972,930 during the quarter ended September 30, 2016. The change in value of warrant liability benefited results with a gain of $56,000 versus a loss of $9,984,541 in comparable quarter last year. A gain of $379,000 was recorded on legal settlements. As of September 30, 2017, Midwest Energy had a $500,000 net deferred tax asset and a $16,100,000 operating loss carry forward.

The company reported net income of $869,221 (or $0.01 per diluted share) versus a loss of $9,301,824 (or $0.19 per diluted share) in the third quarter of 2016. The primary driver for the dramatic improvement in net income was due to the change in value of warrant liability (a gain of $56,000 versus a loss of 9,984,541). Other factors for the improvement include the $431,075 decline in interest expense (due to the decrease in the amortization debt issuance costs and discount on notes payable from the same period in the prior year) and $379,000 gain on legal settlements.

Adjusted EBITDA decreased 31.9% YOY to $1.572 million versus $2.310 million in the comparable quarter last year. As of September 30, 2017, working capital was $2.97 million, a sequential improved from $1.97 million as of the end of the second quarter of 2017.

2017 Revenue Guidance

Management confirmed revenue guidance for the 2017 year of $26 million, representing conservatively only current business-in-hand. 


2017 Contract Announcements

On March 7, 2017, Midwest Energy Emissions announced that the company has secured an order for a $1 million injection system for a redundant long-term application by an owner of a fleet of EGUs. Management is confident that the installation will lead to additional opportunities throughout this customer's fleet.

On April 4, 2017, Midwest Energy Emissions announced that a current utility customer located in the Midwest renewed its contract valued at over $5.0 million over the next two years. The customer has been utilizing Midwest Energy SEA Technology since 2015.

On August 21, 2017, Midwest Energy Emissions announced that the company secured a three-year contract renewal with its largest customer. The contract was anticipated to generate over $25 million during the three-year term. However, subsequently, the utility announced a major reorganization, which management anticipates will lead to generating less than the previously announced $25 million in revenue from product sales. A new estimate is anticipated to be announced by the end of the second quarter of 2018.

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 utility outside the U.S., growing the company’s geographic footprint in North America.

Midwest Energy Emissions is well-positioned to benefit from the implementation of Mercury and Air Toxics Standards (MATS). The company holds the patents to Sorbent Enhancement Additive (SEA™) Technology for the reduction of mercury emissions by coal-fired electric generating units. The technology has been commercially deployed and provides many advantages, including low cost of operation, flexibility for optimization and preservation of fly ash marketability. 

Midwest Energy is unique in that it has a singular focus (the mercury emissions control market), holds the patents to SEA Technology processes, has achieved market penetration through the commercialization of SEA Technology and is positioned to take advantage of further opportunities afforded by EGUs remaining in compliance to MATS. We continue to be optimistic about Midwest Energy Emissions. The company should experience increases in revenues over the next few years as the coal-fired plants fine-tune their mercury emissions control efforts to become/remain MATS-compliant.

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 $1.35, which is based on market-based comparative analysis that utilizes the valuation metric of Price/Sales. An upper-second quartile P/S ratio of 3.4 on projected sales through 3Q-2017 of $29.4 million indicates a share price target of $1.35


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