This investment pitch was prepared by Pernas Research.
Midwest Emissions Energy is a provider of emissions control technology. Their technology is primarily used by coal-fired power plants to lower mercury emissions. MEEC has been litigating against several defendants who have profited enormously (more below) from their technology. We think that MEEC could see a net windfall of almost $150mm from future settlements and with a market cap of $80mm, this amount would be a large needle mover for the company and the share price.
There are roughly two hundred coal-fired power plants in the USA using MEEC’s technology. Only about one-fourth of those have licenses or sales arrangements with MEEC. MEEC earlier settled with four large defendants and opted for licensing fees with them. The story here with traditional energy providers will be pursuing ongoing licensing agreements as these coal-fired power plants will continue to be operational for the next decade.
What makes MEEC more interesting is the litigation proceedings against refined coal producers during a tax credit program that expired in 2021. The Refined Coal Tax Credit Program was a U.S. federal incentive program established in 2008 under the Energy Improvement and Extension Act. It aimed to promote the production and use of “refined coal,” a treated form of coal that reduced air pollution compared to traditional coal. The way to make refined coal was through capturing the mercury and other contaminants from lower-grade coal. MEEC’s technology was used to capture mercury in this process. This program ended in 2021. This was a tax credit bonanza with the government awarding $7/ton of refined coal produced to many new players. Roughly 1B dollars in tax credits per year were awarded throughout the life of this program.
MEEC entered into litigation against these refined coal producers in 2019 and the case is in its later innings. Two of the largest infringers settled however the details of the settlement are not known at the moment. From court documents, the settlement range for defendants will be 35 cents/ton to $1/ton. There are about 350mm tons of refined coal that were produced using MEEC’s tech from 2017 to 2021 that they were not compensated for. Settlement ranges thus could be $90mm to about $350mm. MEEC has a market cap of $80mm and thus even the midpoint would be sizeable. (For our calculations, we use the year 2017 onwards to assess damages as this is when MEEC acquired a portfolio of patents related to mercury emissions control from the University of North Dakota. Some of these purchased patents go back to 2011 however we do not think damages will be awarded prior to the purchase. This could be a surprise to the upside if the damages period extends further).
The defendants that settled were Arthur Gallagher (AJG), DTE, and Alistar Enterprises.
“As part of the settlements announced last week, one of the defendants has entered into a license agreement based on a rate of $1.00 per ton of accused coal sold during the applicable damages period which we believe establishes a proper base line in our efforts against infringers.”
This was a press release that MEEC released November 20th, 2023 disclosing details from one of the defendant’s settlement. The $1 per ton represents the top range of the settlement and it either pertains to DTE or Alistar as they are still producing refined coal. The wording and a recent video call with the CEO suggest that this settlement is a lump sum from the tax credit period combined with an ongoing license arrangement.
We go into some more details on each of the three defendants that settled below. AJG and DTE are the largest infringers out of the group with the combined infringed coal equaling 200mm tons.
Arthur Gallagher (AJG). AJG was the largest infringer and produced about 120mm tons of refined coal from 2017 until 2021. This was found by looking at their public filings and seeing the tax credits they received from 2017 until the end of 2021 and then dividing that number by $7/ton. Comparing AJG risk disclosures on the patent case shows some interesting word changes. The ‘probability of material loss is remote’ has disappeared from more recent filings.
2023 Q3 10Q:
REX (Alistar). Alistar was another one of the defendants that settled. Rex American is a publicly traded company that used to own Alistar up until 2022. From public filings, we can see that REX produced about 20mm tons of refined coal.
DTE was the last of the defendants that settled. Like the other two, public filings show that from 2017 to the end of 2021, 90mm tons of refined coal were produced.
CERT and other potential defendants. The CERT defendants are the remaining defendants in the current patent suit. They are set to go to trial on Feb 26, 2024 and a recent court filing shows they can be on the hook for $57mm in damages.
Other potential players that MEEC will go after are large banks such as Goldman Sachs which also profited from the tax credit program. Goldman Sachs received about $300mm in tax credits with other large banks also profiting from this program.
Using the midpoint of 67 cents per ton as the settlement award and using 350mm tons as the infringed coal amount. We arrive at a settlement award of $235mm. After taking into account litigation finance fees of $17mm, NOLs of $31mm, a 30% tax rate, and debt of 10mm we are left with a cash amount of 145mm or about $1.60/share.
We believe that MEEC will be able to reach profitability with its existing business pursuing licensing arrangements with coal-fired power plants but do not ascribe significant value here. This could surprise to the upside but we are simply assuming that the core business does not lose money. Management has shown to be extremely optimistic with operational projections and thus estimates are to be taken with a grain of salt. In any case, the value is from the litigation proceedings.
MEEC’s capital expenditure does give us some pause given the unknown probability of success of their new PFAS segment so we have sized MEEC accordingly. The CEO does own 9mm shares so at least there is shareholder alignment.
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