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MEEC...Caught In Trump's Jetstream (For Now)

|Includes: Midwest Energy Emissions Corp. (MEEC)

Midwest Energy Emission Corp. (OTCQB:MEEC) represents an interesting stock that stands to be a huge beneficiary of the Mercury and Toxics Air Standards (MATS) regulations…IF the regulations continue to be enforced under the Trump regime.

  1. MEEC has been weak due to concerns over MATS
  2. What is MATS?
  3. What will happen to MATS?
  4. What I foresee for MEEC

In early November, Midwest Energy Emissions Corp. was poised to launch into a breakout year. Working on mercury emission control from coal-fired burners, the company had a technology solution that was the best bang-for-the-buck in the market. Meanwhile, with the EPA moving forward aggressively to enforce the Obama administration's MATS standards, customers were coming to the company in droves.

On November 11th, it looked like all systems go for MEEC. Then, Donald Trump won the election. It is rumored that Hillary didn't appear on stage that night as she was in her hotel room throwing a tantrum. It's possible that the senior management of Midwest Energy was doing the same…they certainly were sharing her pain.

Since the election there has been a nice rally in the market as stocks hit new highs on what seems like a weekly, if not daily, basis. Small cap stocks have been a particularly strong participant in the rally, as it appears that Trump represents a lot of hope for these companies. Trump has an agenda that includes lower corporate taxes, higher barriers to entry for foreign companies and goods, lower income taxes, etc; all great things for smaller companies.

Trump has also spoken about lessening regulations, saving the coal industry, and gutting the EPA. Once again, things that are beneficial for small caps as a whole. However, not all companies can be painted with the broad brush of "Trump's policies are good for all small caps," because, wherever there are winners, there are bound to be some losers.

In the case of MEEC, if Trump decides to pull the plug on MATS, the companies fortunes could take an immediate turn for the worse. This is the conundrum of investing in Midwest Energy Emissions and the reason why, while the market is rallying to new highs, MEEC shares are trading well below their level of November 11th.

What is MATS?

The Mercury and Air Toxics Standards were first introduced in 2011. At that time there hadn't been any significant regulation over power plant emissions since the Clean Air Act of 1990. The new emissions standards set under the toxics program are federal air pollution limits that individual facilities must meet by a set date.

The initial passing of MATS occurred in June of 2011, but, as usual in D.C., it got immediately held up in court. Despite what the EPA refers to as "overwhelming evidence", the courts didn't think the EPA justified the costs of the law and, in early 2016, effectively sent it back for supporting evidence or withdrawal. It had taken 5 years to get to that point in the court system, but it only took the EPA a couple months before they were back with essentially the same legislation, only with some hard numbers around the cost/benefit analysis. Thus, in the summer of 2016, MATS became effective.

For a complete understanding of the rules and guidelines dictated by MATS, the EPA has a great website. But, in a nutshell this is regulation that limits mercury from the smokestacks of electricity generators, affecting the approximately 1,100 coal and oil-fired electrical generating units that are larger than 25 megawatts and generate electricity for sale & distribution to the national grid.

Mercury is typically present in coal in minute traces. However, when you have a large power plant, you burn a lot of coal and, thus, produce a lot of mercury in your smoke. MATS' goal is a reduction by over 90% of the mercury produced when burning coal to create power.

This is a laudable thing, reducing mercury in the atmosphere, as its highly toxic and can lead to many health issues, including pre-mature death. Which, by the way, is a strange adjective; I would think most people who are dying would say their death is pre-mature. But, I digress.

Anyways, MATS is meant to regulate the amount of mercury put into the atmosphere by power plants. It has hard costs (equipment and annual maintenance expenses) and a bigger, though less well defined, benefit of healthier people around said plants. All in all, it was certainly a no-brainer for the Obama administration to support MATS. Trump, on the other hand, is an anti-regulation, pro-coal kind of president. Most investors are thinking he won't support MATS…

Can Trump Overturn MATS?

There is a great deal of concern in the market about what the Trump administration will do to a large number of regulations, MATS included in the list. Simply put, Trump is a fan of coal and for reducing restrictions on coal producers and users. As such, one could speculate that MATS has a target on it and Trump is lining up his sights.

This concern is furthered by Trump's choice of Scott Pruitt to head the EPA. As Quartz Media says about Pruitt:

"SCOTT PRUITT IS NOT A FAN OF THE US ENVIRONMENTAL PROTECTION AGENCY IN ITS CURRENT FORM (HE HAS SUED THE AGENCY 13 TIMES AS OKLAHOMA'S ATTORNEY GENERAL). BUT PRUITT IS ESPECIALLY NOT A FAN OF THE EPA'S POLICIES TO REDUCE AIR TOXICS AND SMOG FROM POWER PLANTS; HE HAS SUED THE AGENCY MULTIPLE TIMES IN AN EFFORT TO OVERTURN POLLUTION-LIMITING REGULATIONS. SO IT CAN BE CONSIDERED AN EDUCATED GUESS THAT AS THE HEAD OF THE EPA, HE WOULD EXERCISE HIS POWER TO FINALLY DO JUST THAT."

This concern about the Trump administration's treatment of MATS has led to underperformance by shares of MEEC, especially relative to the overall market which has gone straight up. Since the election, the Russell 2000 is up over 10% and MEEC is down over 20%. See graph below.

But, is it that simple? Can Trump simply overturn MATS, thereby disrupting the booming pipeline of clients at Midwest Energy Emissions? I don't think that's the case. Instead, I question as to whether or not Trump will even try to overturn MATS. I'm basing this statement not on my own gut, but on the opinions of various groups that are focused on researching these issues. I've put their own words below.

"Rescinding rules that are already final and partially implemented can be especially difficult to the extent the affected industry already has invested in compliance. In such circumstances, the industry itself may resist change because it would suffer additional expense from the uncertainty or volatility posed by rescission." ~ Harvard University, Environmental Law Program

"As EPA chief, Pruitt could not just kill the EPA's air pollution rules with a waive of a pen. The Mercury and Air Toxics and the Cross-State Air Pollution rules have both been in effect since 2011, so in many cases power plants are already in compliance or in the process of getting there. Plus, to legally change a rule that has already gone through the lengthy notice-and-comment period, the Trump Administration would have to propose a new rule and go through the notice-and-comment period-which can last upwards of 60 days-again. Then the agency would need to respond to and consider all those public comments, another long process.

Plus, they would need to be prepared to defend the new rule in court. It's very hard to defend a new rule when the one it's meant to replace is backed up by rigorous scientific evidence, or if the industry is already relying on it." ~ Quartz Media

It is evident that the MATS standard will be very hard to overturn. First off, the EPA is designed to be a group that operates independently. They are not meant to answer directly to the whims of the president and congress certainly wouldn't be happy if they did so.

Secondly, in order to change a law that has been in effect will require creation of a new law, including the whole public comment period, fighting the legal challenges, and then overcoming scientific evidence that supports removing mercury from the air. You could argue the cost/benefit of mercury removal, but, once the standard has been implemented in a number of cases, it becomes significantly more difficult to do so.

I also believe that the Trump administration's current battle over immigration is really damaging his support. Would Trump be willing to go to court over another battle that will greatly upset the left and have limited gains to his party and core supporters? I don't think he will have an appetite for this anytime soon. And, the longer he waits on MATS, the more utilities are compliant, the less benefit to anyone for overturning it, especially against the perceived health benefits that would be at risk.

The Expected Outcome for MEEC

Midwest Energy Emissions is a company that surely didn't envision the last three months in their plans. They are a prime beneficiary of the MATS standard, having the lowest cost product offering for power generators looking to meet their mercury recapture requirements. MEEC has a strong pipeline of business and had just started to turn the corner from being a research project to a commercial success. Then Trump actually won and threw them a major curve ball.

I see the Trump victory, and subsequent underperformance of MEEC, as a lucky buying opportunity for investors. I don't believe that MATS will be overturned. The utilities are done complaining about it and have done the majority of the work to get compliant. Meanwhile, Trump certainly has other battles to fight.

In my opinion, Midwest Energy Emissions will see greatly increased revenue and profits from their pipeline of business. And, investors will be able to look back at the time when MEEC stock was weak based on concerns over MATS with a smile on their faces.

The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Daniel Carlson of Tailwinds Research [TR] including but not limited to, commentary, opinions, views, assumptions, reported facts, estimates, calculations, etc. is to be considered, in any way whatsoever, implicit or explicit investment advice. Further, nothing contained herein is a recommendation or solicitation to buy or sell any security. The content contained herein is not directed at any individual or group. Mr. Carlson and [TR] are not responsible, under any circumstances whatsoever, for investment actions taken by the reader. Mr. Carlson and [TR]have never been, and are not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and they do not perform market making activities. Mr. Carlson and [TR] are not directly employed by any company, group, organization, party or person. Shares of Midwest Energy Emissions, Corp. are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they consult with their own licensed or registered financial advisors before making investment decisions.

At the time this article was posted, Daniel Carlson owned shares inMidwest Energy Emissions, Corp. Readers understand and agree that they must conduct their own research, above and beyond reading this article. While the author believes he's diligent in screening out companies that are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. Mr. Carlson & [TR] are not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. Mr. Carlson & [TR] are not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. Mr. Carlson and [TR] are not experts in any company, industry sector or investment topic.

Disclosure: I am/we are long MEEC.