The introduction of Pennsylvania Senate Bill 724 – known as the Watershed Improvement Act – is the culmination of several years of environmental and economic studies that have identified an affordable pathway to help meet the state’s Environmental Protection Agency (“EPA”) mandates to clean up the Chesapeake Bay. Besides providing dramatic savings to the state’s tax and ratepayers and accelerating the Bay cleanup, the new regulations could provide a dramatic boost to Bion Environmental Technologies Inc. (OTCQB: BNET).
Bion Environmental Technologies’ livestock waste treatment technology platform was developed to bridge the gap between the livestock industry and environmental concerns. Livestock and their waste have been recognized as one of the largest unregulated (mostly) sources of both air and water pollution in the Chesapeake Bay, as it is in most of the U.S.
Bion’s patented livestock waste treatment systems can provide large-scale, low-cost nutrient reductions to meet Pennsylvania’s mandated reductions as an alternative to high-cost downstream water treatment and other approaches that are used today. As an expert in the space for 25 years and responsible for helping guide much of the policy evolution today, the company has the credibility needed to ensure its solution sees the light of day.
In this article, we’ll take a look at the genesis of SB 724 and why Bion Environmental Technologies is well positioned to capitalize on the opportunity.
Environmental Policy 101
The Chesapeake Bay has experienced steep declines in marine life and water quality over the past several decades. After many years of failed voluntary cleanup programs, the EPA took matters into its own hands in December of 2010 by implementing the Chesapeake Bay Total Maximum Daily Load (“TMDL”), which established a scheme to regulate and enforce rules governing the entire watershed. The TMDL calls for significant reductions in excess nitrogen, phosphorus and sediment flowing to the Bay.
Traditional options under the Clean Water Act (CWA) to handle the cleanup process are notoriously high-cost – estimated at between $30 and $50 billion per year by some experts. Pennsylvania has the largest obligation under the TMDL, as the Susquehanna delivers most of the water to the Bay. In 2012, Pennsylvania’s bipartisan Legislative Budget and Finance Committee (LBFC) commissioned a study to identify alternative solutions to the problem, concluding in 2013 that a competitively bid procurement program for verified reductions from all sources, could save the state’s tax and ratepayers $1.5 billion annually by 2025 and beyond, an 80 percent reduction in cost. Note that these savings projections, if accurate, mean that PA will still be spending $375 million annually in 2025 and beyond on the Chesapeake Bay cleanup (and if the savings are only 60%, which is probably more realistic, PA would be spending $750 million annually) which provides a huge market for a company like Bion Environmental Technology.
Pennsylvania lawmakers responded by introducing SB 724 that would establish a procurement program to enable point sources that face high pollution control costs to meet their regulatory requirements by acquiring verified equivalent pollution reductions (credits) from another source at a lower cost. The bill establishes a competitively-bid request for proposal (RFP) program, where verified credits would be offered, based on cost and the value of their local benefits. Further, the bill requires that in the future, traditional infrastructure projects will have to demonstrate that they are cost-effective compared to the credits, or forgo state and federal cost sharing money – usually two-thirds of public project funding.
SB 724 will create accountability and transparency in a space where it has been lacking. Escalating costs and declining overall water quality are symptoms of a failed strategy and highlight the need for change. Naturally, the bill is opposed by those entrenched and invested interests that thrive in today’s status quo, despite the clear failure of clean-up efforts over the last decade. A similar bill, SB 994 was introduced in 2013, and stalled from a lack of understanding of potential and alternative costs, a lack of industry support, and opposition from the status quo.
Things have changed: A Special Report
, issued this month by the Pennsylvania Auditor General, highlighted the potentially dire economic consequences of EPA-imposed sanctions if the state fails to meet the 2017 TMDL targets, which could include ‘no growth’ limits being placed on Pennsylvania’s entire Chesapeake Bay watershed. The report also supported using low-cost solutions and technologies as alternatives to higher-cost public infrastructure projects, where possible. The report specifically mentioned direct investment in manure control technologies.
Recently, the opposition to SB 724 has marginalized itself to a degree, reducing themselves to desperate tactics aimed at deflecting attention away from the key issues. Because the independent studies are clear: the decades-old approach has failed, Pennsylvania is facing tremendous costs, and a new market-based strategy will not only reduce those costs, but actually accelerate implementation, the status quo opposition to SB 724 has lost credibility. Further, the bill is now supported by large state and national agricultural interests, which also increases its likelihood of passing.
Bion’s Innovative Solution
Bion Environmental’s proven and patented technology platform provides verifiable, comprehensive environmental treatment of livestock waste and recovers renewable energy and valuable nutrients from the waste stream. In other words, the technology provides large-scale reductions in pollution at dramatically lower cost than traditional solutions from both the public and private sector.
Currently, the company’s platform is the only technology approved to supply verified credits that can be used as a qualified offset to EPA-mandated reductions from wet livestock waste (which includes most beef, dairy cattle and hogs)– one of the largest sources of nutrients in the watershed. Unlike traditional agricultural Best Management Practice (“BMP”) credits, Bion’s credits can be measured, just like a point source, which increases their ‘certainty’ and value (see below).
Bion’s showcase system at Kreider Farms has been operating since 2012. The company has been active in Pennsylvania since 2009, both proving its technology and helping to craft and guide the policy framework represented by SB 724. The company’s technology and its benefits were discussed in detail within the state’s bipartisan 2013 LBFC study
. Bion’s deep understanding of the issues, the acceptance of its proven and verifiable technology, and the respect they have built over years of perseverance through bureaucratic and political hurdles, places them in a unique position in this emerging opportunity.
It Comes Down to Cost
A market-based strategy is inevitable, and it is clearly in process, as evidenced by federal policy guidance and recent activities in several states. Further, as the largest pollution source in the watershed, it will be impossible to solve our water quality problems without addressing agriculture and livestock.
Last year’s establishment of the verified credit created a ‘common currency’ and nutrient reductions can now be acquired from any source. Credits can, and will be ‘procured’, as with any other commodity or service that is acquired on behalf of the taxpayer, by cost.
Data from two recent independent studies of the economics of nutrient removal in the Chesapeake Bay, demonstrated the following annual nutrient reduction costs (per pound) by source:
Point source (municipal wastewater) $43
Agriculture* $44 - $54
On-site (septic) $311
Urban stormwater $386 - $633
*Based on EPA’s 2014 guidance: BMPs will now be subject to 2 to 1 ‘uncertainty factor’ that will cut their value as pollution reduction methods in at least half. Note that PADEP in April 2015 has increased the ’uncertainty factor’ for PA trading market to 3:1 for BMPs . – As a result ‘modeled’ agriculture pollution reduction costs will likely double or more.
Bion’s patented technology platform can provide large-scale, verified equivalent reductions as low as $8 to $12 per pound, depending on livestock type, location, and scale.
Measuring the Potential
Bion Environmental is uniquely positioned as the only company with a proven and verifiable solution to wet livestock waste sources. And the stakes are tremendously high as our clean water strategy evolves to deal with livestock. Nine million dairy cows, 92 million beef cattle, 62 million swine, and several billion poultry, create a billion tons of manure each year - providing Bion a tremendously large opportunity.
According to recent data from EPA, Pennsylvania will need to reduce well over 10 million pounds of nitrogen from existing levels to reach its 2017 targets or, as the AG’s Special Report said, face costly sanctions that will force the very expensive stormwater reductions. There are enough potential low-cost reductions to be tapped with livestock waste treatment and other solutions to reach that goal. However, with the lag time involved with permitting and constructing large-scale projects, they will have to hurry to meet the deadline.
It should be mentioned that Bion has already proven that its technology works through its commercial dairy operation at Kreider Farms that has operated since 2012. The company is waiting on the policy change that SB 724 represents to begin Phase 2, treatment of Kreider’s poultry operations, which will bring the total credits that Bion produces from the farm to nearly two million annually. The company has been active since 2012 refining the technology, improving effectiveness while reducing cost and footprint.
In terms of the newly addressable market, the company’s management believes that a national reallocation of spending will reach at least $8 to $10 billion annually. Legislation including SB 724 and Wisconsin’s Clean Waters Healthy Economy act are setting precedent for the more than 30 other states experiencing the same problems, as evidenced by similar problems in the Great Lakes and Gulf of Mexico.
These bills represent the final steps in establishing a pathway to reduce our clean water costs, and more importantly to Bion, the ‘funding’ of a new, multi-billion dollar space to stimulate low-cost, market-based solutions. There has traditionally been very little private-sector participation in the clean water space, as it has been dominated by government entities and NGOs and its lack of transparency and accountability has not been conducive to free-market involvement. When it becomes clear it is being opened to the private sector and the spending is coming…like the telecom and biofuels spaces, institutional investment will follow.
In many ways, investors might compare Bion to a pharmaceutical company with a blockbuster drug in late-stage clinical trials. A long and capital-intensive R&D phase is followed by a steep revenue ramp upon approval. While there may be substantial technology risk, the potentially large market is understood and justifies the risk and the high market cap. However, in Bion’s case, the ‘drug’ is approved – there is no technology risk. Rather, it is the market-size potential that is not well understood. Bion believes that policies are near enough to completion that the institutional investment is not far behind. Lion Biotechnologies Inc. (NASDAQ: LBIO) MEI Pharma Inc. (NASDAQ: MEIP), and Oncothyreon Inc. (NASDAQ: ONTY) are three examples of pharmaceutical plays in this situation. But unlike these, Bion Environmental trades at a fraction of its potential valuation with a market cap of only approximately $25 million.
The technology works, regulations are coming, and the Street is ready to take notice – three trends suggesting investors may want to take a closer look.
For more information on Bion Environmental Technologies, please visit the company website at: http://biontech.com