Bion Environmental Technologies, Inc. (OTCQB: BNET) is a small company tackling an enormous problem – the restoration of the Chesapeake Bay and other U.S. watersheds that suffer from excess nutrients. According to U.S. Environmental Protection Agency (“EPA”), these excess nutrients represent the single greatest water quality problem that the country faces, due to its pervasiveness and costs to society.
With a unique, proven, and cost-effective treatment solution for livestock waste – one of the largest contributors to excess nutrients in U.S. watersheds – investors may want to take a closer look at the micro-cap company, with its modest $15 million market capitalization, as this new water treatment “space” unfolds.
Chesapeake Bay’s Troubled History
The Chesapeake Bay has experienced steep declines in oyster, crab and fish populations, reduced water clarity and underwater grasses, algal blooms and annual dead zones over the past several decades. Algal blooms, fueled by excess nutrients from agricultural and stormwater runoff, can produce elevated levels of toxins and bacteria that are harmful to humans. When algal blooms inevitably die-off and remove oxygen from the water, they create dead zones that support no marine life.
After 30 years of failed voluntary programs, the EPA took matters into its own hands in December of 2010 by implementing the Chesapeake Bay Total Maximum Daily Load (“TMDL”), which establishes, for the first time, a scheme to regulate and enforce rules governing the entire watershed. The TMDL sets limits for how much nitrogen, phosphorus, and sediment can enter the Bay and requires substantial reductions in these pollutants from the six Bay states and D.C.
Based on current strategies, estimated costs to comply with the Chesapeake Bay TMDL that requires a reduction of 51 million pounds of nitrogen annually, vary from $30 to $50 billion. The precedent that these measures set could have enormous implications, since the Great Lakes are estimated to need more than 200 million pounds of annual nitrogen reductions to restore water quality and the Mississippi River Basin will need over a billion pounds to accomplish the same goals.
To deal with these unsustainable compliance costs, new policies and strategies are being developed in the Bay watershed states that will provide a blueprint for the other U.S. watersheds that struggle with the same issues. These new policies are creating a brand new opportunity in the water treatment space that Bion feels will receive upwards of $8 to $10 billion in annual spending.
What has to Change in Order to Succeed?
Since the passage of the Clean Water Act in 1970, the nation’s clean water strategy has focused on the regulation of point sources, such as municipal wastewater treatment plants, power plants, and factories. The regulations all but ignore agriculture and livestock production, even though the land application of untreated livestock waste for fertilizer is the single largest source of excess nutrients in most major U.S. watersheds – including the Chesapeake Bay.
A legacy spending policy that directs a disproportionate amount of funding to point source reductions and too little to agriculture stands at the root of the problem. For example, in Pennsylvania, point sources accounted for only 19 percent of the state’s mandated nutrient reductions, despite receiving 77 percent of the state’s mandate-related spending. In contrast, agriculture, which accounted for 75 percent of targeted reductions, received only 11 percent of the spending.
This imbalance, which is representative of most states, is why clean water costs that reached $114 billion in 2010 continue to escalate, while overall water quality continues to decline. Livestock waste, which Bion targets with its solutions, represents an un-tapped reservoir of large-scale reductions at dramatically lower cost than the traditional high-cost infrastructure projects that have dominated our clean water strategy in the past.
A recent report
from the Pennsylvania’s Auditor General, Eugene DePasquale, highlights the state’s need to tap these low cost solutions or face serious and expensive sanctions from EPA, beginning in 2017. The report recommends that the “commonwealth should revise and promote the existing nutrient trading program which encourages the transfer of nutrient reduction credits between buyers to allow the marketplace to be used to achieve nutrient reduction goals”, and more importantly that “the Department of Environmental Protection should support using low-cost solutions and technologies as alternatives to higher-cost public infrastructure projects, where possible.”
A Common Sense Policy Approach
Faced with rising costs and recognizing that more effective and lower cost alternatives exist, strategies at the federal and state level are evolving to reallocate spending to more cost-effective solutions. The EPA, USDA and Office of Management and Budget all support a more transparent and accountable process that engages the private sector and funds the lowest-cost solutions, regardless of source.
Key milestones in this policy shift have included:
Nutrient trading has now been implemented in 20 states with the support of the EPA, allowing point sources that face high pollution control costs to meet their regulatory requirements by acquiring equivalent pollution reductions (credits) from another source at lower cost.
A verified credit standard that defines “equivalent” was recently established for the Chesapeake Bay. Verified credits, like those Bion produces, can be measured like a point source. Other credits, such as traditional agricultural best management practices (bmp’s), are calculated using historical models. Recent data shows that these practices are considerably less effective than previously thought. As a result, bmp credits will be subject to a 2:1 (3:1 in Pennsylvania) “uncertainty factor” (downward adjustment) beginning in 2017, doubling or tripling their cost.
The Pennsylvania Legislative Budget and Finance Committee issued a bipartisan report in 2013 that estimated that large-scale agriculture projects, such as those possible with Bion’s solutions, could save the state’s taxpayers $1.5 billion (80%) in annual spending by 2025. Bion’s technology and its benefits are discussed in detail in the report.
PA Senate Bill 994 was introduced in the Senate Agriculture Committee in June 2013 to establish a competitive bidding program, open to all sources, to acquire nutrient reductions based on cost and the value of local benefits. Several critical stakeholders did not support or opposed the bill due to its radical changes, but Senator Vogel plans to introduce a modified version in the current session that’s now strongly supported by large agricultural interests – a bill that could pass in this session that ends in June.
Pennsylvania missed its CB TMDL-mandated nitrogen reductions by 2 million pounds in 2013 and is projected to miss its 2017 targets by 5 to 10 million pounds. The state was placed on the highest level of EPA oversight last year.
A policy framework to redirect funding to alternative solutions that can provide lower-cost nutrient reductions is moving toward completion in Pennsylvania.
With the Auditor General report’s emphasis on the potential economic losses from non-compliance starting in 2017, it seems apparent that funding for these projects cannot be far behind.
Under such a framework, Bion’s technology can supply large-scale nutrient reductions at a fraction of current costs as evidenced at the Kreider Farms project, where Phase 1 is already in operation. There are many additional farms in the region, also suitable for Bion’s technology, which can supply further reductions and better combat the enormous problem.
A National Problem
There are nine million dairy cows, 92 million beef cattle, 62 million swine and several billion poultry in this country that produce approximately a billion tons of manure each year. This translates to over 8 million pounds per day of nitrogen and 3 million pounds per day of phosphorus. In just the Mississippi River Basin, Great Lakes and Chesapeake Bay watersheds, more than 1.25 billion pounds of nitrogen must be removed annually in order to restore water quality.
Several states, including Wisconsin, Iowa, and Ohio, are also gearing up their nutrient trading programs to address the low hanging fruit represented by agriculture. As the policy issues in the Chesapeake Bay are resolved, Bion expects the framework that emerges to serve as a national model. In just the three major watersheds listed above, Bion expects a reallocation of at least $8 to $10 billion in annual spending to take place in the coming years. Bion also believes that, as the Street recognizes this transition is taking place, substantial investment will come to this new “space” and its newly minted private-sector opportunities.
Several lawsuits, most notably the Cow Palace lawsuit
in Washington, have also demonstrated just where the industry may be headed, including:
A coalition of environmental, animal rights, and citizen actions groups filed two lawsuits against the EPA for failing to address air pollution problems stemming from large-scale livestock farms. The lawsuit demands, in part, a response to petitions from 2009 and 2011 to categorize livestock as a source of pollution under the Clean Air Act.
U.S. District Judge D. Price Marshall found two federal agencies liable for illegally guaranteeing portions of $3.6 million in loans applied for by a 6,500-animal factory farm operating on a tributary river in 2013. The organizations failed to conduct adequate environmental reviews before guaranteeing the loan, which could lead to stricter lending ahead.
Lawsuits like these may help drive regulators to take action more quickly, while holding livestock farms accountable for their actions. At the very least, they underscore the need to change the way the livestock industry deals with its waste. With Bion’s solutions, farms can proactively take action to reduce their impact on the environment before federal agencies mandate change across the board.
Bion Environmental’s Solution
Bion’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. Simply put, the company’s technology is capable of providing large-scale reductions at dramatically lower cost than alternative options provided by the public and private sector.
Converting nutrients into industry standard by products, the technology removes up to 95% of the nutrients from livestock waste and substantially lowers air emissions like ammonia and greenhouse gases. Management believes this is the only cost-effective solution on the market targeting wet waste from dairy, beef, and swine.
After struggling to develop its technology over the past 25 years, the company is finally approaching a key tipping point for investors. The implementation of the EPA’s standards across states in the Chesapeake Bay has created a large end market. At this time, Bion 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, one of the largest sources of nutrients in the CB watershed.
While many environmentally-focused investors have latched onto solar stocks, like Yingli Green Energy Holding Co. Ltd. (NYSE: YGE), alternative energy stocks like American Superconductor Corporation (NASDAQ: AMSC), or energy companies like U.S. Geothermal Inc. (NYSE: HTM), they may want to take a look at Bion Environmental Technologies, Inc. (OTCQB: BNET) given its modest $15 million market capitalization and enormous potential as a first-mover in the space.
For more information, visit the company’s website at www.biontech.com