ISSN 1940-204X A Green Winter: The Case of Proposed Jiminy Peak

ISSN 1940-204XA Green Winter: The Case of Proposed Jiminy PeakMountain Resort Wind TurbineJohn B. MacArthur, Ph.D., FCCAThomas L. Barton, Ph.D., CPAUniversity of North FloridaUniversity of North FloridaINTRODUCTIONBut there is only so much Jiminy Peak is able to achievein energy conservation with its existing facilities andstill offer high quality recreational services. Fairbank hasrealized that a more ambitious energy reduction initiative isneeded, and so he and resort managers are now consideringharnessing an abundant renewable green resource readilyavailable to the mountain resort: wind power.Brian Fairbank, president and CEO of Jiminy PeakMountain Resort, is worried about energy costs. Primarily aski resort, Jiminy Peak’s business is very energy-intensive,mainly because most of the winter snow is manufacturedby machines that run on electricity. Strong conservationcampaigns over the years have reduced energy consumptionby 25 percent, but the resort still consumes about 7.5 millionkilowatt hours (kWh) of electricity each year, with about 60percent used during the peak winter months.Last year, electricity costs were about $0.11 per kWh,but this season, the cost skyrocketed to $0.16 per kWh – anincrease of almost 50 percent. Even before the electricitycost increase, Jiminy Peak had tried to operate as efficientlyas possible to minimize its electricity consumption. Asexamples, 1,800 new fluorescent bulbs were installed in thelodge, replacing incandescent bulbs; high-efficiency lightshad been installed on the ski runs that automatically dimto half wattage during night maintenance work; half of thesnowmaking system had been converted to zero-energygravity-feed.Jiminy Peak was even a test site for the development ofrevolutionary new high-efficiency “guns” for thesnowmaking machines. This new snowmaking technologyuses 40 percent less electricity than the older version. In the1990s, the resort won an energy conservation recognitionaward from Massachusetts Electric for saving over onemillion kWh of electricity from its improvements insnowmaking, lighting, and elsewhere.I M A E D U C AT IO N A L C A S E J O U R N A LTHE WIND TURBINE PROJECT PROPOSALFairbank has been in the ski resort business long enough toknow that the Berkshire mountaintops can get very windyin the winter. He has decided to investigate the feasibilityof erecting a wind turbine to put the mountaintop windto profitable and “green” use to help stabilize the resort’selectricity costs. In addition, this would be consistent withJiminy Peak’s corporate mission to protect the environmentand should also permit the use of “green marketing” in thehope of attracting even more visitors to its popular ski slopes.Jiminy Peak managers recognize that determining theviability of installing a wind turbine will be a complicated,specialized process, and so they have engaged SustainableEnergy Developments, Inc. (SED) of Ontario, New York,to examine the feasibility of such an investment. SED’sfee is $157,000. With SED’s help, Jiminy Peak has alreadyreceived a small grant of $15,000 from the MassachusettsTechnology Collaborative to offset part of the cost of theformal feasibility study. The feasibility study is to cover thefinancial, technical, social, and environmental aspects of theproposed wind turbine.1V O L . 5 , N O . 3 , A R T. 1 , S E P T E M B E R 2 0 1 2You are the leader of the SED wind turbine feasibilitystudy team with the responsibility for preparing thememorandum outlining the study’s findings and the team’srecommendations for Jiminy Peak’s management.Technology Collaborative to complete the financing for theproposed wind turbine purchase and installation. Fundingfor the Renewable Energy Trust Fund comes from a chargeon Massachusetts electric bills.Although erecting the wind turbine on the proposed sitewould partly hide it from the view of skiers, the local bankmanagement would be able to see the wind turbine througha window in the bank’s boardroom and, perhaps alarmingly,observe the bank’s loan collateral when the blades were notturning because of insufficient wind strength.Jiminy Peak management and the SED team areconcerned about general community acceptance and supportfor the wind turbine project. The local community is veryconcerned with aesthetic and environmental issues. Theproposed GE Energy wind turbine is taller than the Statue ofLiberty. Its three 123-foot blades are each longer than threeschool buses placed end to end. Local residents may not behappy with such a large structure being erected at the top ofthe mountain. Also, the construction materials would travelnoisily through the local community on trucks from the Portof Albany and add to road congestion. One suggested ideato help gain community acceptance and enthusiasm for theproject is to invite the public to submit names for the windturbine in a “Name That Turbine” competition. A wellpublicized ceremony could be held to announce the winningname and to tout the environmental and social benefits ofthe wind turbine.The GE Energy unit would provide about one-third ofJiminy Peak’s annual electrical needs. With electricity, thematching of generation with consumption is an importantissue because electricity cannot be stored for use later. Withsufficiently strong winds, the turbine generates power 24hours a day, seven days a week, much of the time whenJiminy Peak does not need that level of power. Fortunately,with the winds on Jiminy Peak at their strongest in thewinter, the turbine turns faster, generating more electricity.This phenomenon matches up nicely with the resort’s higherelectricity demand for snowmaking in the winter. Thewind turbine is expected to supply up to one-half of JiminyPeak’s winter electricity needs. Electricity generated bythe wind turbine is expected to result in cost savings frombuying about 2.3 million fewer kWh per year. In addition,excess electricity generated by the wind turbine can beautomatically diverted to the power grid and sold for anestimated $161,000 each year.An important financial component of the wind turbineproject is the sale of renewable energy credits (RECs) to athird party. There is a ready market for these credits becausethey certify that the purchaser of the credit purchasedJIMINY PEAK’S HISTORYJiminy Peak opened in the Berkshire Mountains of westernMassachusetts in 1948. By 2005 it was larger than anyother skiing and snowboarding resort in the southern NewEngland states. During this time period, it evolved into afour-season resort, offering skiing, mountain biking, andother outdoor sporting activities. Jiminy Peak is about 2-1/2to 3 hours’ travel time from New York City and Boston andis only about one hour away from Albany, New York, andSpringfield, Massachusetts.Through good management and sound development,Jiminy Peak became a popular winter ski destination thatcovers 170 acres, with 45 ski and snowboard trails, threeterrain parks, and nine lifts, including a high-speed sixpersonchairlift. Savvy marketing and attractive mountainfacilities have enabled the resort to operate profitably,even in the summer. For summer sport enthusiasts, JiminyPeak installed the first mountain coaster on the East Coast,an alpine super slide, a giant swing, scenic rides, a rockclimbing wall, a “euro-bungy” trampoline, hiking, and, forchildren, rope adventures, mini-golf, a rope spider web, andan inflatable “bouncy bounce” playground. Winter visitorsnumber about a 250,000 annually, while summer visitorsaverage about 100,000.THE ECONOMICS OF HARNESSING THE WINDThe SED team has established that there is enough wind onthe west shoulder of Jiminy Peak’s mountain to effectivelyuse a wind turbine. Significantly, the wind force on themountain is strongest during the winter, when Jiminy Peak’sdemand for electricity is at its greatest for snowmaking, skilifts, and lighting. Jiminy Peak consumes about 4.5 millionkWh of electricity during the winter, which is 60 percent ofits total annual needs.GE Energy, a unit of General Electric, is able to providea 1.5 MW-capacity wind turbine to Jiminy Peak within ayear at an estimate
d total purchase and installation coston the proposed site of $3.9 million. Subject to a favorablefeasibility study, a loan of $3.3 million for 10 years is availablefrom Jiminy Peak’s local bank at an annual interest rate of 7.3percent. A grant of $582,000 is available from the RenewableEnergy Trust Fund administered by the MassachusettsI M A E D U C AT IO N A L C A S E J O U R N A L2V O L . 5 , N O . 3 , A R T. 1 , S E P T E M B E R 2 0 1 2d.the NPV method assuming that all renewableenergy grants, RECs, and renewable energyproduction tax credits are removed.2. Identify and evaluate the environmental advantages of thewind turbine project.renewable energy. Third parties have already agreed topurchase Jiminy Peak’s credits for 10 years at $166,667 peryear, and it is to be assumed in the feasibility study that salesof RECs will continue at this level for the remaining years ofthe wind turbine’s life cycle.In addition to the RECs, the wind turbine would enableJiminy Peak to benefit from $46,000 per year in renewableenergy production tax credits for 10 years, and it qualifiesfor MACRS (Modified Accelerated Cost Recovery System)double-declining balance depreciation for a five-year periodwith half-year depreciation in the first and last recoveryyears. Also, the new turbine would enable Jiminy Peakto open from two to four weeks before other area resortsbecause of the cheaper snowmaking from using wind power.This is estimated to generate an additional $100,000 netcash inflow per year. Jiminy Peak management estimatesthat a wind turbine service contract, insurance, and othermaintenance would cost about $75,000 annually.Based on discussions with Jiminy Peak management,SED has determined that:••••3. Identify and evaluate the environmental disadvantages of thewind turbine project.4. Identify and evaluate the social factors and any other factorsnot already mentioned that are pertinent to the wind turbinefeasibility study.5. Using the results from 1 through 4 above, prepare a memoaddressed to Brian Fairbank to present your feasibility studyfindings and make a recommendation as to whether the resortshould proceed with the wind turbine project.6. Discuss how ongoing environmental cost management canbe used in the decision-making process to increase value tocustomers and to help achieve the organizational goals ofJiminy Peak.7. Describe any help or practical insight that you received fromreading the case and preparing the case analysis. Stating thatyou did not receive any benefit from reading the case andpreparing the case analysis is a valid response as long as yougive at least one reason why you believe this to be the case.Jiminy Peak is subject to a 40 percent income tax rate;Jiminy Peak has sufficient taxable income to benefit fromany deductions and credits that result from the windturbine purchase;The after-tax weighted average cost of capital is 6 percentfor discounting the expected cash flows of the project;The wind turbine has a 25-year useful life with noterminal disposal value.ABOUT IMAWith a worldwide network of more than 60,000 professionals,IMA is the world’s leading organization dedicated toempowering accounting and finance professionals to drivebusiness performance. IMA provides a dynamic forum forprofessionals to advance their careers through CertifiedManagement Accountant (CMA®) certification, research,professional education, networking and advocacy of thehighest ethical and professional standards. For moreinformation about IMA, please visit www.imanet.org.CASE ANALYSIS QUESTIONSAs the lead member of the SED team, your responsibilitiesare to supervise the completion of the feasibility studyof the proposed wind turbine project and to make arecommendation to Jiminy Peak management on whetherto install a wind turbine. Address the following questionsto provide your analysis and opinion on whether JiminyPeak should proceed with the purchase and installation ofthe wind turbine. Clearly state any assumptions used inaddressing the case questions and fully reference any sourcesaccessed for information.1.AUTHORS NOTE:The authors thank Sandra L. Raburn and Jody Ratliff fortheir research contributions and Katie Fogel of Jiminy PeakMountain Resort for her assistance.Using pertinent information from the case text, prepare acapital budgeting analysis of the wind turbine projectusing:a. the payback methodb. the net present value methodc. the internal rate of return methodI M A E D U C AT IO N A L C A S E J O U R N A L3V O L . 5 , N O . 3 , A R T. 1 , S E P T E M B E R 2 0 1 2