The ROI of Doing the Right Thing

As independent brewing company Sierra Nevada grows, so does the cost of its sustainability projects. Finance ensures the projected cost savings are...

In its early days in 1980s Chico, Calif., independent brewing company Sierra Nevada had to employ practices that were friendly to the environment because “we didn’t have the resources to be wasteful,” said Bill Bales, the company’s finance chief, at CFO’s Playbook West conference on Tuesday. So co-founder Ken Grossman, whom Bales called a “mechanical genius,” devised ways to be energy efficient and to reuse and recycle some of the byproducts of beermaking. 

But in 2013 Sierra Nevada is a much bigger company. It sells in all 50 states and produces about 1 million barrels of its Pale Ale and other beers yearly. Given its size, any sustainability projects are likely to have a much higher price tag, so the financial ramifications of new “green” business projects are much more important. “Finance concepts become a little bit more critical,” said Bales. “Sure we should do [these projects], but how much is it going to cost? What’s the [return on investment]? What’s the practical thing to do?”

The tangible part of a sustainability project is pretty simple, said Bales –as long as finance is aware of the bias of vendors trying to sell their solution. Finance can use analytics and projections to calculate a project’s cost and determine the payback period. But it should be skeptical of the numbers supplied by vendors, Bales said.

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“Vendors come up with these really cool spreadsheets, and they all look the same,” he said. “They have the same variables—a capitalization rate, the original investment, tax credits, depreciation—and [they] usually come up with this great ROI. Not very often do [the calculations] show that the project is not going to work out.” 

Vendors make two errors in particular that CFOs should watch for, especially in energy-saving projects. First, their projections of savings include a forecast of what energy prices will be 10 years forward. “How do they know what energy costs are going to be?” Bales said. “They have to bring it back to what commodities cost today, and today energy is cheap.”

Second, vendors usually throw in many tax credits and rebates without figuring out whether or not the particular company can use them. When Sierra Nevada was weighing energy-saving designs and equipment for its new facility in Asheville, N.C., “the first thing vendors did was throw in an investor tax credit of 10 or 12 percent,” Bales said. But because of Sierra Nevada’s S corporation status in California, the tax credit wouldn’t have lowered the company’s bill from the IRS.

In some cases, the vendor then proceeds to change the capitalization rate, Bales said, to create a positive net present value (NPV) for the project. “What was wrong with the capitalization rate to begin with?” he asked.

In some cases the numbers don’t quite work out, but Sierra Nevada believes it needs to do the project anyway for corporate social responsibility reasons. “Enough of the NPV being positive, is it close? And if it’s not, what will [the project] cost us?” Bales said.

Still, many of Sierra Nevada’s sustainability projects have a solid long-term return. 

For example, building a $4 million water treatment facility to treat wastewater from brewing was a “no brainer,” said Bales. Sierra Nevada will avoid a $250,000-per-month surcharge from the city of Chico and “[our facility] reduces stress on the local water treatment facility,” Bales said.

On the energy conservation front, the company has a $14 million (net of tax rebates and credits) solar array and was the first brewery to install fuel cells at its plant. It has four 250-kilowatt cells that generate 50 percent of the company’s power needs. The payback period for both projects is as little as seven years. “Our goal is to get off the grid,” Bales said.

Ultimately, Sierra Nevada pursues these and other sustainability projects because they are the right thing to do, Bales said, not because they will add to the bottom line. “As an industry, brewers consume a lot of water, raw materials and other natural resources,” Bales said. “We need to be receptive to the fact that we are going to affect these things today and in the future.”

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