77:

Water Heater

Manufacturer

Impact

Analysis

Draft Report

U.S. Deparbnent of Energy

Office of Codes and Standards

1000 Independence Ave., SW

Washington, DC

Date: June 7,1999

EE-RM-97-900 COMMENT 77I
Table of Contents

Executive Summary ........................................................................................................ 1

1.0 M anufacturer Impact Analysis M ethodology ......................................................... 6

1.1. Phase 1: Industry Profile and Issue Identification................................................6

1.2. Phase 2: "Strawman" Industry Cash Flow Analysis ............................................ 7

1.3. Phase 3: M anufacturer Interview Process ........................................................... 7

1.4. Phase 4: Industry Cash Flow Analysis ................................................................ 7

2.0 M anufacturing Impact Analysis Results ................................. .......................... 8

2.1. Industry Profile .......... .................................................................... 8

2.1.1. Current Manufacturer Market Shares and Characteristics .................................................... 8

2.1.2. Industry Shipments.......................................................................................................... 10

2.2. M anufacturer Impact Analysis Interview .......................................................... 13

2.2.1. Flammable Vapor Ignition Prevention.............................................................................. 14

2.2.2. Phase-Out of HCFC 141b As A Blowing Agent for Polyurethane Foam Insulation .......... 15

2.3. Industry Cash Flow Analysis............................................................................ 17

2.3.1. Manufacturing Costs........................................................................................................ 17

2.3.2. V ariable C osts ................................................................................................................. 18

2.3.3. Capital Investments/Product Conversion .......................................................................... 19

2.3.4. Financial Inputs ............................................................................................................... 20

2.3.5. S hipm ents ....................................................................................................................... 20

2.3.6. Cash Flow Impacts .......................................................................................................... 20

2.4. Impacts on Manufacturing Capacity, Plant Closures and Loss of Capital Assets27

2.5. Employment Impacts Assessment ........................................ .............. 28

2.6. Impact on Small M anufacturers........................................................................ 29

2.7. Competitive Impacts Assessment ............................ .......................... 29

2.7.1. Global Competition ......................................................................................................... 30

2.8. Other Comments .............................................................................................. 30

2.8.1. Manufacturer's Comments on Consumer Utility............................................................... 30

EE-RM-97-900 COMMENT 77I
List of Tables

Table 1: Trial Standards Levels................................................................................................................. 1

Table 2: Investments to M eet Trial Standard Levels ........................................................ 1

Table 3: Expected Impacts on M anufacturers ............................................................................................ 3

Table 4: Impacts on Employment Levels...................................................................................................3

Table 5: Impacts on Capacity....................................................................................................................4

Table 6: Impacts on Small M anufacturers ................................................................................................. 5

Table 7: Effect on Global Competition......................................................................................................5

Table 8: List of W ater Heater M anufacturers ........ ...................................................... 9

Table 9: M anufacturer Sub-groups.......................................................................................................... 10

Table 10: Shipment and Value of Household W ater Heaters in 1997 ....................................................... 11

Table 11: Gas Variable Costs and Options ........................................................ 18

Table 12: Electric Variable Costs and Options ........................................ ........ 18

Table 13: Oil Variable Costs and Options ........................................................ 19

Table 14: Gas Capital and Product Conversion Costs .............................................................................. 19

Table 15: Electric Fixed Capital and Product Conversion Costs ................................... ............. 19

Table 16: Oil Fixed Capital and Product Conversion Costs...................................................................... 19

Table 17: Financial Inputs for GRIM ...................................................................................................... 20

Table 18: Business Scenario 1: Results ................................................................................................... 21

Table 19: Business Scenario 2 Results .................................................................................................... 22

Table 20: Business Scenario 3 Results .................................................................................................... 24

Table 21: Business Scenario 1 ................................................................................................................ 25

Table 22: Business Scenario 2 ................................................................................................................ 25

Table 23: Business Scenario 3 ................................................................................................................ 26

Table 24: Impacts on Capacity................................................................................................................ 27

Table 25: Impacts on Employment Levels............................................................................................... 29

Table 26: Impact on Small M anufacturers ............................................................................................... 29

Table 27: Effect on Global Competition.................................................................................................. 30

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EE-RM-97-900 COMMENT 77I
List of Figures

Figure 1: Residential Water Heater Market Shares ........................................ .......................... 9

Figure 2: Historical Trend in Value of Shipments.................................................................................... 11

Figure 3: Historic Revenue per Heater ........................................ .......................... 12

Figure 4: Outlet Division for 1997 (Millions of Residential Water Heaters) ............................................. 13

Figure 5: Business Scenario 1: Relationship of Cost to the Dealer/Distributor to Investments................... 22

Figure 6: Business Scenario 2: Relationship of Cost to the Dealer/Distributor to Investments................... 23

Figure 7: Business Scenario 3: Relationship of Cost to the Dealer/Distributor to Investments................... 24

Figure 8: Short Term Cash Flows for Business Scenario 3....................................................................... 26

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EE-RM-97-900 COMMENT 77I
Executive Summary

In accordance with the Energy Policy and Conservation Act (EPCA) as amended, the

U.S. Department of Energy (DOE or Department) is currently in the process of revising

the minimum energy-efficiency levels for residential water heaters. DOE is currently

analyzing minimum water heater standards for residential electric, natural gas and oil

water heaters. This report assesses the financial and employment impacts of a potential

new standard for four trial standards levels for each fuel type. The four trial standards

levels, and the corresponding energy factor equations, are shown in Table 1.

Table 1: Trial Standards Levels

1 0.95-0.00132V 0.63-0.0019V 0.60-0.0019V

_____ 2 I 0.96-0.00132V 0.66-0.0019V 0.61-0.0019V

3 0.97-0.00132V 0.69-0.0019V 0.64-0.0019V

4 0.97-0.00132V 0.78-0.0019V 0.67-0.0019V

This analysis focuses on financial and non-financial impacts of the various standard

levels. Financial analysis based on expected future cash flows as used in this report is

straightforward and is the method most commonly used as the basis for business

decisions. The annual cash flow analysis is used as a measure of potential investment

acceptability by determining a total value today of the future cash flows, implicitly

including the cost of capital. In addition to financial impacts, a wide range of

quantitative and non-qualitative effects will occur following adoption of a standard

requiring major changes to water heater manufacturing practices. Some examples

include:

* Future viability of manufacturers

* Impacts on employment levels

* Impacts on product pricing

Additionally, the proposed energy efficiency standards are just one facet, albeit an

important one, of the increased pattern of regulations and other factors facing the water

heater industry. Beyond energy efficiency standards, water heater manufacturers face

government actions forcing them to eliminate HCFC's as a blowing agent for foam

insulation and the required production of a flammable vapor resistant natural gas water

heater. The manufacturers believe the overall impact of these regulations, in addition to

energy efficiency standards, could be significant, given the limited resources and

overlapping schedule requirements.

The aggregate investment estimated by the manufacturers to meet each of the four trial

standard levels, including the costs to meet the above-mentioned additional regulations

(represented by cumulative regulations) is shown in Table 2. Standards only represent

the investments needed to meet the energy efficiency level of the trial standard level.

Cumulative includes the investments required for energy efficiency improvement,

changes to a new blowing agent (assumed water based) and the development and

manufacture of a flammable vapor resistant natural gas water heater.

Table 2: Investments to Meet Trial Standard Levels

-rmnm~ *.. *. . S~

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Standards Only Cumulative Regulations

I 1 ---- -- - - _ $ 7.84 $ 111.95

2 $ 59.65 $ 165.68

___ 3 $__ 145.80 $ 253.61

4 $ 266.32 $ 368.80

The investments for cumulative regulations are potentially large given the current

profitability of the water heater industry, estimated to be $41 million (1998) after taxes

on sales of $1.3 billion.

Definition of Business Scenarios

Financial impacts were evaluated using different scenarios to characterize uncertainty in

future industry shipments and industry competitive dynamics (primarily low

manufacturer operating margins). Three different regulatory scenarios were examined.

1. Cash flow assuming no government regulations, i.e. status quo continues. This case

provides a current industry value to be used as a benchmark. (Base Case)

2. Cash flow assuming only energy efficiency regulations (Standard Case).

3. Cash flow assuming all government regulations facing the water heater industry (i.e.

flammable vapor design requirements, HCFC foaming agent phase-out and energy

efficiency standards) (Cumulative Case),

Additionally, the ability of manufacturers to recover the investments required for each of

these cases was examined in three business scenarios:

i. The average cost to the dealer/distributor needed for all water heaters sold to maintain

the industry's current value (Business Scenario 1).

2. The average cost to the dealer/distributor needed for all water heaters sold to recover

variable costs and markup only (loss of fixed cost investment) (Business Scenario 2).

3. The average cost to the dealer/distributor based on the water heater manufacturer's

expected cost to the dealer/distributor and operating performance, based on comments

received during the interview process (Business Scenario 3).

Impacts on Cash Flows

The potential return earned by the water heater industry, represented by the industry

value or industry net present value (INPV), is directly related to the manufacturers' cost

to the dealer/distributor of the water heaters. Since all five of the major manufacturers,

which account for over 95 percent of all shipments, produce both natural gas and electric

water heaters, which account for over 99 percent of all residential water heaters sold, the

average cost to the dealer/distributor of water heaters is discussed. As prices increase

from the current average cost to the dealer/distributor of $156.61, the industry can begin

to recoup its extra manufacturing costs and conversion expenses. Table 3 below shows

the expected decrease in INPV and the average water heater cost to the dealer/distributor

for all fuels based on Business Scenario 3, which represents results based on

manufacturers comments.

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EE-RM-97-900 COMMENT 77I
Table 3: Expected Impacts on Manufacturers

Regulatory Scenario: Cumulative

Standard Base Case Cumulative Change in Weighted Average Cost to the

Level INPV (millions) INPV (millions) INPV Dealer/Distributor

1 $ 295.29 $ 267.30 -9.50%$ 182.04

2 -$ 295.29 $ 253.87 -14.0% $195.68

3 $ 295.29 $ 231.89 -21.5% $ 215.74

4 -$ 295.29 $ 203.09 -31.2% $ 293.38

Regulatory Scenario: Standards

Standard Base Case Standard Change in Weighted Average Cost to the

Level INPV (millions) INPV (millions) INPV Dealer/Distributor

1 $ 295.29 $ 293.33 -0.7% $ 161.90

2 -$ 295.29 $ 280.38 -5.1% $ 175.36

3 -$ 295.29 $ 258.84 -12.3% $ 195.26

4 $ 295.29 $ 228.71 -22.5% $ 273.36

Impacts on Employment

The impact of HCFC-141b foaming agent phase-out and flammable vapor resistant gas

water heaters on employment levels was considered minimal by all interviewed

manufacturers. However, all interviewed manufacturers indicated that a transition to

plastic tanks for electric water heaters would result in large job losses. A transition to

side-arm water heaters could also result in domestic job losses.

Table 4: Im acts onEmloment Levels

No expected major impact on employment levels

2 No expected major impact on employment levels

3 Plastic tank electric units require a manufacturing process that obsoletes current

electric water heater manufacturing lines. This could potentially lead to some

manufacturers abandoning the electric water heater market. While some of the

employment would shift to manufacture natural gas water heaters, this would

reduce employment levels substantially.

4 Side arm gas water heaters would require large investments and reduce

manufacturing capacity. This reduction in capacity would also be accompanied

with a reduction in employment levels.

Impacts on Manufacturing Capacity

In general, manufacturers expect to meet future demand as long as trial standard levels

three and four, potentially requiring side-arm gas water heaters and plastic tank electric

units, are not mandated. Currently, the US industry has far more manufacturing capacity

than the domestic market can absorb. Manufacturers estimated the industry is operating at

anywhere from 60 to 80 percent of total capacity.

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Table 5: Impacts on apacit

1 No expected major impact on capacity. While increased cavity sizes will initially

increase scrap rates due to foaming errors, manufacturers expect to meet the

challenge.

2 No expected major impact on capacity beyond the issues discussed in trial

standard level one.

3 Plastic tank electric units require a manufacturing process that obsoletes current

electric water heater manufacturing lines. The required capital investments to

convert existing or build new facilities are expected to cause some manufactures

to cease the production of electric water heaters.

4 Side arm gas water heaters would require large investments and reduce

manufacturing capacity. Manufacturers expressed concern that foreign

competitors who already mass-produce such heaters would gain access to the US

market and displace domestic producers. Side-arm water heaters are no longer

manufactured in the US because of low demand.

Due to the changes in foaming agent and flammable vapors, regardless of what efficiency

standard is chosen, it is likely nearly every product line would have to be redesigned, recertified, and launched for sale in the US. One manufacturer claimed it would take them

two years to re-tool, which would give the manufacturer a year to finalize designs before

the new standards go into effect. Several manufacturers indicated a preference to re-tool

for new foaming agents, proposed energy-efficiency standards and flammable vaporresistant designs at the same time, to avoid any redundant efforts and limit costs.

Impacts on Small Manufacturers

Small manufacturers of water heaters in the United States concentrate on niche products

such as electric only, solar, oil-fired, indirect, or marine systems, etc. Depending on the

company, more or less of the product line will be affected by the proposed rulemaking.

Small manufacturers use a variety of insulating and lining materials, which include stone,

fiberglass, and a variety of foams. At least one domestic producer already uses waterblown foam in their water heaters. As efficiency is a strong selling point for these

manufacturers, investments will be required if manufacturers decide to continue

significantly surpassing energy efficiency standard levels. However, any required retooling would be amortized across a much smaller volume than that of a larger

competitor, potentially having a larger impact.

The low volumes in these niches necessitate somewhat different manufacturing processes

than the ones used by larger commodity producers. Consequently, these manufacturers

will be impacted differently than the commodity producers. It is expected small

manufacturer's material and labor costs will increase more compared to their larger

competitors because of supplier discounts and production efficiencies. Table 6 below

describes the expected impact on small manufacturers.

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EE-RM-97-900 COMMENT 77I
Table 6: Im acts on Small Manufacturers

_1__I __________No expected major impact beyond what will be seen by the rest of the industry

2 As many small manufacturers use increased efficiency as a selling point,

movement of the standard to level two, and more so with the higher efficiency trial

standards levels, may eliminate the market differentiation the small niche

manufacturers have. This could potentially reduce sales dramatically and force

them out of business.

3 Plastic tank electric water heaters are probably impossible to achieve for small

competitors unless licensing fees and market conditions are very favorable. Thus,

any efficiency standard level requiring technology use will most likely cause small

manufacturers to abandon the electric market affected by the rulemaking.

4 Side arm gas water heaters would require large investments and may also prompt

small manufacturers to leave that segment of the residential market.

Competitive Impacts Assessment

Changes in industry concentration-the distribution of market share among

manufacturers-can signal potential reductions in competition. Under reduced

competition, firms are better able to use their market power to increase profits. Firms

may exert market power by raising prices or reducing quality, service, and other aspects

of the product that consumers value. The water heater industry is a fiercely competitive

market. Several manufacturers indicated the fiercely competitive market might lead to a

market exit of one or more manufacturers. Manufacturers also stated the array of

regulations facing water heater manufacturers could speed up any market exit.

Global competition currently has little impact on the overall US water heater industry.

One multinational manufacturer stated that large increases in labor costs would prompt

them to shift more production abroad. Some purchased parts used in water heaters, such

as gas controls, are already manufactured outside the United States. The long-term trend

to manufacture labor-intensive components in low-labor cost areas is largely independent

of any energy efficiency standard. However, the majority of parts in water heaters are still

purchased locally.

Table 7: Effect on Global Competition

41________ ~~~No additional expected major impact

2 No additional expected major impact

3 No additional expected major impact

4 Side-arm gas water heaters are no longer manufactured in the United States. Thus,

any energy efficiency standard needing side-arm water heaters to meet it could

effect market entry of foreign manufacturers who already mass-produce such

heaters.

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1.0 Manufacturer Impact Analysis Methodology

In determining whether a standard is economically justified, the Secretary of Energy is

statutorily required to consider "the economic impact of the standard on the

manufacturers and on the consumers of the products subject to such a standard." The

legislation also calls for an assessment of the impact of any lessening of competition as

determined in writing by the Attorney General. The purpose of the Manufacturer Impact

Analysis (MIA) is to provide information that can be used to evaluate these impacts. The

MIA estimates the financial impact of standards on manufacturers and calculates impacts

on employment and manufacturing capacity.

The MIA was conducted in four phases. Phase 1, Industry Profile and Issue Definition,

consisted of two activities, namely, preparation of an industry characterization and the

conduct of an issue identification interviews. The second phase, Industry Cash Flow, had

as its focus the larger industry. In this phase, the Government Regulatory Impact Model

(GRIM) was used to prepare a "strawman" industry cash flow analysis. Here the

Department used publicly available information developed in Phase 1 and the data

provided by manufacturers to the rulemaking process to adapt the GRIM structure to

facilitate the analysis of new standards. In Phase 3, Manufacturer Interview Process, the

"strawman" cash flow was used to discuss with individual manufacturers the impact of

the standard levels on industry cash flows. Phase 3 also entailed documenting additional

impacts on employment and manufacturing capacity through the interview process.

Finally in Phase 4, Industry Cash Flow, ADL aggregated the information from the

interview process with the data submittal of GAMA to develop an industry cash flow.

1.1. Phase 1: Industry Profile and Issue Identification

Phase 1 of the MIA consisted of two activities, namely, preparation of an Industry

Characterization, and the conduct of issue identification interviews. Prior to initiating the

detailed impact studies, the Department received input on the present and past structure

and market characteristics of the water heater industry. This activity involved both

quantitative and qualitative efforts to assess the industry and products to be analyzed.

Issues addressed included manufacturer market shares and characteristics, trends in

number of firms, the financial situation of manufacturers, and trends in water heater

characteristics and markets.

To further assist in performing the Industry Profile and to define key issues, the

Department conducted a series of interviews with water heater manufacturers in late

1997. The interviews and review of public literature suggested the following guidelines

to assess the impacts of a new water heater standard:

1. The analysis should recognize the increasingly competitive nature of the water heater

industry.

2. The MIA should include consideration of impacts of other regulatory requirements

facing water heater manufacturers. The Department recognized manufacturers are

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EE-RM-97-900 COMMENT 77I
facing significant issues related to the HCFC refrigerant phase-out and the voluntary

adoption of flammable vapor resistant gas water heaters.

1.2. Phase 2: "Strawman" Industry Cash Flow Analysis

Phase 2 of the MIA focuses on the "larger" industry. The analytical tool used for

calculating the financial impacts of standards on manufacturers is the Government

Regulatory Impact Model (GRIM). In Phase 2, GRIM was used to perform a "strawman"

industry cash flow analysis.

For the "strawman," the Department prepared a list of financial values to be used in the

GRIM industry analysis. These were calculated by studying publicly available financial

statements of water heater manufacturers. A detailed definition of financial inputs and

their values for a "strawman" water heater manufacturer was presented in the document

entitled "Financial Inputs to GRIM for the Water Heater Rulemaking Analysis." This

document was presented at the public workshop held on November 1998. Manufacturing

costs-labor, materials, depreciation/tooling, etc.- were obtained from the GAMA

submittal to the Department for various design options. Finally, in preparing the

"strawman" industry cash flow analysis, the Department used the same shipment

scenarios developed for the National Energy Savings (NES) spreadsheet.

The "strawman" was used to provide a starting point from which manufacturers could

develop more recent and accurate inputs. The intent of the "strawman" was to use

"placeholder" values in order to illustrate the working of the GRIM spreadsheet and to

elicit comment on the modeling inputs from manufacturers.

1.3. Phase 3: Manufacturer Interview Process

The Department conducted detailed interviews with water heater manufacturers in

February and March 1999 to gain insight into the potential impacts of standards. During

these interviews, the Department solicited the information necessary to evaluate cash

flows and to assess employment and capacity impacts.

The interview process played a key role in the MIA, since it provided an opportunity for

manufacturers to privately express their views on important issues and provide

confidential information needed to assess financial, employment and other business

impacts. To support the development of cash flows, an interview guide solicited

information on the possible impacts of new standards on manufacturing costs, product

prices, and sales. The evaluation of the possible impacts on direct employment and

manufacturing assets also drew heavily on the information gathered during the

interviews. The interview guide solicited both qualitative and quantitative information.

Supporting information was requested whenever applicable.

1.4. Phase 4: Industry Cash Flow Analysis

During the interview process, the results of the "strawman" cash flow analysis were

discussed with the manufacturers. In most cases, the manufacturers felt the "strawman"

analysis closely represented the industry as a whole and their organization in particular.

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EE-RM-97-900 COMMENT 77I
Where manufacturers differed from the "strawman," the financial inputs were adjusted to

account for these differences. Generally, ADL found close agreement among

manufacturers in development of the overall impact of the various standard levels. The

analysis discussed in this report is based on the financial inputs provided by

manufacturers.

2.0 Manufacturing Impact Analysis Results

2.1. Industry Profile

ADL developed an initial industry characterization using information from relevant

industry and market publications, industry trade organizations, company financial reports,

and product literature. This industry characterization report helped ADL in developing

the "strawman" industry cash flow analysis and also aided in the development of a

detailed and focused interview guide to perform the MIA. Specifically, shipment

information was obtained from publicly available Current Industrial Reports (CIRs)

published by the U.S. Bureau of Census. Financial and cost information was obtained

from the Census of Manufactures (another Bureau of Census publication), SEC 10-K

statements, and Dun & Bradstreet reports.

2.1.1. Current Manufacturer Market Shares and Characteristics

Table 8 lists the major water heater manufacturers and their characteristics. ADL

conducted manufacturer interviews and plant visits with them during the October to

December 1997 time frame, with additional interviews in February and March 1999.

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Table 8: List of Water Heater Manufacturers

Manufacturer Characteristics

American Water A subsidiary of Southcorp, an Australian holding company, AWHC

Heater Company produces mostly residential and some commercial water heaters in its

Johnson City, TN facility and sells into the wholesale and retail channel.

The parent company owns the largest manufacturer of water heaters in

Australia and also manufactures water heaters in New Zealand and China.

AO Smith The largest manufacturer of commercial water heaters. AO Smith also

produces residential units. The water systems technology division

manufactures in the US, Canada, Mexico, the Netherlands, and China. AO

Smith only sells through the wholesale channel.

Bradford-White Producer of commercial and residential, natural gas, oil and electric water

heaters. Primary manufacturing facility is in Middleville, MI. Sells only

through the wholesale channel.

Rheem Second largest manufacturer of residential and number two producer of

commercial water heaters. Rheem produces residential products in Mexico

although its largest facility is still in Montgomery, AL. Subsidiary Water

Heater Innovations manufactures the Marathon plastic tank electric water

heaters. Rheem sells into the wholesale and retail channel

State Industries State is estimated to be the largest manufacturer of residential water

heaters, with its production facility in Ashland City, TN, with components

manufacturing in Franklin, TN. Some State electric water heaters feature

steel tanks with an inner plastic lining. State sells into the wholesale and

retail channel.

Bock Water Located in Madison, WI, one of the largest oil water heater manufacturers

Heaters in the US. Bock also manufactures indirect water heaters

Vaughn Vaughn manufactures stone-lined electric water heaters in its Salisbury,

Manufacturing MA plant. Vaughn uses exclusive distribution to the utility industry, sold

mainly on their long life and the load controls that he attaches to each tank.

Heat Transfer Based in East Freetown, MA, Heat Transfer Products manufactures

Products commercial natural gas water heaters, residential and commercial electric

and oil water heaters, as well as marine and indirect water heaters and

copper coil heat exchangers.

Figure 1: Residential Water Heater Market Shares

1997 Water Heater Market Share

Bradford-White

13%

AO Smith

15%

American

17% Rheem

27%

source: Appliance Magazine (1997)

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The interviews conducted in 1997/1999 suggested product mix, firm size, location of

production facilities, and level of vertical integration were possible characteristics to be

used in defining sub-group categories. For purposes of the MIA and after consultation

with industry, ADL elected to group manufacturers exhibiting similar product mix

characteristics. This aggregation scheme was selected as it represents the most

comprehensive way to report the variation of impacts on different manufacturers while

ensuring confidentiality of individual manufacturers' positions. Based on information

presented in Table 9, ADL divided the manufacturers into the following two sub-groups:

Table 9: Manufacturer Sub-groups

Sub-group 1: Large Manufacturers Sub-group 2: Small Manufacturers

Manufacturers of both electric and natural gas Manufacturers that produce oil; Manufacturers

water heaters that produce less than 1% of residential electric

and gas water heaters (List below is

representative, not inclusive).

* Rheem * Bock

* American * Heat Transfer

* State · Vaughn

* Bradford White

* AO Smith

The majority of discussion will focus on the entire industry, which is dominated by subgroup 1. All cash flow impacts presented in this report are representative of the five large

manufacturers. Small manufacturers of water heaters in the United States concentrate on

niche products, all estimated at less than 1% of water heaters sold, such as electric only,

solar, oil-fired, indirect, or marine systems, etc and typically provide product through

different channels of distribution than the sub-group 1 manufacturers. No cash flow

impacts were calculated for sub-group 2, however, expected impacts on sub-group 2 is

discussed in section 2.6, impacts on small manufacturers.

2.1.2. Industry Shipments

Current Industrial Reports (CIRs), published by the U.S. Bureau of Census, provide

detailed data on quantity and total value of U.S. shipments of water heater products. The

census bureau uses SIC codes 36391 and 36392 to describe the water heater industry.

According to CIR data, 9.4 million residential water heaters, valued at $1.3 billion, were

shipped in 1997.

Figure 2 presents the trend in the dollar value of manufacturers' shipments of household

water heaters over the period 1990 through 1997.

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EE-RM-97-900 COMMENT 77I
Figure 2: Historical Trend in Value of Shipments

900- . E w ~ :

800

200

100 - M 19.

00

1990o 1991 1992 1993 1994 1995 1996 1997

source: US Census

Table 10: Shipment and Value of Household Water Heaters in 1997

approximately 40,000 to 60,000 oil water3 heat Dippe eh

Electric: Storage 4,300.8 550.1 41% $127.91

Electric: Non-storage 292.1 28.7 2% $98.25

Gas: 4,691.4 732.2 55% $156.07

Oil: NIA NIA NIA NIA

Other 107.3 20.8 2% $193.85

Total 9391.6 1331.89

source: US Census

Note: Other includes indirect, wood, solar, and marine.

Oil shipments are not available from the CIR. It is estimated by industry sources that

approximately 40,000 to 60,000 oil water heaters are shipped each year.

EE-RM-97-900 COMMENT 77I
Figure 3: Historic Revenue per Heater

240

230 -

220 -A- Gas G- WH - CIR

~210~ - .. . i / \ .-E- U Elec WH - CIR

Other WH -CIR

10 7 70 ..

a:160- . ..

150 -

140

130 - __

120

1992 1993 1994 1995 1996 1997

Year

source: Current Industrial Reports (US Census)

The average revenue per heater is shown in Figure 3. The revenue for electrical units has

been flat for a number of years while natural gas unit prices spiked in 1995 before

returning to 1992-1994 levels. The increased price in 1995 for other and natural gas water

heaters is unknown. One explanation would be an increase in the number of commercial

(i.e. higher price) water heaters sold in 1995. The data for the 'other' type units contains

oil, wood, and other types of heaters.

The vast majority of water heaters currently purchased are replacements, estimated by the

manufacturers to be 80 to 90 percent of all sales. For the past decade, the overall volume

of water heaters being distributed through the wholesale channel has been relatively flat,

while large retailers increased their volumes by 50%. This has had two significant

financial impacts on water heater manufacturers:

* Markups tend to be lower selling into the retail channel compared to selling to a

wholesale channel.

* Large retailers offer their customers money-back guarantees and charge the

manufacturer for returned goods, whether the good had a manufacturing defect or not.

This has led to warranty costs in this channel to be higher than the wholesale channel.

These two factors currently have created an environment of aggressive pricing with

increased warranty costs. This growth of the retail market has affected the profitability of

all water heater manufacturers.

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Figure 4: Outlet Division for 1997 (Millions of Residential Water Heaters)

Exports

Mobile Homes _r_

Plumbers Wholesale1 :

New Constru

Retail Outlets

Plumbers Wholesal :

Replacements

Source: ADL Estimate (1998)

Water heaters purchased for new construction, and the majority of water heaters

purchased by contractors for replacement, are baseline units. Mark-ups for the baseline

"commodity" water heaters tend to be much smaller than for the upscale units.

Manufacturers stated that increasing the energy efficiency standard eliminates this ability

to "up-sell," and this will lower profitability and/or increase baseline costs

disproportionately. Manufacturers felt this was particularly true for standard levels three

and four. As the relatively large percentage of sales through retailers might indicate,

contractors are purchasing from these suppliers (versus plumbing wholesalers) in

significant numbers. This has helped effect nearly equal prices between the two

channels, as wholesalers must now compete with the retail outlets for water heater sales.

2.2. Manufacturer Impact Analysis Interview

Department representatives visited and conducted preliminary interviews with

representatives of 8 water heater manufacturers during the fall of 1997. The following

manufacturers were included in this series of preliminary interviews.

* American Water Heating Group, Johnson City, TN

* A.O. Smith, McBee SC

· Bradford White, Middleville, MI

* Bock, Madison WI

* Heat Transfer Products, East Freetown MA

* Rheem, Montgomery, AL

* State Industries, Ashland City, TN

* Vaughn Manufacturing, Salisbury MA

The interviews included open-ended discussions based on the items outlined in the

interview guide and are included in this document as Attachment A.

13

EE-RM-97-900 COMMENT 77I
There was general consensus that the most important phenomenon affecting the character

of the water heater industry are new regulations set to take effect over the next five years.

In particular, these will address the prevention of flammable vapor ignition with gas

water heaters and the phase-out of HCFC 141b as the insulating foam blowing agent.

A second round of interviews was conducted concerning the cash flow analysis only

during February-March 1999. The following manufacturers participated in these

interviews:

* American Water Heating Group, Johnson City, TN

* A.O. Smith, McBee, SC

* Bradford White, Middleville, MI

* Rheem, Montgomery, AL

A copy of the interview guide is included in this document as Attachment B, and shall be

referred to as the Manufacturer Interview Guide. During this interview, the

manufacturers were asked to comment on the "strawman" industry cash flow, as well as

to provide any additional cost data for the various trial standard levels. Based on these

comments, the financial assumptions to the GRIM were adjusted.

During the interviews, water heater manufacturers continually mentioned two potentially

costly new regulations they are having to face. These are:

* Natural gas flammable vapor ignition prevention and

* Phase-out of HCFC 141b as a blowing agent for polyurethane foam insulation

The technical aspects, as well as the costs associated with each, are discussed in the

Engineering Analysis report. The following are comments on the impacts on

manufacturing.

2.2.1. Flammable Vapor Ignition Prevention

The U.S. Consumer Product Safety Commission considered initiating a rulemaking

proceeding requiring natural gas residential water heaters to be designed to prevent the

ignition of flammable vapors, but chose in late 1994 to work with the water heater

manufacturers to develop a voluntary performance standard. The water heater industry is

working on multiple design options to respond to this problem. Some of the water heater

manufacturers are working through the Water Heater Industry Joint Research and

Development Consortium and/or the Gas Research Institute, and some are working on

their own. Although development of a satisfactory test procedure has been difficult,

industry sources anticipate the American National Standards Institute (ANSI) will adopt a

standard test procedure in 1999. The industry is proceeding to construct test facilities, as

well as flammable vapor resistant water heaters, in anticipation of a standard test

procedure.

Meanwhile, some manufacturers have produced and are field-testing water heaters with

flammable vapor ignition prevention designs, while others are testing a range of design

14

EE-RM-97-900 COMMENT 77I
options for competitive reasons. Manufacturers have been reluctant to discuss specific

designs and their costs of implementation in detail, so at this time a value of $20/unit has

been assumed as the investment required to comply with the voluntary standard. This cost

was provided by the Water Heater Industry Joint Research and Development Consortium.

Some lower cost designs are being considered but there is an inverse relationship

between cost and commercial readiness. That is, industry sources indicate the more

reliable and mature designs are at the upper end of the cost range, and the lower cost

designs are more speculative and further from being commercially ready. There is no

indication that new designs for flammable vapor ignition prevention will affect energy

efficiency, but the manufacturers have not yet evaluated costs of achieving the minimum

energy efficiency standard with the new flammable vapor ignition prevention design

options.

2.2.2. Phase-Out of HCFC 141b As A Blowing Agent for Polyurethane Foam Insulation

Most residential water heaters are insulated with polyurethane foam in the space between

the tank and the jacket. The insulation is foamed in place using a blowing agent included

in the mixture. The heat of reaction vaporizes the blowing agent, and this creates an

expanding frothy mass that hardens quickly into closed-cell foam insulation. Currently,

most water heater manufacturers use HCFC-141b, an ozone depleting substance, as the

blowing agent. This HCFC will be phased out by January 1, 2003.

Initially, the appliance industry, including water heaters, had indicated a potential to

adopt HFC-245fa, which performs nearly equal to HCFC141b, but at a projected much

higher cost. Unfortunately, according the water heater manufacturers interviewed, the

exclusive license holder for the technology in the United States has not committed to

building production capacity sufficient to provide economies of scale in time for the

HCFC-141b phase-out.

The entire appliance industry consumes approximately 20% of all foaming agents and the

water heater industry only a fraction thereof. The largest user of foaming agents is the

construction insulating board industry, which is expected to convert over to cyclopentane. Consequently, water heater manufacturers do not expect any unique and

inexpensive foam insulation and do not wish to depend on one exclusive supplier either.

All interviewed manufacturers are expecting to use water-based foaming agents. Process

control will also have to be improved to handle the tighter manufacturing standards the

new agents will require. The higher thermal conductivity of water-based foaming agents

will necessitate thicker insulation cavities to meet even current energy efficiency

standards. Thicker cavities exacerbate any process problems with foam, such as

shrinkage, blowouts, etc., adding to production costs. While thicker cavities currently

cause an increase in scrap, all manufacturers expect to reduce scrap levels as they learn to

better control the process, but do not expect to return to present levels after the change.

As insulation thickness increase, fewer water heaters can fit on the assembly line, be

stored in a warehouse, or shipped by truck. According to one manufacturer, for every row

in a truck that is eliminated by oversized water heaters, shipping costs increase by about

15

EE-RM-97-900 COMMENT 77I
25%. The trailers the water heaters are transported in are usually limited to 120" in

height, which further limits heights of water heaters. Unless a manufacturer can ship a

mixture of lowboys and tall units to the same location, additional costs will be incurred.

In the worst case, an entire layer of water heaters is eliminated and shipping costs

increase 50%.

Several manufacturers and industry stakeholders worry new water heaters will become

too large to replace defective units easily. The most common concern is that thicker water

heaters will no longer fit through common doorways or attic hatches. Furthermore, many

water heaters are installed in very tight locations, such as those found in attics, crawl

spaces, manufactured housing, etc. Several manufacturers responded to such market

demand by designing "zero-clearance" water heaters, which do not require any clearances

to adjacent surfaces. Zero-clearance water heaters may need to be re-designed to satisfy

the replacement market.

2.2.3. Evaluation of Impacts

The GRIM cash flow analysis was used to capture the financial impacts of the antiflammability design requirement and the elimination of blowing agent HFC-141b. The

basic assumptions and industry-supplied values for cumulative burden GRIM inputs are

the same as those used for the Engineering Analysis for flammable vapors and the

conversion to water based foam. We expect design changes required for meeting the new

regulations to change:

* the cost of sales per unit

* profitability as a fraction of revenue (to the extent that the cost changes are not

passed through directly to customers), and

* Conversion capital expenditures which might be required to modify production and

test facilities.

There is uncertainty with regard to the financial impacts associated with selection of a

new blowing agent to replace HCFC-141b. The same variables as above are affected, but

in different ways. That is, the use of a "drop-in" organic blowing agent would increase

the cost of materials for the insulation whereas the use of water could keep blowing agent

costs low but would require the use of more insulation materials (i.e., increased cost) to

meet the insulating properties of today's foam. Flammable vapor resistant designs and

foaming agent changeovers may cause stranded assets due to the following:

* The adoption of the most likely flammable vapor resistant designs will necessitate a

complete redesign of the lower part of gas units. The tools and some equipment used

to make these lower parts will become obsolete.

Most water heaters will require thicker cavities due to the foaming agent conversion.

Thicker cavities in turn necessitate larger stamping dies for the outer jackets of water

heaters. While it may be possible to reuse some stamping dies, some tooling

acquisitions will be required. Thicker cavities will also require some equipment

investment to handle longer spud weldments.

16

EE-RM-97-900 COMMENT 77I
2.3. Industry Cash Flow Analysis

The economic impact of proposed standards on manufacturers is determined by

estimating the cash flows associated with meeting the standards and calculating a value

for those cash flows. ADL used information provided by the manufacturers and the

GRIM spreadsheet to evaluate cash flow impacts of regulations on the industry. The

GRIM spreadsheet calculates the change in INPV of the manufacturer(s) due to the

imposition of a regulation. INPV is defined, for the purposes of this analysis, as the

present value of future cash flows for the manufacturer(s) in question. The basic structure

of the GRIM is a standard annual cash flow analysis which uses price and shipment

information as an input, builds on manufacturing cost information, and accepts a set of

regulatory conditions as changes in costs, associated margins and investments. The model

calculates actual cash flows by year and then determines the present value of these cash

flows, for three regulatory scenarios:

1. Cash flow assuming no government regulations, i.e. status quo continues. This case

provides a current industry value to be used as a benchmark. (Base Case)

2. Cash flow assuming only energy efficiency regulations (Standard Case).

3. Cash flow assuming all government regulations facing the water heater industry (i.e.

flammable vapor design requirements, HCFC foaming agent phase-out and energy

efficiency standards) (Cumulative Case)

Additionally, the ability of manufacturers to recover the investments required for each of

these cases was examined in three business scenarios:

1. The average price needed for all water heaters sold to maintain the industry's current

value, essentially recovering one hundred percent of the investments (Business

Scenario 1).

2. The average price needed for all water heaters sold to recover variable costs and

markup only (loss of fixed cost investment, i.e. zero percent recovery) (Business

Scenario 2).

3. The average price based on the water heater manufacturer's expected price and

operating performance, based on comments received during the interview process,

essentially leading to recovery of seventy-five percent of the investments (Business

Scenario 3).

Some of the important inputs required to develop cash flow estimates and INPV are

industry shipments, manufacturer costs, capital investments, and the financial operations

of the industry. These are discussed in the next sections.

2.3.1. Manufacturing Costs

In order to calculate water heater unit prices, and conversely industry revenue,

incremental manufacturing costs attributable to efficiency improvements are required. In

addition, the cash flow models' accuracy is contingent on the detail in which the

manufacturing costs are given.

17

EE-RM-97-900 COMMENT 77I
Manufacturing cost estimates are broken down into variable and fixed costs. A detailed

description of the development of the variable costs is included in the Engineering

Analysis.

2.3.2. Variable Costs

Variable costs include material, labor, overhead, and transportation costs. For this

analysis, transportation costs represented in the Engineering analysis have been included

in overhead. Variable cost development is discussed in the Engineering Analysis section

of the rulemaking.

Table 11, Table 12, and Table 13 show the efficiency levels, variable costs, and design

options, for the four trial standard levels analyzed for gas, electric, and oil water heaters;

respectively.

Table 11: Gas Variable Costs and Options

Current Product $75.02 $10.74 $48.02 .62-0.0019V)

2003 Baseline Water blown blowing agent, $17.04 $0.18 $1.54 (0.62 -0.0019V) flammable ignition device __

Trial Standard Level 1 I _ « _ al Standard Level 1 Heat trap $2.75 $0.16 $0.19 (0.63-0.0019V) eattrap_________501$.

(0.66-0.001 0.66-0.001r 9V)9Level 2 Heat trap + 78% RE + 2" Insulation $10.18 $1.82 $4.99

-Trial S r Level 3 Heat trap + 80%RE 2.5" Insulation $14.48 $2.59 $11.49

Trial Standard Level 4 Heat trap +80%RE + 3"lnsulation +

(0.75-0.0019V) Side-Arm + Electronic Ignition + $93.37 $7.85 $49.26 Plastic Tank

Table 12: Electric Variable Costs and Options

i: I .: . !. ! E !

Current Product $62.16 $10.57 $49.00

2003 Baseline

00.93 -0.001s V Water blown blowing agent $9.81 $0.00 $0.00

Trial Standard Level 1 Heat trap + Insulated Tank Bottom $4.87 $0.31 $1.18 (0.95-0.00132V) _____

Trial Standard Level 2 Heat trap + Insulated Tank Bottom + $8.44 0.69 $3.99

(0.96-0.00132V) 2.5" Insulation

Trial Standard Level 3 Heat trap + Insulated Tank Bottom $1 187 $11 17

(0.97-0.00132V) +3" Insulation + Plastic Tank 7 4 __

Trial Standard Level 4 Heat trap + Insulated Tank Bottom 17.74 ,$1.87 $11.17

(0.97-0.00132V) +3" Insulation + Plastic Tank $7.____"*

18

EE-RM-97-900 COMMENT 77I
Table 13: Oil Variable Costs and tions

urrent Product $85.00 $18.25 $36.00 (0.58-0.0019V)

2003 Baseline Water blown blowing agent $3.54 $0.00 $0.00 (0.58 -.0019V)

Trial Standard Level I Heat trap $2.95 $0.13 $0.05 (0.60-0.0019V)Heattrap

Trial Standard Level 2 Heat trap + 2.5" Insulation $8.17 $0.44 $1.69 (0.61-0.0019V)

Trial Standad Level 3 Heat trap + 80%RE 2.5" Insulation $14.59 $1.14 $4.35 (0.64-0.0019V)

Trial Standard Level 4 Heat trap +80%RE + 3"Insulation

(0.67-0.0019V) +Side-Arm + Electronic Ignition + $44.56 $2.34 $7.60 (0.67-0.0019V)_______Plastic Tank____________________________

2.3.3. Capital Investments/Product Conversion

This analysis considers both capital investments and product conversion expense as fixed

costs. Capital investment involves tooling and investment costs associated with evolving

a water heater product line to meet new production of higher efficiency water heaters.

Product conversion investment includes the research and development and marketing of

higher efficiency water heaters. Capital and product conversion costs are shown below in

Table 14 through Table 16. These costs are assumed for the entire water heater industry.

Table 14: Gas Ca ital and Product Conversion Costs

Cost to meet non-energy $97.00 $10.78

efficiency regulations

Trial Standard Level 1 $0.36 $068

(0.63-0.0019V)

Trial Standard Level 2

(0.66-0.0019V) _ _____$13.09 $10.60

Trial Standard Level 3 $18.7 $10.78

(0.69-0.0019V) _ _____$18.75 $ _______10.78

Trial Standard Level 4 1. . (0.75-0.001 9V) __ ___$120.79 $20.49

Table 15: Electric Fixed Capital and Product Conversion Costs

Cost to meet non-energy $0.00 $0.00

efficiency regulations .

Trial Standard Level 1 $540 $1.25

(0.95-0.00132V)_ _ __ 5 $1. _40 25

(0.95-0.00132V)

Trial Standard Level 3 $110.98 (0.96-0.00132V)

0.97-0.00132V) _

$ 4 .

1 5 $1_______ 0 9_________

Trial Standard Level 4 $4.42 $118

(0.97-0.00132V) 4 4 2 ____

Table 16: Oil Fixed Capital and Product Conversion Costs

Cost to meet non-energy $0.05 $0.03

efficiency regulations _

Trial Standard Level i $0.10 $0.05 (0.60-0.0019V) ___________

Standard Level 2 $0.10 $0.05

(0.61-0.0019V)

Trial Standard Level 3 $0.76 $0.38

(0.64-0.0019V)

Trial Standard Level 4 $1.64 0.82

(0.67-0.0019V)_____________________1

19

EE-RM-97-900 COMMENT 77I
Some manufacturers are currently debt-free and operate profitably by focusing on

commercial or niche products. Other manufacturers are highly leveraged or are facing

steep declines in demand due to competition. Thus, access to capital in the industry is

uneven and could cause some manufacturers to go out of business if large expenditures

were required to meet new efficiency standards.

2.3.4. Financial Inputs

GRIM input is firm-level financial information that can indicate the extent to which

individual firms may be adversely impacted by new standards. A financial profile for

each firm is developed from information contained in balance sheets and income

statements. These parameters include:

* Tax rate (%): Used to calculate the taxes on profit before tax.

* Interest rate (%): Used as the discount rate for calculating the present value of future

cash flows.

* Working capital as a percentage of sales (%): Used to calculate the change in working

capital resulting from increased revenues.

* Selling, General & Administration ($): Includes all non-factory costs. It is computed

by adding R&D, Product Conversion, and SG&A.

* R&D as a percentage of revenues (%): Used to compute R&D costs.

* Depreciation as a percentage of revenues (%): Non-cash cost used as a part of the

cash flow calculation.

* Variable overhead as a percentage of total overhead (%): Helps to separate the fixed

and the variable parts of the overhead costs.

Table 17 illustrates a representative financial structure the Department used in conducting

the cash-flow analysis of the water heater industry. This information was based on data

provided by manufacturers during the February and March interviews. The original

"strawman" financial inputs, along with their sources, are provided in Attachment C.

Table 17: Financial InIuts for GRIM

Tax Rate 38.00%

Discount Rate for INPV 7.99%

Working Capital 15.65%

Standard SG&A 9.00%

Research and Development 1.00%

Ordinary Depreciation 3.10%

Ordinary Capital Expenditures -4.50%

2.3.5. Shipments

The Department used the same shipment scenarios in GRIM as developed by LBNL in

the National Energy Savings (NES) spreadsheet.

2.3.6. Cash Flow Impacts

Business scenarios one and two provide the boundaries for examining the financial

impact on the water heater manufacturers and for examining the increase in the cost to

20

EE-RM-97-900 COMMENT 77I
the dealer/distributor needed to maintain the industry value. Business scenario three

represents the expected impact based on manufacturer's comments during the interview

process. When compared to base case cash flow, the impact on both the manufacturer

and the consumer becomes apparent. Table 18 through Table 20 show the impacts for

both the standard and cumulative cases for the three business scenarios.

For Business Scenario 1, the impact on cost to the dealer/distributor was examined while

the industry maintains its current value. For this case, an average mark-up is determined

and applied to the various fuel options to obtain a cash flow that results in the same

industry value as the current business operations would be expected to produce. This

assumes the water heater industry is allowed to operate current market conditions. These

results are shown below in Table 18, along with the investments required for each

scenario.

Table 18: Business Scenario 1: Results

Regulatory Case: Cumulative

Standard Base Case Standard Investment Average Cost to the Dealer/Distributor

Level INPV INPV (millions) Electric Gas Oil Weighted (millions) (millions) Average

1 $ 295.29 $ 295.29 $ (111.95) $ 170.35 $ 192.74 $ 180.20 $ 182.57

2 $ 295.29 $ 295.29 $ (165.68) $178.87 $ 210.54 192.56 $ 196.46

3 $-- 295.29 $ 295.29 $ (253.61) $ 203.52 $ 227.34 $ 206.33 $ 216.93

4 $ 295.29 .29 $ 29 $ (368.80) $ 199.93 $ 377.59 $ 247.59 $ 295.12

Regulatory Case: Standards

Standard Base Case Standard Investment Average Cost to the Dealer/Distributor

Level INPV INPV (millions) Electric Gas Oil Weighted (millions) (millions) Average

1 $ 295.29 $ 295.29 $ (7.84) $ 155.91 $ 166.82 $ 174.64 $ 161.94

2 -- $ 295.29 $ 295.29 $ (59.65) $ 164.76 $ 184.25 $ 186.69 $ 175.64

3 --- $ 295.29 $ 295.29 $(145.80) $ 189.29 $ 201.05 $ 200.81 $ 195.94

4 $ 295.29 $ 295.29 $ (266.32) 186.84 350.60 $ 241.85 $ 274.62

Figure 5 shows the relationship between the average cost to the dealer/distributor and the

level of investments. It shows the average increase in cost to the dealer/distributor

required to support the level of investments needed to meet each trial standard level.

21

EE-RM-97-900 COMMENT 77I
Figure 5: Business Scenario 1: Relationship of Cost to the Dealer/Distributor to Investments

$400.00 -:.-s;--. $350.00

$300.00 )/ -J $300.00

7': $200.00 - ,I - $250.00

$2000.00

; ($10 °°)it 11 g n | F; $150.00 $0.00

$100.00 ,

($200.00) $0.00

~~~~($300.~00) ~ ($50.00)

($400.00) ($100.00)

Trial Standard Level

Bi Standards I Cumulative -- Standards Price

-X- Current Price -A- Cumulative Price

Next, we analyzed the impact on the water heater manufacturers assuming they are

unable to recover their investments. This can be characterized as an absolute worst case,

as it is expected the manufacturers will be able to recover some of the fixed costs. The

value of the industry drops by 36% for just level one, due primarily to the manufacturers

not being able to recover the costs associated with new blowing agents and flammable

vapor design. For Business Scenario 2, the difference between the impacts of standards

vs. the cumulative impact shows what a large potential impact flammable vapor and the

HCFC phase-out will have on the industry. The investments are not presented in Table 19

and Table 20, in order to show the change in INPV, and since the level of investments do

not change for each business scenario.

Table 19: Business Scenario 2 Results

Regulatory Case: Cumulative

Standard Base Case Cumulative Change in Average Cost to the Dealer/Distributor

Level INPV INPV Value Electric Gas Oil Total

(millions) (millions)

1 $ 295.29 $ 183.34 -38% $168.58 $ 190.34 $ 179.36 $180.46

2 $ 295.29 $ 129.61 -56%$ 176.48 $ 206.82 $ 190.77-$ 193.33

3 $ 295.29 $ 41.68 -86% $ 199.14 $ 222.24 $ 203.43 $ 212.15

4 - $ 295.29 $ (73.51) -125% - $197.34 $ 366.80 $ 243.68 $ 288.14

Regulatory Case: Standards

Standard Base Case Standard Change in Average Cost to the Dealer/Distributor

Level INPV INPV Value ta (millions) (millions) Electric Gas Oil Total

1 $ 295.29 $ 287.45 -3% $ 155.71 $ 166.72 $ 174.51 $ 161.79

2 $ 295.29 $ 235.64 -20% $ 163.79 $ 183.00 $ 185.69 $ 174.52

3 $ 295.29 $ 149.49 -49% $ 186.42 $ 198.39 $ 198.64 $ 193.20

4 $ 295.29 $ 28.97 -90% $ 185.20 $ 342.61 $ 238.78 $ 269.57

22

EE-RM-97-900 COMMENT 77I
Figure 6 shows the relationship between the average cost to the dealer/distributor and the

level of investments. These results depict what could be expected in a worst case

scenario, i.e. loss of all investments, so cost to the dealer/distributor is based on the

markup that results in the loss of these funds.

Figure 6: Business Scenario 2: Relationship of Cost to the Dealer/Distributor to Investments

$400.00 $350.00

$300.00 $300.00

' $ $200.00 $200.00 2q

'.--Z $1oo~~~~~oo ~~$200.00

E $100 .. $15o.oo

CEis~~~~oaool~~~ 5$100.00 =

E ($100.00)

$50.00

S ($20 00.00

($300.00) ~i~~~($50.00) - <

($400.00) ($100.00)

Trial Standard Level

Standards I Cumulative Standards Price

Current Price -- Cumulative Price

During the interviews, manufacturers commented on what they expected to be able to

recover in terms of the fixed costs associated with each standard level. Some

manufacturers felt they would be able to mark-up fully any incremental costs associated

with a standard, while others felt they would not be able to fully recover the investments,

due to pricing pressures in the market. Based on these comments, ADL developed an

analysis that represents the increased costs associated with the new regulations and the

expected impacts on manufacturers, as well as the expected cost to the dealer/distributor

needed to meet these expectations. The results for Business Scenario 3 are shown in

Table 20 and Figure 7.

23

EE-RM-97-900 COMMENT 77I
Table 20: Business Scenario 3 Results

Regulatory Case: Cumulative

Standard Base Case Standard Change in Average Cost to the DealerlDistributor

Level INPV INPV Value (millions) (millions) Electric Gas Oil Weighted

$ 295.29 $ 267.30 -9.5% $ 169.91 $ 192.14 179.99 $ 182.04

2 $ 295.29 $ 253.87 -14.0% $ 178.27 $ 209.61 $192.11 $ 195.68

3 $ 295.29 $ 231.89 -21.5% $ 202.42 $ 226.06 $ 205.61 $ 215.74

4 $ 295.29 $ 203.09 -31.2% $ 199.28 $ 374.90 $ 246.61 $ 293.38

Regulatory Case: Standards

Standard Base Case Standard Change in Average Cost to the DealerlDistributor

Level INPV INPV Value

(millions) (millions) __Electric Gas Oil Weighted

1 $ 295.29 $ 293.33 -0.7% $ 155.86 $ 166.79 $ 174.61 $ 161.90

2 $ 295.29 $ 280.38 -5.1% $ 164.52 $ 183.94 $ 186.44 $ 175.36

3 $ 295.29 $ 258.84 -12.3% $ 188.57 $ 200.38 $ 200.27 $ 195.26

4 $ 295.29 $ 228.71 -22.5% $ 186.43 $ 348.60 $ 241.09 $ 273.36

Figure 7: Business Scenario 3: Relationship of Cost to the Dealer/Distributor to Investments

$400.00 $350.00

$300.00 -ii!~ $300.00

or $200.00 - -/ .. $250.00

· _ $200.00 ' $ 0$200.00

(»P/~I~?~' $150.00 A

$0.00 $100.00

E ($100.00) $50.00 =

($200.00) $0.00

($300.00) ,:ii, ($50.00)

($400.00) ~:~ ($100.00)

Trial Standard Level

Standards I Cumulative -- Standards Price

-- Current Price )t Cumulative Price

Business Scenario 3 represents the most likely scenario as to the impact on

manufacturers. From all scenarios analyzed, flammable vapor ignition prevention and

new blowing agent investments have a greater financial impact than the energy efficiency

investments needed to meet trial standard levels one or two. However, the investments

needed to meet trial standard levels three or four are greater than the investments required

to meet flammable vapor ignition prevention and the new blowing agents. The combined

costs of trial standard levels three or four, flammable vapor ignition prevention and new

blowing agents are significant and may potentially reduce industry value by 22 to 31

percent.

24

EE-RM-97-900 COMMENT 77I
2.3.6.1. Short-term Cash Flows

The GRIM spreadsheet calculates cash flows year-by-year and hence can be used to

assess short-term impacts. Short-term cash flow impacts can help quantify the impact of a

standard on capital investments and costs in years preceding the standard, and therefore

provide valuable insights into the industry's ability to meet the standard. Short-term

negative cash flows can have negative business consequences. Due to the reduced

availability of internally generated cash flows, manufacturers may find it necessary to

increase borrowing thereby adding to financial leverage. Diminished free cash flow may

also make it difficult to meet obligations to current and new debt holders and/or payment

of dividends to shareholders.

ADL has quantified short-term impacts by summarizing the cash flow impacts on

manufacturers in the few years proceeding and following the standard. Table 21 through

23 show the short-term cash flows for each business scenario.

Table 21: Business Scenario 1

Scenario Years P St d ar Years Preceding Standard Standards Fol Standard Standard

2000 2001 2002 2003 2004 2000 2001 2002 2003 2004

Base Case 18.24 19.52 20.09 20.39 21.66 18.24 19.52 20.09 20.39 21.66

Std. Level 1 -8.2 -17.4 -22.1 -7.4 32.6 16.8 17.6 17.9 13.3 22.6

Std. Level 2 -19.3 -33.1 -40.0 -23.2 37.6 6.1 2.6 0.7 -2.4 27.5

Std. Level 3 -42.6 -65.7 -77.3 -44.0 47.1 -16.7 -29.4 -35.8 -23.1 36.7

Std. Level 4 -70.4 -104.6 -121.8 -142.9 63.7 -45.8 -70.2 -82.4 -122.2 53.8

Table 22: Business Scenario 2

Scenario Years P St d ar Years Preceding Standard Years Following receing aar Standard___ _ _____ Standard

2000 2001 2002 2003 2004 2000 2001 2002 2003 2004

Base Case 18.24 19.52 20.09 20.39 21.66 18.24 19.52 20.09 20.39 21.66

Std. Level 1 -8.2 -17.4 -22.1 -15.5 21.2 16.8 17.6 17.9 12.7 21.8

Std. Level 2 -19.3 -33.1 -40.0 -35.2 20.8 6.1 2.6 0.7 -6.7 21.4

Std. Level 3 -42.6 -65.7 -77.3 -62.4 21.3 -16.7 -29.4 -35.8 -33.6 21.9

Std. Level 4 -70.4 -104.6 -121.8 -169.7 26.0 -45.8 -70.2 -82.4 -141.6 26.6

25

EE-RM-97-900 COMMENT 77I
Table 23: Business Scenario 3

Years Following Years Following Scenario Years Preceding Standard YasFloig Years Preceding Standard Y s Standard Standard

2000 2001 2002 2003 2004 2000 2001 2002 2003 2004

Base Case 18.24 19.52 20.09 20.39 21.66 18.24 19.52 20.09 20.39 21.66

Std. Level 1 -8.2 -17.4 -22.1 -9.5 29.8 16.8 17.6 17.9 13.2 22.4

Std. Level 2 -19.3 -33.1 -40.0 -26.2 33.4 6.1 2.6 0.7 -3.5 25.9

Std. Level 3 -42.6 -65.7 -77.3 -48.6 40.6 -16.7 -29.4 -35.8 -25.7 33.0

Std. Level 4 -70.4 -104.6 -121.8 -149.6 54.3 -45.8 -70.2 -82.4 -127.1 47.0

Since Business Scenario 3 is the most likely outcome, the results from Table 23 were

plotted in Figure 8.

Figure 8: Short Term Cash Flows for Business Scenario 3

100 --- .100

50 50

o

[+ Base Case + Standards, TS Base 1 Case Cumulative, || 1| TS 

-150 -150

20) -200 -

-4 Base Case --- Standards, TS 1 -4 Base Case -- Cumulative, TS 1

-+-Standards, TS2 -Standards, TS 3 1 ^ Cumulative, TS 2 ---- Cumulative, TS 3

- Standards, TS 4 -1( Cumulative, TS 4

As displayed in Figure 8, the short-term financial impacts for the standard case are

pronounced for trial standard levels three and four. When cumulative effects are taken

into account, it is clear that the manufacturers may have an adverse impact in the shortterm, regardless of the trial standard level. This could lead to one of three outcomes:

1. Manufacturers may lose the level of funds in those years as shown in the above

charts.

2. Manufacturers, in the short-term, may try to raise costs to the dealer/distributor to

recover their increased costs. This could lead to increased cost to the consumer.

However, over the long time frame, due to the competitive nature of the water heater

industry, prices may decline to levels similar to those presented in Business Case 3.

3. Manufacturers could raise the cost to the dealer/distributor for current products to

offset the negative cash flows in the years preceding the standard. This could

potentially increase the cost to the dealer/distributor of the current baseline water

26

EE-RM-97-900 COMMENT 77I
heater by as much as 12% (the amount of revenue needed to offset the level four loss

in the year previous to the standard taking effect), which could be passed on to

consumers.

2.4. Impacts on Manufacturing Capacity, Plant Closures and Loss of Capital Assets

One of the potential outcomes of new standards can be the forced retirement of existing

manufacturing assets, including tooling and investment. The Manufacturer Interview

Guide used a series of questions to identify impacts on manufacturing capacity. These

questions were developed to understand the impact of a standard on:

* U.S. and North American manufacturing capacity

· Capacity utilization and plant location decisions in the U.S. and North America both

with and without standards

* The ability of manufacturers to upgrade or remodel existing facilities to accommodate

a new product mix

* The nature and value of stranded assets, if any

In general, manufacturers expect to meet future demand and expect little impact on

manufacturing capacity as long as trial standard levels three and four, potentially

requiring side-arm gas water heaters and plastic tank electric units, are not mandated.

Currently, the US industry has far more manufacturing capacity than the domestic market

can absorb. Manufacturers estimated the industry is operating at anywhere from 60 to 80

percent of total capacity. Table 24 below summarizes the manufacturer's comments.

Table 24: Im acts on Ca acit

1 No expected major impact on capacity. While increased cavity sizes will initially

increase scrap rates due to foaming errors, manufacturers expect to meet the

challenge.

2 No expected major impact on capacity beyond the issues discussed in trial

standard level one.

3 Plastic tank electric units require a manufacturing process that obsoletes current

electric water heater manufacturing lines. The required capital investments to

convert existing or build new facilities are expected to cause some manufactures

to cease the production of electric water heaters.

4 Side arm gas water heaters would require large investments and reduce

manufacturing capacity. Manufacturers expressed concern that foreign

competitors who already mass-produce such heaters would gain access to the US

market and displace domestic producers. Side-arm water heaters are no longer

manufactured in the US because of low demand.

Due to the phase-out of the HCFC-141b insulation blowing agent and for flammable

vapor ignition resistant design, regardless of what efficiency standard is chosen, it is

likely nearly every product line would have to be redesigned, re-certified, and launched

for sale in the US. One manufacturer claimed it would take them two years to re-tool,

which would give the manufacturer a year to finalize designs before the new standards go

into effect. Several manufacturers indicated a preference to re-tool for new foaming

agents, proposed energy-efficiency standards and flammable vapor-resistant designs at

the same time, to avoid any redundant efforts and limit costs.

27

EE-RM-97-900 COMMENT 77I
2.5. Employment Impacts Assessment

In order to assess employment impacts due to a standard, the Manufacturer Interview

Guide was used to explore current trends in production employment and solicit

manufacturer views on changes in employment patterns resulting from new energy

efficiency standards. The employment impacts section of the interview guide was used to

understand:

* Current employment levels associated with manufacturing at each production facility

* Expected future employment levels both with and without a standard

* Differences in workforce skills, and issues related to retraining of employees

The impact of HCFC-141 b foaming agent phase-out and flammable vapor resistant gas

water heaters on employment levels was considered minimal by all interviewed

manufacturers. However, all interviewed manufacturers indicated a transition to plastic

tanks for electric water heaters would result in domestic job losses. A transition to sidearm water heaters could also result in domestic job losses.

Absent standards, total employment in the industry will be a function of labor

productivity and market growth. No revolutionary technologies have recently emerged to

challenge the current manufacturing processes and related employment levels. Foreign

competition is not expected to be a threat to commodity water heater manufacturing

operations. Manufacturers expect to transition to water based foaming agents without job

losses. The industry-wide voluntary adoption of flammable-vapor resistant gas water

heaters is not expected to change employment levels either.

As the manufacturing processes for gas and electric storage water heaters are largely the

same, three factors will influence overall water heater employment in the United States:

1) Switching to other water heating technologies. Unless the cost of switching to

alternative water heating technologies becomes attractive, consumers are expected to

replace their water heaters with like models.

2) Competition from abroad: Due to high shipping costs and the low overall labor cost in

water heaters, there is little incentive to compete from abroad. Higher efficiency

standards will further increase cavity sizes and thus shipping costs. But any large

increases in labor content would prompt at least one manufacturer to shift more

production abroad.

3) Productivity and market growth: The vast majority of new homes are expected to

employ low-cost storage water heaters. The overall market growth of 2.5% per year

and modest productivity gains ensure current employment levels for the foreseeable

future. The steady and predictable replacement market ensures future demand.

As stated earlier, the impact of new foaming technologies and flammable vapor resistant

designs on labor is expected to be minimal. Unless efficiency levels requiring the

adoption of side arm heaters or plastic tanks is mandated, manufacturers do not anticipate

significant changes in employment levels or training requirements. The impacts on

employment are summarized below in Table 25.

28

EE-RM-97-900 COMMENT 77I
Table 25: Impacts on Emplo ment Levels

1 No expected major impact on employment levels

2 No expected major impact on employment levels

3 Plastic tank electric units require a manufacturing process that obsoletes current

electric water heater manufacturing lines. This could potentially lead to some

manufacturers abandoning the electric water heater market. While some of the

employment would shift to manufacture natural gas water heaters, this would

reduce employment levels substantially.

4 Side arm gas water heaters would require large investments and reduce

manufacturing capacity. This reduction in capacity would also be accompanied

with a reduction in employment levels.

2.6. Impact on Small Manufacturers

The remaining small manufacturers of water heaters in the United States concentrate on

niche products such as electric only, solar, oil-fired, indirect, or marine systems, etc.

Depending on the company, more or less of the product line will be affected by the

proposed rulemaking.

Small manufacturers use a variety of insulating and lining materials, which include stone,

fiberglass, and a variety of foams. At least one domestic producer already uses waterblown foam in their water heaters. As efficiency is a strong selling point for these

manufacturers, investments will be required if manufacturers decide to significantly

surpass standard levels. However, any required re-tooling would be amortized across a

much smaller volume than that of a larger competitor. Therefore, it may potentially have

a larger impact.

The low volumes in these niche markets necessitate somewhat different manufacturing

processes than the ones used by larger commodity producers. Consequently, these

manufacturers will be impacted differently than the commodity producers. It is expected

small manufacturer's material and labor costs will increase more compared to their larger

competitors because of supplier discounts and production efficiencies. Flammable vapors

resistant technology is a good example of this trend. Table 26 below describes the

expected impact on small manufacturers.

Table 26: Impact on Small Manufacturers

___1 ____No expected major impact beyond what will be seen by the rest of theindustry

2 As many small manufacturers use increased efficiency as a selling point,

movement of the standard to level two, and more so with the higher efficiency trial

standards levels, may eliminate the market differentiation the small niche

manufacturers have. This could potentially reduce sales dramatically and force

them out of business.

3 Plastic tank electric water heaters are probably impossible to achieve for small

competitors unless licensing fees and market conditions are very favorable. Thus,

any efficiency standard level requiring technology use will most likely cause small

manufacturers to abandon the electric market affected by the rulemaking.

4 Side arm gas water heaters would require large investments and may also prompt

small manufacturers to leave that segment of the residential market.

2.7. Competitive Impacts Assessment

Analyzing the expected financial impacts of new standards on manufacturers is only one

aspect of the Manufacturing Impact Analysis. Impacts on consumers from any shift in

market power to manufacturers are also assessed. In fact, EPCA directs the Department

29

EE-RM-97-900 COMMENT 77I
to consider any lessening of competition likely to result from new standards. It further

directs the Attorney General to determine the impact, if any, of any lessening in

competition. In assessing potential competitive effects, the Department will draw on the

experience and assistance of the Department of Justice.

Changes in industry concentration-the distribution of market share among

manufacturers-can signal potential reductions in competition. Under reduced

competition, firms are better able to use their market power to increase profits. Firms

may exert market power by raising prices or reducing quality, service, and other aspects

of the product that consumers value. The water heater industry is a fiercely competitive

market. Several manufacturers indicated the fiercely competitive market might lead to a

market exit of one or more manufacturers. Manufacturers also stated the array of

regulations facing water heater manufacturers could speed up any market exit.

2.7.1. Global Competition

Global competition currently has little impact on the overall US water heater industry.

One multinational manufacturer stated that large increases in labor costs would prompt

them to shift more production abroad. Some purchased parts used in water heaters, such

as gas controls, are already manufactured outside the United States. The long-term trend

to manufacture labor-intensive components in low-labor cost areas is largely independent

of any energy efficiency standard. However, the majority of parts in water heaters are still

purchased locally.

Table 27: Effect on Global Competition

_______I No additional expected major impact

2 No additional expected major impact

3 No additional expected major impact

~~~~~4 ~Side-arm gas water heaters are no longer manufactured in the United States. Thus,

any energy efficiency standard needing side-arm water heaters to meet it could

effect market entry of foreign manufacturers who already mass-produce such

heaters.

Several manufacturers have made international investments or acquisitions in the water

heater industry. This trend is also assumed to be independent of proposed standards.

2.8. Other Comments

2.8.1. Manufacturer's Comments on Consumer Utility

All interviewed manufacturers expressed concern about the loss of utility to consumers

that have water heaters located in small spaces. Many residential water heaters are

certified for zero-clearance and are installed that way; especially in mobile homes, crawl

spaces, attics, and manufactured housing.

Manufacturers made the following comments on the location of a water heater and the

effects of energy efficiency standards on water heater size. They indicated that if a water

heater is installed in a small space, any added insulation might prevent simple

replacement. Instead, a consumer may be forced to potentially accept a unit with a

smaller storage tank, removing the door or altering the space, or buying and installing

30

EE-RM-97-900 COMMENT 77I
multiple units. All of the proposed trial standard levels (except for oil trial standard level

one), coupled with the use of new blowing agents, will increase the size of water heaters.

According to one manufacturer, half of all installations would be impacted by a change in

height or width of the water heater. Several manufacturers indicated they might

discontinue low demand or models designed for small spaces when new energy

efficiency standards go into effect.

31

EE-RM-97-900 COMMENT 77I
Attachment A: First Manufacturer Questionnaire

Attachment B: Manufacturer Interview Guide

Attachment C: Original Financial Inputs

Attachment D: GRIM Operating Principles

Attachment E: Cash Flow Results

32

EE-RM-97-900 COMMENT 77I
ATTACHMENT A

Interview Guide from 1996/1997 Stakeholder Interviews

Background

The July 1996 Process Rule established procedures, interpretations and policies to guide the

Department in the consideration of new or revised appliance efficiency standards. Key elements of

this rule which have a direct bearing on the conduct of any future analyses include:

1. Providing opportunities for public input early in the rulemaking process.

2. Developing qualitative and quantitative estimates of critical variables from multiple

sources with inputs from interested parties.

3. Understanding and reporting the distribution of costs and benefits of standards on

different manufacturers.

4. Considering the impacts of standards on existing domestic manufacturing facilities

including capital investments and employment levels.

5. Utilizing an annual cash flow approach to determine quantitative impacts on

manufacturers.

Introduction

The July 1996 Process Rule describes the approach DOE will use in the engineering, consumer,

and manufacturer analyses. The process provides for consultation with interested parties before

initiating a detailed analysis.

The purpose of this interview was to help identify issues, gather information and identify

additional sources of information that could help assess the likely impact of standards. This is only

one of several opportunities that stakeholders in the water heater rulemaking process will have to

contribute information.

Questions

1) There is an Environmental Protection Agency requirement to phase out manufacture and

import of HCFC blowing agents currently used for foam insulation by January 1, 2003. What

are your plans for a replacement blowing agent? How will this affect your products and

manufacturing line?

2) The Consumer Product Safety Commission (CPSC) has been working with industry toward

developing a voluntary standard to address gas-fired water heater ignition of flammable

vapors. The CPSC expects a test method (standard) incorporating vapor ignition protection to

be sent to the American National Standards Institute (ANSI) in 1999 for approval as a national

standard. What are your plans for manufacturing gas-fired water heaters that will resist

flammable vapor ignition? How will this affect your products and manufacturing line?

3) The Department is concerned that increasing fuel-fired water heater recovery efficiencies to

high levels may cause health and safety problems with existing venting systems. At what

recovery efficiency levels do you provide special instructions that go beyond the Category I

NFGC venting guidelines?

4) Additionally, the Department is aware of three alternative venting systems, direct venting,

induced draft and induced draft with flue gas dilution, which may reduce installation costs and

could be used to avoid safety problems at higher recovery efficiencies. What do these options

cost to manufacture and install? In what installation situations are these systems feasible?

EE-RM-97-900 COMMENT 77I
5) In order to run the simulation models WATSIM and TANK for the engineering analysis, the

Department will need information about the geometry of the baseline models. These

parameters are mostly dimensions, such as, tank height, tank diameter, tank wall thickness,

dome height, insulation thickness, thermostat location, etc. What are your recommendations

for:

e Tank height:

* Tank diameter:

* Tank wall thickness:

* Insulation thickness:

* Thermostat location:

EE-RM-97-900 COMMENT 77I
6) For purposes of this analysis assume a five year regulatory life (i.e., amortize this cost over

five years). Do you agree with this assumption?

7) The Energy Information Agency (EIA) energy price forecasts do not consider the possible

impacts of utility restructuring. This may differ from other forecasts. For example, the Gas

Research Institute (GRI) has a future price scenario showing 29% lower electricity prices by

2015. DOE will use the most recent EIA electricity/gas price forecast in the engineering and

life-cycle cost analysis. For the purpose of calculating national benefits the Department will

perform life-cycle-cost sensitivity analyses at -12.5% and -25% of the EIA forecast for

electricity prices. In an additional sensitivity analysis, the Department will determine the rate

of decrease in electricity/gas price needed to reduce net present value of the reduced life-cyclecost to zero. Do you agree with this approach? Do you have any suggestions for an alternative

fuel price projection for the 30 year period?

8) In addition to what we have previously discussed, what changes have occurred in the water

heater industry in recent years, and how have these changes impacted your company?

EE-RM-97-900 COMMENT 77I
Attachment B

Water Heater Manufacturers Interview Guide

Introduction

The Department proposes to conduct interviews with manufacturer representatives to

gather key information on the effects that potential new energy efficiency standards for

water heaters might have on their company's revenues and finances, and on their

workforce. This interview guide provides a starting point to identify relevant issues and

qualitatively and quantitatively describe the impacts of possible candidate standards

levels.

Part A: Current Organizational Characteristics

The Department's interest concerning manufacturer impact is focused at the plant or

profit center level directly pertinent to water heater production. The context within

which the plant operates and the details of plant production and costs are not readily

available from the published literature, however, so the Department invites the

manufacturers to provide these details confidentially in their own words to the extent

practical. The organizational setting around the water heater profit center is of interest to

round out the Department's understanding of the probable future of the water heater

manufacturing activity without and with energy efficiency standards.

A. 1 Identify names of parent companies and any subsidiaries relevant to the water

heater industry.

A.2 Please provide the locations of your water heater production facilities and the

product mix manufactured there.

A.2.1 How would energy efficiency standards affect each production facility mix?

A.3 How has your company incorporated energy efficiency improvements in water

heater technology into its product line and marketing strategy?

A.4 How would a new energy efficiency standard on water heaters affect your product

mix and marketing strategy?

Part B: Industry Infrastructure

As part of an attempt to better understand the industry infrastructure and the impact

energy efficiency standards might have on it, the Department would like for manufacturer

representatives to discuss their major distribution channels and major sources of supply.

Major Customer Types

EE-RM-97-900 COMMENT 77I
The following questions are intended to gain an understanding of how potential energy

standards levels might affect customer mix and distribution channels.

B. 1. Generally how would a new water heater standard impact your customer mix,

distribution channels and corresponding profit margins?

B.2. Do you see any changes in emphasis on domestic sales channels, and would the

presence of new energy efficiency standards have an impact on production of water

heaters for sale?

Major Suppliers

The Department recognizes that manufacturers do not operate in insolation and that

changes in production levels or economic health of a manufacturer can have significant

impacts on its suppliers and other trade allies. The Department plans to be available to

meet with representatives of these trade allies and to consider their impacts.

B.3. Who are the suppliers that may be affected by changes in your product mix as a

result of standards? How might they be affected?

Part C: Manufacturer Cash Flow Analysis

Each manufacturer has been given the Government Regulatory Impact Model (GRIM) to

develop its own cash flow model to compare with that of the "industry" cash flow. This

will allow each manufacturer to use its own financial information to arrive at the

expected differences in cash flow due to new energy efficiency standards. These results,

together with an adequate understanding of how they were developed, will help the

Department to estimate industry impacts for different types of manufacturers.

C.1. Costs

How do you explain differences, if any, between your manufacturing costs with and

without new energy efficiency standards and those presented in the sample results

for the industry as a whole?

C. 1.1. Is the "Industry" cost structure (materials, labor, overhead, tooling, etc.)

representative of your firm's costs? What are the differences and their

causes?

C. 1.2. How might new standards alter this cost structure?

C.2 Prices

How do you explain differences, if any, between your expected product prices with

and without new energy efficiency standards and those presented in the sample

results for the industry as a whole?

EE-RM-97-900 COMMENT 77I
C.2. 1. Are your gross margins (% revenue) different post standards? If so, what

are the causes?

C.3 Shipments

How do you explain differences, if any, between your expected product shipments

with and without new energy efficiency standards?

C.3.1. What assumption(s) did you make about your firm's market share poststandards? What was your reasoning?

C.3.2 Is your product mix significantly different from the overall industry

proportions?

C.4 Financial

How do you explain differences, if any, between your financial data and those

presented for the industry as a whole?

C.5 Impacts on the Business

Please discuss your interpretations of the cash flow analyses results for the

standards cases. What do the results imply about the future of the business?

Availability of capital?

Are there additional financial impacts on new standards that are not being captured

in the cash flow analysis? Please explain? (i.e., Tax Rate, Discount Rate, Working

Capital, SG&A, R&D, Depreciation)

C.6 Additional Economic Measures

Please discuss any additional measures, if any, that you might have developed that

provide insight into the economic effects of changes in energy-efficiency standards.

Part D: Competitive Impacts Assessment

Competitive impacts are assessed mainly in terms of market power, which is defined as

the ability to set a given product price within a limited range. The Department is

interested in manufacturer viewpoints on the extent to which new energy efficiency

standards would increase market power and thereby lesson competition within the water

heater industry.

D. 1. How would new energy efficiency standards affect your ability to compete in the

marketplace?

D.2. Do you believe that new energy efficiency standards would unfairly assist or harm

the ability of some firms in the industry to compete?

D.3. Please discuss examples, if any, wherein substantial consumer subgroups would

experience economic or performance penalties as a result of new standards.

D.4. Can your firm meet potential efficiency levels without changing your products in

ways that consumers might care about?

EE-RM-97-900 COMMENT 77I
D.5. Does your company have specific information for the Department on consumer

preferences for product attributes potentially affected by new standards?

Part E: Employment Impacts Assessment

The impact of new energy efficiency standards on employment is an important

consideration in the rulemaking process. This section of the interview guide seeks to

explore current trends in water heater production employment and solicit manufacturer

views on how domestic employment patterns might be affected by new energy efficiency

standards.

E. 1. How would your employment levels change under new energy efficiency

standards?

E.2. Would the workforce skills required under new energy efficiency standards be

different enough to require extensive retraining or replacement of employees?

Part F: Manufacturing Capacity Impacts Assessment

The information discussed here is important for developing an understanding of the

investment cost inputs to GRIM.

F. 1. How would the imposition of new energy efficiency standards affect your capacity

utilization and manufacturing assets levels at your domestic production facilities?

F.1.1 Would any facilities be closed or downsized?

F.1.2. Would any facilities be added or upgraded?

F.2. If current capacity were to be made obsolete, would it be remodeled to

accommodate a new product mix?

F.3. Please estimate the value of stranded assets resulting from a new standard, and/or

the costs of refitting the facility and carrying out the research, engineering, and

other supporting activities required to accommodate the new product mix.

EE-RM-97-900 COMMENT 77I
Attachment C

Financial Inputs for "Strawman" Water Heater Manufacturer for the GRIM

Abstract: The following table illustrates a representative financial structure to be used

for conducting the cashflow analysis of a "strawman" water heater manufacturer. This

data was changed in the final analysis to represent comments received during the

interview process.

Assumptions for

Water Heaters

Scenario Description WaeriHeateis; ,'::

Base Year 1998 Beginning yearfor analytical purposes

Announcement Year 2000 Year in which the regulation announcement is made

Standard Year 2003 Year in which the regulation takes effect

Tax Rate 35.8%

Discount Rate for NPV 7.88%

Inflation Rate per annum

Working Capital 12.91% of Revenue

Standard SG&A 11.06% ofRevenue

Research and Development _2.1%l ofRevenue

Ordinary Depreciation 3.09% of Revenue

Ordinary Capital Expenditures -3.71% ofRevenue

Financial Inputs to GRIM for the Water Heater Rulemaking Analysis

Introduction

The Department of Energy proposes to use the Government Regulatory Impact Model

(GRIM) to calculate the financial impacts of new standards on manufacturers of water

heaters.

Given the relatively small number of firms in the industry, the Department proposes to

create an industry cash flow analysis using a bottom-up approach. Essentially each

manufacturer would provide its own cash flow analysis to be aggregated with all other

manufacturer submittals. In order to facilitate individual manufacturer analysis, the

Department will prepare baseline scenarios for a strawman manufacturer using publicly

available financial information. The objective of this document is to outline and

document the basis of financial assumptions to be used in GRIM when performing the

cash flow analyses for a strawman water heater manufacturer. Manufacturers will be able

to modify relevant parameters to meet their own situation (price, cost, financial

parameters, shipments, etc.).

EE-RM-97-900 COMMENT 77I
GRIM Model

The GRIM model is used to conduct a standard annual cash flow analysis that uses price,

quantity, and cost information to assess the impact of regulatory conditions on

manufacturer income and cash flow. This process is represented in Figure C-1.

___ Price _ D < Manufacturing Costs

Quantity - Financial Information

Cash Flow

Figure C-1. Using GRIM to perform an industry cash flow analysis

Financial Inputs to GRIM

Prior to initiating the cash-flow analysis, financial data on variables such as tax rate,

working capital, depreciation, cost of capital, etc., need to be input into GRIM. To obtain

estimates for these inputs DOE has analyzed information available from publicly

available sources of firm-specific financial information for major water heater

manufacturers-SEC-1 OK Reports, Dun and Bradstreet Company Data Reports, and

Standard & Poor's (S&P) Stock Reports and Value Line Reports.

Water heater manufacturers are not a homogeneous group. However, for the purpose of

the GRIM cash flow analysis, only the water heater segment of each firm's operations is

considered. Thus financial information relevant to the GRIM analysis should be

representative of plant level statistics to the extent possible. Where firm specific data are

to be used these should be drawn only from firms with a substantial portion of their

operations concentrated in water heater manufacturing.

Value Line and Standard and Poor's (S&P) composite industry statistics for the home

appliance industry were reviewed. Value Line's statistics for the home appliance

industry are a composite of the following companies: Whirlpool, Maytag, Fedders Corp.,

Black and Decker, Toro and National Presto Industries. In S&P reports, appliance

manufacturers are included in the "Household Furnishings and Appliance" industry. The

S&P statistics are a composite of the following companies: Armstrong World, Basset

Furniture, Fedders Corp., Maytag, Mohasco, Roper, Rubbermaid, Whirlpool, White

Consolidated Industries and Zenith Electronics. Given the composition of the industry

composites, water heater manufacturer specific financial information was given greater

weight.

EE-RM-97-900 COMMENT 77I
The tables in the following sub-sections present historical financial data obtained from

the sources previously described.

Tax Rate

Firms pay an annual tax, levied by the federal and state governments, based on income.

Taxable income and the income taxes paid are presented as separate line items in a

company's income statement. Table C-1 presents the effective income tax rates for one

water heater manufacturer over the period 1995-1997. This information was obtained

from the manufacturers' income statements, by dividing the income taxes paid by the

taxable income. The marginal tax rates paid by diversified manufacturers for their water

heater operations is difficult to estimate and may or may not be reflected by the

"effective" tax rate on financial reports. The tax rate for the industry composite, as

reported by Value Line is higher than for the manufacturer.

Table C-1. Average income tax rates

: Manufactuirer:"' : Avg. Taxl li :: Year

A 35.8% 1995-1997

Value Line 40.0% 1990-1996

The Department proposes using an income tax rate of 35.8% as an input to GRIM. This

value is based on the manufacturer average tax rate.

Working Capital

Working capital is defined as the difference between a firm's short-term (or current)

assets and short-term (or current) liabilities. It is the part of a company's capital that

must be maintained in order to under take day-to-day operations of the company without

experiencing liquidity problems. Because cash inflows and outflows are not

synchronized, a firm needs to maintain access to cash either from its own liquidity

portfolio, or from back-up liquidity. This capital cannot be used in the investing activities

of the company.

Table C-2 presents average working capital maintained by a major water heater

manufacturer as a percentage of its annual revenues over the period 1996-1997. Working

capital is also presented for the home appliance industry composite as reported by Value

Line. Working capital is calculated by subtracting current liabilities from current assets

of the firm, where the current assets and liabilities are obtained from the firm's annual

balance sheets.

EE-RM-97-900 COMMENT 77I
Table C-2. Average working capital as a percentage of revenues

: Manufacturer Working Capitalas : i: ' :Year 

:.- 

_____________ , ;:;: :; :o ' ^: % of Revenues:__________ :ofRhenes iii: Ei : . ::; ' ' ' ';'-

A 28.3% 1997

A 12.91% 1996

Value Line 6.76% 1990-1996

Based on information available in Table C-2, the Department will assume working

capital to be 12.91% of revenues for input into GRIM.

In general, companies will strive to lower their working capital to the lowest amount

possible to free up as much cash flow as possible for revenue-generating investing

activities. According to Standard & Poor's, in the last few years improved workingcapital management techniques have greatly reduced the investment that has traditionally

been required.

Selling, General and Administration (SG&A)

Table C-3 presents average SG&A expenses for a major water heater manufacturer as a

percentage of its annual revenues. The data has been averaged over four years, 1994

through 1997. SG&A information is presented as a line item in individual

manufacturers' income statements, presented in SEC 10-K reports.

Table C-3. Average SG&A expense as a percentage of revenues

Manufactrer SGAas % ofIe.; ''

' : f . . :: , . .Revenues, H .;: .: . : i

A 11.06 1991-1997

Selling costs include any expense or class of expense incurred in selling or marketing. In

a manufacturing firm, selling costs include both marketing (order getting) costs and

logistics (order-filling) costs. Marketing costs include market research, advertising,

point-of-sale promotions, and salespersons' compensation and travel costs. Logistics

costs include warehousing and delivery costs as well as record-keeping costs associated

with processing an order.

General and Administrative (G&A) costs are expenses incurred for the general direction

of the enterprise. G&A costs include the cost of service and staff units (such as the

personnel office) and general corporate costs, including compensation of top

management and donations to charitable organizations.

The Department proposes using a value 11.06% of revenues for SG&A expense as an

input to GRIM.

Research and Development (R&D)

Table C-4 presents the R&D costs incurred by a major water heater manufacturer as a

percentage of its annual revenues. The R&D cost data has been averaged over the past

four years, 1991 through 1997.

EE-RM-97-900 COMMENT 77I
Table C4. Average R&D costs as a percentage of revenues

Manufacturer; ;Avg. R&D Cost

. :!: l: as % of Revenues

: .Wv: ti;4 A L i (1991-1997)

A 2.11

The separate disclosure of research and development expense is a relatively recent

requirement. Formerly, most companies included this expense as a part of general and

administrative expenses. Because the amount spent on research and development can

provide an important clue as to how energetic the company is in keeping its products and

processes up to date, Federal Accounting Standards Board (FASB) requires that this

amount be reported separately if it is material.

Based on the information in Table C-4, the Department proposes using R&D expense as

2.11% of revenues for input into GRIM.

Depreciation

Plant and manufacturing equipment assets have limited useful lives; that is, they will

provide service to the firm over a limited number of future accounting periods. A

fraction of the cost of these assets is therefore properly chargeable as expense in each of

the accounting periods in which the assets provide service to the firm. The accounting

process for this gradual conversion of plant and equipment capitalized cost into expense

is called depreciation.

Table C-5 presents average depreciation for a major water heater manufacturer as a

percentage of its annual revenues. The data has been averaged over eight years, 1990

through 1997. Depreciation is presented as a separate line item in the manufacturers'

income statements as presented in SEC 10-K reports.

EE-RM-97-900 COMMENT 77I
Table C-5. Average depreciation expense as a percentage of revenues.

Maniufacturer Depreciation as i% '' .Year

* an c 1 : *of Revenuesj'i;^-X ;: ;

A 3.09 1991-1997

Value Line 3.66 1990-1996

Based on information in Table 5, the Department proposes using a value of 3.09% of

revenues for depreciation expense as an input into GRIM.

Capital Expenditures

These are the expenditures made for additions to fixed assets, like plant, equipment, etc.,

intended to benefit future accounting periods (in contrast with other expenditures that

benefit the current period). These expenditures are aimed at increasing the capacity,

efficiency, life span, or economy of the operation of an existing fixed asset, or, in some

cases, to build entirely new assets.

Table C-6 presents average capital expenditures for a major water heater manufacturer as

a percentage of its annual revenues. The data has been averaged over eight years, 1991

through 1997. The table also presents data from the 1992 Census of Manufactures.

Table C-6. Average capital expenditures as a percentage of revenues

Mfacnuaer;? a t: ;

::: V CapitalExpenditures I, 'iYe'ar,';

· 0:7:5 : I:}_}i> ; ; °as % of iRevenues: - t: it:: g i ' ' A 3.71 1995-1997

Census of Manufactures 0.71 1992

The Department has no corresponding value for depreciation from the Census of

Manufactures. Hence the Department proposes to use the capital expenditure information

available from the 10-K financial reports of Manufacturer A. Based on information in

Table C-6, the Department proposes using capital expenditures as 3.71% of base year

revenues for input into GRIM.

Cost of Capital/Discount Rate

Cost of capital is a measure of a company's cost of using capital that it raises either

through loans (i.e., debt) or by issuing equity. It is the minimum rate of return that must

be earned on new investments that will not dilute the equity of the shareholders. This

rate of return is often referred to as the discount rate, hurdle rate, or the opportunity cost

of capital.

The company cost of capital is a weighted average of the returns that investors expect

from various debt and equity securities issued by the firm. It is calculated as the cost of

debt capital (which is then adjusted for the income tax effect of debt financing) plus the

cost of equity capital, weighted by the relative amount of each in a company's capital

structure. For the purpose of characterizing financial impacts of regulations on

manufacturers using GRIM, the Department proposes using the company cost of capital

to discount future cash flows for arriving at the water heater industry value.

EE-RM-97-900 COMMENT 77I
In order to calculate the company cost of capital, it is essential to identify a company's

cost of raising debt, cost of raising capital through issuing equity, and the capital structure

of the company. Capital structure of a company gives information about the amount of

debt versus the amount of equity in the company.

Cost of debt: Cost of debt is a weighted average cost of debt based on all forms of debt

financing outstanding. Information on the amount of debt outstanding and the interest

rate at which it was issued was obtained from SEC 10-K financial statements and

Moody's reports for a major publicly traded water heater manufacturer. The water heater

manufacturer has a line of credit available from a group of banks. In addition the

company can raise debt through offering corporate bonds. The company's corporate

bonds have been rated by Moody's rating services.

Debt ratio is defined as the ratio of long-term debt to total long-term capital (i.e., longterm debt plus equity), and illustrates a company's capital structure.

Table C-7. Cost of debt and debt ratio

Manufacturer Debt Ratio Costof Debt

1. : 997 , ; :::; :1997 :

A 0.281 6.73%

Cost of equity: Cost of equity is the rate of return that equity investors expect to earn on

their investments in a company's stock. These expectations are reflected in the market

price of the company's stock. One way of estimating the cost of equity is by using the

capital asset pricing model (CAPM). The CAPM is based on the premise that the

expected or the required rate of return on any firm's common stock equals the riskless

rate of interest plus a premium for risk. The CAPM is widely used by large corporations

to estimate their costs of equity.' Another method that could be used to determine the

cost of equity is the historical rate of return to the stockholder.

According to the CAPM, the cost of equity, or, the expected return for equity, is

determined as:

cost of equity = riskless rate + beta * [risk premium]

where:

riskless rate is usually the short-term Treasury bill rate, or the long-term government

bond rate adjusted for the risk premium over Treasury bills,

risk premium is the difference between the expected return on the market portfolio and

the riskless rate, and

beta is a measure of the sensitivity of a company's stock to market movements.

' For more information on CAPM refer to Chapters 7, 8 and 9 of Corporate Finance by Brealey, R.A., and

Myers, S.C.; and the article entitled Does Capital Asset Pricing Model Work by Mullins, D.W., published

in the Harvard Business Review.

EE-RM-97-900 COMMENT 77I
Table C-8 presents yields on Treasury bills and government bonds, and the average risk

premium associated with these securities. Each portfolio offers different degrees of risk.

Treasury bills are about as safe an investment as one can make. There is little risk of

default, and their short maturity means that the prices of Treasury bills are relatively

stable. However, investors cannot lock in a real rate of return; there is still some

uncertainty about inflation. By switching to long-term government bonds, investors

acquire an asset whose prices fluctuate as interest rates vary. (Bond prices fall when

interest rates rise and rise when interest rates fall.) An investor who switches from

government bonds to common stocks has a direct share in the risks of the enterprise, and

hence accepts the additional default risk. Investors who accepted the extra risk of

common stocks received, on average, a premium of 8.5 % a year over the return on

Treasury bills.

Table C-8. Average rates of return (1990-96) and risk premiums (1926-94) on some securities (figures

in percent per year)

'Portfolio 1 :"!' li, '; :,: ,::Average . ; Annual : Average Risk

: : ' ' = ; Rate of Return2 Premium3

* 0 ~i *It;: ' , i (Nominal) (Extrareturn vs..

: X: E ;: :. ~~ , 1 =? : :3EiiTreasury bills)

:= !':: : : : 5:? !! =

!!'^;! i'=:=i:: : :~ m': :; (1990-96) ' X: : : (1926-94)

Treasury bills 5.00 0

Government bonds (10 yr.) 7.06 1.5

Common stocks (S&P 500 index) 8.5

Table C-9 presents average values of beta for a water heater manufacturer. The data has

been averaged over the period 1990-97. The values of beta are obtained from financial

services provided by the Dow Jones Company. They measure the sensitivity of a stock's

price to overall fluctuations in the S&P 500 stock index. Beta measures the sensitivity of

the return on an individual stock to the return on the market portfolio. A stock with a

beta of 1 tends to move up and down the same percentage as the market. Stocks with a

beta coefficient less than 1 tend to move in percentage terms less than the market.

Similarly, a stock with a beta that is higher than 1 will tend to move up and down more

than the market.

Table C-9. Average Beta values for a Water Heater Manufacturer

iMan, u factuiiTrer0i ; 1; ;:: =;,; ;s'Betai :; . !

N:: ~ .=: ~:(!99 :(:: : 97: ! 

A 0.84

Using CAPM to calculate the cost of equity, the following results are obtained for the

water heater manufacturer:

Manufacturer A: Cost of equity= (7.06-1.5) + 0.84 * (8.5) = 12.7%

2 Based on data from the Federal Reserve Statistical Release.

3 Source: Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation, 1994 Yearbook

EE-RM-97-900 COMMENT 77I
[riskless rate] beta * [risk premium]

Adjusting for inflation (averaging 3.27% per year over the period 1990-97), the real cost

of equity for Manufacturer A is 9.43%.

Weighted Average Cost of Capital (WACC) is defined as:

WACC = (1-tax rate) * cost of debt * [debt/(debt+equity)] +

cost of equity * [equity/(debt+equity)]

Manufacturer A: WACC = [(1-0.358) * 6.73 * 0.281 ] + [9.43 * (1-0.281)] = 7.99%

The weighted average cost of capital accounts for inflation, as real values of cost of

equity and debt are used in the calculation. In calculating WACC it is assumed that the

manufacturer maintains the same capital structure in the future, i.e. future debt ratios

remain the same as in the past (see Table C-7).

Independent estimates of the WACC were obtained from Ibbotson Associates, a company

that tracks the industry cost of capital for over 300 industries. Their analysis reports a

WACC of 11.6% for the household appliance industry (represented by the SIC code 363)

in the year 1997. Adjusting for inflation (2.2% in 1997), the WACC net of inflation

would be 9.4%.

The Department proposes using a WACC of 7.99% as the real cost of capital for

discounting future cash flows in GRIM, i.e. the discount rate for the industry NPV.

EE-RM-97-900 COMMENT 77I
Attachment D

GRIM Operating Principles (Tailored to conduct Water Heater Manufacturers' Cash-Flow Analysis)

1.0 Introduction and purpose

The purpose of the Government Regulatory Impact Model (GRIM) is to help identify the

effects of various efficiency regulations and other regulations on manufacturers. The

basic mode of analysis is to determine the change in value of the manufacturers(s)

following a regulation or a series of regulations. The model structure also allows an

analysis of multiple products with regulations taking effect over a period of time, and of

multiple regulations on the same product.

Industry value is defined, for the purposes of this analysis as the present value of cash

flows for the manufacturer(s) in question. Cash flow is calculated by the user entering

shipment volumes and manufacturer prices (i.e., prices from manufacturers to the first

customer, such as a wholesaler) and then selecting user-defined regulatory levels. The

model calculates the actual cash flows by year and then determines the present value of

those cash flows both without regulations (the pre-regulation base case) and with

regulations (the post-regulation standards case).

Output comes from the model in terms of summary statistics, graphs of major variables,

and, when appropriate, access to the complete cash flow calculation.

2.0 Model description

The basic structure of the GRIM is a standard annual cash flow analysis which uses price

and volume information as an input, builds on fundamental base cost information, and

accepts a set of regulatory conditions as changes in costs and investments. The cash flow

analysis is separated into two major blocks: income and cash flow. The income

calculation determines the profit after taxes but before financial charges. The cash flow

calculation converts profit after taxes into an annual cash flow by including investment

and non-cash items. Below are definitions of listed items on the printout of the output

sheet. (see Section 3.0)

(1) Income Statement: Overall calculation of Net Income Before

Financing (17) using revenue and cost items

subject to income tax effects as described in (2)

through (17).

(2) Price/Unit: Actual manufacturer unit price charged to the first

level of distribution (distributor, etc.), entered as an

input variable by user.

(3) Unit Sales: Annual shipments; entered as an input variable by

user.

EE-RM-97-900 COMMENT 77I
(4) Revenues: Annual revenues; computed by multiplying

Price/Unit (2) by Unit Sales (3).

(5) Base Costs: Costs per unit prior to regulations entered as input

(Labor, Material, Overhead) variables by the user.

(6) New Costs: Costs per unit following regulations; entered as

(Labor, Material, Overhead) input variables by the user.

(7) Labor: Factory direct labor and fringe benefit costs;

entered as an input variable by the user.

(8) Material: Purchased materials and components; entered as an

input variable by the user.

(9) Overhead: Factory overhead excluding depreciation; entered as

an input variable by the user.

(10) Depreciation: Annual depreciation on pre-regulation assets;

computed as a percentage of Revenues (4). Annual

depreciation on post-regulation assets is computed

by dividing Capital Expenditures (24) by a useful

life from Major Assumptions. For post-regulation

years, Depreciation is the sum of depreciation on

pre- and post-regulation assets.

(11) Cost of Sales: Total cost of sales, computed by adding Labor (7),

Material (8), Overhead (9) and Depreciation (10).

(12) R&D: Research and development costs unrelated to

regulations; computed as a percentage of Revenues

(4). From Major Assumptions.

(13) Product Conversion: Expensable costs related to meeting a regulation,

often including product redesign costs and

expensable factory conversion expenses. Also

includes costs incurred for new product literature

and catalogs, product obsolescence, and various

related marketing expenses. GRIM computation

based on regulatory level selected by user.

(14) SG&A: Selling, general and administrative costs are

computed as a percentage of Revenues (4).

EE-RM-97-900 COMMENT 77I
(15) Profit Before Tax: Profit before taxes and any financing costs;

computed by subtracting the Cost of Sales (11) and

SG&A (14) from Revenues (4).

(16) Taxes: Taxes on Profits Before Tax; computed by

multiplying the tax rate contained in Major

Assumptions by Profit Before Tax (15).

(17) Net Income: Profits after taxes; computed by subtracting Taxes

(16) from Profit before Tax (15).

(18) Cash Flow Statement: Overall assessment including net income, other cash

related items and adjustments and investments.

(19) Cash Flow: Determination of cash flow generated from

operations.

(20) Net Income: Net income; identical to Net Income (17).

(21) Depreciation: Depreciation is a non-cash cost and is added back

into Net Income (20) as part of the cash flow

calculation; identical to Depreciation (10).

(22) Change in Working Capital: Additional accounts receivable, inventory, and other

cash investments necessary to support increased

revenues; computed by multiplying a percentage

from Major Assumptions by the change in

Revenues (4).

(23) Cash Flowfrom Operations: The cash flow from operating activities; computed

by adding Net Income (20), Depreciation (21) and

subtracting Change in Working Capital (22).

(24) Capital Expenditures: Investment to maintain and replace existing

production assets; computed as a percentage of base

year Revenues (4) using a percentage contained in

Major Assumptions. Post-regulation capital

expenditures equal pre-regulation expenditures plus

depreciation on Conversion Expenditures (25).

(25) Conversion Expenditures: Depreciation costs for meeting regulations, typically

including plant, equipment, tooling and the like;

GRIM computation based on regulatory level

selected by user.

EE-RM-97-900 COMMENT 77I
(26) Cash Used in Investments: Cash required for assets; computed by adding

Capital Expenditures (24) and Conversion

Expenditures (25).

(27) Net Cash Flow: Annual cash flow from operations and investments;

computed by subtracting Cash Used in Investments

(26) from Cash Flowfrom Operations (23).

(28) Post-Regulation Value: Value of the relevant industry following adoption

and implementation of the regulatory scenario; the

present value of the annual Net Cash Flow (27)

from the base year to five years after the regulation

goes into effect, plus a terminal value based on the

final year's cash flow valued as an annuity, are

computed by model and listed. The discounted rate

for the present value is the "INTEREST RATE"

contained in Major Assumptions. Pre-regulation

value is computed by taking the base year Net Cash

Flow (27), excluding any regulation effects, and

treating it as a perpetual annuity.

EE-RM-97-900 COMMENT 77I
Attachment E: Cash Flow Outputs

EE-RM-97-900 COMMENT 77I
Figure 1: Base Case Cash Flow

BASE CASE SCENARIO Bas Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

UmtSal es 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.18 1034 10.47 10.64 10.83 11.03 ~Rev~venes 1: 1.33929 1.381.76 1415.091 1.44324 147068 1.49925 11.54205 1522.13 15 66.0 5 1594.52 1,618.48 1,639.60 1,665.57 1,695.65 1,726.70

Cosl of ale s - - - -s

Labor 91.66 94.57 96.81 98.71 100.56 102.49 104.03 105.39 107.04 109.01 110.67 112.13 113.93 116.00 118.12

Maneial 592.10 610.78 625.55 638.01 650.21 662.98 673.23 682.07 692.67 705.23 715.79 725.10 736.56 749.84 763:61

Overhead -Fixed _

Ovoed -Vmkblek 414.02 427.25 437.56 446.27 454.71 463.44 470.40 476.53 483.95 492.76 500.18 506.71 514.74 524.05 533.60

DepiMion 41. 42.8 43.9 44.7 456 46.5 47.2 47.8 48.5 49.4 50.2 50.8 51.6 52.6 53.5

Seling (ieneralmdAdminisrative

StndardSG&A 120.5 124.4 127.4 129.9 132.4 134.9 137.0 138.8 140.9 143.5 145.7 147.6 149.9 1526 155.4

R&D 134 13.8 142 14.4 14.7 15.0 15.2 154 15.7 15.9 16.2 164 16.7 17.0 17.3

Poduct Conversion Expase - - - - -

Prfit BeforeTax 66.1 68.2 69.8 71.2 72.5 73.9 75.1 76.1 77.2 786 79.8 80.9 82.1 83.6 85.2

Taxes 25.1 25.9 26.5 27.0 27.6 28.1 28.5 28.9 29.4 29.9 30.3 30.7 31.2 31.8 32.4

Nd Income Before Fimeing 41.0 423 43.3 44.1 45.0 45.8 46.5 47.2 47.9 48.8 49.5 50.1 50.9 519 52.8

Net Inome 41.0 42.3 43.3 44.1 45.0 45.8 46.5 47.2 47.9 48.8 49.5 50.1 50.9 51.9 52.8

Depraimon 41.5 42.8 43.9 44.7 45.6 46.5 47.2 47.8 48.5 49.4 50.2 50.8 51.6 52.6 53.5

Chagein WoringCapitI - (6.6) (5.2) (4.4) (4.3) (4.5) (3.6) (3.1) (3.8) (4.5) (3.7) (3.3) (4.1) (4.7) (4.9)

Cash Flos fium Opmraai 825 784 81.9 84.5 863 87.9 90.2 91.8 92.7 937 959 97.7 985 99.7 101.5

Ordimay Capital Expqndimres (60.3) (62.2) (63.7) (64.9) (66.2) (67.5) (68.5) (69.4) (70.5) (71.8) (72.8) (73.8) (75.0) (763) (77.7)

Cornvi Ceait Expenditures

Cah Used Invstinrnt (60.3) (622) (63.7) (64.9) (66.2) (67.5) (68.5) (69.4) (70.5) (71.8) (72.8) (73.8) (75.0) (76.3) (77.7)

NtCashFlow 22.2 16.3 18.2 19.5 20.1 20.4 21.7 22.4 22.2 22.0 23.1 23.9 23.6 23.4 23.8

Teminal Value 297.5

Pent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discormtd CashFlow 22.2 15.1 15.6 15.5 14.8 13.9 13.7 13.1 12.0 11.0 10.7 10.3 9.4 8.6 109.5

Industy Value (Nt Prlet Value) S 295.3

EE-RM-97-900 COMMENT 77I
Figure 2: Standard Level 1, Business Scenario 2, Cumulative

STANDARD CASE SCENARIO 8a.. Y ar Announce Year Standlrd Yr.,

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.48 10.64 10.84 11.0

Revenues 1339.33 1381.29 1414.78 1443.01 1470.39 1727.99 1754.56 1777.72 1805.45 1838.35 1865.97 1890.3 1920.32 1955.1 1991.13

(Cos of Sales

Labor 91.67 994.521 96.78 98.69 100.53 105.61 107.21 108.63 110.35 112.39 114.10 115.61 117 4 119.6 11.

Matenal 592.12 610.55 625.39 637.90 650.06 829.95 842. 87 54.03 86732 883.07 896.28 907.9 922.29 939 956.3

Overhead -Fixed 0.00 O.O 0.001 0.00 o0.00 0. 0.00 0.00 0.00 o.ol 0.00 0.00 0

Overhead-Vaiable 414.03 427.15 437.49 446.22 454.65 477.67 484.88 491.24 498.91 508.03 515.70 522.4 530.78 54041 550

Depreciation 415 42.8 43.9 44.7 45.6 67.8 68.9 69.8 70.8 72.1 73.2 74.2 75.4 76.7 78.1

Selling General and Amrnistrarive

Standard SG&A 120.5 124.3 127.3 129.9 132.3 155.5 157.9 160.0 162.5 165.5 167.9 170.1 172.8 176.0 179.2

R&D 13.4 13.8 14.1 14.4 14.7 17.3 17.5 17.8 18.1 18.4 18.7 18.9 19.2 19.6 19.9

Product Conveion Expense - - 4.1 5.7 6.5 0.3 - - - - -

Pofit Before Ta 66.1 68.1 65.7 65.5 66.0 73.8 75.3 76.3 77.5 78.9 80.1 81.1 82.4 83.9 85.4

Txes 25.1 25.9 25.0 24.9 25.1 28.0 28.6 29.0 29.4 30.0 30.4 30.8 31.3 31.9 32.5

Ndt Inome Before Financing 41.0 42.2 40.7 40.6 40.9 45.8 46.7 47.3 48.0 48.9 49.6 50.3 51.1 52.0 53.0

Net Income 41.0 42.2 40.7 40.6 40.9 45.8 46.7 47.3 48.0 48.9 49.6 50.3 51.1 52.0 53.0

Dcpreciation 41.5 42.8 43.9 44.7 45.6 67.8 68.9 69.8 70.8 72.1 73.2 74.2 75.4 76.7 78.1

Change in Working Capital - (6.6) (5.2) (4.4) (4.3) (40.3) (4.2) (3.6) (4.3) (5.1) (4.3) (3.8) (4.7) (5.4) (5.6)

Cash Flows from Opration 82.5 78.5 79.4 80.9 82.2 73.3 111.4 113.4 114.5 115.9 118.5 120.7 121.8 123.3 125.5

Ordinary Capital Expeditnres (60.3) (62.2) (63.7) (64.9) (66.2) (88.8) (90.2) (91.4) (92.8) (94.5) (95.9) (97.1) (98.7) (100.5) (102.3)

Conversion Capital Expenditures - (23.8) (33.4) (38.2)

Cash Used In Invesent (60.3) (62.2) (87.5) (98.3) (104.3) (88.8) (90.2) (91.4) (92.8) (94.5) (95.9) (97.1) (98.7) (100.5) (102.3)

NctCash Fow 22.2 16.3 (8.2) (17.4) (22.1) (15.5) 21.2 22.1 21.8 21.4 22.7 23.5 23.1 22.8 23.2

Terminal Value 289.9

Pesent Value Factor 10000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Disouted Cash Flow 22.2 15.1 (7.0) (13.8) (16.2) (10.6) 13.4 12.9 11.8 10.7 10.5 10.1 9.2 8.4 106.7

Industry Value (Net Present Value) S 183

EE-RM-97-900 COMMENT 77I
Figure 3: Standard Level 2, Business Scenario 2, Cumulative

STANDARD CASE SCENARIO Bas Vea Announce «ear Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sale 8.56 8.83 9.04 :9.22 9.39 9.51 9.72 9.85 10.00 10.18 10.34 10.48 10.65 10.85 11.06

Revenues 1339.29 1381:76 1415.09 1443.24 1470.68 1851.30 1879.67 1904.18 1933.63 1969.01 1999.03 2025.73 2058.73 2097.14 2137.10

Cost ofSales

Labor 91.66 94.57 96.81 98.71 100.56 115.99 117.76 119.30 121.161 123.3 125.2 126.98 129.06 13 3.9

Material 592.10 610.78 625.55 638.01 650.21 886.30 900.00 911.75 925.80 942.68 956.91 969.71 985.4 1003.89 1023.12

Overhead -Fixed .O 0.o 0 .0 0 0 .00 00.00 . 0.00 600.0. 0.000 0.00 0.00 0.00

Overhead -Variable 414.02 427.25 437.56 446.27 454.71 515.23 523.01 529.82 538.04 547.94 556.33 563.80 572.9 583.6 594.6

Depreciation 41.5 42.8 43.9 44.7 45.6 74.8 75.9 76.9 781 79.5 80.8 81.8 83.1 84.6 86.2

Selling. General andAdmtninstralve

Standard SG&A 120.5 124.4 127.4 129.9 132.4 1666 169.2 171.4 174.0 177.2 179.9 182.3 185.3 18.7 192.3

R&D 13.4 138 14.2 14.4 14.7 18.5 18.8 19.0 19.3 19.7 20.0 20.3 20.6 21.0 21.4

Product Convenion Expense- - 9.6 13.4 15.4 0.8 - - - - - -

Profit Before Tax 66.1 68.2 60.2 57.7 57.2 73.1 75.0 76.0 77.1 78.6 79.8 80.8 82.2 83.7 85.4

Taxes 25.1 25.9 22.9 21.9 21.7 27.8 28.5 28.9 29.3 29.9 30.3 30.7 31.2 31.8 32.4

Net ncome Before Finmcing 41.0 42.3 37.3 35.8 35.5 45.3 46.5 47.1 47.8 48.7 49.5 50.1 51.0 51.9 52.9

Netlncome 41.0 42.3 37.3 35.8 35.5 45.3 46.5 47.1 47.8 48.7 49.5 50.1 51.0 51.9 52.9

Depreciation 41.5 42.8 43.9 44.7 45.6 74.8 75.9 76.9 78.1 79.5 80.8 81.8 83.1 84.6 86.2

Change in Woking Capital - (6.6) (5.2) (4.4) (4.3) (59.6) (4.4) (3.8) (4.6) (5.5) (4.7) (4.2) (5.2) (6.0) (6.3)

Cash Flows from Operations 82.5 78.4 76.0 76.1 76.7 60.5 118.0 120.2 121.3 122.7 125.5 127.8 128.9 130.6 132.9

Ordinary Capital Expenditues (60.3) (62.2) (63.7) (64.9) (66.2) (95.8) (97.2) (98.5) (100.0) (101.9) (103.4) (104.8) (106.4) (108.4) (110.4)

Conveion Capital Expenditures - - (31.6) (44.3) (50.6) - -

Cash Used In Invesment (60.3) (62.2) (95.3) (109.2) (116.0) (95.8) (97.2) (98.5) (100.0) (101.9) (103.4) (104.8) (106.4) (108.4) (110.4)

NetCash low 22.2 16.3 (19.3) (33.1) (40.0) (35.2) 20.8 21.7 21.3 20.8 22.1 23.0 22.5 22.2 22.5

Terminal Value 281.7

Present Vale Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Disconted Csh Flow 22.2 15.1 (16.6) (26.3) (29.4) (24.0) 13.1 12.7 11.5 10.4 10.2 9.9 8.9 8.2 103.7

Industry Value (Net Present Value) S 130

EE-RM-97-900 COMMENT 77I
Figure 4: Standard Level 3, Business Scenario 2, Cumualtive

STANDARD CASE SCENARIO Bau Y*a Announe Year Standlad Y*r.

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales .56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.I19 10.3 10.49 10.6 10.86 11.07

Revenues 1339.29 1381.76 1415.09 1443.24 1470.68 2031.43 2062.27 2089.08 2121.39 2160.59 2194.03 2223.98 2260.96 2304.0 2348.86

Costof Soles _ : ' : _I

Labor 91.66 94.57 96.81 98.71 100.56 125.10 127.00 128.66 130.67 133.11 135.18 137.05 139.33 141.98 144.72

Material 592.10 610.78 625.55 638.01 650.21 950.06 964.56 977.09 992.15 1010.42 1025.99 1039.95 1057.24 1077.42 1098.48

Overhead- Fixed 0.00 0.00 0.00 0.00 0.0o 0.00 0.00 0.00 0.00 0.00 0.0 0.00 O 0.00 0. 0.0

Overead -Variable 414.02 427.25 437.56 446.27 454.71 580.41 589.15 596.81 606.08 617.32 626.92 635.51 646.08 658.35 671.07

Depreciation 41.5 428 43.9 44.7 45.6 97.4 98.9 100.2 101.7 103.6 105.2 106.6 108.3 110.3 112.4

Selling, General and Administratrve

Standard SG&A 120.5 124.4 127.4 129.9 132.4 182.8 185.6 188.0 190.9 194.5 197.5 200.2 203.5 207.4 211.4

R&D 13.4 13.8 14.2 14.4 147 20.3 20.6 20.9 21.2 21.6 21.9 22.2 22.6 23.0 23.5

Product Conversion Epense - - 6.4 9.0 10.2 0.5 - - - -

Profit Before Tax 66.1 68.2 63.4 62.2 62.3 74.8 76.5 77.4 78.6 80.1 81.3 82.5 83.9 85.5 87.3

Taxes 25.1 25.9 24.1 23.6 23.7 28.4 29.1 29.4 29.9 30.4 30.9 31.3 31.9 32.5 33.2

Net Income Before Finacing 41.0 42.3 39.3 38.6 38.6 46.4 47.4 48.0 48.8 49.7 50.4 51.1 52.0 53.0 54.1

Net ncome 41,0 42.3 39.3 38.6 38.6 46.4 47.4 48.0 48.8 49.7 50.4 51.1 52.0 53.0 54.1

Depreciation 41.5 42.8 43.9 44.7 45.6 97.4 98.9 100.2 101.7 103.6 105.2 106.6 108.3 110.3 112.4

Change in Working Capital - (6.6) (5.2) (4.4) (4.3) (87.8) (4.8) (4.2) (5.1) (6.1) (5.2) (4.7) (5.8) (6.7) (7.0)

Cash Flows from Operaons 82.5 78.4 78.0 78.9 79.9 56.0 141.5 144.0 145.4 147.1 150.4 153.0 154.6 156.6 159.5

Ordinary Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (118.4) (120.2) (121.8) (123.6) (125.9) (127.8) (129.6) (131.6) (134.1) (136.6)

Conversion Capital Expenditures (56.9) (79.6) (91.0)

Cash Usd In Investment (60.3) (62.2) (120.6) (144.6) (157.2) (118.4) (120.2) (121.8) (123.6) (125.9) (127.8) (129.6) (131.6) (134.1) (136.6)

NetCashFlow. 22.2 16.3 (42.6) (65.7) (77.3) (62.4) 21.3 22.2 21.8 21.2 22.5 23.5 22.9 22.6 22.9

Terminal Value 286.9

Preent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discoonted Cash Flow 22.2 15.1 (36.5) (52.1) (56.8) (42.5) 13.4 13.0 11.8 10.6 10.5 10.1 9.1 8.3 105.6

Industry Value (Net Preent Value) S 42

EE-RM-97-900 COMMENT 77I
Figure 5: Standard Level 4, Business Scenario 2, Cumulative

1u P = H:^^ esatoraiii teraiiiiiiii

STANDARD CASE SCENARIO Ba.se Yar Announce Year Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 .1 10.33 10.46 10.63 10.81 1101

Revenues 1339.29 1381.76 1415.09 1443.24 1470.68 2759.01 2803.61 2841.32 2885.03 2935.35 2976.66 3012.75 3057.58 3110.17 3165.3

Cost of Sales Labor 91.66 94.57 96.81 98.71 100.56 i 15178 154.19 156.25 158.68 161.49 163.82 165:5 168.36 171.2 174.3

Material 592.10 610.78 625.55 638.01 650.21 1350.55 1372.62 1391.19 1412.58 1437.11 1457.20 1474.74 1496.54 1522.16 1549.12

Overhead -Fixed .00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 8.00 0.00 0.00 8.00 .00 0.00

Overhead- Variable 414.02 427.25 437.56 446.27 454.71 773.78 786.11 796.60 808.84 823.0 834.65 844.84 857.51 872.34 887.85

Depreciation 41.5 42.8 43.9 44.7 45.6 121.0 122.8 124.4 126.3 128.6 130.5 132.2 1343 136.7 139.2

Selling General and Administrarie

Standard SG&A 120.5 124.4 127.4 129.9 132.4 248.3 252.3 255.7 259.7 264.2 267.9 271.1 275.2 279.9 284.9

R&D 13.4 13.8 14.2 14.4 14.7 27.6 28.0 28.4 28.9 29.4 29.8 30.1 30.6 31.1 317

Product Conversion Expense - 8.8 12.3 14.1 0.7 -

Profit Before Tax 66.1 68.2 61.0 58.8 58.4 85.3 87.5 88.8 90.1 91.6 92.8 93.8 95.1 967 98.4

Taxes 25.1 25.9 23.2 22.4 22.2 32.4 33.3 33.7 34.2 34.8 35.3 35.7 36.1 36.7 37.4

Net Income Before Finacing 41.0 42.3 37.8 36.5 36.2 52.9 54.3 55.0 55.9 56.8 57.5 58.2 59.0 59.9 61.0

Net hncome 41.0 42.3 37.8 36.5 36.2 52.9 54.3 55.0 55.9 56.8 57.5 58.2 59.0 59.9 61.0

Depreciation 41.5 42.8 43.9 44.7 45.6 121.0 122.8 124.4 126.3 128.6 130.5 132.2 134.3 136.7 139.2

Change in Working Capital - (6.6) (5.2) (4.4) (4.3) (201.6) (7.0) (5.9) (6.8) (7.9) (6.5) (5.6) (7.0) (8.2) (8.6)

Cash Flows from Operations 82.5 78.4 76.5 76.8 77.5 (27.8) 170.1 173.5 175.4 177.5 181.6 184.7 186.3 188.4 191.5

Ordinary Capital Expeditures (60.3) (62.2) (63.7) (64.9) (66.2) (142.0) (144.1) (146.0) (148.3) (150.9) (153.2) (155.2) (157.6) (160.4) (163.3)

Conversion Capital Expenditures (83.2) (116.5) (133.1)

Cash Used In Investment (60.3) (62.2) (146.9) (181.4) (199.3) (142.0) (144.1) (146.0) (148.3) (150.9) (153.2) (155.2) (157.6) (160.4) (163.3)

NetCashFlow 22.2 16.3 (70.4) (104.6) (121.8) (169.7) 26.0 27.5 27.1 26.6 28.4 29.6 28.6 28.0 28.2

Terminal Value 352.7

Prsent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted Cash Flow 22.2 15.1 (60.4) (83.1) (89.5) (115.6) 16.4 16.1 14.6 13.3 13.2 12.7 11.4 10.3 129.8

Industry Value (Net Present Value) S (74)

EE-RM-97-900 COMMENT 77I
Figure 6: Standard Level 1, Business Scenario 2, Standard

V APVN Ma-C, A .C i

STANDARD CASE SCENARIO Bae Y.ar Announc. Year Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 8.56 8.83 . 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.48 10.64 104 1103

Retvenues 1339.33 1381l.2 : 1414.78 1443.01 1470.39 154915 1572.89 1593.64 1618.56 1648.16 1673.03 1694.97 1721.93 175317 1785.41

Cot of Soles

Labor 91.67 94.52 96.78 9869 100.53 104.67 106.25 107.66 109.36 111.38 113.08 114.58 116.4 118.54 12.71

Material 59212 610.55 625.39 637.90 650.06 698.79 709.58 718.97 730.21 743.53 754.72 764.58 776.7 790.80 805.39

Overhead -Fined 0 0 80.00 0.0( 0.01 O.0 0.00 08.00 0.00 0.00 0.00 0.00 0.00 0 .0. 0.00 0.00

Overhead -Variable 41403 427.15 437.49 446.22 454.6 469.59 476.64 482.89 490.43 499.41 506.96 513.63 521.81 531.21 541.01

Depreciation 41.5 42.8 43.9 44.7 45.6 469 47.6 482 48.9 49.8 50.6 51.2 521 53.0 54.0

Selling Gteneral nd AinsdAd irative

Standard SG&A 1205 124.3 127.3 129.9 132.3 139.4 1416 143.4 145.7 148.3 1506 152.5 155.0 157.8 160.7

R&D 134 13.8 14.1 14.4 14.7 15.5 15.7 159 16.2 16.5 16.7 169 17.2 17.5 17.9

Product Converon Expense - 15 2.1 2.4 0.1 - - -

Profit Before Tax 66.1 68.1 68.3 69.1 70.1 74.3 75.6 76.6 77.8 79.2 80.4 81.4 82.7 84.2 85.8

Taxes 25.1 25.9 25.9 26.2 26.6 28.2 287 29.1 29.5 30.1 30.5 30.9 31.4 32.0 32.6

Net Income Before Financing 41.0 42.2 42.3 42.8 43.5 46.1 46.8 47.5 48.2 49.1 49.8 50.5 51.3 52.2 53.2

Net neome 41.0 42.2 42.3 42.8 43.5 46.1 46.8 47.5 48.2 49.1 49.8 50.5 51.3 52.2 53.2

Deprecition 41.5 42.8 43.9 44.7 45.6 46.9 47.6 48.2 48.9 49.8 50.6 51.2 52.1 53.0 54.0

Change in Woring Capitl - (6.6) (5.2) (4.4) (4.3) (12.3) (3.7) (3.2) (3.9) (4.6) (3.9) (3.4) (4.2) (4.9) (5.0)

Cash Flows from Oprations 82.5 78.5 81.0 83.1 84.8 80.6 90.7 92.4 93.3 94.3 96.5 98.3 99.1 100.3 102.1

Ordinary Capital Expendiures (60.3) (62.2) (63.7) (64.9) (66.2) (67.9) (68.9) (69.8) (70.9) (72.2) (73.2) (74.2) (75.4) (76.7) (78.1)

Conversion Capital Ependitures - - (0.4) (0.6) (0.7)

Cash Used n Investment (60.3) (62.2) (64.1) (65.5) (66.9) (67.9) (68.9) (69.8) (70.9) (72.2) (73.2) (74.2) (75.4) (76.7) (78.1)

NetCashFlow 22.2 16.3 16.8 17.6 17.9 12.7 21.8 22.6 22.4 22.1 23.3 24.1 23.8 23.6 24.0

Terminal Value 300.0

Present Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted Cash Flow 22.2 15.1 14.4 14.0 13.2 87 13.8 13.2 12.1 11.1 10.8 10.3 9.4 8.7 110.4

Indusoy Value (Net Present Value) S 287

EE-RM-97-900 COMMENT 77I
Figure 7: Standard Level 2, Business Scenario 2, Standard

STANDARD CASE SCENARIO B.s. Y.r Announ c Year Standerd Y..r

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 1 10,18 104.3 10.48 10.6 5 11.06

Revenues 1339.29 1381.76 1415.09 1443.24 1470.68 1671.13 1696.60 1718.72 1745.3 1777.43 1804.63 1828.84 1858.67 1893.34 1929.30

Cost of Sales_

Labor 91.66 94.5 96.81 98.71 :100.56 115.03 116.78 118.31 120.15 122.37 124.26 125.94 128.00 130.39 132.86

Material 592.10 610.781 625.55 638.01 650.21 754.38 765.97 775.98 787.99 802.41 814.65 825.55 839.01 854.6 870.99

Ovetcad -Fixed 0.00 0.00 0.00 0.00 0.00 0.00 0.00 . 0.00 0.00 0.00 0.0o 0.0 0.00 0.00

Overhead -Variable 414.02 427.25 437.56 446.27 454.71 507.01 514.64 521.33 529.44 539.19 547.46 554.83 563.8 574.37 585.21

Deprecition 41.5 42.8 43.9 44.7 45.6 53.4 54.3 55.0 55.8 56.8 57.7 58.4 59.4 60.5 61.6

Selling. General and Adinistraoive

Standard SG&A 120.5 124.4 127.4 129.9 132.4 150.4 152.7 154.7 157.1 160.0 1624 164.6 167.3 170.4 173.6

R&D 13.4 13.8 14.2 14,4 14.7 16.7 17.0 17.2 17.5 17.8 18.0 18.3 18.6 18.9 19.3

Product Conversion Expnse - 7.0 9.8 11.2 0.6 - - - -

Profi Beore Tax 66.1 68.2 62.8 61.4 61.3 73.6 75.3 76.3 77.5 78.9 80.1 81.2 82.5 84.1 85.8

Taxes 25.1 25.9 23.9 23.3 23.3 28.0 28.6 29.0 29.4 30.0 30.4 30.9 31.4 32.0 32.6

Net Income Before Finacing 41.0 42.3 38.9 38.1 38.0 45.6 46.7 47.3 48.0 48.9 49.7 50.3 51.2 52.2 53.2

Netncome 41.0 42.3 38.9 38.1 38.0 45.6 46.7 47.3 48.0 48.9 49.7 50.3 51.2 52.2 53.2

Deprcition 41.5 42.8 43.9 44.7 45.6 53.4 54.3 55.0 55.8 56.8 57.7 58.4 59.4 60.5 61.6

Change in Working Capital- (6.6) (5.2) (4.4) (4.3) (31.4) (4.0) (3.5) (4.2) (5.0) (4.3) (3.8) (4.7) (5.4) (5.6)

Cah Flow from Operations 82.5 78.4 77.6 78.4 79.3 67.7 96.9 98.8 99.7 100.7 103.1 105.0 105.9 107.2 109.1

Ordinary Capital Expeditures (60.3) (62.2) (63.7) (64.9) (66.2) (74.4) (75.6) (76.5) (77.7) (79.2) (80.3) (81.4) (82.7) (84.2) (85.7)

Conversion Capital Expendires - - (7.8) (10.9) (12.4)

Cash Used In nvestmcnt (60.3) (62.2) (71.5) (75.8) (78.6) (74.4) (75.6) (76.5) (77.7) (79.2) (80.3) (81.4) (82.7) (84.2) (85.7)

Net Cah Flow 22.2 16.3 6.1 2.6 0.7 (6.7) 21.4 22.2 21.9 21.6 22.8 23.6 23.2 23.0 23.4

Terminl Value 292.4

Present Value Factor 10000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Dicounted Cash Flow 222 15.1 5.3 2.0 0.5 (4.6) 13.5 13.0 11.9 10.8 10.5 10.1 9.2 8.5 107.7

Industry Value (Net Pesent Value) S 236

EE-RM-97-900 COMMENT 77I
Figure 8: Standard Level 3, Business Scenario 2, Standard

i, ,, ~,,~ Wtmer~teMo iw I = R= ^..=,hS=,=,,~i,

STANDARD CASE SCENARIO Base Year Announce var Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.49 10.66 10.86 11.07

Revenues 1339.29 1381.76 1415.09 1443.24 1470.68 1849.91 1877.89 1902.36 1931.90 : 1967.75 1998.33 . 2025.72 2059.43 2098.61 :2139.24

Cost o/Sales : ', _____________

Labor. 91.66 94.57 96.81 98.71 100.56 124.13 126.01 127.66 129.66 132.07 134.14 135.99 138.25 140.88 143.60

Material 592.10 610.72 625.55 638.01 650.21 817.41 829.83 840.65 853.68 869.48 882.97 895.05 909.95 927.28 945.3

Overhead- Fixed 0.00 OM 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0 0 0.00 0.0 0.00 0.00 0.00

Overhead -Variable 414.02 427.25 437.56 446.27 454.71 72.07 580.66 588.22 597.36 608.47 617.94 626.42 636.84 648.94 661.4

Deprecition 41.5 42.8 43.9 44.7 45.6 75.7 76.8 77.8 79.0 80.5 81.7 82.8 84.2 85.7 87.3

Selling. General and Adtrinisrawve

Stndard SG&A 120.5 124.4 127.4 129.9 132.4 166.5 169.0 171.2 173.9 177.1 179.9 182.3 185.3 1889 192.5

R&D 13.4 13.8 14.2 14.4 14.7 18.5 18.8 19.0 19.3 19.7 20.0 20.3 20.6 21.0 21.4

Product Conversion Expense - 3.8 5.3 6.0 0.3 - - - - -

Profit Bfore Tax 66.1 68.2 66.0 659 66.5 75.3 76.8 77.8 79.0 80.4 81.7 82.9 84.3 85.9 87.7

Taxes 25.1 25.9 25.1 25.1 25.3 28.6 29.2 29.5 30.0 30.6 31.1 31.5 32.0 32.7 33.3

Net Income Before Financing 41.0 42.3 40.9 40.9 41.3 46.7 47.6 48.2 49.0 49.9 50.7 51.4 52.3 53.3 54.4

Net Income 410 42.3 40.9 40.9 41.3 46.7 47.6 48.2 49.0 49.9 50.7 51.4 52.3 53.3 54.4

Depreciation 41.5 42.8 43.9 44.7 45.6 75.7 76.8 77.8 79.0 80.5 81.7 82.8 84.2 85.7 87.3

Change in Woking Capital - (6.6) (5.2) (4.4) (4.3) (59.3) (4.4) (3.8) (4.6) (5.6) (4.8) (4.3) (5.3) (6.1) (6.4)

Cash Flows from Operations 82.5 78.4 79.6 81.2 82.5 63.0 120.0 122.2 123.4 124.8 127.6 129.9 131.1 132.9 135.3

Ordinay Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (96.7) (98.1) (99.4) (101.0) (102.8) (104.4) (105.8) (107.5) (109.4) (111.5)

Conversion Capital Expendintres (32.6) (45.7) (52.2)

Cash Used IInvestment (60.3) (62.2) (96.3) (110.6) (118.4) (96.7) (98.1) (99.4) (101.0) (102.8) (104.4) (105.8) (107.5) (109.4) (111.5)

Net Cash Flow 22.2 16.3 (16.7) (29.4) (35.8) (33.6) 21.9 22.8 22.4 21.9 23.2 24.1 23.7 23.4 23.8

Terminal Value 298.2

Peenat Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted Cash Flow 22.2 15.1 (14.3) (23.3) (26.3) (22.9) 13.8 13.3 12.1 11.0 10.8 10.4 9.4 8.6 109.8

Industry Value (Net Present Value) S 149

EE-RM-97-900 COMMENT 77I
Figure 9: Standard Level 4, Business Scenario 2, Standard

STANOARD CASE SCENARIO Bau Year Announc. Y..r Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sles 8.56 8:83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.18 10.33 10.46 10.63 10.81 11.01

Revenues 1339.29 1381.76 1415.09 : 1443.24 1470.68 2581.24 2622.95 2658.24 2699.16 2746.27 2784.96 2818.76 2860.71 2909.9 : 2961.52

Cost ofSales__ ' ' ' " ' _ 

Labor 91.61 94.57 96.81 98.71 100.56 150.86 153.24 155.29 157.71 160.50 162.82 164.84 167.34 170:24 173.25

Material 592.10 610.78 625.55 638.01 650.21 1219.81 1239.79 1256.59 1275.93 1298.08 1316.22 1332.06 1351.74 1374.85 1399.1 Overbend Overitead --Fixd Fixed 0.0( 0.00 0.04 0.008.00 0.0( e o0· .0 0 ooo .00 o.oo0 o.oo0 o.ooT 0.00 0.00 0.00 o.oo7 o.oo 0.00 0.00 o.ol 0.00 o.o- 8.0 o. 0.00 0.00 0.00

Overhead-Variable 414:02 427.25 437.56 446.27 454.71 765.85 778.04 788.40 800.52 814.54 826.09 836.18 848.73 863.43 878.79

Depreciation 41.5 42.8 43.9 44.7 45.6 100.3 101.8 103.2 104.8 106.7 108.3 109.7 111.4 113.4 115.4

Sellng, General and Administralive

Standard SG&A 120.5 124.4 127.4 129.9 132.4 232.3 236.1 239.2 242.9 247.2 250.6 253.7 257.5 261.9 266.5

R&D 13.4 13.8 14.2 14.4 147 25.8 26.2 26.6 27.0 27.5 27.8 28.2 28.6 29.1 29.6

Product Conversion Expens- - 6.3 8.8 10.1 0.5

Profit Before Tax 66.1 68.2 63.5 62.4 62.4 85.8 87.7 89.0 90.3 91.8 93.1 94.1 95.4 97.0 98.7

Taxes 25.1 25.9 24.1 23.7 23.7 32.6 33.3 33.8 34.3 34.9 35.4 35.8 36.3 36.9 37.5

Net Income Befoe Fiancing 41.0 42.3 39.4 38.7 38.7 53.2 54.4 55.2 56.0 56.9 57.7 58.4 59.2 60.2 61.2

Net Income 41.0 42.3 39.4 38.7 38.7 53.2 54.4 55.2 56.0 56.9 57.7 58.4 59.2 60.2 61.2

Depreciation 41.5 42.8 43.9 44.7 456 100.3 101.8 103.2 104.8 106.7 108.3 109.7 111.4 1134 115.4

Chtage in Working Capital- (6.6) (5.2) (4.4) (4.3) (173.8) (6.5) (5.5) (6.4) (7.4) (61) (5.3) (6.6) (7.7) (8.1)

Cash Flows from Operations 82.5 78.4 78.0 790 80.0 (20.3) 149.7 152.8 1544 156.2 159.9 1627 164.0 165.8 1686

Ordintay Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (121.3) (123.2) (124.8) (1267) (129.0) (130.9) (132.6) (134.7) (137.1) (139.6)

Conversion Capital Expenditures - (60.1) (84.2) (96.2)

Cash Used In nvestment (60.3) (62.2) (123.8) (149.2) (162.4) (121.3) (123.2) (124.8) (126.7) (129.0) (130.9) (132.6) (134.7) (137.1) (139.6)

NtCashFlow 22.2 16.3 (45.8) (70.2) (82.4) (141.6) 26.6 28.0 27.7 27.2 29.0 30.1 29.3 28.7 29.0

Termial Value 362.4

Present Value Factor 1.000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 05839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted Cash Flow 22.2 15. (39.3) (55.7) (60.6) (96.4) 167 16.4 15.0 136 13.4 12.9 116 106 133.4

Industry Value (Net Present Value) S 29

EE-RM-97-900 COMMENT 77I
Figure 10: Standard Level 1, Business Scenario 3, Cumulative

STANDARD CASE SCENARIO Base YIar Announce Year Sflndr.d YIar

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

UnitSales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.48 10.64 10.84 11.03

Revenues 1339.33 1381.29 .1414.78 1443.01 1470.39 1743.17 1769.91 1793.33 , 1821.30 1854.49 1882

.35 1906.92 1937.17 1972.27 2008.60

Cos of Sales I I 0

Labor 91.67 94.52 96.78 98.69 100.53 105.61 107:21 108:63 110.35 112.39 114.10 115.61 117.46 11960 121.80

Material 592.12 610:55 625.39 637.90 650.06 829.95 842:87 854.03 867.32 883.07 896.28 907.92 922.29 938.97 95632

Ovehead- Fixed 0.00 0.0 10.500 0 .00 .9 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0. 0.00 . .

Overhead- Variable 414.03 427.15 437:49 446.22 454.65 477.67 484.88 491.24 498.91 508.03 515.70 522.47 530.78 540.41 550.32

Depreciaion 41.5 42.8 43.9 44.7 45.6 67.8 68.9 69.8 70.8 72.1 73.2 74.2 75.4 76.7 78.1

Selling. General and Adminisrative

Standard SG&A 120.5 124.3 127.3 129.9 132.3 156.9 159.3 161.4 163.9 166.9 169.4 171.6 174.3 177.5 180.8

R&D 13.4 13.8 14.1 14.4 14.7 17.4 17.7 17.9 18.2 18.5 18.8 19.1 19.4 19.7 20.1

Product Conversion Expense- - 4.1 5.7 6.5 0.3 - - - -

Profi Before Tax 66.1 68.1 65.7 65.5 66.0 87.5 89.2 90.3 917 93.4 94.8 96.0 97.6 99.3 101.2

Taxes 25.1 25.9 25.0 24.9 25.1 33.2 33.9 34.3 34.9 35.5 36.0 36.5 37.1 37.7 38.4

Net Income Before Financing 41.0 42.2 40.7 40.6 40.9 54.2 55.3 56.0 56.9 57.9 58.8 59.5 60.5 61.6 62.7

Ndtncome 41.0 42.2 40.7 40.6 40.9 54.2 55.3 56.0 56.9 57.9 58.8 59.5 60.5 61.6 62.7

Depreciation 41.5 42.8 43.9 44.7 45.6 67.8 68.9 69.8 70.8 72.1 73.2 74.2 75.4 76.7 78.1

Change in Working Capital- (6.6) (5.2) (4.4) (4.3) (42.7) (4.2) (3.7) (4.4) (5.2) (4.4) (3.8) (4.7) (5.5) (5.7)

Cash Flows frm Operations 825 78.5 79.4 80.9 82.2 79.4 119.9 122.1 123.4 124.9 127.6 129.9 131.1 132.8 135.2

Ordinary Capital Expendires (60.3) (62.2) (63.7) (64.9) (66.2) (88.8) (90.2) (91.4) (92.8) (94.5) (95.9) (97.1) (98.7) (100.5) (102.3)

Conversion Capital Expenditures - (23.8) (33.4) (38.2)

Cash Used In Invetment (60.3) (62.2) (87.5) (98.3) (104.3) (88.8) (90.2) (91.4) (92.8) (94.5) (95.9) (97.1) (987) (100.5) (102.3)

NetCashFlow 22.2 16.3 (8.2) (17.4) (22.1) (9.5) 29.8 30.8 30.6 30.4 31.8 32.7 32.4 32.4 32.9

Terminal Value 411.3

Pesent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

DicontedCash Flow 22.2 15.1 (7.0) (13.8) (16.2) (6.4) 18.8 18.0 16.5 15.2 14.7 14.1 12.9 11.9 151.4

Industry Value (Net Present Value) S 267

EE-RM-97-900 COMMENT 77I
Figure 11: Standard Level 2, Business Scenario 3, Cumulative

i.,",n 7:, .577,:,'7 7Wet .? . , :.. v I=E , -. .7' 7 q

STANDARD CASE SCENARIO 0... Y..r Announce Year Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 8.56 .83 9.04 9.22 9.39 9.58 . 9.72 9.85 10.00 10:18 10.34 10.48 10.65 10.85 11.06 Revenues 1339.29 1381.76 1415.09 1443.24 1470.6 8 1873.74 1902.46 1927.27 1957.07 1992.87 2023.24 2050.26 2083.65 2122.53 2162.98

Cost of& Sles k :I : . "

Labor 91.66 94.57 96.81 98.71 100.56 115.99 117.76 119.30 121:16 123.39 125.29 126.98 129.06 13147 1339 Material 592.10 610.78 625.55 638.01 650.21 886.30 900.00 911.75 925.80 942.68 956.98 969.71 985.49 100389 1023.12 Overehad -Fied 0.00 .0.0 8.08 0.00 0 .00 8.00..080 0.00 0.00 0.80 0.0 0 000 : 0.080 O.0 0.00 0.00

Overhead -Variable 414.02 427.25 437.56 446.27 454.71 515.23 523.01 529.82 538.04 547.94 556.33 563.80 572.99 583.66 594.69

Depreciation 41.5 42.8 43.9 44.7 45.6 74.8 75.9 76.9 78.1 79.5 808 81.8 83.1 84.6 86.2

Selling. Generl andAdninistrativ

Standard SG&A 120.5 124.4 127.4 129.9 132.4 168.6 171.2 173.5 176.1 179.4 182.1 184.5 187.5 191.0 194.7

R&D 13.4 13.8 142 14.4 14.7 18.7 19.0 19.3 19.6 19.9 20.2 20.5 20.8 21.2 21.6

Product Conversion Expense- - 9.6 13.4 15.4 0.8 - - -

Profil Befon Tax 66.1 68.2 60.2 57.7 57.2 93.3 95.5 96.8 98.2 100.0 101.6 102.9 104.6 106.6 108.7

Taxes 25.1 25.9 22.9 21.9 21.7 35.4 36.3 368 37.3 38.0 38.6 39.1 39.8 40.5 41.3

Net Inome Befoe Financing 41.0 42.3 37.3 35.8 35.5 57.8 59.2 60.0 60.9 62.0 63.0 63.8 64.9 66.1 67.4

Net ncome 410 42.3 37.3 35.8 35.5 57.8 59.2 60.0 60.9 62.0 63.0 63.8 64.9 66.1 67.4

Depreciation 41.5 42.8 43.9 44.7 45.6 74.8 75.9 76.9 78.1 79.5 80.8 81.8 83.1 84.6 86.2

Change n Workig Capital- (6.6) (5.2) (4.4) (4.3) (63.1) (4.5) (3.9) (4.7) (5.6) (4.8) (4.2) (5.2) (6.1) (6.3)

Cash Flows from Operatios 82.5 78.4 76.0 76.1 76.7 69.5 130.7 133.0 134.4 136.0 139.0 141.4 142.8 144.7 147.3

Ordinary Capitl Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (95.8) (97.2) (98.5) (100.0) (101.9) (103.4) (104.8) (106.4) (108.4) (110.4)

Coversion Capital Expenditures - (31.6) (44.3) (50.6) --

Cash Used In Invetrcnt (60.3) (62.2) (95.3) (109.2) (116.8) (95.8) (97.2) (98.5) (100.0) (101.9) (103.4) (104.8) (106.4) (108.4) (110.4)

NetCash Flow 22.2 16.3 (19.3) (33.1) (40.0) (26.2) 33.4 34.5 34.3 34.1 35.6 36.6 36.3 36.3 36.9

Termial Valu 461.5

Present Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted Cash Flow 22.2 15.1 (16.6) (26.3) (29.4) (17.9) 21.1 20.2 18.6 17.1 16.5 15.7 14.4 13.4 169.9

Industy Value (Net Pesent Value) S 254

EE-RM-97-900 COMMENT 77I
Figure 12: Standard Level 3, Business Scenario 3, Cumulative

STANDARD CASE SCENARIO Base er Announce Ver Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 8.56 8.83 9.04 9.22 .9.39 . 9.58 9.72 9.85 10.00 10.19 10.34 10.49 10.66 10.86 11.07

Revenues 1339.2 1 1381.76 1415.09 1443.24 1470.68 2065.74 2097.10 2124.36 2157.22 2197.07 2231.07 2261.52 2299.12 2342.94 2388.51

Cost of SaIes

Labor 91.66 94:57 96.81 98.71 100.56 125.10 127.00 128.66 130.67 133.11 135181 137.05 139.33 141.98 144.72

Material 592.10 610.78 625.55 638.01 650.21 950.06 964.56 977.09 992.15 1010.42 1025.99 1039.95 1057.24 1077.42 1098.48

Overhead -Fixed 0.00 0.001 0.0 0.00 0 .0 00.0 0.010. 0.010 0.0 0 0 0.00

Overhead- Variable 414.02 427.25 437.56 446.27 454.71 580.41 589.15 596.81 606.08 617.32 626.92 635.51 646.08 658.35 671.07

Depreciation 41.5 42.8 43.9 44.7 45.6 97.4 98.9 100.2 101.7 103.6 105.2 106.6 108.3 110.3 112.4

Selling. Ceneral and Administraltiv

Standard S&A 120.5 124.4 127.4 129.9 132.4 185.9 188.7 191.2 194.1 197.7 200.8 203.5 206.9 210.9 215.0

R&D 13.4 13.8 14.2 14.4 14.7 20.7 21.0 21.2 21.6 22.0 22.3 22.6 23.0 23.4 23.9

Product Conversion Expens- - 6.4 9.0 10.2 0.5 -

rofit Before Ta 66.1 68.2 63.4 62.2 62.3 105.7 107.8 109.2 110.9 112.9 114.7 116.3 118.2 120.5 123.0

Taxes 25.1 25.9 24.1 23.6 23.7 40.2 41.0 41.5 42.1 42.9 43.6 44.2 44.9 45.8 46.7

Net Income Before Finacing 41.0 42.3 39.3 38.6 38.6 65.5 66.8 67.7 68.7 70.0 71.1 72.1 73.3 74.7 76.2

Ne Income 41.0 42.3 39.3 38.6 38.6 65.5 66.8 67.7 68.7 70.0 71.1 72.1 73.3 74.7 76.2

Depreciation 41.5 42.8 43.9 44.7 45.6 97.4 98.9 100.2 101.7 103.6 105.2 106.6 108.3 110.3 112.4

Change i Woring Capital- (6.6) (5.2) (4.4) (4.3) (93.1) (4.9) (4.3) (5.1) (6.2) (5.3) (4.8) (5.9) (6.9) (7.1)

Cash Flows from Operations 82.5 78.4 780 78.9 79.9 69.8 160.8 163.6 165.3 167.4 171.0 173.9 175.8 178.2 1815

Ordinary Capital Ependitues (60.3) (62.2) (63.7) (64.9) (66.2) (118.4) (120.2) (121.8) (123.6) (125.9) (127.8) (129.6) (131.6) (134.1) (136.6)

Conversion Capital Expenditures - (56.9) (79.6) (91.0)

Cash Used In Investment (60.3) (62.2) (120.6) (144.6) (157.2) (118.4) (120.2) (121.8) (123.6) (125.9) (127.8) (129.6) (131.6) (134.1) (136.6)

NetCash Flow 22.2 16.3 (42.6) (65.7) (77.3) (48.6) 40.6 41.8 41.7 41.5 43.1 44.4 44.1 44.1 44.9

Terminal Value 562.4

Pesent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 06305 0.5839 0.5407 05007 0.4636 04293 0.3976 0.3681 0.3409

Discountd Cash Flow 22.2 15.1 (36.5) (52.1) (56.8) (33.1) 25.6 24.4 22.5 20.8 20.0 19.0 17.5 16.3 207.0

Industy Value (Net resent Value) S 232

EE-RM-97-900 COMMENT 77I
Figure 13: Standard Level 4, Business Scenario 3, Cumulative

ijl .S.? WaifroHateeai.,, = .*g

STANDARD CASE SCENARIO Base YV.r Announce Ya. r Standard ..ar

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.18 t 0.33 10.46 10.63 10.81 11.01

Revenues 1339.29 1381.76 M1415.0 1 443.24 1470.68 2809.15 2954.61 2893:03 2937.52 2988.72 3030.74 3067.45 3113.05 3166.57 3222.73

Cost of Sleso _,

Labor 91.66 94.571 96.11 98.71 100.56 M151.78 154.19 156.25 158:681 161.49 163.82 165.85 168.36 171.28 174.31

Material 592.10 610.78 625.55 638.01 650.21 1350.55 1372.62 1391.19 1412.58 1437.11 1457.20 1474.74 1496.54 1522.16 1549.12

Overhead -Fixed 0.00 0.00 0.0O 0.00 0.00 0.00 0.00 0. 00 0.00 00 .00 0.00 0. 0.00 0.00

Ovehead -Variable 414.02 427.25 437.56 446.27 454.71 773.78 786.11 796.60 808.84 823.00 834.65 844.84 857.50 872.34 887.85

Depnciation 41.5 42.8 43.9 44.7 45.6 121.0 122.8 124.4 126.3 128.6 130.5 132.2 134.3 136.7 139.2

Seling, General andAdministrative

StandardSG&A 1205 124.4 127.4 129.9 132.4 252.8 256.9 260.4 264.4 269.0 272.8 276.1 280.2 285.0 290.0

R&D 134 13.8 14.2 14.4 14.7 28.1 28.5 289 294 29.9 30.3 30.7 31.1 31.7 32.2

Product Conversion Expense- 8.8 12.3 14.1 0.7 - - - - - - -

Profit Before Tx 66.1 68.2 61.0 58.8 58.4 130.4 133.4 135.3 137.3 139.6 141.5 143.0 145.0 147.4 150.0

Taxes 25.1 25.9 23.2 22.4 22.2 49.6 50.7 51.4 52.2 53.1 53.8 54.4 55.1 56.0 57.0

Nt Income Before Fiancing 41.0 42.3 37.8 36.5 36.2 80.9 82.7 83.9 85.1 86.6 87.7 88.7 89.9 91.4 93.0

Nt Income 41.0 42.3 37.8 36.5 36.2 80.9 82.7 83.9 85.1 86.6 87.7 88.7 89.9 91.4 93.0

Depreciation 41.5 42.8 43.9 44.7 45.6 121.0 122.8 124.4 126.3 128.6 130.5 132.2 134.3 136.7 139.2

Change in Woring Capital- (6.6) (5.2) (4.4) (4.3) (209.5) (7.1) (6.0) (7.0) (8.0) (6.6) (5.7) (7.1) (8.4) (8.8)

Cash Flows frm Operations 82.5 78.4 76.5 76.8 77.5 (7.6) 198.4 202.3 204.5 207.2 211.7 215.2 217.1 219.7 223.4

Ordinary Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (142.0) (144.1) (146.0) (148.3) (150.9) (153.2) (155.2) (157.6) (160.4) (163.3)

Conversion Capital Expendites - - (83.2) (116.5) (133.1)

Cash Used I Investent (60.3) (62.2) (146.9) (181.4) (199.3) (142.0) (144.1) (146.0) (148.3) (150.9) (153.2) (155.2) (157.6) (160.4) (163.3)

NetCash Fow 22.2 16.3 (70.4) (104.6) (121.8) (149.6) 54.3 56.3 56.3 56.2 58.5 60.0 59.5 59.3 60.1

Teminal Value 751.6

Present Value Factor 1.000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted Cash Flow 22.2 15.1 (60.4) (83.1) (89.5) (101.9) 34.2 32.9 30.4 28.2 27.1 25.8 23.6 21.8 276.7

Industry Valu (Net Present Value) S 203

EE-RM-97-900 COMMENT 77I
Figure 14: Standard Level 1, Business Scenario 3, Standard

STANDARD CASE SCENARIO Ba«e YOer Announce Year Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales :S56 8.83 904 9.204 1 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.48 10.64 10.84 11.03

Revenues 133933 1381.29 1414.78 144301 1470.39 1550.31 157

3.9 7 1594.73 1619.67 1649.29 1674.18 169613 1723.11 1754.3 1786.64

CostofSales I

Labor 91.67 94.52 96.78 98.69 100.53 104.67 106.25 107.66 109.36 111.38 113.08 114.58 116.42 118.54 120.71

Material 592.12 610.55 .625.39 637.90 650.06 698.79 709.51 718.97 730.21 743.53 754.72 764.58 776.72 790.80 805.3

Ovcrhead -Fixed 0.00 0 .00 .0 0.0 0 0.00 0.0 : 0.0.00 0.0 0.00 0.00 0 0.000 o.o . 0.01 O.

Overhead -Vanable 414.03 427.15 437.49 446.22 454.65 469.59 476.64 482.89 490.43 499.41 506.96 513.63 521.81 531.28 541.01

Depreciation 41.5 42.8 43.9 44.7 45.6 469 47.6 48.2 48.9 49.8 50.6 51.2 52.1 53.0 54.0

Selling General and Administrative

Standard SG&A 120.5 124.3 1273 129.9 132.3 139.5 141.7 143.5 145.8 1484 150.7 152.7 155.1 157.9 160.8

R&D 13.4 13.8 14.1 14.4 14.7 15.5 15.7 159 16.2 16.5 16.7 17.0 17.2 17.5 17.9

Product Conversion Expense - - 1.5 2.1 2.4 0.1 - - - - - -

Profit Before Tax 66.1 68.1 68.3 69.1 70.1 75.2 76.5 77.5 78.8 80.2 81.4 82.5 83.8 85.3 86.9

Taxes 25.1 25.9 25.9 26.2 26.6 28.6 29.1 29.5 29.9 30.5 30.9 31.3 31.8 32.4 33.0

Net Income Before Financing 41.0 42.2 42.3 42.8 43.5 46.7 47.4 48.1 48.8 49.7 50.5 51.1 52.0 52.9 53.9

Net Income 41.0 42.2 42.3 42.8 43.5 46.7 47.4 48.1 48.8 49.7 50.5 51.1 52.0 52.9 53.9

Depreciation 41.5 42.8 43.9 44.7 45.6 46.9 47.6 48.2 48.9 49.8 50.6 51.2 52.1 53.0 54.0

Change in Working Capital - (6.6) (5.2) (4.4) (4.3) (12.5) (3.7) (3.2) (3.9) (4.6) (3.9) (3.4) (4.2) (4.9) (5.0)

Cah Flows from Operations 82.5 78.5 81.0 831 84.8 810 91.3 93.0 93.9 949 97.2 98.9 99.8 1010 102.8

Ordinary Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (67.9) (68.9) (69.8) (709) (72.2) (73.2) (74.2) (75.4) (76.7) (78.1)

Conversion Capital Expenditrs - - (0.4) (0.6) (0.7)

Cash Used In Investment (60.3) (62.2) (64.1) (65.5) (66.9) (67.9) (68.9) (69.8) (70.9) (72.2) (73.2) (74.2) (75.4) (76.7) (78.1)

Ndt Cash Flow 22.2 16.3 16.8 17.6 17.9 13.2 22.4 23.2 23.0 22.8 23.9 24.7 24.4 24.3 24.6

Tenrinal Value 308.5

Present Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted CashFlow 22.2 15.1 14.4 14.0 13.2 9.0 14.1 13.6 12.4 114 11.1 10.6 97 8.9 1136

Indstry Value (Nt Present Value) S 293

EE-RM-97-900 COMMENT 77I
Figure 15: Standard Level 2, Business Scenario 3, Standard

STANDARD CASE SCENARIO n a. Yir Announce Year Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

UnitSales 8.561 8.831 :9041 9.221 9.39 9.581 9.72 9.85 10.00 10.18| 10.34 10.48 10.65 10.851 1106

Revenue 133929 1331.761 141509 1443.24 1470.6 1679.21 1704.80 1727.03 1753.82 1786.02 1813.35 1837.67 1867.65 1902.48 1938.62

Cost of Sales

Labor 91.66 94. 96.81 98.71 100.561 115.03 116.78 118.31 120.15 122.3 124.26 125.94 128.00 130.3 132.8

Material 592.10 610.78 625.55 638.01 650.21 754.38 765.97 775.98 787.98 802.41 814.65 825.55 839.01 854.6 870.99

Overhead -Fied 0.00 0. 0.00 0.00 0.0 1 0.00 0.0 0 O.O 0.00 0.00 0 0.00 0.0 0.00

Overead- Vafiable 414.02 427.25 437.56 446.27 454.71 507.01 514.64 521.33 529.44 539.19 547.46 554.8 563.8 574.3 585.21

Depcition 41.5 42.8 43.9 44.7 45.6 53.4 54.3 55.0 55.8 56.8 57.7 584 59.4 60.5 61.6

Sellng, General andAdministrative

Stmadard SG&A 120.5 124.4 127.4 129.9 132.4 151.1 153.4 155.4 157.8 160.7 163.2 165.4 168.1 171.2 174.5

R&D 13.4 13.8 14.2 14.4 14.7 16.8 17.0 17.3 17,5 179 18.1 18.4 18.7 19.0 19.4

Product Conerion Expese - - 7.0 9.8 11.2 0.6 - - - - - - - -

Profit Before Tax 66.1 68.2 62.8 61.4 61.3 80.9 82.7 83.7 85.0 86.6 88.0 89.2 90.6 92.3 94.1

Taxes 25.1 25.9 23.9 23.3 23.3 30.7 31.4 31.8 32.3 32.9 33.4 33.9 34.4 35.1 35.8

Net ncome Bfore Finainneg 41.0 42.3 38.9 38.1 38.0 50.1 51.3 51.9 52.7 53.7 54.5 55.3 56.2 57.3 58.4

Nt Income 41.0 42.3 38.9 38.1 38.0 50.1 51.3 51.9 52.7 53.7 54.5 55.3 56.2 57.3 58.4

Depreciation 41.5 42.8 43.9 44.7 45.6 53.4 54.3 55.0 55.8 56.8 57.7 58.4 59.4 60.5 61.6

Change in Working Capital - (6.6) (5.2) (4.4) (4.3) (32.6) (4.0) (3.5) (4.2) (5.0) (4.3) (3.8) (4.7) (5.5) (5.7)

Csh Flows from Operations 82.5 78.4 77.6 78.4 79.3 70.9 101.5 103.4 104.4 105.5 107.9 109.9 110.9 112.3 114.3

Ordinay Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (74.4) (75.6) (76.5) (77.7) (79.2) (80.3) (81.4) (82.7) (84.2) (85.7)

Converion Capital Expeditures (7.8) (10.9) (12.4) -

Cash Used Innvestment (60.3) (62.2) (71.5) (75.8) (78.6) (74.4) (75.6) (76.5) (77.7) (79.2) (80.3) (81.4) (82.7) (84.2) (85.7)

NetCash Flow 22.2 16.3 6.1 2.6 0.7 (3.5) 25.9 26.9 266 26.3 27.6 28.5 28.2 28.1 28.5

Terminal Value 357.2

Pst Value Fator 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted Cash Fow 22.2 15.1 5.3 2.0 0.5 (2.4) 16.4 15.7 14.4 13.2 12.8 12.2 11.2 10.3 131.5

Industry Value (Nt Present Value) S 280

EE-RM-97-900 COMMENT 77I
Figure 16: Standard Level 3, Business Scenario 3, Standard

STANDARD CASE SCENARIO Baa va ....nnounce Year SL.andrd Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

UnitSales 8.56 8.83 9.04 9.22 9.39 958 . 9.72 9.85 10.00 10.19 1034 10.49 10.66 10.86 11.07 Revenues 1339.29 1381.76 1415.09 1443.24 1470.68 : 1869.62 1897.90 1922.63 1952.49 1988.72 2019.63 2047.32 2081.39 2120.97 2162.03

Cos of Sales I I .

Labor '91i66 94.571 .; 96.81 98.71 100.56 124:13 126.01 127.66 129.66 132.07 134.14 135.99 138:25 140.81 143.60 Material 592.10 610.78 625.55 638.01 650.21 817.41 829.83 840.65 853.68 869:48 882.97 895.05 909.95 927.28 945.30 Overhead -Fixed 0.00 0:00 0.00 0.00 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.0 0. 0 0.00 Overhead -Variable 414.02 427.25 437.56 446.27 454.71 572.07 580.66 588.22 597.36 608.47 617.94 626.42 636.84 648.94 661.44 Depreciation 41.5 42.8 43.9 44.7 45.6 75.7 76.8 77.8 79.0 80.5 81.7 82.8 84.2 85.7 87.3

Selling General and Adminisrative

Standard SG&A 120.5 124.4 127.4 129.9 132.4 168.3 170.8 173.0 175.7 179.0 181.8 184.3 187.3 190.9 194.6 R&D 13.4 13.8 14.2 14.4 14.7 18.7 19.0 19.2 19.5 199 20.2 20.5 20.8 21.2 21.6

Product Conversion Expense - 3.8 5.3 6.0 0.3 - -

Profit Before Ta 66.1 68.2 66.0 65.9 66.5 93.1 94.8 96.0 97.5 99.3 100.9 102.3 104.1 106.1 108.2

Taxes 25.1 25.9 25.1 25.1 25.3 35.4 36.0 36.5 37.0 37.7 38.3 38.9 39.5 40.3 41.1

Net ncome Before Finacing 41.0 42.3 40.9 40.9 41.3 57.7 58.8 59.5 60.4 61.6 62.6 63.4 64.5 65.8 67.1

Net Income 41.0 42.3 40.9 40.9 41.3 57.7 58.8 59.5 60.4 61.6 62.6 63.4 64.5 65.8 67.1

Depreciation 41.5 42.8 43.9 44.7 45.6 75.7 76.8 77.8 79.0 80.5 81.7 82.8 84.2 85.7 87.3

Change in Woking Capital - (6.6) (5.2) (4.4) (4.3) (62.4) (4.4) (3.9) (4.7) (5.7) (4.8) (4.3) (5.3) (6.2) (6.4) Cash Flows from Operations 82.5 78.4 79.6 81.2 82.5 709 131.2 133.5 134.8 1364 1394 141.9 143.3 1453 148.0

Ordinay Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (96.7) (98.1) (99.4) (101.0) (102.8) (104.4) (105.8) (107.5) (109.4) (111.5)

Conversion Capital Expenditures - (32.6) (45.7) (52.2) ----

Cash Used In Investmen (60.3) (62.2) (96.3) (110.6) (118.4) (96.7) (98.1) (99.4) (101.0) (102.8) (104.4) (105.8) (107.5) (109.4) (111.5)

Net Cash Flow 22.2 16.3 (16.7) (29.4) (35.8) (25.7) 33.0 34.1 33.8 33.6 35.1 36.1 35.9 35.8 36.5

Terminal Value 456.5

Pesent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted Cash Flow 22.2 15.1 (14.3) (23.3) (26.3) (17.5) 20.8 19.9 18.3 16.8 16.3 15.5 14.3 13.2 168.1

Industy Value (Net Pesent Value) S 259

EE-RM-97-900 COMMENT 77I
Figure 17: Standard Level 4, Business Scenario 3, Standard

STANDARD CASE SCENARIO Bs. Y.r Announc. Y*T Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 8.56 8.83 ::9.04 9.22 9.39 9.58 9.72 9.85 . 10.00 10.1 10.33 10.46 10.63 10. 11:01

Revenues 1339-29 1381.76 1415.09 1443.24 : 1470.681 2617.45 7 2659.79 2695.59 2737.08 2784.82 2824.02 2858.25 2900.77 2950.65 3002.96

Cost oSales . : . . I . _ 

Labor 91.66 94.57. 96.81 98.71 100.561 150.861 153.24 155.29 157.71 160:501 162.82 164.84 167.34 170.24 173.25

Material 592.10 610.78 625.55 638.01 650.21 1219.81 1239.79 1256.59 1275.93 1298:08 1316.22 1332.06 1351.74 1374.85 1399.18

Overhead -Fixed 0.00 .0.00 0.00 0.00 0.00 0.0 0. 0.00 0.00 0.00 0.00 0.00 0.00 000 0.00

Overhead -Variable 414.02 427.25 437.56 446.27 454.71 765.85 778.04 788.40 800.52 814.54 826.09 836.18 848.73 863.43 878.79

Depreciation 41.5 42.8 43.9 44.7 45.6 100.3 101.8 103.2 104.8 106.7 1083 109.7 111.4 113.4 115.4

Sellig, General and Adminstrative

Standard SG&A 120.5 124.4 127.4 129.9 132.4 235.6 239.4 242.6 2463 250.6 254.2 257.2 261.1 265.6 270.3

R&D 13.4 13.8 14.2 14. 14.7 26.2 26.6 27.0 27.4 27.8 28.2 28.6 29.0 29.5 30.0

Product Conversion Epense- - 6.3 8.8 10.1 0.5 - - - - -

Profit fore Tax 66.1 68.2 63.5 62.4 62.4 118.3 120.9 122.6 124.4 126.5 128.2 129.7 131.5 133.7 136.0

Taxes 25.1 25.9 24.1 23.7 23.7 45.0 45.9 46.6 47.3 48.1 48.7 49.3 50.0 50.8 51.7

Net Icome Before Financig 41.0 42.3 39.4 38.7 38.7 73.4 75.0 76.0 77.1 78.4 79.5 80.4 81.5 82.9 84.3

Net Income 41.0 42.3 39.4 38,7 38.7 73.4 75.0 76.0 77.1 78.4 795 80.4 81.5 82.9 84.3

Depreciation 41.5 42.8 43.9 44.7 45.6 100.3 101.8 103.2 104.8 106.7 108.3 109.7 111.4 113.4 115.4

Change in Workig Capital- (6.6) (5.2) (4.4) (4.3) (179.5) (6.6) (5.6) (6.5) (7.5) (6.1) (5.4) (6.7) (7.8) (8.2)

Cash Flows from Operations 82.5 78.4 78.0 79.0 80.0 (5.8) 170.2 173.6 175.4 177.7 181.6 184.7 186.3 188.5 191.6

Ordinary Capital Erpenditures (60.3) (62.2) (63.7) (64.9) (66.2) (121.3) (123.2) (124.8) (126.7) (129.0) (130.9) (132.6) (134.7) (137.1) (139.6)

Conversion Capital Expenditres (60.1) (84.2) (96.2) -

Cash Used In Investmnt (60.3) (62.2) (123.8) (149.2) (1624) (121.3) (123.2) (124.8) (126.7) (129.0) (130.9) (132.6) (134.7) (137.1) (139.6)

Net Cash Flow 22.2 16.3 (45.8) (70.2) (82.4) (127.1) 47,0 48.8 48.7 48.7 50.7 52.1 51.6 51.3 52.0

Terinal Value 650.4

Prsent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted Cash Flow 22.2 15.1 (39.3) (55.7) (60.6) (86.5) 29.6 28.5 26.3 24.4 23.5 22.4 20.5 18.9 239.5

Industry Value (Net Present Value) S 229

EE-RM-97-900 COMMENT 77I
Figure 18: Standard Level 1, Business Scenario 1, Cumulative

i 'ii iii i i iii i i r ii ii r ] 

STANDARO CASE SCENARIO Bae .. Yar Announce Y..r Standard Y.ar

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales -8.56 8.83 9.04 9.22 9.39 : 9.58 :9.72 9.85 1. 10.019 10.341 0.48 0. 10. 0.84 11.03

Revenues 133933 1381.29 1414.78 1443.01 :1470.39 1748.23 1775.11 1798.54 1826.591 1859.81 1887.81 1912.45 1942:78 1977.98 2014.43

Cost ofSales_ _ ' . Labor 91.67 94.52 96.78 98.69 100.53 105:61 107.21 108.63 110.35 112.39 114.10 115:61 117.46 119.60 121.80

Material 592.12 610.55 625.39 637.90 650.06 829.95 842.87 854.03 867.32 883.07 896.28 907.92 922.29 938.97 956.32

Overead -Fixed 0.00( 0.00 : 0.00 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.000.00 0.0 0.00

Overhad- Variable 414.03 427.15 437.49 446.22 454.65 477.67 484.88 491.24 498.91 508.03 515.70 522.47 530.78 540.41 550.32

Depreciation 41.5 42.8 43.9 44.7 45.6 67.8 68.9 69.8 70.8 72.1 73.2 74.2 75.4 76.7 78.1

Selling, General andArministrative

Standard SG&A 120.5 124.3 127.3 129.9 132.3 157.3 159.8 161.9 164.4 167.4 169.9 172.1 174.9 178.0 181.3

R&D 13.4 13.8 14.1 14.4 14.7 17.5 17.8 18.0 18.3 18.6 18.9 19.1 19.4 19.8 20.1

Product Conversion Expense - - 4.1 5.7 6.5 0.3 - - - - -

Profit Before Tax 66.1 68.1 65.7 65.5 66.0 92.0 93.8 95.0 96.5 98.3 99.7 101.0 102.6 104.5 106.4

Taxes 25.1 25.9 25.0 24.9 25.1 35.0 35.6 36.1 36.7 37.3 37.9 38.4 39.0 39.7 40.4

Net Income Before Fincing 41.0 42.2 40.7 40.6 40.9 57.0 58.1 58.9 59.8 60.9 61.8 62.6 63.6 64.8 66.0

Net Income 41.0 42.2 40.7 40.6 40.9 57.0 58.1 58.9 59.8 60.9 61.8 62.6 63.6 64.8 66.0

Depreciation 41.5 42.8 43.9 44.7 45.6 67.8 68.9 69.8 70.8 72.1 73.2 74.2 75.4 76.7 78.1

Change i Working Capital (6.6) (5.2) (4.4) (4.3) (43.5) (4.2) (3.7) (4.4) (5.2) (4.4) (3.9) (4.7) (5.5) (5.7)

Cash Flows from Operations 82.5 78.5 79.4 80.9 82.2 81.4 122.8 125.0 126.3 127.8 130.7 133.0 134.2 136.0 138.4

Ordinay Capital Expnditues (60.3) (62.2) (63.7) (64.9) (66.2) (88.8) (90.2) (91.4) (92.8) (94.5) (95.9) (97.1) (98.7) (100.5) (102.3)

Conversion Capital Expenditures (23.8) (33.4) (38.2) ---- -

Cash Used In Ivestment (60.3) (62.2) (87.5) (98.3) (104.3) (88.8) (90.2) (91.4) (92.8) (94.5) (95.9) (97.1) (98.7) (100.5) (102.3)

NetCashFlow 22.2 16.3 (8.2) (17.4) (22.1) (7.4) 32.6 33.7 33.5 33.4 34.8 35.8 35.6 35.5 36.1

Terminal Valu 451.8

Present Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discouned Cash Flow 22.2 15.1 (7.0) (13.8) (16.2) (5.1) 20.6 19.7 18.1 16.7 16.1 15.4 14.1 13.1 166.3

Industy Value (Ne Present Valu) S 295

EE-RM-97-900 COMMENT 77I
Figure 19: Standard Level 2, Business Scenario 1, Cumulative

STANDARD CASE SCENARIO B Year .se Announc. Year Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 8.56 8.83 9.04 9.22 9.391 9.58 9.721 9.85 10.00 10.18 10.34 10.48 10.65 10.85 11.06

Revenues 339.29 1381.76 1415.09 : 1443:24 1470.68 1881.22 1910.061 1934.96 1964.88 2000.82 2031.31 2058.43 2091.91 2130.99 2171.6

Cost of Sales · '

s Labor 91.66 9457 96.8 8.71 1 00.561 115.99 117.76 119.30 121.16 123.39 125.29 126.98 129.06 131.47 133.97

Material 592.10 610.78 625.55 638.01 650.21 886.30 900.00 911.75 925.80 942.68 956.98 969.71 985.49 1003.89 1023.12

Overhead- Fixed 0. 00 0 .. 0.00 o 000 0.00 000 0.00 0.00 0.o 0.00 0.00

Overhead -Variable 414.02 427.25 437.56 446.27 454.71 515.23 523.01 529.82 538.0 547.94 556.33 563.8 72.9 83.66 594

Depreciation 41.5 42.8 43.9 44.7 45.6 74.8 75.9 76.9 78.1 79.5 80.8 81.8 83.1 84.6 86.2

Selling. General and Admminsrative

Standard SG&A 120.5 124.4 127.4 129.9 132.4 169.3 171 9 174.1 176.8 180.1 182.8 185.3 188.3 191.8 195.4

R&D 13.4 13.8 14.2 144 14.7 18.8 19.1 19.3 19.6 20.0 20.3 20.6 20.9 21.3 21.7

Product Conversion Expense - - 9.6 13.4 15.4 0.8 --- -

Profit Before Tax 66.1 68.2 60.2 57.7 57.2 100.0 102.4 103.7 1053 107.2 108.8 110.3 112.1 114.2 116.4

Taxes 25.1 25.9 22.9 21.9 21.7 38.0 38.9 39.4 40.0 40.7 41.4 41.9 42.6 43.4 44.2

Net Income Before Finncing 41.0 42.3 37.3 35.8 35.5 62.0 63.5 64.3 65.3 66.5 67.5 68.4 69.5 70.8 722

Net Income 41.0 42.3 37.3 35.8 35.5 62.0 63.5 64.3 65.3 66.5 67.5 68.4 69.5 70.8 72.2

Depreciation 415 42.8 43.9 44.7 45.6 74.8 75.9 76.9 78.1 79.5 80.8 81.8 83.1 84.6 86.2

Change in Woring Capital - (6.6) (5.2) (4.4) (4.3) (64.2) (4.5) (3.9) (4.7) (5.6) (4.8) (4.2) (5.2) (6.1) (6.4)

Cash Flows from Operation 82.5 78.4 76.0 76.1 76.7 72.5 134.9 137.3 138.7 140.4 143.4 145.9 147.4 149.4 152.1

Onrinmry Capital Expenditurs (60.3) (62.2) (63.7) (64.9) (66.2) (95.8) (97.2) (98.5) (100.0) (101.9) (103.4) (104.8) (106.4) (108.4) (110.4)

Conversion Capital Expedics - - (31.6) (44.3) (50.6)

Cash Used In Investment (60.3) (62.2) (95.3) (109.2) (116.8) (95.8) (97.2) (98.5) (100.0) (101.9) (103.4) (104.8) (106.4) (108.4) (110.4)

Net Cash Flow 22.2 16.3 (19.3) (33.1) (40.0) (23.2) 37.6 38.8 38.7 38.5 40.0 41.2 40.9 41.0 41.7

Termial Value 521.5

Present Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted Cash Flow 22.2 15.1 (16.6) (26.3) (29.4) (15.8) 23.7 22.7 20.9 19.3 18.6 17.7 16.3 15.1 192.0

Industry Value (Net Present Value) S 295

EE-RM-97-900 COMMENT 77I
Figure 20: Standard Level 3, Business Scenario 1, Cumulative

STANDARD CASE SCENARIO Base Yl Announce Ye.r Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 85 8. 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.49 10.66 10.86 11:07

Rveonus 133929 1381.76 1415.09 1443.24 :1470.68 2077.18 : 2108.71 2136.12 2169.16 2209.23 2243.42 2274.03 2311.84 2355.90 2401.7

Cost ofSales ' :

Labor 9166 9 96.81 9 98.71 100.56 125.10 . 127.00 128.66 130.67 133.11 135.18 137.05 139.33 141.98 144.7

Matrial 592.10 610.78 625.55 638.01 650.21 950.06 964.56 977.09 992.15 1010.42 1025.99 1039.95 1057.24 1077.42 1098.48

Overhead -Fixed 0.00 0.O0 0.00 0.00 0.00 0.00 0.00 0.00 .0 0.00.00 0.00 0.00 0.00

Overhead-Variable 414.02 427.25 437.56 446.27 454.71 580.41 589.15 596.81 606.08 617.32 626.92 635.51 646.08 658.35 671.07

Depreiation 41.5 42.8 43.9 44.7 45.6 97.4 98.9 100.2 101.7 103.6 105.2 106.6 108.3 110.3 112.4

Selling. General andAdministrative

StandardSG&A 120.5 124.4 127.4 129.9 132.4 186.9 189.8 1923 195.2 198.8 201.9 204.7 208.1 2120 216.2

R&D 13.4 13.8 14.2 14.4 14.7 20.8 21.1 21.4 21.7 22.1 22.4 22.7 23.1 23.6 24.0

Product Converion Expnse - - 6.4 9.0 10.2 0.5 - - - - -

Profit Before Tax 66.1 68.2 63.4 62.2 62.3 116.0 118.3 119.8 121.6 123.9 125.8 127.5 129.7 132.2 134.9

Taxes 25.1 25.9 24.1 23.6 23.7 44.1 44.9 45.5 46.2 47.1 47.8 48.5 49.3 50.2 51.2

Net Income ore Financing 41.0 42.3 39.3 38.6 38.6 71.9 73.3 74.3 75.4 76.8 78.0 79.1 80.4 82.0 83.6

Net Inome 41.0 42.3 39.3 38.6 38.6 71.9 73.3 74.3 75.4 76.8 78.0 79.1 80.4 82.0 83.6

Depreciation 41.5 42.8 43.9 44.7 45.6 97.4 98.9 100.2 101.7 103.6 105.2 106.6 108.3 110.3 112.4

Change in Working Capital - (6.6) (5.2) (4.4) (4.3) (94.9) (4.9) (4.3) (5.2) (6.3) (5.3) (4.8) (5.9) (6.9) (7.2)

Cash Flows fom Operations 82.5 78.4 78.0 78.9 79.9 74.4 167.3 170.1 172.0 174.1 177.8 180.9 182.8 185.4 188.9

Ordinary Capital Expenditurcs (60.3) (62.2) (63.7) (64.9) (66.2) (118.4) (120.2) (121.8) (123.6) (125.9) (127.8) (129.6) (131.6) (134.1) (136.6)

Conversion Capital Expenditures -(56.9) (79.6) (91.0)

Cash Used I Ivestment (60.3) (62.2) (120.6) (144.6) (157.2) (118.4) (120.2) (121.8) (123.6) (125.9) (127.8) (129.6) (131.6) (134.1) (136.6)

NetCashFlow 22.2 16.3 (42.6) (65.7) (77.3) (44.0) 47.1 48.4 48.3 48.2 50.0 51.3 51.2 51.3 52.3

TeminalValue 654.2

Prsent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Dscouted Cash Flow 22.2 15.1 (36.5) (52.1) (56.8) (30.0) 29.7 28.3 26.1 24.1 23.2 22.0 20.3 18.9 240.8

Industy Value (Net Present Value) S 295

EE-RM-97-900 COMMENT 77I
Figure 21: Standard Level 4, Business Scenario 1, Cumulative

lI ~ i ' .:i: i ^Ster . - :, I

STAIDARD CASE SCEIARIO B... Year Announce .... Standard Y.t

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

UnitSales 8.56 8.83 9.04 : 9.22 9.39 9.58 9.72 9.85 : 10.00 10.18 10.33 10.46 10.63 10.81 11.01

Revenues 1339.29 1381.76 .1415.09 1443.24 1470.68 2825.86 2871.61 2910.27 2955.02 3006.51 3048.77 3085.68 3131.54 318537 3241.86

Cost /fSs ~

Labor 91.66 .94.57 96.81 98.71 100.56 151.78 154.19 156.25 158.68 161.49M 68.36 171.28 174.31

Material 592.10 610.78 625.55 638.01 650.21 :1350.55 1372.62 1391.19 1412.58 1437.11 1457.20 1474.74 1496.54 1522.16 1549.12

Overhead -Fixed 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.00 0.00

Ovehead- Variable 414.02 427.25 437.56 446.27 454.71 773.78 786.11 796.60 808.84 823.00 834.65 844.84 857.50 872.34 887.85

Depreciation 41.5 42.8 43.9 44.7 45.6 121.0 122.8 124.4 126.3 128.6 130.5 132.2 134.3 136.7 139.2

Selling General andAdministrative

Standard SG&A 120.5 124.4 127.4 129.9 132.4 254.3 258.4 261.9 266.0 270.6 274.4 277.7 281.8 286.7 291.8

R&D 134 13.8 14.2 14.4 14.7 28.3 28.7 29.1 29.6 30.1 30.5 30.9 31.3 31.9 32.4

Product Conversion Expense- - 8.8 12.3 14.1 0.7 - - - -

Profit Befo Tax 66.1 68.2 61.0 58.8 58.4 145.5 148.7 150.8 153.1 155.6 157.7 159.5 161.7 164.4 167.2

Taxes 25.1 25.9 23.2 22.4 22.2 55.3 56.5 57.3 58.2 59.1 59.9 60.6 61.4 62.5 63.6

Net Income Before Financing 41.0 42.3 37.8 36.5 36.2 90.2 92.2 93.5 94.9 96.5 97.8 98.9 100.2 101.9 103.7

Nelncome 41.0 42.3 37.8 36.5 36.2 90.2 92.2 93.5 94.9 96.5 97.8 98.9 100.2 101.9 103.7

Depreciation 41.5 42.8 43.9 44.7 45.6 121.0 122.8 124.4 126.3 128.6 130.5 132.2 134.3 136.7 139.2

Change in Working Capital (6.6) (5.2) (4.4) (4.3) (212.1) (7.2) (6.0) (7.0) (8.1) (6.6) (5.8) (7.2) (84) (8.8)

Cash Flows from Operation 82.5 78.4 76.5 76.8 77.5 (0.9) 207.8 211.8 214.2 217.1 221.7 225.3 227.4 230.2 234.0

Odinary Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (142.0) (144.1) (146.0) (148.3) (150.9) (153.2) (155.2) (157.6) (160.4) (163.3)

Conversion Capital Expnditures - (83.2) (116.5) (133.1)

Cash Usedn Innvetment (60.3) (62.2) (146.9) (181.4) (199.3) (142.0) (144.1) (146.0) (148.3) (150.9) (153.2) (155.2) (157.6) (160.4) (163.3)

NetCashFlow 22.2 16.3 (70.4) (104.6) (121.8) (142.9) 63.7 65.9 66.0 66.1 68.5 70.1 69.8 69.7 70.7

Telminl Value 884.5

Present Value Fctor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Dicounted Cash Flow 22.2 15.1 (60.4) (83.1) (89.5) (97.3) 40.2 38.5 35.7 33.1 31.8 30.1 27.7 25.7 325.6

Industry Value (Net Preset Value) S 295

EE-RM-97-900 COMMENT 77I
Figure 22: Standard Level 1, Business Scenario 1, Standard

IMR i&i.EWtterfl a0,il2S21 j j

STANDARD CASE SCENARIO Base Y.ea Announce Year Standard Yar

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 8.56 .08.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.48 10.64 10.84 11.03

Revenuecs 1339.33 1381:29 1414.78 .1443.01 1470.39 1550.66 1574.33 1595.09 1620.04 1649.67 1674.56 1696.52 1723.50 1754.77 1787.05

Cost ofSales .

Labor 91.67 94:52 96.7818 98.69 100.53 104.67 106.25 107.66 109.36 111.38 113.08 114.58 116.42 118.54 120.71

Material 592.12 610.55 6625.39 637.90 650.06 698.79 709.58 718.9 730.21 743.53 754.72 764.58 776.72 790.80 805.39

Overhead -Fixed 0.00 0.00 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.0 .0.0 0.00 0.0 0.00 0.00

Overhead- Variable 414.03 427.15 437.49 446.22 454.65 469.59 47664 482.89 490.43 499.41 506.96 513.63 521.81 531.2 541.01

Depreciation 41.5 42.8 439 44.7 45.6 469 476 482 48.9 498 50.6 51.2 52.1 53.0 540

Selling. General and Adninistraive

StandardSG&A 120.5 124.3 127.3 129.9 132.3 139.6 141.7 143.6 145.8 148.5 150.7 152.7 155.1 157.9 160.8

R&D 13.4 13.8 14.1 14.4 14.7 15.5 15.7 16.0 16.2 16.5 16.7 17.0 17.2 17.5 17.9

Product Conversion Expense - 5 2.1 2.4 0.1 - - -

Profit Before Tax 66.1 68.1 68.3 69.1 70.1 75.6 76.8 77.9 79.1 80.5 81.8 82.8 84.1 85.7 87.3

Taxes 25.1 25.9 25.9 26.2 26.6 28.7 29.2 29.6 301 30.6 31.1 31.5 32.0 32.6 33.2

Net Income Before Financing 41.0 42.2 42.3 42.8 43.5 46.9 47.6 48.3 49.0 49.9 50.7 51.4 52.2 53.1 54.1

Net Income 41.0 42.2 42.3 42.8 43.5 46.9 47.6 48.3 49.0 49.9 50.7 51.4 52.2 53.1 54.1

Depreciation 41.5 42.8 43.9 44.7 45.6 46.9 47.6 48.2 48.9 49.8 50.6 51.2 52.1 53.0 54.0

Change in Working Capital - (6.6) (5.2) (4.4) (4.3) (126) (3.7) (3.2) (3.9) (4.6) (3.9) (3.4) (4.2) (4.9) (5.1)

Cash Flows from Opations 82.5 785 81.0 83.1 84.8 81.1 91.5 93.2 94.1 95.1 97.4 99.2 100.0 101.2 103.0

Ordinary Capital Expenditurs (603) (62.2) (63.7) (64.9) (66.2) (67.9) (68.9) (69.8) (70.9) (72.2) (73.2) (74.2) (75.4) (76.7) (78.1)

Conversion Capital Expenditures - - (0.4) (0.6) (0.7)

Cash Used In investent (60.3) (62.2) (64.1) (65.5) (66.9) (67.9) (68.9) (69.8) (70.9) (72.2) (73.2) (74.2) (75.4) (76.7) (78.1)

Net Cash Flow 22.2 16.3 16.8 17.6 17.9 13.3 22.6 23.4 23.2 23.0 24.1 25.0 24.6 24.5 24.9

Terminal Value 311.3

Present Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted Cash Flow 22.2 15.1 14.4 14.0 13.2 9.1 14.3 13.7 12.5 11.5 11.2 10.7 9.8 9.0 114.6

Industry Value (Net Present Value) S 295

EE-RM-97-900 COMMENT 77I
Figure 23: Standard Level 2, Business Scenario 1, Standard

STANDARD CASE SCENARIO Sas. Y.er Announce Year Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sale 8.6 8;83 9.04 : .9.22 9.39 9.58 9.72 9.85 10.00 10.18 10.34 10.48 1065 10.85 11.06

Revenues 1339.29 1381.76 1415.09 :1443.24 1470.68 1681.90 1707.53 1729.80 1756.63 1788.88 1816.26 1840.62 1870.64: 1905.53 1941.73

Cost of Sales . _ I

Labor 91.66 94.7 96.811 98.71 100.56 115.03 116.781 118.31 120.151 122.37 124:26 125.94 128.00 130.39 13286

Material 592.101 610.78 625.55 638.01 650.21 754.38 765.97 775.98 787.98 802.41 814.65 825.55 839.01 854.67 87099

Overhead -Fied ' 0.00 0.00 ' 0.00 0.00 0.0 0.00 0 0.00 0 .00 0.0 0.00 0.00 0.00 0.00 0.00

Overhead -Vriable 414.02 427.25 437.56 446.27 454.71 507.01 514.64 521.33 529.44 539.19 547.46 554.83 563.87 574.37 585.21

Depreciation 41.5 42.8 43.9 447 45.6 53.4 54.3 55.0 55.8 56.8 57.7 58.4 59.4 60.5 61.6

Selling. General and Administratve

Standard SG&A 120.5 124.4 127.4 129.9 132.4 151.4 153.7 155.7 158.1 161.0 163.5 165.7 168.4 171.5 174.8

R&D 13.4 138 142 14.4 14.7 16.8 17.1 17.3 17.6 17.9 18.2 18.4 18.7 19.1 19.4

Product Conversion Expense - - 7.0 9.8 11.2 06 -

Profit Before Tax 66.1 68.2 62.8 61.4 61.3 83.3 85.1 86.2 87.6 89.2 90.6 91.8 93.3 95.1 96.9

Taxes 25.1 25.9 23.9 23.3 23.3 31.6 32.4 32.8 33.3 33.9 34.4 34.9 35.5 36.1 36.8

Net Income Before Finncing 41.0 42.3 38.9 38.1 38.0 51.6 52.8 53.5 54.3 55.3 56.2 56.9 57.9 59.0 60.1

Net Income 41.0 42.3 38.9 38.1 38.0 51.6 52.8 53.5 54.3 553 56.2 56.9 57.9 59.0 60.1

Depreciation 41.5 42.8 43.9 44.7 45.6 53.4 54.3 55.0 55.8 56.8 57.7 58.4 59.4 60.5 61.6

Change it Working Capital - (6.6) (5.2) (4.4) (4.3) (33.1) (4.0) (3.5) (4.2) (5.0) (4.3) (3.8) (4.7) (5.5) (5.7)

Cash Flows from Opertions 82.5 78.4 77.6 78.4 79.3 72.0 103.0 104.9 105.9 107.1 109.6 111.5 112.5 113.9 116.0

Ordinary Capital Ependitres (60.3) (62.2) (63.7) (64.9) (66.2) (74.4) (75.6) (76.5) (77.7) (79.2) (80.3) (81.4) (82.7) (84.2) (85.7)

Conversion Capital Expenditures - - (7.8) (10.9) (12.4)

Cash Used In Investmnt (60.3) (62.2) (71.5) (75.8) (78.6) (74.4) (75.6) (76.5) (77.7) (79.2) (80.3) (81.4) (82.7) (84.2) (85.7)

NetCash Flow 22.2 16.3 6.1 2.6 0.7 (2.4) 27.5 28.4 28.2 27.9 29.2 30.1 29.8 29.8 30.3

Terminal Value 378.7

Preset Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Discounted Cash Flow 22.2 15.1 5.3 2.0 0.5 (1.6) 17.3 16.6 15.2 14.0 13.5 12.9 11.9 11.0 139.4

Industry Value (Net Present Value) S 295

EE-RM-97-900 COMMENT 77I
Figure 24: Standard Level 3, Business Scenario 1, Standard

STANDARD CASE SCENARIO Base Yer. Announ. Y..r Stand.rd Y.r

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Uait Sale 8.56 8.83 .9.04 :' 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.49 10.6 10.6 1 11.0

Revmues 1339.29 1381.76 1415.09 1443.24 -1470.68 1876.19 1904.57 . 192938 1959.3 1995.71 2026.73 2054.51 2088.70 2128.43 2169,63

Cost of Sales

Labor 91.66 94.57 96.811 98.71 100.56 124.13 126.01 127.66 129.66 132.07 134.14 135.99 138.25 140.08 14360

Material 592.10 610.78 625.55 638.01 650.21 817.41 829.83 840.65 853.68 869.48 882.97 95.05 909.95 927.28 945.30

Overhead -Fixed 0.00 :0.00 0.0000 0.0 0. 00 0.0 0 0 0.00 0.00 0.00 00. 00 0.00 0.00

Overead- Variable 414.02 427:25 437.56 446.27 454.71 572.07 580.66 588.22 597.36 608.47 617.94 626.42 636.84 648.94 661.44

Depreciation 41.5 42.8 43.9 44.7 45.6 75.7 76.8 77.8 79.0 80.5 81.7 82.8 84.2 85.7 87.3

Selling. General andAdministrative

Standard SG&A 120.5 124.4 127.4 129.9 132.4 168.9 171.4 173.6 176.3 179.6 182.4 184.9 188.0 191.6 195.3

R&D 13.4 13.8 14.2 144 14.7 18.8 19.0 19.3 19.6 20.0 20.3 20.5 20.9 213 21.7

Prduct Conversion Expense - 3.8 5.3 6.0 0.3 - - - -

ofit Before Tax 66.1 68.2 66.0 65.9 66.5 99.0 100.8 102.1 103.7 1056 107.3 108.8 110.6 112.8 115.0

Taxes 25. 25.9 25.1 25.1 25.3 37.6 38.3 38.8 39.4 40.1 40.8 41.3 42.0 42.9 43.7

Neat Income Before Fincig 41.0 42.3 40.9 40.9 41.3 61.4 62.5 63.3 64.3 65.5 66.5 67.4 68.6 69.9 71.3

Net Income 41.0 42.3 40.9 40.9 41.3 61.4 62.5 63.3 64.3 65.5 66.5 67.4 68.6 69.9 71.3

Deprciation 41.5 42.8 43.9 44.7 45.6 75.7 76.8 77.8 79.0 80.5 81.7 82.8 84.2 85.7 87.3

Change in Working Capital - (6.6) (5.2) (4.4) (4.3) (63.5) (4.4) (3.9) (4.7) (5.7) (4.9) (4.3) (5.4) (6.2) (6.4)

Cah Flows from Operatios 82.5 78.4 79.6 81.2 82.5 73.6 134.9 137.2 138.6 140.3 143.4 145.9 147.4 149.4 152.2

Ordinary Capital Expenditues (60.3) (62.2) (63.7) (64.9) (66.2) (96.7) (98.1) (99.4) (101.0) (102.8) (104.4) (105.8) (107.5) (109.4) (111.5)

Conversion Capital Ependitures - (32.6) (45.7) (52.2)

CashUsed In aIvestment (60.3) (62.2) (96.3) (110.6) (118.4) (96.7) (98.1) (99.4) (101.0) (102.8) (104.4) (105.8) (107.5) (109.4) (111.5)

NetCashFlow 22.2 16.3 (16.7) (29.4) (35.8) (23.1) 36.7 37.8 37.7 37.5 39.0 40.1 39.9 40.0 40.7

Terminal Value 509.3

Present Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Disounted Cash Fow 22.2 15.1 (14.3) (23.3) (26.3) (15.7) 23.2 22.1 20.4 18.8 18.1 17.2 15.9 14.7 187.5

Industy Value (Net Present Value) S 295

EE-RM-97-900 COMMENT 77I
Figure 25: Standard Level 4, Business Scenario 1, Standard

ST.DAILD CASE SCENIR1O Bass. ... onnonce Year Standard Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Sales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.18 10.33 10.46 10.63 10.81 11.01

Resmues 1339.2 1381.7 1415.09 1443.4 1470.68 2629.52 2672.07 2708.0 2749.71 2797.6 2837.03 2871.42 29142 2964.22 3016.78

Costo/Sales · : ' .

Labor 91.66 945 . 96.S1 98.71 100.56 ,.150.86 153.24 155.29 .157.71 '160.50 162.82 :164.84 167.34 170.24 17.2

Matarial 592.10 610.75 625.55 636.01 . 650.21 1219.81 1239.79 1256.59 1275.93 1298.0 1316.22 1332.06 1351:74 1374. 1399.1

Ovehead. -Fited 0.00 0.0 0.00 0 .00 0 0.00. 0.00.00 0.00 0.00 0.0 ---- 0 0 0.0 0.00 0.00

Overhead-Variable . 414.02 427.2 437.56 :446.27 454.71 765.85 778.04 788.40 800.52 814.54 826.09 836.18 848.73 863.43 87S7

Depreciation 41.5 42.8 439 44.7 45.6 100.3 101. 103.2 104.8 106.7 0.7 93 111.4 113.4 115.4

Selling, GeneralandAdm6inistrativ e

Stadard SG&A 120.5 1244 127.4 129.9 132.4 236.7 240.5 243.7 247.5 251.8 255.3 254 2623 266. 271.5

R&D 13.4 13.8 14.2 14.4 14.7 26.3 26.7 27.1 27.5 280 28.4 28.7 29.1 29.6 30.2

Product Conv-sion Expens - 63 8.8 10.1 0 - - - - -

Pofit Before Tax 661 68.2 63.5 62.4 62.4 129.2 1319 133.8 135.8 138.1 139.9 141.5 143.5 145.9 148.4

Txes 25 2525.9 24.1 23.7 23.7 49.1 50.1 50.8 51.6 52.5 53.2 53. 54.5 55.4 56.4

Net Income Before Fmancmg 41.0 42.3 39.4 387 38.7 S0.1 11.8 2.9 84.2 5.6 86.8 87.7 09.0 90.5 92.0

N e Income 41.0 42.3 39.4 38.7 38.7 80.1 81.8 82.9 84.2 85.6 86.8 87.7 89.0 90.5 92.0

Depreciation 41.5 42.8 43.9 44.7 45.6 100.3 101.8 103.2 104.8 106.7 108.3 109.7 111.4 113.4 115.4

Chage i WorkingCapital - (6.6) (5.2) (4.4) (4.3) (181.4) (6.7) (5.6) (6.5) (7.5) (62) (5.4) (6.7) (78) (.2)

Cash Flows from Operations 82.5 78.4 78.0 79.0 80.0 (0.9) 177.0 180.5 182.5 184.8 188.9 192.0 193.7 196.0 199.2

Ordinary Capital Ependitures (60.3) (62.2) (63.7) (64.9) (66.2) (121.3) (123.2) (124.8) (126.7) (129.0) (130.9) (132.6) (134.7) (137.1) (139.6)

Conversion Capital Expendies - - (60.1) (84.2) (96.2) -

Cash Used In nvestment (60.3) (62.2) (123.8) (149.2) (162.4) (121.3) (123.2) (124.8) (126.7) (129.0) (130.9) (132.6) (134.7) (137.1) (139.6)

Net Csh Flo 22.2 16.3 (45.8) (70.2) (82.4) (122.2) 53.8 55.7 55.8 55.8 57.9 59.4 59.0 58.9 596

746.4

Terminal Value3 03976 0.3681 0.3409

Prsnt Vaue Factor 10000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409

Disonted Cash Flow 22.2 15.1 (39.3) (55.7) (60.6) (83.2) 33.9 32.5 30.1 27.9 26.9 255 23.4 217 2748

Industry Value (Net Present Value) S 295

EE-RM-97-900 COMMENT 77I