# 12 B

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# APPENDIX 12B. GOVERNMENT REGULATOR Y IMPACT MODEL (GRIM )

OVERVIEW

TABLE OF CONTENTS

12B.1 INTRODUCTION AND PUR POSE

................................ ................................ .......... 12B

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12B.2 MODEL DESCRIPTION

................................ ................................ ........................... 12B

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12B.3 DETAILED CASH FLOW E XAMPLE

................................ ................................ ..... 12B

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# 12 B

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# APPENDIX 12 B

. GOVERNMENT REGULATOR Y IMPACT MODEL (GRIM )

12B.1 INTRODUCTION AND PURPOSE

The purpose of the Government Regulatory Impact Model (GRIM) is to help quantify the

impacts of energy conservation standards and other regulations on manufacturers. The basic

mode of analy sis is to estimate the change in value of the industry or manufacturers(s) following

a regulation or a series of regulations. The model structure also allows a n analysis of multiple

products with regulations taking effect over a period of time, and of mult iple r egulations on the

same products

.

Industry net present value is defined, for the purpose of this analysis, as the discounted

sum of industry free cash flows plus a discounted terminal value. The model calculates the actual

cash flows by year and then determines the present value of those cash flows both without an

amended energy conservation standard ( i.e ., the base case) and under different trial standard

levels (TSLs).

Output from the model consists of summary financial metrics, graphs of major variables,

and, when appropriate, access to the complete cash flow calculation.

12B.2 MODEL DESCRIPTION

The basic structure of the GRIM is a standard annual cash flow analysis that uses

manufacturer selling prices, manufacturing costs, a shipments forecast, and financial parameters

as inputs 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 net operating profit after tax es. The cash flow calculation converts net operating

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 s ection 1 2. B .3).

(1) Unit Sales: Total a nnual shipments for the industry were obtained from the National Impact

Analysis Spreadsheet;

(2) Revenues: Annual revenues

- c omputed by multiplying unit price s at each efficiency level

by the app ropriate manufacturer markup;

(3) Labor: The portion of cost of goo ds sold (COGS) that includes direct labor, commissions,

dismissal pay, bonuses, vacation, sick leave, social security contributions, fringe, and

assembly labor up

- time;

(4) Material: The portion of COGS that includes materials;

(5) Overhead: The portion of COGS t hat includes indirect labor, indirect material, energy use,

maintenance, depreciation, property taxes, and insurance related to assets. While included

in overhead, the depreciation is shown as a separate line item;

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# (6) Depreciation: Annual depreciation compute d as a percentage of Revenues (2)

. While

included in overhead, the depreciation is shown as a separate line item;

(7) Stranded Assets: In the compliance year of the standard, a one

- time write

- off of net

property, plant, and equipment ( PPE ) assets to account for the book value of these assets

that would have enjoyed a longer life if not for the standard ;

(8) Standard SG&A: Selling, general, and administrative costs are computed as a percentage of

Revenues (2) ;

(9) R&D: the GRIM separately accounts for ordinary research and development (R&D) as a

percentage of Revenues (2) ;

(10) Product Conversion Costs : Product conversion costs are one

- time investments in research,

development, testing, mar ke ting , and other costs focused on making equipment design s

comp ly with the new energy conservation standard. The GRIM allocates these costs over

the period between the standard’s announcement and the effective date ;

(11) Earnings Before Interest and Taxes (EBIT): Includes profit before deductions for interest

paid and tax es;

(12) EBIT as a Percentage of Sales (EBIT/Revenues) : the GRIM calculates EBIT as a

percentage of sales to compare with the industry’s average reported in financial statements;

(13) Taxes: Taxes on EBIT (11) are calculated by multiplying the tax rate contained in Major

Assumptions by EBIT (11)

.

(14) Net Operating Profits After Taxes (NOPAT): Computed by subtracting Cost of Goods

Sold ((3) to (6))

, SG&A ( 8

)

, R&D ( 9

)

, Product Conversion Costs (10 ) , and Taxes (13)

from Revenues (2)

.

(15) NOPAT repeated : NOPAT is repeated in the Statement of Cash Flows;

(16) Depreciation repeated : Depreciation and Stranded Assets are added back in the Statement

of Cash Flows because they are non

- cash expense s ;

(17) Change in Working Capital : Change in cash tied up in accounts receivable, inventory, and

other cash investments necessary to support operations is calculated by multiplying

working capital (as a percentage of revenues) by the change in annual revenues.

(18) Cash Flow From Operations : Calculated by taking NOPAT (15) , adding back non

- cash

items such as a Depreciation (16) , and subtracting out Change in Working Capital (17) ;

(19) Ordinary Capital Expenditures: Ordinary investments in property, plant, and equipment to

maintain and replace existing production assets, computed as a percentage of Revenues (2) ;

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# (20) Capital Conversion Costs : Capital c onversion costs are one

- time investments in property,

plant, and equipment to adapt or change existing production facilities so that new product

designs can be fabricated and assembled under the new regulation;

(21) Capital I nvestment: Total investments in property, plant, and equipment are computed by

adding Ordinary Capital Expenditures (19) and Capital Conversion Costs (20) ;

(22) Free Cash Flow: Annual cash flow from operations and investments; computed by

subtracting Capital Inv estment (2 1 ) from Cash Flow from Operations (18)

(23) Terminal Value: Estimate of the continuing value of the industry after 2043

. Computed by

growing the Free Cash Flow in year 2043 at a constant rate in perpetuity;

(24) Present Value Factor: Factor used to calculate an estimate of the present value of an

amount to be received in the future;

(25) Discounted Cash Flow: Free Cash Flows (2 2 ) multiplied by the Present Value Factor

(2 4 )

. For 2043 the discounted cash flow includes the discounted Terminal Value (2 3 ) ; and

(26) Industry Value thru 2043 : The sum of Discounted Cash Flows (2 5 )

.

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# 12B.3 DETAILED CASH FLOW E XAMPLE

Base Year Standard

Year

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Unit Sales 11.851 11.340 9.626 14.028 14.668 15.060 15.206 15.001 14.794 14.280 13.696 13.501 13.826 14.540

Revenues 1,820.7 $ 1,742.2 $ 1,478.8 $ 2,155.1 $ 2,253.5 $ 2,313.6 $ 2,336.0 $ 2,389.6 $ 2,356.6 $ 2,274.8 $ 2,181.7 $ 2,150.7 $ 2,202.4 $ 2,316.2 $

Cost of Sales

Labor 127.6 $ 122.1 $ 103.6 $ 151.0 $ 157.9 $ 162.2 $ 163.7 $ 167.5 $ 165.2 $ 159.4 $ 152.9 $ 150.7 $ 154.4 $ 162.3 $

Material 1,216.1 $ 1,163.6 $ 987.7 $ 1,439.5 $ 1,505.2 $ 1,545.3 $ 1,560.3 $ 1,596.0 $ 1,574.0 $ 1,519.4 $ 1,457.2 $ 1,436.5 $ 1,471.1 $ 1,547.1 $

Overhead 39.4 $ 37.7 $ 32.0 $ 46.7 $ 48.8 $ 50.1 $ 50.6 $ 51.7 $ 51.0 $ 49.2 $ 47.2 $ 46.6 $ 47.7 $ 50.1 $

Depreciation 61.4 $ 58.8 $ 49.9 $ 72.7 $ 76.0 $ 78.0 $ 78.8 $ 80.6 $ 79.5 $ 76.7 $ 73.6 $ 72.5 $ 74.3 $ 78.1 $

Stranded Assets

- $

- $

- $

- $

- $

- $

- $

- $

- $

- $

- $

- $

- $

- $

Selling, General and Administrative

Standard SG&A 227.2 $ 217.4 $ 184.6 $ 269.0 $ 281.2 $ 288.7 $ 291.5 $ 298.2 $ 294.1 $ 283.9 $ 272.3 $ 268.4 $ 274.9 $ 289.1 $

R&D 40.2 $ 38.5 $ 32.7 $ 47.6 $ 49.8 $ 51.1 $ 51.6 $ 52.8 $ 52.0 $ 50.2 $ 48.2 $ 47.5 $ 48.6 $ 51.1 $

Product Conversion Costs

- $

- $

- $

- $ 42.6 $ 59.7 $ 68.2 $ 3.5 $

- $

- $

- $

- $

- $

- $

Earnings Before Interest and Taxes (EBIT) 108.8 $ 104.1 $ 88.3 $ 128.8 $ 92.0 $ 78.5 $ 71.3 $ 139.3 $ 140.8 $ 135.9 $ 130.3 $ 128.5 $ 131.6 $ 138.4 $

EBIT/Revenues 6.0% 6.0% 6.0% 6.0% 4.1% 3.4% 3.1% 5.8% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

Taxes 36.9 $ 35.3 $ 30.0 $ 43.7 $ 31.2 $ 26.7 $ 24.2 $ 47.3 $ 47.8 $ 46.1 $ 44.2 $ 43.6 $ 44.7 $ 47.0 $

Net Operating Profit after Taxes (NOPAT) 71.9 $ 68.8 $ 58.4 $ 85.1 $ 60.8 $ 51.9 $ 47.1 $ 92.0 $ 93.0 $ 89.8 $ 86.1 $ 84.9 $ 86.9 $ 91.4 $

NOPAT 71.9 $ 68.8 $ 58.4 $ 85.1 $ 60.8 $ 51.9 $ 47.1 $ 92.0 $ 93.0 $ 89.8 $ 86.1 $ 84.9 $ 86.9 $ 91.4 $

Depreciation 61.4 $ 58.8 $ 49.9 $ 72.7 $ 76.0 $ 78.0 $ 78.8 $ 80.6 $ 79.5 $ 76.7 $ 73.6 $ 72.5 $ 74.3 $ 78.1 $

Change in Working Capital 0

- $ 2.3 $ 7.7 $ (19.9) $ (2.9) $ (1.8) $ (0.7) $ (1.6) $ 1.0 $ 2.4 $ 2.7 $ 0.9 $ (1.5) $ (3.3) $

Cash Flows from Operations 133.3 $ 129.8 $ 116.0 $ 137.8 $ 133.9 $ 128.1 $ 125.3 $ 171.0 $ 173.5 $ 168.9 $ 162.4 $ 158.3 $ 159.7 $ 166.2 $

Ordinary Capital Expenditures (64.4) $ (61.6) $ (52.3) $ (76.2) $ (79.7) $ (81.8) $ (82.6) $ (84.5) $ (83.3) $ (80.4) $ (77.2) $ (76.1) $ (77.9) $ (81.9) $

Capital Conversion Costs

- $

- $

- $

- $ (2.0) $ (2.8) $ (3.2) $

- $

- $

- $

- $

- $

- $

- $

Capital Investments (64.4) $ (61.6) $ (52.3) $ (76.2) $ (81.7) $ (84.6) $ (85.8) $ (84.5) $ (83.3) $ (80.4) $ (77.2) $ (76.1) $ (77.9) $ (81.9) $

Free Cash Flow 68.9 $ 68.2 $ 63.7 $ 61.6 $ 52.2 $ 43.5 $ 39.5 $ 86.5 $ 90.1 $ 88.5 $ 85.3 $ 82.3 $ 81.8 $ 84.3 $

Terminal Value

- $

- $

- $

- $

- $

- $

- $

- $

- $

- $

- $

- $

- $

- $

Present Value Factor 0.000 0.000 0.000 0.000 1.000 0.933 0.871 0.813 0.758 0.708 0.660 0.616 0.575 0.537

Discounted Cash Flow

- $

- $

- $

- $ 52.21 $ 40.64 $ 34.38 $ 70.31 $ 68.34 $ 62.60 $ 56.32 $ 50.70 $ 47.04 $ 45.23 $

Industry Value thru 2043 1,283.53 $ Cash Flow Statement STANDARD CASE SCENARIO

Industry Income Statement