APPENDIX 13C. FEDERAL PRODUCTION TAX CREDIT

TABLE OF CONTENTS

13C.1 INTRODUCTION .......................................................................................................13C-1 13C.2 ELIGIBILITY REQUIREMENTS ..............................................................................13C-1 13C.3 ELIGIBLE CCW EQUIPMENT .................................................................................13C-2 13C.4 ESTIMATED LVM FEDERAL TAX CREDIT BENEFITS......................................13C-2 13C.5 SHIPMENTS PROJECTIONS ....................................................................................13C-3 13C.6 ESTIMATED LVM TAX CREDIT ............................................................................13C-4 13C.7 IMPACTS ON INDUSTRY N ET PRESENT VALUE...............................................13C-5

LIST OF TABLES

Table.13C.2.1 RCW and CCW Tax Cred it Eligibility Requirements .....................................13C-2 Table 13C.4.1 Federal Production Tax Benefit to the LVM for 2007–2009...........................13C-3 Table 13C.5.1 Estimated Total CCW Shipments by Equipment Class for the LVM by Year..................................................................................................................13C-4 Table 13C.6.1 Estimated Tax Credit for the LVM for Eligible Years ....................................13C-5 Table 13C.8.1 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base-Case Shipments) .....................................................................................13C-5 Table 13C.8.2 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) ...........................................................13C-6 Table 13C.8.3 Changes in Industry Net Presen t Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base-Case Shipments) .....................................................................................13C-6 Table 13C.8.4 Changes in Industry Net Presen t Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) ...........................................................13C-6Table 13C.8.5 Changes in Industry Net Present Value for Top-Loading and FrontLoading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base-Case Shipments) ..................................................13C-6Table 13C.8.6 Changes in Industry Net Present Value for Top-Loading and FrontLoading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasti city of Demand Shipments)........................13C-7

13C-iAPPENDIX 13C. FEDERAL PRODUCTION TAX CREDIT

13C.1 INTRODUCTION

The purpose of this appendix is to clarify how the Department of Energy (DOE) made its estimates of the Federal production tax credits (“ tax credits”) that would benefit commercial clothes washer (CCW) manufacturers. These ta x credits have been ma de available to CCW manufacturers by the enactment of the Energy Improvement and Extension Act of 2008 (EIEA 2008; Pub. L. 110-343). To make its estimates, DOE relied primarily on market research, the audited annual and quarterly repo rts of the low-volume manufactur er (LVM) filed with the U.S. Securities and Exchange Commission (SEC), and information provided by manufacturers.

13C.2 ELIGIBILITY REQUIREMENTS

Multiple tax credit programs have been en acted in order to stimulate the adoption of higher efficiency products and equipment. The fi rst to impact the CCW industry was the Energy Policy Act of 2005 (EPACT 2005), followed by EIEA 2008. Both programs share some eligibility requirements:

• EPACT 2005 included a $75 million cap on the tota l tax credit that any one manufacturer can receive across all eligible products and equipment it manufactures during the effective dates of the program. EIEA 2008 also has a $75 million limit per taxpayer for all taxable years beginning after Decemb er 31, 2007, though the washers qualifying for the highest tier are not c ounted towards the cap.

• Appliances or equipment that meet the effici ency requirements must be manufactured in the United States. The tax credit only applie s to the original equipment manufacturer; i.e. tax-credits for private-labeled goods sourced from other domestic ma nufacturers accrue to the source, not the reseller.

• Tax credits accrue on the basis of how ma ny additional eligible appliances the manufacturer has sold than in years past. The calculation is based on a rolling average of qualifying shipments, the length of whic h varies by the tax credit program.

• Title I section 1334 (c)(1)(B) of EPACT 2005 amended section 45M of the U.S. tax code. This section in EPACT 2005 was amended by EIEA 2008 Title III section 305 (b)(2) on October 3, 2008. Both EPACT 2005 and EIEA 2008 amend Title 26 of the United States Code (U.S.C) 45M.

• Products or equipment must meet certain e fficiency metrics that vary by program. For CCWs, targets were set for minimum modi fied energy factors (MEF) and maximum water factors (WF), as defined by the DOE cl othes washer test procedure (10 CFR 430, subpart B, appendix J1).

Some differences between the tax credits in EPACT 2005 and EIEA 2008 are shown in Table.13C.2.1. Principal differences include the effective dates, th e length of the rolling average

13C-1period over which marginal qualifying units are ca lculated, the number of tiers that each program has, the minimum efficiency requirements, and the per-unit tax credits that accrue to the original equipment manufacturer.

Table.13C.2.1 RCW and CCW Tax C redit Eligibility Requirements

Tax Credit Program Effective Date Rolling Average Basis Tier Efficiency Requirements Tax Credit
per unit Start End min. MEF max. WF

Residential EPACT 2005 2006 2007 3 years N/A 1.72 8.0 $100

EIEA 2008 2008 2008 2 years 1 (top-loading) 1.72 8.0 $150
2008 2009 2 (top-loading) 1.8 7.5 $250

2008 2010 2 years 1 (all washers) 2.0 8.0 $150

2008 2010 2 years 2 (all washers) 2.2 4.5 $250

Commercial EPACT 2005 2006 2007 3 years N/A 1.72 8.0 $100

EIEA 2008 2008 2010 2 years 1 (all washers) 2.0 8.0 $150 2 (all washers) 2.2 4.5 $250

13C.3 ELIGIBLE CCW EQUIPMENT

DOE research suggests that no currently ava ilable, top-loading CCW meets any of the tax credit energy efficiency eligib ility requirements. Of the three major suppliers of front-loading washers to the CCW market, only one makes e quipment that meets the efficiency and other eligibility requirements. Unlike its two prin cipal competitors, the LVM produces its frontloading equipment in its own f actory in the United States.

The two other major suppliers to the U.S. CCW industry produce some clothes washer products domestically, though none of these domestically-produced CCWs meet the energy efficiency eligibility requirements. CCWs sold by these manufacturers that are eligible on the basis of energy efficiency metrics are either pr oduced in wholly owned facilities abroad or sourced from another domestic manufacturer.

Hence, DOE research suggests that the tax credits associated with the CCW industry are accruing solely to the LVM on the basis of in creased front-loading CC W shipments. Using audited financial statements from the LVM in conjunction with previously submitted data, DOE research suggests that LVM shipments of front -loading washers have in creased substantially since 2006.

13C.4 ESTIMATED LVM FEDERAL TAX CREDIT BENEFITS

DOE used Form 10-Ks and Form 10-Qs submitted by the LVM to the SEC to calculate the benefit the LVM received from the tax credit programs from 2007 through 2009. 1 DOE research suggests that the LVM is not eligible for any other tax credit programs; therefore, DOE

13C-2attributed all tax credit benefits to the sale of eligible front-loading CCWs for the years 2007– 2010.

• Note 16 of the LVM’s 2007 Form 10-K shows that the LVM’s effective tax rate for 2007 was reduced by 7.8 percent due to the Federal tax credit. 2

• In its 2008 10-K, the LVM recorded a $2.4 million credit from the program which reduced its effective Fede ral tax rate by 11.2 percent. 3 DOE assigned this tax credit benefit to the LVM’s 2008 fiscal year.

• The LVM’s Form 10-Q for the quarter e nding March 31, 2009 stated that the LVM expected its effective Federal tax rate would be lowered by 2.7 percent in 2009. 4 The LVM’s Form 10-Q for the quarter ending on September 30, 2009 revised its estimated annual effective tax rate to 28.3 percent, attributing the ad justment primarily to higher energy tax credits earned in the United States. 5 In comparison, 10-Q for the quarter ending on March 31, 2009 showed the LVM expect ed an annual effective tax rate of 36 percent for all of 2009. 4 Based on the revised estimated annual effective tax rate, DOE attributed this additional 7.7 pe rcent decline in the annual effective ta x rate to additional tax credits earned under EIEA. For the total Federal benefit under the program for all of 2009, DOE added the additional 7.7 percent be nefit expected from the 10-Q filed on September 30, 2009 to the expected 2.7 percent Federal tax rate bene fit found in the 10-Q for the quarter ending on March 31, 2009. The ef fective Federal tax rate is estimated to be lowered by 10.4 percent from the Federa l production tax credits for all of 2009.

• DOE annualized the expected earnings before taxes to estimate the total benefit the LVM is likely to receive for all of 2009. Table 13C .4.1 shows the total benefit for the LVM for 2007 through 2009.

Table 13C.4.1 Federal Production T ax Benefit to the LVM for 2007–2009 2007 2008 Q1 2009* Q2 2009* Q3 2009* 2009 (estimate)** Earnings before Taxes ($ millions) 16.754 21.992 3.356 -5.424 11.017 11.436

Federal Production Tax Credit ($ millions) 1.31 2.4

- - - 1.19

*LVM reported earnings before taxes from Q1 through Q3 **2009 annualized earnings before taxes

13C.5 SHIPMENTS PROJECTIONS

To estimate the tax credit the LVM will receive in 2010, DOE used revenues posted in the LVM’s SEC filings, the LVM’ s reported estimate for North American commercial laundry market growth, and previously collected data shown in appendix 13A of the technical support document (TSD) accompanying today’s final rule . To calculate annual front-loading and top

13C-3loading shipments over the period, DOE estimated annual revenues for each washer segment and divided those revenues by an estimated averag e manufacturing production cost (MPC) for each platform. The average manufacturing cost was de rived using extrapolat ed historical data.

For 2009, DOE used the reported projections of the tax credit for 2009 by the LVM’s third quarter 10-Q report to estimate front -loading shipments for 2009. For 2010 segment revenues, DOE used the LVM’s estimate for the compound annual growth rate for the North American commercial laundry market (2.7 percen t) as the projected revenue increase from 2009 to 2010. The projected revenues for 2009 and 2010 we re disaggregated by equipment class using the same process used for 2004 through 2008 reve nues to estimate future shipments. Table 13C.5.1 shows DOE’s estimates of the total CCW sh ipments for the LVM in the years used for the tax credit calculations.

Table 13C.5.1 Estimated Total Shipments by Equipment Class for the LVM by Year Type of Washer Year

2004 2005 2006 2007 2008 2009 2010TopLoading* 86,800 89,800 101,100 119.600 115,600 115,000 115,100FrontLoading* 17,700 18,700 22,900 32,900 43,600 44,200 46,100

* Total shipments are rounded to the nearest hundred
For the LVM’s 2007 fiscal year, DOE estimated the number of washers eligible for a tax credit on the basis of a 3-calendar year period per the EPACT 2005 benefits (title I section 1334 (c)(1)(B) of EPACT 2005). As noted in Table.13C.2.1, the EIEA 2008 legislation changed multiple eligibility requirement s. For the 2008, 2009, and 2010 tax credit benefits, DOE used the EIEA 2008 eligibility requirements. For all years, DOE assumed that every front-loading washer sold by the LVM qualified for the Federal production tax credit.

13C.6 ESTIMATED LVM TAX CREDIT

To calculate the eligible tax credit amounts for each calendar year, DOE multiplied the estimated qualifying total clot hes washer shipments by a corresponding credit per unit. EPACT 2005 allows a $100 credit per qualifying washer for 2007. Therefore, DOE multiplied $100 by the qualifying shipments for 2007 to calculate the eligible tax credit fo r that year. For 2008, the LVM reported a $2.4MM tax credit in its SEC Form 10-K. 6 DOE estimated additional eligible front-loading unit shipments on the basis of the total tax credit and an estimated individual unit shipment credit of $150 per front-loading wash er. For 2009, and 2010, EIEA 2008 allows either a $150 or $250 tax credit depending on the energy conservation characteristics of the washer. According to the ENERGY STAR website, the LVM introduced new washers in 2008 that qualify for the higher-tier tax credit. 7 DOE estimated an average tax credit of $200 per frontloading washer for the 2009 and 2010 LVM fiscal year. The average credit was used because DOE could not determine the number of shipme nts of each type of qualifying washers with certainty. Table 13C.6.1 shows DOE’s estimates of the tax credit for each eligible year.

13C-4Table 13C.6.1 Estimated Tax Credit for the LVM for Eligible Years

Category Year 2007 2008 2009 2010 Tax Credit using $100 per qualifying unit

Tax Credit using $150 per qualifying unit

Tax Credit using $200 per qualifying unit $1.31 million

$2.4 million

$1.19 million $0.43 million

DOE estimates that, in total, the LVM is el igible to receive approximately $5.3 million in tax credits from the EPACT 2005 and EIEA 2008 legislation from 2007 to 2010. DOE used a 2.7-percent CCW revenue growth from 2009 to 2010 to determine the 2010 qualifying frontloading shipments. DOE estimates the LVM will have a sufficient increase in shipments of qualifying washers to obtain a slight bene fit from the tax cr edits in 2010.

13C.7 IMPACTS ON INDUSTRY NET PRESENT VALUE

To determine the impacts of the tax credit on the industry net pres ent value (INPV), DOE implemented the tax credit in the Government Regulatory Impact Model (GRIM). The calculated tax credit was added as a cash flow item in the base case and standards case. Table 13C.7.1 through Table 13C.7.6 provide the INPV estimates for the CCW industry under the two shipment scenarios analyzed with incorpor ation of tax credits. In all the results, DOE added the entire benefit to the CCW industry in the base case an d standards case. Therefore, the impacts on INPV in the results for just top-loading or front-l oading are optimistic becau se the entire Federal production tax credit estimates for the CCW indu stry are added to INPV in the base and standards cases while only part of the total CCW industry is evaluated.

Table 13C.7.1 Industry Net Present Value for Top-Loading Commercial Clothes Washers including Federal Production Tax Credits (Preservation of Gross Margin Percentage Markup – Base-Case Shipments) Preservation of Gross Margin Percentag e Markup with Base-Case Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 35 38 38 31 31 31

Change in INPV (2008 $ millions) - 4 4 (4) (4) (4)
(%)

- 10.64% 10.64% -10.41% -10.41% -10.41%

13C-5Table 13C.7.2 Industry Net Present Value for Top-Loading Commercial Clothes Washers including Federal Production Tax Credits (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) Preservation of Gross Margin Percentage Markup with Price Elasticity of Demand Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 35 37 37 29 29 29

Change in

INPV (2008 $ millions) - 3 3 (6) (6) (6)
(%)

- 8.01% 8.01% -16.80% -16.80% -16.80%

Table 13C.7.3 Industry Net Present Value for Front-Loading Commercial Clothes Washers including Federal Production Tax Credits (Preservation of Gross Margin Percentage Markup – Base-Case Shipments) Preservation of Gross Margin Percentag e Markup with Base-Case Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 30 30 28 28 26 13

Change in

INPV (2008 $ millions) - 0 (2) (2) (5) (17)
(%)

- 0.00% -7.59% -7.59% -15.00% -55.53%

Table 13C.7.4 Industry Net Present Value for Front-Loading Commercial Clothes Washers including Federal Production Tax Credits (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) Preservation of Gross Margin Percentage Markup with Price Elasticity of Demand Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 30 30 28 28 26 13

Change in

INPV (2008 $ millions) - 0 (2) (2) (5) (17)
(%)

- 0.00% -7.60% -7.60% -15.52% -56.81%

Table 13C.7.5 Industry Net Present Valu e for Top-Loading and Front-Loading Commercial Clothes Washers including Federal Production Tax Credits (Preservation of Gross Margin Percentage Markup – Base-Case Shipments) Preservation of Gross Margin Percentag e Markup with Base-Case Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 63 67 65 58 55 43

Change in INPV (2008 $ millions) - 4 1 (5) (8) (20)
(%)

- 5.82% 2.18% -7.61% -12.41% -32.25%

13C-6Table 13C.7.6 Industry Net Present Valu e for Top-Loading and Front-Loading Commercial Clothes Washers including Federal Production Tax Credits (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) Preservation of Gross Margin Percentage Markup with Price Elasticity of Demand Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 63 66 64 56 53 40

Change in

INPV (2008 $ millions) - 3 0 (7) (10) (23)
(%)

- 4.38% 0.74% -11.11% -16.15% -36.36%

The results from the GRIM show that th e estimated Federal production tax credit has minimal impact on CCW INPV. Depending on th e shipment scenario and equipment class analyzed, the tax credit lowers the impacts of energy conservation standards by up to 1 percent. This small decrease is not enough to substantia lly mitigate the impacts on the CCW industry due to energy conservation standards.

13C-7REFERENCES

1 SEC documents for the LVM are available online at: http://www.sec.gov /cgi-bin/browse

idea?action=getcompany&CIK=0001063697&owner=exclude&count=40

2 Alliance Laundry Systems Form 10-K for 2007, p. 103. Available online at: http://www.sec.gov/Archives/edgar/data/1063697/000119312508053028/d10k.htm

3 Alliance Laundry Systems, Form 10 -K for 2008, p. 96. Available online at: http://www.sec.gov/Archives/edgar/data/1063697/000119312509048716/d10k.htm

4 Alliance Laundry Systems, Form 10-Q for the quarterly period ending March 31, 2009, p. 15. Available online at http://sec.gov/Archives/edgar/data/1063697/000119312509107306/d10q.htm

5 Alliance Laundry Systems, Form 10-Q for the quarterly period ending September 30, 2009, p. 13. Available online at http://www.sec.gov/Archives /edgar/data/1063698/000119312509229598/0001193125-09

- 229598-index.htm

6 Alliance Laundry Systems, Form 10-K for 2008. Op. cit., p. 91.

7 ENERGY STAR-Qualified Commercial Clothes Washers. Available online at: www.energystar.gov/index.cfm?fuseaction=clotheswash.display_commercial_cw

.

13C-8