3 Brokers downgraded, page-52

Joewolf - my thoughts per your point.

1. If the half yearly dividend paid (fully franked) is 252m shares x 3.5c = $8.825m, franking credit is 1.5c (based on tax rate of 30%) then franking credit used is $3.78m per half. So if they maintain this for full year franking credits used are $7.56m (not $17.6m for the half). I think you might be mixing up taxable income v franking credits - franking credits only relate to actual tax paid. Secondly, EPW has had tax losses for a little while (hence dividends that were unfranked) and if you look at thier financials and the note on franking credits they say at 31 December 2016 (p38) franking credits available to shareholders for subsequent years $184,000 (down from from $256,000 at 30 June 2016 - not bloody much and if you read the text it takes into account certain adjustments) so they had to do something big to get sizeable franking credits which meant they had to do something to pay tax and paying the penalty has led therefore to higher taxable income and therefore tax expense and the increase is basically the $36.6m in relation to the penalty not being deductible - don't confuse accounting tax expense (p&L) with actual tax paid (CF and BS - actual tax paid is what franking credits are based on - no pay ATO money, no get franking credits. At present for this half year, this suggest to me that they are effectively paying at least $3.78m to tax man somehow, but what I cant work out is how much tax losses/effective tax credits they had (as I will have to go back to last years annual report to do that and I haven't yet - to see how much that is offset by the $36.6m expense - obviously the tax credit must be less than about $33m to be in a position to pay tax.- next step would be to see if you go forward the next quarter - will they have franking credits and if so how much for the next dividend.

Note in the commentary of their management discussion - they specifically state the penalty stuff was a deliberate commercial decision to buy optionality at a cost - but don't state what the effective cost was.

I am not sure the company saves $7m in cashflow a year, by paying a lower fully franked dividend necessarily as they alos have to pay tax to the ATO for that year to get the franking credits, they would save cashflow in a year if they have excess franking credits from previous year where they have paid tax to ATO but not franked it in dividends to shareholders, but EPW don't have excess credits from previous years, well they do but less than $200k.

2. not surprised by that - financials show like $49m for the certificates which occurred in Jan 2017 per their notes in the financials and discussions, but also they purchased a lot of hedge swaps from Mr St Bakers power station in NSW that he bought the other year and the notes say that is for 1 Jan 2017 to 31 December 2022 - 6 years worth - not sure how that is broken up but they do say in total it represents 20% of EPW's AUS load - so if their average annual load is 20 TWh for simplisticity per year, then total sales for 6 years is 120 TWh, so 20% of that is 24 TWh. Now as you will see from the increase in the cost of wholesale electricity prices from 2015 per EPW's own slides - NSW prices have gone up like 50 or 60% from memory and that's before 31 December, since probably even more but that will be in the full years accounts, why up, supply/demand, SA issues, closure of Hazelwood etc, so whatever price EPW agreed to pay back in February last year, the market price has since gone up even more for that 24TW, so I would expect EPW to have a huge value to that which they will be benefiting from in signing up new customers now for future years. Now remember - EPW has bought hedges for up to 6 years in advance - they say current customers are only signing very short term contracts at present... so EPW must have considered that prices will stay up for a long term and regardless if customers sign 1 year contracts or not that when they come to renew market prices will still be high - hence unrealised profits, and given the recent stuff in the last few weeks, well if nothing else changes in this 6 months that will get higher again. The only thing that will bring that undone, is if electricity prices come way back down, then the unrealised will decrease accordingly, EPW's only real risk is that pool prices go down below their swap prices and are out of the money, and they either lose lots of customers to competitors or they make losses signing up new customers at lower prices then what their hedge swaps are with Mr St Bakes power station - how likely is that - I would say less likely and likely more upside, but have to remember the reputational risk too. One rish which I just thought of is credir risk if Mr St Bakers power station for some reason doesn't operate for long periods of time during that 6 years for whatever reason, fails to start when pool prices are high (like as been reported recently in that heatwave last week of one of them had a failure to start) and therefore doesn't sell electricity to the market and gets no money for the high prices and he then has to pay large swap payment to EPW, then you have the issue of whether he can pay that to EPW, so credit risk - remember most base load power stations are with governments or very big energy players so credit risk is significantly reduced. If a government power station broke down and had to pay say $25m to EPW, EPW will definitely get 100% of that money (govt backed generator) however, if same event happened to Mr St Bakers power station - could he hand over a cheque to EPW for $25m, if he can't then where does that leave EPW - they have to pay the market for the high pool prices, they get fixed prices from their customers and are left short by the swap payment from the power station - isn't that how the swaps work?

3. agree - but its not unique to EPW, every company controlled by a major shareholder does the same - look at Crowns special dividend this week... or Fortescues and how much their biggest shareholders get cheques for....each could almost buy a small nation with each cheque for the six months. as I read today, bumper dividends expected this year compared to last year, which means more money to shareholders - wonder if that will boost economy or go under peoples beds.....

4. Yep - but EPW are probably getting more of the benefit now (Mr St Baker only gets 25% of that benefit) imagine if he only did the deal with EPW now at current prices , he would be rolling in it for 100% - timing...and LUCK always plays a part, but agree both are winning but I am sure one is extremely happy doing the deal last year and one would be pondering if only they had of waited 6 months or more to do the deal, they would be better off by a mile.

5. I completely agree, I don't even think their other small businesses here are going to make any real dint in total, AUS market has stalled as they really are at maturity in regards of market capacity and only way to gain more is to have competitors drop or lose or be the one who takes another major competitor out - EPW is not big enough to do that when you look at the other 4 major competitors, AGL, ORG, Energy Australia and Alinta Energy - they all dwarf EPW - Alinta is the smallest and its still like probably $2b+ so they are unlikely to fail, worse still if they really get their soxs on EPW which says its second in the business market, we could see much more competition from them particularly EA and Alinta who are considering listing, in order to gain market share. if EPW are right in being second, then 3 of those are smaller than EPW in market share - by how much cant be to much- they all have the muscle and balance sheet if they get their model right or fixed up to move up and knock EPW down the ladder

6. yes as they said they made a commercial decision at a cost for the option - well all options cost you money one way or another. hopefully it works out or that they didn't pay too much of a cost (however you work that out) to have the option. Not such regulator, governments or some customers might care about commerciality when they are all trying to push renewable targets and supporting the industry - because this penalty or lack of surrender is the biggest by a country mile if you look at the clean energy regulator site, and as the money goes to consolidated revenue (clean energy site tells that) then its not going to renewable generators so that's more a political issue as whichever way you look at it, EPW are complying with the rules of the scheme, people say not the spirit or intention, well then that's the fault of those who wrote the legislation and should have closed the loophole - I think this might be the last time anyone gets to do it this way, as I am sure the legislation will change, but as with everything it always takes only one party to publicly find the loophole before those who maybe unintentionally wrote the legislation realise their mistake. Good on EPW for finding loophole from a commercial point of view, hopefully it benefits its shareholders both short term and long term (through the option)

8. Personally can't see them selling the AUS business, not at current share prices for the company, the St Bakers have lost way too much money at these prices, and its not like you can sell just the generators or just the retail - either both or nothing. if Mr St Baker wanted out he could have sold down the other year at the 2.50 odd prices and didn't. So I cant see that, you never know if the price keeps down like it is or falls lower, he might even buy it back that is the bit he doesn't own... its happened before on other companies. The only way they might sell is if the US story is so great and that they effectively decide to put all their eggs just into the US basket - but then again I think personally unlikely but too early to see how US will go - so me thinks nothing in the next few years, except if price falls more or doesn't improve significantly then I am sure Mr St Baker might buy back the farm and add it to his base load generation. Then he would have baseload, peaking generation (covering NSW, QLD and WA) and a natural retail book of customers - fix it up - might actually make a strong competitor to the others by bulking up it - alteratively, maybe EPW might buy the power station f Mr St Baker, certainly gets rid f the credit risk - although they take the operational risk but I am sure they could do that well, add to it etc with some private equity and come back to the market in a few years time to relist it.... BTW I only just thought of that as I was typing - its not a bad idea from his part is it.......That's how the rich get richer, remember Kerry Packer said you only get one Alan Bond in your life

Anyway Joewolf - enough typing for me today - my hands are now killing me - but sorry everyone I think I wrote too much but I just wrote it as I went - and didn't want to spend the time re reading it constantly to get it down...after all its the weekend..... hope everyone enjoys it and helps to put them to sleep

Happy for any feedback thoughts and comments....GLTA