3 Brokers downgraded, page-21

FSW - with respect to point number 1 - its not cheaper to pay the penalty. A $65 penalty is not tax deductible like all penalties and fines by government (ie no expense allowed for tax purposes by the tax office) hence why ERM is saying they will have an increased tax charge of $37m to pay on higher taxable profits (as the $123m is not a tax deduction)

So if you do the maths, then a $65 not deductible penalty divided by 0.7 (1-tax rate) = $92.86 equivalent if you paid the market price and then claimed a deduction as such. Therefore it is smarter and better to buy LRECS on the market up to $92.86, only if the price goes above that is it smarter to pay the $65 penalty - this obviously excludes any reputational risk or getting named and shamed in the papers as ERM did, let alone potential customers deciding to look elsewhere....as customers are paying money to support the renewable energy scheme, and that means that Renewable energy generators didn't get paid up to $175.7m ($123m/(1-tax rate). Penalty goes to government and consolidated revenue. Good luck getting back $123m in a few years from the government - probably all spent and them some......

If you look at the prices over the last year, and ERM themselves said the price went up to $90 (but not for the whole year) then ERM have effectively been uncommercial and hit this years earnings by paying the equivalent of $92.86 when they could have paid way less over the year. When you times that by 1.9m LRECS which they said they are paying the penalty on - well that's a lot of money.. minimum $5.4m -if the price was $90 the whole year in the market and it wasn't - it was lower. for every $1 reduction in the cost of the LREC average for the year, ERM has lost the equivalent of $1.9m in gross margin or (EBITDA/EBIT). For the last six months of 2016 the price hovered between $85 to $90, it looked like it was lower for the first half of 2016 as the LREC requirement is a calendar year not a financial year.

The real question is how much gross margin have they sacrificed......on Thursday we will see.