3 Brokers downgraded, page-31

Brumbypat - well under the legislation they have 3 years to buy certificates and surrender them to the regulator for 2016. So if they are paying a tax equiv market price of $92.86 now, lets just say the price of certificates goes down by $10 - lets say for argument sake $80, they go and buy those certificates for $80 and hand them over, regulator gives them back the $65 not tax deductible which is equiv to $92.86, then EPW will effectively make $1.9m x $10+ or $19m+ gross margin at that time. So they are punting on the price going down, if the price stays up, they make nothing, and maybe not even and over any LRECS for 2016 and just leave penalty.

Does EPW hold those 1.9m LRECS at the moment - no idea, I would say from the June accounts last year they did hold a lot - but do they still hold them now, or maybe they have sold them into the market at the higher prices, depends on what they paid for them. We wont really know until we see accounts and even then, it will be hard to work out - they show under inventory so we will have to look at how much they had at June $ and try to then work out if its gone up or down.

Your logic might be right IF they hold the certificates now - but really if they had bought them cheaply anyway, why not surrender them rather than pay the penalty (non deductible). That is the real issue here is what they are doing and why - even the analysts are really cautious about it... as it came out of nowhere just like many things in the last couple of years with these guys..... I reckon they have sold all their certificates and then paid the penalty - making money on selling the certificates and hoping to make money in the future to buy cheaper certificates to replace the penalty - the proof will be in the gross margins particularly they present. If they have done above then they should have a huge gross margin - making profit on selling their certificates at more than what they paid and on only paying $65 penalty with the rest below the line in tax expense - but that hides a lower actual gross margin on their actual business which the analysts are concerned about. If however, they only have $3/MWh gross margins including the above, then the analysts will be right and it will mean margins have decreased from $4.50 to a lot less..... only a couple of days away so we will see.

The other question here is what are customers paying in their electricity price for LRECs v what the company is paying to buy LRECs or pay the penalty (tax equivalent) - that's another question as well. Are they making money or losing money?