Ann: ERM Power announces LGC Fulfilment Plan for 2016, page-19

Maybe I am being stupid - sometimes happens.

Having tried to unpack this I get these issues:

1. If you pay $123 million and its not tax deductable then unless they recovered these charges from their clients they would not have the income in their P&L. So I am assuming is that to date they have taken the LGC requirement and purchased LGC certificates. That that cost was part of their operating expenses.
2. If that is the case and they have recovered the $123 million from customers then in effect they had a choice to purchase certificates which cost $90 or $171 million. They can then expense those and get a tax deduction. However if they used the $65 as a price recovery then they would in fact incur a tax loss of the difference and that's $48 million gone via purchasing LGC's
3. So they are in fact going to pay $37 million in tax ( being the taxable income recovered of $123 million @ 30%) together with the $123 million which is $160 million in total or $11 million less than via purchase. They can always purchase certificates in the next 3 years if they want to unwind this charge.
4. They then see the benefit of that $37 million as giving them franked dividends of $123 million they can pay to shareholders.
5. They then hope that the cost of purchasing LGC's drops and they can at some point take a decision to purchase on market - if they increase then in effect they have limited the cost...

So I dont see this as totally positive because they really have to find the $37 million in tax to pay over which becomes an expense...

I dont think they have 1.9 million LGC's on their balance sheet - I just think they decoded not to pay more than they have recovered. What is interesting is that every time they renew a supply contract they can take a profit of $25 per MW as the new contracts will in fact have to recover $90 going price or more suppliers will be paying the penalty.

Personally I think they are being smart and taking the cheapest option but maybe we would have been better served not to grow the business into the next few years whilst this uncertainty exists.

I am no expert in this but its the only way I can unpack it and make sense out of it.

Does it mean that its best to not grow but milk your existing size and not get into this expansion phase? If they say you are only recovering $3.00 per MWH then how does that relate to the $65.00 cost ... I dont know enough to unpack that.