Meridian Energy Limited (MEL) Earnings Call Transcript & Summary

Well, good morning, everyone, and a good morning it is. I'm sure you know us by now, but I'm Neal Barclay, Meridian's Chief Executive; Mike Roan, our CFO, is sitting right there. Also, slightly out of camera, we have Owen Hackston, our Investor Relations Manager; Jason Woolley, our General Counsel; and our Head of Communications, Phil Clark. Mike and I will talk through some aspects of these NZAS -- the new NZAS agreements, and then we can move to questions. [Operator Instructions] Look, it's taken a while, but at last, we have some very positive news in respect to NZAS. This is a fantastic outcome, we think, for the -- in particular for the Southland community. There were a lot of households and businesses that rely heavily on the smelter for their livelihoods. And it's not overstating it, but it would have been a massive impact on Southland had the smelter closed. And I can assure you that was at the forefront of our minds as we worked through the negotiations. And I don't believe anybody involved in the negotiations, from any of the generators or the NZAS team, wanted the smelter to close, certainly not on our watch. I think it's also a fantastic outcome for New Zealand in terms of validating the ability of large industrial customers to work in this country, produce green products, export dollars, productive jobs, all those sorts of things. And just maybe, just maybe, we've helped draw a wee line in the sand in terms of the insidious reduction in industry in this country, which is sort of not helping our productivity from a total country perspective, I think. There was an immense amount of work that went in to producing the contracts so that did take a wee while, obviously. But I have to call out the NZAS team, they did the heavy lifting. They're not only dealing with us, but obviously, at least 2 other generators. Contact and Mercury eventually did deals with them, and other stakeholders. So they did a great job. They got it done. And we're really, really thankful to them. And I must say in the 12 years that I've been dealing with Rio Tinto executives, by far, this lot were the most constructive. They were positive and approached the negotiations in good faith at all times. Now from a Meridian perspective, there were probably 4 -- well, there were 4 things that we talked about constantly that were important to us. Firstly, we needed to see a long-term commitment to the country. The 1-year termination for convenience clause that was struck in the 2012 agreement was always going to end up in tears at some stage, and it did in 2020. So I think agreeing a long-term future for the smelter of 20 years is probably the most important and fundamental aspect of these agreements. Now there are termination provisions that allow them to exit after a 10-year period, but -- and Mike will talk about this in a bit more detail shortly, but the provisions around those termination conditions are such that we think we've removed the tendency or the temptation to use that as an opportunity to renegotiate these contracts. Secondly, what was important to us was we needed the smelter owners to understand that they needed to work more in sympathy with the electricity sector, in particular, help manage those dry year events. So they have brought to the table a DR package that we think is groundbreaking, it certainly is on a global stage, from a global perspective, and it's pretty fundamental from a New Zealand electricity sector perspective as well. They will provide up to 185 megawatts of demand response, up to 800 gigawatt hours in any 1 year. Not every year, of course, but over the course. We don't think we'd be calling it on every year. And that's a game changer really from a New Zealand electricity sector perspective. And to put it in context, we'll get the same capacity out of that DR arrangement as we would out of the Huntly unit. So every megawatt of consumption the smelter doesn't use when the lakes are low is a megawatt of coal as a country we won't have to burn. The third point was that we needed to be confident that the smelter owners were being -- were taking the environmental remediation requirements seriously. And they are. We've seen their plan. We know that they're working closely with Environment Southland in Ng?i Tahu. So we've gained confidence that they really are getting on with it. They've sent us a letter which attaches their environmental remediation plan and all the key milestones, and we have attached that letter -- we have included that letter on our website, so it's there for everybody to see. We think it's a strong plan and we support it. And lastly -- what was the last one? Oh, price, most important one. Yes, look, I think -- well, both -- the parties have agreed to keep prices and both the base contract and the DR arrangement confidential. But from our perspective, we think we've struck a fair deal. We think it will underpin the sustainability of the smelter for the next 20 years. It will also return a fair return to Meridian shareholders, which is important, obviously. But most importantly, we think it's a fair price framework, if you like, in the context of what other consumers of electricity pay for their power in New Zealand. And that's pretty important for us too. So all up, we think those 4 conditions were well addressed, and we're very happy with the outcome. There is one other reasonably significant benefit from our perspective that we managed to get out of these negotiations, which is a reduction in our exposure to one very large customer, obviously, of 95 megawatts. So our base contracts that we're moving from, and in net terms once you take into account Contact back-to-backs, we'll be moving from 472 megawatts to 377 megawatts. So obviously, it gives us an advantage in terms of diversifying our exposure across a larger customer base. But I think it's also a positive for the sector because -- and a healthy aspect because NZAS have diversified their risks across more generators, and other generators have stepped up to the challenge. So it's a net win for everyone too, I believe. Oh. There are some CPs and they're articulated. Mike will talk about these in a bit more detail. From our perspective, the one critical one is the approval we need to get from the EA for having a materially large contract. We do believe that we've met the conditions of the code in terms of the materially large contract rules, but we had to go through the process of getting that approved. And hopefully, we will see that approval some time during the month of June. So that's that. I think all up, we believe we've come up with a package of arrangements, particularly between us and the smelter, that will last the test of time. I think it removes a massive amount of uncertainty from the sector that's been hanging over us since I've been in the sector, and ultimately, will encourage new investment in new renewables and fast forward this economy to the green state that it can be. And so it's a really, really good outcome, and we're very pleased with it. With that, I'll hand over to Mike, and you're going to talk to some of the contracts in a bit more detail.

Talk to in a bit more detail, as you say. [Foreign Language], everybody. I'd reflect the comments that Neal just made, which is it's a superb day. I think the key bit is removing the uncertainty that we and community in Southland, alongside investors in the smelter have had for the last 10 to 15 years. So it feels damn good to be sitting in front of you on this call this morning. Hey, I'm going to talk the preso as Neal mentioned. So we released a presentation this morning as part of the NZX release and I'm going to talk to that. So if you've got the pack, turn to Slide 4, I reckon, because that's where I'm going to start. If you don't, no big deal, hopefully, my description will be plain English enough that you can follow along. So I'm going to give you the key elements of the base contract and demand response agreement. So before I do that, and to help you decipher the contracts we've actually got this session, but we've also released redacted copies of the contracts on our website, and we're going to follow this up with an Investor Day late June that we're also able to confirm, which is quite nice as well. But if you want full immersion between now and the Investor Day, then download the contracts. As Neal said, the only redactions in the contracts are to the base contract price, the demand response premium and the demand response strike prices. If you've already been on the website, then well done. But you'll also pick up that there's another agreement there. It's the reduction line agreement. And that's an important agreement, but it's pretty straightforward. It just allows us to work with the smelter to help the potline offloads when they need to change the configuration of the smelter and maintain energy security. It's something we've done for a long time, but it is there as well. So I just wanted to note that for anyone that's stumbled across it. I don't intend to talk to it at all. And last but not least is there will be a hedge settlement agreement between us and the smelter. It's not on our website, but it will show up in time. But for now, let's jump back to Slide 4, because outside the force majeure clause in the base contract, it's pretty straightforward. And we've framed up the key terms there. As Neal mentioned, the new pricing kicks in from 1 July, 2024. Now that might sound a bit weird because there are a number of conditions precedent to the agreement and some could be outstanding beyond 1 July, 2024. But if you read the contracts, I'm sure some of you will, if that's the case, and let's say that the CPs don't get satisfied until, say, 1 September, in the first settlement run under the contracts, there will be a washup of contract prices between 1 July and whenever that date is, or 1 September for the purpose of this example. And so it will be as if, in that settlement run, contract prices had begun on 1 July. So new pricing kicks in 1 July 2024. Pricing's escalated from 2028 using CPI. It's conditional, so conditional escalation could be a little unusual. There's conditional on aluminum prices in the previous 12 months being higher than they were in the prior 12 months. It's just our attempt to try and balance out risk and reward for both us and the smelter, something we picked up in the old contract. But the key point is if the smelter does well, then Meridian will do a little bit better as well. Contract's got a term of 20 years. From December 2032, that NZAS can provide 2 years' notice of termination. Hopefully, you've picked up through our presentation that if they do that, on provision of that notice, they have to give us $180 million. Our view is that's a pretty big disincentive to gain the contract. If that's what anyone tries to do at that point in time, we would happily accept the $180 million and move on at that point. But the idea of that payment is to ensure that we have a good conversation as opposed to conversations that we've had in the past. And both we and the team at NZAS think that that's what it will facilitate. So it's a real positive element to the contract from our perspective. And lastly, the prudential support under this transaction is far more substantial than what we've seen in any of the previous agreements. So core base contract, it really is that straightforward. Demand response contract, as Neal said, it's a game changer. It's a game changer for our industry, for us, and for the smelter. And that's because rather than use our traditional swaptions to manage portfolio risks, we're going to start working with consumers. In this case, it's a big consumer, obviously. But if we get it right, it should provide the basis for how we engage with other customers. And from Rio's perspective, while we might get ahead of ourselves a little bit, it could provide the basis for how other renewable electricity systems outside New Zealand utilize aluminum smelters to manage similar risks. We think there's a big role to play beyond New Zealand from that perspective. But given it's new, it will take a bit of road testing, and we're up for change, if required, because we really want this to work. And in fact, it's bloody important that it does. So key point is the demand response component of this contract is sizable and it's more flexible than anything that we have engaged with the smelter on previously. So we expect it to do some pretty big and some pretty heavy lifting. Slide 5 of the preso says we've got 4 demand response options. They span from 18.75 megawatts through to 138.75 megawatts, that we can call by providing notice as set out on Slide 6. And I was aware that Slide 6 might take a bit of ciphering. It's straightforward from my perspective, but what I thought I'd do is I'd give you an example of how to read Slide 6, so it'll help you cipher it. If it's still not a straightforward, the beauty is this is being recorded and you can go back to the recording and replay it, but let's give this a go. So let's say Meridian wants to exercise Option 1 or the 18.75-megawatt option, it needs to give NZAS 3 business days if it wants to do that. At the same time, it needs to nominate the period over which it wants to make the call. So if we look at that 18 point -- or Option 1, we can nominate a demand or a DR period of anywhere between 10 and 150 days. So for the purposes of the example, let's say, we nominate the demand response period as 123 days. So we give that as we provide notice. At the point that the notice period is met, the -- effectively, what happens is the base contract quantity reduces from that point over 5 days until it's reduced by 18.75 megawatts; the 5 days base contract quantity reduces by 18.75 megawatts. The base contract quantity would stay at that level for 123 days for the demand response period. And then it would start lifting back to 377 megawatts over 15 days. So that's how to read that table. If we want to reduce the number of days in the demand response period at any point, we simply give the smelter 3 business days' notice. So say we want to go from 123 to 50 days for that Option 1, we provide the smelter with that 3 days' notice and that period comes into effect. The table works the same way for all the other options. The only thing that changes is different volumes and in different time frames. But hopefully, the example was useful. One key point is the Column 6 on that same table shows that the options that we've got, they're not unlimited. That's for 2 reasons. One, we want to make sure that smelter continues to produce aluminum to meet its customer needs. That's pretty important when you're an aluminum smelter. But as Neal mentioned, we needed to ensure we've got a certain volume from the smelter, but we don't need infinite flexibility from the smelter to manage our portfolio risks. So we think between, on average, 400 gigs in any year over the life of a contract or a maximum of 800-gigawatt hours and any challenging year is, one, what would work for the smelter, and two, what would work for us. So that's how we kind of landed at the volumes. Key point is the volumes in this contract go a long way and the flexibility go a long way to managing dry year risk for us. And it helps decarbonize the electricity sector, as Neal had mentioned. But I did want to provide a little bit of clarity, which is we want to continue to work with our customer base on additional demand response products. We expect that we would pay other consumers for the option to reduce their consumption for similar or products that might be tweaked a little bit. And we intend to keep working with the gas industry on swaptions that might work for them and work for us to supplement this arrangement. So wanted to just make that point. But I'll take you back to Slide 5, because there's plenty in this slide and there might be some people who are lost in the volumes. The key point on Slide 5 is that, if we make a call, say, Option 1, 18.75 megawatts, is that should incent a 25-megawatt reduction in smelter consumption, whereas 138.75-megawatt call should incentivize a 185-megawatt reduction in smelter consumption. The lower number reflects the volume that comes off the contract quantity in our base agreements. The higher number reflects the physical reduction at the smelter, if the smelter wants to secure the full demand response premium and strike for that call. And to put it in context, I know it's been a couple of releases, but useful to repeat, is 185 megawatts is close to the size of a Huntly unit -- or a Huntly Rankine unit, so this is big and it's flexible. Last couple of points before heading back to Neal from this slide, if there's no physical response from the smelter, the demand response premium will half. So it's a bit of an incentive that's in there. The strike prices in the contract have been dovetailed to both ensure that the smelter receives a cash flow or revenue stream that would offset the revenue it received had it made aluminum, while being aligned to where we think the economics fit to sit within our portfolio. There's just a nice balance and relationship of where they have landed for both the smelter and for us. And lastly, the term of this agreement is the same as the base contract, so they are linked. And prices in this contract escalate in very similar ways to contract prices in that base agreement. One thing not on the slide, pretty important, it is buried in -- buried is probably the wrong word. You'll find that in the demand response agreement, is Meridian won't pay the demand response premium for the first 6 months of the contract. We tried to put it all in a pretty picture, Owen did that is, so they say a picture tells a thousand words. That's Slide 7. It does do a good job of stepping through where we sit today versus where we'll end up over time. But we did want to try and simplify things. That's it for me until we do questions. So [Foreign Language].

Cheers, Mike. Hey, look, I want to sum up quickly. Jason, Owen, Mike and myself, we've been trying to get this kind of outcome since 2012. So it's been quite a journey. And I think it's a great outcome for all the reasons we've just talked about. But also, I think from a New Zealand perspective, it's a good outcome from a reputational perspective. We are open to business and it's a great place to do business, and if you want to produce green products for export markets, so that's pretty important given the sort of direction of travel over recent times. And lastly, Mike mentioned it, but our Investor Days are on, 24th and 25th down at Manapouri, which is quite appropriate as it turns out. And now we'll all have to find something else to grizzle about over dinner, so that will be fun. Anyway, so we'll get to your questions. [Operator Instructions] Thanks.

That's right. So as Neal said, good to see hands have already been raised. We can see the order that the questions or the hands were raised. So I'm going to open, Andrew, your microphone. It's Andrew Harvey-Green. Are you there, Andrew?

Shall we try Grant in case Andrew is getting it wrong? This is a homemade video comm, so this was always a risk.

It is. Right. So Andrew, we're going to come back to you. So Grant?

Can you hear me, guys?

Yes.

Yes.

There you go. Perfect.

It is.

Thanks, Grant.

Look how well your little home job's worked. And now there's two things you've done so well this morning. So first question. You're not giving the price on these contracts, but aren't these -- need to be certified by the EA, won't that be made public at that stage?

I don't believe it is.

No.

No, they actually have to go through. So they will understand the price clearly, but they do not make it public as part of their process.

Yes. Keep going, Grant. Keep going.

To be honest, Grant, we were reasonably comfortable for releasing the price because the investor community works it out pretty quickly anyway, looking at our operating results and so forth. But I think the smelter just had a view on that and they're consistently applying, so.

And then in terms of this demand response, are all the strike prices across all options the same? And then just extension on that, can you get 1/2 back even if you just call one of those little options, so it's either nothing for 1/2 or you pay the full price?

So first question, Grant, was, are the strike prices the same across all options? The answer is no. So the first 3 options, the strike price is the same, and the strike price for Option 4 is higher.

[indiscernible]. Yes.

Yes. And then when you look into the contract, this gets a little complex, but you'll start to see it in the contract, we make full payment of the demand response premium to NZAS, and we do that every month. But to the extent we make a call under the contract and the smelter doesn't respond physically in line with the core profile that we've made, and there are bounds to what reasonable performance looks like, is the payment of the demand response premium is halved and/or returned to us to the extent it's already been received. So you only get...

So it's more penalty on them than an incentive for you not to use it.

Yes, that's a good way of putting it. We've talked for a long time, like with the Rio team, to make sure that it was an incentive rather than a penalty. Because they do -- it's challenging for the smelter to reduce volume, as we all know. It's not a perfect science. So we tried to put bounds in the contract that the team felt were achievable, realistic and wouldn't penalize them. So we're not trying to penalize anybody. We just want to ensure that there is a physical reaction from a system perspective so that there is actually demand response provided. So it was a -- we're trying to provide it as more of an incentive for the smelter. The way it comes off -- across in the contract, it might feel a bit like a penalty. But certainly, the conversations were really constructive, to make sure we could meet what they're after and reward them for doing it.

Fantastic. And my final question, so before the contract stepped down to the low number a few years back, you were looking to normalize $0.0488 dividend. Can we now expect that announcement soon to return to that sort of policy? Or do we have to wait until the end of next month to get a revised dividend outlook?

Grant, we're aiming at August, so you might have to wait a little longer. Because if you go back to our announcements, what we've said is we'll review both the policy and the dividend profile that flows from the policy once we know whether the smelter was going to stay or go. So we need a little bit of time to work that through with the Board and from a policy perspective, and then we'll frame up -- well, it will become obvious at that point what that means from a dividend profile perspective. So it will take us just a little bit longer. I'm sure you'll ask us at our Investor Day, and we'll probably have a little more info. But we do need to engage the Board, obviously.

Well, thanks so much for answering my questions, and thanks for getting the industry back on to a level track.

Thanks, Grant.

Yes. Thanks, Grant. And can you throw yourself...

Back on mute.

Back on mute, that would be awesome. Thank you. Andrew, I'm going to come back to you. No? Okay. Owen, we'll try and work with you to remedy that. We're going to go to Vignesh.

Can you hear me?

Yes.

Hey, mate. Yes.

Awesome. Congrats once again. Obviously, a long time coming. I suppose just two questions from me today, if you've already been asked. But can you talk to anything on the EAF carbon allocation grant to the smelter from MFE? Obviously, it's a reasonably critical drive in economics and potentially a reset every year. Do you have any color on what that is or at least when we can expect an update from them?

No, we don't, Vignesh. We've...

Just don't have visibility at all.

We've got no visibility at all. You'll have to talk to Chris Blenkiron. He might be able to provide a better...

He might be able to give you a little bit of color on it. But one thing we do intend to do, Vignesh, is once the CPs have been either waived or realized, then we will provide a further disclosure. So -- But we wouldn't do it on a CP-by-CP basis. We'll just work through all the CPs and let the market know that the contract's come into effect. So sorry, mate, doesn't answer your question, but we just don't -- we don't know.

Okay. No problem. And just secondly, I suppose, I think you mentioned this briefly in passing earlier, Mike, but how binding is the demand response arrangement with NZAS? The only reason I ask that is there's a Clause 4 on the current contract, I think it suggests that NZAS really just bears the lack of the strike price payment if they don't comply. Is that a sort of similar style in this revised arrangement?

I'd be -- hey, Vignesh, I'd be really surprised if the smelter doesn't operate in the way that the frame is intended, which it provides real demand response is -- because we're relying on them as a country. So the way the contract works and contract payments work is Rio only gets paid for the volume that it reduces. In terms of the demand response premium, the option comes into effect, and we get contract volume relief under the option. So Rio would be paying the spot price to the extent it didn't respond as we anticipate. So it's a reasonably healthy incentive. But I'll just come back to the whole conversation with the smelter has been how can they provide support to the system in ways that they hadn't done historically and that the supply side has provided. And over time, it's going to become more and more important that they do. So the revenue streams in the contract, as best we can see them, we're trying to ensure that Rio's revenue or the smelters' revenue is maintained through the demand response payments and the strike prices during the call in lieu of producing aluminum. So you don't know what you don't know because it's a financial contract.

But I think for sure, there's a strong financial incentive that they will [indiscernible] if they don't. And as Mike said, this is the full intention to have that.

Yes. But we expect it to do some heavy lifting, Vignesh.

Understood. Otherwise, it seems to be a fairly elegant contract by the looks of it. I think that's all for me, guys.

Thanks, man.

Thanks.

I've actually got Andrew's questions here. So Andrew, I'm going to read them directly as you said them. So confirm the 800-gigawatt hour annual mix and the DR is Meridian's share? The answer is yes to that. Any consideration the fourth potline supply? The answer is no to that, Andrew. We did talk about that early on, but it was a step too far. Obviously, we wanted to get confidence and commitment on this agreement. But never say never on that stuff. Where's there's a will, there's a way. And any thoughts -- the last question is, any thoughts on impact of Rio buying out Sumitomo, is no, not really for us.

I think it might speed up decision making. We haven't seen Sumitomo executives at all through this process. So Rio fronted the thing from start to finish.

Yes. And we'd just be guessing at anything. So hopefully, that faithfully asked the questions that you had. If not, text Owen and let him know. So I'm going to go to Steve Hudson.

Congratulations from me too, and to the rest of the team. Hey, most of mine have been asked. But I guess the smelter will be -- it's sort of the same vintage as me actually, it'll be 74 years old in 2044. My understanding is it's like Grandad's axe, if I'm still allowed to say that. Have you got any sort of insights into whether or not there's life in the old dog from 2044 or is that it? Or basically, can it live for longer? I know Bell Bay is 70 years old, 70 years old as we stand today. So I'm hopeful that there might be a bit more in it. But any sort of feeling on that?

I mean, we don't know for sure, obviously. But certainly, the message we have got and the reason why term was really important to Rio as well, was they do expect to invest in the smelter. Some of this new technology they're trialing elsewhere, they can retrofit into the smelter and make it even more green. And I guess if you're investing money into something, and the sort of nature of the businesses that we're in or they're in, they'd be looking for potentially longer than to 20-year returns. So I wouldn't be assuming that the smelter closes in 20 years, that's for sure. And we'll learn more, I guess, in the next wee while as we see their investment plans.

And just one on demand response and sort of balancing the smelter's high purity and ultrahigh purity production, did you get any insight into whether or not they've cracked that puzzle? Because my understanding was the demand response was a little tricky because of those high purity lines.

Yes. Hey, we wouldn't expect that demand response comes off the high purity lines. So the 185 megs that you see as the max core or volume that might be reduced is likely to come off the other pipelines. So that high purity pipeline would just stay in effect and continue to produce the high purity aluminum. So that's probably a question to confirm with them, with Chris Blenkiron and team, or Andrew Elder, but that's certainly what our take would be.

Excellent. And just final one from me. I mean you -- we've talked in the past about the chilling effect that this smelter and uncertainty around its operation has had on GE's grid gas market, low generation, you name it. I mean, Neal, maybe a question for you, just how profound is this in that regard in terms of unlocking investment across the sector?

Yes. Look, I think it's a game changer. I mean we haven't been sitting on options, but we haven't been pursuing them as fast as we possibly could have. I think this -- the level of uncertainty removed now will firm up those investment decisions, and will also open up the resource in Southland. I mean there's a couple of wind farms that have been developed, but there's some great resources down there that's at very, very competitive sort of pricing or LCOEs that we think will now be developed at haste. So I think there's some talk about greening up our economy by closing down some of these large industrial users that use the renewable energy. I think the offset must be true. We need to grow the level of renewable energy, use that advantage that we have in this country, brand new industry into the [ gland ]. I mean obviously, data center is becoming pretty clear and obvious target for us, but I think it's the foundation now we go forth and become a far more green, sustainable country supporting the globe and its aspirations.

Cheers, Steve. And I'd add to that, which is confidence is everything, Steve, is whether it's from an economy, we're talking ourselves down in that perspective, or an industry that forms part of the economy, is you've got to have confidence and you've got to have certainty. So that's what that brings. I'm going to open the mic to Cam. Cam, all yours.

Congratulations, guys. Congratulations to the team, and good outcome.

Yes, thanks, Cam.

Look, first question is just can you talk to that risk around the EA approvals? Is it more kind of administrative? Or do you think it's open to challenge?

We've -- I mean, we understand the rules. We understand the nature of the contracts that we've entered into. We are confident they pass those rules. But it's still there's a process that has to be worked through. And they are the regulator. But they'd have to, I think, start thinking outside of the existing rules that are part of the code to find an issue with these contracts. So we're hopeful, but like I say, it's really their process. They have seen early drafts. I know we finalized...

Okay. So they've really got a heads up.

So they've got a heads up.

Yes. Okay. Great. And I was just wondering about the duration, the 20-year duration of the contracts. Sort of what sort of analysis has gone into kind of just looking at different durations and what best suits you guys in terms of your portfolio?

Well, interestingly, Cam, we started off with a shorter contract. So we proposed a shorter contract than 20 years, and it was the Rio team that wanted additional confidence in term for the reasons Neal mentioned, is if they're going to apply capital into this business, they need a longer runway. So we actually worked to a longer term of contract based on their needs. And obviously, it fits with ours. But just so you know, we did start and suggest a shorter term than 20 years.

Right. Right. Cheers for that. And just touching on your future developments, how close do you think you are to pushing down on another sort of supply arrangement?