2019 River Murray Water Information SessionsCurrent conditions and options for 2019-20

Chris Olszak | Director | Aither | March2019

SA Murray information sessions

• Independent advisors on water markets, policy and infrastructure

• Our team works closely with investors, agricultural corporations and governments

• Offices in Melbourne, Sydney, Canberra, Brisbane, Adelaide

• Aither provides its water market clients with:

– Ongoing advisory retainers

– Transaction and investment due diligence

– Water portfolio strategy

– Water valuation services

– Water price modelling

– Regulatory and policy advice

Who is Aither?

2

The dryland drought conditions have been serious and have

greatly reduced inflows into storages

3

1 March 2018 – 28 February 2019

Allocation prices have responded to reduced inflows and high

demand

4

Source: Aither, 2019. Based on state water registers.

Major southern Murray–Darling Basin allocation market prices

$-

$100

$200

$300

$400

$500

$600

Feb 2017 May 2017 Aug 2017 Nov 2017 Feb 2018 May 2018 Aug 2018 Nov 2018 Feb 2019

Combined Murray Murrumbidgee Goulburn SA Murray

Entitlements prices continue to rise

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Source: Aither, 2019. Based on state water registers.

Aither Entitlement Index (AEI)

217.6

0

50

100

150

200

250

Jul 2008 Jul 2010 Jul 2012 Jul 2014 Jul 2016 Jul 2018

Ind

ex

Large shifts in irrigated agricultural demand have occurred

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Tree cropsLarge increases in the

planted area of almonds

(and citrus) in the lower

Murray and the

Murrumbidgee

CottonLarge scale introduction of

cotton into the sMDB with

~70k ha and 800k bales in

Murrumbidgee and Murray

for 2017-18 season

GrapesStrong export conditions

have driven recent

investments in new table

and dried grape

developments

The forecasts for next season are concerning

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Victorian 2019-20 mid-February allocation forecasts, announced 15 February 2019

NSW 2019-20 opening allocation forecasts, announced 15 February 2019

Entitlement Wet Average Dry Extreme Dry

Victorian Murray HRWS 100% 100% 58% 20%

Goulburn HRWS 100% 100% 47% 18%

Campaspe HRWS 100% 100% 32% 16%

Loddon HRWS 100% 100% 37% 0%

Broken HRWS 100% 100% 7% 0%

Bullarook HRWS 100% 100% 39% 0%

Entitlement Opening Allocation

NSW Murray GS 0%

NSW Murray HS 97%

Murrumbidgee GS 7%

Murrumbidgee HS 95%

Lachlan GS 0%

Lachlan HS 100%

Water allocated in dry years compared to horticultural demand

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https://waterregister.vic.gov.au/images/documents/Water_availability_fact_sheet.pdf

So what does all this mean and how can you manage risk?

• What’s your plan for the short term?

– What happens if doesn’t rain?

• Have you considered all your options?

– e.g. leases, carryover, forwards

• What’s your longer-term business

strategy?

– Long-term average cost of water

• How will you monitor and execute?

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The good news: there are more options than ever before

In addition to local allocation and entitlement markets, you can source water

from:

• Interstate entitlements

• Forwards

• Multi-year forwards

• Entitlement leases

• Parking/carryover

• (Call options)

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Consider the costs, benefits and risks involved

• Cost risk

• Counterparty risk

• Diversification

• Trade restrictions

• Product availability

• Up-front capital costs

• Time frames

• Predictability

• Administration costs

• Liquidity / lock in

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There’s no universal best

option – it’s all about what’s

right for your business at this

point in time.

Buying more entitlement

• Additional SA River Murray entitlement

• Other High Security / Reliability products

– NSW and Victoria – potential diversification benefits versus risk of trade constraints

– Major capital expenditure in a sellers markets at the moment

• NSW General Security and Victorian LRWS

– Lower cost

– Carryover potential

– But mainly yields water in average/wet seasons

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Leasing entitlement

• Typical cost – 5-6% of entitlement cost (currently around $300 - $370/ML for Vic 7 High and SA Murray)

– Lease cost has increased significantly in the last 12 months

• Consider as a financing product – Opex not capex

• But you still bear the allocation risk

• Other features to consider– Term / extension options, revaluation clauses, access to carryover rights, payment terms

– Mainly sourced from major water investors

13

Forwards for allocation

• Typical cost

– Premium on current allocation price (reflecting cost to carryover water)

– Currently around $580/ML for next season

• The only product which guarantees delivery of volume of water on a set date

– Counterparty risk is more the issue here

• Other features to consider

– Term – hard to get more than 2 year forwards

– Payment terms and delivery dates

– Mainly sourced from major water investors

– Locking in at a high price – regret is your biggest concern

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Purchasing carryover space

• Draws on carryover rights of others who are not using them

– Mainly in NSW and Victoria

• Move your allocation at end of year, then move it back again in new year

• Prices vary based on demand for carryover and the system

– Generally fairly cheap (circa $20-$35/ML of space but this varies and check conditions)

• An alternative to purchasing Vic LRWS and NSW GS entitlement to get

access to carryover

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Spectrum of water portfolio options to balance risk and return

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Owned

entitlements

Allocation

spot market

Allocation exposedOPEX intensive

Leases

Allocation

spot market

Light hedge

LeasesOwned

entitlements

Allocation

spot market

Conservative CAPEX intensive

Owned

entitlements

More hedge

Source: Aither, 2019.

Carryover or

forwards

Carryover or

forwards

Leases

Carryover or

forwards

Be proactive

• Sunraysia wine

grape grower – 2010

“If you are not across

the water market, then

you might as well be

playing golf”

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How Aither can assist

• Monthly updates for retainer clients

• Transaction and investment due diligence

• Water portfolio strategy

• Water valuation services

• Water price modelling

• Regulatory and policy advice

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www.aither.com.au

© copyright Aither 2018

Chris Olszak

Director

+61 425 707 170

chris.olszak@aither.com.au

© 2018 Aither Pty Ltd. All rights reserved.

This document has been prepared on the basis of information available to Aither Pty Ltd at the date of publication. Aither Pty Ltd makes no

warranties, expressed or implied, in relation to any information contained in this document. This document does not purport to represent

investment, commercial, financial or legal advice, and should not be relied upon as such. Aither Pty Ltd does not accept responsibility or

liability for any loss, damage, cost or expense incurred or arising by reason of any party using or relying on information provided in this

document. Any party that uses information contained in this document for any purpose does so at its own risk.

The information contained in this document must not be reproduced or used, in whole or in part, for any purpose without the express written

permission of Aither Pty Ltd.

Images courtesy of the Earth Science and Remote Sensing Unit, NASA Johnson Space Center (http://eol.jsc.nasa.gov).

Quick overview of southern MDB markets

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Total entitlement market value (February 2019):

$23.4 billion

Aither Entitlement Index (AEI) (February 2019):

217.57 points (up 38 per cent over

twelve months)

Annual value of total entitlement transfers (2017-

18):

$347 million Estimated annual value of commercial allocation

trade (2017-18): $189 million

(approximately)

Entitlement market turnover (2017-18):

2 per cent

Allocation prices (week of 4 March 2019):

$450 to $455 per ML