Meeting of the Finance Audit & Risk Sub-committee

 

Late Items

 

Date:                 Wednesday 11 November 2020

Time:                9.00am

Venue:

Council Chamber

Hawke's Bay Regional Council

159 Dalton Street

NAPIER

 

Agenda

 

Item       Title                                                                                                                        Page

   

10.       2019-20 Annual Treasury Report                                                                                  3

11.       Quarterly Treasury Report for 1 July - 30 September 2020                                       17

 

 


HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

Wednesday 11 November 2020

Subject: 2019-20 Annual Treasury Report

 

Reason for Report

1.      This item provides an annual update of the Councils investment activity and reports the performance of the Council’s investment portfolio for the year ending 30 June 2020.

Background

2.      The Investment management reporting requirements, outlined within Council’s Treasury Policy, requires Office to report to the Financial Audit & Risk Sub-Committee (FARS) on the Council’s investment allocation and investment performance.

3.      As stated within the Policy, all Treasury investments are required to be reported on quarterly, with other defined investments reported annually. A general outline of the reporting requirements is listed below.

Minimum update to FARS

Quarterly

Annually

Liquidity

Investment property

Financial assets

Forestry assets

CCTO - HBRIC

Intangible assets

 

Napier / Gisborne Rail

 

4.      Officers continue to welcome feedback from FARS to improve and further develop the reporting process and to highlight any specific gaps of information they would benefit from.

Discussion

5.      The Annual Treasury report is written as at 30 June 2020, and reports on:

5.1.      Investment Portfolio Summary

5.2.      FY19-20 Performance Summary

5.2.1.   Napier Port (PONL) IPO

5.2.2.   Other

5.3.      Liquidity

5.3.1.   Cash & Cash Equivalents

5.3.2.   Debt

5.4.      Financial Assets

5.5.      Investment Property

5.6.      Forestry Assets value

5.7.      Intangible Assets (Carbon Credits)

5.8.      Napier / Gisborne Rail

5.9.      CCTO – HBRIC


Investment Portfolio Summary

6.      The below table is an extract from HBRC Balance sheet, which shows the complete list of HBRC assets as at 30 June 2020:

 

Asset

FY18-19

FY19-20

Change

 

 

$000

%

$000

%

$000

 

Cash & cash equivalents

28,436

4.0

6,522

0.7

(21,914)

*

Trade & other receivables

10,063

1.4

11,327

1.3

1,264

*

Inventories

113

0.0

452

0.1

339

 

Advances to CCO

6,500

0.9

-

0.0

(6,500)

 

Other financial assets

55,700

7.8

124,366

13.9

68,665

 

Management Funds

41,910

75.2

111,073

89.3

69,163

*

Other

13,791

28.5

13,293

10.7

(498)

 

Investment property

48,393

6.8

57,855

6.5

9,462

*

Forestry assets

11,482

1.6

11,087

1.2

(395)

 

Intangible assets

7,347

1.0

10,096

1.1

2,749

 

Napier / Gisborne Rail

236

0.0

1,486

0.2

1,250

 

Investment in HBRIC

340,396

47.9

457,260

51.0

116,864

*

Property, plant & equipment

27,473

3.9

28,574

3.2

1,101

*

Infrastructure assets

174,709

24.6

187,387

20.9

12,678

 

Total Assets

710,848

100.0

896,412

100.0

185,564

*

 

-

These assets aren’t considered ‘Investment Assets’ and are excluded from this report.  They will however be reported on as part of Council’s Annual Report.

Note amounts listed above are subject to Audit sign off.

 

7.      The graphs below illustrate geographically, where Councils investments are located.

8.      The percentages equate to the percentage of total Council investment portfolio.

9.      The graphs demonstrate the response to HBRC Long-Term Plan (LTP 2018-28) strategy, which pursued the strategy of diversifying the Council’s investment base, thereby de-risking reliance on the Hawke’s Bay region and/or income derived from any one asset class.

10.    The diversification of the investments base is less than anticipated over the past 12 months as a result of the extraordinary value increase realised in PONL; where in spite of Council divesting 45% of its ownership, the investment value increased by $71M. As at 30 June 2020, PONL still accounts for ~60% of the total investment portfolio.

FY19-20 Performance Summary

11.    The tables below show Actuals against the Annual Plan’s income and funding derived by Councils investments.

 

Income

FY19-20

Annual Plan

FY19-20

Actuals

Variance

Actual v. Plan

 

 

$000

%

$000

%

$000

%

 

Other financial assets

7,727

8

3,422

3

(4,305)

44

 

Management Funds

6,650

86

2,530

74

(4,120)

38

 

Interest

1,077

14

892

26

(185)

78

 

Investment property

2,284

2

2,343

2

59

103

 

Endowment leasehold land

1,443

63

1,500

64

57

104

 

Wellington Leasehold land

841

37

843

36

2

100

 

Napier / Gisborne Rail

-

-

-

-

-

-

 

Investment in HBRIC

90,900

90

109,583

95

18,683

121

 

PONL Dividend

7,900

9

2,500

2

(5,400)

32

 

IPO ‘special’ Dividend

83,000

91

107,083

98

24,083

129

 

Income Total

100,911

100

115,348

100

14,437

114

 

12.    The FY19-20 income result reflects six months from the first reports of Covid-19 in China, and the global the impact from it thereafter.

12.1.    Other Financial Assets: namely the two Managed Funds, preformed albeit as expected up to Q2, took a significant hit in Q3 and with support from equally significant global fiscal support packages, made a rebound in Q4.

12.2.    As a result of the numerous global fiscal packages, equity ‘valuations’, when compared to low interest rates will now more appealing.

12.3.    Investment Property:  Endowment land property has out-performed expectations, with the market value of the land increasing by ~$9M in FY19/20. However, a prior Council decision [ACC] limits the benefit to Council, and therefore both land areas performed as expected.

12.4.    Investment in HBRIC:  The success of the PONL listing is detailed below but is as expected, the success of FY19-20.

13.    The overall FY19-20 performance saw a $14.4M or 14% favourable variance in regard to income generation.

PONL IPO Summary

14.    On 20 August 2019, Council successfully listed the minority share of PONL on the NZX; resulting in HBRIC receiving $107M cash proceeds in exchange for 45% of capital.

15.    As part of the LTP 2018-28 consultation, funds received through the capital liquidation were to establish a ‘ring fenced’ ‘Future Investment Fund’ (FIF). As a consequence of being ‘ring fenced’, Council cannot reinvest the 107M received for the capital without initial community consultation.

16.    As a result of an unfavourable IRD binding tax ruling, $35M of the $107M received was financially impractical to transfer as planned from HBRIC to HBRC. Transferring the additional amount would have created onerous tax consequences. Furthermore, the IPO raised an additional $27M compared to the LTP expectations. Any capital achieved over and above the forecasted $83M would initially remain in HBRIC due to Tax consequences.

17.    Following the unfavourable binding ruling decision, HBRIC continued to explore options to transfer the IPO funds in a tax efficient manner to HBRC. Upon consultation with PwC a decision was made in June 2020 by Council and the HBRIC board to transfer/ sell circa 16M of Jarden held domestic investments to HBRC in return for an interest bearing loan. This arrangement transferred all risks and rewards of ownership of the funds to HBRC and enabled HBRC to benefit from future earnings and capital gains of the investments transferred.

18.    The remaining $45M is invested by HBRIC and governed by the HBRC SPIO.

18.1.    As part of the Investment Strategy of the LTP 2021-31, the SIPO of HBRIC will be considered to take advantage of the benefits a CCTO has over Local Government.

PONL IPO Proceeds breakdown summary:

 

 

 

 

IPO

HBRIC

HBRC

 

$000

 

$000

$000

Gross IPO Proceeds

108

 

 

 

Net IPO Proceeds * Ring Fenced Amount

107

 

 

Fully Imputed Dividend Paid to HBRC

 

 

 

44

FIF still held in HBRIC

 

 

35

 

FIF HBRIC

 

 

27

 

Internal Loans

 

 

(17)

17

Total

107

45

61

 

Liquidity - Cash & Cash Equivalents

 

 

Asset

FY19-20

 

 

$000

%

%

 

Cash

4,022

 

61.7

*

HBRC Held Cash

3,553

88.3

 

 

Works Group

138

3.4

 

 

Other – managed trusts

330

8.3

 

 

Short-term bank deposits

2,500

 

38.3

-

Cash & and cash equivalents

6,522

 

100

* $650k is marked to rebalance the disaster damage reserve referenced in the report.

- The remaining Term Deposit was invested for 84 days & returned 1.65%.

 

19.    With the Reserve Bank of New Zealand (RBNZ) currently setting unprecedented monetary policy easing, the forecast for returns from Cash and Cash Equivalents type investments is to remain low, when compared to Pre Covid-19 levels.

20.    This is unfavourable for Council’s FY20-21 Annual Plan forecast interest earned from Cash and Cash Equivalents.  Returns from cash was forecast at 4.5% as per the significant assumptions used in the 2018-28 LTP.    However, lower cash rates will have favourable financial implications through reduced borrowing costs etc.

21.    Cash and cash equivalents are used purely for working capital to enable the organisation to meet its requirements.

21.1.    The following graph displays HBRC daily closing cash position for the FY19-20.

22.    As per the Treasury policy, a minimum $3M liquidity should be accessible at all times.

23.    The low material points seen in January/February are a result of rates being due in February 2020. The low points in May/June are loans yet to be drawn for debt funded activities, such as Sustainable Homes and The Erosion Control Scheme. These loans wear drawn in July 2020.

24.    The Treasury Accountant reports weekly to the CFO on HBRC short term cash position (up to 13 weeks).

Debt Management

25.    HBRC Loans drawn as at 30 June 2020:

 

Loan Id

Bank

Loan Type

Interest Rate

Amount drawn

Execution

Maturity

 

 

 

 

%

$000

 

 

 

1062

BNZ

Fixed

6.4600

 500

07 Jul ‘11

30 Jun ‘21

 

R0423LF63

LGFA

Floating

1.5875

 1,000

10 May ‘19

15 Apr ‘23

 

1068

BNZ

Fixed

5.7500

 1,000

22 Jun ‘12

22 Jun ‘22

 

1072

BNZ

Fixed

6.4500

 2,450

09 Dec ‘03

09 Dec ‘23

 

1076

BNZ

Fixed

5.7400

 2,925

18 Dec ‘14

18 Dec ‘24

 

1078

BNZ

Fixed

4.8500

 2,600

16 Dec ‘16

15 Dec ‘26

 

92

Westpac

Fixed

5.0950

 2,750

14 Dec ‘15

18 Dec ‘25

 

93

Westpac

Fixed

4.5500

 3,000

14 Dec ‘17

15 Dec ‘27

 

R0429LF63

LGFA

Floating

1.2875

 1,500

10 May ‘19

15 Apr ‘29

 

Average

 

 

4.5986

 17,725

 

 

 

 

Repayments

 

 

Principal

Interest

Total

 

FY Year

$000

$000

$000

 

FY21

 3,650

 896

 4,546

 

FY22

 3,150

 532

 3,682

 

FY23

 3,650

 374

 4,024

 

FY24

 2,300

 230

 2,530

 

FY25

 1,625

 135

 1,760

 

FY26

 1,050

 75

 1,125

 

FY27

 600

 39

 639

 

FY28

 200

 23

 223

 

FY29

 1,500

 15

 1,515

 

Total

17,725

2,319

20,044

 

26.    Officers have considered refinancing the higher interest rate loans with the BNZ and Westpac Banks with a lower interest rate with the LGFA. Unfortunately, as detailed below, the penalties associated with the early repayment, and with the LGFA Principals only being repayable at loan maturity – results in a $324k unfavourable option. 

27.    Prior to the 2018-28 Treasury Policy, exposure to fixed / floating interest rates was not prescribed through policy and therefore a more conservative approach was taken to borrow at fixed rates. Unfortunately, in the current environment this has seen Council commit longer to higher the fixed amounts. To mitigate this exposure, new borrowing considers hedging interest risk with a combined of floating/fix rate exposure.

 

Consideration to Refinance

Interest

Total

 

 

$000

$000

 

BNZ early break fee

(735)

 

 

Westpac early break fee

(528)

 

 

LFGA Interest Charged at 1.1804% for 6.75 years

(1,169)

 

 

Total Refinancing Costs

 

(2,432)

 

Westpac & BNZ Interest on current loans held

2,108

 

 

Remain as is

 

2,108

 

Savings / (costs)

 

(324)

*

The opening balance differs to the $17.2M above as calculations where preformed in FY20-21 Q1.

Borrowing Limits

 

Ratio

HBRC

LGFA

Actual

 

 

 

%

 

%

%

 

Net external debt as a % of total revenue

150

175

19.6

 

Net interest on external debt as a % of total revenue

 15

20

1.2

 

Net interest on external debt as a % of annual rates income

20

 25

4.2

 

Liquidity buffer amount comprising liquid assets and available committed debt facility amounts relative to existing total external debt

10

10

65.9

 

28.    The ratios mentioned above are self-imposed for HBRC and are covenant requirements for LGFA.  HBRC will be reviewed as part of the Treasury policy review for the 2021-31 LTP.

Other financial assets

Managed Funds (excluding HBRIC)

29.    The Managed Funds referred to in this section the entire LTIF because this sits solely on HBRC Balance Sheet, and $61M of the FIF held by HBRC.

30.    At 30 June 2020 the total original capital invested by HBRC was $107.1M. At 30 June the value of both investments was valued at $111M. 


Quarter ending Fund balances.

 

Fund

FY18-19

Q1

Q2

Q3

Q4

 

 

$000

$000

$000

$000

$000

 

LTIF

41,926

49,539

50,674

46,305

49,922

 

FIF

-

43,967

44,724

41,712

61,105

 

Total

41,926

93,506

95,398

88,017

111,027

 

31.    The table above, highlights the volatility seen throughout FY19-20, by outlining the investment balance at the start/end of each quarter. While this market volatility can create uncertainly, the downs (and ups) will occur from time to time.  The strategy of diversifying an asset base is by far the best way of safeguarding any investment; achieved through exposing the investment to the full spectrum of any global market movements.

32.    The investment strategy aims to provide capital protection for intergenerational benefit, meaning these managed funds should always be considered with a long-term view.  Reacting to short term shifts in the market can have a significant financial impact in the longer term.

33.    As part of the investment strategy discussion for the 2021-31 LTP the Treasury and SIPO policy settings will be reviewed and recommendations made to ensure any changes to the strategy are reflected in the policy and direction given via the SIPO to the fund managers.

Long Term Investment Fund (LTIF) - Income

 

Annual Plan

Actual

Variance

Opening Balance - 01 July 2019

 

41,926

 

Additional Capital Invested

 

6,578

 

 

50,000

48,504

(1,496)

Maintain Capital Value

1,667

1,418

(249)

Fund Council Operating Costs*

2,500

-

(2,500)

Fund Regional Reserves/Loans

833

-

(833)

Closing Balance – 30 June 2020

55,000

49,922

(5,078)

 

34.    The LTIF actual income of $1.4M is attributed to:

34.1.    Fund earned Dividends/Interest: $0.4M

34.2.    Fund Capital Gain: $1.0M

35.    Direct investment into the LTIF is $46.6M.

36.    Adjusted for CPI, $48M is protected capital.

37.    This equates to a potential cash withdrawal for HBRC of up to $1.9M.

38.    It should be noted that the $1.9M is a life to date amount, not a FY19-20 amount.


 

Future Invest Fund HBRC (FIF HBRC) – Income

 

Annual Plan

Actual

Variance

Opening Balance - 01 July 2019

 

-

 

Additional Capital Invested

 

60,564

 

 

83,000

60,564

(22,436)

Maintain Capital Value

1,660

541

(1,119)

Fund Council Operating Costs*

4,150

-

(4,150)

Fund Regional Reserves/Loans

-

-

-

Closing Balance – 30 June 2020

88,810

61,105

(27,705)

 

41.    As a result of the unfavourable binding ruling, less of the Napier Port IPO proceeds were passed through to HBRC, however these are held in a mirrored FIF fund in HBRIC.

42.    The FIF (HBRC) actual income of $0.5M is attributed to:

42.1.    Fund earned Dividends/Interest: $0.2M

42.2.    Fund Capital Gain: $0.3M

43.    The FIF HBRC balance of $61.1M includes $60.9M of protected capital.

44.    This equates to a potential cash withdrawal for HBRC of up to $0.2M.


Government bonds and Other Funds in Management

Regional Disaster Reserve (RDR)

45.    Incorporated as part of the LTP 2018-28, the RDR is set aside to meet the commercial insurance excess of $600,000 on a ‘disaster event.

46.    Per Council Policy, the RDR must have liquid investments available above $2.75M.

47.    During FY2018-19 $200k was utilised from the reserve and put towards the HB draught relief fund.

48.    At 30 June 2020 the reserve balance was $2.8M.

 

Type

Maturity

Return

FY19-20

 

 

 

 

Interest Earned

Capital Gain

Value

 

 

 

%

$000

$000

$000

 

GOVT Inflation-indexed bonds

20/09/2030

3

16

9

545

 

GOVT Inflation-indexed bonds

20/09/2025

2

6

5

280

 

LFGA Fixed Rated Bond

15/04/2023

5.5

10

-

175

 

Total

 

 

32

14

1,000

 


 

Fund Manager

Fund

5 Year Avg. Return

Comment

FY19-20

Value

 

 

 

%

 

000

 

Milford

Active Growth

10

A medium to high risk investment, with focus of ASX.

121

 

Devon

Alpha Fund

5.18

A higher risk investment, with a concentrated portfolio of approx. 10-15 selected companies listed on the NZX and ASX.

66

 

Platinum

International

5.40

A medium risk investment, with a portfolio of 70-140 companies from across industry sectors and geographically spread.

177

 

Platinum

Asia

10.7

A medium to high risk investment, with a diversified portfolio of Asian (ex-Japan) companies across industry sectors.

75

 

Orbis

Global

8.5

A medium to high risk investment. The Fund is designed to remain fully invested in global equities.  It aims to earn higher returns than world stock markets.

166

 

Orbis

US

(2.1)

The Fund seeks capital appreciation in US dollars on a low risk global portfolio.

76

 

MMC Fund

Aspiring

10

A medium risk investment. The Fund principally invests in NZX, ASX and Globally listed equities. The principal objective of the Fund is to achieve positive absolute returns averaging at least 4% over inflation

135

 

Total

 

 

 

 

816

 

 

 

 

 

 

 

 

Prior Year Returns & cash

 

 

963

 

 

 

 

 

 

 

 

DDR Total

 

 

 

 

2,779

 


Investment Property

 

Property

FY18-19

FY19-20

Change

 

 

000

# of Properties*

000

# of Properties*

000

 

Endowment leasehold land

30,645

168

39,630

 160

8,985

 

Wellington Leasehold land

17,300

12

17,750

12

450

 

Property at Tutira

450

1

475

1

25

 

Total

48,395

181

57,855

173

9460

*

The number of properties is different to the number of leases because of multiple dwellings etc.

 

Endowment leasehold land

49.    The Endowment leasehold portfolio comprises of 160 individual leases, with all but 1 (commercial) being residential leases. The majority are perpetually renewable ground leases, renewable every 21 years at a prescribed rent at 5% of the land value when reviewed.

50.    As per the Hawke's Bay Endowment Land Empowering Act, Freeholding the land is permitted to only the sitting lessees and this is occurring steadily, although the rate is slowing as the proportion of cross leases remaining increases where freeholding is more complex.

51.    On 17 December 2013, HBRC sold its entitlement to the next 50 annual rents of the endowment land to ACC for $37.7M to ACC; effectively creating a present-day value of a $172M loan discounted at 6.88%. These funds were originally budgeted against RWSS, however has been invested as part of the LTIF.

52.    When accounting for the ACC agreement, the Endowment leasehold land incurred a $1.3M outflow of cash for the FY19-20 year as detailed below.

 

Financial Performance:

 

 

 

 

$000

$000

 

Annual Rent Collected

1,500

 

 

Collection Cost (ACC)

90

 

 

 

 

1,590

 

ACC minimum repayment

(855)

 

 

PV of Freeholding (paid to ACC)

(1,800)

 

 

Gain/(Loss) on Value sold, when compared to present value

(260)

 

 

 

 

(2,915)

 

Total

 

(1,325)

 

53.    The agreement assumed the Endowment Lands increased at 1.5% year on year. Although the Napier Market is presently out preforming this assumption, when a section is freeholded HBRC must pay out the present value of the remaining years rent previously sold to ACC which in effect reverses any upside for HBRC. This resulted in $1.8M or 18 leases being paid out in FY2019-20.

54.    It is likely that in the near future, this agreement will continue to heavily favour ACC, as HBRC will likely be paying back any freeholded properties faster than it was assumed. In the longer term, it will be less onerous as the percentage of cross lease leaseholds grows, and whereby freeholding is generally more complex, and it is likely only rental payments will be due.

55.    As at 30 June 2020, the minimum repayment to ACC is $45.1M, relating to the 159 leases, 90 single and 69 cross leases.

Wellington Leasehold Land

56.    The Wellington portfolio comprises of 12 individual leases, within the main, inner city residentials areas of Wellington City. The majority are perpetually renewable ground leases, renewable every 14 years. At a prescribed rent between 5.00-5.25% of the land value when reviewed.

57.    Annual rent received for the FY19-20 was $843k, representing a 5.1% cash return on Investment.

58.    As part of the required Annual Reporting process, an annual valuation is completed on the properties. The FY2019-20 saw the investment grow $0.5M (capital gains).

Future lease renewals

59.    As a requirement of the Treasury policy, below shows the leasehold properties up for renewal:

 

 

 

Lease renewals

 

Location

FY21

FY22

FY23

FY24

FY25

 

Endowment

20

16

3

8

5

 

Wellington

-

1

1

3

-

 

Total

20

17

4

11

5

 

60.    As indicated above, renewals are important to the HBRC forecast, as rent requirements are set based on the Land Market Value at renewal.

Intangible Assets

 

Asset

FY-18-19

FY19-20

 

 

$000

%

$000

%

 

IT Software

5,342

65.7

6,148

60.9

*

Carbon Credits

2,785

34.3

3,948

39.1

 

Intangible Assets

8,127

100

10,096

100

*

NZU value at 30 June 2020 $31.90, this is compared to $23.10 in 2019.

 

61.    3.12 NZU (Carbon credits) have been gained from the normal forestry and berm enhancement operations of Council.

62.    Council policy is to only sell safe carbon which would offer no liability to repay credits at harvest

Napier/Gisborne Rail

63.    In February 2019, HBRC agreed to advance KiwiRail $1.25M as a contribution towards the reinstatement of the log freight service between Wairoa and Napier.

64.    Repayment of the $1.25M, along with interest, will happen when log volumes of the line for a ‘rolling’ 6-month exceeds 90,000 tonnes.

65.    Due to the Covid-19 market downturn, KiwiRail closed the line in February 2020. The 12 months (July 2019 – June 2020) volumes were 1,946 tonnes.

66.    Current indications from KiwiRail’s are that the line will target to achieve a rolling 6-month tonnage of 39,000 tonnes, or 43% of the required 90,000 tonnes.

67.    HBRC currently does not forecast of any repayment.


HBRIC

Overall Summary

68.    Subject to audit sign off, HBRIC’s Net Profit after Tax was $218M.

69.    Dividends passed from HBRIC to HBRC were $46.5M.

70.    At year end, 30 June 2020, HBRIC held 55% of the capital in NPHL, which was valued $396M or $3.60 p/s.

71.    HBRIC currently holds $1.1M Imputations Credits, which equates to ~$4m of funds able to be transferred to HBRC Tax Free.

 

Fund

FY18-19

Q1

Q2

Q3

FY19-20

 

 

000

000

000

000

000

 

FIF

-

59,009

60,041

58,452

45,620

 

Total

-

59,009

60,041

58,452

45,620

 

Future Invest Fund HBRC (FIF HBRIC) - Income

 

Annual Plan

Actual

Variance

Opening Balance - 01 July 2019

 

-

 

Additional Capital Invested

n/a

45,019

 

 

 

45,019

 

Maintain Capital Value

n/a

601

601

Fund Council Operating Costs*

n/a

 

 

Fund Regional Reserves/Loans

n/a

 

 

Closing Balance – 30 June 2020

 

45,620

45,620

 

72.    The FIF held within HBRIC was not anticipated in the FY19-20 Annual Plan.

73.    The FIF (HBRC) actual income of $0.6M is attributed to:

73.1.    Fund earned Dividends/Interest: $0.4M

73.2.    Fund Capital Gain: $0.2M

74.    The FIF HBRIC balance of $45.6M includes $45.0M of protected capital.

75.    This equates to a potential cash withdrawal for HBRC of up to $0.6M

 

 

 

 

 

 

 

 

 



Decision Making Process

76.    Staff have assessed the requirements of the Local Government Act 2002 in relation to this item and have concluded that:

77.    as this report is for information only, the decision-making provisions do not apply

78.    any decision of the sub-committee (in relation to this item) is in accordance with the Terms of Reference and decision-making delegations adopted by Hawke’s Bay Regional Council 25 March 2020, specifically the Finance, Audit and Risk Sub-committee shall have responsibility and authority to:

78.1.    Monitor the performance of Council’s investment portfolio.

 

Recommendations

That the Finance, Audit and Risk Sub-committee receives and notes the “2019-20 Annual Treasury Report”.

 

Authored by:

Geoff Howes

Treasury & Funding Accountant

Bronda Smith

Chief Financial Officer

Approved by:

Jessica Ellerm

Group Manager Corporate Services

 

 

Attachment/s

There are no attachments for this report.     


HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

Wednesday 11 November 2020

Subject: Quarterly Treasury Report for 1 July - 30 September 2020

 

Reason for Report

1.      This item provides an update of compliance monitoring of treasury activity and reports the performance of Council’s investment portfolio for the quarter to 30 September 2020.

Background

2.      The Investment management reporting requirements, outlined within Council’s Treasury Policy, requires Office to inform to the Financial Audit & Risk Sub-Committee (FARS) on the Council’s current investment allocation and investment performance.

3.      As stated within the Policy, all Treasury investments are required to be reported on quarterly. As at Q1, 30 September 2020, the Treasury Investments to be reported on consist of:

3.1.      Liquidity

3.1.1.   Cash and Cash Equivalents

3.1.2.   Rates

3.1.3.   New debt

3.1.4.   Negative Interest Rates

3.2.      Externally Managed Investment Funds

3.2.1.   Long-Term Investment Fund (LTIF)

3.2.2.   Future Investment Fund (FIF)

3.3.      CCTO - HBRIC

4.      Since 2018, HBRC has procured treasury advice and services from PwC. Their quarterly compliance report has been attached to this report.

Discussion

FY20-21 Performance

5.      The table below shows the income to date against the FY20-21 Annual Plan.

 

Income

Annual Plan

YTD

Annual Plan

YTD

Actuals

 

 

$000

%1

$000

%2

$000

%3

 

Other financial assets

5,644

51

1,411

71

5,056

358

 

Management Funds

5,263

93

1,316

93

5,056

384

 

Interest

381

7

95

7

-

-

 

Investment property

2,343

21

586

29

443

76

 

Endowment leasehold land

1,502

64

376

64

229

61

 

Wellington Leasehold land

841

36

210

26

214

100

 

PONL Dividend

3,000

27

-

-

-

 

 

Total

10,987

 

1,997

 

5,499

275

%1

Annual plan - Asset income vs. Total Income

%2

YTD planned asset income vs. Total Income

%3

YTD asset income vs. YTD planned asset income

 


Key observations

6.      The YTD income of $5.1M YTD equates to gross income the [LTIF & FIF] funds have increased by since 30 June 2020.

7.      Of the $5.1M, $300K is what the funds have earned by way of interest, dividends & selling shares at a gain. Alternatively, $4.8M is by way of ‘market’ equity growth.

Liquidity - Cash & Cash Equivalents

8.      Cash and cash equivalents:

 

Asset

30 Sep 2020

 

 

 

$000

%

%

 

 

Cash

15,223

 

100.0

 

 

   HBRC Held Cash

14,149

92.9

 

 

 

   Works Group

502

3.3

 

 

 

   Other – managed trusts

572

3.8

 

 

 

Short-term bank deposits

-

 

-

 

 

Cash & and cash equivalents

6,522

 

100

 

*

$9m was placed in Term Deposits on 2 October 2020, ranging for a period between 17-56 days and returning on average 0.64%.

 

9.      FY20-21 will see historical low interest rates continue throughout the year, which will limit Council’ earning additional income via Term Deposits from surplus liquidity.

10.    To highlight these low market rates, when placing the $9M in Term Deposits recently, the Retail Term Deposits before investment were:

 Term

BNZ

ASB

Kiwi Bank

ANZ

Westpac

up to:

Interest Rate %

30

.15

.15

.25

-

.33

60

.25

.21

.25

-

.68

90

.40

.30

.65

-

.79

 

11.    It is expected that low interest rates will remain for a sustained period. The budgeted interest earned amount in the FY20-21 Annual Plan, was 4.5% or $0.4M for the period. Further analysis has since been completed on this significant assumption set in the 2018-28 LTP, and a 1.5% return or $0.2M, would be used as a deposit rate assumption going forward. It is expected the shortfall can mostly be mitigated through the daily management of the Council working capital via the earlier collection of rates and later borrowing based on this.

Rates and Rates Collection

12.    Last year Council decided to change the due date for Rates Invoices from 1 October to 20 September and to apply the penalties on 21 September for any outstanding rates rather than 31 January which had become the pseudo due date. During the Annual Plan process it was decided to leave the penalty date as 31 January to allow those experiencing hardship to pay the rates without penalty however the due date remained as 20 September. This has seen 80% of all Rates revenue, $28.7M, now collected, compared to 23%, $6.5M at the same point last year.

13.    The following table shows HBRC rolling monthly cash liquidity position. The impact of Rates being collected early is highlighted in the September liquidity position.


 

Cash Position

Apr 20

May 20

Jun 20

Jul 20

Aug 20

Sep 20

Millions (NZD)

Actual

Actual

Actual

Actual

Actual

Actual

Mean

6.5

3.3

4.1

6.5

3.3

9.7

High Point

15.8

6.2

6.3

15.8

6.2

18.3

Low Point

2.6

1.4

1.4

2.6

1.4

4.7

Available facility*

5.0

5.0

5.0

5.0

5.0

5.0

* facility available to HBRC is the BKBM + 1.1% margin. As at June 30, this would cost 1.4% to call on.

 

Debt Funding

14.    Council raised $6.3M of funds through the LGFA tender on 8 July 2020, with principle repayments due in 2024 and 2025. The debt was to fund FY19-20 spending on Sustainable Homes and the Erosion Control Schemes.

15.    New borrowings expected for the FY20-21 include:

15.1.    $7.6M – due to % rates increase and expected reduction in Investment Returns due to COVID-19

15.2.    $3.5M - Sustainable Homes

15.3.    $2.3M - Costal Erosions Schemes

15.4.    The drawn down of loans are based on cashflow requirements. As forecasting is still manual and phasing of budgets is not done, the exact timing of loan drawn downs is monitored on a weekly basis.

16.    A significant forecasted cash item is the Napier Port Dividend, forecasted for December 2020 and will reduce the requirement to borrow to later in the year depending on the level of dividend.

17.    Contrary to the interest earned rates mentioned earlier, the historical low OCR benefits Council where loans are expected to be raised at ~1.15%, ~1.15 less than the ~3.3% forecasted in the FY20-21 Annual Plan.

Negative Interest Rates

18.    Recent forecasts have indicated that in the foreseeable future, there is a likely chance that the NZOCR will fall below 0% (currently 0.25%).

19.    A negative OCR will largely concern wholesale bank rates, as banks will be driven into a position to lend money, rather than keep it and therefore paying interest the funds.

20.    As a borrower, we can expect fixed rate loans will become highly competitive, however as borrowing does attract a margin (2.1% average in 2019), it will be unlikely that HBRC will be in a position where it’s being paid to borrow.

Managed Funds

21.    The total capital invested by HBRC & HBRIC across the two funds was $162.2M as at 30 September 2020. This represents a YTD total income return of $5.1M (3%) or $4.7m after capital protection of the investment (2% as per policy).

22.    Both the Long-Term Investment Fund (LTIF) and Future Investment Fund (FIF) have improved significantly since the last reported positions as at 30 June 2020.


Fund Totals

Fund

30 Sep 2019

31 Dec 2020

31 Mar 2021

30 Jun 2020

30 Sep 2020

 

$000

$000

$000

$000

$000

LTIF

49,539

50,674

46,305

49,922

51,810

FIF (HBRC)

43,967

44,724

41,712

61,105

63,094

Total HBRC

93,506

95,398

88,017

111,027

114,904

FIF (HBRIC)

59,009

60,041

58,452

45,620

47,292

Total

152,515

155,439

146,469

156,647

162,196

 

Performance Long Term Investment Fund (LTIF)

FY20-21 Q1

Annual

Annual P.

YTD

YTD

Return

Plan

YTD

Total

 

 

$000

$000

$000

%

Gross of Fees

 

 

1,900

3.8

Net of Fees

1,677

419

1,418

3.7

Capital Protection (2% annualized)

 

 

 

.05

Real net return

 

 

 

3.2

 

23.    The LTIF balance of $51.8M includes $48.2M of protected capital, which equates to a potential cash withdrawal for HBRC of up to $3.6M. It should be noted that the $3.6M is a life to date amount, not a FY20-21 amount.

24.    The below table reflects what the LTIF has achieved year to date, against the FY20-21 Annual Plan.

FY20-21 Q1

Annual

Annual P.

YTD

 

$000

$000

$000

Real Capital Growth

1,118

280

280

Operational Fund

1,667

419

419

Loan Reduction

559

140

719

 

Performance Future Investment Fund (FIF HBRC)

FY20-21 Q1

Annual

Annual Plan

Actual YTD

YTD

 

Plan

YTD

Total

 

 

$000

$000

$000

%

Gross of Fees

 

 

1,984

3.3

Net of Fees

2,053

513

1,931

3.2

Capital Protection (2% annualized)

 

 

 

.05

Real return

 

 

 

2.7

 

25.    The FIF balance of $63.1M includes $61.2M of protected capital, which equates to a potential cash withdrawal for HBRC of up to $1.5M. It should be noted that the $1.5M is a life to date amount, not a FY20-21 amount.

26.    The following table reflects what the FIF HBRC has achieved to date, against the FY20-21 Annual Plan.

 

FY20-21 Q1

Annual

Annual Plan YTD

Actual YTD

 

$000

$000

$000

Real Capital Growth

1,369

342

342

Operational Fund

2,053

513

513

Loan Reduction

684

171

1076

 

Performance Future Investment Fund (FIF HBRIC)

FY20-21 Q1

Annual

Annual Plan

Actual YTD

YTD

Return

Plan

YTD

Total

 

 

$000

$000

$000

%

Gross of Fees

 

 

1,769

3.9

Net of Fees

1,533

383

1,707

3.7

Capital Protection (2% annualized)

 

 

 

.05

Real net return

 

 

 

3.2

 

27.    The FIF HBRIC balance of $47.3M includes $46.3M of protected capital, which equates to a potential cash withdrawal for HBRC of up to $1.0M. It should be noted that the $1.0M is a life to date amount, not a FY20-21 amount.

28.    The below table reflects what the FIF HBRIC has achieved to date, against the FY20-21 Annual Plan.

FY20-21 Q1

Annual Plan

Annual Plan YTD

Actual YTD

 

$000

$000

$000

Capital Protection

1,022

255

255

Available for Dividend to HBRC

2,044

383

1,452

 

HBRIC

29.    The Adopted FY20-21 annual plan, forecast $3M in dividends to be received from Napier Port Holdings Limited, via HBRIC.

30.    Office’s current forecast is the $3M will be received in December 2020.

31.    There is speculative potential upside to this forecast. Earlier in the year, when the decision was made to cancel the interim dividend, the Napier Board did advise they intended to review the full financial year result and outlook in November 2020 before deciding on a final dividend and ensuring they stay within their dividend policy.

Decision Making Process

32.    Staff have assessed the requirements of the Local Government Act 2002 in relation to this item and have concluded that:

32.1.    as this item is for information only, the decision-making provisions do not apply

32.2.    Any decision of the sub-committee is in accordance with the Terms of Reference and decision-making delegations adopted by Hawke’s Bay Regional Council 25 March 2020, specifically the Finance, Audit and Risk Sub-committee shall have responsibility and authority to monitor the performance of Council’s investment portfolio.

Recommendation

That the Finance, Audit and Risk Sub-committee receives and notes the “Treasury Report to 30 June 2020”.

 

Authored by:

Geoff Howes

Treasury & Funding Accountant

Bronda Smith

Chief Financial Officer

Approved by:

Jessica Ellerm

Group Manager Corporate Services

 

 

Attachment/s

1

HBRC Q1 2020-21 Treasury Report

 

 

  


HBRC Q1 2020-21 Treasury Report

Attachment 1

 

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HBRC Q1 2020-21 Treasury Report

Attachment 1

 



 

 


HBRC Q1 2020-21 Treasury Report

Attachment 1

 

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