Late Agenda of Finance Audit & Risk Sub-committee

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”.