Late Agenda of Regional Council Meeting - Wednesday, 14 December 2022

HAWKE’S BAY REGIONAL COUNCIL

Wednesday 14 December 2022

Subject: Quarterly Treasury report for the period 1 July - 30 September 2022

Reason for Report

1. This item provides compliance monitoring of Hawke’s Bay Regional Council (HBRC) treasury activity and reports the performance of Council’s investment portfolio for the quarter ended 30 September 2022.

Overview of the Quarter – ending 30 September 2022

2. At the end of the quarter to 30 September 2022, HBRC was compliant with all measures in its Treasury policy.

3. During September 2022 there was a breach of counterparty credit risk for a period of 5 days between 22 - 27 September. This was due to receipt of HBRC’s rates income on 20 September and funds were transferred to the Jarden Cash Facility because it offers the highest on-call returns. This was brought back into compliance by transfers back to the BNZ call account and issuing term deposits with Westpac.

4. All other treasury activity during the quarter remained compliant with the Treasury Policy limits.

5. Investment Fund returns have continued to see negative returns this quarter due to a significant financial market decline since January 2022. However, the returns this quarter have been better than the benchmark returns.

6. No divestments have been made from managed funds this quarter. Based on results to date and the value of the protected amount of funds, funds held are not sufficient to deliver the returns required to meet Council’s requirements. Borrowing will be required to cover the revenue shortfall. Further analysis is being undertaken to understand how this will impact the debt forecasts and will be reported on next quarter.

7. Financial markets for the September quarter continue to be volatile, particularly international markets which have been impacted by global inflation remaining at record highs, the tight labour market and the ongoing war in Ukraine. Staff advice is to watch and wait at this point in time, corrective action is not required, and the portfolio is well balanced for the long term.

8. Cash balances are good and borrowing requirements have remained relatively low.

Background

9. Council’s Treasury Policy requires a quarterly Treasury Report to be presented to the Audit and Risk Sub-committee. The policy states that the Treasury Report is to include:

9.1. Treasury Exceptions report

9.2. Policy compliance

9.3. Borrowing Limit report

9.4. Funding and liquidity report

9.5. Debt maturity profile Interest rate report

9.6. Investment management report**

9.7. Treasury investments*

9.8. Cost of funds report Cash flow and debt forecast report

9.9. Debt and interest rate strategy and commentary

9.10. Counterparty credit report

9.11. Loan advances.

10. The Investment Management report** has specific requirements outlined in the Treasury Policy. This requires quarterly reporting on all treasury investments plus annual reporting on all equities and property investments.

11. In addition to the Treasury Policy, Council has a Statement of Investment Policy and Objectives (SIPO) document setting out the parameters required for funds under management for the HBRC Long Term Investment Fund.

12. Since 2018, HBRC has procured treasury advice and services from PriceWaterhouseCoopers (PwC) and their quarterly Treasury Report containing the reports noted in paragraph 8 is attached.

Discussion

13. This report gives a high-level summary of the data in the PwC report.

Liquidity

14. To ensure HBRC has the ability to adequately fund its operations, current policy requires HBRC to maintain a liquid balance of “greater than 10% of existing total external debt”. Current liquidity ratio is 42.08% and therefore meets policy.

15. The following table reports the cash and cash equivalents on 30 September 2022.

30 September 2022	$000
Cash on Call	16,180
Short-term bank deposits	7,000
Total Cash & and Deposits	23,180

16. Council’s balance of cash and deposits compares with the September 2022 balance of $26,845.

17. To manage HBRC liquidity risk, HBRC retains a Standby Facility with BNZ. This facility provides HBRC with a same day draw down option, to any amount between $0.3-$5.0m, and with a 7 day minimum draw period.

Debt Management

18. On 30 September 2022 the current external debt for the Council group was $50.475m (including $1m of pre-funding ($67.138m including the loan from HBRIC).

19. Since the June quarter additional funds of $8.0m were borrowed from LGFA and $450k from PGF lending.

20. The following summarises the Year-to-date movements in Council’s debt position.

Summary of HBRC Debt

	HBRC only	HBRC Group
Opening Debt – 1 July 2021 – excl HBRIC Loan	46,725,018	46,725,018
New Loans raised	8,450,000	8,450,000
Less amounts repaid	(4,700,000)	(4,700,000)
Closing Debt 30 September 2022 (excluding HBRIC loan)	50,475,018*	50,475,018
Plus opening balance - loan from HBRIC	16,663,036	-
Total Borrowing as at 30 September 2022	67,138,054	50,475,018

*Includes pre-funding debt of $1m

Managed Funds

21. The LTP budgets an annual return of 5.16% from managed funds. Of this 3.16% is used to fund activities with 2.0% retained to grow the capital base to enable the future earnings to protect the capital base for future generations. (“Page 33 of LTP – Part 3 – Financial Strategy”)

22. Council budgets separately for revenue from directly held managed funds and those held by HBRIC. HBRIC is required to deliver an overall portfolio return by way of an agreed annual dividend agreed through an annual Statement of Intent. The composition (between revenues from managed funds and other sources such as port dividends is up to the HBRIC board). Council has budgeted to receive $10.5m in dividends from HBRIC within the FY 2022-2023.

23. The Fund performances for this year have been lower than we have experienced for some time. Financial markets have not performed as strongly as the FY2020-2021 with the September 2022 quarter bringing further significant losses to the funds on the back of losses the past 2 quarters also.

24. Given the nature of the investments some volatility is to be expected. However, the performance of the managed funds since placement demonstrate market recovery can occur within relatively short timeframes, and a watch and wait approach is prudent. The portfolio construct is intentionally conservatively balanced for the long-term.

25. The following table summarises the fund balances at the end of each quarter.

	30 Jun 2022	30 Sept 2022
Fund Balances HBRC	$000	$000
Fund Balance HBRC	104,449	103,121
Capital Protected Amount HBRC (2% compounded)	114,239	114,810
Current HBRC value above protected amount	(9,790)	(11,689)

Funds Balances (Group + HBRIC)
Long-Term Investment Fund (HBRC)	45,679	45,101
Future Investment Fund (HBRC)	58,770	58,020
Total HBRC	104,449	103,121
Plus HBRIC	43,226	42,609
Total Group Managed Funds	147,675	145,730
Capital Protected Amount (2% compound inflation)	162,720	163,533
Current group value above/(below) protected amount	(15,045)	(17,803)

HBRIC Ltd

26. In accordance with Council Policy, HBRIC provides separate quarterly updates to the Corporate and Strategic Committee.

Decision Making Process

27. Staff have assessed the requirements of the Local Government Act 2002 in relation to this item and have concluded that, as this report is for information only, the decision making provisions do not apply.

Recommendation

That Hawke’s Bay Regional Council receives and notes the Quarterly Treasury report for the period 1 July - 30 September 2022.

Authored by:

Jess Bennett

Commercial Accountant

Chris Comber

Chief Financial Officer

Approved by:

Susie Young

Group Manager Corporate Services

Attachment/s

Quarterly Treasury report for period ended 30 September 2022

Under Separate Cover

General subject of the item to be considered	Reason for passing this resolution	Grounds under section 48(1) for the passing of the resolution
Recommendations for the appointment of HBRIC councillor directors	7(2)s7(2)(a) That the public conduct of this agenda item would be likely to result in the disclosure of information where the withholding of the information is necessary to protect the privacy of natural persons.	The Council is specified, in the First Schedule to this Act, as a body to which the Act applies.