Treasury Organisational Structure. The organisation chart for treasury activity is as follows: Council. Chief Executive. Treasury Management Group

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1 Treasury Policy Treasury Policy Philosophy The Far North District ( FNDC ) incurs risks arising from debt raising, investments and associated interest rate management activity. FNDC carries out its borrowing and investment (in total referred to in this document as treasury activity) within its normal finance function. FNDC s broad objectives in relation to treasury activity are as follows: Compliance with the Local Government Act 2002 and amendments thereto, and other relevant local authority legislation Development and maintenance of appropriate professional relationships with the financial markets Management of all of s investments in line with its strategic objectives; invest surplus cash in liquid and credit worthy investments Raising of appropriate finance, in terms of both maturity and interest rate Effective management of the overall cash position of s operations Timely and accurate reporting on treasury activities. Meeting the above objectives in relation to the treasury area is a risk management function and involves effective management of interest rate risk, funding risk, liquidity risk and credit risk. does not seek to capitalise on such risks; its focus is entirely on their effective management. Accordingly FNDC does not undertake any activity which is unrelated to its underlying cash flows or may be construed as speculative in nature. Structure Treasury Organisational Structure The organisation chart for treasury activity is as follows: Chief Executive Treasury Management Group General Finance Banking Services Officer Corporate Risk Management Treasury Responsibilities The key responsibilities of the above positions are as follows: Approve (incorporating borrowing and investment policy) document Approve amendments to various control limits, bank facilities and approved instruments Review the treasury management process through regular standard reporting Review formally on a three yearly basis, the treasury policy document. Chief Executive Recommend amendments to treasury policies and procedures for approval after reviewing recommendations from Treasury Management Group Overview treasury risk management processes through monitoring of regular reporting. Treasury Management Group Review regular treasury reports to ensure compliance with policies, procedures and risk limits Set risk management strategies in relation to the implementation of this Oversee the management of s relationship with financial institutions Oversee the negotiation of borrowing facilities with bankers, appoint brokers/arrangers/managers. The Treasury Management Group ( TMG ) meets at least quarterly to review the risk management strategies in place and other treasury related issues as appropriate. Members of the TMG are General Finance and Business, Finance, Banking Services Officer, a representative of the Far North District s ( FNDC ) Independent Treasury Advisor as an ex-officio member. General Finance and Business Report treasury activities to Chief Executive, TMG and Manage s relationship with financial institutions Negotiate borrowing facilities with bankers, appoint brokers/arrangers/managers Approve bids for stock tenders. 92 FAR NORTH FUTURE PLAN

2 Finance Manage borrowing and investment activity on a day-today basis Keep TMG and General Business and Finance informed of significant treasury activity and market trends Assist in managing s relationship with financial institutions Recommend most appropriate source of borrowing to TMG Review s daily cash flow position and cash flow forecasts Liaise with brokers/arrangers/managers for issue of debt; co-ordinate tenders if handled in-house Undertake all borrowing activity Act as back-up dealer for investment and cash management activity Reconcile external confirmations to internal records for transactions undertaken by other officers Review reconciliations of investment/cash management records to general ledge Review bank reconciliations Review credit standing of issuers on a monthly basis. Banking Services Officer Execute daily investment activity Update borrowing/investment/cash management portfolio spreadsheet(s) from deal tickets on the day a deal is done Produce internal reports and work papers on investment, borrowing and risk management activity Act as back up dealer for borrowing activity in Finance s absence Reconcile external confirmations to internal records for transactions undertaken by other officers Update credit ratings for issuers on a quarterly basis Manage s daily cashflow and rolling cashflow forecasts Arrange payment and receipt of approved treasury transactions Prepare journals Reconcile bank statements Complete reconciliations of investment/cash management spreadsheet(s) to the general ledger. Check and reconcile direct debits and credits. Independent Treasury Advisor Attend TMG meetings Assist in negotiation of bank funding facilities and also capital market transactions Supply treasury related support to finance team as and when required Other tasks as detailed in LOE approved by GMF. Liability Management Policy Introduction The Far North District (FNDC) borrows as it considers appropriate and exercises its flexible and diversified borrowing powers within the Local Government Act The approves borrowing by resolution arising from the annual planning process. Projected debt levels are ascertained from cash flow forecasts prepared during the LTCCP and annual planning processes. FNDC raises borrowing for the following primary purposes: General debt to fund FNDC s Balance Sheet, including borrowing to fund purchase or shares in Controlled Organisations ( CCO ), trading enterprises etc Specific debt associated with special one-off projects and capital expenditure Borrowing to fund assets with intergenerational qualities. FNDC is able to borrow through a variety of market mechanisms including the issue of stock and debentures and direct bank borrowing or through accessing the capital markets directly. FNDC in accepting advice from its Treasury Management Group (TMG) incurs risks arising from its borrowing and associated interest rate risk activity. In evaluating any new borrowing or renewal of existing borrowings (in relation to source, term, size and pricing) FNDC will take into account the following: the size and the economic life of any specific project being funded the impact of the new debt on overall borrowing limits relevant margins under each borrowing source s overall debt maturity profile prevailing interest rates available terms from bank and stock issuance legal conditions and financial covenants. The sections below detail how FNDC will manage its borrowing with regard to the following: financial covenants on borrowing interest rate exposure liquidity and funding risk management credit exposure provision of security, repayment, contingent liabilities. FAR NORTH FUTURE PLAN

3 Financial Covenants on Borrowings In managing its borrowings, FNDC will adhere to the following financial covenants: Net Debt should not exceed twice Total Revenue Earnings before interest and tax (EBIT)/Net Interest 2.0 times (EBIT has to be at least 2.0 times net interest) Gross annual interest expense not to exceed 15% of total revenue Net cashflow from operating activities to exceed gross annual interest expense by 2 times. In addition to the above covenants has indicated that borrowing should not, without specific approval, exceed the forecast debt levels set out in the LTCCP by more than 10% Interest Rate Exposure Interest is incurred on any bank funding facility, issuance of local authority stock and other borrowing arrangements. This policy recognises that the longer the term of borrowing, the greater the interest rate risk. Longer term borrowings may be of benefit if the market interest rates rise, but equally may not allow FNDC to take advantage of periods of low interest rates. A balance is achieved through having variable terms with regard to interest rate resets. This can be achieved by the use of overdraft funds at call, the use of a revolving credit facility, other facilities based on the 90-day bill rate and local authority stock issuance at fixed rates. The use of internal funding mechanisms may also be used to minimise interest rate risks. With expert advice from independent treasury advisers, interest rate risks may also be managed by the use of interest rate swaps, forward rate agreements and interest rate options. Interest Rate Maturity Profile Limit (1) Less than 1 year 1 year to 3 years 3 years to 5 years 5 years to 10 years Minimum Fixed Rate 50% 30% 20% 0% Maximum Fixed RAte 100% 80% 60% 40% (1) Any hedging for longer than 10 years must be approved by the full before being initiated. The table above outlines the minimum and maximum hedged or fixed rate exposure requirements within various time buckets. The actual hedging percentages in place, within these bands, will be determined, and reviewed on a regular basis, by the TMG. When managing the interest rate risk of FNDC the hedging percentages above relate to total core debt. Core debt is defined as debt projections as per the current Annual Plan (including any increases approved by resolution) for the current year and borrowing projections as per the current LTCCP for periods thereafter. the actual quantum used for policy parameters will be reviewed annually by the TMG. The hedging parameters are cumulative. For example if total debt was $50 million, $10 million of hedging entered into for a period of five years would increase the hedging profile for all time buckets up to five years, by 20%. The TMG sets the interest rate risk management strategy by monitoring the interest rate markets on a regular basis, evaluating the outlook for short term rates in comparison to the rates payable on fixed rate borrowing. Interest rate risk management products to convert fixed rate borrowing into floating rate, floating rate borrowing into fixed or hedged borrowing, and to manage maturity mismatches between borrowings and investments may be used to maintain policy parameters. The following interest rate risk management instruments may be used for interest rate risk management activity. Forward rate agreements Interest rate swaps Interest rate collar type option strategies. Selling interest rate options for the primary purpose of generating premium income is not permitted because of its speculative nature. Liquidity and Funding Risk Management FNDC s ability to readily attract cost effective borrowing is largely driven by its ability to rate and maintain a strong balance sheet as well as its ability to manage its relationship with its banker(s) and the capital markets. To minimise the risk of large concentrations of debt maturing or being reissued in periods where credit margins are high, for reasons within or beyond FNDC s control, FNDC ensures material debt maturities are spread over a number of years. FNDC manages this specifically by ensuring that: No more than $50 million of its outstanding borrowings are subject to refinancing in any financial year. FNDC s treasury operation must also ensure that there are sufficient resources or liquidity to provide the funds to meet its immediate obligations such as creditors and current debt maturities. Appropriate cash flow reporting mechanisms will be maintained to monitor FNDC s estimated liquidity posi- 94 FAR NORTH FUTURE PLAN

4 tion. Funding facilities must be in place to give headroom of at least $5 million over and above the maximum debt requirement as estimated in the current Annual Plan. Credit Exposure In general FNDC borrows funds on the recommendation of TMG, from a variety of registered banks and institutional investors. It is considered that the range and size of s individual borrowing together with the relative strength of the lenders mitigates against institutional credit risk. Provision of Security offers security over its general rates for its general borrowing programme. Security over targeted rates may also be provided in respect of borrowings for particular asset classes. These targeted rates may be across the district as a whole, or, if appropriate, across all the rating units within a defined area or areas of benefit. In unusual circumstances, with the prior consent of the, security may be offered by providing a charge over one or more of FNDC s assets. Repayment The repays borrowings from general funds. Contingent Liabilities FNDC may from time to time provide financial guarantees to recreation and service organisations. The Finance ensures that the business plan of the guaranteed party furthers the strategic objectives of and that financial statements are received on a regular basis. Should the guarantee be called up, will take immediate steps to recover the money. The total of financial guarantees outstanding is limited in value to 4% of the current year s rates revenue. Investment Policy Introduction The Far North District (FNDC) incurs treasury risks arising from its investment and associated interest rate risk management activity. carries out its investment and associated interest rate risk management activity within its finance function. s broad objectives in relation to these activities are: to comply with the Local Government Act 2002 and amendments thereto, and other relevant local authority legislation to maintain professional relationships with s principal banker(s) and financial markets to manage s investments within its strategic objectives, invest surplus cash in liquid and credit worthy investments and optimise investment returns within these limits to manage the overall cash and liquidity position of s operations to recognise, capture and report all investment related risks to provide timely and accurate reporting of investment activities and performance. adopts a risk management approach to its investment activities focused on managing FNDC s cash flows. FNDC does not undertake any investment activity that is unrelated to its underlying cash flows or is purely speculative in nature. With the exception of the shares discussed below, FNDC does not hold financial investments other than those involving specific reserves or cash management activities. FNDC aims to minimise it interest expense by appropriate cash flow management practices focusing on decreasing short term borrowing balances with surplus cash balances and/or using internal funding sources ahead of accessing external borrowing facilities. Credit Risk Management FNDC s primary objectives when investing are protecting the investment s capital value and minimising the risk of loss. FNDC s policy on managing credit risk is to only place surplus funds with: New Zealand registered banks with a Standard & Poors ( S&P ) credit rating of A+ or better with an individual limit of $20 million per institution Other Entities that have an S&P credit rating of A+ or better or unrated Local Authorities that give general security over rates, to a maximum of $5 million per institution. Within these constraints also seeks to: Optimise investment return Ensure investments are liquid and sufficiently flexible Diversify the mix of financial investments Manage potential capital losses due to interest rate movements if investments need to be liquidated before maturity. FAR NORTH FUTURE PLAN

5 Investment Mix maintains investments in the following financial assets: Internal loans Financial investments with external parties Shares in Far North Holdings Limited (a Controlled Organisation) Shares in Local Government Insurance Corporation of New Zealand Shares in Northland Port Corporation (NZ) Ltd. Internal Loans Where the has resolved to borrow monies for any purpose, the funds may be provided by internal borrowings. Internal loans are made from specific reserves for specific purposes. Before raising external borrowings, management firstly reviews its ability to make loans internally from existing reserves. Where the funds that are used for internal borrowing purposes are provided by activities that are funded by separate targeted rates, the activity that is benefiting from the use of these funds will pay interest at the mid point between the rate at which interest would be earned by the providing fund and the rate at which FNDC could borrow the funds. Deposit Funds and Funds Held in Trust The holds funds in trust for periods of time for the purpose of dispersing or returning those funds. The type of funds held include footpath deposits to bond applicants to restoring footpaths, tender deposits requested and held until the awarding of tenders, and contributions that are held for a particular purpose and may be required to be refunded if the particular purpose is not undertaken. Trust and deposit funds will be accounted for separately but form part of s general resources. Cash Management From time to time, FNDC has daily cash flow surpluses and borrowing requirements due to the mismatch of daily receipts and payments. All cash inflows and expenses pass through bank accounts controlled by the Finance and Business Department. This department maintains daily cash forecasts. Generally any cash will be invested short term to provide for adequate cash flows or will be used to decrease short-term borrowing requirements. Cash management investments must mature within three months. General Funds and Reserve Funds General funds refers to any monies or non-specific reserves that FNDC may hold from time to time. Reserve funds refers to any monies that are held for specific purposes and may include depreciation reserves, financial or development contributions, or other named reserves. In addition to cash, FNDC holds funds as reserves for specific purposes or where there is a longer term need for them. It may be appropriate that these funds be invested longer term to maximise returns whilst at the same time ensuring adequate protection of public monies. Such funds must be invested in entities that have an S&P credit rating of A+ or better or Local Authorities that give general security over rates. Where the invested monies are derived from separate reserves or activities funded by targeted rates, the funds will be separately accounted for and any interest income will be returned to the fund from which it was derived. Shares The currently holds shares in Far North Holdings Limited. will only invest in a Controlled Organisations (CCO) like FNHL following an establishment process as set out in Part 5 of the Local Government Act The also holds shares in New Zealand Local Government Insurance Corporation Limited ( LGIC ). These shares were acquired by virtue of FNDC being a Local Authority. The purpose of LGIC is to ensure that adequate insurance arrangements are available to Local Authorities at the lowest possible cost. Annual Reports are received and reviewed by the. Election of Directors takes place at the AGM held at the Local Government New Zealand annual conference. The directors of each CCO will be required to comply with the requirements within Schedule 8 of the Local Government Act 2002, which requires provision of a Statement of Intent. The directors of each CCO will provide to the a report with unaudited accounts within two months of the half-year balance date and a report with audited accounts within three months of the annual balance date. The report will contain: a report of the operations of the CCO and those of any associated companies during the financial year; a statement of financial position an overall operating statement and a separate operating statement in respect of each significant activity a statement of cash flows such other statements as may be necessary to fairly reflect the financial position of the CCO and any associated companies, the resources available to them, and the financial results of their operations (in the case of audited financial statements) the 96 FAR NORTH FUTURE PLAN

6 auditor s report on the financial statements and performance against targets and measures set. Property Held for Investment Purposes will only invest in property where it protects s position in relation to the delivery of core services and provides an adequate sustainable income stream that reduces reliance on rating income. Reporting Policies In accordance with standard practice, the reporting of FNDC s investments will be provided as part of the monthly financial reporting framework. Foreign Exchange Policy The Far North District (FNDC) may have foreign exchange exposure through the occasional purchase of foreign exchange denominated plant and equipment. All significant commitments defined as an exposure in excess of NZD50,000 equivalent, for foreign exchange are hedged using foreign exchange, contracts, once expenditure is approved by management and/or the, under relevant delegation. Both spot and forward foreign exchange contracts are used by FNDC. However, borrowing in foreign currencies is expressly forbidden by Section 113 of the Local Government Act Borrowing can only be denominated in New Zealand dollars. Performance Management Measuring the effectiveness of FNDC s treasury activities is achieved through a mixture of subjective and objective measures. The predominant subjective measure is the overall quality of treasury management information. The Chief Executive and the Group Management Team have primary responsibility for determining this overall quality. Objective measures are as detailed below: Borrowing Adherence to policy Unplanned overdraft costs Number and cost of processing errors Comparison of actual monthly and year to date interest costs vs. budgeted borrowing rate Comparison of month end average interest rate to a predetermined benchmark rate based on current interest rate risk management parameters. Equity Investments Adherence to policy Comparison of financial ratios to budgeted benchmark levels. Accepted ratios include: o Return on Shareholders Funds o Debt/Total Assets Ratio o Current and Liquidity Ratios o Gross Profit Margin o Interest Coverage o Earnings per Share o Dividend per Share Property Investments Adherence to policy Comparison of actual rental yield to budgeted yield. Treasury Investments Adherence to policy Number and cost of processing errors Comparison of actual monthly and year to date accrued returns vs. investing the entire treasury portfolio at the weekly average three month bank bill rate for short term investments. Reporting Reports The following reports are produced: Report Name Daily Cashflow Report Investment Register Monthly Treasury Report Limits Report (included within the Treasury Report) Statement of Public Debt Monthly Once a month, reported daily on an exceptions basis Annually Chief Executive Frequency Daily Prepared by Banking Services Officer Finance Finance Finance Recipient Accounting Services Chief Executive TMG Chief Executive General Finance and Business General Finance and Business Meetings The TMG will meet at least quarterly to discuss the activity for the previous period together with likely activity in the future. Borrowing, investment and risk management strategies are also discussed and developed at this meeting. Impromptu meetings may be held from time to time if changes to the agreed strategies are deemed necessary. The Treasury Management Group (TMG) consists of the General Finance and Business, Accounting Services, Banking Services Officer. A representative of FNDC s Independent Treasury Advisor is an ex-officio member. FAR NORTH FUTURE PLAN

7 Delegated Authorities and Key Internal Controls Delegated Authorities Activity Alter policy document Authorise bank facilities Open/close bank accounts Cheque signatories Approve new loans Arrange new loans Manage investments Transfers of stock/register new debt issues Responsibility As approved by General Finance and Business (Finance under delegation) General Finance and Business (Finance under delegation) Seal register signatories Key Internal Controls Sound treasury procedures with appropriate controls are required to minimise risks the may experience through unauthorised treasury activity or unintentional error. The following key internal controls are adhered to: Cheque/Electronic Banking Signatories Signatories are approved by as per register Dual signatures are required for all cheques and electronic transfers Cheques must be in the name of the counterparty crossed Non-Transferable Account Payee Only, via the bank account. Authorised Personnel All counterparties are provided with a list of personnel approved to undertake transactions, standard settlement instructions and details of personnel able to receive confirmations. Recording of Deals All deals are recorded on deal tickets. Deal summary records are maintained on FNDC s Treasury System, CAPIX. Confirmations All inward confirmations are received and checked by the Banking Services Officer against deal tickets and deal summary records to ensure accuracy Deals, once confirmed, are filed (deal ticket and attached confirmation) by the Banking Services Officer in counterparty order Monthly, the Finance peruses all dealing activity, deal tickets and confirmations to ensure documentation is in order. Reconciliations Any discrepancies arising during bank statement reconciliation are dealt with by the Banking Services Officer and signed off by the Finance Any discrepancies arising during the deal confirmation checking process are dealt with by the deal originator and then signed off by the Finance or the General Finance and Business depending on who completed the original transaction. However, in no case can the originator of any treasury deal sign off any discrepancies The Finance reviews the monthly reconciliation of the investment/cash management spreadsheet to the general ledger, carried out by the Banking Services Officer Interest income as per the treasury system is rec- onciled to bank statements by the Banking Services Officer to ensure income is received. Holding of Certificates All deliverable certificates of investments are to be held in safe custody on site or with FNDC s bankers NZ Government stock, Treasury bills, local authority stock and debentures are registered with Computershare. FNDC receives notice of any stock transferred into its name. Issuing of Securities Securities are normally issued on a fixed rate basis but may be issued on a floating rate basis. Stock is normally issued at par, the issue yield being the same as the coupon rendering the purchase price equal to the face value of the stock. Coupons are paid on a semi-annual basis. Computershare acts as register and paying agent on all FNDC issued securities. normally issues directly by calling for competitive bids in a tender process. Where a broker or arranger/manager is used, correspondence with investors will be attended to by the broker/arranger/manager. Where placement is arranged internally, tender processes will be controlled by the General Finance and Business. A notice of intention to issue stock together with written advice to successful bidders will be arranged by the Finance. Where stock placement is administered internally the following procedures are to be followed: Bids for stock can be solicited verbally in addition to sending out a notice of Intention to Issue to various parties by fax or Incoming bids are recorded and collated by Finance Bids are approved by the General Finance and Business 98 FAR NORTH FUTURE PLAN

8 Successful bidders are notified and forwarded an application for subscription form for their completion and return All deal records and related confirmations, authorities etc. relating to issuing stock are filed by the Banking Services At time of issue will provide Computershare with the following: o Certified copy of resolution o Certified undertaking of the o Original stock application form o Confirmation of receipt of loan monies. The Finance is responsible for collating the appropriate material and forwarding it to Computershare. Glossary Approved Risk Management Instruments Forward rate agreements ( FRA ). Interest rate swap ( IRS ). Interest rate collar. Forward Rate Agreement A forward rate agreement is an agreement between FNDC and counterparty (usually a bank) protecting FNDC against a future adverse interest rate movement. FNDC and the counterparty agree to a notional future principal amount, the future interest rate, the date and the benchmark rate, which is contained on the Bridge or Reuters system. The objective of such an agreement is to provide FNDC with certainty as to its interest rate cost on an agreed principal amount for an agreed period. A Forward Rate Agreement typically applies to a 3-month period, starting at some point within the next 12 months. Example For example, say FNDC wishes to provide certainty on a portion of its floating rate borrowings over the event risk posed by an expected change in monetary policy at a point in the future. A borrower s FRA might be purchased in say, March, at 6.00% for protection through the June to September period. It is described as a 3X6 FRA, i.e. the rate applies to a borrowing for 3 months starting in 3 months time. Outcome If on the rate set date in June, the 3-month interest rate has climbed to, say, 8.00%, FNDC receives the difference between this and the FRA rate of 6.00%. It then borrows at 8.00%, the payment received making the effective borrowing rate 6.00%. Interest Rate Swap An interest rate swap is an agreement between FNDC and a counterparty (usually a bank) protecting FNDC against a future adverse interest rate movement. FNDC pays (or receives) a fixed interest rate and receives (or pays) a floating interest rate. The parties agree to a notional principal amount, the future interest rate, the settlement dates and the benchmark floating rate, which is usually off the Reuters page containing the daily rate sets for BKBM (bank bill reference rates). The aim of an interest rate swap is to provide FNDC with certainty as to its interest rate cost on an agreed principal amount for an agreed period. Floating rate sets are typically every 3 or 6 months over the life of the swap. For example, say FNDC fixes its interest rate for 3 years at 6.50%, on a quarterly basis on a portion of its planned borrowings by entering into a 3-year 6.50% fixed rate swap. The floating rate reference is 3-month BKBM. On a swap-reset date, the 3-month bank bill rate is at, say 4.75%. FNDC borrows from its bank the principal, for 3 months at 4.75% plus FNDC s margin. At the same time the bank pays FNDC 4.75% on the principal amount for a 3-month period. FNDC then pays the bank 6.50% on the principal amount for a 3-month period. This means that FNDC s effective interest rate is 6.50% plus its margin. In practice cashflows would be netted off if the swap and the underlying borrowing facility were with the same bank. Interest Rate Collar An interest rate collar is the combined purchase (or sale) of a cap or a floor with the sale (or purchase) of another floor or cap. The objective of an interest rate collar is to provide FNDC with certainty as to its interest rate cost on an agreed principal amount for an agreed period, but at the same time avoid the need to pay an up front premium. For example, say FNDC wishes to secure a worst case borrowing rate of 7.50% for the next 5 years, but wishes to avoid paying a premium. In exchange for the worst case protection at 7.50%, a best case outcome at 6.00% is accepted. In this structure FNDC has bought and sold options, with the respective option premiums offsetting each other. On each quarterly rate set date FNDC will have a rate between 6.00% and 7.50%, the parameters of the collar. If on each rate set date the 3-month interest rate is in excess of 7.50%, FNDC exercises its option and pays 7.50%, for that 3-month period, its worst case rate. If on each rate set date the 3-month interest rate is below 6.00%, the bank exercises its option on FNDC and FNDC pays 6.00%, FNDC s best case rate. If on any rate set date the 3-month interest rate is between 6.00% and 7.50%, FNDC borrows at the market rate. FAR NORTH FUTURE PLAN