Question (gtnews): What do you think were the hot topics at this year’s AFP Conference in Miami?
Answer (Heather Campbell, treasurer, Gran Tierra Energy): It may be my particular bias for I am fairly concerned with forecasting, but I think that rolling forecasts and the ‘beyond budgeting’ concept were among the hot topics this year. There is a certain amount of discussion around trying to move away from the historical variance analysis and getting ahead of the budgeting cycle, which is not easy to do. My company has started to think about this but moving away from an actual budget would be extremely difficult.
Risk management is a hot topic every year at the AFP conference because it is something that can be quite visible – making the wrong choice can lead to big swings within a company. Commodity price volatility is one example. At Gran Tierra we consciously do not hedge our commodity price risk.
Answer (John Lee, vice president, treasurer, Ontario Power Generation): This year, the classic topics such as cash management are still there, but a new theme that I have picked up on is the uncertainty around what the future holds. People feel that their ability to predict has been compromised by significant world events. Risk management is an important aspect because not only do treasurers have to run their processes, but they need to be able to react and adapt to the new environment.
Globalisation is another aspect that everyone is acutely aware of. As Canadians, we always see ourselves being impacted by what happens in the US, but now the Americans are being affected by global change, whether that is by what is happening in the emerging markets or Europe. As Canadians we have never felt as exposed economically and politically to global issues as we are today.
A third area of interest, which reflects the uncertainty of the times, is cyber fraud. There is an unknown aspect of where the internet will lead. With rapidly changing technology and payments becoming more electronic, control becomes an issue.
Question (gtnews): How, in your opinion, has the role of treasurer changed since you started your career?
Answer (Campbell): The treasurer’s role has broadened. When I started at my company I was a controller with an accounting background, so I have only been a treasurer for five years. But even before I was a treasurer, I could see this broadening when I dealt with treasury. A lot of people think of treasury as foreign exchange (FX) hedging and liquidity management, but my responsibility includes insurance programmes and enterprise risk management (ERM).
Even cash forecasting has evolved to become a management performance tool to fill in the gap between accounting reports. My cash forecast is not just used by me, but also by my chief financial officer (CFO) to determine the cash balance and capital spending efficiency. I do variance analysis that goes beyond just saying that our cash is lower because we are paying more invoices, and answer why and what are the business drivers for that. I think this is part of the maturity process of the ‘beyond budgeting’ concept – management now wants to be forward looking.
Answer (Lee): Treasury used to be viewed in isolation, solely dealing with cash and funding, but today it is more integrated with the strategic aspect of the company. An effective treasury have to be adaptive so that you can look for opportunities as well as downside risks in these volatile times. The old days of projecting and assuming the world is going to move in a similar pattern are over; you have to react because there are many major events that could impact you at any time as a result of globalization.
In order to be effective in the strategic aspects a treasurer needs to be upfront in the decision-making process and more proactively dealing with internal and external user groups. At Ontario Power Generation we have made a conscious effort to increase the awareness of liquidity and financing implications in our upfront planning and decision making process because you end up being reactive if you don’t. Nowadays there is more work being put on the treasury group, so you have to be much more effective and proactive. You either let problems manage you, or you try to manage the issue before it becomes a problem.
Because of resource constraints treasury has to become much smarter. I have found that in our group there is a higher expectation despite less staff. The integration with the business side is crucial. In decision-making, the normal business case analysis looks at net present value (NPV) and the internal rate of return (IRR), but they don’t take into consideration the timing of cash flows. We have put it in metrics to address that it must be part of the analysis – the business has to look at cash flow impact and funds from operations (FFO) coverage in the short term as well as the long term. NPV ignores the aspect of liquidity constraints and short-term risk. We have pushed this upstream so it is integrated as part of our business case approval analysis.
Question (gtnews): Are there specific challenges to being a Canadian treasurer, whether that is changing regulation, liquidity, funding opportunities, risk or changing payments environment?
Answer (Campbell): When you get to a certain business size in Canada, you can’t be domestically focused. We are an international company and consciously not in the Canadian domestic market; but even if we were a domestic oil and gas company, we would not necessarily be able to rely on the Canadian market. First, the capital markets are much smaller and second there are no global prices denominated in Canadian dollars. World oil prices are denominated in US dollars. Even if all our production was in Canada instead of being in South America, we would be exposed to US FX through the price of oil.
This may be an industry bias, but it is true in many industries because Canadian companies have to deal with the global markets sooner than if they were operating in a larger economy. Even though the Canadian dollar is a hard currency, it is not a reference currency.
Answer (Lee): What has cropped up on the near-term horizon is Basel III. Canada is adopting the regulations much earlier than other countries; consequently the banks are reacting earlier. However, banks are moving at different paces, so it is a real challenge for us in terms of managing relationships with various Canadian banks to ensure transparency and consistency in pricing.
Another concern relates to the political uncertainty we are facing. In Canada we are somewhat insulated, but if other countries catch a cold it is likely to spread to us.
Question (gtnews):Do you think the role of the banks will further diminish in future? If ‘yes’, which alternative sources of funding will fill the gap?
Answer (Campbell): The banks need to come up with a way to get back in the game. Corporates are building up cash, but it remains difficult for us to deal directly with other corporates. My treasury investment policy is conservative and I can’t deal directly in commercial paper, so I need a third party to provide the assurance that I know what I am dealing with.
Everyone is frightened of what happened in 2008 and regulation is getting piled on, but at the same time banks need to have the flexibility to operate. The banks are a marketplace and we need that marketplace.
The bank market didn’t really dry up in Canada. From our point of view, the bank market in the US only dried up for a short period of time. We have a credit facility that we never draw upon – because we are in the lucky position of being cash rich ourselves – but we have always had banks knocking on our doors to lend us more cash.
Answer (Lee): The banks’ role won’t diminish but they face increasing challenges because of return requirements on their capital. We are a highly-rated entity and banks tend to gravitate towards stronger credits that have need for ancillary financial services. However, banks may choose to leave lower-rated companies because they perceive them to be a higher risk unless they are able to achieve the appropriate returns. If you are core to the bank’s business, then you will be fine; but if you are more peripheral, it is going to be very challenging for you.
Corporate treasuries have to react to the new banking products – we are trying to have some impact on what the banks are developing. One thing the banks can do is be more effective in communicating why they are doing certain things and what is driving them to change certain products.
Some companies are exploring new funding avenues, such as the private placement market. We have tapped this market as a source of funding. What changes, such as Basel III, will mean for treasurers is that they will have to diversify their funding sources and ensure sufficient liquidity is available. It is important to diversify so that you don’t get caught if a certain funding source experiences problems.
Question (gtnews): What steps will you take in the year ahead to make your treasury department more efficient?
Answer (Campbell): We have embarked on a cash forecasting project which encompasses different time horizons. We define short-term forecasting as four to eight weeks ahead, medium-term is up to a year ahead and longer term is two years ahead, understanding that the second year is less accurate. We are just trying to reach the two year mark and are working with the business development group that is steering the process to get the information needed.
The one-year forecast, which we do ourselves, is very manual – we use Excel. But we are trying to make it more efficient and focus each time period on its objective. Presently each week we do an eight-week plus four-month forecast, which focuses activity in the wrong area. A lot of time is spent on the four-month forecast, whereas we don’t need to do that on a week-to-week basis unless something big changes. We need to make the weekly forecast more operationally focused and make the medium-term forecast more strategic.
Whenever I go to conferences like the AFP, I always look for cash forecasting answers because it is so difficult. In a way it is reassuring to me that we are not an exceptionally stupid treasury department and that this is difficult for everyone. But at the same time I wish that someone could say this is how we do it and the light bulb goes on for everyone. But there hasn’t been that epiphany moment yet.
Answer (Lee): Presently, we are fulfilling the requirement to reduce our overall staff from the company’s perspective. Our corporate footprint is getting smaller as we move out of the fossil side of the business – this was mandated by the government. At the same time, we are going through a refurbishment phase in our nuclear business, which means additional capital requirements and much more work for treasury.
We are trying to increase the value-added aspect of treasury and be more proactive. For those who play football, we are using a ‘zone defence’. Traditionally we would have people that specialised in certain areas, but today we don’t have enough people so they have to be cross-trained on FX, cash management and financing to support one another in a team. The problem with this set-up is that if you lose a person, it leaves a gap because you are spread so thin.
From the technology side we are also looking at evolving the treasury platform to be an enhanced repository for Treasury information. This will enhance our reporting capability and hopefully reduce manual work.
Question (gtnews): Although Canada remained relatively unscathed by the financial crisis of 2008, do you expect several more years of difficult economic conditions? If so, how will you respond to the challenge?
Answer (Campbell): Yes, I think there will be a few more difficult years. Canada is tied to the US economy, although we have our own natural resource base that insulates us to a certain extent. I am hearing a lot about the fiscal cliff. No one will do anything before the US elections, of course, and then there is only six weeks after the election to act. Maybe it is a bit Y2K-ish when everyone thought the world was going to end and it ended up being a non-event, but it still makes me nervous.
Scenario planning is something that we are doing to mitigate the big economic issues which have huge impacts on oil price as a global commodity. One idea that I will be taking back from the AFP Conference is to create a playbook, which is the next step in planning what we are actually going to do. For example, it could be a disaster-type of scenario for us if the oil price crashed down to US$30 per barrel again. We wouldn’t have to shut down the company but our activity would likely go back to only absolute essentials. The playbook will lay out a few generic decisions that we can stick to. If you talk about highly emotive issues in a ‘what if’ scenario, then it is easier to make the hard decisions.
Answer (Lee): The key thing for Canadians is that we had a fair amount of reserves, our banks were relatively strong and we are more conservative than other countries. It is like having a full inventory. But if things are going from bad to worse and you start drawing down your inventory, at some point you will run out as the crisis overtakes you.
Many people are saying that there will be limited growth – about 2% – even with many positive underlying assumptions, such as if we get through this fiscal crisis in the US, if Europe doesn’t implode, and so on. There are many positive ‘ifs’ that will have to happen even to get a modest outcome.
We are going to face challenging times for a while with the fiscal cliff in the US, the ongoing European sovereign debt crisis and global economic slowdown. Given the uncertain environment, driving efficiencies, maintaining effective liquidity management, diversifying funding sources, and developing good business relationships with key banks will be critical for treasurers today.
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