Meridian Energy’s treasury operation is based at corporate headquarters in Wellington, New Zealand. It consists of a small in-house team, comprising a treasury manager and the author, group manager for treasury and procurement, who reports to the chief financial officer (CFO).
Treasury supplements the activities of the company’s in-house professional team by outsourcing a range of functions, including some day-to-day deal execution, settlements and confirmation checking, to a specialist treasury outsourcing company called E-Treasury Outsourcing Services (ETOS).
Meridian Energy’s treasury operations are governed by a formal policy, which includes the following objectives:
- Conduct treasury management in a risk-averse, non-speculative manner.
- Measure, monitor and control – and where relevant reduce – all financial risks within the Meridian group, including but not limited to funding, interest rate, currency, and liquidity risks.
- Ensure that business plans and long term strategic plans are supported by sound treasury management.
- Maintain and enhance lender relationships and the general borrowing profile in the local and offshore debt and capital markets; to assist Meridian’s ability to take advantage of windows of opportunity as they arise; and to manage funding costs within acceptable limits.
- Monitor the financing/borrowing covenants and other obligations required under existing and proposed funding facilities.
- Ensure that the board, management and staff are kept abreast of the latest treasury products, methodologies and accounting treatments through continuing education and in-house presentations.
Meridian Energy’s Financial Portfolio
Meridian operates two debt books. One is denominated in New Zealand dollars (NZD) and is currently about NZD840m (US$736m, £433m); the other is in Australian dollars (AUD) and sized at AUD280m (US$264m, £155m). There is also a derivative book of approximately NZD1.2bn and AUD350m.
Meridian additionally operates a foreign exchange (FX) hedging portfolio of approximately NZD58m. Most of the hedging requirement arises from managing the FX component for financing two wind farms currently under construction. One is in Australia, the other in New Zealand, so most of the hedging is for AUD/EUR, AUD/USD, NZD/USD and NZD/EUR.
Meridian maintains a diversified funding base, with debt sourced through bank facilities in NZD and AUD, plus NZD retail bonds which are listed on the New Zealand Stock Exchange, NZD wholesale bonds, US private placements (some of which are swapped back to NZD and some into AUD) and a Danish Export Credit Agency (EKF) facility. Treasury maintains a spread of maturities, with a requirement to have more than 20% of its book maturing in longer than five years at all times.
The Treasury Systems Project
Meridian had been operating two treasury management systems; a situation resulting from historical reasons that were no longer valid. The team therefore decided that treasury would be best supported by a single, consolidated system solution supporting both day to day operations and sophisticated risk management.
Following an evaluation process, Australian software company Visual Risk was selected as the group’s treasury technology provider. Previously, the team had used Visual Risk just as a treasury risk management (TRM) system, and evaluated it against alternative providers of a complete solution. In essence, team members determined that Visual Risk could do everything offered by its competitors, who were found to be unable to do everything that Visual Risk can. Most notably, the team liked Visual Risk’s facilities for presenting treasury risk graphically, making it very straightforward to understand Meridian’s exposures and hedges.
The implementation project team included individuals from Meridian Energy, the group’s treasury outsourcing partner ETOS, and Visual Risk and our. No external consultants were involved. The main implementation effort required a period of three months, running from January to March 2014. Team members encountered the usual project management challenge of finding enough time to focus on implementation to a sufficient degree; and refrained from rushing things as there was a full three months to complete.
The implementation was completed on time and within budget. All Meridian’s treasury-related transactions are now processed by the Visual Risk system, and are available for risk management analysis. Visual Risk allows the team to replicate its current division of duties between Meridian and ETOS; and front, middle and back office functions are segregated as required by treasury policy within the system itself.
The treasury team is now working on getting its counterparty credit reporting fully automated in the system. As its next treasury implementation step, members are considering implementing the interface to the general ledger system.
Cash flow at risk
One of the key features of Visual Risk is its cash flow at risk (CFaR) functionality, with a CFaR analysis reported to the board once every quarter.
The CFaR analysis utilises Monte Carlo simulations to model variable interest expense across future time bands. It reveals how the team’s hedging strategies have narrowed the forecast interest expense variability, and also how the results track relative to the interest expense budget. For board reporting purposes, Meridian models the CFaR for quarterly time bands over a five year horizon, for both the NZD and AUD debt books.
Visual Risk has proved to be a great tool for a treasurer, as it enables the user to show the board visually what the company’s underlying exposures are, how they are managed relative to key criteria within treasury policy, and what the resultant profiles are. It also offers great forecasting and ‘what if’ capabilities, enabling treasury to evaluate a range of possible future market scenarios and to plan potential actions based on this forward-looking analysis.
The cost savings that Meridian Energy is now achieving have been primarily realised by the consolidation of its operational and risk management requirements into a single system solution. The team has also avoided the need to purchase additional system modules, for example for credit valuation adjustment (CVA) calculations.
In practice, the biggest benefit has not been the cost savings. The team is achieving tangible benefits from Visual Risk’s functionality scope, its ease of use and the excellence of the vendor’s service model. Above all, this has proved to be of great value for board level reporting of replacing tables and masses of numbers with graphs that are produced with Visual Risk rather than through Excel. This is enabling management and directors to understand quite complex financial risk scenarios easily.
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