Transpower owns and operates New Zealand’s National Grid – the high voltage transmission network connecting areas of generation with towns and cities across the country. The state-owned company keeps New Zealand’s energy flowing by transporting bulk electricity, connecting with smaller lines companies and managing the nation’s power system 24/7. Net profit after tax but before net changes in the fair value of financial instruments for the full year ended 30th June 2013 was $268.5m, compared with $166.9m for the full year to 30th June 2012. Transpower was named Energy Company of the Year at the 2013 Deloitte Energy Excellence Awards.
When Chris Sutherland joined Transpower in 2011, he was not only tasked with overseeing the integration of a new treasury management system, but also needed to steer the business through a major capital restructuring. In this interview, Chris talks in-depth about the challenges Transpower’s treasury team faced during this period of change, and describes how they rose to the occasion.
Starting out as a maths and economics teacher in a New Zealand high school, and subsequently working his way through a handful of banking and consultancy roles in Australia, Chris Sutherland moved back to Wellington from Sydney in 2011. He was looking for a job that would diversify his skillset and push him outside his comfort zone. The role of Treasurer at Transpower – New Zealand’s National Grid operator – was the perfect opportunity.
Working for a state-owned company is a significant change from Sutherland’s previous positions, not least because Transpower’s key business activities are heavily regulated. “Being a natural monopoly, Transpower is regulated by the Commerce Commission and the Electricity Authority in New Zealand. In fact, nearly 98% of Transpower’s revenue comes from regulated activities,” explains Sutherland. Interestingly, the Commerce Commission also sets a weighted average cost of capital (WACC) benchmark that Sutherland’s team must either meet or exceed.
Regulation is therefore a key driver of organisational behaviour and decision-making at Transpower. As a result, the company’s DNA is quite different to that of a typical corporate – as is the remit of its treasury function.
“The company has five debt facilities: a domestic medium-term note (MTN) programme; an Australian MTN programme; a European commercial paper programme; a domestic commercial paper programme; and a revolving cash advance facility.”
“We’re a relatively small team – there are four of us in the treasury area – myself, the Assistant Treasurer, a Dealer and a graduate who works with us as a Treasury Analyst,” says Sutherland. “We also have a Treasury Accountant and an Accounting Assistant who technically form part of the finance function, although they work very closely with us. My team is responsible for the company’s funding and liquidity management, as well as Transpower’s insurance programmes. We also oversee the company’s enterprise risk management (ERM) processes, so it’s quite a wide mandate for us.”
Within corporate treasury operations in New Zealand, it is not unusual to have treasury and insurance sitting together, but ERM is not typically included within that remit. But it is precisely this kind of challenge that really appeals to Sutherland. Moreover, the role gives him significant exposure at board level and he also enjoys the relationship and marketing side of issuing debt to the public. The latter is something Sutherland has had plenty of opportunity to do as a direct result of the capital structure review that Transpower undertook in mid-2011.
When Sutherland joined Transpower, the company was still considering how to change its capital structure. “The findings of the review highlighted that Transpower was perhaps not as leveraged as we could be in comparison with our international peers. At the time, we were around 50% geared and given that the company has a very high regulated income, we determined that we could move that gearing up a notch. We are now up to about 70% gearing. This is middle of the field when we look at the gearing levels of other international companies in our peer group,” notes Sutherland.
“To achieve the capital restructuring, Transpower debt funded much of the capex throughout the peak of our capital cycle and also paid some additional dividends up to the government,” he explains. The company has five debt facilities: a domestic medium-term note (MTN) programme; an Australian MTN programme; a European commercial paper programme; a domestic commercial paper programme; and a revolving cash advance facility.
As Sutherland outlines: “Most of the company’s funding comes from New Zealand: we have a little over $1 billion in domestic bonds and we have around $200m in domestic bank debt. We then have around NZD $860m worth of USPP – equivalent to around USD $600-650m. In our European MTN and Australian MTN programmes, we have a mixture of currencies: Swiss francs, Hong Kong dollars, Canadian dollars and Australian dollars, totalling the equivalent of circa NZD $1.1 billion.
Sutherland’s experience of issuing debt over the last two years has been rather mixed. “As the local market, issuing in New Zealand has always been easier for us and we undertook a really good issue in November 2013, raising $200m in five year bonds which were listed on the NDX Debt Market.” Issuing offshore has definitely been more challenging. “It can be difficult to get the currency back into our domestic currency in terms of cost. This cross-currency basis cost factor narrows our windows of opportunity.” Nevertheless, Sutherland’s team undertook a successful Australian issue in August 2013, which saw AUD $300m in senior unsecured notes issued to Australian and Asian institutional investors.
Yet, despite its success, Sutherland is quick to point out that this issue was not without its challenges: “We were initially looking to issue early on in 2013, but when the US Federal Reserve started talking about tapering and caused the market to react, we decided to hold off and wait for the market to calm down. The fact that we were looking for a ten year tenor, and that we were first-time issuers in the Australian market, also made it a more challenging process.”
“We have seven relationship banks, which feels like rather a lot, but certainly isn’t as many as other corporate treasury functions in New Zealand. Generally, we work closely with our relationship banks and they are a primary resource when we are looking to arrange a debt issue.”
The hard work was worth it in the end though: one of the funding challenges Transpower faces going forward is being able to undertake more issues with longer tenors in order to better match its long-dated asset base. “Tenors on the local market tend to be relatively short, which doesn’t necessarily cater to the needs of an infrastructure company. It’s really encouraging to know that we can go to markets such as Australia and raise funds with the tenors that we want.”
While Transpower’s treasury team is obviously well-versed in debt issuance, the role that its banking partners play in the process is also vital. “We have seven relationship banks, which feels like rather a lot, but certainly isn’t as many as other corporate treasury functions in New Zealand. Generally, we work closely with our relationship banks and they are a primary resource when we are looking to arrange a debt issue. The banks also help us with our hedging requirements – from interest rate to currency and commodity deals, as well as emissions trading.” Transpower works with four Australasian banks: NAB, Commonwealth Bank, ANZ and Westpac. The company also uses three international banks: Citi, Bank of Tokyo Mitsubishi and HSBC.
Having now achieved its desired 70% gearing level, Transpower has reached the peak in its funding programme. “We’re also keeping an eye on our key financial metrics, such as funds from operations (FFO) to interest, which we look to be no less than 2.8x and FFO to debt around 12-13% in order to maintain a level of prudence.”
“I’ve been fortunate to work with some very good managers in my time and I’ve really been able to put their behaviour and proactive approach into action at Transpower. The most important thing that I learned from them is that ‘the only constant is change’.”
To help his team keep an eye on these metrics; the company’s risk exposures; and to carry out day-to-day treasury tasks in an efficient manner, Sutherland’s department runs three IT systems. “We use a TMS called Visual Risk which is from an outfit based in Sydney. When I first arrived at Transpower, we were using a treasury system called Integrity. The problem was that we were running an unsupported version so we couldn’t continue on with it.”
Visual Risk had already been selected as the preferred platform for Transpower’s treasury team to migrate over to and there was a project underway to make that happen. “I picked that project up in the very early stages. There were a few challenges in implementing the new system and making it fully end-to-end, but we’ve overcome those now. In fact, I find it a very good system and I’m quite encouraged by it,” Sutherland notes.
For risk management, Sutherland’s team uses two systems, the first of which is supplied by Quantate, a Wellington-based provider of web solutions for enterprise governance. The Quantate system can be configured using the company’s own evaluation criteria and helps in the identification and assessment of risks, as well as allowing for recording and monitoring of relevant controls. The second system is CS Vue. Transpower uses this system to track and monitor compliance with obligations under borrowing programmes.
In addition to these three core systems, Sutherland’s team, also uses Excel spreadsheets “quite a bit” in the day-to-day running of Transpower’s treasury function. “They’re a very flexible and useful business tool,” he adds.
Despite being “comfortable” with the systems he now has in place, Sutherland is not one to stand still. Automation around the TMS is ongoing and he is now looking to automate the rates upload, which currently requires some manual intervention. He is also looking to enhance the bank reconciliation process through further automation. “This will improve the team’s working lives and will also cut down on errors and rework,” he observes.
Once completed, Sutherland will be able to add this to the list of the treasury team’s achievements under his leadership. That list currently includes the raising of $1.5 billion dollars of debt with full support from the company’s board; listing on the New Zealand Stock Exchange debt market for the first time; and adjusting the company’s insurance to accommodate the additional asset base that Transpower has been building over the last two years. Considering the relatively short time that Sutherland has been at the company, that is impressive work.
Explaining these achievements, he says: “I’ve been fortunate to work with some very good managers in my time and I’ve really been able to put their behaviour and proactive approach into action at Transpower. The most important thing that I learned from them is that ‘the only constant is change’. This means that you have to be resilient. Never be surprised by change – be encouraged by it and embrace the challenges that change brings.”
|12 months to 30th June 2013||2013||2012||2011||2010||2009|
|Total revenue1 ($m)||920||785||731||730||694|
|Earnings before net changes in fair values of financial instruments ($m)||269||167||126||142||136|
|Funds from operations interest coverage (Times)||2.9||2.9||3.2||3.9||4.0|
|Total debt at face value2 ($m)||2,937||2,319||1,746||1,413||1,190|
|Non current assets, including held for sale assets ($m)||4,822||4,389||3,676||3,144||2,747|
|Total equity ($m)||1,410||1,509||1,534||1,455||1,400|
|Return on equity3 (%)||12.1||11.3||8||10||10|
|Total debt/total capital (%)||68||61||53||49||46|
Excludes interest revenue
After adjusting for related foreign exchange derivatives
Excludes discontinued activities
Includes the interim and final dividend related to that year as well as special dividends