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Treasury Corporation of Victoria Annual Report 1998 Jr j. A| sa*' w M /a fcfs Iin Èg to change • A' * «km o we are Where we are going What we achieved - Highlights Overview of our performance ' Financial summary 'Report of the Chairman and Managing Director Working with our clients tr- Our dealings in financial markets flisk monitoring and compliance framework Our people and how we are organised Corporate governance Financial Statements , . Appendices: -, Our clients International debt portfolio m « f • Wm aggBBlj^ if 5 V , AJ.-iir* ! "•«îRfj •V ^^f-'iUf^î •Six-k^A.. in a moving environment By selecting the right path and prudent financial management we are adding value to Victoria, today and tomorrow. m Who we are Treasury Corporation of Victoria Our stakeholder and clients ('TCV' or 'the corporation') is the Our sole stakeholder Is the Treasurer of Victoria. Our Chairman, on behalf of the Board of central financing authority for the Directors, reports directly to him. Our clients are the State of Victoria, participating authorities State of Victoria. The corporation and other State owned entitles. A list of our clients is on page 56. was established by the Treasury What we do Corporation of Victoria Act 1992 Treasury Corporation of Victoria is empowered to borrow, Invest and undertake financial and commenced operations on arrangements to hedge, protect or manage the financial assets or liabilities of the State or 1 January 1993 to manage all the corporation. We also provide financial advice to the Treasurer and our clients. of the State of Victoria's funding We work with our clients to provide financial solutions tailored to meet their underlying business requirements and to provide needs. We fund these needs from both the domestic and international money markets and financial services and advice to ensure that the total borrowing portfolio is optimised within recognised prudential standards. the State and its various public We also advise our clients on a wide range of financial matters. authorities. Our guarantee Centralisation within TCV of Our payment obligations in relation to borrowings and derivative transactions are guaranteed Government guaranteed debt, by the Government of Victoria (section 32 of the TCV Act). We lend only to the State and including that of the larger public participating authorities that are themselves guaranteed by the State of Victoria. authorities in the electricity, gas and water industries, has been Where we are going substantially completed. Our vision Our vision is to be a respected centralised financing authority, maximising benefits for the State of Victoria and our clients, Our mission Combining our people and technology, we are united in our commitment to deliver innovative financial solutions. Our culture motivates our people to act with integrity and professionalism to achieve the best results for the State and our clients. Our objectives • Act as a financial institution for the benefit of the State and participating authorities. • Enhance the financial position of our corporation, participating authorities and the State. • Provide services in an effective, efficient and competitive manner. Our goals • Fund the State and its public authorities at the lowest possible cost having regard to their business needs. • Ensure that the State's financing is undertaken using a risk averse approach with due regard to internationally accepted standards of prudence. • Deliver efficient services and a high standard of financing and treasury advice to assist our clients to effectively manage their financial exposures. • Maintain a well-defined and respected presence in domestic and international financial markets. • Advise the Government on effective financial management strategies. • Maintain, without conflicting with the preceding goals, the corporation's value by achieving a return on capital in excess of the TCV 10 year bond rate. E What we achieved Highlights • Delivered pricing at yields competitive with other AAA rated Australian States, despite a lower rating for most of the year. Upgraded by Standard and Poor's to AAA in April 1998. • Advised and assisted with the privatisation of PowerNet Victoria and Southern Hydro Ltd. These privatisations were largely responsible for reducing the market value of our net debt from $17.3 billion to $14.4 billion. • Undertook 30 advisory assignments that received strong positive feedback from clients. Our advice included the financial restructuring of the gas and water sectors. • Delivered our strategic focus by exceeding the minimum critical level of outstandings in our core A$ debt programme while efficiently repurchasing $2.0 billion illiquid debt. • Repurchased $6.0 billion of international debt over the past three years at no economic cost to the State. • Transacted innovative CPI indexed swaps, a first in the Australian financial market. • Restructured our Dealer Panel arrangements to support delivery of our key strategic objectives. • Implemented Value at Risk as the primary measure for monitoring our exposure to financial markets. • Achieved an annual return on capital of 18%. This is reflected in a net profit of $24.4 million (1997: $34.5 million). • Paid a special dividend of $13 million in June 1998 in addition to the $16 million dividend provided in 1997-98. Daily 10 Year Margin to Swap and Margin to Commonwealth Government Loans Margin to CGL Margin to Swap O O) O) o> § u-8. 5| ^A St ^| ^ Overview of our performance Objective 97-98 Target 97-98 Outcome Target 98-99 Delivery of State financing Ensure certainty of funding Satisfied clients requirements for Deliver client needs at rates requirements Provide competitive financing funding at rates competitive with competitive with other AAA for the State other AAA rated States rated States Manage the States financial Reduce client risk by providing Actively involved in 30 Reduce client risk by providing exposures professional advice assignments during the year professional advice Efficient access to financial Develop strategies for Maintained core $A debt Develop strategies for markets implementation in the context programme at appropriate levels implementation in the context of TCV's critical mass in Continued buyback of illiquid of TCV's critical mass in financial markets debt ($2.0 billion) financial markets Planned strategic structural changes to our financial market approach in the event of a change in Interest Withholding Tax arrangements Pricing relativity Ensure our spread to 10 year Consistently ahead of equivalent Ensure our spread to 10 year Commonwealth stock and State credits Commonwealth stock and margin to swap are better margin to swap are better priced than equivalent credits priced than equivalent credits Liquidity in Hotstocks Maintain sufficient market activity Progressively restored Maintain sufficient market activity in Hotstocks through Dealer outstandings to $6.5 billion in Hotstocks through Dealer Panel participation face value at 30 June 1998 in Panel participation response to market sentiment on critical mass for Hotstock outstandings Reduction of refinancing risk Maintain 12 month maturities at At 30 June 1998 $3.1 billion Maintain 12 month maturities at levels consistent with anticipated of outstandings mature in less less than 20% of outstandings privatisation process than 12 months - 16% of total outstandings Capital adequacy Maintain at a minimum of 10% Minimum 12% Maximum 21% Maintain target of 10% with a minimum of 8% Return on capital A return on capital in excess of A return of 18% was achieved, Monitor industry developments TCV 10 year bond rate averaged well in excess of average and respond appropriately over 1997-98 bond rate Complete review of appropriate This approach to be reviewed The review is not yet completed benchmark during the year Review risk monitoring Implement appropriate risk Created Risk Control Unit The review was finalised arrangements monitoring strategies in October 1997 1997-98 Value at Risk (VaR) implemented in January 1998 Credit Ratings of TCV and State of Victoria at 30 June 1998 Debt Standard & Moody's Investors Japan Bond Poor's Service Research Institute Australian Currency AAA Aa1 Foreign Currency AA Aa2 AA Short Term A-1+ P-1 H Financial summary Income and Expenditure Summary | 1997-98 Annual 1996-97 1995-96 1994-95 1993-94 $ million change % $ million $ million $ million $ million Net income from operations 25.8 (28) 35.7 41.8 58.8 24.5 Administrative expenses (9.4) 6 (8.9) (9.7) (9.0) (9.0) Borrowing related expenses (3.7) (3) (3.8) (5.9) (6.7) (8.5) (13.1) 3 (12.7) (15.6) (15.7) (17.5) Administrative fees and recoveries 11.7 2 11.5 12.9 14.9 27.0 (1.4) 17 (1.2) (2.7) (0.8) 9.5 Net Surplus 24.4 (29) 34.5 39.1 58.0 34.0 Dividend (16.0) (29) (22.5) (25.5) (38.0) 0.0 Special dividend (13.0) Balance Sheet Summary 30 June 1998 Annual 1997 1996 1995 1994 $ million change % $ million $ million $ million $ million Loans to clients 16,038 (14) 18,737 24,132 32,973 32,335 Deposits from clients (1,269) 16 (1,093) (1,423) (941) (1,709) Net loans to clients 14,769 (16) 17,644 22,709 32,032 30,626 Other assets 173 (26) 235 601 867 818 Total 14,942 (16) 17,879 23,310 32,899 31,444 Financed by: Hotstocks 7,725 10 7,024 9,227 13,624 13,119 International 5,714 (28) 7,952 10,459 10,351 8,855 Domestic other 6,343 18 5,396 6,043 9,944 10,699 Total Debt 19,782 (3) 20,372 25,729 33,919 32,673 Cash and investments (5,374) 76 (3,058) (3,238) (2,115) (2,096) Net Debt 14,408 (17) 17,314 22,491 31,804 30,577 Other liabilities 402 (6) 429 695 984 777 Equity 132 (3) 136 124 111 90 Total 14,942 (16) 17,879 23,310 32,899 31,444 Report of the Chairman and Managing Director '...we delivered, throughout the Over the past three years we have Australia's monetary policy was only adjusted year, a cost of funding to State successfully managed a major transformation once during the year when official interest of the State's exposure to financial markets. rates were reduced by 50 basis points to 5% authorities competitive with other The scale of privatisations during this period in July 1997. This, together with the reductions AAA rated States.' has been unprecedented, and responding of the year before, helped to boost our to these changes has required flexibility domestic economy. Net Financing and professionalism. The Victorian economy should achieve real Market Value at 30 June $b Debt reduction remains a major focus, growth of about 3.5% for 1997-98, in line although the more readily accessible with the national performance. While our .5» securities have already been acquired. substantial trade with the Asian region Innovative approaches to remaining Illiquid will probably reduce growth in 1998-99, debt are being applied. responsible national and State economic policies should still mean a healthy economy. Meanwhile our management of core liquid programmes has delivered, throughout the ll III Privatisation proceeds year, a cost of funding to State authorities competitive with other AAA rated States. During the year we continued to advise o> O) OÌ Ol on electricity privatisation. We helped with Our operations generated a net surplus of the settlement of the sale of both PowerNet $24.4 million (1997: $34.5 million) from which Victoria in November and Southern Hydro a dividend of $16 million (1997: $22.5 million) Ltd in December. PowerNet raised has been provided. In addition a special $2.6 billion and Southern Hydro $0.4 billion dividend of $13 million from retained earnings to increase total capital proceeds from was paid during the year. electricity privatisation to $20.9 billion. Our accumulated profitability has enabled us to provide $115 million as dividends to Maintaining liquid Hotstocks and our stakeholder since Incorporation while buying back debt retaining sufficient capital to cover our credit Our strategy has been to focus on and market risks. A further $25 million of maintaining liquid domestic Hotstocks retained earnings has been transferred while buying back Illiquid debt where to the General Reserve to reflect the economically viable. capital requirement. During the year we have repurchased around $2 billion of debt, of which $1.5 billion were Debt reduction international securities. At 30 June 1995 our net debt was $31.8 billion. This has been progressively We are disappointed that the recent Federal reduced to the current level of $14.4 billion Government legislation exempting certain (market value). This improved financial domestically issued bonds from Australian position has been recognised by Standard interest withholding tax, specifically excluded & Poor's Corporation upgrading our TCV. We believe that the development guaranteed local currency rating to AAA of an interest withholding tax exempt global in April 1998 (AA+ since September 1996). Australian dollar bond programme would provide significant advantages for the State Challenging and changing environment of'Victoria. By their very nature, financial markets are Advising on financial risks volatile. The past year has seen more activity than usual as the implications and impact of One of the corporation's key roles is advising the economic crisis in East Asia deepened: on the financial risks associated with State regional equity markets and currencies fell; liabilities and projects. Apart from managing the fixed interest markets generally rallied in the proceeds of privatisation sales, we also response to deteriorating global economic implemented gas debt restructuring in July growth; and the yield on domestic 10 year 1997 and simplified treasury systems for bonds ended the year about 1.5% lower. the new disaggregated gas businesses. Left to right: David Carruthers, Managing Director, Ian N Ferres, Chairman. In January 1998 we also helped fifteen Acknowledging the efforts of many • continuing to buy back illiquid debt before non-metropolitan water authorities replace We pay tribute to Dr Michael Vertigan it matures; and third party debt by formulating and applying who retired from our Board of Directors • keeping our investment levels as low simplified lending structures. on 31 December. He was a great supporter as possible in the context of the above At present we are putting in place a treasury and made an invaluable contribution during two objectives. his five years on the Board. On 15 April, system to replace Department of Treasury The reduction in international debt buyback the Board welcomed Ms Carolyn Kay as and Finance's debt database. This prototype activity to $1.5 billion (1997: $2.4 billion) a Director and we look forward to the system will eventually be available to all of evidences the increasing difficulty of retiring benefit of her breadth of experience our clients. debt before maturity and has led to a build in financial markets. up in investment levels pending retirement Monitoring risk Our special thanks go to the Hon. Alan or maturity of illiquid debt. We have established a Risk Control and Stockdale MLA, Treasurer of Victoria, Our challenge is to retain the flexibility needed Reporting Unit to oversee market, credit for his continued encouragement, his to respond to the changing needs of the and liquidity risk. communication to financial markets of State's finances and the dynamics of the State policies and support for our This unit implemented the Value at Risk (VaR) financial markets. method of measuring risk in January 1998. business objectives. VaR provides a measure of market risk by Nothing would have been achieved this year recognising the correlation between various if it were not for the commitment and talent financial products. of our staff and management team. We all take pride in their achievements. We are aware of the year 2000 problem Ian N Ferres and the associated risk to business Chairman Strategic priorities for managing continuity. In 1996 we began our efforts the future to minimise the impact of the year 2000 design flaw on our business, our clients and Moving forward, our strategies will focus on: our counterparties. These stringent efforts • maintaining the right amount of liquid debt David Carruthers continue, but we are unable to guarantee on issue to retain our competitive pricing Managing Director that there will be no impact whatsoever and financing flexibility to deliver benefits on our business, especially where we to our clients; depend on third parties. m Working with our clients Key Results Centralised treasury means cost Net Loans to Clients by Sector savings for clients • Successful settlement of the PowerNet Market Value at 30 June $b ••• and Southern Hydro Ltd sales and The Treasury Corporation of Victoria is management of the proceeds from sale. the State's centralised financing authority. X Our core business is to provide financing, • Metropolitan water authorities borrowing investment products and risk management portfolios restructured to fixed rate services for our clients. Our financial products evergreen borrowing facilities. are tailored to meet the business needs of • Number of corporation clients increased. our clients and our advice supports their Hi i • treasury functions. • Completed 30 advisory assignments. Future Objectives We promote the benefits of a centralised treasury model to our clients to simplify their • In the event of gas industry privatisation, financial needs and improve their treasury the settlement and efficient management advice. This approach enables our clients of the proceeds. to achieve substantial cost savings by • Advance our advisory and centralised eliminating the need to maintain their own treasury services. specialist treasury resources. • Develop our lending business with new Our standing in the financial markets, clients in the non-metropolitan urban together with the State's guarantee, enables water sector. us to raise funds at very competitive wholesale interest rates. Our pricing policy ensures these savings flow on to our clients by linking the pricing of our client loans to the TCV yield curve. It is this curve that defines the price at which we can raise funds at any time. Our client base Key government reforms Our remaining electricity industry clients include the SECV "Shell", Victorian Power The State of Victoria is our principal client. The Victorian Government's industry Exchange and Generation Victoria. Our public authority clients include water, reforms during 1997-98 resulted in a We now manage the SECV "Shell" treasury gas, electricity, transport, infrastructure, sport, significant change in the size and structure operations as well as providing liability tourism, education and emergency services. of our clients. During 1997-98, 28 new participating management advice. authorities were accepted by the corporation. Completing electricity privatisations Restructuring the gas industry A list of our clients is shown on page 56. The privatisation of the State's electricity In July 1997 Gascor was disaggregated industry was substantially completed by During 1997-98, the market value of loans to into three retail companies, three distribution late 1997 with the sale of PowerNet Victoria clients fell from $17.6 billion to $14.8 billion. companies and Gasmart and Gas Services for $2.6 billion (6 November) and Southern This reduction was mainly due to receiving Business. In December 1997 Gas Hydro Ltd for $391 million (18 December). almost $3 billion privatisation funds, which Transmission Company was also corporatised. The privatised companies' liability to TCV were used to reduce loans to clients, was repaid with $796 million of the sale including the Budget Sector. proceeds and the balance of the PowerNet Note 10 of the financial statements on page sale was paid to the Budget Sector to 40 details individual client loans and deposits reduce State debt. The balance from the at 30 June 1998. Southern Hydro sale was transferred to Victorian Funds Management Corporation. Transmission & Wholesale Distribution Retail Ikon Energy Energy 21 Kinetik Energy Pty Ltd Pty Ltd Pty Ltd The restructure meant Gascor's liability to Advice on a range of financial services the corporation was transferred to the new We have a client service team dedicated entities. Instead of simply transferring the to providing high quality financial services to existing Gascor debt to the new companies clients. In consultation with our quantitative we provided them with specific loan facilities analysts and other areas of the corporation, that met their business needs in the lead up our staff advise clients on a broad range to possible privatisation. of financial services. Restructuring the water industry Our team works closely with clients, often on a daily basis, on financial market On 9 October 1997 the Victorian Government developments, funding and investment announced reforms for the water industry options and strategies for managing portfolio that included: and interest rate risks and specific • the State's assumption of $850 million assignments, as shown below. metropolitan water debt; • allocating $410 million to non-metropolitan Some specific advisory urban water authorities (NMUs); assignments • allocating $40 million to rural water Advice to the Risk Management authorities. Committee of the Department of Treasury and Finance. The corporation analysed the metropolitan water authorities' debt portfolios and advised Advice to a number of clients on the Water Reform Unit on restructuring to improving their banking structures simplify and tailor the debt facilities to the and reducing banking costs. corporatised environment. This advice Restructure of Director of Housing was accepted and, in January 1998, we debt portfolio. bought back $3.1 billion debt and issued $2.25 billion new borrowing to the water Participation on a Steering Committee companies. The remaining $850 million of and Working Group reviewing the debt was assumed by the Budget Sector. Budget Sector banking arrangements. The $410 million NMU allocation was Development of an interest and debt deposited with TCV on behalf of the fifteen forecasting system for the Department water authorities to repay debt or to fund of Treasury and Finance. capital works. Previously all NMUs, with the Advice on financial implications of the exception of Coliban Region Water Authority, disaggregation of the Alpine Resorts borrowed under the Water Industry Act, not Commission. through the corporation. These reforms gave Advice to a number of clients on us an opportunity to work more closely with management of specific foreign currency the NMUs, and we advised each of the exposures. authorities on their options for applying the financial assistance package to repay debt. Development of treasury policies for clients. Advice and execution for a number of clients on specific non-debt interest rate risk management. Advice to the Department of Treasury and Finance on a review of the treasury management guidelines for government business enterprises. We also provide a full range of economic services and are regarded as an authoritative The Midas treasury system is an source on the Victorian economy and State international treasury system selected financial management for our investors and to provide a solution to our back-office clients. During the year we promoted Victoria processing. It has been enhanced to and communicated our market strategies accommodate specific TCV and client through economic presentations, our Internet requirements and support our portfolio site and the joint publication with the risk management system. Department of Treasury and Finance of Features the Victorian Economic Review. Maintains accurate and reliable portfolio, Future direction continues reform focus settlement and accounting information. Privatisations remain a major focus during Provides flexibility to accommodate 1998-99. We will work with the Department future product enhancements as of Treasury and Finance to apply these required by TCV and our clients. privatisation proceeds In line with Provides flexible entity structures and prevailing policy. therefore the ability for discrete remote We will continue developing and advancing access. the centralised treasury approach. The International software vendor with restructuring of the metropolitan water and accessibility to an Australian branch gas authorities' debt portfolios into simplified office to develop required loan facilities during 1997-98 largely enhancements. completed the de-linking of our assets and liabilities. We now have the flexibility to meet clients' financing needs while developing a competitively priced overall debt portfolio. We will be implementing the Midas treasury system in the coming year. This system can maintain portfolio and accounting details for our clients as well as meeting our own needs. The Budget Sector will be the first to outsource Its treasury administration and accounting needs to us, and when this is finalised the service will be offered to other clients. We are in a unique position to identify and advise on State financial risks and play an important advisory role on a range of major projects. A key priority for the coming year is to further develop our relationships with government sectors so that effective approaches to total State balance sheet risk management are pursued. Our dealings in financial markets Key Results Debt Mix at 30 June 1998 Risk management in a volatile environment • Managed $3.0 billion of proceeds from Domestic Other. privatisation. 32% The 1997-98 financial year saw a high focus on managing the mismatches between • Reduced net debt from $17.3 billion assets and liabilities inherent in our balance to $14.4 billion. International. 31% sheet as a result of providing clients with • Maintained Hotstock outstandings within innovative financial solutions. We have target levels for each line. extensively used market products to help manage these risk gaps. We have • Successfully repurchased $2.0 billion Promissory Notes. successfully minimised risk exposures on of illiquid debt. 1% our balance sheet while effectively satisfying • Generated income from treasury client needs. operations of $25.8 million. Hotstocks 36% Our risk management activities during the Future Objectives year generated over $72 billion of financial Liquid debt # • Maintain liquidity in a benchmark market transactions (1997: $67 billion). We Australian dollar bond programme. Illiquid debt • complemented this physical product activity with exchange traded futures and options to: • Exploit opportunities to reduce illiquid debt. • hedge risks associated with privatisation; Balance sheet • manage risks associated with investments; • Manage current levels of liquidity with The Victorian Government's remaining the aim of reducing investments as electricity privatisation programme and major • rationalise domestic and international opportunities arise. client portfolio restructuring has driven our swaps; balance sheet activities over the past year. • Maintain a flexible approach to balance • hedge the offshore debt retirement During the year to 30 June 1998 our net sheet management to accommodate programme; and client needs. loans to clients has reduced by $2.8 billion to $14.8 billion (1997: reduced by $5.1 billion • facilitate client transactions through • Maintain profitable treasury operations to $17.6 billion). market activity. within appropriate risk parameters. Until early 1997-98 the proceeds received We have developed innovative approaches from privatisations were invested short term to risk management; for example, we and used to repay or buyback debt within completed a significant restructure of State six months of receipt. As further privatisation exposure to Consumer Price Index (CPI) proceeds were received this target timeframe linked debt by entering into a number of became increasingly unrealistic as maturities CPI swap transactions that converted the and buyback opportunities slowed. original CPI debt into conventional debt. Consequently, for the coming year we will continue to manage investment levels in the short term on our balance sheet above that prescribed by our liquidity policy. Planning strategies for risk management, Benchmarking and key performance The chosen measure of value for all client together with the provision of advice to our indicators and market transactions is our domestic yield curve as derived from the market price of clients, is a function of our Asset and Liability We use a variety of indicators to measure our core programmes. This transparent yield Management Committee. This process our performance including: develops the framework for efficient and curve is used as the basis for our transfer • the TCV yield margin to: prudential management of our balance sheet pricing to clients and is an important indicator - Commonwealth yield curve and exposures and strategies for our clients' of our efficiency in debt markets. financing requirement. certain State Government bond yield curves, and TCV Hotstock Yield Curve The introduction of Real Time Gross - the Bank Bill Swap yield curve; Spread Spread to the Swap Market Settlement in June 1998 emphasised the (basis points) importance of cash flow management within • maintenance of liquidity in key funding the operations of financial institutions. Our programmes; extensive preparation resulted in a minimal • the success of buying back debt at impact on our operations. economic levels; • profitability relative to budget; Market Activity by Product $b • maintenance of efficient balance sheet structures within risk limits, credit limits and capital utilisation; and • adherence to dealing commitments contained in Client Service Agreements. OS Our dealings in financial markets Core funding programmes Hotstock Outstandings We have two core funding programmes - the Face Value Hotstock and Promissory Note programmes. Our Promissory Note programme continues to provide short-term funding to bridge the timing gap in managing cash flow mismatches. 1,000 Our Promissory Note facility peaked at $800 million to meet temporary funding requirements, but we do not target a core level of outstandings in this facility. Hotstocks are our benchmark fixed interest securities, which are actively traded and supported by our Dealer Panel. We are addressing the issue of critical mass in the Hotstock programme. The general commitments we have made include: • targeting a minimum of $1 billion for each Hotstock line; • maintaining total Hotstock outstandings above $5 billion; • providing weekly updates of Hotstock outstandings via our information screens; • providing ready access to a short-term stock lending facility for all Hotstock lines; and • providing detailed market turnover information to our panel members. At 30 June 1998 we had five Hotstock lines with maturities ranging from 1999 to 2008. The level of outstandings in each line was managed above the stated minimum commitment levels to ensure they remain liquid and well priced. For the coming year we will also look to lengthen the portfolio with the issuance of debt to new maturities. Offshore Debt Maturity Profile Dealer Panel performance criteria Face Value Turnover of Hotstocks TCV debt buybacks Risk management products Economic data, offshore information flows and general dealer relations Top six Dealer Panel members Warburg Dillon Read Australia Limited Deutsche Capital Markets Australia 30 June 1997 Limited 30 June 1998 Merrill Lynch International Australia Limited Dealer Panel changes Buying back securities on international Westpac Banking Corporation The TCV Dealer Panel has been reduced markets Salomon Smith Barney Capital Markets to ten members with the top six dealers in Our international market activity during Australia Ltd a year becoming eligible for performance 1997-98 was focused solely on buying back fees. We have realigned the focus of the our securities at a fair price in the secondary Bankers Trust Australia Limited Dealer Panel to more closely reflect our market. We worked with a wide range current market operations by amending of financial intermediaries to identify the performance criteria to place greater opportunities for the early retirement of our emphasis on contribution to our debt offshore debt. A list of major contributors retirement programme. to this effort appears on page 16. Our staff met market participants in Tokyo, London, During the year, there was little change in New York and Frankfurt to reinforce our our spread relative to other semi-government objectives for offshore debt. Over the past issuers. While Standard & Poor's Corporation three years, part of the proceeds of Victoria's upgraded the domestic currency rating of the privatisation programme has been designated State of Victoria and TCV to AAA from AA+, to the reduction of the State's offshore debt. with effect from 22 April 1998, the market These proceeds have been applied to the had priced our securities at least equivalent rundown of maturities ($2.4 billion) and the to other prime rated issuers for many buyback of debt, prior to scheduled maturity, months before this announcement. of over $6.0 billion. Our message to the international markets is: • We will continue to buyback debt at a fair market price providing secondary market liquidity for loans and securities that would otherwise be illiquid. Our dealings in financial markets During 1997-98, we repurchased $1.5 billion Significant contributors to offshore (1997: $2.4 billion) of debt securities that buybacks during 1997-98 were cancelled prior to scheduled maturity. RBC DS Global Markets Together with maturities of $0.8 billion, offshore outstandings at 30 June 1998 Salomon Smith Barney were reduced from $7.9 billion in 1997 to Toronto Dominion Securities $5.7 billion in 1998 (market value). The table Nomura Australia Limited on page 57 details our outstanding security issues and summarises our buyback activity The Chase Manhattan Bank against those issues. Westpac Banking Corporation Other debt outstanding Commonwealth Bank of Australia Our other debt includes capital indexed The Nikko Securities Co., Limited bonds, indexed annuity bonds, private Merrill Lynch International Australia placements, retail bonds, Hotstocks less than Limited 12 months to maturity and Commonwealth Warburg Dillon Read Australia Limited State Housing Agreement debt. There has been little activity in these market sectors ABN Amro Australia Limited for the corporation over the financial year. Investments During the year, investments increased in line with our overall debt management strategy. We monitor our liquidity requirement and investments daily. Our investment powers derive from the Borrowing and Investment Powers Act, pursuant to which an Order in Council and approvals of the Treasurer have been granted. All our investments are governed by Board approved policies. Investment Levels ! 2,000 In addition to satisfying credit policy and Subject to the satisfaction of eliminating exposure to foreign currency, stringent credit and liquidity investment activity must satisfy a further criteria, TCV may invest in: set of criteria imposed to ensure liquidity. • money market deposits; Future directions • Commonwealth Government issued or guaranteed securities; Today we have a threefold focus in financial market strategies: to ensure that Hotstock • promissory notes issued by statutory outstandings are maintained at levels authorities; necessary for optimal liquidity and price • bills of exchange accepted or tension; to strive to retire illiquid debt lines endorsed by an Australian bank and before maturity; and to minimise certificates of deposit issued by an investment levels. Australian bank; We are committed to maintaining liquidity • Australian dollar denominated in our Hotstock programme. We plan to securities issued by Australian banks; maintain a minimum of five maturity dates each with at least $1 billion outstanding, • certain securities issued by foreign but will target our outstandings above governments (e.g. US 'Treasuries', these minimum levels. UK 'Gilts'); and There are several financial market • Australian dollar denominated uncertainties that may impact our operations securities issued by certain over the next financial year. Bond market supranational institutions, government supply and liquidity relating to the proposed agencies and foreign banks. Telstra sale has been a major issue for the Australian fixed interest market. The liquidity levels of both Commonwealth and semi- government debt could be affected depending on the way net debt levels are reduced over time. We firmly believe that the development of an interest withholding tax exempt global Australian dollar bond programme would provide significant advantages to the State, the corporation and its participating authorities. The benefits include: • an immediate pricing benefit; • enhanced liquidity and better price definition through a global yield curve; • opportunities for the extension of maturities beyond ten years; and • maximisation of price tension between domestic and international sectors. Risk monitoring and compliance framework Our business exposes the TCV Capital Ratios corporation to financial risks. Actual 1997-98 Management of these risks is therefore central to our policies. Prudential supervision Mr Patrick Burroughs was appointed by the The capital ratios for the Treasurer of the State of Victoria as TCV's year have ranged between Prudential Supervisor, effective 1 July 1994. 12% and 21% (1997: 15% In this capacity he reports to the Treasurer and 28%), well in excess t&o of the target level of 10%. of Victoria. The prudential framework established by the In 1997-98 we actively promoted our Capital adequacy Treasurer is complemented by the prudential prudential supervision policy within the The Treasurer has determined that the standards, policies and procedures set by our organisation and the Prudential Supervisor Reserve Bank of Australia's prudential Board of Directors and management, who made a presentation to all staff. The statements in relation to capital adequacy report regularly to the Prudential Supervisor. Prudential Supervisor provided valuable input apply to the corporation. The objective is to to our implementation of Value-at-Risk (VaR) ensure that we maintain an adequate level Risk Management methodology for measuring interest rate risk of capital to withstand any potential losses Monitoring Framework and the extent to which our risk management resulting from credit exposures and market framework addressed the requirements of risk. We are required to maintain a minimum Treasurer of Victoria the Reserve Bank of Australia's Prudential capital adequacy ratio of 8% of risk weighted Statement C3: 'Capital Adequacy of Banks: assets. However, we target to maintain a Market Risk'. capital ratio no worse than 10% of risk Prudential Supervisor weighted assets. In relation to capital required to support interest rate risk, TCV will comply Prudential supervision policy with the requirements of the Reserve Bank Board of Directors and Managing Director Our policy states, 'The prudential of Australia Prudential Statement C3 as framework is directed towards the from 1 July 1998. Audit Committee corporation satisfying the Supervisor and ultimately the Treasurer that: Risk control and reporting unit External Auditors • the corporation manages its exposures In October 1997 we established an to market and credit risk so as to ensure independent Risk Control and Reporting Internal Audit at all times it maintains appropriate Unit that ensures appropriate policies and capital to cover these exposures. procedures are maintained to control and limit In this approach, the risks undertaken risks. It reports to the Executive General Treasury & by the corporation expressed in terms Manager, International and Corporate Services. Client Services of utilisation of capital must not exceed a specified percentage of the The unit: capital base of the corporation; • constantly reviews business operations International & Corporate Services • the corporation is following manage- to identify and assess risks; ment practices and has established • develops policies and procedures to Finance & Administration policies and procedures that limit facilitate the management of risk; Planning & Marketing risks to prudent levels; and Human Resources • designs and implements risk management • the corporation's practices, policies systems; and procedures are being observed • produces and analyses daily risk and and kept under review to take utilisation reports; and account of changing circumstances.' Market Liquidity Credit Operational • reports internally and externally. Risk Risk Risk Risk Market risk - interest rates Policies for monitoring and measurement For the purpose of liquidity, we only hold prime credit ranking securities, such Different portfolio positions are valued of risk are reviewed regularly to ensure that as Commonwealth Government, semi- using interest rates or yields specific to their they comply with Industry best practice. government and prime bank paper, cashflow structure, term to maturity and which can be actively traded and liquidated credit quality. Yields corresponding to similar Interest rate risk is the potential loss to quickly. Liquidity is monitored daily and cashflow structures and credits are grouped an organisation resulting from changes any exceptions to the required liquidity together as yield curves. Owing to the nature in the value of its portfolios due to holding are reported to senior management, of our balance sheet, we are exposed to the changes in market interest rates. the Board and the corporation's outright level of interest rates and to the Liquidity risk Is the potential loss to an Prudential Supervisor. shape and relativities of different yield curves. organisation resulting from the inability to fund its upcoming cashflow In January 1998, we implemented Value- Credit risk at-Risk (VaR) methodology for the overall commitments economically. The corporation's exposure to credit measurement of interest rate risk. The VaR Credit risk is the possibility of financial risk is through its investments in financial measure replaced a Contingent Loss Risk loss due to a counterparty defaulting on assets and derivative financial instrument (CLR) methodology after a comprehensive their contractual obligations. transactions associated with our risk operational trial period whereby VaR was Value at Risk (VaR) is a measure of the management activities. Our loans to critically examined for its appropriateness estimated loss faced by the corporation participating authorities are considered as a measure for risk measurement, within a certain level of confidence over to be credit risk free as the Government management and reporting within a given holding period under normal of Victoria guarantees the loans. the corporation. market conditions. We enter into interest rate and currency Our approach to VaR incorporates historical swap transactions, forward rate agreements, simulation based upon archived data of rates foreign exchange contracts and interest relating to money market activities, futures, Market risk - currency rate options with market participants swaps, Commonwealth bonds and semi- The corporation does not maintain any and participating authorities, as well as government securities. Our VaR model material net foreign currency exposure. exchange-traded futures and interest rate calculates outright interest rate risk and option contracts. spread risk between the TCV yield curve and Liquidity risk The notional amount, market value and each of the swap curve, the Commonwealth Typically, liquidity risk results from the need assessed credit exposure of each class of bond curve and appropriate semi- to fund when markets are unable to offer derivative financial instrument outstanding at government curves. Risk due to yield volatility the required volume or price. Our liquidity balance date are presented in Note 22 to the shifts, especially in relation to option policy ensures we maintain holdings in liquid financial statements on Page 52. Generally, positions, is also measured. assets and immediately accessible standby we will not enter into derivative transactions lines equivalent to 100% of liabilities maturing We maintain the Contingent Loss Risk having a maturity exceeding twelve months within one month and a declining proportion framework for our routine stress testing unless the counterparty has a Standard & of liabilities maturing out to twelve months. programme as the inherent scenarios Poor's/Moody's rating of A+/A1 or better, In addition, there is a requirement to hold within this methodology are biased towards and will not enter into a transaction with a minimum amount of these assets in extreme volatility and worst case outcomes. a maturity exceeding 5 years unless the Commonwealth Government securities counterparty is rated AA-/Aa3 or better. We manage interest rate risk within a risk or cash. limit structure. There are various levels of delegation from the Board to the Managing Director, with further delegation to individual Concentration of Credit Risk Cash 3 Cash Equivalents $b risk managers. Our management information Securities Investments systems allow risk exposures to be measured Derivatives intra-day and monitored relative to this limit structure. Based on Standard & Physical instruments and derivative Poor's credit rating scale. Amounts expressed in instruments, such as interest rate swaps, current market value forward and futures contracts and interest AAA AA+ AA AA- terms. rate options, are used to manage these exposures. Risk monitoring and compliance framework Derivatives Portfolio by Maturity The charts and tables provide details of our Operational risk derivatives portfolio by rating category and 0-6 months— We manage operational risk by ensuring that 31% currency composition and maturity. The appropriate policies and procedures are in 6-12 months. concentration of derivatives exposure by 1% place. Compliance with these policies and type of counterparty is presented in Note procedures is tested regularly. 1-2 years. 22 to the financial statements on page 16% 52. The notional principal amounts of the We have developed and implemented derivatives represent an indication of the sophisticated intra-day risk management volume of derivatives transacted by the systems solutions. The portfolio risk 2-5 years. management system was developed in-house 32% corporation. The notional principal amounts are not a measure of credit risk. The credit and provides us with a comprehensive and equivalent amounts (current replacement highly flexible suite of risk management tools. 5-10 years. value and an allowance for potential future 20% Year 2000 compliance exposure) are calculated in accordance The maturity profile of swap counterparty with the Reserve Bank of Australia's capital TCV Is aware of the risks associated exposures by credit equivalent amounts as adequacy guidelines. We do not net with Year 2000. We are dependent upon at 30 June 1998. exposures for credit purposes. computer systems for our business operations and therefore commenced initial assessment of Year 2000 compliance in early 1996. Derivatives Portfolio by Currency Operational Risk is the potential loss As a relatively new organisation we do Australian Dollars due to shortcomings in our day to day not have a range of legacy systems 48% operations. These shortcomings could developed using a 2-digit year field. When British Pounds. 5% occur in a range of areas, including the preliminary assessment was completed Canadian Dollars systems, settlements, policies and we set up a project team to formally review 3% Japanese Yen. procedures, as well as risk management and validate all our Information Technology 15% and pricing methodologies. (IT) and non-IT systems for Year Swiss Francs 2000 compliance. 2% Our Year 2000 project manager coordinates Derivatives portfolio by counterparty risk reduction and Year 2000 compliance. credit rating We have established a central risk register of United States Dollars. 27% Standard % of Moody's % of all our IT and non-IT software and hardware & Poor's Portfolio Rating Portfolio to ensure the centralised management of TCV had swap positions denominated in six Rating systems risk. As we receive compliance currencies at balance date. The chart is based certificates, and testing of hardware and AAA 36 Aaa 41 on notional principal amounts. software products is completed, the register AA+ 23 Aa1 11 is updated and each of our systems is ranked AA 8 Aa2 14 by importance to business operations. AA- 24 Aa3 26 Systems that fail to meet this standard are unacceptable to the corporation and must A+ 8 A1 5 be upgraded or replaced with equivalent A 0 A2 2 compliant systems. So far in our Year 2000 A- 0 A3 0 compliance testing relatively few hardware and software systems have been found to be BBB 1 Baal 1 unsatisfactory. Those non-compliant systems 100 100 with date field related problems have been upgraded, modified or replaced. The proportion of TCV's derivative portfolio by counterparty credit rating at 30 June 1998 In providing our core business services we (measured by notional principal amounts). also rely upon external Interfaces (real time financial markets data and news information service providers and settlement, payment and registry system service providers) and suppliers of IT and non-IT hardware and software. Our strategy in respect of Year 2000 We obtain financial accommodation from Year 2000 conformity compliance for all externally developed Australian and international financial markets The Government requires that we systems has been to first obtain a Year and enter into financial transactions with and evaluate our compliance against the 2000 compliance certificate from the system through appropriately credit rated financial Australasian Performance Standard hardware or software vendor. If a particular institutions or financial intermediaries. As part SAA/SNZ MP 77: 1998:4 Definition of system is not compliant we have arranged for of our Year 2000 compliance programme we Year 2000 conformity requirements. Our upgrades or replacement. Once compliance are in the process of seeking clarification from Year 2000 conformity shall mean that certificates are received or systems upgrades relevant clearing houses, counterparties and neither performance nor functionality is completed for externally developed systems, the fiscal or paying agents for our bond or affected by dates prior to, during or after we conduct our own testing/review. This note issues on the status of their Year 2000 the Year 2000. In particular: testing is carried out to the fullest extent compliance. we are able, subject to the cooperation of Rule 1 - No value for a current date In common with many other corporations suppliers, to provide a higher level of will cause any interruption in TCV's we also rely on a variety of third party utility confidence that we have minimised our Year operation. suppliers, such as power and telecommuni- 2000 exposure in relation to these systems. cations. We currently lease premises at Rule 2 - Date-based functionality must Our internally developed AS/400 and PC 1 Collins Street, Melbourne. Various non-IT behave consistently for dates prior to, based systems are also subject to this systems are used in these premises to during and after the Year 2000. Year 2000 testing/review process. All of control air conditioning, fire alarms and our business critical hardware and software Rule 3 - In all interfaces and data lift/door access. At present we are awaiting IT systems had passed our tests for storage, the century in any date advice from the building owners about the compliance as of 31 December 1997. must be specified either explicitly Year 2000 readiness of these systems. or by unambiguous algorithms or Part of our formal policy for installations Although the corporation has established inferencing rules. and upgrades since 1996 has been that and is undertaking a Year 2000 compliance Rule 4 - Year 2000 must be recognised all new software and hardware purchased programme, we are unable to guarantee as a leap year in terms of handling both must be Year 2000 ready. We also insist that that the transition to the Year 2000 will have 29 February and day 366. all corporation developed code using date no impact whatsoever on our activities or fields, including spreadsheets, databases, our business, particularly where we are etc. must have those date fields stored in dependent on third parties, such as utilities, long form, i.e. century, year, month, day. clearing houses, fiscal and paying agents. Year 2000 Exposure - Major activities undertaken or already completed Estimated/Actual External Interfaces Status Completion Date Prepare inventory of all TCV external IT Services (Review services supply contracts where applicable) Completed September 1996 Request service suppliers to provide details of Year 2000 compliance status and programme details 1 product outstanding September 1998 (est) Confirm existing suppliers or arrange for transfer to service suppliers with compliant services Ongoing September 1998 (est) (where applicable) To the fullest extent possible (subject to the cooperation of suppliers), verify Year 2000 compliance 1 product outstanding September 1998 (est) by conducting appropriate levels of TCV specific testing Hardware/Software Products Prepare inventory of all TCV IT and non-IT products Completed September 1996 Request hardware and software suppliers to provide details of Year 2000 compliance status 4 non-IT products September 1998 (est) and programme details outstanding Upgrade or replace non-Year 2000 compliant hardware and software products with compliant versions 1 non-IT upgrade in progress September 1998 (est) To the fullest extent possible (subject to the cooperation of suppliers), verify Year 2000 compliance 4 non-IT products September 1998 (est) by conducting appropriate levels of TCV specific testing outstanding Our people and how we are organised Key Results Comparative staffing figures • 29 staff attended a Management 30 June 1998 30 June 1997 Development programme. Female Male Total Female Male • 14 staff attended Presentation Skills Total programme. Executive management 0 3 3 0 3 3 • 8 staff completed qualifications or were Middle management 6 12 18 4 9 13 supported in undertaking higher Other staff 15 16 31 19 17 36 education. Total 21 31 52 23 29 52 • Bonus scheme successfully implemented. Equivalent full-time 20.2 29.8 51 20.8 29 49.8 • $2,500 allocated per employee for Salary and related employee expenses $5.4 million $5.0 million training and development. Future Objectives • Motivate and train staff to develop Workplace issues by the corporation from 1 December 1997 personally and professionally. Equal opportunity as the Human Resources Manager. TCV is a proponent of equal opportunity • Provide flexible work and remuneration Consultants arrangements. in the workplace, and our staff selection is The corporation only employs expert based on skills, competence and experience. • Performance measurement and consultants for specific projects and to Our equal opportunity policies are regularly evaluation training programme. maintain best practice in the finance industry. reviewed and updated and a staff awareness During 1997-98 one consultancy was • Plan for succession to key roles. programme is in place. undertaken costing $20,900. Other external • Development of new policies for Industrial relations sen/ices, such as internal audit, legal advice employee health and fitness. and delivery of training and development, Our record of no time lost owing to industrial are provided on a contractual basis. disputes or due to industrial accidents continued throughout the year, and no Developing skills and abilities workers compensation claims were Our commitment to training continued during submitted by our employees. the year with an emphasis on employee Superannuation responsibility for identification of specific training needs. Each year we conduct a All employees are eligible to join our formal appraisal of skills as a tool for targeting superannuation scheme, which is an future development or training and allocate accumulation fund providing optional death funds to support this development. Other and disability benefits. In 1997-98 our fund skill training initiatives included a 2-day was administered by Towers Perrin and presentation skills programme and a 5-day managed by a trustee company whose residential Management Development directors were two TCV appointed and Programme. This programme was attended two elected member trustees. From by staff from all functional areas, with the 1 July 1998 the fund will be administered aim of developing leadership and by Buck Consulting. 97% of employees were management concepts. members of our Fund and 3% were members of the State Superannuation Scheme. Subsequent to the Management Development Programme the participants In 1997, one employee retired, the first have established an Issues Forum, which in our history. now meets regularly to discuss line management issues. This forum complements Human resources the successful monthly in-house information A 12 month contract for an outsource sessions introduced in 1996-97. Human Resources Adviser expired on 30 November 1997. The contractor under In addition, nine staff sat and passed the this arrangement was employed directly Australian Financial Markets Association Dealer Accreditation exam. Health and fitness performance saw a further development Future directions All employees were invited to undertake to our existing performance reviews. We have an ongoing commitment to fitness assessments, which included a needs This flexibility extends to general work offering staff a flexible approach to human analysis. This assessment will form the basis arrangements wherever practical, and during resource issues combined with clear of a new approach to supporting corporate the year six staff members were able to tailor communication in the areas of remuneration, health during the coming year. their work arrangements to meet their training and development. individual needs. To this end, we will develop a comprehensive Flexibility in working arrangements Our preference for filling vacancies by internal policies and procedures manual for All staff have the opportunity to take appointment saw six staff changing roles use by all staff. The annual performance advantage of flexible remuneration during the year. Responding to change in measurement cycle will be enhanced arrangements. The introduction, in August this way improves the organisation's skill through specific targeted training designed to raise skill and confidence in completing 1997, of a bonus scheme linked to base and helps to address the issue of performance evaluations and setting key succession planning. performance indicators. What TCV is all about - Topics In 1997 TCV introduced monthly Prudential supervision July 1997 information sessions under the banner Mr Ian Ferres, Chairman, TCV August 1997 of 'What TCV is all about'. These sessions Sexual harassment and discrimination September 1997 provide our staff with opportunities to learn about topical issues impacting Systems redevelopment project October 1997 not only on the organisation itself, but Value at Risk (VaR) December 1997 on the financial markets at large. The Risk control and reporting unit February 1998 topical nature of these sessions explains the voluntary attendance rate of 67%, Staff development review and 360 degree feedback February 1998 on average. Remuneration process March 1998 Employee health and fitness April 1998 Real time gross settlements May 1998 Functional Organisation Chart Board of Directors1 Chairman: Ian Ferres Deputy Chairman: Reg Nicolson Managing Director: David Carruthers Duncan Andrews Carolyn Kay David Meiklejohn Paul Rizzo Managing Director David Carruthers Secretary: Christine Strachan | Reception: Ann Laity Silvana Martin Executive General Executive General Manager Manager Treasury & Client International Services: & Corporate Services: Michael Dontschuk John Davies Secretary: Secretary: Liz Georgeson Vanessa Eldridge Treasury Services Legal, Corporate Finance & Planning & Marketing Brett Anderson Services and Risk Administration Irini Alaouna Giovanna Baffi Control Geoff Anderson Angela Beattie Justin Lofting Carolyn Dow Tina Ryan Roger Mcintosh Ari Katsogiannis Janine Miller Euan Macallan Ian Smart Ian Mackenzie James Wright Terry Milligan Accounting Internal Audit Brigitte Beaupre Ian Ritter Kate Mahony Hui Meng Voon Michele Olson Client Services Banking & Settlements Ingrid Raspor Adam Donaldson Steve Blkakis Bernard Gastin Andrew Fasham Julian Polic Gerry Garcia Human Resources Tania Ventura Lorraine Stellini Information Systems Charles Brass Simon Wilson Geoff Wilkie 2 Alfred Cheung Belinda Worton Charles Dagher Rhonda Dixon John laria Jenny McKinley 1 Details of the Directors Ken O'Brien are included on pages George Quibell 27 and 28 Helen Salisbury Flki Sanerive 2 Effective 19 October 1998 Our people and how we are organised The Executive team David Carruthers, Michael Dontschuk, John Davies, BCom (Auckland), BSc(Hons) Fellowship ACA, MAICD Dip DipBusStud, CPA Michael heads Treasury & Client Services David is a Director of the Board and the as Executive General Manager responsible John heads International and Corporate Managing Director. David has the two for Treasury Portfolio & Quantitative Services Services as the Executive General Manager Executive General Managers reporting and Client & Economic Services. responsible for the international operations to him as well as the areas of Finance of TCV, the Risk Control Unit, Credit Michael has been with the corporation & Administration, Planning & Marketing, Management, Corporate Services, Legal for 5 years, following 14 years working Internal Audit and Human Resources. Services and Compliance. He is also the in financial markets and actuarial positions. Details of his work history are shown Corporation Secretary. He spent 7 years at Bankers Trust Australia under Board of Directors on page 27. Ltd, with 3 years spent in Londop managing John has been employed at the corporation the Australian and New Zealand interest for 5 years. He formerly held senior Treasury rate business. management positions with State Electricity Commission of Victoria, where he was The Executive management employed for 22 years, and Australian Wheat Board. team comprises David Carruthers, Michael Dontschuk and John Davies. In addition to daily communication as required, the team meets weekly to discuss and plan business issues and meets monthly with operational managers to further promote communication within the organisation. Corporate governance Board composition The TCV Act requires a director who Other governance committees has a pecuniary interest in a matter being The Treasury Corporation of Victoria Act 1992 Audit committee (the TCV Act) provides for a Board of considered by the Board, to declare the All of the corporation's Board of Directors Directors consisting of the Chief Executive nature of the interest at a meeting as soon are members and meetings are held every Officer and between five and seven other as practicable after the relevant facts have alternate month. The primary objectives are Directors appointed by Victoria's Governor come to their knowledge. The declaration to ensure that the corporation's internal in Council on the recommendation of the is required to be recorded in the minutes. control structure and processes are Treasurer of Victoria. The TCV Act also provides that, unless appropriate for its activities. the Board (excluding the Director) resolves The Chief Executive Officer of the corporation otherwise, the Director must not be present (the Managing Director) cannot be appointed Remuneration committee during any deliberation with respect to the Chairperson or Deputy Chairperson of the matter. The Director is not entitled to vote All of the corporation's Board of Directors, Board. Officers of the corporation, other than on the matter and if the Director does vote except the Managing Director, are members the Managing Director, are not eligible to on the matter, the TCV Act requires the of this committee, which meets every alternate be Directors. vote to be disallowed. month, If required. The primary objectives are to ensure that TCV has appropriate processes Under the Act, the Managing Director is to determine remuneration, to approve appointed by the Board with the approval Corporate policy remuneration terms for senior management of the Treasurer of Victoria for a term not The corporation has established a code and to set the contract terms and conditions exceeding 5 years, but is eligible for of conduct for all staff and consultants or for the Managing Director. reappointment. Corporation Directors are contractors. This code is based on the code appointed for a maximum period of 3 years, of conduct developed by the Australian but are also eligible for reappointment. Financial Markets Association. Compliance Directors' remuneration is determined by the with the code of conduct is an inviolable Governor in Council, other than that of the condition of each employee's contract and Managing Director or a Director who is also all staff are encouraged to use the code as an officer of the public service. Details of a frame of reference in their dally activities. remuneration of Directors and senior management is given in Note 18 of the Attendance by Directors at Directors' meetings financial statements on page 49. Board Audit Remuneration Responsibilities Director No. of Meetings No. of Meetings No. of Meetings Under the TCV Act the Board Is responsible Meetings* Attended Meetings* Attended Meetings* Attended for the management of the affairs of Ian Ferres 12 11 6 6 4 4 the corporation. The Board reviews and approves strategic plans annually, monitors Reginald Nicolson 12 11 6 6 4 3 performance of the corporation and of the David Carruthers 12 12 6 6 na na Chief Executive Officer, assesses and Duncan Andrews 12 10 6 5 4 3 monitors business risks, the achievement of financial objectives, and provides overall Carolyn Kay 3 3 2 2 0 0 policy guidance. David Meiklejohn 12 11 6 6 4 3 The Board also approves key policies Paul Rizzo 12 8 6 1 4 3 in relation to risk management activities Michael Vertigan 6 5 3 1 2 1 and monitors the management of the corporation's business within the prudential Michael Vertigan retired on 31 December 1997 framework established by the State Treasurer. Carolyn Kay was appointed on 15 April 1998 The Board meets monthly, though the *No. of meetings held while the director was in office. Directors may meet with the Executive Team between Board meetings to review specific issues or matters of concern. Board of directors Ian N Ferres, Reginald A D Nicolson, David Carruthers, FFA (Edinburgh), FIAA (Aust) AAIB, FAIM BCom (Auckland), ACA, MAICD Dip Chairman. Deputy Chairman. Managing Director. Age 59 Age 66 Age 50 A specialist in the finance, investment and Mr Nicolson was Deputy Managing Director Mr Carruthers was appointed Managing financial services sector, Mr Ferres was an of the ANZ Banking Group from 1984-88 Director of Treasury Corporation of Victoria on Executive Director of the National Mutual and Group Managing Director from 1988 30 October 1995. Prior to this appointment group from 1983-90 and spent more than until 1991. He is Chairman of Telstra Super he was the Director, Finance & Liability 34 years with that group. He Is also Chairman Pty Ltd and Chairman of Bank of Tokyo - Management with the Victorian Department of CH China Investments and Infosentials Mitsubishi (Australia) Ltd. of Treasury and Finance for 18 months. Limited. He is a Director of Amrad This followed a period of 16 years with Corporation Limited, Swiss Re Australia Ltd, British Petroleum Co. pic in various corporate Victorian Funds Management Corporation treasury roles In Wellington, Melbourne, and other unlisted companies. London and Brussels. In Brussels he was Chief Executive BP Finance Europe and was part of the international executive team which ran BP Finance worldwide. Before this he worked for 10 years with Arthur Young (now Ernst & Young) in New Zealand and London. Corporate governance Duncan G Andrews, S Carolyn H Kay, David E Meiklejohn, Paul J Rizzo, BCom (Melb), MBA (Melb) BA (Melb), LLB (Melb) BCom (Qld), FCPA, FAIM BCom (Melb), MBA (Melb) Age 50 Age 37 Age 56 FAIB, AMP (Harvard) Age 53 Mr Andrews is the Chief Ms Kay was appointed a Mr Meiklejohn is Executive Executive of a private investment Director of the corporation on Director, Finance and Mr Rizzo has been Group company. From 1980-90, he 15 April 1998. Ms Kay is an Administration, of Amcor Managing Director, Finance was founder and Chief Executive Executive Director of Morgan Limited. He has been with & Administration and Chief of Australian Ratings, Australia's Stanley Dean Witter. She joined Amcor since 1966 and has been Finance Officer of Telstra major credit rating agency, until the bank in London in 1992. its Chief Financial Officer since Corporation Limited since joining its sale to Standard & Poor's Prior to joining Morgan Stanley 1981. He is Chairman of that company in 1993. His Inc., New York, in 1990. He is she worked for J.P. Morgan, Kimberly-Clark Australia Pty Ltd, previous appointments were a Director of Trade Indemnity Linklaters & Paines and Gillotts and a Director of Amcor Limited, in the banking industry. From Australia Ltd., David Golf & (now Minter Ellison). She is Colonial Limited and Spicers 1966-90 Mr Rizzo was with the Engineering Pty Ltd and a Director of Morgan Stanley Paper Limited. ANZ Banking Group, notably Business Brands International Australia Securities Limited as Chief Executive, ANZ New Pty Ltd. He is also a Director and other private companies. Zealand from 1988 to 1990. of Ruyton Girls School and the In 1990 he left ANZ to become Victorian Independent Schools Chief Executive Officer of the Superannuation Fund. State Bank of Victoria, moving to the position of Chief General Manager, Retail Banking on the State Bank's merger with the Commonwealth Bank. Mr Rizzo has served as chairman and director of numerous companies. Financial Statements 1997-1998 Statement of Income and Expenditure 30 Balance Sheet 31 Cash Flow Statement 32 Notes to and forming part of the Financial Statements 33 Statement of Accounting Policies 33 Income and Expenditure Items 35 Average Balance Sheet and Related Income 36 Dividends/Reserves 37 Cash and Cash Equivalents 37 Investments 38 Loans to the State of Victoria and Participating Authorities 39 Fixtures, Fittings and Equipment 39 Deposits from Public Sector 40 Client Loans and Deposits Outstanding 40 Borrowed Funds: Domestic 41 Borrowed Funds: Offshore 42 Foreign Currency Borrowings 42 Interest Rate Risk 43 Weighted Average Yields 47 Superannuation 48 Auditor's Remuneration 48 Related Party Information 48 Remuneration 49 Contingencies/Commitments 50 Taxation 51 Provisions 51 Derivative Financial Transactions 51 Notes Supporting Cash Flow Statement 52 Transactions with other Government Controlled Entities 53 Certification of Financial Statements 54 Auditor-General's Report 55 Treasury Corporation of Victoria Statement of Income and Expenditure For the year ended 30 June 1998 1998 1997 Note $'000 $'000 Treasury operations Kb) 22,481 23,593 Income from debt restructuring and buy backs Kb) 2,925 10,673 Other income 423 1,438 Net Income from Operations 2 25,829 35,704 Administrative expenses 2 (9,454) (8,914) Borrowing related expenses 2 (3,688) (3,869) (13,142) (12,783) Administrative fees and recoveries 2 11,753 11,541 (1,389) (1,242) Net Surplus 24,440 34,462 Amount to be paid as a dividend 4 (16,000) (22,500) 8,440 11,962 Retained surplus - opening balance 36,293 24,331 Special dividend 4 (13,000) Transfer to general reserve 4 (25,000) Retained Surplus - Closing Balance 6,733 36,293 Annual Report 1998 Balance Sheet As at 30 June 1998 1998 1997 Note $'000 $'000 Assets Cash and cash equivalents 5 2,825,869 812,141 Receivables and prepayments 2,592 13,319 Accrued interest receivable 166,706 220,690 Investments 1(h), 6 2,548,505 2,245,719 Loans to Participating Authorities 7 16,038,079 18,737,213 Fixtures, fittings and equipment 1(0,8 2,647 1,327 Total Assets 21,584,398 22,030,409 Liabilities Accounts and other payables 1,430 1,462 Accrued interest payable 383,813 404,892 Provisions 1(j), 21 16,796 23,229 Deposits from public sector 9 1,268,765 1,093,115 Borrowed funds - domestic 11 14,067,840 12,419,961 Borrowed funds - offshore 12 5,714,021 7,951,457 Total Liabilities 21,452,665 21,894,116 Equity Contributed capital 30,000 30,000 General reserve 4 95,000 70,000 Retained earnings 6,733 36,293 Total Equity 131,733 136,293 Total Equity and Liabilities 21,584,398 22,030,409 I Treasury Corporation of Victoria Cash Flow Statement As at 30 June 1998 1998 1997 Note $'000 $'000 Cash Flows from Operating Activities Interest received from Participating Authorities 1,106,038 2,238,032 Interest paid on borrowings (1,477,413) (2,217,004) Net cash received (paid) - market transactions (49,036) 523,818 interest received on investments and cash 241,634 136,617 Fees and commissions received 11,313 10,066 Cash paid to suppliers and employees (12,856) (13,650) Net Cash from Operating Activities 23(ii) (180,320) 677,879 Cash Flows from Investing Activities Reduction in loans to Participating Authorities 3,021,171 5,947,336 Purchase of investments (389,308) (895,567) Payments for fixtures, fittings and equipment (2,086) (477) Net Cash from Investing Activities 2,629,777 5,051,292 Cash Flows from Financing Activities Reduction in borrowings (640,729) (6,456,929) Increase (reduction) in deposits from authorities 175,650 (329,761) Special dividend paid (13,000) Dividends paid (22,500) (25,500) Net Cash Flows from Financing Activities (500,579) (6,812,190) Net lncrease/(Decrease) in Cash Held 1,948,878 (1,083,019) Cash Held at Beginning of Year 796,991 1,880,010 Cash Held at End of Year 2,745,869 796,991 Reconciliation of Cash Cash and cash equivalents in balance sheet 5 2,825,869 812,141 At call deposits payable to financial institutions 11 (80,000) (15,150) Cash per the Cash Flows Statement 2,745,869 796,991 Annual Report 1998 Notes to and forming part of the Financial Statements Note 1 Statement of Accounting Policies (a) Basis of accounting The financial statements have been prepared in accordance with Australian Accounting Standards, the requirements of the Financial Management Act 1994 and other mandatory professional reporting requirements. (b) Income recognition and valuation Income from operations Treasury Operations income reflects the outcome of the integrated day to day management of the total financial exposures of the Corporation. These arise from the aggregate of interest income, interest expense, realised gains and losses, and unrealised gains and losses incurred in the management of both physical and derivative positions. Income from debt restructuring and buy backs is the gains and losses associated with the management of specific debt restructuring and buy back programmes which the entity has undertaken during the period. Valuation of financial assets and liabilities Financial instruments in the Balance Sheet are stated at market value representing net fair value. Any unrealised profits and losses from revaluation are reported in the Statement of Income and Expenditure. Transactions are recognised on a settlement date basis. However, market rate exposure on unsettled transactions as at balance date is brought to account in the Statement of Income and Expenditure. Market valuations are performed with reference to appropriate market sourced rates for the underlying asset or liability. Market rates for loans to authorities are based on rates commensurate with the TCV rate for similar securities. (c) Derivative financial instruments TCV enters into derivative financial instruments, as outlined in note 22, to manage the financial risks inherent in its asset and liability management activities. Those derivative instruments used to manage interest rate risk are valued to market on a daily basis and the resulting profits and losses recognised in the Statement of Income and Expenditure. On settlement, the realised gains and losses resulting from derivative instruments, such as futures contracts and forward rate agreements, are reported immediately in the Statement of Income and Expenditure. Currency and Cross Currency swaps used to manage currency risk are accounted for as stated in Note (1)(g). (d) Assets and liabilities Assets and liabilities have been classified according to their nature and presented in an order that reflects relative liquidity. (e) Debt and loans reconstruction TCV debt securities may be repurchased from the market and cancelled. Similarly, loans to authorities may be repaid before maturity and replaced with new loans. Gains and losses associated with these repurchases/prepayments are recognised immediately in the Statement of Income and Expenditure. (f) Amortisation of discount/premiums Discounts and premiums on assets (including loans to Participating Authorities) and liabilities are amortised over the term of the asset or liability on historical or constant yield basis, with the amortisation being taken to the Statement of Income and Expenditure. (g) Foreign currency translation Assets and liabilities and associated hedging arrangements denominated in foreign currencies are initially recorded at the spot rate at the date of the transaction and are translated at the current exchange rates at balance date. Net unrealised gains and losses arising from translation of foreign currency assets and liabilities are brought to account in the Statement of Income and Expenditure. (h) Stock lending The issue of stock secured by the provision of substitute stock of an Australian Government or Semi-Government Authority is accounted for at face value in the Balance Sheet as a liability under 'Borrowed funds - domestic', and an equivalent amount, being the amount of stock to be paid back, is shown as an asset under 'Investments'. Treasury Corporation of Victoria Notes to and forming part of the Financial Statements (i) Depreciation of fixtures, fittings and equipment Depreciation of fixtures, fittings and equipment is calculated on a straight line basis using rates designed to allocate the cost over the expected useful life of the asset. Software costs of EDP systems are capitalised and amortised over estimated useful life, (j) Provisions Long service leave is based on contractual requirements and assessments having regard to staff departures, leave utilisation, future salary increases and appropriate discount factors. Long service leave is payable, pro-rata to employees with more than seven completed years of approved service. Provision for annual leave represents the liability for the unused leave entitlements for employees. No provision for bad or doubtful debts, including impaired loans, has been made as at 30 June 1998 as all amounts owed to TCV are expected to be recovered in the normal course of business. Provision for dividend is usually paid within 4 months of recognition, (k) Repurchase agreements Securities sold/purchased under repurchase agreements are retained in the Financial Statements and a counterparty asset/liability is disclosed under the classification 'Investments - receivables from financial institutions/Domestic borrowings - payables to financial institutions'. Interest on the counterparty loan/deposit is charged to income and expenditure. (I) Cashflow statement For the purpose of the cashflow statement, cash includes 11 am deposits with financial institutions and liquid investments maturing in less than three months. (m) Receivables and payables Interest receivable/payable is accrued in accordance with the terms and conditions of the underlying financial instruments. Receivables are carried at amounts due. The collectibility of debts is assessed at balance date and specific provision is made for any doubtful debts. Accounts and other payables represent liabilities for goods and services provided prior to the end of the financial year and which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. (n) Rounding Amounts have been rounded to the nearest thousand dollars, unless otherwise indicated, (o) Comparative figures Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. Annual Report 1998 Notes to and forming part of the Financial Statements Note 2 Income and Expenditure Items 1997-98 1996-97 $'000 $'000 Net Income from Operations Interest income on cash and cash equivalents 112,385 67,466 Interest income on investments 136,817 105,807 Interest income on loans to Participating Authorities 1,087,237 1,840,522 Interest expense on borrowings (1,349,395) (1,960,897) Realised and unrealised market movements 38,785 (17,194) 25,829 35,704 Administration Expenses Salaries and related employee expenses 5,424 5,014 Depreciation of miscellaneous assets 766 559 Professional fees and contract services 680 595 Rent and power 649 508 Market information services 553 524 Corporate expenses 206 327 Legal costs 146 115 Other expenses 1,030 1,272 9,454 8,914 Borrowing Related Expenses Financial institutions duty and other charges 1,423 1,235 Dealer fees 1,140 983 Rating agency fees 337 365 Facility fees 77 136 Retail bond expenses 30 64 Offshore borrowing - issue and agents fees 69 86 Other costs 612 1,000 3,688 3,869 Administrative Fees and Recoveries 11,753 11,541 Administration fees and recoveries income from fees charged for services provided to the Budget Sector and Participating Authorities is used to meet associated administrative and borrowing expense. Treasury Corporation of Victoria Notes to and forming part of the Financial Statements Note 3 Average Balance Sheet and Related Income 1998 1998 1998 1997 1997 1997 Average Average Average Average Balance Income Rate Balance Income Rate $'000 $'000 % $'000 $'000 % Interest Earning Assets Cash and cash equivalents 2,287,910 112,385 4.91 1,006,839 67,466 6.70 Investments 2,549,118 136,817 5.37 1,569,225 105,807 6.74 Loans to Participating Authorities 16,757,812 1,087,237 6.49 22,124,982 1,840,522 8.32 21,594,840 1,336,439 6.19 24,701,046 2,013,795 8.16 Non-Interest Earning Assets Investments 1 415 Fixtures, fittings and equipment 1,843 1,200 Receivables and prepayments 4,097 3,352 Accrued interest receivable 240,848 444,390 246,789 449,357 Total Assets 21,841,629 25,150,403 Interest Bearing Liabilities Deposits from public sector 1,310,308 65,082 4.97 1,020,451 64,955 6.37 Borrowed funds domestic 13,343,589 741,473 5.56 14,358,154 1,162,073 8.09 Borrowed funds offshore 6,620,911 504,055 7.61 9,061,386 751,063 8.29 21,274,808 1,310,610 6.16 24,439,991 1,978,091 8.09 Net Income from Operations 25,829 35,704 Non-Interest Bearing Liabilities Provisions 6,393 8,861 Accounts and other payables 4,840 1,375 Accrued interest payable 408,401 561,319 419,634 571,555 Total Liabilities 21,694,442 25,011,546 Annual Report 1998 Notes to and forming part of the Financial Statements Note 4 Dividends/Reserves Dividend Under Section 31 of the Treasury Corporation of Victoria Act 1992, TCV is required to pay dividends to the Government of Victoria as the Treasurer shall determine. At 30 June 1998, a dividend of $16 million (1997: $22.5 million) has been provided for in the accounts of TCV. During the 1997-98 financial year, a special dividend of $13 million was paid to the consolidated fund as directed by the Treasurer of the State of Victoria, representing a repatriation of capital from retained earnings. Reserves It is TCV's policy to maintain an adequate capital base to mitigate the risks inherent in its asset and liability management activities. The General Reserve: (I) covers interest rate risk which could arise In the event of future adverse market changes; and (ii) provides capital to cover any potential market and counterparty risk associated with financial arrangements entered into between TCV and external counterparties. At 30 June 1998, $25 million (1997: nil) has been transferred to general reserve. Note 5 Cash and Cash Equivalents Contractual maturity in At call Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years 1998 000's 000's 000's 000's 000's 000's 000's Cash at bank and on hand 14,506 14,506 Deposits with futures clearing house 9,792 9,792 Receivables from financial institutions 175,000 175,000 Short term discounted securities 2,529,606 2,529,606 Fixed interest securities 96,965 96,965 Total Cash and Cash Equivalents 199,298 2,626,571 2,825,869 At call Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years 1997 000's 000's 000's 000's 000's 000's 000's Cash at bank and on hand 4,670 4,670 Deposits with futures clearing house 9,891 9,891 Receivables from financial institutions 279,000 279,000 Short term discounted securities 518,188 518,188 Fixed interest securities 392 392 Total Cash and Cash Equivalents 293,561 518,580 812,141 Treasury Corporation of Victoria Notes to and forming part of the Financial Statements Note 6 Investments Contractual maturity in Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years 1998 000's 000's 000's 000's 000's 000's Receivables from financial institutions 1,507 1,507 Other receivables 300 300 Stock lending 15,000 15,000 Floating rate securities 5,009 5,009 Foreign currency securities 23,417 16,474 39,891 Fixed interest securities 215,960 147,400 1,226,618 327,704 1,917,682 Index linked securities 569,686 569,686 Other (607) 37 (570) Total Financial Investments 16,807 220,362 147,400 1,250,035 913,901 2,548,505 Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years 1997 000's 000's 000's 000's 000's 000's Receivables from financial institutions 23,212 23,212 Other receivables 300 300 Stock lending 115,000 115,000 Short term discounted securities 232,049 232,049 Fixed interest securities 5,272 334,321 1,182,584 278,923 1,801,100 Index linked securities 74,009 74,009 Other 11 38 49 Total Financial Investments 138,212 237,632 334,321 1,182,584 352,970 2,245,719 Annual Report 1998 Notes to and forming part of the Financial Statements Note 7 Loans to the State of Victoria and Participating Authorities Section 8(1) of the Treasury Corporation of Victoria Act 1992 ('the TCV Act') states that one of the functions of the Corporation is to provide financial accommodation to a Participating Authority or the State of Victoria. Outstanding loans at balance date, by contractual maturity, are categorised as follows: At call Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years 1998 000's 000's 000's 000's 000's 000's 000's Overnight and short term cash 578,075 578,075 Short term discounted loans 32,130 64,546 96,676 Floating rate loans 130,813 173,089 127,319 50,160 185,199 666,580 Fixed interest loans 446,195 1,462,889 1,256,055 3,263,996 6,935,401 13,364,536 Index linked loans 11,713 546 172,392 1,126,032 1,310,683 Other 15,413 6,395 (279) 21,529 Total Loans to Participating Authorities 578,075 620,851 1,715,937 1,390,315 3,486,269 8,246,632 16,038,079 At call Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years 1997 000's 000's 000's 000's 000's 000's 000's Overnight and short term cash 705,750 705,750 Short term discounted loans 74,219 14,321 88,540 Floating rate loans 50,552 201,234 828,514 90,166 242,507 1,412,973 Fixed interest loans 74,559 577,741 1,080,572 5,501,936 7,524,918 14,759,726 Index linked loans 15,509 11,789 127,952 1,506,098 1,661,348 Other 25,003 57,434 26,439 108,876 Total Loans to Participating Authorities 705,750 199,330 808,805 1,945,878 5,777,488 9,299,962 18,737,213 Refer to note 10 for details of loans by client. Note 8 Fixtures, Fittings and Equipment 1998 1997 $'000 $'000 Fixtures, fittings, computers and equipment 4,727 2,786 Accumulated depreciation (2,080) (1,459) Written Down Value of Miscellaneous Assets 2,647 1,327 Depreciation rates used are 33% in respect of computer hardware and software, and 20% in respect of furniture, fittings and equipment. Treasury Corporation of Victoria Notes to and forming part of the Financial Statements Note 9 Deposits from Public Sector Deposits at balance date, by contractual maturity, are categorised as follows: At call Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years 1998 000's 000's 000's 000's 000's 000's 000's Deposits from Public Sector 674,787 525,700 68,278 0 1,268,765 At call Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years 1997 000's 000's 000's 000's 000's 000's 000's Deposits from Public Sector 784,395 306,720 2,000 1,093,115 Refer to note 10 for details of deposits by client. Note 10 Client Loans and Deposits Outstanding 1998 1998 1997 1997 $'000 $'000 $'000 $'000 Loans Deposits Loans Deposits State of Victoria 11,683,379 229,735 12,949,633 401,000 Melbourne Water Corporation 1,305,940 5,000 1,826,890 Yarra Valley Water Limited 520,670 603,467 Multinet (Assets) Pty Limited 461,004 Westar (Assets) Pty Limited 419,001 Stratus Networks (Assets) Pty Limited 382,084 South East Water Limited 349,808 1,700 514,911 855 Transmission Pipelines Australia (Assets) Pty Limited 226,066 City West Water Limited 225,240 15,381 260,824 13,450 Rural Finance Corporation 196,244 1,400 77,928 Melbourne Port Corporation 111,281 27,667 122,283 7,735 Gas Transmission Corporation 10,925 143,560 Gascor 66,546 887,020 Power Net Victoria 705,051 Director of Housing 40,444 487,755 57,873 Other Participating Authorities 146,437 516,148 157,891 248,407 Other public sector entities 364,744 363,795 16,038,079 1,268,765 18,737,213 1,093,115 The privatisation of Victoria's electricity industry was substantially completed during the 1997/98 financial year with the settlement of the sale of assets of Power Net Victoria on 6 November 1997 and Southern Hydro Limited on 18 December 1997. Annual Report 1998 Notes to and forming part of the Financial Statements Note 11 Borrowed Funds: Domestic Financial accommodation obtained by TCV pursuant to Sections 8 and 9 of the Borrowing and Investment Powers Act 1987 has the benefit of the guarantee of the Government of Victoria contained in Section 32 of the TCV Act. Contractual maturity in At call Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years 1998 000's 000's 000's 000's 000's 000's 000's Hotstocks 1,744,027 1,404,878 4,575,702 7,724,607 Domestic Borrowings - Other Payables to financial institutions 80,000 139,169 219,169 Stock lending 15,000 15,000 Promissory notes 248,495 248,495 Long term bonds 37,512 1,719,506 87,425 451,411 251,009 2,546,863 Commonwealth Government 84,781 80,470 242,845 838,004 1,246,100 Indexed linked securities 10,981 545 169,881 1,844,760 2,026,167 Other (5,177) 30,482 17,393 (6,391) 5,132 41,439 Total Domestic Borrowings - Other 80,000 445,980 1,834,769 185,833 857,746 2,938,905 6,343,233 Total Domestic Borrowings 80,000 445,980 1,834,769 1,929,860 2,262,624 7,514,607 14,067,840 At call Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years 1997 000's 000's 000's 000's 000's 000's 000's Hotstocks 1,097,454 2,463,846 3,463,179 7,024,479 Domestic Borrowings - Other Payables to financial institutions 15,150 41,880 57,030 Stock lending 115,000 115,000 Promissory notes 50,187 50,206 100,393 Floating rate notes 20,140 20,140 Long term bonds 643,009 98,196 127,415 651,701 266,323 1,786,644 Commonwealth Government 61,413 80,175 235,814 716,128 1,093,530 Indexed linked securities 15,433 11,789 121,415 1,956,868 2,105,505 Other (1,288) (310) 34,812 42,380 41,646 117,240 Total Domestic Borrowings - Other 15,150 848,788 224,938 274,331 1,051,310 2,980,965 5,395,482 Total Domestic Borrowings 15,150 848,788 224,938 1,371,785 3,515,156 6,444,144 12,419,961 Treasury Corporation of Victoria Notes to and forming part of the Financial Statements Note 12 Borrowed Funds: Offshore Financial accommodation obtained by TCV pursuant to Section 9 of the Borrowing and Investment Powers Act 1987 has the benefit of the guarantee of the Government of Victoria contained in Section 32 of the TCV Act 1992. Contractual maturity in Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years 1998 000's 000's 000's 000's 000's 000's Euro medium term notes 97,693 82,050 143,020 276,904 599,667 Eurobonds 523,311 757,291 1,287,880 607,133 3,175,615 Globals 7,195 106,215 113,410 Samurai bonds 53,335 388,729 447,714 889,778 Yankee bonds 27,765 331,740 359,505 Yen private loans 31,917 207,370 336,759 576,046 Total Offshore Borrowings 621,004 120,212 839,341 2,358,739 1,774,725 5,714,021 1997 Euro medium term notes 293,374 188,642 128,902 556,069 1,166,987 Eurobonds 195,591 581,346 1,988,509 1,281,400 4,046,846 Globals 24,897 169,684 194,581 Samurai bonds 50,080 158,958 83,495 264,291 715,301 1,272,125 Yankee bonds 29,323 680,613 709,936 Yen private loans 33,331 165,742 361,909 560,982 Total Offshore Borrowings 245,671 452,332 941,034 3,228,057 3,084,363 7,951,457 Note 13 Foreign Currency Borrowings TCV's currency exposure as a result of the offshore funding programs is hedged by way of forward foreign exchange contracts, cross currency swaps or financial assets denominated in the same currency. For information purposes only, offshore foreign currency borrowings consist of: Face Value of Foreign Currency Borrowing by Currency of Issue Contractual maturity in Currency Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years Currency Currency Currency Currency Currency Currency 000's 000's 000's 000's 000's 000's As at 30 June 1998 Japanese yen 40,000,000 7,070,000 52,600,000 51,750,000 151,420,000 US dollars 21,410 193,833 407,533 622,776 Swiss francs 50,000 147,800 197,800 Canadian dollars 119,664 112,530 232,194 British pounds 128,696 95,650 224,346 As at 30 June 1997 Japanese yen 19,800,000 28,800,000 54,290,000 41,600,000 81,190,000 225,680,000 US dollars 21,410 884,038 905,448 Swiss francs 200,000 200,000 Canadian dollars 295,057 295,057 British pounds 128,696 105,650 234,346 Annual Report 1998 Notes to and forming part of the Financial Statements Note 14(i) Interest Rate Risk Financial Assets Next interest repricing in Less than 3 months 1 to 2 to Greater than Non-interest Total 3 months to 1 year 2 years 5 years 5 years bearing 1998 000's 000's 000's 000's 000's 000's 000's Cash and cash equivalents Cash at bank and on hand 14,506 14,506 Deposits with futures clearing house 9,792 9,792 Receivables from financial institutions 175,000 175,000 Short term discounted securities 2,529,606 2,529,606 Fixed interest securities 96,965 96,965 Total Cash and Cash Equivalents 2,825,869 2,825,869 Investments Receivables from financial institutions 1,507 1,507 Other receivables 300 300 Stock lending 15,000 15,000 Floating rate securities 5,009 5,009 Foreign currency securities 23,417 16,474 39,891 Fixed interest securities 215,960 147,400 1,226,618 327,704 1,917,682 Index linked securities 569,686 569,686 Other (607) 37 (570) Total Financial Investments 6,816 215,353 147,400 1,250,035 913,864 15,037 2,548,505 Loans to Participating Authorities Overnight and short term cash 578,075 578,075 Short term discounted loans 32,130 64,546 96,676 Floating rate loans 595,840 70,740 666,580 Fixed interest loans 446,195 1,462,889 1,256,055 3,263,996 6,935,401 13,364,536 Index linked loans 11,713 546 172,392 1,126,032 1,310,683 Other (197,926) 219,455 21,529 Total Loans to Participating Authorities 1,466,027 1,598,175 1,256,601 3,655,843 8,061,433 16,038,079 Other Financial Assets Receivables and prepayments 2,592 2,592 Accrued interest receivable 166,706 166,706 Total Other Financial Assets 169,298 169,298 Treasury Corporation of Victoria Notes to and forming part of the Financial Statements Note 14(i) Interest Rate Risk (continued) Financial Liabilities Next interest repricing in Less than 3 months 1 to 2 to Greater than Non-interest Total 3 months to 1 year 2 years 5 years 5 years bearing 1998 (continued) 000's 000's 000's 000's 000's 000's 000's Deposits from Public Sector 1,200,487 68,278 1,268,765 Domestic Borrowings Hotstocks 1,744,027 1,404,878 4,575,702 7,724,607 Payables to financial Institutions 219,169 219,169 Stock lending 15,000 15,000 Promissory notes 248,495 248,495 Long term bonds 37,512 1,719,506 87,425 451,411 251,009 2,546,863 Commonwealth Government 84,781 80,470 242,845 838,004 1,246,100 Indexed linked securities 10,981 545 169,881 1,844,760 2,026,167 Other (128,141) (85,850) 146,589 (2,251) 111,092 41,439 Total Domestic Borrowings 388,016 1,718,437 2,059,056 2,266,764 7,620,567 15,000 14,067,840 Offshore Borrowings Euro medium term notes 240,045 54,153 143,021 162,448 599,667 Eurobonds 523,311 757,291 1,287,880 607,133 3,175,615 Globals 7,195 106,215 113,410 Samurai bonds (48,922) 102,257 388,729 447,714 889,778 Yankee bonds 27,765 331,740 359,505 Yen private loans 154,024 156,004 266,018 576,046 Total Offshore Borrowings 714,434 291,241 811,444 2,307,374 1,589,528 5,714,021 Other Financial Liabilities Accounts and other payables 1,430 1,430 Accrued interest payable 383,813 383,813 Provision for dividend 16,000 16,000 Total Other Financial Liabilities 401,243 401,243 Annual Report 1998 Notes to and forming part of the Financial Statements Note 14(i) Interest Rate Risk (continued) Financial Assets Next interest repricing in Less than 3 months 1 to 2 to Greater than Non-interest Total 3 months to 1 year 2 years 5 years 5 years bearing 1997 000's 000's 000's 000's 000's 000's 000's Cash and cash equivalents Cash at bank and on hand 4,670 4,670 Deposits with futures clearing house 9,891 9,891 Receivables from financial Institutions 279,000 279,000 Short term discounted securities 518,188 518,188 Fixed interest securities 392 392 Total Cash and Cash Equivalents 812,141 812,141 Investments Receivables from financial institutions 23,212 23,212 Other receivables 300 300 Stock lending 115,000 115,000 Short term discounted securities 232,049 232,049 Fixed Interest securities 5,272 334,321 1,182,584 278,923 1,801,100 Index linked securities 74,009 74,009 Other 11 38 49 Total Financial Investments 23,212 237,632 334,321 1,182,584 352,932 115,038 2,245,719 Loans to Participating Authorities Overnight and short term cash 705,750 705,750 Short term discounted loans 74,219 14,321 88,540 Floating rate loans 1,342,330 70,643 1,412,973 Long term loans 74,559 577,741 1,080,572 5,501,936 7,524,918 14,759,726 Index linked loans 15,509 11,789 127,952 1,506,098 1,661,348 Other (106,161) 52,579 1,026 161,432 108,876 Total Loans to Participating Authorities 2,090,697 678,214 1,144,940 5,630,914 9,192,448 18,737,213 Other Financial Assets Receivables and prepayments 13,319 13,319 Accrued interest receivable 220,690 220,690 Total Other Financial Assets 234,009 234,009 Treasury Corporation of Victoria Notes to and forming part of the Financial Statements Note 14(i) Interest Rate Risk (continued) Financial Liabilities Next interest repricing in Less than 3 months 1 to 2 to Greater than Non-interest Total 3 months to 1 year 2 years 5 years 5 years bearing 1997 (continued) 000's 000's 000's 000's 000's 000's 000's Deposits from Public Sector 1,091,115 2,000 1,093,115 Domestic Borrowings Hotstocks 1,097,454 2,463,846 3,463,179 7,024,479 Payables to financial institutions 57,030 57,030 Stock lending • 115,000 115,000 Promissory notes 50,187 50,206 100,393 Floating rate notes 20,140 20,140 Long term bonds 643,009 98,196 127,415 651,701 266,323 1,786,644 Commonwealth Government 61,413 80,175 235,814 716,128 1,093,530 Indexed linked securities 15,433 11,789 121,415 1,956,868 2,105,505 Other (187,814) (9,929) (53,715) 91,890 276,808 117,240 Total Domestic Borrowings 582,552 215,319 1,263,118 3,564,666 6,679,306 115,000 12,419,961 Offshore Borrowings Euro medium term notes 394,875 99,902 188,642 99,364 384,204 1,166,987 Eurobonds 776,937 1,988,509 1,281,400 4,046,846 Globals 24,897 169,684 194,581 Samurai bonds (67,765) 360,298 264,291 715,301 1,272,125 Yankee bonds 29,323 680,613 709,936 Yen private loans 121,961 33,331 114,423 291,267 560,982 Total Offshore Borrowings 1,104,046 582,161 276,192 3,147,201 2,841,856 7,951,457 Other Financial Liabilities Accounts and other payables 1,462 1,462 Accrued interest payable 404,892 404,892 Provision for dividend 22,500 22,500 Total Other Financial Liabilities 428,854 428,854 Annual Report 1998 Notes to and forming part of the Financial Statements Note 14(ii) Weighted Average Yields 1998 1998 1998 1997 1997 1997 Less than 1 to Greater than Less than 1 to Greater than 1 year 5 years 5 years 1 year 5 years 5 years % % % % % % Cash and Cash Equivalents Floating 5.00 5.50 Fixed 5.06 5.34 Investments Floating 5.21 Fixed 5.25 5.43 5.54 5.48 6.03 6.77 Indexed 3.46 4.57 Loans to Participating Authorities Floating 5.08 5.41 Fixed 5.20 5.34 5.75 5.32 5.91 6.97 Indexed 4.24 3.48 3.42 4.43 4.29 4.50 Deposits Public Sector Floating 5.00 5.50 Fixed 5.00 5.50 5.50 Domestic Borrowings Floating 5.00 5.41 Fixed 5.22 5.28 5.78 5.46 5.80 7.06 Indexed 4.24 3.43 3.39 4.43 4.40 4.49 Offshore Borrowings Floating 5.12 5.32 Fixed 5.18 5.40 5.68 5.29 6.05 6.89 Interest Rate Swaps Floating 5.16 5.38 Fixed 5.18 5.52 5.93 5.36 5.98 7.10 Treasury Corporation of Victoria Notes to and forming part of the Financial Statements Note 15 Superannuation TCV made contributions to the following superannuation funds for staff and Directors: Name of Fund Contributions Contributions made made 1998 1997 $ $ Treasury Corporation of Victoria Superannuation Fund (TCVSF) 258,653 223,388 State Superannuation Fund 27,868 26,563 First Exar Superannuation Fund 1,800 1,800 National Mutual Retirement Fund 1,797 3,596 Superannuation contributions were made at least on the minimum 6% Superannuation Guarantee Charge contribution. Several staff elected to have a greater proportion of their remuneration paid as superannuation on a salary sacrifice basis. Contributions to the State Superannuation Fund were made as invoiced by the Department of Treasury and Finance (currently at the rate of 13.35% of superannuation salary for members of this Fund). The TCVSF is a fully funded accumulation fund with no unfunded liabilities and TCV has made all payments to cover its liability for members of that fund. All payments due for employees and Directors who are members of other funds have also been made. Note 16 Auditor's Remuneration Amounts received or due and receivable by the Auditor-General and other auditors in relation to the audit of the TCV financial statements for the year ended 30 June 1998: 1998 1997 $'000 $'000 Auditor-General 136 131 Note 17 Related Party Information TCV, being the debt management and borrowing authority for the State of Victoria, provides financial accommodation to the budget sector and Participating Authorities in the non-budget sector. Details of such accommodation as at 30 June 1998 are set out in Notes 7, 9 and 10. All transactions are priced in accordance with TCV's lending policies. For the purposes of Part 9.4 of the Directions of the Minister for Finance under the Financial Management Act 1994, the following Directors, together with the Honourable Alan R. Stockdale MP, Treasurer for Victoria, are the responsible persons of TCV: Ian N. Ferres, Chairman Reginald A.D. Nicolson, Deputy Chairman David Carruthers, Managing Director Duncan G. Andrews David E. Meiklejohn Paul J. Rizzo Michael J. Vertigan (resigned 31 December 1997) S. Carolyn H. Kay (appointed 15 April 1998) Annual Report 1998 Notes to and forming part of the Financial Statements Note 17 Related Party Information (continued) TCV undertakes transactions with entities of which the above may also be a Director. These transactions are undertaken in the ordinary course of business, are at arms length and carry normal commercial terms. These entities are: Ian N. Ferres Director Hambros Australia Limited (resigned 31 March, 1998), Swiss Re Australia Ltd and Victorian Funds Management Corporation. Reginald A.D. Nicolson Chairman Telstra Super Pty Ltd, Chairman of Bank of Tokyo Mitsubishi (Australia) Ltd. David E. Meiklejohn Director of Colonial Limited. Paul J. Rizzo Group Managing Director, Finance & Administration - Telstra, Director IBM Global Services Australia Limited. Michael J. Vertigan Secretary of the Department of Treasury & Finance. S. Carolyn H. Kay Executive Director Morgan Stanley Dean Witter. TCV Directors have the benefit of indemnities given by the Treasurer of Victoria pursuant to the Financial Management Act 1994 and the Treasury Corporation of Victoria Act 1992. Note 18 Remuneration Directors The total remuneration paid to Directors for the year is $443,868 (1997: $425,182). These amounts include salary and payments made to superannuation funds on behalf of Directors. The following analysis of Directors' remuneration is provided: Remuneration Paid 1998 - No. of Directors 1997 - No. of Directors $250,000 to $259,999 1 $230,000 to $239,999 1 $60,000 to $69,999 1 1 $30,000 to $39,999 4 4 Nil 2 1 Executive Officers The following analysis of remuneration received by executive officers (excluding the Managing Director) is provided. Remuneration includes salary, superannuation, fringe benefits (expense reimbursements, cars and car parking) and FBT paid by TCV in relation to benefits received. Remuneration Paid 1998 - No. of Executive Officers 1997 - No. of Executive Officers $260,000 to $269,999 1 _ - $210,000 to $219,999 1 $200,000 to $209,999 1 $160,000 to $169,999 1 1 $150,000 to $159,999 2 1 $140,000 to $149,999 1 $130,000 to $139,999 1 $120,000 to $129,999 1 $110,000 to $119,999 1 3 $100,000 to $109,999 1 The total remuneration paid to Executive Officers for the year Is $1,431,834 (1997: $1,003,733). Treasury Corporation of Victoria Notes to and forming part of the Financial Statements Note 19 Contingencies/Commitments From time to time, TCV has incurred contingent liabilities as part of its general function to engage in activities relating to the finances of the Victorian public sector, as is prescribed by its enabling legislation and approved by the Treasurer. In this regard, indemnities have been provided by TCV to third parties involved either directly or indirectly in financing arrangements with TCV which relate to the maintenance of the financial outcome expected to be available to those parties over the term of the transaction. TCV's exposure arising as a result of indemnities and other financial obligations of this type is itself either guaranteed or otherwise fully indemnified by the State of Victoria. TCV is of the view that the existence of such supporting indemnification arrangements with the State of Victoria is sufficient to justify not raising any specific provisions in respect of the transactions referred to in the previous paragraph. On 28 June 1996, TCV terminated the Gold Loan arrangements that had been entered into by its predecessor the Victorian Public Authorities Finance Agency with the FAI group in 1987. A judgement is pending from a Supreme Court hearing to determine the correct basis for calculating sums payable consequent to termination of the transaction. TCV is fully indemnified by the State Government in respect of this transaction. TCV has a commitment to provide funding to participating authorities to the extent of Treasurer's approval limits. Foreign Exchange Contracts Contractual maturity in Contract Currency Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years OOO's OOO's OOO's OOO's OOO's OOO's Purchase USD 1,216 38,362 39,793 47,468 126,839 Sell USD (1,216) (38,362) (39,793) (47,468) (126,839) 0 0 0 0 0 Traded Securities Not Yet Settled Face value maturing in Category Less than 3 months 1 to 2 to Greater than Total 3 months to 1 year 2 years 5 years 5 years OOO's OOO's OOO's OOO's OOO's OOO's Purchase of investments 5,044 3,098 125,528 133,670 Sale of investments 24,126 24,126 Loan commitments 5,000 17,000 22,000 Buyback of offshore borrowings 1,144 1,575 11,235 13,954 Lease Commitments Commitments in respect of non-cancellable operating leases due: 1998 1997 $ $ Not later than 1 year 572,208 572,208 Later than 1 year but not more than 2 years 572,208 572,208 Later than 2 years but not more than 5 years 953,680 1,525,888 Later than 5 years 2,098,096 2,670,304 Annual Report 1998 Notes to and forming part of the Financial Statements Note 20 Taxation TCV is not a taxpayer under the Income Tax Assessment Acts, accordingly no income tax is applicable. TCV is also not subject to the Taxation under State Owned Enterprises Tax Equivalent system for the 1997-98 financial year. Note 21 Provisions 1998 1997 $'000 $'000 Employee entitlements 796 729 Dividend to be paid to the Government of Victoria 16,000 22,500 Total Provisions 16,796 23,229 Note 22 Derivative Financial Transactions. TCV enters into derivative financial instruments, such as exchange traded futures and options, forward rate agreements, swaps and forward foreign exchange contracts, to manage the interest rate and currency risk inherent in the borrowing and asset management activities of the Corporation. Interest rate risk inherent in the TCV's asset and liability management activities is monitored on a daily basis against Board approved contingent loss limits using the Value at Risk methodology. Value at Risk is a measure of the estimated loss faced by TCV within a certain level of confidence over a given holding period under normal market conditions. Forward rate agreements are entered into with expiration terms ranging out to six months. Interest rate option contracts have repricing terms up to six months. Interest rate swap contracts include fixed, floating and indexed cashflows. These net cashflows may occur quarterly, semi annually and annually. Maturity of these swaps range from less than three months to greater than five years. Currency swap contracts include cashflows on a quarterly, semi annual or annual basis. Maturity of these swaps range from less than three months to greater than five years. Currency swaps have been entered into to swap cashflows on underlying borrowings in foreign currency to Australian dollar cashflows. Details of the underlying foreign currency borrowings are provided in Note 12 and Note 13. The three major risks involved with financial instruments are: - market - liquidity - credit Exposure to market and liquidity risk is minimised by: (1) the Corporation not being a price maker in derivative financial instruments, but being a price taker in its use of derivatives; (2) the Corporation dealing in highly liquid markets in respect of the futures market; and (3) the Corporation avoiding concentration of exposures to any one counterparty and having a wide range of approved counterparties. Credit risk, which arises due to the potential of a counterparty to default under the terms of a derivative contract, is monitored daily against prudentially set credit limits for each counterparty. TCV's maximum credit risk to the various classes of financial assets is represented by the market value of those assets, except for certain derivative transactions - swaps, forward rate agreements, forward foreign exchange contracts and options. The credit equivalent amounts (current replacement value and an allowance for potential future exposure) for these derivative transactions are calculated in accordance with the RBA's capital adequacy guidelines. TCV's loans to Participating Authorities are guaranteed by the Government of Victoria and are therefore considered to be credit risk free. Treasury Corporation of Victoria Notes to and forming part of the Financial Statements Note 22 Derivative Financial Transactions (continued) Notional Amount and Credit Exposure of Derivatives 1998 1998 1998 1997 1997 1997 Category of Derivative Notional Market Assessed Notional Market Assessed Amount Value Credit Amount Value Credit Exposure* Exposure* $'000 $'000 $'000 $'000 $'000 $'000 Currency swaps 8,510,849 336,474 1,101,373 8,639,646 (253,799) 774,940 Interest rate swaps 2,977,193 (49,466) 46,863 3,346,267 (51,575) 141,178 Forward rate agreements 2,055,000 (231,931) 613 140,000 138,223 Foreign exchange contracts and options 368,627 28,156 195,450 13,496 Exchange traded futures contracts 2,500,600 406 2,509,700 (1,557) Exchange traded options contracts 200,000 (114) 75,500 6 *The exposures as detailed are gross prior to risk weighting. No account is taken of the value of any collateral or other security arrangements nor have any exposures been netted for credit purposes. The capital required to support this credit risk, calculated in accordance with the Reserve Bank of Australia's prudential statements in relation to capital adequacy, was $84.4 million (based on TCV's requirement to maintain a minimum capital adequacy ratio of 8% of risk weighted assets). At 30 June 1998, after allowing $12 million of capital to support market risk, TCV held $119.8 million of capital to support credit risk. Concentration of Credit Risk - by credit rating (Standard & Poor's) AAA AA+/AA/AA- A+/A/A- BBB Victorian Total Public Authorities 000's 000's 000's 000's 000's 000's Cash and cash equivalents 282,076 2,503,529 39,873 391 2,825,869 Securities investments 1,597,611 808,680 127,784 2,534,075 Derivatives 389,166 636,277 119,876 19,570 12,116 1,177,005 2,268,853 3,948,486 159,749 19,570 140,291 6,536,949 Concentration of Credit Risk - by type of counterparty Commonwealth State Foreign Banks Non-bank Other Victorian Total Government Government Government Financial Public Institution Authorities 000's 000's 000's 000's 000's 000's 000's Cash and cash equivalents 501 56,091 2,619,113 149,773 391 2,825,869 Securities investments 781,428 1,466,286 39,891 226,685 13,329 6,456 2,534,075 Derivatives 101,920 1,277 11,073 627,676 424,220 10,839 1,177,005 883,849 1,523,654 50,964 3,473,474 587,322 17,686 6,536,949 Note 23 Notes Supporting Cash Flow Statement 0) Cash Flows presented on a net basis Cash Flows arising from: - Payments for/sales of investment securities - Loans granted to/repaid from public authorities - Deposits accepted from/repaid to authorities - Proceeds from issuance of borrowings/repayment of borrowings are presented on a net basis in the Cash Flow Statement Annual Report 1998 Notes to and forming part of the Financial Statements Note 23 Notes Supporting Cash Flow Statement (continued) (ii) Reconciliation of Net Cash from Operating Activities to Net Surplus 1998 1997 $'000 $'000 Net surplus 24,440 34,462 Amortisation: discount on investments 8,938 2,616 discount on loans to Participating Authorities (48,506) (72,483) discount on borrowings (120,776) 153,935 Revaluation of: investments (22,415) (46,788) loans to Participating Authorities (273,531) (480,096) borrowings 207,099 982,678 Depreciation of miscellaneous assets 766 559 Decrease (increase) in accounts receivable 10,147 5,590 Increase (decrease) in accrued expenses payable (21,079) (259,726) Increase (decrease) in accrued income receivable 53,984 358,644 Increase (decrease) in accounts payable 568 (367) Increase (decrease) in accrued employee benefits 66 96 Decrease (increase) in prepayments (21) (1,241) Net Cash from Operating Activities (180,320) 677,879 (iii) Financing Facilities US$100 million (1997: US$50 million) credit facility extended by Morgan Guaranty Trust Company of New York to facilitate securities transactions through the Euroclear system. In addition to cash and cash equivalents, TCV holds a substantial portfolio of liquid assets that can be readily converted into cash. These assets comprise money market investments and Semi-Government and Commonwealth Government securities. Note 24 Transactions with other Government Controlled Entities During the 1997-98 financial year, transactions were undertaken with other Victorian Government controlled entities. These transactions are summarised as follows: 1998 1997 $'000 $'000 Assets 16,140,089 18,904,633 Liabilities 1,288,330 1,117,725 Revenue 1,871,325 3,533,191 Expenses 66,679 66,347 During the 1997-98 financial year, a special dividend of $13 million was paid to the consolidated fund as directed by the Treasurer of the State of Victoria, representing a repatriation of capital from retained earnings. At 30 June 1998, a dividend of $16 million (1997: $22.5 million) has been provided for in the accounts of TCV. Treasury Corporation of Victoria In our opinion, the financial statements of the Treasury Corporation of Victoria, comprising the statement of income and expenditure, balance sheet, statement of cash flows and notes to and forming part of the financial statements, prepared for the year ended 30 June 1998: (a) Present fairly the financial transactions of the Treasury Corporation of Victoria during the financial year ended 30 June 1998 and its financial position as at 30 June 1998; and (b) Have been prepared in accordance with Australian Accounting Standards and the Financial Management Act 1994. At the date of signing, we are not aware of any circumstances which would render any particulars included in the statements to be misleading or inaccurate. IAN N. FERRES DAVID CARRUTHERS GEOFFREY G. ANDERSON Chairman Managing Director Principal Accounting Officer Date: 14 September 1998 Date: 14 September 1998 Date: 14 September 1998 Annual Report 1998 Audit Scope The accompanying financial statements of Treasury Corporation of Victoria for the year ended 30 June 1998, comprising a statement of income and expenditure, balance sheet, cash flow statement and notes to the financial statement, have been audited. The members of the Corporation's Board are responsible for the preparation and presentation of these financial statements and the information they contain. An independent audit of the financial statements has been carried out in order to express an opinion on them as required by the Audit Act 1994. The audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance as to whether the financial statements are free of material misstatement. The audit procedures included an examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial statements, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion as to whether, in all material respects, the financial statements are presented fairly in accordance with Australian Accounting Standards and other mandatory professional reporting requirements and comply with the requirements of the Financial Management Act 1994, so as to present a view which is consistent with my understanding of the financial position of the Treasury Corporation of Victoria and the results of its operations and its cash flows. The audit does not provide any assurances that Treasury Corporation of Victoria's systems, or any other systems that the entity relies on in the conduct of its activities such as those of suppliers and service providers are year 2000 compliant, or whether plans and associated actions are adequate to address the year 2000 issue. The year 2000 issue has been addressed only in the context of existing audit responsibilities under Australian Auditing Standards to express an opinion on the financial statements. The audit opinion expressed on the financial statements has been formed on the above basis. Audit Opinion In my opinion, the financial statements present fairly the financial position of Treasury Corporation of Victoria as at 30 June 1998 and the results of its operations and its cash flows for the year ended on that date in accordance with Australian Accounting Standards and other mandatory professional reporting requirements and comply with the requirements of the Financial Management Act 1994. for C.A. Baragwanath Auditor-General Melbourne 14 September 1998 Treasury Corporation of Victoria Our Clients State of Victoria Ports Budget Sector Debt Portfolio Melbourne Port Corporation Electricity Port of Melbourne Authority Generation Victoria Victorian Channels Authority State Electricity Commission of Victoria Transport Victorian Power Exchange Melbourne City Link Authority Gas Public Transport Corporation Energy 21 Pty Ltd Roads Corporation Gascor Pty Ltd Victorian Rail Track Corporation Gasmart (Vic) Pty Ltd V/Line Freight Gas Services Business Pty Ltd Education Gas Transmission Corporation Council of Adult Education Ikon Energy Pty Ltd Monash University Kinetik Energy Pty Ltd Sunraysia College of Technical and Further Education Multinet (Assets) Pty Ltd Sports and Recreation Stratus Networks (Assets) Pty Ltd Falls Creek Alpine Resort Management Board Transmission Pipelines Australia (Assets) Pty Ltd Lake Mountain Alpine Resort Management Board Victorian Energy Networks Corporation (VENcorp) Melbourne and Olympic Parks Trust Westar (Assets) Pty Ltd Mount Buller Alpine Resort Management Board Water - Metropolitan Mount Hotham Alpine Resort Management Board City West Water Limited Phillip Island Nature Park Board of Management Melbourne Water Corporation Tourism Victoria South East Water Limited The Victorian Arts Centre Trust Yarra Valley Water Limited Zoological Parks and Gardens Board of Victoria Water - Regional Other Barwon Region Water Authority Country Fire Authority Central Gippsland Region Water Authority Director of Housing Central Highlands Region Water Authority Docklands Authority Coliban Region Water Authority Emergency Services Superannuation Board East Gippsland Region Water Authority Leo Cussen Institute Gippsland and Southern Rural Water Authority Lilydale Memorial Park and Cemetery Glenelg Region Water Authority Melbourne Market Authority Goulburn Murray Rural Water Authority Metropolitan Fire Brigades Board Goulburn Valley Region Water Authority The Museum Board of Victoria Grampians Region Water Authority Rural Finance Corporation of Victoria Lower Murray Region Water Authority Transport Accident Commission North East Region Water Authority The Trustees of the Necropolis Springvale Portland Coast Region Water Authority Urban Land Corporation South Gippsland Region Water Authority Victorian Plantations Corporation South West Region Water Authority Other Clients Sunraysia Rural Water Authority At 30 June 1998 there were 47 other public sector entities Western Region Water Authority that had deposits of $367.9 million with TCV. Westernport Region Water Authority Wimmera Mallee Rural Water Authority Annual Report 1998 International Debt Portfolio Euro Bonds (listed), Yankee Bonds and Samurai Bonds* Total amount Total amount repurchased by remaining Original amount TCV up to and outstanding Exchange on issued currency Coupon including 30 June 98 at 30 June 98 which bonds Issue currency '000s Issue date Maturity date % currency '000s currency '000s are listed Listed Euro Bonds and Global Bonds Australian Dollars 500,000 15.12.93 15.12.98 6.500 492,843 7,157 Luxembourg 100,000 27.7.92 27.7.99 9.250 28,022 71,978 London 200,000 17.1.90 17.1.00 zero 63,584 136,416 London 100,000 11.1.91 11.1.01 zero 43,229 56,771 . London 125,000 30.5.91 30.5.01 12.250 49,551 75,449 London 100,000 12.12.91 12.12.01 10.500 33,346 66,654 Luxembourg 200,000 24.2.94 28.2.02 6.750 172,669 27,331 London 100,000 12.3.92 12.3.02 11.000 61,446 38,554 London 100,000 9.4.92 9.4.02 11.000 43,670 56,330 London 200,000 16.4.92 16.4.02 zero 68,579 131,421 Luxembourg 150,000 4.9.92 4.9.02 9.000 62,329 87,671 Luxembourg 150,000 7.3.93 7.4.03 8.750 72,374 77,626 Luxembourg 100,000 22.5.92 27.5.03 10.500 48,586 51,414 London 125,000 18.9.92 18.9.03 9.250 66,994 58,006 London 100,000 30.9.93 30.9.03 7.250 50,845 49,155 Luxembourg 500,000 15.4.93 15.10.03 8.250 405,173 94,827 Luxembourg 100,000 27.6.95 27.6.05 9.000 30,696 69,304 London 100,000 29.11.93 29.11.05 7.125 37,706 62,294 Luxembourg 200,000 11.1.91 11.1.06 zero 105,186 94,814 London 200,000 11.1.91 11.1.11 zero 71,829 128,171 London 200,000 11.12.91 31.8.11 zero 70,089 129,911 Luxembourg 3,650,000 2,078,746 1,571,254 Canadian Dollars 200,000 2.10.92 2.10.02 7.875 80,336 • 119,664 London 250,000 24.11.93 24.11.03 7.250 137,470 112,530 London 450,000 217,806 232,194 British Pounds 150,000 11.8.92 11.8.99 9.625 21,304 128,696 London 150,000 9.7.93 9.7.03 8.750 54,350 95,650 London 300,000 75,654 224,346 United States Dollars 200,000 31.7.89 15.9.99 zero 25,167 174,833 Luxembourg 300,000 15.1.92 15.1.02 8.250 85,560 214,440 London 500,000 110,727 389,273 Japanese Yen 50,000,000 20.6.94 20.7.98 variable 10,000,000 40,000,000 Luxembourg Swiss Francs 150,000 24.8.93 24.8.01 4.75 2,200 147,800 Zurich, Basle, Geneva Yankee Bonds United States Dollars 150,000 1.12.88 1.12.98 9.50 148,305 1,695 Not Listed 200,000 1.2.89 1.2.99 9.50 180,285 19,715 Not Listed 531,355 1.10.91 1.10.01 8.45 338,262 193,093 Not Listed 881,355 666,852 214,503 Samurai Bonds Japanese Yen 30,000,000 19.10.95 19.10.98 6.100 25,930,000 4,070,000 Not Listed 5,000,000 27.9.90 27.9.00 8.100 1,000,000 4,000,000 Not Listed 5,000,000 27.9.90 27.9.00 7.000 1,900,000 3,100,000 Not Listed 6,000,000 15.2.91 15.2.01 7.100 2,000,000 4,000,000 Not Listed 10,000,000 22.2.91 22.2.01 7.100 0 10,000,000 Not Listed 6,000,000 21.6.91 21.6.01 6.200 5,800,000 200,000 Not Listed 20,000,000 18.3.93 18.3.03 5.570 6,700,000 13,300,000 Not Listed 12,000,000 30.3.94 15.3.04 5.000 5,000,000 7,000,000 Not Listed 15,000,000 9.12.94 9.12.04 5.850 4,800,000 10,200,000 Not Listed 15,000,000 21.12.94 21.12.04 5.100 3,450,000 11,550,000 Not Listed 124,000,000 56,580,000 67,420,000 * These bonds were issued in the name of Treasury Corporation of Victoria, Victorian Public Authorities Finance Agency and State Electricity Commission of Victoria. J Not all offshore issues are shown. Treasury Corporation of Victoria Communications Annual Report 1996-97 Publication also available on our Internet site. The Annual Report was tabled and released in October 1997 Victorian Economic Produced in conjunction with the Department of Treasury and Finance on a quarterly basis. Currently Review offered in printed form, the publication is also available on our Internet site. Winter 1997, Autumn 1997, September 1997 and June 1997 issues were produced TCV Internet Site www.tcv.vic.gov.au Our site offers direct access to current information on TCV financial market activity, the Victorian economy, press releases and the opportunity to download the Victorian Economic Review and our latest annual report. Our site is also updated on a monthly basis Press Releases 1998-99 Net Funding - $2.1 billion. April 1998 Changes to domestic dealer arrangements. November 1997 1996-97 Market activity at record levels. October 1997 TCV confirms PowerNet Victoria proceeds to retire debt. October 1997 Reuters Page Nos. TCVM (Hotstocks), TCVN (Repurchase of offshore stock) Telerate Page No. 22885 Bloomberg Details of securities TCV has issued Reuters Australia Pty Ltd, Dow Jones Telerate (Australia) Pty Ltd and Bloomberg are real time global financial market information services Major External Presentations Overseas Presentations Presentations in Japan, Frankfurt, London, New York and San Francisco during May 1998 Dealer presentations in New York, London and Tokyo during February and April 1998 1998-99 Budget TCV sponsored the Committee for Economic Development of Australia luncheon in Melbourne and hosted a luncheon in Sydney with guest speaker, The Hon Alan Stockdale MLA, Treasurer of Victoria and Minister for Multimedia, discussing Victoria's Economic Report Card in April 1998 Treasury Corporation of Victoria Annual Report 1998 Appendices: Legislation and State Policies Treasury Corporation of Victoria Act 1992 Financial Management Act 1994 The Treasury Corporation of Victoria Act 1992 establishes the This annual report has been prepared in accordance with this Act. Corporation and sets out its functions and powers. The Act was Information in respect of Part 9.1.3. (iv) of Directions of the Minister reprinted on 21 December 1995 incorporating amendments up to for Finance under the Act which is not contained in this annual Act No. 100/1995. Notes in relation to the amendments of Act No. report has been prepared and is available to the Treasurer, 100/1995, which became effective as a result of proclamation on Members of Parliament and the public on request. 30 April 1996, are contained in Notes 3, 4 and 5 of the reprinted Freedom of Information Act 1982 version of the Treasury Corporation of Victoria Act. Act Nos. Pursuant to section 40 of the TCV Act, the Corporation is not, 73/1996, 79/1996, 35/1997, 71/1997, 91/1997, 104/1997 and and is not eligible to be declared to be, an agency or prescribed 46/1998 also contain provisions which further amend the Treasury authority within the meaning of this Act. Corporation of Victoria Act. Competition Policies Direction of the Treasurer under the TCV Act 1992 Treasury Corporation of Victoria is listed as a Public Financial On 3 April 1998 the Treasurer of the State of Victoria made the Enterprise in Table 1: Government Business Enterprises in following direction: 'Competitive Neutrality, A Statement of Victorian Government 'I, Alan Stockdale, Treasurer of the State of Victoria, under section Policy' published by the Department of Premier and Cabinet, June 10 of the Treasury Corporation of Victoria Act 1992, HEREBY 1996. The Table currently excludes TCV from nomination for the DIRECT the Treasury Corporation of Victoria (the "Corporation") Commonwealth Tax Equivalent Regime, Commonwealth sales tax, to pay to the Consolidated Fund on or before 30 June 1998 State taxes and charges and relevant regulations. The policy an amount of $13 million representing a repatriation of capital statement also indicates that the State financial accommodation from the Corporation's retained earnings.' levy is not applicable to TCV because it is not a net borrower in its own right. Borrowing and Investment Powers Act 1987 The Corporation's power to borrow, invest and undertake financial arrangements is conferred under this Act. Dealer Panels The Primary and Secondary Dealer Panels for our Hotstocks were merged during 1997-98 to form a single dealer group. The Dealer Panel now focuses on our dealing relations, including dealing in domestic inscribed stock, buybacks and restructuring of non-Hotstock outstandings, as well as dealing in a variety of other financial market securities we use in our risk management activities. Domestic Programmes International Facilities Dealer Panel - Domestic US$3,000 million Euro Medium Term Note ABN Amro Australia Ltd Morgan Stanley and Co. International Limited Bankers Trust Australia Limited Morgan Stanley Bank AG Citibank Ltd Nomura International pic Commonwealth Bank of Australia SBC Warburg Dillon Read CS First Boston Australia Limited US$1,000 million Commercial Paper Programme Deutsche Capital Markets Australia Limited BA Securities, Inc. Merrill Lynch International Australia Limited Goldman Sachs Money Markets National Australia Bank Limited US$500 million Euro-Commercial Paper Programme Salomon Smith Barney Capital Markets Australia Limited Citicorp Investment Bank Limited Warburg Dillon Read Australia Limited A$400 million Euro-Commercial Paper Programme Westpac Banking Corporation (Hong Kong) Promissory Note Panel Members BA Asia Limited Australian and New Zealand Banking Group Ltd BT Asia Limited Bankers Trust Australia Limited Commonwealth Bank of Australia Commonwealth Bank of Australia National Australia Bank Limited Westpac Banking Corporation 2TC2 OctoberV Deale 1998 r Turnover $6.8 billion 15 September 1999 $13.5 billion 22 September 2001 $11.0 billion Contact Points Internet www.tcv.vic.gov.au Email [email protected] Address Level 12, 1 Collins Street, Melbourne, Victoria 3000 Telephone (03) 9651 4800 Facsimile (03) 9651 4880 (General) (03) 9650 7557 (Treasury & Client Services) (03) 9651 4890 (International & Corporate Services) (03) 9651 4899 (Settlements) AA151935 (answerback TRCORP) Telephone Email Managing Director David Carruthers (03) 9651 4800 [email protected] Treasury & Client Services Executive General Manager Michael Dontschuk (03) 9651 4800 [email protected] Manager Treasury Services Brett Anderson (03) 9651 4836 [email protected] Quantitative Services Roger Mcintosh (03) 9651 4836 [email protected] Dealer Ian Smart (03) 9651 4836 [email protected] Dealer James Wright (03) 9651 4836 - [email protected] Dealer Justin Lofting (03) 9651 4836 [email protected] Stock Lending Janine Miller (03) 9651 4841 [email protected] Manager Client Services Bernard Gastin (03) 9651 4825 [email protected] Client Services Tania Ventura (03) 9651 4836 [email protected] Advisory Services Julian Polic (03) 9651 4836 [email protected] Economist Adam Donaldson (03)9651 4819 [email protected] Client Services Simon Wilson (03) 9651 4836 [email protected] International & Corporate Services Executive General Manager John Davies (03) 9651 4827 [email protected] Legal Services Euan Macallan (03) 9651 4814 e. macallan@tc v. vie. gov. au Credit Management Terry Milligan (03) 9651 4897 t. m il I igan@tc v. vie. gov. au Risk Control & Reporting Ian Mackenzie (03) 9651 4874 [email protected] Banking Services Geoff Wilkie (03) 9651 4800 g ,wilkie@tcv. vie .gov.au Settlements Steve Bikakis (03) 9651 4847 s. bikakis@tcv. vie .gov. au Finance & Administration Manager Geoff Anderson (03) 9651 4869 [email protected] Accounting Michele Olson (03) 9651 4875 [email protected] IT Operations George Quibell (03) 9651 4858 [email protected] IT Development Charles Dagher (03) 9651 4876 c. dagher@tcv. vie. gov. au IT Redevelopment Jenny McKinley (03) 9651 4833 [email protected] Planning & Marketing Tina Ryan (03) 9651 4826 [email protected] Internal Audit Hui Meng Voon (03) 9651 4808 h. voon @tcv. vie. go v. au Human Resources Charles Brass (03) 9651 4873 [email protected] Registry of Inscribed Stock Inscribed stock registries are operated by National Registries Pty Ltd, at Level 9, 600 Bourke Street, Melbourne, Victoria 3000 Telephone (03) 9275 7999 Facsimile (03) 9670 6373 Government Bonds of Victoria Freecall Number 1800 628 008 Designated Investment Bonds For more information on Designated Investment Bonds issued under the Australian Department of Immigration and Ethnic Affairs Migration Regulations, please contact Simon Wilson, whose details appear above. Design and production by The Ball Group TCV0004 10/98 ORPORATION mI CTORIA Adding Value to the State of Victoria