QTC Half Yearly Report July-December 2012

Vision

Securing Queensland’s financial success

Mission

To deliver optimal financial outcomes through sound funding and financial risk management

Values

We are focused on our clients
We are passionate about Queensland
We value and respect our people
We are collaborative and seek continuous improvement
Above all else, we value integrity

Queensland Treasury Corporation is the Queensland Government’s central financing authority and corporate treasury services provider, with responsibility for:

• sourcing and managing the debt funding to finance Queensland’s infrastructure requirements in the most cost-effective manner
• providing financial and risk management advice to the Queensland Government and its public sector clients on financial risk issues, and
• investing the State’s short- to medium-term cash surpluses, to maximise client returns through a conservative risk management framework.

QTC does not formulate Government policy, but works within the policy frameworks developed by the Government and Queensland Treasury.

Debt funding and management

QTC borrows funds in the domestic and international markets in a manner that minimises the State’s and QTC’s liquidity and refinancing risk. We then lend these funds to our clients, or use them to manage our clients’ debt or refinance maturing debt. With responsibility for all of the State’s debt raising, QTC is able to capture significant economies of scale and scope in the issuance, management and administration of debt.

Financial advisory and risk management services

QTC works closely with its public sector clients to assist in managing their risk in financial transactions and achieve the best financial solutions for their organisations and for Queensland. In assisting clients, QTC does not provide advice that is contrary to the interests of the State. We encourage Queensland Treasury, our major stakeholder, and our clients to use our organisation as an extension of their resources, by:

• providing access, on a cost recovery basis, to professional skills and resources to ensure that their financial risks are identified and managed on a consistent basis
• acting as a central store of knowledge and expertise on financial structures and transactions, and the risks and benefits they encompass
• providing Queensland Treasury with advice on matters of financial and commercial policy and risk relating to the State and its entities
• working as a conduit between the Government and the private sector, and
• using our economies of scale and scope to ensure that the best possible solutions are obtained.

Short- to medium-term investments

QTC uses its financial markets expertise, enhanced by strong relationships with the domestic and international markets, together with its understanding of debt management and the management of financial risk, to provide clients with investment solutions that achieve a high return within a conservative risk environment. Clients can choose from an overnight facility, a managed short-term fund or fixed-term facility. Alternatively, we can assist them to source appropriate solutions from the marketplace.

For the half-year ended 31 December 2012, Queensland Treasury Corporation (QTC) achieved an operating profit from its capital markets operations of $225.4 million (HY2011: $120.2 million). We also achieved quantifiable savings for clients and the State of $410.7 million, principally through our capital markets activities and economies of scale.

With regular market issuance, QTC had successfully raised $11.9 billion or 64 per cent of the total year’s program of $18.7 billion, as at 31 December 2012.

Separate from QTC’s capital markets operations, the long-term assets operations recorded a profit of $1,154.5 million (HY2011: loss of $526.8 million). This segment comprises the investments that fund the State’s defined benefit superannuation and other long-term obligations. Managed by QIC, these obligations were transferred to QTC by the Queensland Government under an administrative arrangement; in return, QTC issued the State with fixed-rate notes that provide a fixed rate of return. While QTC bears the fluctuations in the value and returns on the asset portfolio, there is no cash flow effect for QTC. Any accumulated losses incurred by this segment have no impact on QTC’s ability to meet its obligations or on its capital markets activities.

Delivering whole-of-State benefits

A key highlight of the past six months has been the support that QTC has provided to the State in the attainment of its fiscal priorities and objectives, particularly in light of the release of the Queensland State Budget and the development of the Government’s key fiscal principles.

QTC has delivered strong whole-of-State benefits, through quantifiable savings generated for clients from core funding and liquidity management activities, and its contribution to the success of some of the State’s key initiatives.

These initiatives have included the Queensland Government’s major independent review of Queensland’s current and future financial position, and the establishment of Projects Queensland—a stand-alone unit of Queensland Treasury and Trade to achieve the efficient and cost-effective assessment, prioritisation and delivery of critical infrastructure.

QTC also played a central role in managing the partial sell-down of the State’s $1.5 billion shareholding in QR National Ltd (QRN; now known as Aurizon) in October. This transaction represented an exceptional outcome for the State in terms of process management, the sale price achieved and the costs incurred.

Achieving sustainable access to funding

The Queensland Government released its Mid-Year Fiscal and Economic Review in late December, which did not result in any change to the borrowing requirements for the remainder of the year. Following the strong fiscal measures put in place by the Government to regain its AAA/Aaa credit rating over the long term, credit rating agencies Standard & Poor’s and Moody’s affirmed their respective ratings (AA+/Stable/A-1+ and Aa1/Negative/P1) for Queensland.

With an annual borrowing requirement of $18.7 billion, as at 31 December 2012, we had raised $6.6 billion through term debt, and had commercial paper outstandings of $5.3 billion. Funds raised through our regular issuance program are used to fund the State’s capital infrastructure program and to refinance maturing debt.

In the period under review, we issued three new AUD benchmark bonds maturing in 2017, 2019 and 2023, offering investors a choice of Queensland Government-guaranteed bonds with maturity dates in every year through to 2024.

All three benchmark bond issues received strong support from a diverse mix of investors, both in terms of geographical location and investor type. In particular, the 2017 benchmark bond attracted a higher proportion of US investor participation as a result of the inclusion of a US Rule 144A capability, which came into effect in 2011-12.

As we complete our 2012-13 borrowing program in the next six months, AUD benchmark bonds will remain our principal source of funding. We will continue regular issuance into existing liquid benchmark bond lines on both a public and a reverse enquiry basis. With interest rates at a historic low, we will also seek opportunities to lengthen our debt maturity profile.

Through regular dialogue with the 15 global banks that make up our Fixed Interest Distribution Group and provide pricing to investors in the primary and secondary markets, we will also continue to monitor global markets for opportunities to diversify our funding sources to meet investor requirements.

Creating client value

Following elections at both the State and local levels of government in the first half of 2012, we implemented a significant program of work to renew our client relationships across the public sector and increase client value through product, service and organisational innovation.

Over the past six months, our expertise has been sought across a number of major client projects and initiatives, including the:

• Boundaries Commission’s evaluation of the financial impacts of a number of proposed local government de-amalgamations
• public consultation process undertaken by the Australian Energy Market Commission on the rules governing the economic regulation of electricity network service providers
• Department of Treasury and Trade’s establishment of Projects Queensland, with the secondment of 16 QTC employees to help staff that office
• recovery planning and funding application support to local governments, following a number of significant natural disasters, and
• State-wide series of educational forums to support senior officials of local governments, including courses for Indigenous and Torres Strait Island local governments, in conjunction with the Department of Local Government and the Local Government Association of Queensland.

Our ability to respond flexibly to the needs of our clients will remain a key focus across the next six months, particularly as we balance ongoing client demand with increasing demand for our involvement in significant whole-of-State initiatives.

Maintaining organisational sustainability

Over the past six months, we have reviewed and updated our strategic plan, reflecting on the value we can deliver to our clients and the State, and the unique role we fulfil across the public sector. Through this process, we renewed our corporate vision and mission, reaffirming our commitment to build on the strong foundation of our past achievements to best address the challenges of the future, and ensure we meet the State’s financing requirements and contribute to a sustainable future for all Queenslanders.

We also took the opportunity to align our organisational structure to our strategy, streamlining responsibility and accountability, ensuring the prioritised allocation of resources, and maintaining our organisational flexibility.

The delivery of increased operational efficiencies across the organisation has been a significant priority, with the rationalisation of our work spaces and subsequent co-location of all employees into one office. We also delivered enhanced online services to our clients through QTC Connect, improving operational efficiencies and completing this major program of work.

Over the next six months, QTC will focus on its core funding and debt management business to meet the State’s financing requirements and help drive public sector financial sustainability. On behalf of the Board and our senior management team, we thank our team of experts, whose collective efforts, energies and commitment have delivered a strong outcome for our organisation.

We look forward to building on this positive foundation over the second half of the financial year to deliver optimal financial outcomes that help secure Queensland’s financial success.

G P Bradley
Chairman

P C Noble
Chief Executive

Australian Government Guarantee (AGG): Also known as the Commonwealth Government Guarantee. The global financial crisis had an adverse effect on the state government bond market and threatened the capacity of state governments to deliver critical infrastructure projects. In response, on 25 March 2009, the Australian Government announced that it would provide a time-l

imited, voluntary guarantee over Australian state and territory government borrowing, available for both existing and new issuances of securities over a range of maturities. On 16 June 2009, the Queensland Government announced it would take up the Australian Government’s offer of the guarantee on all existing AUD denominated benchmark bond lines (global and domestic) issued by QTC with a maturity date of between 12 months and 180 months (1-15 years). On 18 September 2009, the Reserve Bank of Australia (RBA) approved QTC’s application for the Australian Government Guarantee to be applied to selected AUD Domestic Benchmark bonds. On 11 December 2009, the RBA approved QTC’s application for the Australian Government Guarantee to be applied to selected AUD Global Benchmark bonds. The AGG was withdrawn for new borrowings after 31 December 2010.

Basis point: One hundredth of one per cent (0.01%).

Bond: A financial instrument where the borrower agrees to pay the investor a rate of interest for a fixed period of time. A typical bond will involve regular interest payments and a return of principal at maturity.

Commonwealth Government Guarantee (CGG): See Australian Government Guarantee above.

CP (commercial paper): A short-term money market instrument issued at a discount with the full face value repaid at maturity. CP can be issued in various currencies with a term to maturity of less than one year.

Credit rating: Measures a borrower’s creditworthiness and provides an international framework for comparing the credit quality of issuers and rated debt securities. Rating agencies allocate three kinds of ratings: issuer credit ratings, long-term debt and short-term debt. Issuer credit ratings are among the most widely watched. They measure the creditworthiness of the borrower including its capacity and willingness to meet financial obligations. QTC has a strong rating from two rating agencies—Standard & Poor’s, and Moody’s.

Distribution group: A group of financial intermediaries who market and make prices in QTC’s debt instruments.

Global financial crisis: The global financial crisis refers to a series of events following the rapid increases in default rates on US sub-prime mortgages over 2007-08. Funding and liquidity problems in the world’s major financial centres morphed into concerns about the solvency of many financial institutions over the first half of 2008-09, peaking in September 2008. The highly coordinated and substantial response to the crisis from fiscal and monetary policy makers around the world led to the stabilisation of markets and created the foundation for the global economic recovery that began in March 2009.

GOC: Government-owned Corporation.

Issue price: The price at which a new security is issued in the primary market.

Liquid: Markets or instruments are described as being liquid, and having depth, if there are enough buyers and sellers to absorb sudden shifts in supply and demand without price distortions.

Market value: The price at which an instrument can be purchased or sold in the current market.

MTN (Medium-Term Note): A financial debt instrument that can be structured to meet an investor’s requirements in regards to interest rate basis, currency and maturity. MTNs usually have maturities between 9 months and 30 years.

QTC: Queensland Treasury Corporation.

RBA: Reserve Bank of Australia.

T-Note (Treasury Note): A short-term money market instrument issued at a discount with the full face value repaid at maturity. T-Notes are issued in Australian dollars with a term to maturity of less than 1 year.

Queensland Treasury Corporation

Level 6, 123 Albert Street
Brisbane Queensland Australia
GPO Box 1096
Brisbane Queensland
Australia 4001
Telephone: +61 7 3842 4600
Facsimile: +61 7 3221 4122
Email: enquiry@qtc.com.au
Internet: https://www.qtc.com.au/

Queensland Treasury Corporation’s annual and half-yearly reports (ISSN 1837-1256 print; ISSN 1837-1264 online) are available on QTC’s website at www.qtc.com.au/qtc/public/annual-reports. If you would like a copy of a report posted to you, please call QTC’s Communication and Marketing Group on +61 7 3842 4714.

If you would like to comment on our Annual Report, please complete the online enquiry form located on our website.

QTC is committed to providing accessible services to Queensland residents from culturally and linguistically diverse backgrounds. If you have difficulty understanding this Annual Report, please contact QTC’s Communication and Marketing Group on +61 7 3842 4880 and we will arrange for an interpreter to effectively communicate the report to you.

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