Financement-Québec Financial Statement for the year ended March 31, 2014
Financement-Québec Financial Statement for the year ended March 31, 2014
TABLE OF CONTENTS MANAGEMENT S REPORT... 3 INDEPENDENT AUDITOR S REPORT... 5 FINANCIAL STATEMENTS... 7 INCOME AND ACCUMULATED SURPLUS... 7 STATEMENT OF REMEASUREMENT GAINS AND LOSSES... 8 STATEMENT OF FINANCIAL POSITION... 9 STATEMENT OF THE CHANGE IN NET FINANCIAL ASSETS... 10 CASH FLOWS... 11 NOTES TO THE FINANCIAL STATEMENTS... 13
MANAGEMENT S REPORT The financial statements of Financement-Québec have been drawn up by management, which is responsible for their preparation and their presentation, including significant judgements and estimates. This responsibility includes the selection of appropriate accounting methods that satisfy Canadian public sector accounting standards. The financial information contained in the operational report agrees with the information given in the financial statements. To carry out its responsibilities, management maintains a system of internal accounting controls designed to provide reasonable assurance that assets are protected and that operations are correctly accounted for in a timely fashion, are duly approved and are such as to produce reliable financial statements. The Corporation acknowledges that it is responsible for managing its affairs in accordance with the laws and regulations that govern it. The Board of Directors oversees how the Corporation s management carries out its responsibilities in terms of financial information and it approves the financial statements. The Auditor General of Québec has audited the Corporation's financial statements in accordance with Canadian generally accepted accounting standards. His independent auditor s report sets out the nature and extent of this audit and expresses his opinion. The Auditor General of Québec may, without limitation, meet the Board of Directors to discuss anything concerning his audit. Original French version signed Executive Vice-President Original French version signed President and Chief Executive Officer Québec City, June 16, 2014
INDEPENDENT AUDITOR S REPORT To the Minister of Finance Report on the I have audited the accompanying financial statements of Financement-Québec, which comprise the statement of financial position as at March 31, 2014, and the statement of income and accumulated surplus, statement of remeasurement gains and losses, statement of change in net financial assets and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information included in the notes to the financial statements. Management's Responsibility for the Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting standards and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.
Opinion In my opinion, the financial statements present fairly, in all material respects, the financial position of Financement-Québec as at March 31, 2014, and the results of its operations, its remeasurement gains and losses, changes in its net financial assets and its cash flows for the year then ended in accordance with Canadian public sector accounting standards. Report on Other Legal and Regulatory Requirements As required by Auditor General Act (CQLR, chapter V-5.01), I report that, in my opinion, the accounting principles in these standards have been applied on a basis consistent with that of the preceding year. Original French version signed Michel Samson, CPA Auditor, CA Acting Auditor General of Québec Québec City, June 16, 2014
FINANCIAL STATEMENTS Income and accumulated surplus for the fiscal year ended March 31, 2014 Net interest income Budget Actual results Actual results Interest on loans 780 384 751 347 800 524 Interest on investments 428 1 395 4 610 780 812 752 742 805 134 Interest on borrowings and advances (note 3) (741 164) (720 310) (768 015) 39 648 32 432 37 119 Gains (losses) on derecognition of financial derivatives 3 725 3 904 (1 739) Operation and administration expenses 43 373 36 336 35 380 Wages, salaries and allowances 953 883 919 Depreciation of fixed assets 2 115 2 Service agreement with the Financing Fund 35 (70) 30 Other 93 32 60 1 083 960 1 011 SURPLUS FOR THE YEAR 42 290 35 376 34 369 ACCUMULATED SURPLUS AT THE BEGINNING 234 249 199 880 Operations on accumulated surplus (note13) (17 512) - ACCUMULATED SURPLUS AT THE END 252 113 234 249 The notes are an integral part of the financial statements. Financement-Québec 7
Statement of remeasurement gains and losses for the fiscal year ended march 31, 2014 ACCUMULATED REMEASUREMENT GAINS AT THE BEGINNING OF THE YEAR 158 076 73 327 Unrealized (losses) gains attributable to the following: Fair value financial derivatives (32 382) 83 010 Exchange rate financial derivatives - (2 125) Exchange rate borrowing - 2 125 Reclassified amounts in the income statement: Fair value financial derivatives (3 904) 1 739 Exchange rate financial derivatives - (276 012) Exchange rate borrowing - 276 012 NET REMEASUREMENT (LOSSES) GAINS FOR THE YEAR (36 286) 84 749 ACCUMULATED REMEASUREMENT GAINS AT THE END OF THE YEAR 121 790 158 076 The notes are an integral part of the financial statements. 8 Financement-Québec
Statement of financial position as at March 31, 2014 Financial assets Loans (note 4) 20 542 918 25 345 223 Accrued interest on loans 213 436 214 622 Cash position 33 85 Investments - 44 673 Accounts receivable 3 263 38 614 Financial derivatives 291 106 466 954 21 050 756 26 110 171 Liabilities Borrowings and advances (note 5) 20 326 139 25 196 785 Net accrued interest on borrowings and advances 206 373 202 537 Financial derivatives 145 702 289 035 Accounts payable 393 30 778 20 678 607 25 719 135 Net financial assets 372 149 391 036 Non-financial assets Tangible fixed assets 1 854 1 389 CAPITAL STOCK (NOTE 10) 100 100 ACCUMULATED SURPLUS 373 903 392 325 Accumulated surplus consists of: Accumulated surplus 252 113 234 249 Accumulated remeasurement gains 121 790 158 076 TOTAL 373 903 392 325 The notes are an integral part of the financial statements. For the board of directors, Original French version signed Executive Vice-President Original French version signed President and Chief Executive Officer Financement-Québec 9
Statement of the change in net financial assets for the fiscal year ended March 31, 2014 Budget Actual results Actual results NET FINANCIAL ASSETS AT THE BEGINNING 375 569 391 036 199 264 Changes due to tangible fixed assets Acquisitions (1 359) (580) (675) Depreciation 2 115 2 (1 357) (465) (673) Surplus for the year 42 289 35 376 34 369 Operations on accumulated surplus (note 13) - (17 512) - Accumulated remeasurement (losses) gains 55 509 (36 286) 158 076 (Decrease) increase in net financial assets 96 441 (18 887) 191 772 NET FINANCIAL ASSETS AT THE END 472 010 372 149 391 036 The notes are an integral part of the financial statements. 10 Financement-Québec
Cash flows for the fiscal year ended March 31, 2014 Operating activities Surplus for the year 35 376 34 369 Items not affecting cash and cash equivalents: Discounts and premiums on loans (589) (518) Interest income charged to loans (27 964) (34 091) Issue expenses on loans (15 717) (15 007) Administration expenses on loans (3 923) (3 696) Issue expenses on borrowings and advances 6 253 5 946 Premiums and discounts on borrowings and advances 22 406 38 063 (Gains) losses on derecognition of financial derivatives (3 904) 1 739 Change in futures contracts 58 (1 770) Depreciation of tangible fixed assets 115 2 12 111 25 037 Change in financial assets and liabilities related to operations (note 11) 3 700 (4 350) Cash flows from operating activities Investing activities 15 811 20 687 Loans made (6 219 338) (13 419 743) Loans transferred (note 13) (763 889) - Loan repayments 11 852 194 11 595 380 Cash flows from investing activities Fixed assets investment activities Acquisition of tangible fixed assets and cash flows from fixed asset investment activities Financing activities 4 868 967 (1 824 363) (580) (675) Short-term borrowings and advances 54 165 358 39 548 334 Long-term borrowings and advances 1 000 000 3 586 276 Repayments of long-term borrowings and advances (3 779 522) (1 868 976) Repayments of short-term borrowings and advances (56 314 759) (39 416 550) Cash flows from financing activities (4 928 923) 1 849 084 CHANGE IN CASH AND CASH EQUIVALENTS (44 725) 44 733 CASH AND CASH EQUIVALENTS AT THE BEGINNING 44 758 25 CASH AND CASH EQUIVALENTS AT THE END (NOTE 11) 33 44 758 The notes are an integral part of the financial statements. Financement-Québec 11
NOTES TO THE FINANCIAL STATEMENTS 1. Constitution, Purpose and Financing Financement-Québec (the Corporation) was incorporated under An Act respecting Financement-Québec (CQLR, chapter F-2.01) which entered into force on October 1, 1999. The Corporation is a legal person with share capital and is a mandatary of the State. The Corporation's mission is to supply financial services to public organizations covered by its act of incorporation. It finances them directly by granting them loans or by issuing debt securities on their behalf. It advises them to facilitate their access to credit and to minimize their financing costs and, to that end, it develops financing programs. It may also manage the financial risks of these organizations, in particular cash flow risks and exchange risks. The Corporation may also provide public organizations with technical services regarding financial analysis and management. The Corporation charges loan issue expenses to borrowers to offset those incurred by the Corporation on borrowings made. The Corporation also charges administration expenses to borrowers. The level of expenses charged is subject to government approval. The Corporation issues debt securities that are guaranteed by the Québec government. The Corporation is subject neither to Québec nor to Canadian income tax. 2. Main accounting methods The financial statements are established in accordance with the CPA Canada Public Sector Accounting Handbook. Use of any other source of generally accepted accounting principles must be consistent with that Handbook. In accordance with Canadian generally accepted accounting principles, the preparation of the Corporation s financial statements requires that management make use of accounting estimates and assumptions. These have an impact on the recognition of assets and liabilities, the presentation of assets and contingent liabilities on the date of the financial statements and the recognition of income and charges of the period presented in the financial statements. The actual results may differ from management s best estimates. Financial Instruments Upon their initial recognition, financial instruments are classified either in the category of financial instruments valued at fair value or in the category of financial instruments valued at cost or at amortized cost. On the date of the transaction, for financial instruments valued at fair value, issue expenses are expensed while, for financial instruments valued at cost or at amortized cost, they are added to the book value of such instruments. The Corporation has classified financial derivatives in the category of financial instruments valued at fair value. The Corporation has classified loans, accrued interest on loans, cash position, short-term investments, accounts receivable, borrowings and advances, accrued interest on borrowings and advances and accounts payable in the category of financial instruments valued at cost or at amortized cost. Financial assets and financial liabilities are offset, and the net balance is shown in the statement of financial position, if and only if the Corporation has a legally enforceable right to offset the amounts recognized and if it intends either to settle the net amount or to simultaneously realize the asset and settle the liability. Financement-Québec 13
A financial instrument is derecognized when the contractual obligations are extinguished at expiration or the Corporation transfers the contractual rights to receive the cash flows linked to the financial instruments under a transaction in which practically all the risks and benefits inherent in the ownership of the financial instrument are transferred. Loans Loans are recorded at the amount disbursed at the time of issue, adjusted by the discount or premium and issue expenses and are valued at amortized cost using the effective interest rate method. The interest income on loans, valued using the effective interest rate method, is recognized when earned. Borrowings and Advances Borrowings and advances from the General Fund of the Consolidated Revenue Fund are recorded at the amount received at the time of issue, including the discount or premium and issue expenses. After their initial recognition, borrowings and advances from the General Fund of the Consolidated Revenue Fund are valued at amortized cost using the effective interest rate method. The corresponding interest expenses are shown under the heading Interest on borrowings and advances in the statement of operations. Financial Derivatives The Corporation makes use of financial derivatives to reduce risk related to fluctuations in currencies and interest rates. It is the Corporation s policy not to use financial derivatives for speculative purposes. Financial derivatives with a positive value are entered as financial assets and financial derivatives with a negative value are shown as financial liabilities. The change in the fair value of each financial derivative is recorded in the statement of remeasurement gains and losses until it is derecognized. The cumulative balance of remeasurement gains and losses associated with financial derivatives is then reclassified in the statement of operations. Currency Translation The assets, liabilities and amounts shown in the statement of operations arising from a currency transaction are translated into Canadian dollars at the exchange rate on the date of the transaction. Monetary assets and liabilities as well as non-monetary items classified in the category of financial assets valued at fair value, denominated in foreign currencies, are translated into Canadian dollars at the exchange rate on the date of the financial statements. Unrealized foreign exchange gains and losses on assets and liabilities in foreign currencies are recognized in the statement of remeasurement gains and losses until they are derecognized. The cumulative unrealized foreign exchange gains and losses are then reversed and a foreign exchange gain or loss is recognized in the statement of operations. 14 Financement-Québec
Cash and Cash Equivalents The Corporation presents, under cash and cash equivalents, bank balances and investments that are easily convertible in the short term into a known amount of cash whose value is not likely to change significantly. 3. Interest on Borrowings and Advances Interest on borrowings and advances consists of the following: Interest on borrowings and advances (658 371) (682 988) Interest on financial derivatives recorded under liabilities (154 086) (201 195) Realized exchange loss on financial derivatives - (276 012) (812 457) (1 160 195) Interest on financial derivatives recorded under assets 92 147 116 168 Realized exchange gain on borrowing - 276 012 92 147 392 180 TOTAL (720 310) (768 015) Financement-Québec 15
4. Loans Borrowers Entities included in the government reporting entity: School boards 6 446 889 7 559 836 General and vocational colleges 1 721 061 2 048 685 Health and social services institutions and agencies 6 624 907 10 929 712 Université du Québec and its constituents 738 027 1 040 358 15 530 884 21 578 591 Entities excluded from the government reporting entity: Universities other than the Université du Quebec and its constituents 2 733 576 2 631 708 Municipalities 1 016 075 1 082 351 Transit authorities 665 156 - Public bodies exercising fiduciary activities 545 516 - Other entities 51 711 52 573 5 012 034 3 766 632 TOTAL 20 542 918 25 345 223 Due in Amount Effective rate (%) (1) Amount 2014-5 358 347 2015 4 139 599 1.27 to 5.08 4 150 700 2016 2 185 131 1.69 to 6.70 2 116 513 2017 2 737 826 1.50 to 6.48 2 887 984 2018 2 832 340 1.84 to 9.59 3 011 241 2019 2 996 439 2.05 to 8.44 3 158 379 2020-2038 5 651 583 2.50 to 10.17 4 662 059 TOTAL 20 542 918 25 345 223 (1) Excludes floating rate loans, which are at the rate of 3-month bankers acceptances and at the rate of 1-month bankers acceptances plus a spread of 0.30%. Loans maturing during the fiscal year ending March 31, 2015 include short-term loans of $290.1 million. For the long-term loans, maturities and interest rates on loans made by the Corporation are, with a few exceptions, identical to those of borrowings and advances contracted for this purpose taking into consideration currency and interest rate swap contracts, if any. However, depending on available capital, the Corporation may make new loans from repayments of existing loans. These new loans are made at interest rates and maturities that may differ from the conditions of the advance or borrowing initially received. 16 Financement-Québec
5. Borrowings and Advances Summary Borrowings on markets 19 089 633 23 867 289 Advances from the General Fund of the Consolidated Revenue Fund 140 434 142 356 Canada Mortgage and Housing Corporation (CMHC) 1 016 075 1 082 351 Financing Fund 59 106 64 936 Société québécoise des infrastructures (SQI) 20 891 39 853 TOTAL 20 326 139 25 196 785 Schedule and effective interest rate Borrowings on markets Due in Amount Effective rate (%) (1) Amount 2014 6 477 911 2015 4 131 520 2.82 to 4.71 3 428 118 2016 1 815 272 3.07 to 6.50 1 818 720 2017 3 029 889 2.52 to 3.88 3 028 078 2018 3 028 835 1.72 to 3.87 3 030 730 2019 3 034 229 1.94 to 2.71 3 032 751 2020 2 494 092 2.40 to 2.54 1 494 209 2035 1 555 796 4.68 to 5.62 1 556 772 TOTAL 19 089 633 23 867 289 (1) Excludes floating rate borrowings and swaps, which are at the rates of 3-month bankers acceptances plus a spread varying between minus 0.67% and plus 1.80%. All these borrowings are repayable solely at maturity. Borrowings maturing during the fiscal year ending March 31, 2015 include short-term borrowings of $695.5 million. All borrowings are guaranteed by the Québec government. Short-term borrowings bear interest at rates varying from 0.96% to 1.01% (rates varying from 0.99% to 1.44% as at March 31, 2013). Financement-Québec 17
Advances from the General Fund of the Consolidated Revenue Fund Due in Amount Effective rate (%) Amount 2023 140 434 8.60 to 9.56 142 356 TOTAL 140 434 142 356 Borrowings from CMHC Due in Amount Effective rate (%) Amount 2021 200 206 2.77 to 3.54 225 234 2026 315 855 3.28 to 3.92 336 743 2031 500 014 3.50 to 4.12 520 374 TOTAL 1 016 075 1 082 351 Borrowings from the Financing Fund Due in Amount Effective rate (%) Amount 2018 909 9.50 1 136 2021 6 195 9.78 7 071 2023 52 002 6.78 56 729 TOTAL 59 106 64 936 Borrowing from SQI Due in Amount Effective rate (%) Amount 2015 20 891 13.26 39 853 TOTAL 20 891 39 853 18 Financement-Québec
The amounts of principal payments to be made on borrowings and advances over the coming fiscal years are as follows: Schedule of principal payments 2015 2016 2017 2018 2019 2020 and following Borrowings on markets 4 138 295 1 809 400 3 034 000 3 020 000 3 042 000 4 022 350 Advances from the General Fund of the Consolidated Revenue Fund 1 740 1 740 1 740 1 740 1 740 129 525 Borrowings from CMHC 68 650 71 110 73 658 76 299 79 035 647 323 Borrowings from the Financing Fund 5 852 5 852 5 852 5 852 5 624 30 154 Borrowing from SQI 20 891 - - - - - TOTAL 4 235 428 1 888 102 3 115 250 3 103 891 3 128 399 4 829 352 6. Determination of fair value The fair value of a financial instrument corresponds to the price at which it would be traded between parties acting under normal competitive conditions. The Corporation applies widely used valuation techniques reflecting best practices and incorporating data observed on markets. The methodology the Corporation uses to arrive at the fair value of its financial instruments involves discounting future financial flows receivable less those payable. Swap contracts are traded on an over-the-counter market and prices are not published for these financial instruments. The fair value of these financial instruments is estimated using swap and CDOR rate curves published on recognized financial information systems available to all stakeholders, as well as financial discounting methods consistent with best practices. Futures contracts on three-month Canadian bankers acceptances are exchange-traded and their fair value is determined on the basis of the daily settlement price. Financement-Québec 19
By way of indication, the fair value of the Corporation s financial instruments as at March 31, 2014 is shown in the following table. Fair value of financial instruments Book value Fair value Book value Fair value Loans - Total 20 542 918 21 237 904 25 345 223 26 379 105 Borrowings and advances Borrowings on markets 19 089 633 19 661 225 23 867 289 24 714 914 Advances from the General Fund of the Consolidated Revenue Fund 140 434 202 464 142 356 215 008 Borrowings from CMHC 1 016 075 1 053 420 1 082 351 1 147 793 Borrowings from the Financing Fund 59 106 71 789 64 936 81 072 Borrowing from SQI 20 891 23 325 39 853 46 572 TOTAL 20 326 139 21 012 223 25 196 785 26 205 359 Financial derivatives Financial assets Interest rate swap contracts 291 106 291 106 466 928 466 928 Futures contracts on three-month Canadian bankers acceptances - - 26 26 Liabilities 291 106 291 106 466 954 466 954 Interest rate swap contracts (145 698) (145 698) (289 035) (289 035) Futures contracts on three-month Canadian bankers acceptances (4) (4) - - (145 702) (145 702) (289 035) (289 035) TOTAL (145 404) 145 404 177 919 177 919 The fair value of other financial instruments corresponds essentially to book value in view of their nature or their short-term maturity. 7. Financial Derivatives Financial derivatives are financial contracts whose value fluctuates on the basis of the underlying security and that do not require that the underlying security itself be held or delivered. This underlying item may be financial in nature (interest rate, currency, security or stock index) or merchandise (precious metal, commodity, oil). The outstanding face amount of a financial derivative represents the theoretical value of the principal, to which applies a rate or a price to determine the exchange of future cash flows, and does not reflect the credit risk pertaining to the derivative. The Corporation makes use of two (2) types of financial derivatives to manage its financial risks. Interest rate swap contracts are used to manage the interest rate risk exposure of long-term financial instruments, while futures contracts on three-month Canadian bankers acceptances are used to manage short-term risk. 20 Financement-Québec
Interest Rate Swap Contracts The Corporation uses interest rate swap contracts to manage interest rate risks on its financial intermediation activities. Interest rate swap contracts give rise to the periodic exchange of interest payments without an exchange of the reference face amount on which the payments are based. The total outstanding face value of interest rate swap contracts in Canadian currency as at March 31, 2014 is $14 177 million (March 31, 2013: $17 047 million). Currency Swap Contracts The Corporation uses currency swap contracts to hedge its exchange rate risk. Since March 25, 2012, the Corporation has held no currency swap contracts. Futures Contracts on Three-Month Canadian Bankers Acceptances (BAX) The Corporation uses futures contracts on three-month Canadian bankers acceptances (BAX) to hedge the interest rate risk arising from its short-term financing activities. These positions are revalued and revised every day and daily financial offsets are applied to them based on the closing prices of the contracts. As at March 31, 2014, the Corporation held a long position with an outstanding face value of $334 million ($1 313 million as at March 31, 2013). 8. Hierarchy of Fair Value Valuations The fair value valuations of the Corporation s financial derivatives are classified according to a hierarchy that reflects the importance of the data used. The hierarchy of fair value valuations consists of the following levels: a) prices (unadjusted) quoted on active markets for identical assets or liabilities; (level 1); b) data other than the quoted prices mentioned in level 1, that are observable for the asset or the liability, directly (i.e. prices) or indirectly (i.e. price derivatives) (level 2); c) data relating to the asset or the liability that are not based on observable market data (non-observable data) (level 3). Financement-Québec 21
The following table shows the fair value of financial instruments recognized at fair value in the statement of financial position and classified according to the valuation hierarchy described above: Hierarchical Structure of Fair Value Valuations As at March 31, 2014 Financial derivatives Financial assets Level 1 Level 2 Level 3 Total Interest rate swap contracts - 291 106-291 106-291 106-291 106 Liabilities Interest rate swap contracts - (145 698) - (145 698) Futures contracts on three-month Canadian bankers acceptances (4) - - (4) TOTAL (4) 145 408-145 404 Hierarchical Structure of Fair Value Valuations As at March 31, 2013 Financial derivatives Financial assets Level 1 Level 2 Level 3 Total Interest rate swap contract - 466 928-466 928 Futures contracts on three-month Canadian bankers acceptances 26 - - 26 26 466 928-466 954 Liabilities Interest rate swap contracts - (289 035) - (289 035) TOTAL 26 177 893-177 919 9. Financial Risk and Risk Management The Corporation s general philosophy is to avoid unnecessary risk and to limit, as much as possible, any risk associated with the Corporation s activities. The Corporation avoids taking any risk not related to the normal course of its business. The Corporation does not engage in speculative activities but recognizes that the conduct of its activities exposes it to various risks, including credit, liquidity and market risk, and that it must manage these risks on an ongoing basis. To limit the effect of these risks on its results and on its financial position, the Corporation gives preference to ongoing risk management through its day-to-day operations but may also make use of financial derivatives. Financial derivatives are used solely for risk management purposes. 22 Financement-Québec
a) Credit Risk Credit risk is the risk that the Corporation suffers a financial loss as a result of the failure of the counterparty of a financial instrument to fulfil a financial commitment. The Corporation s credit risk is negligible in view of the securities put in place and, consequently, the book value of the financial assets adequately represents the maximum credit risk exposure of the financial instruments. Organizations receiving a subsidy for the repayment of long-term borrowings contracted with the Corporation must pledge this subsidy in favour of the Corporation as security. For the other loans without subsidy, the Minister responsible for the organization undertakes to act, in the event of the organization s default, so that it remedies the situation as soon as possible. All credit risks are associated with the Québec government. In any case of default, the Québec government s intervention is stipulated under the terms of the various contracts in question, both for the Corporation s assets and its liabilities. Accordingly, the Québec government is the ultimate counterparty of the financial instruments held or incurred by the Corporation. b) Liquidity Risk Liquidity risk is the risk that the Corporation is unable to honour its financial commitments when they are due. The Corporation forecasts cash flows to ensure that it has the necessary funds to meet its obligations in a timely fashion. The Corporation is of the view that the cash flows generated by ongoing operations as well as available sources of funding are sufficient to satisfy its obligations as they arise. The Corporation obtains funding through long-term borrowings and short-term credit facilities, ensuring sufficient entries of funds to meet financial commitments when required. The Corporation is authorized to contract short-term and long-term borrowings on financial markets. The following table gives an analysis of the maturities of monetary flows of financial instruments as at March 31, 2014. The net exposure to liquidity risk shows, for each interval, the excess amount (positive) or shortfall (negative) of monetary flows. Financement-Québec 23
As at March 31, 2014, the summary of maturities expressed in face value of cash flows of financial assets and financial liabilities is as follows: Maturity schedule of monetary flows As at March 31, 2014 (millions of dollars) Due in Nonderivatives (1) Assets Liabilities Net exposure Derivatives Nonderivatives (2) Derivatives By maturity Cumulative, after reinvestment of available capital (3) 2015 6 025 52 4 771 108 1 198 1 198 2016 3 322 60 2 367 64 951 2 163 2017 3 405 47 3 520 26 (94) 2 113 2018 3 125 30 3 440 7 (292) 1 876 2019 2 804 16 3 368 4 (552) 1 381 2020-2024 3 165 57 3 592 5 (375) 1 178 2025-2030 913 35 791 (1) 158 1 703 2031-2038 408 65 1 923 1 (1 451) 688 (1) Financial assets that limit liquidity risk are loans, accrued interest on loans and accounts receivable. (2) Financial liabilities that expose the Corporation to liquidity risk are borrowings, accrued interest on borrowings and advances, and accounts payable. (3) In the normal course of its business, the Corporation reinvests its available capital productively and to honour its financial commitments when they are due. Maturity schedule of monetary flows As at March 31, 2013 (millions of dollars) Due in Nonderivatives (1) Assets Liabilities Net exposure Derivatives Nonderivatives (2) Derivatives By maturity Cumulative, after reinvestment of available capital (3) 2014 7 477 98 7 255 133 187 187 2015 5 488 69 4 043 129 1 385 1 574 2016 3 028 66 2 360 53 681 2 281 2017 3 243 48 3 498 23 (230) 2 094 2018 3 002 28 3 405 7 (382) 1 758 2019 2 683 20 3 334 10 (641) 1 162 2020-2024 2 341 73 2 583 9 (178) 1 144 2025-2030 893 78 791 3 177 1 622 2031-2038 400 109 1 923 2 (1 416) 530 (1) Financial assets that limit liquidity risk are loans, accrued interest on loans, investment and accounts receivable. (2) Financial liabilities that expose the Corporation to liquidity risk are borrowings, accrued interest on borrowings and advances, and accounts payable. (3) In the normal course of its business, the Corporation reinvests its available capital productively and to honour its financial commitments when they are due. 24 Financement-Québec
c) Market Risk Market risk is the risk that changes in market price affect the value of the Corporation s financial instruments. Market risk includes price, interest rate and exchange rate risks. i) Price Risk Price risk is the risk that the fair value or the future cash flows of the Corporation s financial instruments vary with fluctuations in market price, where such fluctuations do not stem from interest rates or exchange rates. Because of the nature of its activities, the Corporation is not exposed to price risk. ii) Interest Rate Risk Interest rate risk refers to uncertainty relating to the current fair value, fair value at maturity or future cash flows of financial securities taking into account possible changes in applicable interest rates, in the interval between the execution of a transaction on financial securities and the disposition or maturity of such securities. To control interest rate risk, the Corporation s strategy is to match the maturities of assets and liabilities and, if necessary, change the composition of its portfolios using financial derivatives. By managing interest rate risk, the Corporation must be able to contain the effects of interest rate fluctuations within the limits it has set. The following table shows the interest rate risk exposure of long-term financial instruments, broken down according to the sensitivity specific to each financial instrument and monetary flows that make up a financial instrument, in order to show the related refinancing and reinvestment risks. Short-term financial instruments, i.e. short-term loans, investment, short-term borrowings and short-term financial derivatives, are excluded from this table because the associated interest rate risk is eliminated by day-to-day risk management operations. Financement-Québec 25
As at March 31, 2014, the summary of maturities expressed in face value of cash flows of financial assets and financial liabilities whose fair value is sensitive to fluctuations in interest rates is as follows: Interest rate risk exposure of financial instruments (millions of dollars) 2014 Financial assets Liabilities Net exposure Loans Derivatives Borrowings and advances Derivatives Floating rate 47 25 7 666 (7 844) 250 Fixed rate: 2015 5 725 (466) 2 137 3 104 18 2016 3 317 175 2 092 1 292 108 2017 3 401 539 1 905 1 993 42 2018 3 122 (70) 1 948 1 038 66 2019 2 801 (445) 1 785 546 25 2020-2024 3 151 (307) 2 584 192 68 2025-2030 897 32 791 126 12 2031-2038 398 1 608 1 923 79 4 TOTAL 22 859 1 091 22 831 526 593 Interest rate risk exposure of financial instruments (millions of dollars) 2013 Financial assets Liabilities Net exposure Loans Derivatives Borrowings and advances Derivatives Floating rate 52 (3 698) 8 224 (11 455) (415) Fixed rate: 2014 4 471 1 617 2 836 3 230 22 2015 5 483 (159) 2 028 3 174 122 2016 3 023 437 2 089 1 270 101 2017 3 239 666 1 902 1 965 38 2018 2 999 70 1 945 1 061 63 2019 2 681 432 1 783 1 308 22 2020-2024 2 327 385 2 583 70 59 2025-2030 878 60 791 135 12 2031-2038 389 1 626 1 923 88 4 TOTAL 25 542 1 436 26 104 846 28 26 Financement-Québec
The following table shows the sensitivity of the annual surplus to the rate of interest, measured by an increase or decrease in the applied interest rate of 100 basis points over the entire fiscal year: Interest rate sensitivity of the annual surplus Simulated interest rate shock estimate of the impact Increase of 100 basis points (3 586) (3 046) Decrease of 100 basis points 3 466 3 596 The following table shows the sensitivity of the year s net remeasurement losses (gains), measured by an increase or decrease in the rate of interest of 100 basis points over the entire fiscal year: Interest rate sensitivity of the year s net remeasurement (losses) gains Simulated interest rate shock estimate of the impact Increase of 100 basis points 16 528 5 530 Decrease of 100 basis points 9 190 27 321 iii) Exchange Risk Exchange risk is the risk that the fair value or future cash flows of a financial instrument fluctuates as a result of changes in exchange rates. In view of its mission, the Corporation avoids any exposure to exchange risk. As at March 31, 2014, the Corporation holds no financial instrument denominated in foreign currency and consequently is not exposed to exchange risk. 10. Capital Stock Description The Corporation s shares are part of the public domain and are attributed to the Minister of Finance of Québec. Authorized 1 000 000 shares with a par value of $100 each. Issued and paid for 1 000 shares: $100 000 The Corporation's shares are held by the Minister of Finance of Québec. Financement-Québec 27
11. Cash Flows As at March 31, 2014, cash and cash equivalents consist of the following items: Cash and cash equivalents Cash position 33 85 Investment - 44 673 TOTAL 33 44 758 For the fiscal year ended March 31, 2014, the change in financial assets and liabilities relating to operations consists of the following items: Change in financial assets and liabilities Accrued interest on loans 1 186 3 410 Accounts receivable (1) (629) 4 919 Net accrued interest on borrowings and advances 3 836 (14 010) Deferred income - 992 Accounts payable (2) (693) 339 TOTAL 3 700 (4 350) (1) The amount for 2013 has been adjusted to reflect accounts receivable relating to loan repayment amounts not received as at March 31, 2013 for an amount of $36.0 million. (2) The amount for 2013 has been adjusted to reflect accounts payable relating to borrowing repayment amounts not disbursed as at March 31, 2013 for an amount of $29.7 million. Interest paid by the Corporation during the year amounted to $711.3 million ($774.5 million to March 31, 2013). 12. Related Party Transactions In addition to the related party transactions already disclosed in the financial statements and recorded at exchange value, the Corporation is related to all the ministries and special funds as well as all the organizations and enterprises controlled directly or indirectly by the Québec government or subject either to joint control or to significant common influence by the Québec government. All the Corporation's business transactions with these related parties were carried out in the normal course of its activities and under usual business conditions. These transactions are not separately disclosed in the financial statements. 28 Financement-Québec
13. Operations on accumulated surplus In the course of the restructuring of the Corporation s activities in, loans belonging to the Financing Fund and made with entities excluded from the Québec government reporting entity were transferred to the Corporation. The book value and accrued interest relating to these loans are $746.4 million and $10.2 million respectively. The consideration paid by the Corporation was $774.1 million, corresponding to their fair value. The excess of the amount paid over the transferred assets, $17.5 million, was posted directly to the accumulated surplus. 14. Comparative Figures Some comparative figures for 2013 have been reclassified for consistency with the presentation adopted in 2014. Financement-Québec 29