Financement-Québec operational report

Transcription

1 Financement-Québec operational report

2 Financement-Québec operational report

3 Operational Report Financement-Québec Legal deposit September 2014 Bibliothèque et Archives nationales du Québec ISSN (PDF) Gouvernement du Québec, 2014

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5 TABLE OF CONTENTS LETTER TO THE PRESIDENT OF THE NATIONAL ASSEMBLY... 5 LETTER TO THE MINISTER PROFILE OF FINANCEMENT-QUÉBEC FISCAL YEAR AT A GLANCE OBJECTIVES FINANCING OF ORGANIZATIONS BORROWINGS ON FINANCIAL MARKETS IN SOURCES OF LONG-TERM FINANCING EXPENDITURE REDUCTION MEASURES CODE OF ETHICS AND PROFESSIONAL CONDUCT REMUNERATION OF OFFICERS SUSTAINABLE DEVELOPMENT MANAGEMENT S REPORT INDEPENDENT AUDITOR S REPORT NOTES TO THE FINANCIAL STATEMENTS LIST OF MEMBERS OF THE BOARD OF DIRECTORS AND MEMBERS OF MANAGEMENT APPENDIX CODE OF ETHICS AND PROFESSIONAL CONDUCT

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7 Québec City, September 18, 2014 Mr. Jacques Chagnon President of the National Assembly Parliament Building 1045, rue des Parlementaires Québec (Québec) G1A 1A4 Dear Sir, I have the honour of submitting the operational report and financial statements of Financement-Québec for the fiscal year beginning April 1, 2013 and ending March 31, Yours truly, Original French version signed Carlos Leitão

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9 Bureau du sous-ministre associé Québec City, July 4, 2014 Mr. Carlos Leitão Minister of Finance 12, rue Saint-Louis, 1 er étage Québec (Québec) G1R 5L3 Mr. Minister, On behalf of the Board of Directors, I am pleased to submit the operational report and financial statements of Financement-Québec. This report and these financial statements have been prepared in accordance with the provisions of section 42 of An Act respecting Financement-Québec (CQLR, chapter F-2.01) and reflect the activities carried out during fiscal year , i.e. from April 1, 2013 to March 31, Yours truly, Original French version signed Bernard Turgeon Chairman of the Board

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11 1. PROFILE OF FINANCEMENT-QUÉBEC Financement-Québec was incorporated under An Act respecting Financement-Québec (CQLR, chapter F-2.01) which entered into force on October 1, Its mission is to offer financial services to public bodies covered by its statute of incorporation, in particular by making loans to them. Since April 1, 2013, Financement-Québec has provided loans only to organizations outside the government reporting entity. Customers within the government reporting entity, which prior to this date borrowed from Financement-Québec, now borrow from the Financing Fund. These organizations are the agencies and public institutions of the health and social services network, colleges, school boards and the Université du Québec and its constituents. During fiscal year , Financement-Québec issued long-term borrowings for a total of $1.0 billion and made long-term loans of some $1.6 billion. As at March 31, 2014, outstanding borrowings of Financement-Québec amounted to $20.3 billion while loans outstanding amounted to $20.5 billion Operational Report 9

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13 2. FISCAL YEAR AT A GLANCE TABLE 1 Activities Long-term loans made ($ million) Number of loans Number of clients Average amount of short-term loans made ($ million) Number of loans Number of clients Long-term borrowings made ($ million) Number of borrowings 1 15 TABLE 2 Financial results Surplus for the year ($ million) TABLE 3 Statement of outstanding loans and borrowings March 31, 2014 March 31, 2013 Long-term Short-term Total Total Outstanding loans ($ million) Number of loans Number of clients Outstanding current investments ($ million) Outstanding borrowings ($ million) Operational Report 11

14 CHART 1 Breakdown of long-term loans made in (1) Public bodies exercising fiduciary functions. (2) Universities other than the Université du Quebec and its constituents. 12 Financement-Québec

15 3. OBJECTIVES This section describes the four main objectives of Financement-Québec as well as the activities carried out to achieve them. First objective: minimize the cost of financing of its clients Borrowings by Financement-Québec are unconditionally guaranteed by the government. It uses the amounts thus borrowed to make short and long-term loans. Financement-Québec makes short-term loans to its clients, in tandem with financial institutions. Short-term loans made by Financement-Québec satisfy the conditions stipulated by the Regulation respecting borrowings made by a body since they are made at an interest rate does not exceed the rate on Canadian bankers acceptances plus 0.30% including expenses. Long-term loans made by Financement-Québec enable its clients to have access to financing at lower cost than if they themselves borrowed on financial markets. Accordingly, pooled financing helps organizations reduce their financing costs. Second objective: offer the customer quality service To meet its clients needs, Financement-Québec improves existing financing processes, adds new services and works with certain organizations to assess and negotiate, on their behalf, traditional or structured financing operations. Provide clients with a simpler way to obtain financing Organizations adopt a borrowing plan to make it simpler to obtain loans. With the required authorizations, the borrowing plan sets the maximum amount of loans to be made as well as their limits and characteristics. It allows authorized officers to jointly contract loans within the established framework. Consequently, the borrowing plan streamlines the process and reduces the time needed to obtain financing since it eliminates the constraint of having them approved individually by the organization s board of directors. In , all long-term loans of organizations were carried out under borrowing plans. Since fiscal year , organizations have carried out all their long-term loans under a single loan agreement, signed when their borrowing plan is implemented. Consequently, at the time a long-term loan is contracted, only the note and deed of hypothec are required. Short-term loans are made under a single loan agreement. Accordingly, at the time a short-term loan is contracted, only a note or a transaction confirmation is required. Adapt loan conditions to the customer's needs Loan conditions, in particular the term, principal repayment structure and frequency of interest payments, are adapted to the needs of the customers or ministries responsible. Third objective: adequately manage financial risks Credit risk of borrowers Organizations receiving a subsidy for the repayment of long-term loans contracted with Financement-Québec must pledge this subsidy in its favour as security. For 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 Operational Report 13

16 Liquidity risk Financement-Québec manages liquidity risk by planning needs, forward-looking matching of financial flows of its asset and liability portfolios and by maintaining access to credit to ensure that it can meet its commitments at all times. Future cash flows generated in the normal course of its activities, as well as available sources of funding, are sufficient to satisfy its current and future obligations. Exchange risk In accordance with the exchange risk management policy, Financement-Québec incurs no risk of this nature. Accordingly, on their issue date, borrowings in foreign currencies are translated into Canadian dollars using currency swap contracts. Interest rate risk Financement-Québec manages interest rate risk using matching methods such as those used by financial institutions for their intermediation activities. It thus limits the net exposure of its assets and liabilities to fluctuations in interest rates, in accordance with the policy adopted to that effect. Fourth objective: self-financing and efficient operations Financement-Québec must be self-financing while offering its customers the best financing conditions. To do so, it must maintain an adequate and competitive rate structure for its products and services. It must also optimize its operational processes to reduce operating costs To improve efficiency and reduce costs, Financement-Québec has entered into a service agreement with the Ministère des Finances, for compensation, for the following services: negotiation, completion, accounting and settlement of borrowings and derivatives; management of loans to organizations and follow-up; human and physical resources management. 14 Financement-Québec

17 4. FINANCING OF ORGANIZATIONS 4.1 Short-term financing During fiscal year , Financement-Québec made 500 short-term loans with amount of $10.7 million. an average Short-term borrowings by organizations included within the government reporting entity were transferred to the Financing Fund during fiscal year , in six stages, for a total of $ million. As at March 31, 2014, short-term loans outstanding stood at $290.1 million. 4.2 Long-term financing During fiscal year , Financement-Québec made 25 long-term loans totalling $ million, including nine loans transferred to Financement-Québec by the Financing Fund during the year with a value of $746.4 million. TABLE 4 Loans transferred from the Financing Fund to Financement-Québec (millions of dollars) Transit authorities Commission administrative des régimes de retraite et d'assurance Conseil de gestion de l assurance parentalee Montreal Museum of Fine Arts TOTAL Numberr of loans Outstanding Operational Report 15

18 Long-term loans to transit authorities, universities other than the Université du Québec and its constituents and to public bodies exercising fiduciary functions account for 44% %, 39% and 16% respectively of long-term loans made in CHART 2 Breakdown of long-term loans made in (1) (2) (1) (2) Public bodies exercising fiduciary functions. Universities other than the Université du Quebec and its constituents. TABLE 5 Summary of long-term loans made in (millions of dollars) Total amount Average amount Number of loans Universities other than the Université du Quebec and its constituents Transit authorities Public bodies exercising fiduciary functions Other entities TOTAL Financement-Québec

19 The following chart shows the breakdown of outstanding long-term loans as at March 31, CHART 3 Breakdown of outstanding long-term loans as at March 31, 2014 Total: $ million Health and social services School boards (1) $ million Universities 17..1% $ million 32.7% $ million 31.8% Colleges Municipalities (2) Transit authorities Fiduciary bodies Other entities $665.2 million 3.3% $255.4 million 1.3% $51.6 million 0.3% $ million 5.0% $ million 8.5% (1) Universities other than the Université du Quebec and its constituents. (2) Public bodies exercising fiduciary functions. Chart 4 shows the March 31, breakdown by maturity segment of outstanding long-term loans as at CHART 4 Breakdown by maturity segment of outstanding long-term loans as at March 31, 2014 The average term to maturity of outstanding long-term loans was 4.8 years as at March 31, Operational Report 17

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21 5. BORROWINGS ON FINANCIAL MARKETS IN The face value of long-term borrowings carried out in totalled $1.0 billion, for the same realization value. Realization value corresponds to face value plus the premium or minus the discount at issue. These borrowings were all made on the Canadian market. All of the borrowings carried out in will mature during fiscal year Average yield spreads at issue of Financement-Québec securities issued in were of the same level as those of Québec government securities Operational Report 19

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23 6. SOURCES OF LONG-TERM FINANCING Sources of long-term financing consist of long-term borrowings on financial markets and net principal repayments received by Financement-Québec. TABLE 6 Sources and utilization of funds in (millions of dollars) Sources of financing Long-term borrowings Net repayments of principal TOTAL Utilization of funds Long-term loans TOTAL Table 7 shows long-term borrowings made on financial markets during the fiscal year. TABLE 7 Long-term borrowings made in Realization value Interest rate (1) Issue date Maturity date Price to the investor (2) Yield to the investor ($ millions) (%) (%) 45 Variable October 29, 2013 May 29, Variable 423 Variable October 29, 2013 May 29, Variable 65 Variable October 29, 2013 May 29, Variable 100 Variable October 29, 2013 May 29, Variable 132 Variable October 29, 2013 May 29, Variable 25 Variable October 29, 2013 May 29, Variable 10 Variable October 29, 2013 May 29, Variable 50 Variable October 29, 2013 May 29, Variable 150 Variable October 29, 2013 May 29, Variable 1 000,0 (1) Interest payable semi-annually. (2) The price to the investor corresponds to a price in dollars for $100 of face value Operational Report 21

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25 7. EXPENDITURE REDUCTION MEASURES Further to the entry into force, in 2010, of An Act to implement certain provisions of the Budget Speech of 30 March 2010, reduce the debt and return to a balanced budget in (S.Q. 2010, chapter-20), Financement-Québec implemented measures to reduce its operating expenditures. For fiscal year , the reduction targets were: $ in administrative operating expenditures, including $925 for advertising, training and travel expenses; an additional $ for remuneration and/or operating expenditures. Compliance with the Act was achieved Operational Report 23

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27 8. CODE OF ETHICS AND PROFESSIONAL CONDUCT To manage its assets efficiently and transparently, Financement-Québec has adopted a Code of Ethics and Professional Conduct applicable to the members of the board of directors, management and personnel. Under the Code of Ethics and Professional Conduct, these individuals people undertake to act with integrity and responsibly in the exercise of their duties. Since the Code was adopted, no violation of its principles and rules has been reported. Consequently, no decision has been handed down in this regard. In accordance with the Act respecting the ministère du Conseil exécutif (CQLR, chapter M-30), the Code of Ethics and Professional Conduct is published in an appendix to this report Operational Report 25

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29 9. REMUNERATION OF OFFICERS In accordance with the decision of the Conseil du trésor of June 26, 2001, Financement-Québec publishes the remuneration of its officers. As at March 31, 2014, one person occupied the positions of president and chief executive officer and chairman of the board of directors and another, those of executive vice president, secretary and vice chairman of the board of directors. No remuneration was paid for these duties during the fiscal year Operational Report 27

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31 10. SUSTAINABLE DEVELOPMENT On June 12, 2013, Financement-Québec extended its Sustainable Development Action Plan ( ) (the Plan) until March 31, 2015, in accordance with the government s sustainable development strategy and the Sustainable Development Act (CQLR, chapter D-8.1.1). The Plan presents Financement-Québec s objectives and actions to achieve them. The Plan includes the following three government objectives: Government objective 1: promote the sustainable development initiative by sensitizing and training personnel Financement-Québec has a service agreement with the Ministère des Finances. During , activities to sensitize its employees were carried out by the Ministère des Finances. Government objective 6: foster the application of concrete environmental management and eco-responsible procurement practices Financement-Québec continued the revision of financial documentation to streamline documentation requirements for the funding of organizations and reduce the quantity of paper. In addition, Financement-Québec encourages payments by electronic transfer and pre-authorized withdrawal as well as the use of new technologies for the transmission of documents. Financement-Québec also contributes to the actions of the Ministère des Finances for eco-responsible procurement, minimum use of paper, reduced energy consumption, reuse and recycling of resources. Government objective 17: leave healthy public finances for future generations As a result of its mission, Financement-Québec is involved in a continuous process of support and services to its customers in connection with the oversight of financial transactions stipulated in the Financial Administration Act (CQLR, chapter A-6.001) and related regulations with the aim of contributing to this objective Operational Report 29

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33 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

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35 INDEPENDENT AUDITOR S REPORT To the Minister of Finance Report on the Financial Statements 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 Financial Statements 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.

36 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

37 FINANCIAL STATEMENTS Income and accumulated surplus for the fiscal year ended March 31, 2014 (thousands of dollars) Net interest income Budget Actual results Actual results Interest on loans Interest on investments Interest on borrowings and advances (note 3) ( ) ( ) ( ) Gains (losses) on derecognition of financial derivatives (1 739) Operation and administration expenses Wages, salaries and allowances Depreciation of fixed assets Service agreement with the Financing Fund 35 (70) 30 Other SURPLUS FOR THE YEAR ACCUMULATED SURPLUS AT THE BEGINNING Operations on accumulated surplus (note13) (17 512) - ACCUMULATED SURPLUS AT THE END The notes are an integral part of the financial statements Operational Report 35

38 Statement of remeasurement gains and losses for the fiscal year ended march 31, 2014 (thousands of dollars) ACCUMULATED REMEASUREMENT GAINS AT THE BEGINNING OF THE YEAR Unrealized (losses) gains attributable to the following: Fair value financial derivatives (32 382) Exchange rate financial derivatives - (2 125) Exchange rate borrowing Reclassified amounts in the income statement: Fair value financial derivatives (3 904) Exchange rate financial derivatives - ( ) Exchange rate borrowing NET REMEASUREMENT (LOSSES) GAINS FOR THE YEAR (36 286) ACCUMULATED REMEASUREMENT GAINS AT THE END OF THE YEAR The notes are an integral part of the financial statements. 36 Financement-Québec

39 Statement of financial position as at March 31, 2014 (thousands of dollars) Financial assets Loans (note 4) Accrued interest on loans Cash position Investments Accounts receivable Financial derivatives Liabilities Borrowings and advances (note 5) Net accrued interest on borrowings and advances Financial derivatives Accounts payable Net financial assets Non-financial assets Tangible fixed assets CAPITAL STOCK (NOTE 10) ACCUMULATED SURPLUS Accumulated surplus consists of: (thousands of dollars) Accumulated surplus Accumulated remeasurement gains TOTAL 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 Operational Report 37

40 Statement of the change in net financial assets for the fiscal year ended March 31, 2014 (thousands of dollars) Budget Actual results Actual results NET FINANCIAL ASSETS AT THE BEGINNING Changes due to tangible fixed assets Acquisitions (1 359) (580) (675) Depreciation (1 357) (465) (673) Surplus for the year Operations on accumulated surplus (note 13) - (17 512) - Accumulated remeasurement (losses) gains (36 286) (Decrease) increase in net financial assets (18 887) NET FINANCIAL ASSETS AT THE END The notes are an integral part of the financial statements. 38 Financement-Québec

41 Cash flows for the fiscal year ended March 31, 2014 (thousands of dollars) Operating activities Surplus for the year 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 Premiums and discounts on borrowings and advances (Gains) losses on derecognition of financial derivatives (3 904) Change in futures contracts 58 (1 770) Depreciation of tangible fixed assets Change in financial assets and liabilities related to operations (note 11) (4 350) Cash flows from operating activities Investing activities Loans made ( ) ( ) Loans transferred (note 13) ( ) - Loan repayments Cash flows from investing activities ( ) Fixed assets investment activities Acquisition of tangible fixed assets and cash flows from fixed asset investment activities Financing activities (580) (675) Short-term borrowings and advances Long-term borrowings and advances Repayments of long-term borrowings and advances ( ) ( ) Repayments of short-term borrowings and advances ( ) ( ) Cash flows from financing activities ( ) CHANGE IN CASH AND CASH EQUIVALENTS (44 725) CASH AND CASH EQUIVALENTS AT THE BEGINNING CASH AND CASH EQUIVALENTS AT THE END (NOTE 11) The notes are an integral part of the financial statements Operational Report 39

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43 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, 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 Operational Report 41

44 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. 42 Financement-Québec

45 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: (thousands of dollars) Interest on borrowings and advances ( ) ( ) Interest on financial derivatives recorded under liabilities ( ) ( ) Realized exchange loss on financial derivatives - ( ) ( ) ( ) Interest on financial derivatives recorded under assets Realized exchange gain on borrowing TOTAL ( ) ( ) Operational Report 43

46 4. Loans Borrowers (thousands of dollars) Entities included in the government reporting entity: School boards General and vocational colleges Health and social services institutions and agencies Université du Québec and its constituents Entities excluded from the government reporting entity: Universities other than the Université du Quebec and its constituents Municipalities Transit authorities Public bodies exercising fiduciary activities Other entities TOTAL Due in (thousands of dollars) Amount Effective rate (%) (1) Amount to to to to to to TOTAL (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. 44 Financement-Québec

47 5. Borrowings and Advances Summary (thousands of dollars) Borrowings on markets Advances from the General Fund of the Consolidated Revenue Fund Canada Mortgage and Housing Corporation (CMHC) Financing Fund Société québécoise des infrastructures (SQI) TOTAL Schedule and effective interest rate Borrowings on markets (thousands of dollars) Due in Amount Effective rate (%) (1) Amount to to to to to to to TOTAL (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) Operational Report 45

48 Advances from the General Fund of the Consolidated Revenue Fund (thousands of dollars) Due in Amount Effective rate (%) Amount to TOTAL Borrowings from CMHC (thousands of dollars) Due in Amount Effective rate (%) Amount to to to TOTAL Borrowings from the Financing Fund (thousands of dollars) Due in Amount Effective rate (%) Amount TOTAL Borrowing from SQI (thousands of dollars) Due in Amount Effective rate (%) Amount TOTAL Financement-Québec

49 The amounts of principal payments to be made on borrowings and advances over the coming fiscal years are as follows: Schedule of principal payments (thousands of dollars) and following Borrowings on markets Advances from the General Fund of the Consolidated Revenue Fund Borrowings from CMHC Borrowings from the Financing Fund Borrowing from SQI TOTAL 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 Operational Report 47

50 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 (thousands of dollars) Book value Fair value Book value Fair value Loans - Total Borrowings and advances Borrowings on markets Advances from the General Fund of the Consolidated Revenue Fund Borrowings from CMHC Borrowings from the Financing Fund Borrowing from SQI TOTAL Financial derivatives Financial assets Interest rate swap contracts Futures contracts on three-month Canadian bankers acceptances Liabilities Interest rate swap contracts ( ) ( ) ( ) ( ) Futures contracts on three-month Canadian bankers acceptances (4) (4) - - ( ) ( ) ( ) ( ) TOTAL ( ) 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. 48 Financement-Québec

51 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 $ million (March 31, 2013: $ 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) Operational Report 49

52 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 (thousands of dollars) Financial derivatives Level 1 Level 2 Level 3 Total Financial assets Interest rate swap contracts Liabilities Interest rate swap contracts - ( ) - ( ) Futures contracts on three-month Canadian bankers acceptances (4) - - (4) TOTAL (4) Hierarchical Structure of Fair Value Valuations As at March 31, 2013 (thousands of dollars) Financial derivatives Level 1 Level 2 Level 3 Total Financial assets Interest rate swap contract Futures contracts on three-month Canadian bankers acceptances Liabilities Interest rate swap contracts - ( ) - ( ) TOTAL 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. 50 Financement-Québec

53 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, The net exposure to liquidity risk shows, for each interval, the excess amount (positive) or shortfall (negative) of monetary flows Operational Report 51

54 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 Cumulative, after Nonderivatives Derivatives reinvestment of By maturity available capital (3) (94) (292) (552) (375) (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) (230) (382) (641) (178) (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. 52 Financement-Québec