Public Accounts 2017-18: Consolidated financial statements

Independent auditor’s report

To the Legislative Assembly of the Province of Ontario

I have audited the accompanying consolidated financial statements of the Province of Ontario, which comprise the consolidated statement of financial position as at March 31, 2018, and the consolidated statements of operations, change in net debt, change in accumulated deficit and cash flow for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the Consolidated Financial Statements

The Government of Ontario (Government) is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian public sector accounting standards, and for such internal control as Government determines is necessary to enable the preparation of consolidated 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 consolidated 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 consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 the Government, as well as evaluating the overall presentation of the consolidated 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, these consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Province of Ontario as at March 31, 2018, and the consolidated results of its operations, change in its net debt, change in its accumulated deficit and its cash flows for the year then ended in accordance with Canadian public sector accounting standards.

Bonnie Lysyk, MBA, FCPA, FCA, LPA
Auditor General
Toronto, Ontario
September 12, 2018

Province of Ontario Consolidated Statement of operations

Province of Ontario Consolidated Statement of financial position

Province of Ontario Consolidated Statement of change in net debt

Province of Ontario Consolidated Statement of change in accumulated deficit

Province of Ontario Consolidated Statement of cash flow

Notes to the Consolidated Financial Statements

1. Summary of significant accounting policies

a) Basis of accounting

The Consolidated Financial Statements are prepared by the Government of Ontario in accordance with the accounting standards for governments recommended by the Public Sector Accounting Board (PSAB).

b) Reporting entity

These financial statements report the activities of the Consolidated Revenue Fund combined with those organizations that are controlled by the Province.

Government business enterprises (GBEs), broader public sector (BPS) organizations (i.e., hospitals, school boards and colleges) and other government organizations controlled by the Province are included in these financial statements. Controlled organizations are consolidated if the organizations are reasonably expected to maintain and meet one of the following criteria: i) their revenues, expenses, assets or liabilities are greater than $50 million; or ii) their outside sources of revenue, deficit or surplus are greater than $10 million. In accordance with PSAB, the Province also applies the “benefit versus cost constraint” in determining which organizations should be consolidated in the Province’s financial statements. A listing of consolidated government organizations is provided in Schedule 8. For those organizations that do not meet the PSAB benefit versus cost constraint standard, such as Children’s Aid Societies, government transfer payments to these organizations are included as expenses in these financial statements through the accounts of the ministries responsible for them.

Trusts administered by the Province on behalf of other parties are excluded from the reporting entity, but are disclosed in Note 15.

c) Principles of consolidation

Government organizations, including hospitals, school boards and colleges (collectively known as BPS organizations) as well as other government organizations controlled by the Province are consolidated on a line-by-line basis with the assets, liabilities, revenues and expenses of the Province based on the percentage of ownership the government held during the fiscal year. Where appropriate, adjustments are also made to present the accounts of these organizations on a basis consistent with the accounting policies of the Province and to eliminate significant inter-organizational accounts and transactions.

Government business enterprises are defined as those government organizations that: i) are separate legal entities with the power to contract in their own name and that can sue and be sued; ii) have the financial and operating authority to carry on a business; iii) have as their principal activity and source of revenue the selling of goods and services to individuals and non-government organizations; and iv) are able to maintain their operations and meet their obligations from revenues generated outside the government reporting entity. The activities of GBEs are recorded in the financial statements based on their results prepared in accordance with International Financial Reporting Standards (IFRS), including IFRS 14, using the modified equity method. Their combined net assets are included in the financial statements as Investment in Government Business Enterprises on the Consolidated Statement of Financial Position, and their net income is shown as a separate item, Income from Investment in Government Business Enterprises (GBEs) on the Consolidated Statement of Operations. Less than wholly owned GBEs (e.g., Hydro One Limited) are reflected using the modified equity method based on the percentage of ownership government held during the fiscal year.

d) Measurement uncertainty

The preparation of financial statements requires the Province to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses during the reporting period. Uncertainty in the determination of the amounts at which an item is recognized or disclosed in the financial statements is known as measurement uncertainty.

Measurement uncertainty that is material to these financial statements exists in the valuation of pensions and other employee future benefits obligations; the value of tangible capital assets; the estimation of personal income tax (PIT), corporations tax and Harmonized Sales Tax (HST) revenue accruals; the valuation of the Canada Health Transfer; Canada Social Transfer Equalization Payment entitlements; and the estimation of liabilities for contaminated sites, land claim settlements, and other liabilities.

Pension and other employee future benefits liability of $11.5 billion (2016-17, $11.9 billion), see Note 6, are subject to measurement uncertainty because actual results may differ significantly from the Province’s best long-term estimate of expected results (for example, the difference between actual results and actuarial assumptions regarding return on investment of pension fund assets and health care cost trend rates for retiree benefits may be significant).

The net book value of tangible capital assets of $113.9 billion (2016-17, $107.3 billion), see Note 9, is subject to uncertainty because of differences between estimated useful lives of the assets and their actual useful lives.

Personal income tax revenue estimate of $32.9 billion (2016-17, $30.7 billion), may be subject to subsequent revisions based on information available in the future related to past year tax return processing. Corporations tax revenues of $15.6 billion (2016-17, $14.9 billion), and Harmonized Sales Tax revenues of $25.9 billion (2016-17, $24.8 billion) are also subject to uncertainty for similar reasons.

The estimation of the Canada Health Transfer of $14.4 billion (2016-17, $13.9 billion) and Canada Social Transfer of $5.3 billion (2016-17, $5.1 billion), and Equalization Payments entitlements of $1.4 billion (2016-17, $2.3 billion), see Schedule 1, are subject to uncertainty because of variances between the estimated and actual Ontario share of the Canada-wide personal income and corporations tax base and population.

There is measurement uncertainty surrounding the estimation of liabilities for contaminated sites of $1.8 billion (2016-17, $1.8 billion), see Note 7. The Province may be responsible for cleanup costs that cannot be reasonably estimated due to several factors, including: insufficient information related to the nature and extent of contamination, timing of costs well into the future (e.g., unknown impacts of future technological advancements), the challenges of remote locations and unique contaminations.

There is measurement uncertainty surrounding the estimate of liabilities for contingent liabilities, including estimates for land claim settlements. Estimates for these liabilities are recorded when the contingency is determined to be likely and reasonably estimated however, the actual amount of any settlement may vary from the estimate recorded.

The Province’s investment in Ontario Power Generation (OPG) includes asset retirement obligations for fixed asset removal and nuclear waste management, discounted for the time value of money. These obligations are estimated based on the expected amount and timing of future cash expenditures based on plans for fixed asset removal and nuclear waste management. Such estimates are subject to uncertainty in the nature and extent of cost estimates, the timing of costs being incurred, changes in the discount rate applied to the cash flow estimates, and other unanticipated changes in fixed asset removal and nuclear waste management techniques.

Estimates are based on the best information available at the time of preparation of the financial statements and are reviewed annually to reflect new information as it becomes available. By their very nature, estimates are subject to measurement uncertainty. Therefore, actual results may differ materially from the Province’s estimates.

e) Significant accounting policies

Revenue

Tax revenues are recognized in the period in which the taxable event occurs and when they are authorized by legislation, or the ability to assess and collect the tax has been provided through legislative convention. Reported tax revenues include estimated revenues for the current period, adjustments between the estimated revenues of previous years and actual amounts, and revenues from reassessments relating to prior years. Reported amounts do not include estimates of some unreported taxes or the impact of future reassessments.

Personal income tax revenue for the period is accrued based on an estimate of current year tax assessments (plus late-arriving assessments/reassessments for prior years) prorated from the federal Department of Finance’s Tax Sharing Statements and an estimate for the following tax year based on the First Estimate of Payments.

The Harmonized Sales Tax component of sales tax revenue is collected by the Government of Canada under a Comprehensive Integrated Tax Coordination Agreement and is remitted to the Province net of credits. The remittances are based on the federal Department of Finance’s best estimates, which are subject to periodic updates. The Province recognizes Harmonized Sales Tax revenues based on these federal estimates.

Accrued corporate income tax revenue for the period is based on estimated corporate taxpayers’ taxable income for the year. The estimate is based on an Ontario Ministry of Finance economic model projection which leverages the historical relationship between aggregate taxable income and corporate profits.

PSAB 3510 distinguishes between tax concessions (relief of taxes paid), which are accounted for as revenue offsets, and transfers made through the tax system (financial benefits independent of taxes paid), which are reported as expenses.

Refundable personal and corporate income tax credits constitute transfers made through the tax system that are reclassified as expenses to conform to the PSAB standard. To ensure that the reclassification is fiscally neutral, a corresponding increase is made to personal income tax revenue and corporations tax revenue. Non-refundable personal and corporate income tax credits constitute tax concessions (relief of taxes paid), which are accounted for as revenue offsets by crediting the related tax revenue.

Transfers from the Government of Canada are recognized as revenues in the period during which the transfer is authorized by the federal government and all eligibility criteria are met, except if the stipulations related to federal government funding creates an obligation that meets the definition of a liability. Once a liability is recognized, the transfer is recorded in revenue as the obligations related to these stipulations are met.

Carbon allowance proceeds are recognized as revenue in the period during which the control is transferred to the participant and delivery of the emission allowance occurs (Note 18).

Other revenues are recognized in the fiscal year that the events giving rise to the revenues occur and they are earned. Amounts received prior to the end of the year that will be earned in a subsequent fiscal year are deferred and reported as liabilities (see “Liabilities”).

Expense

Expenses are recognized in the fiscal year that the events giving rise to the expenses occur and resources are consumed.

Transfer payments are recognized in the year that the transfer is authorized and all eligibility criteria have been met by the recipient. Any transfers paid in advance are deemed to have met all eligibility criteria.

Interest on debt includes: i) interest on outstanding debt (including BPS debt) net of interest income on investments and loans; ii) amortization of foreign exchange gains or losses; iii) amortization of debt discounts, premiums and commissions; iv) amortization of deferred hedging gains and losses; and v) debt servicing costs and other costs.

Employee future benefits such as pensions, other retirement benefits and entitlements upon termination are recognized as expenses over the years in which the benefits are earned by employees. These expenses are the government’s share of the current year’s cost of employee benefits, interest on the net benefits’ liability or asset, amortization of actuarial gains or losses, cost/gain on plan amendments and other adjustments.

Other employee future benefits are recognized in the period in which the event that obligates the government occurs or in the period in which the benefits are earned by employees.

The costs of buildings, transportation infrastructure, vehicles, aircraft, leased capital assets, machinery, equipment and information technology infrastructure and systems owned by the Province and its consolidated organizations are amortized and recognized as expenses over their estimated useful lives on a straight-line basis.

Liabilities

Liabilities are recorded to the extent that they represent present obligations of the government to outside parties as a result of events and transactions occurring prior to the end of the fiscal year. The settlement of liabilities will result in the sacrifice of economic benefits in the future.

Liabilities include: obligations to make transfer payments to organizations and individuals; present obligations for environmental costs; probable losses on loan guarantees issued by the government; and contingencies when it is likely that a loss will be realized and the amount can be reasonably determined.

Liabilities also include obligations to GBEs.

Deferred revenue represents unspent externally restricted receipts from the Federal Government or other third parties. Deferred revenues are recorded into revenue in the period in which the amounts received are used for the purposes specified or all external restrictions are satisfied. Deferred capital contributions represent the unamortized amount of contributions received from the Federal Government and other third parties to construct or acquire tangible capital assets. These contributions are recognized as deferred capital contributions and recorded into revenue over the useful life of the tangible capital assets based on the relevant stipulations of the contributions taken together with the actions and communications of the Province.

Alternative Financing and Procurement (AFP) refers to the Province using private-sector partners to procure and finance infrastructure assets. Assets procured via AFP are recognized as tangible capital assets, and the related obligations are recognized as other long-term financing liabilities in these financial statements as the assets are constructed.

Debt

Debt consists of treasury bills, commercial paper, medium- and long-term notes, savings bonds, debentures and loans.

Debt denominated in foreign currencies that has been hedged is recorded at the Canadian dollar equivalent using the rates of exchange established by the terms of the hedge agreements. Other foreign currency-denominated debt is translated to Canadian dollars at year-end rates of exchange and any exchange gains or losses are amortized over the remaining term to maturity.

Derivatives are financial contracts, the value of which is derived from underlying instruments. The Province uses derivatives for the purpose of managing risk associated with interest cost. The Province does not use derivatives for speculative purposes. Gains or losses arising from derivative transactions are deferred and amortized over the remaining life of the related debt issue.

Pensions and other employee future benefits

The liabilities for pensions and other employee future benefits are calculated on an actuarial basis using the government’s best estimates of future inflation rates, investment returns, employee salary levels and other underlying assumptions, and where applicable, the government’s borrowing rate. When actual plan experience of pensions, other retirement benefits and termination pay differs from that expected, or when assumptions are revised, actuarial gains and losses arise. These gains and losses are amortized over the expected average remaining service life of plan members for each respective plan.

Liabilities for selected employee future benefits (such as pensions, other retirement benefits and termination pay) represent the government’s share of the actuarial present values of employee benefits attributed to services rendered by employees and former employees, less its share of the market-related value of plan assets. The market-related values are determined in a rational and systematic manner so as to recognize market value asset gains and losses over a period of up to five years. In addition, the liability includes the Province’s share of the unamortized balance of actuarial gains or losses.

Assets

Assets are resources controlled by the government from which it has reasonable expectation of deriving future benefit. Assets are recognized in the year the transaction or event gives rise to the government’s control of the benefit.

Financial assets

Financial assets are resources that can be used to discharge existing liabilities or finance future operations. They include cash and cash equivalents, investments, accounts receivable, loans receivable, net pension assets, advances and investments in GBEs.

Cash and cash equivalents include cash or other short-term, liquid, low-risk instruments that are readily convertible to cash, typically within three months or less.

Investments include temporary investments and portfolio investments. Temporary investments are recorded at the lower of cost or market value. Portfolio investments are recorded at the lower of cost or their estimated net realizable value.

Accounts receivables are recorded at cost. A valuation allowance is recorded when collection of the receivable is considered doubtful.

Loans receivable are initially recorded at cost. A valuation allowance is recorded when collection of the loan receivable, or any part thereof, is considered doubtful.

Loans receivable include loans to GBEs and loans under the student loans program and the advanced manufacturing investment program. Loans receivable with significant concessionary terms are considered in part to be grants, and are recorded on the date of issuance at face value discounted by the amount of the grant portion. The grant portion is recognized as an expense at the date of issuance of the loan or when the concession is provided. The amount of the loan discount is amortized to revenue over the term of the loan.

Investment in GBEs represents the net assets of GBEs recorded on the modified equity basis as described under Principles of Consolidation.

Tangible capital assets

Tangible capital assets are recorded at historical cost less accumulated amortization. Historical cost includes the costs directly related to the acquisition, design, construction, development, improvement or betterment of tangible capital assets. Cost includes overheads directly attributable to construction and development, as well as interest related to financing during construction. All tangible capital assets, except assets under construction, land and land improvements with an indefinite life are amortized over the estimated useful lives of the assets on a straight-line basis. The useful lives of the Province’s tangible capital assets have been estimated as:

Maintenance and repair costs are recognized as an expense when incurred. Betterments or improvements that significantly increase or prolong the service life or capacity of a tangible capital asset are capitalized.

Other non-fnancial assets

Non-financial assets also include prepaid expenses and inventory of supplies.

Intangible assets, assets with historical or cultural value or works of art, and assets inherited by right of the Crown, such as Crown lands, forests, water and mineral resources, are not recognized in the Consolidated Statement of Financial Position.

f) Newly adopted accounting standards

The following standards issued by PSAB were effective April 1, 2017:

PS 2200 – Related Party Transaction

This new Section defines related parties and established disclosures required for related party transactions. Disclosure of information about related party transactions and the relationship underlying them is required when they have occurred at a value different from that which would have been arrived at if the parties were unrelated, and they have, or could have, a material financial effect on the financial statements.

PS 3420 – Inter-Entity Transactions

PS 3420 provides guidance on how to account for and report transactions between public sector entities that comprise a government’s reporting entity from both a provider and recipient perspective. The main features of the new section deal with the measurement of these transactions. Inter-entity transactions are disclosed in accordance with the requirements of PS 2200 – Related Party Transactions.

PS 3210 – Assets

PS 3210 provides additional guidance on the definition of assets and what is meant by economic resources, control, past transactions or events and from which future economic benefits are expected to be obtained.

PS 3320 – Contingent Assets

This new PSAB standard introduces a definition for possible assets arising from existing conditions or situations involving uncertainty which will ultimately be resolved when one or more future events occur that are not wholly within the government’s control. Disclosure is required under this standard when the occurrence of a confirming future event is considered likely (Note 14c).

PS 3380 – Contractual Rights

This standard requires disclosure of information pertaining to future rights to economic resources arising from contracts or agreements that will result in both an asset and revenue in the future. Such disclosure includes the nature, extent and timing of the contractual rights (Note 14b).

g) Future changes in accounting standards

PS 3430 – Restructuring Transactions

PSAB has issued a new standard on restructuring transactions. It provides guidance on accounting for, and reporting assets and liabilities transferred in restructuring transactions by both transferors and recipients. This standard is effective in fiscal year 2018–19 or earlier. The Province will follow this guidance for any restructurings completed after April 1, 2018.

PS 3280 – Asset Retirement Obligations

PSAB has issued a new standard on Asset Retirement Obligations. It provides guidance on the accounting and reporting for legal obligations associated with the retirement of tangible capital assets. This standard is effective in fiscal years starting 2021–2022 or earlier. The Province is currently assessing the impact of this standard on its Consolidated Financial Statements.

PS 1201 – Financial Statement Presentation

The new standard replaces PS 1200 – Financial Statement Presentation, and is effective in fiscal year 2021–22. It introduces a statement of remeasurement gains and losses. Requirements in PS 2601 – Foreign Currency Translation and PS 3450 –Financial Instruments can give rise to the presentation of gains and losses as remeasurement gains and losses. This is explained below.

PS 3450 – Financial Instruments and PS 2601 – Foreign Currency Translation

PSAB has introduced new sections on Financial Instruments and Foreign Currency Translation that categorize items to be accounted for at either fair value, cost or amortized cost. Fair value measurement applies to derivatives and portfolio investments in equity instruments that are quoted in an active market. Other financial assets and financial liabilities will generally be measured at cost or amortized cost. Until an item is derecognized (for example, through disposition) any gains and losses arising due to changes in fair value or foreign currency (remeasurements) will be reported in the Statement of Remeasurement Gains and Losses. These standards are due to come into effect on April 1, 2021. However, PSAB is currently investigating narrow scope amendments to these standards and has planned an exposure draft outlining proposed amendments for 2019. These standards are effective in fiscal year 2021–22. Adoption of these standards require the adoption of revised PS 1201 –Financial Statement Presentation and PS 3041 – Portfolio Investments. The Province is currently assessing the impact of this standard on its Consolidated Financial Statements.

PS 3041 – Portfolio Investments

The new standard replaces PS 3040 – Portfolio Investments, with revised guidance on accounting for and presentation and disclosure of portfolio investments. This standard is effective in fiscal year 2021–22 with the adoption of PS 3450, PS 2601 and PS 1201. The Province is currently assessing the impact of this standard on its Consolidated Financial Statements.

2. Debt

The Province borrows in both domestic and international markets. Debt of $348.7 billion as at March 31, 2018 (2016-17, $333.1 billion) is composed mainly of bonds and debentures issued in the short- and long-term domestic- and international-public capital markets and non-public debt held by certain federal and provincial public sector pension funds. Debt presented in this note comprises Debt Issued for Provincial Purposes of $329.5 billion (2016-17, $312.7 billion) and Ontario Electricity Financial Corporation (OEFC) Debt of $19.2 billion (2016-17, $20.4 billion). The following table presents the maturity schedule of the Province’s outstanding debt, by currency of repayment, expressed in Canadian dollars, and reflects the effects of related derivative contracts. See Note 4 for debt of BPS organizations and obligations under AFP arrangements.

Debt as at March 31 ($ Millions)

Fair value of debt outstanding approximates the amounts at which debt instruments could be exchanged in a current transaction between willing parties. In valuing the Province’s debt, fair value is estimated using discounted cash flows and other valuation techniques and is compared to public market quotations where available. These estimates are affected by the assumptions made concerning discount rates and the amount and timing of future cash flows.

The estimated fair value of debt as at March 31, 2018 was $384.2 billion (2016-17, $373.3 billion). This is higher than the book value of $348.7 billion (2016-17, $333.1 billion) because current interest rates are generally lower than the interest rates at which some of the debt was issued. The fair value of debt does not reflect the effect of related derivative contracts.

School Board Trust debt

A School Board Trust was created in June 2003 to permanently refinance debt incurred by 55 school boards. The Trust issued 30-year sinking fund debentures amounting to $891 million, and provided $882 million of the proceeds to the 55 school boards in exchange for the irrevocable right to receive future transfer payments from the Province related to this debt. An annual transfer payment is made by the Ministry of Education to the Trust’s sinking fund under the School Board Operating Grant program to retire the debt over 30 years. This debt, recorded net of the sinking fund of $261 million (2016-17, $239 million), is reflected in the Province’s debt.

3. Risk management and derivative financial instruments

The Province employs various risk management strategies and operates within strict risk exposure limits to ensure that exposure to financial risk is managed in a prudent and cost-effective manner. A variety of strategies are used, including the use of derivative financial instruments (“derivatives”).

Derivatives are financial contracts, the value of which is derived from underlying instruments. The Province uses derivatives to hedge interest rate risk and foreign currency risk. The Province elects to use hedge accounting for its foreign currency hedges.

Hedges are created primarily through swaps, which are legal contracts under which the Province agrees with another party to exchange cash flows based on one or more notional amounts using stipulated reference interest rates for a specified period. Swaps allow the Province to offset its existing obligations and thereby effectively convert them into obligations with more cost-effective characteristics. Other derivative instruments used by the Province include forward foreign exchange contracts, forward rate agreements, futures and options.

Foreign currency risk

Foreign exchange or currency risk is the risk that foreign currency debt principal and interest payments and foreign currency transactions will vary in Canadian dollar terms due to fluctuations in foreign exchange rates. To manage currency risk, the Province uses derivative contracts including forward foreign exchange contracts, futures, options and swaps to convert foreign currency cash flows into Canadian dollar cash flows. Most derivative contracts hedge the underlying debt by matching all the critical terms to achieve effectiveness. The term of forward foreign exchange contracts used for hedging is usually shorter than the term of the underlying debt, however hedge effectiveness is maintained by continuously rolling the forward foreign exchange contract over the remaining term of the underlying debt, or until replaced with a long-term derivative contract.

The current market risk policy allows the amount of unhedged foreign currency debt principal net of foreign currency holdings to reach a maximum of 5 per cent of Total Debt Issued for Provincial Purposes and OEFC. At March 31, 2018, the respective unhedged levels were 0.2 and 0.1 per cent (2016-17, 0.2 and nil per cent). As of March 31, 2018, unhedged debt was limited to debt issued in Swiss francs. A one-Swiss rappen appreciation of the Swiss currency, relative to the Canadian dollar, would result in unhedged debt denominated in Swiss francs increasing by $7.4 million (2016-17, $7.1 million) and a corresponding increase in interest on debt of $0.9 million (2016-17, $2.5 million). Total foreign exchange losses recognized in the Statement of Operations for 2017-18 were $30.7 million (2016-17, losses of $23.2 million).

Interest rate risk

Interest on debt expense may also vary as a result of changes in interest rates. In respect of Debt Issued for Provincial Purposes and OEFC debt, the risk is measured as interest rate resetting risk, which is the floating rate exposure plus fixed rate debt maturing within the next 12-month period net of liquid reserves as a percentage of Debt Issued for Provincial Purposes and OEFC debt, respectively.

The current market risk policy limits net interest rate resetting risk for Debt Issued for Provincial Purposes and OEFC debt to a maximum of 35 per cent. At March 31, 2018, the net interest rate resetting risk for Debt Issued for Provincial Purposes and OEFC debt was 10.9 per cent and -17.0 per cent, respectively (2016-17, 11.2 per cent and -3.1 per cent). Based on net floating rate exposure at March 31, 2018, plus planned refinancing of maturing fixed rate debt to March 31, 2019, a one per cent (100 basis point) increase in interest rates would result in an increase in interest on debt of approximately $250 million (2016-17, $300 million).

Liquidity risk

Liquidity risk is the risk that the Province will not be able to meet its current short-term financial obligations. To reduce liquidity risk the Province maintains liquid reserves — that is, cash and temporary investments (Note 8) adjusted for collateral (Note 13) at levels that are expected to meet future cash requirements and give the Province flexibility in the timing of issuing debt. Pledged assets are considered encumbered for liquidity purposes while collateral held that can be sold or repledged is a source of liquidity. In addition, the Province has short-term note programs as alternative sources of liquidity.

Credit risk

The use of derivatives introduces credit risk, which is the risk of a counterparty defaulting on contractual derivative obligations in which the Province has an unrealized gain. The table below presents the credit risk associated with the derivative financial instrument portfolio measured through the replacement value of derivative contracts, as at March 31, 2018.

The Province manages its credit risk exposure from derivatives by, among other things, dealing only with high-credit-quality counterparties and regularly monitoring compliance to credit limits. In addition, the Province enters into contractual agreements (“master agreements”) that provide for termination netting and, if applicable, payment netting with most of its counterparties. Gross Credit Risk Exposure represents the loss that the Province would incur if every counterparty to which the Province had credit risk exposure were to default at the same time, and the contracted netting provisions were not exercised or could not be enforced. Net Credit Risk Exposure is the loss including the mitigating impact of these netting provisions. Net Credit Risk Exposure (Net of Collateral) is the potential loss to the Province further mitigated by the collateral received from counterparties.

Derivative portfolio notional value

The table below presents a maturity schedule of the Province’s derivatives, by type, outstanding as at March 31, 2018, based on the notional amounts of the contracts. Notional amounts represent the volume of outstanding derivative contracts and are not indicative of credit risk, market risk or actual cash flows.

Derivative portfolio notional value and fair value of derivatives as at March 31($ Millions)

4. Other long-term financing

Other long-term financing comprises the total debt of the BPS organizations and obligations under AFP arrangements.

The following table presents the maturity schedule of other long-term financing, by type of financing.

Other Long-Term Financing of $14.1 billion as at March 31, 2018 (2016-17, $13.9 billion), includes BPS debt of $5.0 billion (2016-17, $5.0 billion), BPS AFP obligations of $5.6 billion (2016-17, $5.6 billion) and other AFP obligations of $3.5 billion (2016-17, $3.3 billion). The following table presents the maturity schedule of other long-term financing by type of financing.

Other long-term financing as at March 31, 2018 ($ Millions)

Interest expense on BPS debt of $362 million (2016-17, $339 million) is included in Interest on Debt.

5. Deferred revenue and capital contributions

In 2010–11 the Province renewed its long-standing business partnership with Teranet Inc. by extending Teranet’s exclusive licences to provide electronic land registration and writs services in Ontario for an additional 50 years. The Province received approximately a $1.0 billion upfront payment for the transaction, which is amortized into revenue over the life of the contract.

The Province provides a two-year vehicle licence plate renewal option and multi-year driver licence renewals (two years for seniors and five years for all others). Amounts received under these multi-year renewals are recognized as revenue over the periods covered by the licences.

Deferred capital contributions represent the unamortized portion of tangible capital assets or liabilities to construct or acquire tangible capital assets from specific-purpose funding received from the Government of Canada, municipalities or third parties. Deferred capital contributions are recorded in revenue over the estimated useful life of the underlying tangible capital asset when the tangible capital asset is placed in service.

6. Pensions and other employee future benefits

Pensions and other employee future benefits liability (asset)

Pensions and other employee future benefits expense

Pensions

The Province sponsors several pension plans. It is the sole sponsor of the Public Service Pension Plan (PSPP) and a joint sponsor of the Ontario Public Service Employees Union Pension Plan (OPSEUPP) and the Ontario Teachers’ Pension Plan (OTPP). These three plans are contributory defined benefit plans that provide Ontario government employees and elementary and secondary school teachers and administrators with a guaranteed amount of retirement income. Benefits are based primarily on the best five-year average salary of members and their length of service, and are indexed to changes in the Consumer Price Index to provide protection against inflation. Plan members normally contribute 8 to 12 per cent (2016-17, 7 to 11 per cent) of their salaries to these plans. The Province matches these contributions. The obligations for benefits and plan fund assets for OTPP and OPSEUPP exclude those employers not consolidated by the Province. See Note 19 for details of the restatement to the prior year numbers for this issue.

The Province is also responsible for sponsoring the Public Service Supplementary Benefits Plan and the Ontario Teachers’ Retirement Compensation Arrangement. Expenses and liabilities of these plans are included in the Pensions Expense and Pensions Liability reported in the above tables.

In addition to the Provincially sponsored plans, pension benefits for employees in the hospital and colleges sectors are provided by the Healthcare of Ontario Pension Plan (HOOPP) and the Colleges of Applied Arts and Technology Pension Plan (CAATPP) respectively, and are included in these financial statements.

HOOPP is a multi-employer pension plan covering employees of Ontario’s health care community. CAATPP is a multi-employer pension plan covering employees of the Colleges of Applied Arts and Technology in Ontario, the Ontario College Application Services and the Ontario College Library Services. Both of these plans are accounted for as multi-employer defined benefit plans that provide eligible members with a retirement income based on a formula that takes into account a member’s earnings history and length of service in the plan. The plans are financed by contributions from participating members and employers and by investment earnings. The province records a percentage of the net obligations of HOOPP and CAATPP based on the ratio of employer to employee contributions. The Province includes 48.8 per cent of the net obligation of HOOPP and 50 per cent of the net obligation of CAATPP.

The Province does not have unilateral control over the decisions regarding contribution levels or benefit changes for either the HOOPP or CAATPP multi-employer plans as the Province is not a member of the committees responsible for these decisions. Therefore, a valuation allowance is recorded to write down the net asset position in these plans, if any.

In September 2017, HOOPP amended the plan for benefit improvements. These improvements include an increase to lifetime pension from 1.5 per cent to 1.75 per cent of average earnings up to the average year’s maximum pensionable earnings (YMPE) for services prior to January 1, 2018. Post January 1, 2018, service benefits will be based on the average YMPE for the last five years of service instead of the average of the last three years. In addition, improvements have been made to post-retirement survivor benefits. The government’s share of the past service cost of these amendments of $1.5 billion is included in the 2017-18 pension expense estimate, fully offset by recognition of unamortized experience gains.

The obligation for benefits and plan fund assets of the above plans is based on actuarial accounting valuations that are performed annually. Funding of these plans is based on statutory actuarial funding valuations undertaken at least once every three years.

Information on contributory defined benefit plans is as follows:

Other employee future benefits

Other Employee Future Benefits are non-pension retirement benefits, post-employment benefits, compensated absences and termination benefits.

Non-pension retirement benefits

The Province provides dental, basic life insurance, supplementary health and hospital benefits to eligible retired employees through a group insured benefit plan. Certain Public Service Pension Plan members and OPSEU Pension Plan members who had not accrued the minimum eligibility requirement of ten years of pension service before January 1, 2017 are now required to have 20 years of pension service and retire to an immediate unreduced pension to be eligible to receive the post-retirement insured benefits. Further, such eligible members who commenced receipt of a pension on or after January 1, 2017, have the option to either participate in the current legacy post-retirement insured benefits plan and pay 50 per cent of the premium costs, or to participate in the new retiree-focused post-retirement benefits plan, at no cost to the member.

Optional enrolment in the retiree focused plan, at full cost to the retiree, is also available to employees hired before January 1, 2017, and who later retire to an immediate unreduced pension based on a minimum ten years of pension service and employees hired on and after January 1, 2017, who later retire to an immediate unreduced pension based on a minimum 20 years of pension service.

The liability for non-pension retirement benefits of $8.2 billion as at March 31, 2018 (2016-17, $8.1 billion), is included in the Other Employee Future Benefits Liability. The expense for 2017-18 of $363 million (2016-17, $279 million) is included in the Other Employee Future Benefits Expense.

The discount rate used in the non-pension retirement benefits calculation for 2017-18 is 3.35 per cent (2016-17, 3.25 per cent). The discount rate used by BPS organizations in the non-pension retirement benefits calculation for 2017-18 ranges from 2.00 per cent to 6.00 per cent (2016-17, 2.00 per cent to 6.00 per cent).

Post-employment benefits, compensated absences and termination benefits

The Province provides, on a self-insured basis, workers’ compensation benefits, long-term disability benefits and regular benefits to employees who are on long-term disability.

For all other employees subject to terms set out in collective agreements, and in the Management Board of Cabinet Compensation Directive as applicable, the Province provides termination pay equal to one week’s salary for each year of service up to a maximum of 50 per cent of their annual salary. Employees who have completed one year of service but less than five years are also entitled to termination pay in the event of death, retirement or release from employment. All employees who resign are not eligible for any severance pay in respect to service after December 2011.

The total post-employment benefits liability of $2.5 billion as at March 31, 2018   (2016-17, $2.4 billion) is included in the Other Employee Future Benefits Liability. The total post-employment benefits expense of $937 million in 2017-18 (2016-17, $679 million post-employment benefit expense) is included in the Other Employee Future Benefits Expense.

The discount rate used in the post-employment benefits, compensated absences and termination benefits calculations for 2017-18 is 2.90 per cent (2016-17, 2.55 per cent). The discount rate used by BPS organizations for the post-employment benefits in 2017-18 ranges from 2.00 per cent to 6.25 per cent (2016-17, 2.00 per cent to 6.50 per cent).

7. Other liabilities

Power purchase contracts

Power purchase contracts and related loan agreements were entered into by the former Ontario Hydro with non-utility generators (NUGs) located in Ontario. The contracts provided for the purchase of power at prices that were expected to be in excess of the future market price. Accordingly, the Ontario Electricity Financial Corporation (OEFC), as the legal continuation of Ontario Hydro, recorded a liability of $4.3 billion on a discounted cash-flow basis when Ontario Hydro was continued as OEFC on April 1, 1999. OEFC began receiving actual contract prices for power from ratepayers effective January 1, 2005, and therefore OEFC is amortizing this liability to revenue on annual basis. The decrease in the liability for power purchase contracts was $74 million (2016-17, $129 million), recorded to revenue, decreasing the outstanding power purchase contract liability as at March 31, 2018 to $104 million (2016-17, $178 million).

During the year ended March 31, 2018, OEFC's costs under power supply contracts totalled $191 million (2016-17, $838 million). Power supply contract costs exceeded power supply contract recoveries by $6 million due to the recognition of an allowance for doubtful accounts related to NUG loan receivables (as shown in Schedules 1, 3 and 4).

Liabilities for contaminated sites

The Province reports environmental liabilities related to the management and remediation of contaminated sites where the Province is obligated or likely obligated to incur such costs. A contaminated sites liability of $1.8 billion (2016-17, $1.8 billion) has been recorded based on environmental assessments or estimations for those sites where an assessment has not been conducted.

The Province’s ongoing efforts to assess contaminated sites may result in additional environmental remediation liabilities related to newly identified sites, or changes in the assessments or intended use of existing sites, including mine sites. Any changes to the Province’s liabilities for contaminated sites will be accrued in the year in which they are assessed as likely and reasonably estimable.

Amounts due to Fair Hydro Trust

The government has recorded an obligation to the Fair Hydro Trust as of March 31, 2018 in the amount of financing issued by the Fair Hydro Trust, or $1,639 million. In addition, in September 2018, the government made a decision to make a future proposed legislative change to the Ontario Fair Hydro Plan Act to cancel the Global Adjustment Refinancing component of the plan. The government will fund all the future obligations issued and outstanding as of the date the guarantee is invoked. See additional details in note 17.

Other funds and liabilities

Other funds and liabilities include pension and benefit funds related to the Provincial Judges’ Pension Fund, the Public Service, the Justice of the Peace, the Deputy Ministers’ and the Case Management Masters Supplementary Benefit Accounts, externally restricted funds and other long-term liabilities.

8. Investments

Temporary investments

Temporary investments primarily consist of investments in government bonds, including $11.8 billion (2016-17, $8.8 billion) of bonds and treasury bills issued by the Province of Ontario. These bonds and treasury bills are included in total debt outstanding in the schedule in Note 2. The fair value of temporary investments, including assets purchased and sold under resale and repurchase agreements at March 31, 2018, is $26.5 billion (2016-17, $15.9 billion). Fair value is determined using quoted market prices.

A resale agreement is an agreement between two parties where the Province purchases and subsequently resells a security at a specified price on a specified date. A repurchase agreement is an agreement between two parties where the Province sells and subsequently repurchases a security at a specified price on a specified date.

Other investments

Other investments represent the investments held by BPS organizations. These investments primarily consist of fixed-income securities. The fair value of these investments approximates book value.

9. Tangible capital assets

Tangible capital assets as at March 31 ($ Millions)

Land includes land acquired for transportation infrastructure, parks, buildings and other program use, and land improvements that have an indefinite life and are not being amortized. Land excludes Crown lands acquired by right.

Buildings include administrative and service structures, dams and engineering structures.

Transportation Infrastructure includes provincial highways, railways, bridges and related structures and facilities, but excludes land and buildings.

Machinery and Equipment consists mainly of hospital equipment.

Information Technology consists of computer hardware and software.

Other includes leased assets, vehicles, aircraft and other miscellaneous tangible capital assets owned by the government and its consolidated organizations.

Works of art and historical treasures are excluded from tangible capital assets.

Assets under construction have been included within the various asset categories presented above. The total value of assets under construction as at March 31, 2018, is $14.3 billion (2016-17, $12.2 billion). Capitalized interest for the fiscal year 2017-18 is $157 million (2016-17, $159 million). The cost of tangible capital assets under capital leases is $813 million (2016-17, $738 million), and their accumulated amortization is $324 million (2016-17, $294 million).

Amortization expense for the fiscal year 2017-18 totalled $5.6 billion (2016-17, $5.2 billion).

10. Changes in the fair value of Ontario Nuclear Funds

The Ontario Nuclear Funds Agreement (ONFA) Funds were established by Ontario Power Generation Inc. (OPG) and the Province to ensure that sufficient funds will be available to pay for the costs of nuclear station decommissioning and nuclear used fuel waste management.

Since April 1, 2007, the fair value of ONFA Funds has been reflected in the Province’s Consolidated Financial Statements. Unrealized gains and losses of ONFA Funds are included in Investment in Government Business Enterprises and recorded as an Increase (Decrease) in Fair Value of Ontario Nuclear Funds in the Consolidated Statement of Change in Net Debt and the Consolidated Statement of Change in Accumulated Deficit. Realized gains and losses of ONFA Funds are included in Income from Investment in Government Business Enterprises. Inter-organizational balances related to ONFA Funds are eliminated.

ONFA Funds incurred unrealized gains in 2017-18 of $435 million (2016-17, $1,094 million) that resulted in an increase in Investment in Government Business Enterprises and a corresponding decrease in Net Debt and Accumulated Deficit.

11. Sale of Hydro One Limited common shares

2017-18 sale

In May 2017, the Province sold 120 million common shares of Hydro One Limited (Hydro One) at $23.25 per common share through a secondary offering, generating approximately $2.8 billion in gross proceeds. Subsequent to this sale, the Province owned approximately 49.9 per cent of the outstanding common shares of Hydro One Limited. An accounting gain of $791 million was recognized in the 2017-18 financial results ($538 million, 2016-17) in connection with the sale of Hydro One common shares.

A summary of key direct components of the secondary offering of Hydro One shares includes:

In December 2017, First Nations in Ontario acquired 14.3 million common shares of Hydro One.

Subsequent to this transaction, the Province owned 47.4 per cent of the outstanding common shares of Hydro One Limited.

The First Nations purchased the shares at a price of $18 a share, or approximately $259 million, financed by a loan from the Ontario Government. The closing price of the shares on the date prior to the sale was $22.44 per share resulting in a conferred benefit of approximately $64 million. The gain of $23 million, resulting from the excess of the sale price of $18 per share over the book value of the shares, was deferred and will be recognized as revenue as the loans provided to purchase the shares are repaid.

2016-17 sale

In April 2016, the Province sold 14 per cent of Hydro One’s common shares at a price of $23.65 per common share through a secondary offering generating gross proceeds of approximately $2 billion. As of March 31, 2017, the Province owned approximately 70 per cent of Hydro One’s common shares.

An additional gain of $70 million was deferred in connection with a purchase by Ontario Power Generation (OPG) of 9 million common shares of Hydro One through the secondary offering. OPG purchased these shares to distribute to eligible OPG employees represented by the Power Workers’ Union and The Society of Energy Professionals as part of future share-delivery obligations under the collective agreements. This deferred gain will be recognized as revenue as the Hydro One common shares are distributed to qualifying OPG employees for up to a 15-year period starting in 2017-18. There is no agreement between OPG and the Province with respect to Hydro One common shares or the voting of those shares. Although the Province is the sole shareholder of OPG, it does not intend to influence OPG as it pertains to its voting rights of these shares.

A summary of key direct components of the secondary offering of Hydro One shares include:

Acquisition of Avista

In July 2017, Hydro One Limited announced an offer to acquire Avista, an electricity and gas utility based in Spokane, Washington for $6.7 billion Canadian (USD $5.3 billion). Hydro One Limited also announced a $1.54 billion Canadian bought deal of contingent convertible debentures including an overallotment amount to support the equity component of financing the acquisition as well as USD $2.6 billion in debt to buy Avista for $67 Canadian (USD $53) in cash per common share, a 24 per cent premium from the previous day’s market close. Hydro One stated that it expected the deal to close in the second half of 2018 subject to Avista common shareholder approval and certain U.S. state and federal regulatory and government approvals and clearances. The potential acquisition would dilute the Province’s ownership by approximately 5 per cent.

Hydro One deferred income tax regulatory asset

During 2017, the Ontario Energy Board (OEB) concluded that a portion of the Hydro One Networks' net deferred tax asset resulting from transition from the payments in lieu of tax regime under the Electricity Act (Ontario) to tax payments under the federal and provincial tax regime (resulting from Hydro One’s initial public offering) should also be shared with ratepayers. This ruling would result in an impairment of the deferred income tax regulatory asset of up to approximately $885 million, for which the Province would be impacted to the extent of its ownership in Hydro One Networks. In September 2018, the OEB granted Hydro One’s motion for reconsideration of the decision. The outcome of the reconsideration is not determinable.

12. Sale of Hydro One Brampton Networks Inc

In August 2015, Hydro One transferred all of the issued and outstanding shares of Hydro One Brampton Networks Inc. to the Province as a dividend-in-kind. Hydro One also transferred to the Province all of the long-term intercompany debt plus accrued interest owed by Hydro One Brampton Networks Inc. to Hydro One as a return of stated capital. The transfers were made to the newly formed Brampton Distribution Holdco Inc., creating a new government business enterprise for the Province. On February 28^th, 2017, the Province, through Brampton Distribution Holdco Inc., sold its entire interest in Hydro One Brampton Networks Inc. through a sale of shares to Alectra Utilities Corporation (Alectra). As a result, the Province recognized a gain of $109 million in its Consolidated Financial Statements. A summary of key direct components of the sale of Hydro One Brampton Networks Inc. includes:

Subsequent to the sale of Hydro One Brampton Networks Inc., Brampton Distribution Holdco Inc. is no longer a government business enterprise and is classified as an Other Government Organization and consolidated on a line-by-line basis.

In March 2018, Brampton Distribution Holdco was dissolved and a final dividend of $608 million was paid to the Province.

13. Contingent liabilities

Obligations Guaranteed by the Province

Loan guarantees include guarantees or indemnifications provided by the Province or government organizations. The authorized limit for loans guaranteed by the Province as at March 31, 2018, was $1.5 billion (2016-17, $1.4 billion). The outstanding loans guaranteed amounted to $0.7 billion as at March 31, 2018 (2016-17, $0.7 billion). A provision of $1.5 million (2016-17, $1.8 million), based on an estimate of the likely loss arising from guarantees under the Student Support Programs, has been reflected in these financial statements.

Other contingencies for this year is $0.2 billion (2016-17, $0.2 billion).

Ontario Nuclear Funds Agreement

Under the Ontario Nuclear Funds Agreement (ONFA), the Province is liable to make payments should the cost estimate for nuclear used fuel waste management rise above specified thresholds for a fixed volume of used fuel. The likelihood and amount by which the cost estimate could rise above these thresholds cannot be determined at this time. The cost estimate will be updated periodically to reflect new developments in the management of nuclear used fuel waste.

In addition, under ONFA, the Province guarantees a return of 3.25 per cent over the Ontario Consumer Price Index for the portion of the nuclear used fuel waste management segregated fund related to the fixed volume of used fuel. If the earnings on assets in that fund related to the fixed volume exceed the guaranteed rate, the Province is entitled to the excess.

Until the end of 2017, two agreements satisfied the Canadian Nuclear Safety Commission (CNSC) licensing requirements for financial guarantees in respect of OPG's nuclear station decommissioning and nuclear waste management obligations. One agreement gave the CNSC access (in prescribed circumstances) to the segregated funds established under ONFA. The other agreement between the Province and the CNSC, in place to the end of 2017, provided a direct provincial guarantee to the CNSC on behalf of OPG. This guarantee related to the portion of the decommissioning and waste management obligations not funded by the estimated value of ONFA funds as at January 1, 2013. In return, the Province received from OPG an annual fee equal to 0.5 per cent of the value of the guarantee. In January 2017, OPG paid a guarantee fee of approximately $8 million to the Province based on the guarantee amount of $1.6 billion. The provincial guarantee, for up to $1.6 billion, was in effect from January 1, 2013, through December 31, 2017.

On November 28, 2017, the CNSC announced that it accepted OPG's proposed revised financial guarantee for the 2018–2022 period. Effective January 1, 2018, the CNSC's financial guarantee requirement is satisfied by the value of the ONFA funds, without the need for a direct provincial guarantee to the CNSC on behalf of OPG.

Social housing – loan insurance agreements

For all non-profit housing projects in the provincial portfolio, the Province is liable to indemnify and reimburse the Canada Mortgage and Housing Corporation (CMHC) for any net costs, including any environmental liabilities, incurred as a result of project defaults through the Ministry of Municipal Affairs / Housing or the Ontario Mortgage and Housing Corporation.

At March 31, 2018, there were $4.1 billion (2016-17, $4.2 billion) of mortgage loans outstanding. As operating subsidies provided by the Province are sufficient to ensure that all mortgage payments can be made when due, default is unlikely. To date, there have been no claims for defaults on insured mortgage loans.

Claims against the crown

There are claims outstanding against the Crown, of which 56 (2016-17, 59) are for amounts over $50 million. These claims arise from legal action, either in progress or threatened, in respect of Aboriginal land claims, breach of contract, damages to persons and property, and like items. The cost to the Province, if any, cannot be determined because the financial outcome of these actions is uncertain. For a detailed listing of claims against the ministries, refer to Volume 1, “Claims Against the Crown.”

On April 20, 2016, the Ontario Superior Court determined that Bill 115, the Putting Students First Act, 2012, was in contravention of the unions’ right to collective bargaining under the Charter of Rights and Freedoms. The Court did not impose a penalty on the Province and directed that the parties attempt to negotiate a remedy. The impact on the 2016-17 Consolidated Financial Statements of the related accrual was based on the Province’s best estimation of the remedy amount on information available, the extent of which was not disclosed given that agreements had not been reached with all applicant parties. At March 31, 2018, not all of the applicant parties have reached an agreement with the Crown. One of the applicant parties has subsequently returned to court to decide on the remedy amount.

Canadian Blood Services

The provincial and territorial governments of Canada have entered into a Canadian Blood Services Excess Insurance Captive Support Agreement (the “Captive Support Agreement”) with Canadian Blood Services (CBS) and Canadian Blood Services Captive Insurance Company Limited (CBSI), a wholly owned subsidiary of CBS. Under the Captive Support Agreement, each government indemnifies CBSI for its pro-rata share of any payments that CBSI becomes obliged to make under a comprehensive blood risks insurance policy it provides to CBS. The policy has an overall limit of $750 million which may cover settlements, judgments and defense costs. The policy is in excess of, and secondary to, a $250 million comprehensive insurance policy underwritten by CBS Insurance Company Limited, a subsidiary of CBS. Given current populations, Ontario’s maximum potential liability under the Captive Support Agreement is approximately $376 million. The Province is not aware of any proceedings that could lead to a claim against it under the Captive Support Agreement.

Legal Aid Ontario – certificates

Legal Aid Ontario (LAO) issues certificates to individuals seeking legal aid assistance. Each certificate issued authorizes legal services to be performed within the tariff guidelines. As at March 31, 2018, a potential $64.8 million (2016-17, $58.3 million) could still be incurred on certificates issued on or before March 31, 2018, over and above the billings received to date.

Contaminated sites

The Province has identified contingent liabilities related to 136 sites (2016-17, 125 sites) that may have potential liabilities of $367 million (2016-17, $365 million). A liability has not been recorded for these sites at the financial reporting date because either the likelihood of the government becoming responsible for the site is not determinable, the amount of the liability cannot be estimated, or both.

Tax assessments

The province signed a Memorandum of Agreement with the Government of Canada to transition to a single administration for corporate tax for tax years ending after December 31, 2008. As part of the agreement, the Canada Revenue Agency (CRA) is responsible for the administration of audit activities, taxpayer objections and any appeals that may arise from objections administered by the CRA. At March 31, 2018, there were 217 (2017 – 320) Ontario-specific matters and 39 (2017 – 128) federal and consequential matters which are under objection and/or appeal. The resulting loss, if any, cannot be reasonable estimated.

Land and land-related claims

A land or land-related claim is a formal allegation made by an Indigenous community that it is legally entitled to land, financial, or other compensation. Currently 60 land claims are under negotiation, accepted for negotiation, or under review. A liability is recorded if the settlement of the claim is assessed as likely and the amount of the settlement can be reasonably estimated.

General real estate portfolio – lease obligation

Prior to the amalgamation of Stadium Corporation of Ontario Limited (STADCO) with Infrastructure Ontario and the Ontario Realty Corporation on June 6, 2011, all assets, liabilities and operations of STADCO were transferred to the General Real Estate Portfolio (GREP), including ground leases dated June 3, 1989, with Canada Lands Company (CLC) for the SkyDome Lands and the sublease to Rogers Stadium Limited Partnership (sub-tenant). Under the terms of the ground lease, GREP is responsible for base rent, realty taxes, utilities and certain operating costs which are assumed by the sub-tenant under the terms of the sub-lease. In the event of a default by the sub-tenant, the potential financial impact to GREP is estimated to be the base rent, in the range of $300 to $400 annually plus realty taxes, utilities and certain operating costs.

Collateral

The Province has entered into securities repurchase agreements and collateralized swap agreements with certain counterparties. Under the terms of those agreements, the Province may be required to pledge and/or receive assets relating to obligations to the counterparties. In the normal course of business these pledged securities will be returned to the pledger when there are no longer any outstanding obligations.

As at March 31, 2018, the Province pledged assets in the carrying amount of $17 million (2016-17, $105 million), which are included in Investments and/or Cash and Cash Equivalents.

14. a. Contractual obligations

The Province has entered into a number of multiple-year alternative financing and procurement contracts for the construction of assets and delivery of services. The contractual obligations represent the unperformed capital and operating portion of the contracts and will become liabilities in the future when the terms of the contracts are met.

b. Contractual rights

In May 2010, the Province reached a deal with Teranet to provide a 50-year extension to its original agreement in exchange for $1.0 billion cash up front. As part of the new agreement, Teranet has agreed to pay the Province annual royalty payments beginning in 2017 and ending in 2067. The royalty payments are contingent upon Teranet’s financial performance. The Province recognized $28.7 million in revenue relating to royalty payments pertaining to the contractual rights from Teranet in 2017-18 (2016-17, $nil).

Contractual rights are of a certain nature and that they will become assets in the future when the terms of the contracts are met.

c. Contingent assets

The Province has made claims against a number of companies in the tobacco industry pursuant to the Tobacco Damages and Health Care Costs Recovery Act, 2009. Theclaims are in the pre-trial stage and an estimate of any payment to the province is not estimable.

15. Trust funds under administration

The following trust funds under administration are not included in the Consolidated Financial Statements of the Province.

The Workplace Safety and Insurance Board (WSIB) is responsible for administering the Workplace Safety and Insurance Act, 1997, which establishes a no-fault insurance scheme that provides benefits to workers who experience workplace injuries or illnesses.

The Public Guardian and Trustee for the Province of Ontario delivers a unique and diverse range of services that safeguard the legal, personal and financial interests of certain private individuals and estates. It also plays an important role in helping to protect charitable property in Ontario.

The Motor Vehicle Accident Claims Fund operates under the authority of the Motor Vehicle Accident Claims Act. The Act responds to claims that meet certain criteria. Currently, the fund provides two types of coverage: third-party bodily injury and property damage liability; and statutory accident benefits in accordance with legislated requirements.

The Pension Benefits Guarantee Fund (PBGF) provides protection, subject to specific maximums and specific exclusions, to Ontario members and beneficiaries of privately sponsored single-employer defined benefit pension plans in the event of plan sponsor insolvency. The PBGF is governed by the Pension Benefits Act and its Regulation and is administered by the Superintendent of the Financial Services Commission of Ontario.

The Deposit Insurance Corporation of Ontario (DICO) was established under the Credit Unions and Caisses Populaires Act, 1994. DICO's role is to protect depositors of Ontario credit unions and caisses populaires from the loss of their deposits. Deposit insurance is part of a comprehensive depositor-protection program for all Ontario credit unions, which is backed by the Credit Unions and Caisses Populaires Act, 1994.

Summary financial information from the most recent financial statements of trust funds under administration is provided below. The financial statements of the WSIB, the Public Guardian and Trustee for the Province of Ontario and DICO have been prepared in accordance with IFRS (see Volume 2 for additional detailed financial statements).

Other Trust Funds as at March 31 ($ Millions)

Unfunded liabilities of trusts under administration are not included in the Province’s Consolidated Financial Statements as it is intended that they will be discharged by external parties. The most recent financial statements of these trusts are reproduced in Volume 2.

16. Related party disclosures and inter-entity transactions

The Province of Ontario enters into transactions with parties within the reporting entity, including provincial crown corporations, agencies, boards, commissions and government not-for-profit organizations, in the normal course of operations. These inter-entity transactions are those conducted between related parties with common control or ownership are recorded at the exchange value and have been eliminated for purposes of consolidated reporting.

Related party transactions can also include transactions with entities outside the reporting entity where a member of the Province’s key management personnel, or their spouse or dependent, is key management personnel of the counterparty to a transaction with the Province. As key management personnel, they govern or share the power to determine the ongoing financial and operating decisions of that counterparty. Key management personnel of the Province are those individuals having authority and responsibility for planning, directing and controlling the activities of the Government, and have been identified as ministers and deputy ministers for the purpose of this reporting.

The province has a wide variety of controls in place to ensure that key management personnel do not enter into transactions with related parties. For 2017-18 there were no material transactions between related parties which occurred at a value different from that which would have been arrived at if the parties were unrelated.

17. Accounting for regulated entities

Accounting for OPG and Hydro One

The Province is accounting for the results for Hydro One Limited (Hydro One) and Ontario Power Generation (OPG) using the modified equity basis and IFRS (including IFRS 14). Previously, the Province had used Generally Accepted Accounting Principles in the United States (US GAAP), the accounting standards used by these entities in preparing their stand-alone financial statements, in applying the modified equity basis.

Accounting for Ontario’s reduction in current electricity prices

In May 2017, the Ontario Fair Hydro Plan Act, 2017 (the Act) was enacted into law.

The components of the plan to reduce current electricity prices include both aspects of the plan provided for in the Act as well as other policy decisions, as follows:

1. The Ontario Rebate for Electricity Consumers (OREC) in the amount equivalent to the 8 per cent provincial portion of the Harmonized Sales Tax (HST) on electricity bills of eligible residential, small business and farm consumers, commencing January 2017, funded by the government from general revenue and/or borrowing (referred to as the “tax base”);
2. New programs and changes to and transfer of funding of certain existing electricity relief programs from the electricity rate base to the tax base such as:
   • Ontario Electricity Support Program;
   • certain programs supporting rural electricity consumers;
   • support for First Nations residential consumers living on reserve; and
   • a fund established to provide free, energy efficient devices and products to qualified individuals and organizations.
3. An additional reduction in current electricity bills for eligible residential, small business and farm customers, commencing July 1, 2017. This reduction was to be recovered from electricity ratepayers in future years (referred to as the Global Adjustment Refinancing).

In September 2018, the government made a decision to make a future change to the Ontario Fair Hydro Plan Act, 2017 to cancel the Global Adjustment Refinancing component as designed, including reducing the amount of the current electricity price reduction to be borne by future ratepayers, and making any recovery from future ratepayers optional.

The Trust funded the cash shortfall from the IESO during the year ($1,639 million) with subordinated debt from OPG to a maximum of 49 per cent of the Trust’s total outstanding debt, and the balance from third party lenders. Of the amount lent to the Trust from OPG, approximately 90 per cent of that amount ($721 million) was funded by equity injections from the Province, and 10 per cent was funded by debt borrowed by OPG from third party lenders ($82 million). As of March 31, 2018, the Trust owed $803 million to OPG and $836 million to third party lenders. The remaining unfunded shortfall incurred by the IESO as at March 31, 2018 was $150 million.

These transactions are recorded in accordance with PSAS, consistent with the recommendations of the Independent Financial Commission of Inquiry (see note 19) and reflect the policy decision by the government.

In summary, the impact on expenses and assets of the consolidated financial statements of the components of the plan to reduce current electricity rates consistent with the decision of the government in September 2018 is as follows:

Debt incurred to fund item 3 is recorded based on the source of the financing:

18. Subsequent events

Subsequent to March 31, 2018, the government cancelled programs which will result in estimated savings in future years including approximately $400 million in 2018–19 as compared to the 2018 Budget published in March 2018. The cancelled programs include the following:

Social Assistance and Basic Income Pilot wind-down

On July 31, 2018, the Province announced that they will withdraw all funding decisions related to Social Assistance investments announced in the spring 2018 Budget, and scheduled 2018–19 regulations that were to take effect September 1, 2018 under the Ontario Works Act, 1997, andthe Ontario Disability Support Program Act, 1997. As part of this reform, the Province will be winding down Ontario’s Basic Income three-year research project.

OHIP+

On June 30, 2018, the Province announced OHIP+ reform, which will no longer provide free prescriptions to those with private health coverage, at a date to be determined. The financial impact of this cancellation compared to the 2018 Budget published in March 2018 is still being assessed.

In addition, the government cancelled programs which will result in additional estimated net costs of $1.1 billion for 2018–19, compared to the 2018 Budget released in March 2018. The cancelled programs include the following:

Cap and Trade System wind-down

On July 3, 2018, Ontario Reg. 386/18 came into effect, ending the Cap and Trade Program established under the Climate Change Mitigation and Low-carbon Economy Act, 2016, resulting in the cancellation of the remaining auctions in fiscal 2018–19.

Renewable energy contracts

In July 2018, pursuant to a Directive from the Minister of Energy, Northern Development and Mines, the Independent Electricity System Operator (IESO) commenced the wind down of 758 renewable energy contracts. In addition, in July 2018, the White Pines Wind Project Termination Act, 2018, received Royal Assent, terminating the contract for the White Pines Wind Project.

19. Changes in accounting policy and reclassifications

A. Change in accounting for pension assets of jointly sponsored pension plans

The 2017-18 Consolidated Financial Statements reflect a change in accounting for net pension assets of the Province’s jointly sponsored pension plans, as compared to the 2016-17 Consolidated Financial Statements. The change affects the Province’s accounting for both the Ontario Teachers’ Pension Plan (OTPP) and the Ontario Public Service Employees Union Pension Plan (OPSEUPP).

As described in Public Sector Accounting Standards, a net pension asset arises when the government’s total contributions to a plan, including income earned thereon, are greater than the cumulative retirement benefit expense recognized since the start of the plan. Contributions reflect the funding objectives of the plan. The benefit expense reflects the estimated cost of the pensions earned during the year that will be paid out to retirees in the future. Canadian Public Sector Accounting Standards (PSAS) requires the write-down of a net pension asset through recording a valuation allowance when the government is not expected to benefit from the net pension asset.

In July 2018, the government announced the creation of an Independent Financial Commission of Inquiry (Commission) under the Public Inquiries Act, 2009. The mandate of the Commission included a requirement to “perform a retrospective assessment of government accounting practices, including pensions, electricity refinancing and any other matters deemed relevant to inform the finalization of the 2017-18 Consolidated Financial Statements of the Province” (OIC 1005/2018). The Commission reported to the Minister of Finance and the Attorney General on August 30, 2018.

In September 2018, the government accepted the Commission recommendations.

Accordingly, these financial statements reflect the recognition of a full valuation allowance for both of the jointly sponsored plans, thereby eliminating the net pension assets. The 2016-17 balances have been restated on a basis consistent with the 2017-18 financial statements. A summary of the impact of the 2016-17 restatement is shown in below table.

B. Market accounts

For 2016 and 2017, the Independent Electricity System Operator (IESO) recorded the amounts due to the power generators and amounts due from the local distribution companies, among others, in its financial statements, which were collectively referred to as the Market Accounts. In 2017-18, the Province removed these financial assets and obligations from the Consolidated Financial Statements of the Province. This impact on this change to the 2016-17 balances is shown in table below. This change has no impact on the net deficit, net debt or accumulated deficit.

C. Budget reclassification

For comparability and consistency purposes, the 2017 Budget has been reclassified for changes in reporting revenues and expenses for hospitals, school boards and colleges. This change increases the total revenues and expenses of the Province, but has no impact on the annual deficit. The change was made starting with the 2016-17 Public Accounts to fully comply with Public Sector Accounting Standards.

A summary of the reclassifications to the approved 2017-18 Budget for comparative purposes is provided below.

D. Comparative figures

Certain comparative figures have been reclassified as necessary to conform to the 2017-18 presentation.

Schedules to the Consolidated Financial Statements

Province of Ontario schedule 1: revenue by source

Province of Ontario schedule 2: revenue by sector

Province of Ontario schedule 3: expense by sector^{footnote 29[29]}

Province of Ontario schedule 4: expense by Ministry

Province of Ontario schedule 5: accounts payable and accrued liabilities

Province of Ontario schedule 6: accounts receivable

Province of Ontario schedule 7: loans receivable

Province of Ontario schedule 8: Government organizations^{footnote 56[56]}

Province of Ontario Schedule 9: Government Business Enterprises^{footnote 60[60]}

Summary financial information of Government Business Enterprises is provided below.