CONSOLIDATED
FINANCIAL
STATEMENTS

Office of the Auditor General of Ontario
Bureau du vérificateur général de l'Ontario

Auditor's Report

To the Legislative Assembly of the
Province of Ontario

I have audited the consolidated statement of financial position of the Province of Ontario as at March 31, 2007 and the consolidated statements of operations, change in net debt, and cash flow for the year then ended. These financial statements are the responsibility of the Government of Ontario. 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 plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. The audit also includes assessing the accounting principles used and significant estimates made by the Government, as well as evaluating the overall financial statement presentation.

In my opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Province as at March 31, 2007 and the results of its operations, the changes in its net debt, and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

Toronto, Ontario July 23, 2007	Jim McCarter, CA Auditor General Licensed Public Accountant

Box 105, 15th Floor
20 Dundas Street West
Toronto, Ontario
M5G 2C2
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fax 416-326-3812

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www.auditor.on.ca

Province of Ontario Consolidated Statement of Operations
($ Millions)	2006–07 Budget1	2006–07 Actual	2005-06 Actual
Revenues (Schedule 1)
Personal Income Tax	21,671	23,655	21,041
Retail Sales Tax	16,165	16,228	15,554
Corporations Tax	9,845	10,845	9,984
Employer Health Tax	4,314	4,371	4,197
Gasoline and Fuel Taxes	3,045	3,033	3,010
Ontario Health Premium	2,551	2,589	2,350
Other Taxes	3,683	3,589	3,781
Total Taxation	61,274	64,310	59,917
Government of Canada	13,582	14,036	13,251
Income from Investment in Government Business Enterprises (Schedule 8)	3,920	4,196	4,308
Other	6,954	7,855	6,749
	85,730	90,397	84,225
Expenses (Schedules 2 and 3)
Health	35,516	35,698	32,947
Education	12,062	12,058	11,621
Children's and Social Services	10,227	10,442	9,985
Interest on Debt	9,429	8,831	9,019
Environment, Resources and Economic Development	6,534	7,697	8,441
Postsecondary Education and Training	5,201	5,383	4,689
Justice	3,167	3,224	3,037
General Government and Other	4,944	4,795	4,188
	87,080	88,128	83,927
Reserve	1,000
Annual Surplus (Deficit)	(2,350)	2,269	298
Accumulated Deficit at Beginning of Year		(109,155)	(125,743)
Less: Ontario Electricity Financial Corporation Unfunded Liability Adjustment at Beginning of Year (Note 4)		110
Less: Net Assets of Broader Public Sector Organizations at Beginning of Year		–	16,290
Accumulated Deficit at End of Year		(106,776)	(109,155)
See accompanying Notes and Schedules to the Financial Statements.
1 Amounts reported in 2006 Budget.

Province of Ontario Consolidated Statement of Financial Position
As at March 31 ($ Millions)		2007		2006
Liabilities
Accounts Payable and Accrued Liabilities (Schedule 4)		12,463		13,206
Debt (Note 2)	156,993		154,906
Unamortized Foreign Exchange Gains	318		426
		157,311		155,332
Power Purchase Contracts (Note 4)		2,977		3,389
Nuclear Funding Liability (Note 4)		–		768
Pensions and Other Employee Future Benefits (Note 5)		1,398		1,686
Other Liabilities (Note 6)		4,398		3,858
		178,547		178,239
Financial Assets
Cash and Cash Equivalents		4,329		4,447
Temporary Investments (Note 7)		2,293		2,979
Accounts Receivable (Schedule 5)		7,876		6,423
Loans Receivable (Schedule 6)		7,378		6,875
Other Assets		1,590		2,417
Investment in Government Business Enterprises (Schedule 8)		13,981		13,170
		37,447		36,311
Net Debt		(141,100)		(141,928)
Non-Financial Assets
Tangible Capital Assets (Note 8)		17,245		16,034
Net Assets of Broader Public Sector Organizations (Schedule 9)		17,079		16,739
		34,324		32,773
Accumulated Deficit		(106,776)		(109,155)
Contingent Liabilities (Note 9) and Contractual Obligations (Note 10)
See accompanying Notes and Schedules to the Financial Statements.

Province of Ontario Consolidated Statement of Change in Net Debt
For the year ended March 31 ($ Millions)	2007		2006
Annual Surplus		2,269		298
Acquisition of Tangible Capital Assets	(2,120)		(1,675)
Amortization of Tangible Capital Assets (Note 8)	838		815
Proceeds on Sale of Tangible Capital Assets	20		45
Loss (Gain) on Sale of Tangible Capital Assets	51		(41)
Increase in Net Assets of Broader Public Sector Organizations (Schedule 9)
	(340)		(449)
		(1,551)		(1,305)
Decrease (Increase) in Net Debt	718		(1,007)
Net Debt at Beginning of Year	(141,928)		(140,921)
Less: Ontario Electricity Financial Corporation Unfunded Liability Adjustment at Beginning of Year (Note 4)	110		–
Net Debt at End of Year	(141,100)		(141,928)
See accompanying Notes and Schedules to the Financial Statements.

Province of Ontario Consolidated Statement of Cash Flow
For the year ended March 31 ($ Millions)	2007		2006
Operating Transactions
Annual Surplus		2,269		298
Amortization of Tangible Capital Assets (Note 8)		838		815
Loss (Gain) on Sale of Tangible Capital Assets		51		(41)
Income from Investment in Government Business Enterprises (Schedule 8)		(4,196)		(4,308)
Remittances from Government Business Enterprises (Schedule 8)		3,385		3,381
Decrease in Liability for Pensions and Other Employee Future Benefits (Note 5)		(288)		(61)
Decrease in Power Purchase Contracts (Note 4)		(412)		(396)
Decrease in Nuclear Funding Liability (Note 4)		(768)		(642)
Decrease in Accounts Payable and Accrued Liabilities (Schedule 4)		(743)		(371)
Decrease in Other Items		(479)		(2,153)
Cash Applied to Operating Transactions		(343)		(3,478)
Capital Transactions
Acquisition of Tangible Capital Assets		(2,120)		(1,675)
Proceeds from Sale of Tangible Capital Assets		20		45
Increase in Net Assets of Broader Public Sector Organizations (Schedule 9)		(340)		(449)
Cash Applied to Capital Transactions		(2,440)		(2,079)
Investing Transactions
Decrease in Temporary Investments (Note 7)		686		1,342
Cash Provided by Investing Transactions		686		1,342
Financing Transactions
Debt Issued		19,210		19,955
Debt Retired		(17,231)		(21,424)
Cash Provided by (Applied to) Financing Transactions		1,979		(1,469)
Net Decrease in Cash and Cash Equivalents		(118)		(5,684)
Cash and Cash Equivalents at Beginning of Year		4,447		10,131
Cash and Cash Equivalents at End of Year		4,329		4,447
See accompanying Notes and Schedules to the Financial Statements.

Notes to the Consolidated Financial Statements

(all tables in millions of dollars)

1. Summary of Significant Accounting Policies

Basis of Accounting

The Consolidated Financial Statements are prepared in accordance with the accounting principles for governments recommended by the Public Sector Accounting Board (PSAB) of the Canadian Institute of Chartered Accountants (CICA) and, where applicable, the recommendations of the Accounting Standards Board (AcSB) of the CICA.

Reporting Entity

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

Public hospitals, specialty psychiatric hospitals, school boards and colleges, collectively referred to as the “Broader Public Sector (BPS) organizations,” are consolidated on a sector basis in these financial statements.

Other organizations that are controlled by the Province are individually consolidated provided they meet one of the following criteria: i) their revenues, expenses, assets or liabilities are greater than $50 million, or ii) their outside sources of revenues, deficit or surplus are greater than $10 million. A listing of these organizations is provided in Schedule 7.

The activities of organizations that do not meet the materiality thresholds are reflected in these financial statements through the accounts of the ministries responsible for them. Trusts administered by the government on behalf of other parties are excluded from the reporting entity but are disclosed in Note 11.

Principles of Consolidation

Government organizations, except for government business enterprises and broader public sector organizations, are consolidated on a line-by-line basis with the Consolidated Revenue Fund in these financial statements. Where necessary, adjustments are made to present the accounts of these organizations on a basis consistent with the accounting policies described below, and to eliminate significant inter-organizational accounts and transactions.

Government business enterprises are defined as those government organizations that i) have the financial and operating authority to carry on a business; ii) have as their principal activity and source of revenue the selling of goods and services to individuals and non-government organizations; and iii) are able to maintain their operations and meet their obligations from revenues generated outside the government reporting entity. The activities of government business enterprises are recorded in the financial statements using the modified equity method. Under this method, government business enterprises are reported in accordance with the accounting principles generally accepted for business enterprises.  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 combined net income is shown as a separate item, Income from Investment in Government Business Enterprises, on the Consolidated Statement of Operations. 

Broader Public Sector (BPS) organizations are recorded in the financial statements using the equity method. Under the equity method or “one-line” basis, BPS organizations are reported in accordance with the accounting principles generally accepted for governments.  Significant gains and losses resulting from inter-organizational transactions occurring from within the government reporting entity are eliminated upon consolidation. Their combined net assets are included in the financial statements as Net Assets of Broader Public Sector Organizations on the Consolidated Statement of Financial Position. Their combined net expenses, that is, the total annual expenses of all BPS organizations net of revenues they receive from sources other than the Province, are included in Expenses on the Consolidated Statement of Operations. The combined net expenses of hospitals are included with Health expenses, school board net expenses are included with Education expenses, and college net expenses are included in Postsecondary Education and Training expenses in the Consolidated Statement of Operations.

Measurement Uncertainty

Uncertainty in the determination of the amount at which an item is recognized in the financial statements is known as measurement uncertainty. Such uncertainty exists when it is reasonably possible that there could be a material variance between the recognized amount and another reasonably possible amount.

Measurement uncertainty in these financial statements and notes thereto exists in the valuation of the power purchase contracts, the accruals for pensions and other employee future benefits obligations, the value of tangible capital assets, and the accruals for personal income and corporations tax revenues.

The nature of the uncertainty in the valuation of the power purchase contracts arises from fluctuations in market prices that would impact this liability. The uncertainty related to pensions and other employee future benefits accruals arises because actual results may differ significantly from the Province’s best 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). Uncertainty in the value of tangible capital assets exists because of differences between estimated useful lives and actual useful lives. Uncertainty related to the accrual for personal tax and corporations tax revenues arises because of the possible difference between the estimated and actual economic growth and the impact of future tax assessments on taxes receivable.

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.

Revenues

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, which relate to revenues that will be earned in a subsequent fiscal year, are deferred and reported as liabilities.

Expenses

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

• accounts payable accruals
• transfer payments
• interest accruing on debt
• pension and other employee future benefits
• the amortization of tangible capital assets
• net expenses of hospitals, school boards and colleges.

Transfer payments are recognized in the year during which the payment is authorized, all eligibility criteria are met and a reasonable estimate of the amount can be made.

Interest on Debt includes the following: i) interest on outstanding 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) servicing 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 cost of benefits including the current year’s cost of benefits, interest on the net benefits liability or surplus, amortization of actuarial gains or losses, cost of or gain on plan amendment, and other adjustments.

Other employee future benefits are either recognized in the period when the event that obligates the government occurs or when the benefits are earned and accumulated by employees.

The costs of buildings and transportation infrastructure owned by the Province are amortized and recognized as expenses over their estimated useful lives on a straight-line basis. Amortization of tangible capital assets owned by government organizations consolidated in these financial statements is also included in expenses.

The Province is phasing in the implementation of PSAB recommendations on tangible capital assets. Consequently, the costs of acquisition of other tangible capital assets owned by the Province, such as furniture and vehicles, are recorded as expenses. Also, for significant capital leases entered into by the Province, an amount equal to the present value of the minimum lease payments required over the term of the lease is recorded as an expense at the inception of the lease, with an offsetting liability recorded for the lease obligation.

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 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 government business enterprises.

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 debt, liabilities and assets are translated to Canadian dollars at year-end rates of exchange and any exchange gains or losses are amortized over the remaining term to maturity.

The Province uses derivative financial instruments (derivatives) for the purposes of minimizing interest costs and managing risk. The Province does not use derivatives for speculative purposes. Derivatives are financial contracts, the value of which is derived from underlying instruments. 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.

The 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 benefits attributed to services rendered by employees and former employees, less its share of the assets of the plans. In addition, the liability includes the Province’s share of the unamortized balance of actuarial gains or losses, and other adjustments primarily for differences between the fiscal year-ends of the pension plans and the Province.

Assets

Assets are resources controlled by the government from which it will derive future benefits. Assets are recognized in the year the events giving rise to the government’s control of the benefit occur.

Financial Assets

Financial assets are resources that can be used to discharge existing liabilities or finance future operations. They include cash, temporary investments, accounts receivable, loans receivable, advances, and investments in government business enterprises.

Temporary investments are recorded at the lower of cost or fair value.

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

Loans receivable with significant concessionary terms are considered in part as 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. The amount of the loan discount is amortized to revenue over the term of the loan. Loans receivable include amounts owing from government business enterprises.

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

Net Assets of Broader Public Sector Organizations

The net assets of the broader public sector (BPS) organizations consist of tangible capital and financial assets of BPS organizations net of their liabilities. While the assets of BPS organizations are consolidated, they are owned, managed and operated by BPS organizations. Tangible capital assets of hospitals and colleges are recorded at historical cost in their financial statements. Interest incurred during construction of major projects is capitalized and included in historical cost when specific project financing is provided. Although school boards do not presently record tangible capital assets in their financial statements, an adjustment is made upon consolidation to record the estimated historical cost of their land and building assets in the Province’s financial statements.

Tangible Capital Assets

Tangible capital assets are recorded at historical cost. 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 but excludes interest. Estimated historical cost was used to record existing tangible capital assets if actual cost was unknown when the Province first implemented tangible capital assets accounting.

As the Province is phasing in the implementation of PSAB recommendations on provincially owned tangible capital assets, the following categories are included under tangible capital assets and recorded at historical cost: land, buildings and transportation infrastructure owned by the Province; and all tangible capital assets owned by government organizations that are consolidated in these financial statements. The remaining other tangible capital assets, including leased assets, computers, equipment, vehicles and furniture, are expensed as acquired. The Province intends to apply PSAB’s recommendations on the remaining other tangible capital assets in 2009–10.

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. External contributions for acquisition of tangible capital assets are recorded as deferred revenue and amortized on the same basis as the related tangible capital assets.

2. Debt

The Province borrows in both domestic and international markets. Debt of $157.0 billion, as at March 31, 2007 (2006, $154.9 billion), is composed of mainly bonds and debentures issued in both the short and long-term public capital markets and non-public debt held by certain federal and provincial public sector pension plans. Debt comprises Debt Issued for Provincial Purposes of $129.1 billion (2006, $126.9 billion) and Ontario Electricity Financial Corporation (OEFC) debt of $27.9 billion (2006, $28.0 billion). The table blow 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.

Debt As at March 31								2007	2006
Currency	Canadian Dollar		U.S. Dollar	Japanese Yen	Euro1	Other Currency2		Total	Total
Maturing in:
2007									$21,421
2008		$13,213	5,461	320	–	228	$19,222		14,019
2009		15,406	4,090	–	795	265	20,556		19,416
2010		9,069	1,629	709	1,443	870	13,720		13,115
2011		6,186	–	–	–	252	6,438		6,254
2012		5,944	1,136	–	–	47	7,127		–
1–5 years		49,818	12,316	1,029	2,238	1,662	67,063		74,225
6–10 years		22,902	7,606	98	1,188	2,018	33,812		29,980
11–15 years		6,424	–	–	–	–	6,424		4,694
16–20 years		12,300	–	–	–	–	12,300		11,766
21–25 years		13,606	–	–	–	–	13,606		12,843
26–403 years		23,788	–	–	–	–	23,788		21,398
Total4, 5		$128,838	19,922	1,127	3,426	3,680	$156,993		$154,906
Debt Issued for Provincial		105,180	16,617	1,127	3,426	2,753	129,103		126,873
Purposes6
OEFC Debt		23,658	3,305	–	–	927	27,890		28,033
Total4, 5		$128,838	19,922	1,127	3,426	3,680	$156,993		$154,906
Effective Interest Rates (Weighted Average)
2007		6.28%	4.93%	3.48%	5.13%	4.46%	6.02%		–
2006		6.39%	5.04%	4.09%	5.61%	4.44%	–		6.14%
1 Euro debt includes debt issues in Euro and French franc legacy currency.
2 Other currencies comprise Australian dollar, New Zealand dollar, Pound sterling, Swiss franc, Hong Kong dollar, South African rand and New Turkish lira.
3 The longest term to maturity is to June 2, 2047.
4 Total foreign currency denominated debt as at March 31, 2007, was $28.2 billion (2006, $27.4 billion). Of that, $27.2 billion or 96.4% (2006, $26.3 billion or 95.9%) was fully hedged to Canadian dollars. The remaining 3.6% (2006, 4.1%) of foreign debt was unhedged as follows: $291 million (2006, $384 million) U.S. dollar denominated debt, $686 million (2006, $695 million) Japanese yen denominated debt and $24 million (2006, $23 million) Swiss franc denominated debt.
5 Total debt includes issues totalling $3.3 billion (2006, $4.8 billion), which have embedded options exercisable by either the Province or the bond holder under specific conditions.
6 Debt denominated in Canadian dollars as at March 31, 2007 includes $1.0 billion (2006, $1.0 billion) long-term debt purchased and held by the Province.

Debt As at March 31	2007	2006
Debt Payable to:
Public Investors	$134,431	$130,760
Canada Pension Plan Investment Fund	10,233	10,233
Ontario Teachers' Pension Plan	6,411	7,596
Public Service Pension Plan	2,502	2,705
Ontario Public Service Employees Union Pension Fund	1,188	1,285
Canada Mortgage and Housing Corporation	914	960
Others1	1,314	1,367
Total	$156,993	$154,906
1 Debt payable to others includes debt payable to Ryerson Retirement Pension Plan, the School Board Trust Debt, debt of Ontario Immigrant Investor Corporation, debt of Royal Ontario Museum and Independent Electricity System Operator.

Fair value of debt issued approximates 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 at March 31, 2007 was $174.7 billion (2006, $170.6 billion). This is higher than the book value of $157.0 billion (2006, $154.9 billion) because current interest rates are generally lower than the interest rates at which 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 in June 2003. The Trust 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. These amounts will be reduced over the 30-year period by the transfer payments made by the Ministry of Education to the Trust under the School Board Operating Grant program. As at March 31, 2007, the outstanding amount of $840 million (2006, $854 million) advanced to school boards is included in Other Assets and outstanding debentures of $848 million (2006, $863 million) are included in Debt.

3. Risk Management and Derivative Financial Instruments

The Province employs various risk management strategies and operates within strict risk exposure limits to ensure exposure to 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 and to minimize interest costs. 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 desirable characteristics. Other derivative instruments used by the Province include forward foreign exchange contracts, forward rate agreements, futures, options, caps and floors.

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 foreign exchange forward contracts, futures, options and swaps to convert foreign currency cash flows into Canadian dollar denominated cash flows. Most of the derivative contracts hedge the underlying debt by matching all the critical terms to achieve effectiveness. In the instances where the term of foreign exchange forward contracts used for hedging is shorter than the term of the underlying debt, the effectiveness is maintained by continuously rolling the foreign exchange forward contract over the remaining term of the underlying debt, or until replaced with a long-term derivative contract.

The current policy allows the net of unhedged foreign currency debt principal net of foreign currency holdings to reach a maximum of 5 per cent of Debt Issued for Provincial Purposes and OEFC debt. At March 31, 2007, the respective unhedged levels were 0.7 and nil per cent (2006, 0.8 and nil per cent). For every one-cent increase in the Canadian dollar versus the U.S. dollar, there would be an increase in the debt amount of $2.5 million (2006, $3.0 million) and an increase in Interest on Debt of $2.4 million (2006, $1.7 million). For every one Japanese yen decrease versus the Canadian dollar, there would be an increase in debt amount of $7.0 million (2006, $7.0 million) and an increase in Interest on Debt of $2.4 million (2006, $2.0 million). Total foreign exchange gains recognized in the Statement of Operations for 2006–07 were $127 million (2005–06, $112 million).

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 net of floating rate exposure, liquid reserves and fixed rate debt maturing within the next 12-month period as a percentage of Debt Issued for Provincial Purposes and OEFC debt respectively. Depending on market conditions, the Province creates or reduces its exposure to interest rate changes by issuing or retiring short-term debt, or by entering into or closing out derivative positions. The current policy limits interest rate resetting risk for Debt Issued for Provincial Purposes and OEFC to a maximum of 35 per cent.

As at March 31, 2007, interest rate resetting risk for Debt Issued for Provincial Purposes and OEFC debt was 15.3 per cent and 14.4 per cent (2006, 14.1 per cent and 20.3 per cent). Based on floating rate interest-bearing financial instruments on hand at the balance sheet date plus planned refinancing of maturing debt in the coming year, a one per cent (100 basis points) increase in interest rates would result in an increase in Interest on Debt of $250 million (2006, $250 million).

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 7), at levels that will meet future cash requirements and will give the Province flexibility in the timing of issuing debt. In addition, the Province has short-term note programs as alternative sources of liquidity.

The table below presents a maturity schedule of the Province’s derivatives, by type, outstanding at March 31, 2007, 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 As at March 31									2007	2006
Maturity in Fiscal Year		2008	2009	2010	2011	2012	6-10 Years	Over 10 Years	Total	Total
Swaps:
Interest Rate		$13,798	$12,152	$8,716	$2,111	$2,536	$24,032	$5,220	$68,565	$64,735
Cross Currency		6,106	5,301	5,717	499	1,231	12,466	–	31,320	28,435
Forward Foreign		1,771	32	–	–	–	–	–	1,803	3,639
Exchange Contracts
Caps and Floors		50	–	88	–	–	–	–	138	532
Futures		–	–	–	–	–	–	–	–	–
Total		$21,725	$17,485	$14,521	$2,610	$3,767	$36,498	$5,220	$101,826	$97,341

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, at March 31, 2007.

Credit Risk Exposure As at March 31	2007	2006
Gross Credit Risk Exposure1	$1,083	$1,507
Less: Netting2	(898)	(1,395)
Net Credit Risk Exposure	$185	$112
1 Gross credit risk exposure is the gross credit exposure to counterparties with net positive exposure (that is, the Province has an unrealized gain).
2 "Netting" is the gross negative credit exposure to counterparties with net positive credit exposures covered by master agreements providing for close out netting when contracts do not have co-terminus settlement dates.

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.

4. Ontario Electricity Financial Corporation Liabilities

The Ontario Electricity Financial Corporation (OEFC) is consolidated as a government organization in these financial statements. The opening accumulated deficit of the Province has been adjusted to reflect an adjustment to the opening Unfunded Liability of the OEFC. The opening Unfunded Liability of OEFC was reduced by $110 million to reflect the elimination of a working capital adjustment payable to Ontario Power Generation Inc. (OPG) that was originally recorded in OEFC’s Unfunded Liability. It was subsequently determined that there was no obligation for this amount.

In addition to the current liabilities and long-term debt of OEFC, recorded in these financial statements under Accounts Payable and Accrued Liabilities and Debt respectively, the following liabilities of OEFC are also reflected in these financial statements:

i) Power Purchase Contracts

Power purchase contracts and related loan agreements were entered into by Ontario Hydro with non-utility generators (NUGs) located in Ontario. As the legal continuation of Ontario Hydro, OEFC is the counterparty to these contracts. A liability arose because these contracts, expiring on various dates to 2048, provided for the purchase of power at prices that were expected to be in excess of the market price.

The NUG liability had been valued at $4.3 billion on a discounted cash-flow (DCF) basis since Ontario Hydro was continued as OEFC on April 1, 1999. Prior to open access to the electricity market in May 2002, power purchased from NUGs was resold at cost to the revenue pool managed by OPG. After the market opened, OEFC sustained annual losses on power purchased from NUGs. The DCF model was updated as of March 31, 2003, which reduced the estimated liability by $422 million to $3.7 billion. This revaluation change is being amortized to operations over a 10-year period.

Under the Electricity Restructuring Act, 2004, effective January 1, 2005, OEFC began receiving actual contract prices for power from ratepayers and will no longer incur losses on these power purchase contracts. At that time, Ministry of Finance estimated that the bulk of the liability would be eliminated over 12 years as existing electricity contracts expire. The decrease in the liability for power purchase contracts for 2006–07 was $412 million (2005–06, $396 million). This results in a liability of $3.0 billion as at March 31, 2007 (2006, $3.4 billion).

ii) Nuclear Funding Liability

The OEFC, as the continued Ontario Hydro, assumed a liability in the amount of $2.4 billion representing nuclear waste management and station decommissioning liabilities that were incurred prior to April 1, 1999. The Province and OPG are parties to the Ontario Nuclear Funds Agreement (ONFA) to establish, fund and manage segregated funds to ensure that sufficient funds are available to pay for costs of nuclear waste management and station decommissioning for existing OPG nuclear stations.

The board of directors of OEFC approved the funding of OEFC’s nuclear liability to the Decommissioning Segregated Fund over a four-year period. Contributions by OEFC began in 2003 and the entire liability including interest has been discharged with a final payment on March 30, 2007.

5. Pensions and Other Employee Future Benefits

Pensions and Other Employee Future Benefits Liability (Asset)
As at March 31	2007		2007		2007	2006
	Pensions		Other Employee Future Benefits		Total	Total
Obligation for benefits	$61,236		$5,818		$67,054	$64,512
Less: plan fund assets	(68,407)		(364)		(68,771)	(64,111)
Unamortized actuarial gains (losses)	2,850		(1,059)		1,791	(189)
Adjustments1	1,324		–		1,324	1,474
Total	($2,997)		$4,395		$1,398	$1,686
1 Adjustments for pensions consist of:
i) differences for amounts reported by the pension plans at December 31, instead of the Province's year-end of March 31
ii) unamortized difference between employer and employee contributions for jointly sponsored pension plans
iii) unamortized employee contribution reductions for solely sponsored plans
iv) unamortized initial unfunded liabilities of jointly sponsored plans
v) amounts payable by the Province that are reflected as contributions in the pension plan assets.

Pensions and Other Employee Future Benefits Expense
For the year ended March 31	2007	2007	2007	2006
	Pensions	Other Employee Future Benefits	Total	Total
Cost of benefits	$1,533	$327	$1,860	$1,768
Amortization of actuarial losses (gains)	(336)	94	(242)	(387)
Employee contributions