2015 Ontario Economic Outlook and Fiscal Review
Chapter III: Economic and Fiscal Outlook

Section D: Borrowing and Debt Management

The Province’s total long-term borrowing in 2015–16 is forecast to be $30.1 billion. The Province is committed to debt sustainability and has extended the term of its borrowing program to take advantage of low interest rates. For fiscal 2015–16, net debt and total debt are projected to be $298.3 billion and $324.3 billion, respectively. Ontario is also committed to helping develop the Canadian Green Bond market and plans to issue its second Green Bond during fiscal 2015–16.

Ontario conducts its borrowing program responsibly to protect the public interest. Overall, Ontario’s forecast indicates the long-term borrowing requirement for 2015­­–16 has decreased by $1.0 billion compared to the forecast in the 2015 Budget. As at November 10, 2015, $20.1 billion, or 65 per cent, of this year’s long-term public borrowing requirement has been completed.

As the first Canadian province to issue Green Bonds, Ontario is leading the way in establishing and developing a Canadian-dollar Green Bond market with global investor participation. The Province plans to issue its second Green Bond during fiscal 2015–16.

Ontario’s net debt is projected to be $298.3 billion as at March 31, 2016, $0.5 billion lower than forecasted in the 2015 Budget. Net debt was $284.6 billion as at March 31, 2015.

Given the low interest rates experienced in recent years, Ontario has actively extended the term of its borrowing program. Term extension has allowed the Province to lock in low interest rates for a longer period, which reduces refinancing risks and helps offset the impact of expected higher interest rates on the Province’s future interest on debt (IOD) costs.

Going back to the beginning of fiscal 2010–11, Ontario has issued $52.4 billion of bonds with terms of longer than 30 years to lock in low rates. As a result, the weighted-average term to maturity of long-term Provincial debt issued has been extended significantly, from 8.6 years in 2008–09 to 14.1 years last year and 16.1 years as at November 10, 2015.

Long-Term Public Borrowing

The Province’s deficit for 2015–16 is now projected to be $7.5 billion — compared to the 2015 Budget forecast of $8.5 billion. The total funding requirement for 2015–16 is now forecast at $1.3 billion lower than the 2015 Budget forecast.

The Province’s total long-term borrowing in 2015–16 is forecast to be $30.1 billion, $9.7 billion lower than the amount borrowed in 2014–15, and $1.0 billion less than forecast for 2015–16 in the 2015 Budget.

TABLE 3.18
Borrowing Program and Medium-Term Outlook: Province and Ontario Electricity Financial Corporation
($ Billions)
  2015–16 2016–17 2017–18
2015 Budget Current Outlook In-Year Change
Deficit/(Surplus) 8.5 7.5 (1.0) 4.5
Investment in Capital Assets 9.1 9.1 11.3 11.8
Non-Cash Adjustments (4.9) (3.1) 1.8 (5.5) (5.6)
Loans to Infrastructure Ontario 1.1 1.1 0.0 0.5 0.4
Other Net Loans/Investments 1.0 (0.3) (1.3) 0.3 0.1
Debt Maturities 21.0 21.1 0.1 21.4 17.5
Debt Redemptions 0.2 0.1 (0.1) 0.1 0.1
Hydro One Special Dividends (0.8) (0.8)
Total Funding Requirement 35.9 34.7 (1.3) 32.7 24.4
Canada Pension Plan Borrowing (0.1)
Decrease/(Increase) in Short-Term Borrowing (1.7)
Increase/(Decrease) in Cash and Cash Equivalents 0.8 0.8 (0.8)
Preborrowing in 2014–15 (4.8) (5.3) (0.5)
Total Long-Term Public Borrowing 31.1 30.1 (1.0) 30.1 24.4
Note: Numbers may not add due to rounding.

As at November 10, 2015, $20.1 billion of this year’s long-term public borrowing has been completed.

Approximately 87 per cent of this year’s borrowing to date has been completed in Canadian dollars, primarily through syndicated issues. Given the strength of demand Ontario has experienced in the Canadian-dollar market, the Province raised its Canadian-dollar borrowing target to at least 75 per cent in 2015–16 in the 2015 Budget. This is an increase from the previous target of 70 per cent.

About $2.6 billion, or 13 per cent, of borrowing has been completed in foreign currencies. The U.S. dollar market has remained an important source of funding for Ontario this year, with $2.4 billion issued in U.S. dollars. The remaining foreign currency borrowing has been completed in Australian dollars.

Green Bond Update

In 2014, Ontario successfully launched its Green Bond program with an inaugural $500 million global Canadian-dollar bond. Ontario’s inaugural Green Bond was oversubscribed, with orders of $2.4 billion that far surpassed the size of the bond issue by $1.9 billion. Green investors in Canada, as well as in the United States, Europe and Asia, participated in the deal, bringing new international buyers to the Canadian-dollar market.

The Province plans to issue its second Green Bond before the end of March 2016 and it will be denominated in Canadian dollars.

Commitment to Debt Sustainability

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $324.3 billion as at March 31, 2016 (March 31, 2015, $315.0 billion).

Ontario’s net debt is the difference between total liabilities and total financial assets. It is projected to be $298.3 billion as at March 31, 2016 (March 31, 2015, $284.6 billion). The net debt projection for March 31, 2016, was forecasted to be $298.9 billion in the 2015 Budget, $305.3 billion in the 2014 Budget and $303.9 billion in the 2013 Budget. Accumulated deficit is projected to be $195.0 billion as at March 31, 2016. The projected difference of $103.3 billion between net debt and accumulated deficit is due to the Province’s consistent level of investment in infrastructure, as shown by the increase in tangible capital assets.

Ontario’s net debt-to-GDP and accumulated deficit-to-GDP ratios are levelling off and the government continues to maintain a target of reducing the net debt-to-GDP ratio to its pre-recession level of 27 per cent.

Cost of Debt

The interest rate that Ontario pays on its debt has been in steady decline since 1990–91, when the effective interest rate (on a weighted-average basis) on total debt was 10.9 per cent. As at September 30, 2015, it was 3.7 per cent, unchanged from March 31, 2015, and lower than 3.9 per cent on March 31, 2014.

The global decline in interest rates over the last 25 years cannot continue indefinitely. To protect itself from an increase in interest rates, the Province has continued to extend the term of its debt. Going back to the beginning of fiscal 2010–11, Ontario has issued $52.4 billion of bonds longer than 30 years to lock in low rates. As a result, the weighted-average term to maturity of long-term provincial debt issued has been extended significantly, from 8.6 years in 2008–09 to 14.1 years last year and 16.1 years as at November 10, 2015.

For 2015–16, the impact of a one percentage point change in interest rates on IOD is approximately $400 million for the Province.

Residual Stranded Debt Update

The 2015 annual financial statements of the Ontario Electricity Financial Corporation (OEFC) showed revenue over expense of $1.6 billion, reducing the OEFC’s unfunded liability (or “stranded debt of the electricity sector”) from $9.8 billion as at March 31, 2014, to $8.2 billion as at March 31, 2015.

The residual stranded debt is estimated to be about $2.2 billion as at March 31, 2015. This is a decrease of about $0.4 billion compared to residual stranded debt of $2.6 billion as at March 31, 2014, and a decrease of $9.7 billion from an estimated peak of residual stranded debt of $11.9 billion as at March 31, 2004.

The residual stranded debt estimate as at March 31, 2015, is based on a stranded debt amount of $8.2 billion, reduced by the estimated present value of future dedicated revenues to OEFC of $6.0 billion. This results in the calculated $2.2 billion of residual stranded debt as at March 31, 2015.

The Auditor General audits OEFC’s annual financial statements and has provided an unqualified opinion every year since the initial 1999–2000 financial statements.

As confirmed in the Auditor General’s 2011 Annual Report, the Debt Retirement Charge (DRC) is used exclusively by OEFC to meet its mandate, as provided for under the Electricity Act, 1998, which includes servicing and retiring its debt and other liabilities.

Hydro One Initial Public Offering: Ontario Electricity Financial Corporation Debt Paydown

As part of the government’s commitment to using the proceeds from broadening Hydro One ownership for infrastructure investments and paying down debt, proceeds related to the book value of the shares sold and the pre-IPO special dividend payment of $800 million paid by Hydro One to the Province will be used to pay down the Province’s electricity sector debt and other payables. This will allow the Ontario Electricity Financial Corporation (OEFC) to reduce its overall debt, and contribute towards the Province’s targeted $5 billion debt paydown. This debt paydown does not affect OEFC’s stranded debt, as OEFC’s receivables from the Province will be reduced by an equivalent amount.

The OEFC has also received $2.6 billion in departure tax from Hydro One, as Hydro One exited the payments in lieu of tax (PILs) regime with the IPO, and will no longer pay corporate tax PILs to OEFC. The OEFC is also expected to receive an additional $200 million in PILs from Hydro One. The cash PILs payments will allow OEFC to reduce its debt outstanding; however, they will not have a net impact on OEFC’s stranded debt, as the departure tax and incremental PILs amount, as expenses to Hydro One, reduce Hydro One net income, and in consequence, reduce the Province’s Electricity Sector Dedicated Income transfer to OEFC in respect of Hydro One net income.

In addition, as per section 50.3 of the Electricity Act, 1998, the Province will provide OEFC with a financial benefit that will help contribute to reducing stranded debt.

Ending the Debt Retirement Charge

As announced previously, the government is removing the DRC cost from residential users’ electricity bills as of January 1, 2016, saving a typical residential user about $70 per year.

The Electricity Act, 1998, provides for the DRC to be paid by consumers until the residual stranded debt is retired. The residual stranded debt is the stranded debt reduced by the estimated present value of future dedicated revenues to OEFC and it is estimated to be retired when the estimated present value of future dedicated revenues to OEFC is equal to the remaining stranded debt. This means that even after the end of the DRC, there will still be stranded debt remaining, to be serviced and paid down by OEFC’s other dedicated revenues.

At the time of the 2014 Ontario Economic Outlook and Fiscal Review, and as stated in the 2015 Budget, it has been estimated that the residual stranded debt would be retired by the end of 2018. However, the estimated residual stranded debt could extend beyond 2018, to the end of 2019 or later.

The amount and timing for its retirement are subject to uncertainty in forecasting future OEFC results and dedicated revenues to OEFC, which depend on the financial performance of Ontario Power Generation, Hydro One and municipal electricity utilities; the broadening of ownership of Hydro One; and other factors such as interest rates and electricity consumption. The Hydro One IPO will result in upfront benefits to OEFC, as well as the loss of future payments in lieu of taxes from Hydro One and revenues dedicated to OEFC in respect of Hydro One net income.

To address this uncertainty and mitigate cost pressures for non-residential users, the government introduced legislation that, if passed, would end the DRC as of April 1, 2018 — nine months earlier than previously estimated. The fixed end date would provide certainty to commercial, industrial and other non-residential electricity users, and help them plan their investment decisions more effectively.

Chart 3.5: 2015–16 Borrowing

As at November 10, 2015, $20.1 billion of this year’s long-term public borrowing has been completed and consisted of $17.5 billion of Canadian dollar bonds, $2.4 billion of U.S. dollar bonds and $0.1 billion of Australian dollar bonds.

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Chart 3.6: Net Debt-to-GDP and Accumulated Deficit-to-GDP

Net debt-to-GDP ratio is projected to be 40.2 per cent for 2015–16. The net debt-to-GDP is projected to peak at 40.2 per cent in 2015–16. The accumulated deficit-to-GDP is projected to be 26.3 per cent for 2015–16.

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Chart 3.7: Effective Interest Rate (Weighted Average) on Total Debt

As at September 30, 2015, the effective interest rate (calculated as a weighted average) is 3.7 per cent on the Province’s total debt. This is unchanged from the 3.7 per cent in 2014–15 and lower than the 3.9 per cent in 2013–14. The effective interest rate has been steadily decreasing from 10.9 per cent in 1990–91.

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Chart 3.8: Residual Stranded Debt since April 1, 1999

As at March 31, 2015, the estimated residual stranded debt was $2.2 billion, a decrease of $0.4 billion compared to residual stranded debt of $2.6 billion as at March 31, 2014. This is also a total estimated decrease of $9.7 billion from an estimated peak of residual stranded debt of $11.9 billion as at March 31, 2004.

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