20181212Technical Hearing Exhibits Vol I.pdf

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o ORIGINAL CSB REPORTING
C e rtilied S h o rt h and Repo rte rs
Post Office Box9774
Boise,Idaho 83707
csbreporting@yahoo. com
Ph: 208-890-5198 Fax: [phone]
Reporter:
Constance Bucy,
CSR
BEFORE THE IDAHO PUBLIC UTIL]TIES COMM]SSION
IN THE MATTER OE THE JOINT
APPL]CATION OE HYDRO ONE LIMITED
AND AVISTA CORPORATION EOR
APPROVAL OF MERGER AGREEMENT
CASE NOS. AVU-E_L7_09
AVU-G-17-05
EXHIBITS ,-':-,
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BEFORE
COMMISSIONER PAUL KJELLANDER (Presiding)
COMMISSIONER ERIC ANDERSON
COMMISSIONER KRIST]NE RAPER
PLACE:Commission Hearing Room
412 West Washington Street
Boise, fdaho
DATES: November 26 & 21, 2078
VOLUMES I - IV - Pages 1 - L26B
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Exhibit No. 1
Case Nos. AVU-E-17-_ and AVU-G-17-_
S. Morris, Avista
Schedule 2, Page 1 ot 1
Avista Capital
Avista Corporation
( D/B/A Avista Uti I ities
AERC
0ther AJT Mining
Properties AEL&P
Snettisham
Electric Co.
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EXHIBIT A
GOVERNANCE REOUIREMENTS
The articles of incorporation and bylaws of the Surviving Corporation, as may be amended from
time to time, shall provide for the following:
the board of directors of the Surviving Corporation (the "SubSidiAry Bo4fd") shall consist of
nine (9) members, determined as follows: (i) trvo (2) directors designated by the sole
shareholder of the Surviving Corporation ("Sole Shareholder") who are executives of Parent
or any of its Subsidiaries; (ii) three (3) directors who are not officers, employees or directors
(other than as an independent director of the Surviving Corporation) of Parent or any of its
Affiliates and who are residents of the Pacific Northwest region, to be designated by Sole
Shareholder (collectively, the directors designated in clauses (i) and (ii) hereof, the "!q!s
Shareholder Desisnees"); (iii) three (3) directors who as of immediately prior to the Effective
Time are members of the Board of Directors of the Company, including the Chairman of the
Board of Directors of the Company (if such person is different fi'om the Chief Executive
Officer of the Surviving Corporation); and (iv) the Chief Executive Off,rcer of the Surviving
Corporation (collectively, the directors designated in clauses (iii) and (iv) hereof, the
"CUqpeny-DeSigngpg"), and (x) the initial Chairman ofthe Board of Directors of the Surviving
Corporation shall be the Chief Executive Officer of the Company as of the time immediately
prior to the Effective Time for a one year term and (y) if any Company Designee resigns, retires
or otherwise ceases to sere as a director of the Surviving Corporation for any reason, the
remaining Company Designees shall have the sole right to nominate a replacement director to
fill such vacancy, and such person shall thereafter become a Company Designee;
2. Sole Shareholder shall have the unfettered right to designate, remove and replace the Sole
Shareholder Designees as directors of the Surviving Corporation with or without cause or
notice at its sole discretion, subject to the requirement that (i) two (2) of such directors are
executives of Parent or any of its Subsidiaries and (ii) three (3) of such directors are not
officers, employees or directors (other than as an independent director of the Surviving
Corporation) of Parent or any of its Affiliates and who are residents of the Pacific Northwest
region, while such requirement is in efflect (subject in the case of clause (ii) hereof to Sole
Shareholder determining, in good faith, that it is not able to appoint a non-employee resident
of the Pacific Northwest region in a timely manner, in which case Sole Shareholder may
replace any such director with an employee of Parent or any of its Subsidiaries on an interim
basis, not exceeding six months, after which time Sole Shareholder shall replace such interim
director with a non-employee resident of the Pacific Northwest region);
3. following the initial one year term of the Chairman of the Board of the Surviving Corporation,
Sole Shareholder shall have the right to designate the Chairman of the Board of the Surviving
Corporation, including electing to continue the term of the initial Chairman of the Board of the
Surviving Corporation;
4. at all times, the chief executive officers of the Surviving Corporation and Parent shall be
members of the Subsidiary Board, unless otherwise determined by Sole Shareholder;
Exhibit No. 2
Case Nos. AVU-E-17- and AVU-G-17-
MJchmidt. Hydro One#ssoe3l4.G Schedule 2, Page 1 of 5
o 5. not less than tfuee (3) business days' notice shall be required to call a meeting of the Subsidiary
Board and such notice shall include an agenda of all items of business to be addressed or
subject to decision at such meeting of the Subsidiary Board, unless such notice requirement or
agenda requirement is expressly waived by Sole Shareholder in writing; and
6. a quorum of the Subsidiary Board shall require (i) at least five (5) directors and (ii) that the
number of Sole Shareholder Designees in attendance be equal to or greater than the number of
Company Designees in attendance, and shall include at least one Parcnt Designee who is an
executive of Parent or any of its Subsidiaries.
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o Exhibit No. 2
Case Nos. AVU-E-l 7-_and AVU-G- l7-
M. Schmidt, Hydro One
Schedule 2, Page 2 of 5#5509314.6
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EXHIBIT B
POST-CLOSING MATTERS
Operational Commitments
Maintain (a) the Surviving Corporation's headquarters in Spokane, Washington; (b) the
Surviving Corporation's office locations in each of its other service territories, and (c) no less
of a significant presence in the immediate location of each of such office locations than what
the Company and its subsidiaries maintained immediately prior to the Effective Time;
2. maintain the Surviving Corporation's and its Subsidiaries' brand and establish the plan for the
operation of the business of the Surviving Corporation and its Subsidiaries;
3. maintain at least the Surviving Corporation's and its Subsidiaries' existing levels prior to the
Effective Time of community involvement and support initiatives in the existing service
teritories of the Surviving Corporation and its Subsidiaries'
4. maintain a $4,000,000 annual budget for charitable contributions by the Surviving
Corporation, make a $7,000,000 initial contribution to the Surviving Corporation's charitable
foundation at or promptly following the Effective Time and make a $2,000,000 annual
contribution to the Surviving Corporation's charitable foundation;
5. maintain at least the Surviving Corporation's and its Subsidiaries' existing levels of economic
development as of the Effective Time, including the ability of the Surviving Corporation to
spend operations and maintenance funds to support regional economic development and
related strategic opportunities in a manner consistent with the past practices of the Surviving
Corporation and its Subsidiaries;
6, maintain the Surviving Corporation's and its Subsidiaries' existing levels as of the Effective
Time of capital allocations for capital investment in strategic and economic development items,
including property acquisitions in the university district, support of local entrepreneurs and
seed-stage investments;
7. continue development and funding of the Surviving Corporation's and its Subsidiaries'
existing and future innovation activities; and
8. maintain the Surviving Corporation's and its Subsidiaries' safety and reliability standards and
policies and service qualrty measures in a manner that is substantially comparable to, or better
than, those currently maintained as of the Effective Time by the Company and its Subsidiaries.
o Exhibit No. 2
Case Nos. AVU-E- I 7 - _ and AVU-G- I 7-_
M. Schmidt, Hydro One
Schedule2, Page 3 of5#55093 13.6
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Governance Matters
l. Retain the Surviving Corporation's existing executive management team to manage the
Surviving Corporation's business;
2. cause the board of directors of the Surviving Corporation (the "Subqidiarylpoard") to consist
of nine (9) members, determined as follows: (i) two (2) directors designated by the sole
shareholder of the Surviving Corporation ("Sqle_ShArchAId9I") who are executives of Parent
or any of its Subsidiaries; (ii) three (3) directors who are not officers, employees or directors
(other than as an independent director of the Surviving Corporation) of Parent or any of its
Affiliates and who are residents of the Pacific Northwest region, to be designated by Sole
Shareholder (collectively, the directors designated in clauses (i) and (ii) hereof, the "Sole
Shareholder Designees"); (iii) three (3) directors who as of immediately prior to the Effective
Time are members of the Board of Directors of the Company, including the Chairman of the
Board of Directors of the Company (if such person is different from the Chief Executive
Officer of the Surviving Corporation); and (iv) the Chief Executive Officer of the Surviving
Corporation (collectively, the directors designated in clauses (iii) and (iv) hereof, the
"Company Desisnees"), and (x) the initial Chairman ofthe Board of Directors of the Surviving
Corporation shall be the Chief Executive Officer of the Company as of the time immediately
prior to the Effective Time for a one year term and (y) if any Company Designee resigns, retires
or otherwise ceases to serve as a director of the Surviving Corporation for any reason, the
remaining Company Designees shall have the sole right to nominate a replacement director to
fiIl such vacancy, and such person shall thereafter become a Company Designee; and
3. maintain the composition of the Subsidiary Board (including regional representation) and the
appointment of the Chairman of the Subsidiary Board in accordance with paragraph 2
immediately above.
Additional Malters
1, Negotiate, enter into, modifr, atnend, terminate or agree to changes in any collective
bargaining agreement or any other Company Material Conhact with any labor organizations,
union employees or their representatives;
2. maintain compensation and benefits related practices consistent with the requirements of the
Merger Agreement; and
3. maintain the dues paid by the Surviving Corporation to various industry trade groups and
membership organizations.
The authority of the Subsidiary Board to make decisions with respect to the foregoing matters
includes the authority to amend the foregoing commitments if the Subsidiary Board determines by
special resolution requiring the approval of 213 of the directors that an amendment would be in the
best interest of the Surviving Corporation, taking into account relevant regulatory considerations.
o Exhibit No. 2
Case Nos. AVU-E-17-- and AVU-G-17-
M. Schmidt, Hydro One
Schedule 2, Page 4 of 5#s5093 13.6
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APPROVAL REOUIREMENTS
Operational Matters
Approval of Sole Shareholder shall be required for any decision to:
enter into any agreement with respect to, or otherwise enter into any merger, consolidation,
amalgamation, share purchase or other business combination hansaction, or any sale of all or
substantially all of the assets of the Surviving Corporation;
2. take any action that would reasonably be expected to lead to or result in (i) a material change
in the nature of the business of the Surviving Corporation or any of its Subsidiaries or (ii) the
carrying out by the Surviving Corporation or any of its Subsidiaries of any business other than
its current business as of the Effective Time;
3. take any steps to wind up, terminate or dissolve the corporate existence of the Surviving
Corporation or any of its Subsidiaries;
4. declare, pay or withhold any distribution or dividend;
5. make any change to director, officer or employee compensation or any aspects thereof, such
as amount, mix, form, timing etc., that would be inconsistent with current market standards
and practices; and
6. make any commitment or enter into any agreement to do any of the foregoing.
Governance and Organizalional Matter s
L repeal, replace or amend in any respect the articles of incorporation, bylaws, or other
organizational documents of the Surviving Corporation or any of its Subsidiaries;
2. increase or otherwise amend or change the authorized or issued capital of the Surviving
Corporation or any of its Subsidiaries;
3. make any change to the number of directors that constitute the full board of directors of the
Surviving Corporation;
4. hire, disrniss or replace the Chief Executive Officer of the Surviving Corporation; and
5. make any commitment or enter into any agreement to do any of the foregoing
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o Exhibit No. 2
Case Nos. AVU-E-17-- and AVU-G-17-
M. Schmidt, Hydro One
Schedule 2, Page 5 of 5#ss093 13.6
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ON BETIAIIE OF AVISTA CORPORATION
DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFEAIRS
P.O. BOX 3121
7417 EAST MISSION AVENUE
SPOKANE, WASHTNGTON 99220-3721
TELEPHONE: [phone]L6
EACSIMILE: [phone]
DAVI D. MEYERGAV] STACORP . COM
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ON BETIAI,F OF HYDRO ONE I,IMITED
EL]ZABETH THOMAS, PARTNER
KAR] VANDER STOEP, PARTNER
K&L GATES LLP
925 FOURTH AVENUE, SUITE 29OO
SEATTLE, WA 981014-1158
TELEPHoNE: [phone]
FACSIMILE: [phone]
LI Z . THOMASGKLGATES . COM
KARI . VANDERSTOEPGKLGATES . COM
i./)i i
Lr)
BEFORE THE IDAHO PT'BI,IC UTILITIES COMMISSION
IN THE MATTER OF THE JOINT
APPLICAT]ON OF HYDRO ONE LIMITED
(ACTING THROUGH ]TS INDIRECT
SUBSIDIARY, OLYMPUS EQUITY LLC)
AND
AVISTA CORPORATTON
FOR AN ORDER AUTHORIZ]NG PROPOSED
TRANSACTION
CASE NO.
CASE NO.
AVU-E- 11 -Oq
AVU-G- 1 7 -
EXHIB]T NO. 3
MARK T. TH]ES
EOR AVISTA CORPORATION
(ELECTR]C AND NATURAL GAS)
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IJNITED STATES
S E CURIT"' OY.P"T":,TfITS,' C OMMIS S ION
Form 10-K
(Mark One)
E ANNUAL REPORT PIJRSUANT TO SECTION 13 OR 15(d) OF THE SECT,]RITIES EXCHANGE ACT OF 1934
FoR rHE FISCAL YEAR ENDEDI}gE3L2IILI[ oR
tr TRANSITION REPORT PURSUANT TO SECTION 13 OR Ts(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FORTHETRANSITIONPERIODFROM TO
Commission file number l-3701
AVISTA CORPORATION
@xact name of Registrant as specified in its charter)
Washington
(State or other jurisdiction of
incorporation or organization)
1411 East Mission Avenue, Spokane, Washington
(Address of principal executive oIfices)
Registrant's telephone number, including area code: l![![!!!!QQ
Web site: http://www.avistacorp.com
Securities registered pursuant to Section 12(b) ofthe Act:
914462470 ',: ':
(I.RS. Employe(::
Identification No,)-
99202-2600
(Zip Code)
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Title of Class Name of Each Exchange on Which Registered
Common Stock, no par value New York Stock Exchange
Securities registered pursuant to Section 12(g) ofthe Act:
Title of CIass
Preferred Stock, Cumulative, Without Par Value
Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes E No El
Indicate by check mark ifthe registrant is not required to file reports pursuant to Section I 3 or I 5(d) ofthe Act. Yes tr No E
Indicate by check mark whether the registrant (1 ) has filed all reports required to be filed by Section I 3 or I 5(d) ofthe Securities Exchange Act of I 934
during the preceding 1 2 months (or for such shorter period that the Registrant was required to file such repons), and (2) has been subject to such filing
requirementsforthepastg0days: Yes E No E
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, ifany, every lnteractive Data File required to
be submitted and posted pursuant to Rule 405 ofRegulation S-T ($232.405 ofthis chapter) during the preceding I 2 months (or for such shorter period that
theregistrantwasrequiredtosubmilandpostsuchfiles). Yes E No tr
Indicate by check mark ifdisclosure ofdelinquent filen pursuant to Item 405 ofRegulation S-K ($ 229.405 ofthis chapter) is not contained herein, and will
not be contained, to the best ofRegistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III ofthis Form I 0-K
or any amendment to this Form 10-K. tr
lndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of"large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule I 2b-2 ofthe Exchange Act. (Check one):
Large accelerated filer E
Non-accelerated filer E (Do not check ifa smallerreporting company)
Accelerated filer
Smaller reporting company
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Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
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Schedule 1,Page 1 ot 177
o Indicate by clreck mark whether the Registrant is a shell company (as defined in Rule l2b-2 of the Exchange Act): Yes tr No E
The aggregate market value ofthe Registrant's outstanding Common Stock, no par value (the only class ofvoting stock), held by non-affiliates is
$2,853,952,416 based on the last reported sale price thereofon the consolidated tape on June 30,2016.
As of January 3l ,2017 ,64,3 I I ,89 I shares of Registrant's Common Stock, no par value (the only class of common stock), were outstanding.
Documents Incoroorated By Reference
Document
Proxy Statement to be filed in connection with the annual meeting
of shareholders to be held on Mty ll,2011-
Prior to such filing, the Proxy Statement fiIed in connection with the
annual meeting ofshareholders held on May 12,2016.
Part of Form 10-K into Which
Document is Incornorated
Part III, Items 10, I l,
12, l3 and l4
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Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page2 o'f 177
Table of Contents
o AVISTA CORPORATION
INDEX
Item Page
No.No.
o
Acronvms and Terms iii
Forward-Lookins Statements 1
Available Information 4
Part I
Business t
Comoanv Overview !
Avista Utilities !General 4-
Electric Operations !-
Electric Reouirements j
Electric Resources j
Hydroelectric Licenses E
Future Resource Needs !.
Natural Gas Ooerations g
Reeulatory Issues I I
Federal Laws Related to Wholesalc Comoetition 12
Regional Transmission Oreanizations 12
Resional Transmission Plannins 13
Reeional Enere), Markets 13
Reliability Standards .11
Avista Utilities Ooerating Statistics 14
Alaska Electric Lieht and Power Companv n
Alaska Electric Liqht and PowerComoanv Operating Statistics I 8
OtherBusinesses J2
Risk Factors 20
Unresolved StaffComments 26
Prooerties )1
Avista Utilities 27
AlaskaElectric Lieht andPowerCompany U
Lesal Proceedinss ,o
Mine Safety Disclosures D-
Part II
Mar*et for Registrant's Common Eoui8. Related Stockholder Matten and Issuer Purchases of Equit], Securities Zz
Selected Financial Data 3 I
Manaeement's Discussion and Analysis of Financial Condition and Results of Operations 32
Business Seqments 32
Executjvelevel Summary y
Regulatory Matters 33
Results ofOperations - Overall 40
Results ofOperations - Avista Utilities 4j
Results ol'Ooerations - Alaska Electric Lisht and Power Companv 55
Results ofOoerations - Ecova - Discontinued Operations 55
Results ofOoerations - OtherBusinesses 5s
Accountine Standards to Be Adopted in 201 7 56
Critical Accountine Policies and Estimates 56
Liquidity and Caoital Resources 59
Overall Liouiditv <o
Review ofConsolidated Cash Flow Statement 60
Capital Resources 62
Caoital Expenditures 6!
Off-Balance Sheet Arranqements Exhibit No. 3 65
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 3 ol 177
1A.
lB.
2
J
4
5
6
'7
a
o
Pcnsion Plan
Credit Ratings
Dividends
Contractual Oblisations
55
65
66
66
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Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-'l 7-_
M. Thies, Avista
Schedule 1,Page4ot177
I
Table of Contents
AVISTA CORPORATIONo
7A.
Comoetition
Economic Conditions and Utilitv Load Growth
Environmental lssues and Otlter Contin genci es
Entemrise Risk Manasement
Ouantitative and Oualitative Disclosures about Market Risk
Financial Statements and Supolementarv Data
Report oflndeoendent Registered Public Accountins Firm
Financial Statements
Consolidated Statements of Income
Consolidated Statements of Comorehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Equity and Redeemable Noncontrolling Interests
Notes to Consolidated Financial Statements
Note l. Summarv ofSisnificant Accountine Policies
Note 2. New Accounting Standards
Note 3. Variable lnterest Entities
Note 4. Business Acouisitions
Note 5. Discontinued Ooerations
Note 6. Derivatives and Risk Manaeement
Note 7. Jointlv Owned Electric Facilities
Note 8. Propert:v. Plant and Equioment
Note 9. Asset Retirement Oblieations
Note 1 0. Pension Plans and Other Postretirement Benefit Plans
Note I I . Accounting for Income Taxes
Note 12. Enersv Purchase Contracts
Note 13. Committ€d Lines of Credit
Note 14. Lone-Term Debt and Caoital Leases
Note 15. Lone-Term Debt to Affliated Trusts
Note 16. FairValue
Note 17. Common Stock
Note I 8. Eamings per Common Share Attributable to Avista Comoration Shareholden
Note 19. Commitments and Contingencies
Note 20. Resulatorv Matten
Note 2l . lnformation by Business Segments
Note 22. Selected Ouarterlv Financial Data (Unaudited)
Chanses in and Disaqreements \ /ith Accountants on Accountinq and Financial Disclosure
Controls and Procedures
Other Information
Part III
Drectors. Executive Officers and Comorate Govemance
Executive Comoensation
Securitv Ownershin of Cenain Beneficial Owners and Manaeement and Related StockllolderMatters
Certain Relationships and Related Transactions. and Director Indeoendence
Princinal Accountins Fees and Services
Pafl ry
Exhibits. Fi nancial Staternent Schedules
Signatures
Exhibit Index
* : not an applicable item in the 20 I 6 calendar year for Avista Corp.
67
68
02
73
80
80
8l
82
82
84
85
El_
89
9l
9t
.ID
102
102
104
105
109
110
110
ill
117
118
119
t2t
123
124
128
129
130
)32
135
137
139
139
-L4r
141
142
142
143
143
t44
145
147
8
o
9.
9A.
9B.
10.
11.
12.
13.
14.
15.
o ll
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 1,Page5ol177
Table of Contents
AVISTA CORPORATIONo
o
Acronvm/Tem
aMW
AEL&P
AERC
AFUDC
AM&D
ASC
ASU
Avista Capital
Avista Corp.
Avista Energy
Avista Utilities
BPA
Capacity
Cabinet Gorge
CIAC
Colstrip
Coyote Springs 2
CT
Deadband or ERM deadband
Dekatherm
Ecology
Ecova
EIM
Energy
EPA
ERM
FASB
FCA
FERC
GAAP
GHG
GS
ACRO].IYI\4S ANDTERMS
(The following acronyms and tems are found in multiple locations within the document)
Memins
_ Average Megawafi - a measure ofthe average rate at which a particular generating source produces energy over a period
oftime
Alaska Electric Light and Power Company, the primary operating subsidiary of AERC, which provides electric services
in Juneau, Alaska
Alaska Energy and Resources Company, the Company's wholly-owned subsidiary based in Juneau, Alaska
Allowance for Funds Used During Construction; represents the cost ofboth the debt and equity funds used to finance
utility plant additions during the construction period
Advanced Manufacturing and Development, does business as METALft
Accounting Standards Codifi cation
Accounting Standards Update
Parent company to the Company's non-utility businesses
Avista Corporation, the Company
Avista Energy, Inc., an inactive electricity and natural gas marketing, trading and resource management business,
subsidiary of Avista Capital
Operating division ofAvista Corp. (not a subsidiary) comprising the regulated utility operations in the Pacific
Northwest
Bonneville Power Administration
The rate at which a particular generating source is capable ofproducing energy, measured in KW or MW
The Cabinet Gorge Hydroelectric Generating Project, located on the Clark Fork River in Idaho
Contribution in aid of construction
The coal-fired Colstrip Generating Plant in southeastem Montana
The natural gas-fired combined-cycle Coyote Springs 2 Generating Plant located near Boardman, Oregon
Combustion turbine
The first $4.0 million in annual power supply costs above or below the amount included in base retail rates in
Washington under the ERM in the state of Washington
Unit ofmeasurement for natural gas; a dekatherm is equal to approximately one thousand cubic feet (volume) or
1,000,000 BTUs (energy)
The state of Washington's Department of Ecology
Ecova, Inc., a provider offacility information and cost management services for multi-site customers and energy
efficiency program management for commercial enterprises and utilities throughout North America, subsidiary of Avista
Capital. Ecova was sold on June 30, 20 I 4.
Energy Imbalance Ma*et
The amount of electricity produced or consumed over a period of time, measured in KWh or MWh. Also, refers to natural
gas consumed and is measured in dekatherms.
Environmental Protection Agency
The Energy Recovery Mechanism, a mechanism for accounting and rate recovery ofcertain power supply costs accepted
by the utility commission in the state of Washington
Financial Accounting Standards Board
Fixed Cost Adjustment, the electric and natural gas decoupling mechanism in Idaho.
Federal Energy Regulatory Commission
Generally Accepted Accountin g Principles
Greenhouse gas
Generating station
llt
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule l, Page 6 of lTT
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AVISTA CORPORATIONo
o
IPUC
IRP
Jackson Prairie
Juneau
KV
KW,KWh
Lancaster Plant
LNG
MPSC
MW,MWh
NERC
Noxon Rapids
OPUC
PCA
PGA
PPA
Pt]D
PURPA
RCA
REC
Salix
Spokane Energy
Therm
uTc
Watt
Idaho Public Utilities Commission
Integrated Resource Plan
Jackson Prairie Natural Gas Storage Project, an underground natural gas storage field located near Chehalis, Washington
The City and Borough ofJuneau, Alaska
Kilovolt (l 000 volts): a measure ofcapacity on transmission lines
Kilowatt (l 000 watts): a measure ofgenerating output or capability. Kilowatt-hour (1 000 watt hours): a measure of
energy produced
A natural gas-fired combined cycle combustion turbine plant located in Idaho
Liquefied Natural Gas
Public Service Commission ofthe State of Montana
Megawatt: 1000 KW. Megawatt-hour: 1000 KWh
North American Electricity Reliability Corporation
The Noxon Rapids Hydroelectric Generating Project, located on the Clark Fod< River in Montana
The Public Utility Commission of Oregon
The Power Cost Adjustment mechanism, a procedure for accounting and rate recovery ofcertain power supply costs
accepted by the utility commission in the state ofldaho
Purchased Gas Adjustment
Power Purchase Agreement
Public Utility District
The Public Utility Regulatory Policies Act of I 978, as amended
The Regulatory Commission of Alaska
Renewable energy credit
Salix, Inc., a subsidiary of Avista Capital, launched in 2014 to explore markets that could be served with LNG, primarily
in westem North America.
Spokane Energy, LLC (dissolved in the third quarter of20 I 5), a special purpose limited liability company and all ofits
membership capital was owned by Avista Corp.
Unit ofmeasurement for natural gas; a therm is equal to approximately one hundred cubic feet (volume) or 1 00,000
BTUs (energy)
Washington Utilities and Transportation Cornmission
Unit ofmeasurement for electricity; a watt is equal to the rate ofwork represented by a current ofone ampere under a
pressure ofone volt
lv
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1,Page7 ot 177
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AVISTA CORPORATION
Forward-Looking Statements
From time-to-time, we make forwardJooking statements such as statements regarding projected or future:
' financial performance;
. cash flows;
. capital expenditures;
. dividends;
. capital structure;
. otherfinancial items;
. strategic goals and objectives;
. business environment; and
. plans for operations.
These statements are based upon underlying assumptions (many of which are based, in tum, upon further assumptions). Such statements are made both in our
reports filed under the Securities Exchange Act of 1 934, as amended (including this Annual Report on Form I 0-K), and elsewhere. ForwardJooking
statements are all statements except those ofhistorical fact including, without limitation, those that are identified by the use ofwords that include "will,"
ForwardJooking statements (including those made in this Annual Repofi on Form I 0-K) are subject to a variety ofrisks and uncertainties and other factors.
Most ofthese facton are beyond our control and may have a significant effect on our operations, results ofoperations, financial condition or cash flows,
which could cause actual results to differ materially from those anticipated in our statements. Such risks, uncertainties and other factors include, among
others:
Financial Risk
. weather conditions (ternperatures, precipitation levels and wind pattems), including those from long-term climate change, which affect both energy
demand and electric generating capability, including the effect ofprecipitation and temperature on hydroelectric resources, the effect ofwind
pattems on wind-generated power, weather-sensitive customer demand, and similar effects on supply and demand in the wholesale energy markets;
. our ability to obtain financing through the issuance ofdebt and/or equity securities, which can be affected by various factors including our credit
ratings, interest rates and other capital market conditions and the global economy;
. changes in interest rates that affect borrowing costs, ourability to effectively hedge interest rates for anticipated debt issuances, variable interest rate
borrowing and the extent to which we recover interest costs through retail rates collected from customers;
. changes in actuarial assumptions, interest rates and the actual retum on plan assets for our pension and other postretirement benefit plans, which can
affect future funding obligations, pension and other postretirement benefit expense and the related liabilities'
. deterioration in the creditworthiness ofourcustomers;
. the outcome oflegal proceedings and other contingencies;
. economic conditions in our service areas, including the economy's effects on customer demand for utility services;
. declining energy demand related to customer energy efficiency and/or conservation measures;
Utility Regulatory Risk
. state and federal regulatory decisions or related judicial decisions that affect our ability to recover costs and eam a reasonable retum including, but
not limited to, disallowance or delay in the recovery ofcapital investments, operating costs, financing costs and commodity costs and regulatory
discretion overauthorized r€tum on investment;
. possibility that our integrated resource plans for electric and natural gas will not be acknowledged by the state commissions;
. the effect on any orall ofthe foregoing, resulting from changes in general economic orpolitical facton;
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 1, Page 8ot177
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Tabl€ 0f Contetrts
AVISTA CORPORATION
Energy Commodity Risk
. volatility and illiquidity in wholesale energy markets, including the availability ofwilling buyers and sellers, changes in wholesale energy prices
that can affect operating income, caslr requirements to purchase electricity and natural gas, value received for wholesale sales, collateral required of
us by counterparties in wholesale energy transactions and credit risk to us from such transactions, and the market value ofderivative assets and
liabilities;
. default or nonperformance on the part ofany parties from whom we purchase and/or sell capacity or energy;
. potential environmental regulations affecting our ability to utilize or resulting in the obsolescence ofour power supply resources;
Operational Rish
. severe weather or natural disasters, including, but not limited to, avalanches, wind storms, wildfires, earthquakes, snow and ice stonns, that can
disrupt energy generation, transmission and distribution, as well as the availability and costs ofmaterials, equipment, supplies and support services;
. explosions, fires, accidents, mechanical breakdowns or other incidents that may impair assets and may disrupt operations ofany ofour generation
facilities, transmission, and electric and natural gas distribution systems or other operations and may require us to purchase replacement power;
. wildfires, including those caused by ourtransmission orelectric distribution systems that may result in public injuries orproperty damage;
. public injuries or damage arising from or allegedly arising from our operations;
. blackouts or disruptions ofinterconnected transmission systems (the regional power grid);
. terrorist attacks, cyberattacks orothermalicious acts that may disrupt orcause damage to ourutility assets orto the national orregional economy in
general, including any effects ofterrorism, cyber attacks or vandalism that damage or disrupt information technology systems;
. work force issues, including changes in collective bargaining unit agreements, strikes, work stoppages, the loss ofkey executives, availability of
workers in a variety ofskill areas, and our ability to recruit and retain employees;
. increasing costs ofinsurance, more restrictive coverage terms and ourability to obtain insurance;
. delays or changes in construction costs, and/or our ability to obtain required permits and materials for present or prospective facilities;
. increasing health care costs and cost ofhealth insurance provided to our employees and retirees;
. third party construction of buildings, billboard signs, towers or other structures within our rights of way, or placement of fuel receptacles within
close proximity to our transfonners or other equipment, including overbuild atop natural gas distribution lines;
. the loss ofkey suppliers for materials or services or disruptions to the supply chain;
. adverse impacts to our Alaska operations that could result from an extended outage ofits hydroelectric generating resources or their inability to
deliver energy, due to their lack ofinterconnectivity to any other electrical grids and the extensive cost ofreplacement power (diesel);
. changing river regulation at hydroelectric facilities not owned by us, which could impact our hydroelectric facilities downstream;
Compliance Risk
. compliance with extensive federal, state and local legislation and regulation, including numerous environmental, health, safety, infrastructure
protection, reliability and other laws and regulations that affect our operations and costs;
. the ability to comply with the terrrs ofthe licenses and permits forourhydroelectric orthermal generating facilities at cost-effective levels'
Technology Risk
. cyber attacks on us or our vendors or other potential lapses that rtsult in unauthorized disclosure ofprivate information, which could result in
liabilities against us, costs to investigate, remediate and defend, and damage to our reputation;
2
o
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Exhibit No. 3
Case Nos. AVU-E-I7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1,Page9ol177
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AVISTA CORPORATION
. disruption to or breakdouns ofinformation systems, automated controls and other technologies that we rely on for our operations, communications
and customer service;
. changes in costs that impede our ability to effectively implement new information technology systems or to operate and maintain our curent
production technology;
. changes in technologies, possibly making some ofthe current technology we utilize obsolete orthe introduction ofnew technology that may create
new cyber security risk;
. insufficient technology skills, which could lead to the inability to develop, modify ormaintain our information systems;
Strategic Risk
. growth or decline of our customer base and the extent to which new uses for our services may materialize or existing uses may decline, including,
but not limited to, the effect ofthe trend toward distributed generation at customer sites;
. potential difficulties in integrating acquired operations and in realizing expected oppofiunities, divenions ofmanagement resources, loss ofkey
employees, challenges with respect to operating new businesses and other unanticipated risks and liabilities;
. the potential effects ofnegative publicity regarding business practices, whether true or not, which could result in litigation or a decline in our
cornmon stock price;
. changes in our strategic business plans, which may be affected by any or all ofthe foregoing, including the entry into new businesses and/or the exit
from existing businesses and the extent ofourbusiness development efforts where potential future business is uncertain;
. non-rcgulated activities may increase eamings volatility;
External Mandates Risk
. changes in environmental laws, regulations, decisions and policies, including present and potential environmental remediation costs and our
compliance with these matters;
. the potential effects oflegislation or administrative rulemaking at the federal, state or local levels, including possible effects on our generating
resources ofrestrictions on greenhouse gas emissions to mitigate concems over global climate changes;
. political pressures or regulatory practices that could constrain or place additional cost burdens on our distribution systems through accelerated
adoption ofdistributed generation or electric-powered transportation or on our energy supply sources, such as campaigns to halt coal-fired power
generation and opposition to other thermal generation, wind turbines or hydroelectric facilities;
. wholesale and retail competition including altemative energy sources, growth in customer-owned power rcsource technologies that displace utility-
supplied energy or that may be sold back to the utility, and altemative energy suppliers and delivery arrangements;
. failure to identifi changes in legislation, taxation and regulatory issues which are detrimental or beneficial to our overall business;
. policy and/or legislative changes resulting from the new presidential administration in various regulated areas, including, but not limited to,
potential tax reform, environmental regulation and healthcare regulations; and
. the risk ofmunicipalization in any ofourservice territories.
Our expectations, beliefs and projections are expressed in good faith. We believe they are reasonably based on, without limitation, an examination of
historical operating trends, our reconds and other information available from third parties. However, there can be no assurance that our expectations, beliefs or
projections will be achieved or accomplished. Furthermore, any forwardJooking statement speaks only as ofthe date on which such statement is made. We
undertake no obligation to update any fonwardJooking statement or statements to reflect events or circumstances that occur after the date on which such
statement is made or to reflect the occurrence ofunanticipated events. New risks, uncertainties and other factors emerge from time-to-time, and it is not
possible for us to predict all such factors, nor can we assess the effect ofeach such factor on our business or the extent tlrat any such factor or combination of
factors may cause actual results to differ materially fiom those contained in any forwardJooking statement.
3
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Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 10 of 177
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AVISTA CORPORATION
Available Information
Our website address is www.avistacorp.com. We make annual, quarterly and current reports available on our website as soon as practicable after electronically
filing these reports wrth the U.S. Securities and Exchange Commission (SEC). Information contained on our website is not part of this report.
PART I
ITEM I. BUSINESS
COMPANYOVERVIEW
Avista Corp., incorporated in the territory ofWashington in I 889, is primarily an electric and natural gas utility with certain other business ventures. As of
December 3 1 , 201 6, we employed I ,7 42 people in our Pacific Northwest utility operations (Avista Utilities) and 240 people in our subsidiary businesses
(including our Juneau, Alaska utility operations). Our corporate headquarters are in Spokane, Washington, the secondJargest city in Washington. Spokane
serves as the business, transportation, medical, industrial and cultural hub ofthe lnland Northwest region (eastem Washington and nodhem Idaho). Regional
services include government and higher education, medical services, retail trade and finance. Through our subsidiary AEL&P, we also provide electric utility
services in Juneau, Alaska.
As of December 3 I , 201 6, we have two reportable business segments as follows:
. Avista Utilities- an operating division ofAvista Corp. (not a subsidiary) that comprises ourregulated utility operations in the Pacific Northwest.
Avista Utilities generates, transmits and distributes electricity and distributes natural gas, serving electric and natural gas customers in eastem
Washington and northem Idaho and natural gas customers in pafis of Oregon. We also supply electricity to a small number of customers in Montana,
most ofwhom are our employees who operate our Noxon Rapids genemting facility. Avista Utilities also engages in wholesale purchases and sales
ofelectricity and natural gas as an integral part ofenergy resource management and our load-sewing obligation.
. AEL&P - a utility providing electric services in Juneau, Alaska that is a wholly-owned subsidiary and the primary operating subsidiary of AERC.
We acquired AERC on July 1, 2014, and as of that date, AERC became a wholly-owned subsidiary of Avista Corp. See 'Note 4 of the Notes to
Consolidated Financial Statements" for further discussion regarding this acquisition.
We have other businesses, including sheet metal fabrication, venture fund investments, real estate investments, a company that explores markets that could
be served with LNG, as well as certain other investments of Avista Capital, which is a direct, wholly owned subsidiary of Avista Corp. These activities do not
represent a reportable business segment and are conducted by various direct and indirect subsidiaries ofAvista Corp., including AM&D, doing business as
METALft.
Total Avista Corp. shareholders'equity was $1,648.7 million as of December3l,20l6, ofwhich $60.7 million represented ourinvestment in Avista Capital
and $ l0l .1 million represented our investment in AERC.
See "Item 6. Selected Financial Data" and "Note 2 1 ofthe Notes to Consolidated Financial Statements" for information with respect to the operating
performance ofeach business segment (and other subsidiaries).
AVISTAUTILITTES
General
At the end of20 1 6, Avista Utilities supplied retail electric service to 377 ,000 customers and retail natural gas service to 340,000 customers across its service
territory. Avista Utilities' service territory covers 30,000 square miles with a population of 1 .6 million. See "Item 2. Properties" for further information on our
utility assets. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Economic Conditions and Utility
Load Growth" for information on economic conditions in our service territory.
Electric Operations
General Avista Utilities generates, transmits and distributes electricity, sewing electric customers in eastem Washington, northem Idaho and a small number
of customers in Montana.
Avista Utilities generates electricity from facilities that we own and purchases capacity, energy and fuel for generation under long-term and short-term
contracts to meet customer load obligations. We also sell electric capacity and energy, as well as surplus fuel in the wholesale market in connection witlr our
resource optimization activities as described below.
4
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Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G- 17-_
M. Thies, Avista
Schedule 1, Page 11 ol 177
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AVISTA CORPORATION
As part ofAvista Utilities'resource procurement and management operations in the electric business, we engage in an ongoing process ofresource
optimization, which involves the economic selection ofenergy rcsources from those available to serve our load obligations and the capture ofadditional
economic value through market transactions. We engage in transactions in the wholesale markets by selling and purchasing electric capacity and energy, fuel
for electric generation, and derivative instruments related to capacity, energy, fuel and fuel transportation. Such transactions are part ofthe process of
matching available resources with load obligations and hedging the related financial risks. These transactions range from terms ofintra-hourup to multiple
years. We make continuing projections of:
. electric loads at various points in time (ranging from intra-hour to multiple years) based on, among other things, estimates of customer
usage and weather, historical data and contract terms, and
. resource availability at these points in time based on, among other things, fuel choices and fuel markets, estimates of streamflows,
availability ofgenerating units, historic and forward martet information, contract terms and experience.
On the basis ofthese projections, we make purchases and sales ofelectric capacity and energy, fuel for electric generation, and related derivative instruments
to match expected resources to expected electric load requirements and reduce our exposure to electricity (or fuel) market price changes. Resource
optimization involves scheduling and dispatching available resources as well as the following:
' purchasing fuel forgeneration,
. when economical, selling fuel and substituting wholesale electric purchases, and
. otherwholesale transactions to capture the value ofgenerating resources, transmission contract rights and fuel delivery (transport) capacity
contracts.
This optimization process includes entering into hedging transactions to manage risks. Transactions include both physical energy contracts and related
derivative instruments.
Avista Utilities'generation assets are interconnected through the regional transmission system and are operated on a coordinated basis to enhance load-
serving capability and reliability. Avista acquires both long-term and shorl-term transmission capacity to facilitate all ofour energy and capacity
transactions. We provide transmission and ancillary services in eastem Washington, northem Idaho and westem Montana.
Electric Requirements
Avista Utilities'peak electric native load requirement for 201 6 was I ,655 MW, which occurred on December 17 ,2016.In 201 5, our peak electric native load
was 1,638 MW, which occurred during the summer, and in 2014, it was 1,715 MW, which occurred during the winter.
Electric Resources
Avista Utilities has a diverse electric resource mix ofCompany-owned and contracted hydroelectdc, thermal and wind generation facilities, and other
contracts for power purchases and exchanges.
At the end of 2016, our Company'owned facilities had a total net capability of I ,862 MW, of which 55 percent was hydroelectric and 45 percent was thermal.
See "ltem 2. Properties" for detailed information on generating facilities.
Hydroelectric Resources Avista Utilities owns and operates six hydroelectric projects on the Spokane River and two hydroelectric projects on the Clark
Foft River. Hydroelectric genemtion is typically our lowest cost source perMWh ofelectric energy and the availability ofhydroelectric generation has a
significant effect on total power supply costs. Under normal streamflow and operating conditions, we estimate that we would be able to meet approximately
one-halfofour total average electric requirements (both retail and long-term wholesale) with the combination ofour hydroelectric generation and long-term
hydroelectric purchase contracts with certain PUDs in the state ofWashington. Our estimate ofnormal annual hydroelectric generation for 2O17 (including
resources purchased under long-term hydroelectric contracts with certain PUDs) is 53 8 aMW (or 4.7 milton MWhs).
5
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Exhibit No. 3
Case Nos. AVU-E-I7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 12 oI 177
Table of Contents
AVISTA CORPORATIONa
The following shows
.t.3 I I
5.250
-1.500
3.750
:;.000
2,:50
t.500
750
Hydroelectrir Generation
5.01{)
t.777
o
E
o
I Noxon Rapidr
I fabiner Coryr
I ftroknne Riucr Prqects
Lonrr.term lrvdroelectrrcf contracLs rvrth PUDs
Nornrrl htdroeleclric
Seneralion ( I I
0
1lt I (r l{rll lI lJ
(1) Normalhydroelectricgenerationisdeterminedbyapplyinganupstreamdamregulationcalculationtomediannaturalwaterflowinformation.Natural
water flow is the flow ofthe rivers without the influence ofdams, whereas regulated water flow takes into account any water flow changes from upstream
dams due to releasing or holding back water. The calculation ofnormal varies annually due to the timing ofupstream dam regulation throughout the
year.
Thermal Resources Avista Utilities owns the following thermal generating resources:
. the combined cycle CT natural gas-fired Coyote Springs 2 located near Boardman, Oregon,
I 5 percent interest in a twin-unit, coal-fired boiler generating facility, Colstrip 3 & 4, located in southeastem Montana,
. a wood waste-fired boiler generating facility known as the Kettle Falls Generating Station (Kettle Falls GS) in northeastem Washington,
. a two-unit natural gas-fired CT generating facility, located in northeastem Spokane (Northeast CT),
. a two-unit natural gas-fired CT generating facility in northem Idaho (Rathdrum CT), and
. two small natural gas-fired generating facilities (Boulder Park GS and Kettle Falls CT).
Coyote Springs 2, which is operated by Portland General Electric Company, is supplied with natural gas undera combination ofterm contracts and spot
market purchases, including transportation agreements with bilateral renewal rights.
Colstrip, which is operated by Talen Energy LLC, is supplied with fuel from adjacent coal reserves under coal supply and transportation agreements in effect
through 20 I 9. During 201 6, Talen Energy LLC provided notice to the Colstrip owners that it no longer plans to operate units 3 & 4 after May 20 I 8. The
Colstrip owners ar€ searching for a replacement operator for units 3 & 4. In addition, see "ltem 7. Managementrs Discussion and Analysis, Environmental
Issues and Contingencies" for further discussion regarding environmental issues surrounding Colstrip.
the ended
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Exhibit No. 3
Case Nos. AVU-E-'17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1 , Page '1 3 of 177
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AVISTA CORPORATION
The primary fuel for the Kettle Falls GS is wood waste generated as a by-product and delivered by trucks from forest industry operations within 100 miles of
the plant. A combination oflong-term contracts and spot purchases has provided, and is expected to meet, fuel requirements for the Kettle Falls GS.
The Northeast CT, Rathdrum CT, Boulder Park GS and Kettle Falls CT generating units are primarily used to meet peaking electric requirements. We also
operate these facilities when marginal costs are below prevailing wholesale electric prices. These generating facilities have access to natural gas supplies that
are adequate to meet their respective operating needs.
See "ltem 2. Properties - Avista Utilities - Generation Properties" for the nameplate rating and present generating capabilities ofthe above thermal resources.
We have the exclusive rights to all the capacity ofthe Lancaster Plant, a 270 MW natural gas-fired combined cycle combustion turbine plant located in
northem Idaho, owned by an unrelated third-party. All ofthe output from the Lancaster Plant is contracted to us througlr 2026 under a PPA. Under the terms
ofthe PPA, we make the dispatch decisions, provide all natural gas fuel and receive all ofthe electric energy output from the Lancaster Plant; therefore, we
consider this plant in our baseload resources. See "Note 3 ofthe Notes to Consolidated Financial Statements" for further discussion ofthis PPA.
The following graph shows Avista Utilities'thermal generation (in thousands of MWhs) during the year ended December 3l:
Thermal Generation
6.0m
5.2J0
4.500
;.750
.1.000
1.150
1.500
750
0
5.508
4.e3:i
.}.
o
I Coyote Springs 1
I colsrrip
I Kculc'lirlls CS
Northeast CT.
Rathdnuu CT. Boulder
Pork CS $rd lsellle
Fnlls CT
Lancaster Plant PPi\
Ir)l(':015 lil lJ
Wind Resources We have exclusive rights to all the capacity of Palouse Wind, a wind generation project developed, ou,ned and managed by an unrelated
third-party and located in Whitman County, Washington. We have a PPA that expires in 2042 and allows us to acquire all of the power and renewable
attributes produced by the project at a fixed price per MWh with a fixed escalation ofthe price over the term ofthe agreement. The project has a nameplate
capacity of 105 MW. Generation from Palouse Wind was 349,771 MWhs in 2016,293,563 MWhs in 2015 and 335,291 MWhs in 2014. We have an annual
option to purchase the wind project beginning in December 2022. The purchase price per the PPA is a fixed price per KW ofin-service capacity with a fixed
decline in the price per KW over the remaining 20-year term ofthe agreement. Under the terms ofthe PPA, we do not have any input into the day-today
operation ofthe project, including maintenance decisions. All such rights are held by the owner.
Other Purchases. Exchanges and Sales ln addition to the resources described above, we purchase and sell power under various long-tenn contracts, and we
also enter into short-term purchases and sales. Further, pursuant to PURPA, as amended, we are required to purchase generation from quali$ing facilities. This
includes, among other resources, hydroelectric projects, cogeneration projects and wind generation projects at rates apprcved by the UTC and the IPUC.
7
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Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1 , Page 14 ol 177
{..1.17
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AVISTA CORPORATION
See "Avista Utilities Electric Operating Statistics - Electric Operations" for annual quantities ofpurchased power, wholesale power sales and power from
exclranges in 2016,201 5 and 20 14. See "Electric Operations" above for additional information with respect to the use of wholesale purclrases and sales as
part ofour resource optimization process and also see "Future Resource Needs" below for the magnitude ofthese power purchase and sales contracts in future
periods.
Hydroelectric Licenses
Avista Corp. is a licensee underthe Federal Power Act (FPA) as administered by the FERC, which includes regulation ofhydroelectric generation resources.
Excluding the Little Falls Hydroelectric Generating Project (Little Falls), our other seven hydroelectric plants are regulated by the FERC through two project
licenses. The licensed projects are subject to the provisions ofPart I ofthe FPA. These provisions include payment for headwater benefits, condemnation of
licensed projects upon payment ofjust compensation, and take-over by the federal govemment ofsuch projects after the expiration ofthe license upon
payment ofthe lesser of"net investment" or "fair value" ofthe project, in either case, plus severance damages. In the unlikely event that a take-over occurs, it
could lead to eitherthe decommissioning ofthe hydroelectric project oroffering the project to anotherparty (likely through sale and transferofthe license).
Cabinet Gorge and Noxon Rapids are underone 45-yearFERC license issued in March 2001. See "Cabinet Gorge Total Dssolved Gas Abatement Plan" in
"Note I 9 ofthe Notes to Consolidated Financial Statements" for discussion ofdissolved atmospheric gas levels that exceed state ofldaho and federal
numeric water quality standards downstream ofCabinet Gorge during periods when we must divert excess river flows over the spillway, as well as our
mitigation plans and efforts.
Five ofour six hydroelectric projects on the Spokane River (Long Lake, Nine Mile, Upper Falls, Monroe Street and Post Falls) are under one 50-year FERC
license issued in June 2009 and are referred to collectively as the Spokane River Project. The sixth, Little Falls, is operated under separate Congressional
authority and is not licensed by the FERC.
Future Resource Needs
Avista Utilities has operational strategies to provide sufficient resources to meet our energy requirements under a range ofoperating conditions. These
operational strategies consider the amount ofenergy needed, which varies widely because ofthe factors that influence demand over intra-hour, hourly, daily,
monthly and annual durations. Our average hourly load was 1,033 aMW in 2016,1,047 aMW in 2015 and 1,062 aMW in 2014.
The following graph shows our forecast ofour average annual energy requirements and our available resources for 20 I 7 through 2020:
Forecasted Electric Energy Requirements and Resources
a o(l0 Iln;uirtrmnl*
I Slstcm lorl
I fsffiilcts for pds(r sitl*s ( I I
Rr;ourrts
|,is8 l.sla t.521 l..l{rut.5U)
I, t{0 t. t{0 t.135 t. t06
l.00Cl
500
('ontynny <rrr trcrt and conroci
h-rdro gcBrrrion (!l
Cmrtunl <rr nrd and rnnlrst
thcmJ gcmnrior{3)
Other contncls lor prrrcr
prrr;hascs
I Addrrimrl arlihblc rncrgr
{"1}
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8
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Exhibit No. 3
Case Nos. AVU-E-I7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 15 ol 177
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AVISTA CORPORATION
(1 ) The contracts for power sales decrease due to certain contracts expiring in each ofthese years. We are evaluating the future plan for the additional
resources made available due to the expiration ofthese contracts.(2) The forecast assumes nearnormal hydroelectric generation.
(3) Includes the Lancaster Plant PPA. Excludes Boulder Park GS, Kettle Falls CT, Northeast CT and Rathdrum CT, as these are considered peaking
facilities and are generally not used to meet ourbase load requirements.(4) The combined maximum capacity of Boulder Park GS, Kettle Falls CT, Northeast CT and Rathdrum CT is 278 MW, witlr estimated available energy
production as indicated for each year.
In August 2015, we filed our 2015 Electric IRP with the UTC and the IPUC. The UTC and IPUC review the IRPs and give the public the opportunity to
comment. The IJTC and IPUC do not approve or disapprove ofthe content in the IRPs; rather they acknowledge that the IRPs were prepared in accordance
with applicable standalds ifthat is the case. The IRP details projected groMh in demand for energy and the new resources needed to serve customers over the
next 20 years. We regard the IRP as a tool for resource evaluation, rather than an acquisition plan for a particular project.
Highlights of the 20 I 5 IRP include the following expectations and proj ections:
. We will have adequate resources between ourowned and contractually controlled generation, combined with conservation and market
purchases, to meet customer needs through 2020.
. 565 MW ofadditional generation capacity is required for the period 2020 through 2034.
. We will meet or exceed the renewable energy requirements of the Washington state Energy Independence Act through the 20-year IRP time
frame with a combination of qualiffing hydroelectric upgrades, the 3O-yearPPA with Palouse Wind, the Kettle Falls GS and selective REC
purchases.
. Load growth will be approx imately 0.6 percent, a decline from the groMh of I .0 percent forecasted in 201 3. This delays the need for a new
natural gas-fired resource by one year. The decrease in expected load growth is primarily due to energy efficiency progrrms (using less
energy to perform activities) employed by our customers over the next 20 years and the load impacts ofincreased prices. See "Item 7.
Management Discussion and Analysis - Economic Conditions and Utility Load Growth' for further discussion regarding utility customer
growth, load growth, and the general economic conditions in our service territory. The estimates of future load growth in the IRP and at
"Item 7. Management Discussion and Analysis - Economic Conditions and Utility Load Growth" differ slightly due to the timing of when
the two estimates were prepared and due to the time period that each estimate is focused on.
. Colstrip will remain a cost effective and reliable source of power to meet future customer needs.
. Energy efficiency will offset more than half of projected load growth through the 2O-year IRP time frame.
Demand response (temporarily reducing the demand for energy) was eliminated from the Preferred Resource Strategy due to higher estimated costs.
We are required to file an IRP every two years, with the next IRP expected to be filed during the third quarter of 201 7. Our resource strategy may change from
the 20 I 5 IRP based on market, legislative and regulatory developments.
We are subject to the Washington state Energy Independence Act, wlrich requires us to obtain a portion of our electricity from qualifoing renewable resources
or through purchase ofRECs and acquiring all cost effective conservation measures. Future generation resource decisions will be impacted by legislation for
restrictions on GHG emissions and renewable energy requirements.
See "ltem 7. Management's Dscussion and Analysis of Financial Condition - Environmental Issues and Contingencies" for information related to existing
laws, as well as potential legislation that could influence our future electric resource mix.
Natural Gas Operations
@[Avista Utilities provides natural gas distribution services to retail customers in parts of eastern Washington, northem Idaho, and northeastem and
southwestem Oregon.
Market prices for natural gas, like other commodities, can be volatile. Our natural gas procurement strategy is to provide a reliable supply to our customen
with some level of price certainty. We procure nalural gas from various supply basins and over varying time periods. The resulting portfolio is a diversified
mix offorward fixed price purchases, index and spot market purchases, utilizing physical and financial derivative instruments. We also use natural gas
storage to support high demand periods and to procure natural gas when prices may be lower. Securing prices throughout the year md even into subsequent
years provides a level ofprice certainty and can mitigate price volatility to customers between years.
9
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 16 of 177
o
o
E&.L@s
AVISTA CORPORATION
Weather is a key component ofour natural gas customer load. This load is highly variable and daily natural gas loads can differ significantly from the
monthly forecasted load projections. We make continuing projections ofour natural gas loads and assess available natural gas resources. On the basis ofthese
projections, we plan and execute a series oftransactions to hedge a portion ofour customersrprojected natural gas requirements through forward market
transactions and derivative instruments. These transactions may extend for multiple years into the future. We also leave a portion of our natural gas supply
requirements unhedged for purchase in tlre short-term spot markets.
Our purclrase of natural gas supply is govemed by our procurement plan and is reviewed and approved annually by the Risk Management Comminee @MC),
which is comprised ofcertain officers and other management personnel. Once approval is received, the plan is implemented and monitored by our gas supply
and risk managemenl groups.
The plan's progress is also presented to the UTC and IPUC staffin semi-annual meetings, and updates are given to the OPUC staffquarterly. Other
stakeholders, such as tlre Public Counsel Unit of the Office of the Attomey General or the Citizen Utility Board, are invited to participate. The RMC is
provided with an update on plan results and changes in their monthly meetings. These activities provide transparency for the natural gas supply procurement
plan. Any material changes to the plan are documented and communicated to RMC members.
As part ofthe process ofbalancing natural gas retail load requirements with resources, we engage in the wlrolesale purclrase and sale ofnatural gas. We plan
for sufficient natural gas delivery capacity to serve our retail customers for a theoretical peak day event. As such, we generally have more pipeline and storage
capacity than what is needed during periods other than a peak day. We optimize our natural gas resources by using market opportunities to generate
economic value that helps mitigate fixed costs. Wrolesale sales are delivered through wholesale market facilities outside of our natural gas distribution
system. Natural gas resource optimization activities include, but are not limited to:
. wholesale market sales ofsurplus natural gas supplies,
. purchases and sales ofnatural gas to optimize use ofpipeline and storage capacity, and
. participation in the transportation capacity release market.
We also provide distribution transportation service to qualified, large commercial and industrial natural gas customers who purchase natural gas through
thind-party marketers. For these customers, we receive their purchased natural gas from such third-party marketers into our distribution system and deliver it to
the customers' premise.
Optimization transactions that we engage in throughout the year arc included in our annual purchased gas cost adjustment filings with the various
commissions and they are subject to review for prudence during this process.
Natural Gas Suoolv Avista Utilities purchases all of its natural gas in wholesale markets. We are connected to multiple supply basins in the westem United
States and Canada through firm capacity transportation rights on six different pipeline networks. Access to this divene portfolio ofnatural gas resources
allows us to make natural gas procurement decisions that benefit our natural gas customers. These interstate pipeline transportation dghts provide the
capacity to serve approximately 25 percent ofpeak natural gas customer demands from domestic sources and 75 percent from Canadian sourced supply.
Natural gas prices in the Pacific Northwest are affected by global energy markets, as well as supply and demand factors in other regions ofthe United States
and Canada. Future prices and delivery constraints may cause our resource mix to vary.
Natural Gas Storage Avista Utilities owns a one-third interest in Jackson Prairie, an underground aquifer natural gas storage field located near Chehalis,
Washington. Jackson Prairie has a total peak day deliverability of l2 million therms, with a total working natural gas capacity of 256 million therms. As an
owner, our share is one-third ofthe peak day deliverability and total working capacity. We also contract for additional storage capacity and delivery at
Jackson Prairie from Northwest Pipeline for a portion oftheir one-third share ofthe storage project.
We optimize our natural gas storage capacity throughout the year by executing transactions that capture favorable market price spreads. Natural gas buyers
identifo opportunities to purchase lower cost natural gas in the immediate tenn to inject into storage, and then sell the gas in a forward market to be
withdrawn at a later time. The reverse ofthis type oftransaction also occurs. These transactions lock in incremental value for customers. Jackson Prairie .is
also used as a variable peaking rrsource, and to prctect from extreme daily price volatility during cold weather or other events affecting the market.
Future Resource Needs In August 2016, we filed our 2016 Natural Gas IRP with the UTC, IPUC and the OPUC. The natural gas IRPs are similar in nature to
the electric IRPs and the process for preparation and review by the state commissions ofboth the electric and natural gas IRPs is similar. The IRP details
projected growth in demand for energy and the new resources
10
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 17 ol 177
o
o
Tabl€ of Contents
AVISTA CORPORATION
needed to serve customers over the next 20 years. We regard the IRP as a tool for resource evaluation, rather than an acquisition plan for a particular project.
Highlights ofthe 20 1 6 natural gas IRP include the following expectations and projections:
. We will have sufficient natural gas transportation resources well into the future with resource needs not occurring during the 20-year
planning horizon in Washington, Idaho, or Oregon.
. Natural gas commodity prices will continue to be relatively stable due to robust North American supplies led by shale gas development.
. Future customer growth in our servi ce territory will increase slightly compared to the 20 l4 IRP. There will be increasing interest from
customers to utilize natural gas due to its abundant supply and subsequent low cost. We anticipate that increased demand in the region will
primarily come from power generation as natural gas is increasingly being used to back up solar and wind technology, as well as replace
retired coal plants. There is also potential for increased usage in other markets, such as transportation and as an industrial feedstock.
. The availability ofnatural gas in North America will continue to change global LNG dynamics. Existing and new LNG facilities will look
to export low cost North American natural gas to the higher priced Asian and European markets. This could alter the price ofnatural gas
and/or transportation, constrain existing pipeline networks, stimulate development ofnew pipeline resources, and change flows ofnatural
gas across North America.
Since forecasted demand is relatively flat, we will monitor actual demand for signs ofincreased growth which could accelerate resource needs.
Our resource strategy in our 20 I 8 IRP may change from the 20 I 6 IRP based on market, legislative and regulatory developments.
Regulatory Issues
General As a public utility, Avista Corp. is subject to regulation by state utility commissions for prices, accounting, the issuance ofsecurities and other
matters. The retail electric and natural gas operations are subject to thejurisdiction ofthe UTC, IPUC, OPUC and MPSC. Approval ofthe issuance of
securities is not required from the MPSC. We are also subject to thejurisdiction ofthe FERC for licensing ofhydroelectric generation resources, and for
electric transmission services and wholesale sales.
Since Avista Corp. is a "holding company" (in addition to being itselfan operating utility), we are also subject 1o the jurisdiction ofthe FERC under the
Public Utility Holding Company Act of 2005, which imposes certain reporting and otherrequirements. We, and all of our subsidiaries (whetherornot
engaged in any energy related business), are required to maintain books, accounts and other records in accordance with the FERC regulations and to make
them available to the FERC and the state utility commissions. In addition, upon the request ofany jurisdictional state utility commission, or ofAvista Corp.,
the FERC would have the authority to review assignment ofcosts ofnon-power goods and administrative services among us and our subsidiaries. The FERC
has the authority generally to require that rates subject to itsjurisdiction bejust and reasonable and in this context would continue to be able to, among other
things, review transactions ofany affiliated company.
Our rates for retail electric and natural gas senices (other than specially negotiated retail rates for industrial or large commercial customers, which are subject
to regulatory review and approval) are generally determined on a "cost ofservice" basis.
Rates are designed to provide an opportunity for us to recover allowable operating expenses and eam a retum ofand a reasonable retum on "rate base." Rate
base is generally determined by reference to the original cost (net ofaccumulated depreciation) ofutility plant in service, subject to various adjustments for
deferred income taxes and other items. Over time, rate base is increased by additions to utility plant in service and reduced by depreciation and retirement of
utility plant and write-offs as authorized by the utility commissions. Our operating expenses and rate base are allocated or directly assigned to five regulatory
jurisdictions: electric in Washington and Idaho, and natural gas in Washington, Idaho and Oregon. In general, requests for new retail rates are made on the
basis ofrevenues, operating expenses and net investment for a test year that ended prior to the date ofthe request, subject to possible adjustments, which
differ among the variousjurisdictions, designed to reflect the expected revenues, operating expenses and net investment during the period new retail rates
will be in effect. The retail rates approved by the state commissions in a rate proceeding may not provide sufficient revenues to provide recovery ofcosts and
a reasonable retum on investment for a number ofreasons, including, but not limited to, unexpected changes in revenues, expenses and investment following
the time new retail rates are requested in the rate proceeding, the denial by the commission
1l
O
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 1,Page 18ol 177
o
Table of Contents
AVISTA CORPORATION
of recovery, or timely recovery, of certain expenses or investment and the limitation by the comrnission of the authorized retum on investment.
Our rates for wholesale electric and natural gas transmission services are based on either "cost ofservice" principles or market-based rates as set forth by the
FERC. See "Notes I and 20 of the Notes to Consolidated Financial Statements" for additional information about regulation, depreciation and deferred
income taxes.
General Rate Cases Avista Utilities regularly reviews the need for electric and natural gas rate changes in each state in which we provide service. See "ltem
7. Management's Discussion and Analysis - Regulatory Matters - General Rate Cases" for information on general rate case activity.
Power Cost Deferrals Avista Utilities defers the recognition in the income statement ofcertain power supply costs that vary from the level currently
recovered from our retail customers as authorized by the UTC and the IPUC. See "ltem 7. Management's Discussion and Analysis - Regulatory Matters -
Power Cost Deferrals and Recovery Mechanisms" and "Note 20 olthe Notes to Consolidated Financial Statements" for information on power cost deferrals
and recovery mechanisms in Washington and Idaho.
Purchased Gas Adiustment (PGA) Under established regulatory practices in each state, Avista Utilities defers the recognition in the income statement of the
natural gas costs that vary from the level currently recovered from our retail customers as authorized by each ofourjurisdictions. See "Item 7. Management's
Discussion and Analysis - Regulatory Matters - Purchased Gas Adjustments" and "Note 20 ofthe Notes to Consolidated Financial Statements" for
information on natural gas cost deferrals and recovery mechanisms in Washington, Idaho and Oregon.
Decouolinq and Earninqs Sharins Mechanisms Decoupling is a mechanism designed to severthe link between a utility's rrvenues and consumers'energy
usage. In each ofAvista Utilities'jurisdictions, each month Avista Utilities'electric and natural gas revenues are adjusted so as to reflect revenues based on
the number ofcustomers in certain customer rate classes, rather than kilowatt hour and therm sales. The difference between revenues based on the number of
customers and revenues based on actual usage is deferred, and either surcharged or retrated to customers beginning in the following year. In conjunction with
the decoupling mechanisms, Washington includes an after-the-fact eamings test. At the end ofeach calendar year, eamings calculations are made for the prior
calendar year and a portion ofany eamings above a certain threshold are deferred and later retumed to customers. Oregon also has an annual eamings review,
not directly associated with the decoupling mechanism, wlrere eamings above a certain threshold are deferred and laterretumed to customers. See "Item 7.
Management's Discussion and Analysis - Regulatory Matters - Decoupling and Eamings Sharing Mechanisms" for further discussion of these mechanisms.
Federal Laws Related to Wholesale Competition
Federal law promotes practices that foster competition in the electric wholesale energy market. The FERC requires electric utilities to transmit power and
energy to or for wholesale purchasen and sellers, and requires electric utilities to enhance or construct transmission facilities to create additional transmission
capacity for the purpose ofproviding these services. Public utilities (through subsidiaries or affiliates) and other entities may participate in the development
ofindependent electric generating plants for sales to wholesale customers.
Public utilities operating under the FPA are required to provide open and non-discriminatory access to their transmission systems to third parties and
establish an Open Access Same-Time Information System to provide an electronic means by which transmission customers can obtain information about
available transmission capacity and purchase transmission access. The FERC also requires each public utility subject to the rules to operate its transmission
and wholesale power merchant operating functions separately and to comply with standards ofconduct designed to ensure that all wholesale users, including
the public utility's powermerchant operations, have equal access to the public utility's transm'ission system. Our compliance with these standards has not had
any substantive impact on the operation, maintenance and marketing ofour transmission system or our ability to provide service to customers.
See "Item 7. Management's Dscussion and Analysis - Competition" for further information.
Regional Transmission Organizations
Beginning with FERC OrderNo. 888 and continuing with subsequent rulemakings and policies, the FERC has encouraged better coordination and
operational consistency aimed to capture efficiencies that might otherwise be gained through the formation ofa Regional Transmission Organization or an
independent system operator (ISO).
t2
o
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G- t 7-_
M. Thies, Avista
Schedule I , Page 19 ol 177
Table of Contents
AVISTA CORPORATIONa
o
Regional Transmission Planning
Avista Utilities meets its FERC requirements to coordinate tmnsmission planning activities with other regional entities through ColumbiaGrid.
ColumbiaGrid is a Washington nonprofit membership corporation with an independent board formed to improve the operational efficiency, reliability, and
planned expansion of the transmission grid in the Pacific Northwest. We became a member of ColumbiaGrid in 2006 during its formation. ColumbiaGrid is
not an ISO, but performs those functions that its members request from time to time. Cunently, ColumbiaGrid fills the role of facilitating our regional
transmission planning as required in FERC Order No. I 000 and other clarifying FERC Orden. ColumbiaGrid and its members also work with other westem
organizations to address transmission planning, including WestConnect and the Northem Tier Transmission Group (I.{TTG). In 201 1 , we became a registered
Planning Participant of the NTTG. We will continue to assess the benefits of entering into other functional agreements with ColumbiaGrid and/or
participating in other forums to attain operational efficiencies and to meet FERC policy objectives.
Regional Energy Markets
The Califomia lndependent System Operator (CAISO) recently implemented an EIM in the westem United States. Most investor-owned utilities in the Pacific
Northwest are either participants in the CAISO EIM or plan to integrate into the market in the near future, which could reduce bilateral market liquidity and
opportunities for wholesale transactions in the Pacific Northwest. Avista Utilities will continue to monitor the CAISO EIM expansion and the associated
impacts. As market fundamentals and our business needs evolve, we will weigh the advantages and disadvantages ofjoining the CAISO EIM or other
organized energy markets in the future.
Reliability Standards
Among its other provisions, the U.S. Energy Policy Act provides for the implementation ofmandatory reliability standards and authorizes the FERC to assess
penalties for non-compliance with these standards and other FERC regulations.
The FERC certified the NERC as the single Electric Reliability Organization authorized to establish and enforce reliability standards and delegate authority
to regional entities for the purpose ofestablishing and enforcing reliability standards. The FERC approved the NERC Reliability Standards, including
westem region standards, rnaking up the set oflegally enforceable standards for the United States bulk electric system. The first ofthese reliability standards
became effectiv e in 2007 . We are required to self-certi! our compliance with these standards on an annual basis and undergo regularly scheduled penodic
reviews by the NERC and its regional entity, the Westem Electricity Coordinating Council (WECC). Our failure to comply with these standards could result
in financial penalties ofup to $ I million per day per violation. Annual self-certification and audit processes to date have demonstrated our substantial
compliance with these standards. Requirements relating to cyber security are continually evolving. Our compliance with version 5 of the NERC's Critical
Infrastructure Protection standard continues to drive several physical security initiatives at our generating stations and substations. We do not expect the
costs ofthese physical security initiatives to have a material impact on our financial results.
l3
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1 , Page 20 ol 177
o
Table of Contents
o AVISTA CORPORATION
A}'ISTA I]TILITIES ELECTRIC OPERATING STATISTICS
Years Ended December 3 I
2016 201 5 2014
ELECTRIC OPERATIONS
OPERATING REVENLIES @ollars in Thousands):
Resideotial
Commercial
Industrlal
Public street and highway lighting
Total retail
Wholesale
Sales of fuel
Other
Decoupling
Provision for eamings sharing
$339,210 $
305,613
'107,296
'7,662
335,552
308,2 I 0
111,7'70
7,277
$338,697
300,1 09
110,77 5
1 <to
7 s9,7 8t
112,07 1
78,334
28,492
17,349
932
757,130
l 38,1 62
83,732
27,467
(7,503)
Total electric operating revenues $ 996,959 $ 998,988
ENERGY SALES (Thousands ofMWhs):
Residential
Commercial
Indusfial
Public street and highway Iighting
Total retail
Wrolesale
Total electric energy sales
ENERGY RESOURCES (Thousands of MWhs):
Hydro generation (from Company facilities)
Thermal generation (from Company facilities)
Purchased power
Power exchanges
Total pow€rresouires
Energy losses and Company use
Total energy resources (net oflosses)
NUMBER OF RETAIL CUSTOMERS (Average for Period):
Residential
Commercial
lndustrial
Public street and highway lighting
3,528
3,r 83
1,7 63
23
3,57 |
3,19',1
1,8 12
3,694
3,1 89
i,868
o 8,497
2,998
8,603
3,t4s
8,776
3,686
11.495 tt,748 t2,462
3,836
3,626
n \o1
(6)
3,434
3,983
4.899
(2)
4,143
3,252
5,61 5
(2s)
12,053
(5s8)
\2,31,4
(566)
12,985
(523)
trAe5 11,748 12,462
330,699
4t,785
t,342
558
327,457
4t,296
1,353
529
324,188
40,988
1,385
531
3,67 p92y743U370,235
RESIDENTIAL SERVICE A\IERAGES:
Annual use per customer (KWh) (l )
Revenue per KWh (in cents)
Annual revenue per customer
AVERAGE HOURLY LOAD (aMW)
t4,667
9.62
1,025.74 $
1,033
t0,827 11,394
9.17
1,044.7 6
1,062
9.40
7.2t $
t,047
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1 , Page 21 ot 177
14
762,809
127,253
82,853
25,839
4,740
(s,62t)
$
Teble of Contents
O AVISTA CORPORATION
AVISTA I]TILITIES ELECTRIC OPERATING STATISTICS
Years Ended December 3 l,
2016 20t5 20t4
1,655 1,529 1,715
474 805 63 I
129%241%t60%
(l )
(2)
(3)
There has been a trending decline in use percustomerduring the three-yearperiod primarily due to weather fluctuations but also due in part to
energy efficiency measures adopted by customers.
Cooling degree days are the measure ofthe warmness ofweather experienced, based on the extent to which the average ofhigh and low temperatures
for a day exceeds 65 degrees Fahrenheit (annual degree days above historic indicate warmer than average temperatures). In 201 5, we switched to a
rolling 2O-year average for calculating cooling degree days, whereas in prior years we used a 30-year rolling average.
Heating degree days are the measure ofthe coldness ofweather experienced, based on the extent to which the average ofhigh and low temperdtures
for a day falls below 65 degrees Fahrenheit (annual degree days below historic indicate warmer than average temperatures). In 20 I 5, we switched to a
rolling 2O-year average for calculating heating degree days, whereas in prior years we used a 30-year rolling average.
l5O
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 'l , Page 22 ol 177
RETAIL NATII,E LOAD at time of system peak (MW):
Winter
Sumrner
COOLING DEGREE DAYS: (2)
Spokane. WA
Actual
Historical average
7o ofaverage
}IEATING DEGREE DAYS: (3)
Spokane, WA
Actual
Historical average
Yo of a,tenge
5,790
6,482
89%
5,614
6,491
86%
6,215
6,820
91o/o
Table of Contents
AVISTA CORPORATIONO
a
AVISTA UTILITIES NATT]RAL GAS OPERATING STATISTICS
2016
Years Ended December 3 1
N,{TURAL GAS.OPERATIONS
OPERATING REVENUES @ollars in Thousands):
Residential
Commercial
Intemrptible
Industrial
Total retail
Wholesale
Transportation
Other
Decoupling
Provision for eamings sharing
Total narural gas operating revenues
THERMS DELWERED (Thousands of Therms):
Residential
Commercial
Intemrptible
Industri al
Total retail
Wrolesale
Transportation
Interdepartmental and Company use
Total therms delivered
NLMBER OF RETAIL CUSTOMERS (Average for Period):
Residential
Commcrcial
Intemrptible
Industnal
Total natural gas retail customers
(t )
(2)
293,780
153,446
8,339
5,7 87
12,309
(2,7 67)
$ 470,894 $ 521,009
$19s27s $
92,978
2,179
3,348
201 5
193,82s $
96,7 5l
2,782
3,792
20t4
203,373
l 03,1 79
7 101
4,1 58
297 ,150
204,289
7,988
5,578
6,004
313,502
228,18'7
7,735
7,461
(221)
s ss6,664
186,565
112,686
5,700
5 ' 1.d.
t7 6,613
107,894
4,708
5,070
190,r71
| 16,7 48
5 nl1
5,648
310,185
684,317
t7 8,37 7
378
I ,173,257
294,285
809. l 32
164,679
335
317,600
545,620
162,311
4l]l
1,26843r 1,025,942
300,883
3 4,86 8
37
255
296.00s
"11 ) ro
35
261
291,928
34,047
37
264
336,043 330,530 326,276
RESIDENTIAL SERMCE AVERAGES:
620 593 651Annual use per customer (therms)
Rwenuepertherm(indollars) $ 1.05 S l.l0 $ 1.07
Antual revenuepercustomer $ 649.01 $ 650.83 $ 696.66
HEATING DEGREE DAYS: (I)
Spokane, WA
Actual 5,790 5,614 6,215
Historical average (2) 6,482 6,491 6,820
%o ofaverage 89o/o 860/0 9l%
Medford, OR
Actual 3,637 3,534 3,382
Historical average (2) 4,129 4,150 4,539
7o ofaverage 88% 85o/o 75%
Heating degree days are the measure ofthe coldness ofweather experienced, based on the extent to which the average ofhigh and low ternperatures
for a day falls below 65 degrees Fahrenheit (annual degree days below historic indicate warmer than average temperatures).
In 20 I 5, we svritched to a rolling 2O-year average for calculating heating degree days, whereas in prior years we used a 30-year rolling average.
l6o
Exhibit No. 3
Case Nos. AVU-E-'l 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 23 of 177
o
Table of Cont€nts
AVISTA CORPORATION
ALASKAELECTRIC LIGHT AND POWER COMPANY
AEL&P is the primary operating subsidiary ofAERC. AEL&P is the sole utility providing electrical energy in Juneau, Alaska. Juneau is a geographically
isolated community with no electric interconnections with the transmission facilities ofother utilities and no pipeline access to natural gas or other fuels.
Juneau's economy is primarily driven by govemment activities, tourism, commercial fishing, and mining, as well as activities as the commercial hub of
southeast Alaska.
AEL&P owns and operates electric generation, transmission and distribution facilities located in Juneau. AEL&P operates five hydroelectric generation
facilities with I 02.7 MW of hydroelectric generation capacity as of December 3 1 , 201 6. AEL&P owns four of these generation facilities (totaling 24.5 MW of
capacity) and has a PPA for the output ofthe Snettisham hydroelectric project (totaling 78.2 MW ofcapacity).
The Snettisham hydroelectric project is owned by the Alaska lndustrial Development and Export Authority (AIDEA), a public corporation ofthe State of
Alaska. AEL&P has a PPA and operating and maintenance agreement witlr the AIDEA to operate and maintain the facility. This PPA is a take-or-pay
obligation expiring in December 2038, to purchase all ofthe output ofthe project.
For accounting purposes, this PPA is treated as a capital lease and as ofDecember 3 I , 20 I 6, the capital lease obligation was $62.2 million. Snettisham
Electric Company, a non-operating subsidiary ofAERC, has the option to purchase the Snettisham project at any trme for a price equal to the principal
amount of the bonds outstanding at that time. See 'Note l4 of the Notes to Consolidated Financial Statements" for further discussion of the Snettisham
capital lease obli gation.
As ofDecember 31,2016, AEL&P also had I 07.5 MW ofdiesel generating capacity from four facilities to provide back-up service to firm customers when
necessary.
The following graph shows AEL&P's hydroelectric generation (in thousands of MWhs) during the trme periods indicated below:
Hydroelectric Generation
Ei
6
t
6
o
.150
400
350
,300
350
300
lJo
100
50
0
I Snettishanr
I Lake [)ororhy
Srtlnton ('reck
E Annex Creek
I cold creetr
_,\-onualhvdroeleclnc
generiltiorl ( I )
:0t(,:01 5 l0l.l SecondhalfoflOl{
(1) Nonnalhydroelectricgenerationisdefinedastheenergyoutputoftheplantduringayearwithaverageinflowstothereservoir.
Only the hydroelectric generation for the second half of 20 1 4 in the graph above was included in Avista Corp.'s overall results for 20 I 4. The fulI I 2 months
of20 1 4 in the graph above is presented for information purposes only.
As of December 3 I , 2016, AEL&P served approximately 17,000 customers. Its primary customers include city, state and federal govemmental entities located
in Juneau, as well as a mine located in the Juneau area. Most of AEL&P's customers are
1'7
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Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 24 of 177
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Tabl€ of Contents
AVISTA CORPORATTON
served on a firm basis while certain ofits customers, including its largest customer, are served on an intemrptible sales basis. AEL&P maintains separate rate
tariffs for each ofits customer classes, as well as seasonal rates.
AEL&P's operations are subject to regulation by the RCA with respect to rates, standard ofservice, facilities, accounting and certain otber matters, but not
with respect to the issuance ofsecurities. Rate adjustments for AEL&P's customers require approval by the RCA pursuant to RCA regulations. AEL&P filed
an electrjc general rate case during 20 1 6. See "ltem 7. Management's Discussion and Analysis - Regulatory Matters" for further discussion ofthis general rate
case filing, including the proposed capital structure.
AEL&P is also subject to thejurisdiction ofthe FERC conceming the permits and licensesnecessary to operate certain ofits hydroelectric facilities. One of
these licenses (for the Salmon Creek and Annex Creek hydroelectric projects) expires in 201 8, but AEL&P plans to extend this license. Since AEL&P has no
electric interconnection with other utilities and makes no wholesale sales, it is not subject to general FERC jurisdiction, other than the reporting and other
requirements of the Public Utility Holding Company Act of 2005 as an Avista Corp. subsidiary.
The Snettisham hydroelectric project is subject to regulation by the State ofAlaska with respect to dam safety and certain aspects ofits operations. ln
addition, AEL&P is subject to regulation with respect to air and water quality, land use and other environmental matters under both federal and state laws.
AEL&P ELECTRIC OPERATING STATISTICS
Ycars Ended Deccmber 3 I ,
2016 20 I 5
Second halfof
20t4
ELECTRIC OPERATIONS
OPERATING REVENUES (Dollars in Thousands):
Res dential
Commercial and govemment
Public street and highway lighting
Total retail
Other
Total electric operating revenues
ENERGY SALES (Thousands ofMWhs):
Residential
Comrnercial'and govemment
Public street and highway lighting
Total eleotric energy sales
NUI\4BER OF RETAIL CUSTOMERS (Average forPeriod):
Residential
Commercial and govemment
Public street and highway Iighting
Total electric retail customers
RESDENTIAL SERMCE A\ER.A,GES :
Annual use per customer (KWh)
Rerrenue per KWh (in cents)
Annual revenue per customer
I{EATING DEGREE DAYS: (1)
Juneau, AK
Actual
Historical average
Yr ofaverage
$18,207
27,322
266
r 8,01 7
26,049
215
8,283
12,948
I50
$$
45,795
481
44,281
497
21,381
263
$ 46,276 $44,778 S 21,644
139
251
I
139
258
I
63
125
I
189393398
t4,448
2,18 t
2lt
14,285
2,179
210
r 6,840 16,67 4 16,482
9,621
13.10
1 ,260.t7
9,730
12.96
1,261 .25
4,461
13.1 5
586.57$$
7,301
8,351
87%
1,395
8,351
89%
3,3 8l
3,721
91%
Heating degree days are the measure ofthe coldness ofweather experienced, based on the extent to whiclr the average ofhigh and low temperatures
for a day falls below 65 degrees Fahrenheit (annual heating degree days below historical average indicate warmer than average temperatures).
o
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18
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 25 of 177
14,121
2,148
213
$
o
Tible of Cont€nts
AVISTA CORPORATION
OTHERBUSINESSES
The following table shows ourassetsrelated to ourotherbusinesses, excluding intracompany amounts as ofDecember3l,20l6 and 2015 (dollars in
thousands):
Entiry md Asset Type 2016 2015
Avista Capital
Salix - wholly owned subsidiary
Equity investments
Other assets
Avista Development
Equity investments
Real estate
Notcs receivable and other assets
3,842 $
3,000
123
2,500
1 019
28
5,10'7
6,718
951
12,779
8,084
I I,530
1 1,359
5,444
1 1,568
8,3 90
MET.AL& - wholly owned subsidiary
Alaska companies (AERC and AJT Mining)
Total 55,256 $39,206
Avista Capital
. Salix is a wholly-owned subsidiary of Avista Capital that explores markets that could be served with LNG.
. Equity investments are primarily in an emerging technology venture capital fund.
Avista Development
Equity investments are primarily in emerging technology venture capital funds and companies, including an investment in a technology company
that delivers scalable smart grid solutions to global pa(ners and customers, and a predictive data science company.
Real estate consists primarily ofmixed use commercial and retail office space.
Notes receivable and other assets are primarily long-term notes receivable made to a company focused on spurring economic development
throughout Washin gton State.
AM&D doing business as METALft performs custom sheet metal fabrication of electronic enclosures, parts and systems for the computer,
construction, telecom, renewable energy and medical industries. The asset balance above excludes an intercompany loan from METALfi to Avista
Corp. The loan balance was $4.0 million as of December 3l , 201 6 and $ I .0 million as of December 3 1, 2015.
Alaska companies
. Includes AERC and AJT Mining, which is a wholly-owned subsidiary ofAERC and is an inactive mining company holding certain properties.
Over time as opportunities arise, we dispose ofinvestments and phase out operations that do not fit with our overall corporate strategy. However, we may
invest incremental funds to protect our existing investments and invest in new businesses that we believe fit with our overall corporate strategy.
Juneau Local Distribution Company (LDC) Project
We continue to evaluate oppofiunities to grow our presence in Alaska beyond our current AEL&P operations. We have been focused on exploring the
viability ofbuilding a natural gas LDC in Juneau to bring this energy option to residents. The opportunity has been challenged by difficult economic
conditions in Alaska (which are largely caused by low oil prices), relatively low heating oil prices and customer equipment conversion costs. At this time,
due to a combination ofunfavorable factors, we have suspended our work on this project for the foreseeable future. Ifconditions change favorably in the
future, we may proceed with the regulatory process to request authority to build and operate a gas utility in Juneau.
19
$
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule '1, Page 26 ot 177
o
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Table of Cont€trts
AVISTA CORPORATION
Salix LNG Project
In early 20 I 6, Salix was selected as the preferred respondent to a request for proposal (RFP) issued by AIDEA that sought a qualified candidate to develop a
new LNG facility to serve the Fairbanks, Alaska area as part ofthe lnterior Energy Project (IEP). Commercial discussions in late 20 I 6 led Salix and AIDEA to
enter into an agreement that concluded Salix's involvement in the IEP.
ITEM 1A. RISK FACTORS
RISKFACIORS
The following factors could have a significant impact on our operations, results ofoperations, financial condition or cash flows. These factors could cause
future results or outcomes to differ materially from those discussed in our reports filed with the SEC (including this Annual Report on Form l0-K), and
elsewhere. Please also see "Forward-Looking Statements" for additional factors which could have a significant impact on our operations, results of
operations, financial condition or cash flows and could cause actual results to differ materially from those anticipated in such statements.
Financial Risk Factors
Weather (temperatures, precipitation levels, wind patterns and storms) has a significant effect on our results ofoperations, financial condition and cash
Ilows.
Weather impacts are described in the following subtopics:
. certain retail electricity and natural gas sales,
' the cost ofnatural gas supply, and
' the cost ofpowersupply.
Certain retail electricity and natural gas sales volumes vary directly with changes in temperatures. We normally have our highest retail (electric
and natural gas) energy sales during the winter heating season in the first and fourth quarters ofthe year. We also have high electricity demand for air
conditioning during the summer (third quarter) in the Pacific Northwest. In general, warner weather in the heating season and cooler weather in the cooling
season will reduce our customers' energy demand and retail operating revenues. The revenue and eamings impact ofweather fluctuations is somewhat
mitigated by our decoupling mechanisms; however, we could experience liquidity constraints during the period between when decoupling revenue is eamed
and when it is subsequently collected from customers through retail rates.
The cost ofnetural gas supply tends to increase with higher demand during periods ofcold weather. lncreased costs adversely affect cash flows
when we purchase natural gas for retail supply at prices above the amount then allowed for recovery in retail rates. We defer differences between actual
natural gas supply costs and the amount currently recovered in retail rates and we are generally allowed to recover substantially all ofthese differences after
rcgulatory review. However, these deferred costs require cash outflows from the time ofnatural gas purchases until the costs are later recovered through retail
sales. Inter-regional natural gas pipelines and competition for supply can allow demand-driven price volatility in other regions ofNorth America to affect
prices in our region, even though there may be less extreme weather conditions in our area.
The cost ofpower supply can be significantly affected by weather. hecipitation (consisting ofsnowpack, its water content and melting pattem plus
rainfall) and other streamflow conditions (such as regional water storage operations) significantly affect hydroelectric generation capability. Variations in
hydroelectric generation inversely affect ourreliance on market purchases and thermal generation. To the extent that hydroelectric generation is less than
normal, significantly more costly power supply resources must be acquired and the ability to realize net benefits fom surplus hydroelectric wholesale sales is
reduced. Wholesale prices also vary based on wind pattems as wind generation capacity is material in our region but its contribution to supply is
inconsistent.
The price ofpower in the wholesale energy markets tends to be higher during periods ofhigh regional deurand, such as occurs with temperature extremes. We
may need to purchase power in the wholesale market during peak price periods. The price ofnatural gas as fuel for natural gas-fired electric generation also
tends to increase during periods ofhigh demand which are often related to temperature extremes. We may need to purchase natural gas fuel in these periods of
high prices to meet electric demands. The cost ofpower supply during peak usage periods may be higher than the retail sales price or the amount allowed in
retail rates by our regulators. To the extent that power supply costs are above the amount allowed curr€ntly in retail rates, the difference is partially absorted
by the Company in current expense and it is partially defened or shared with customers through regulatory mechanisms.
20
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 27 ot 177
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Table of Contetrts
AVISTA CORPORATION
The price ofpower tends to be lower during periods with excess supply, such as the spring when hydroelectric conditions are usually at their maximum and
various facilities are required to operate to meet environmental mandates. Oversupply can be exacerbated when intermittent resources such as wind
generation are producing output that may be supported by price subsidies. In extreme situations, we may be required to sell excess energy at negative prices.
As a result ofthese combined factors, our net cost ofpower supply - the difference between our costs ofgeneration and market purchases, reduced by our
revenue from wholesale sales - varies significantly because ofweather.
We rely on regular access to financial markets but we cannot assure favorable or reasonable financing terms will be available when we need them.
Access to capital markets is critical to our operations and our capital structure. We have significant capital requirements that we expect to fund,
in part, by accessing capital markets. As such, the state offinancial markets and credit availability in the global, United States and regional economies
impacts our financial condition. We could experience increased borrowing costs or limited access to capital on reasonable terms.
We access long-term capital markets to finance capital expenditures, repay maturing long-term debt and obtain additional wo*ing capital &om time-to-time.
Our ability to access capital on reasonable terms is subject to numerous factors and market conditions, many ofwhich are beyond our control. Ifwe are unable
to obtain capital on reasonable terms, it may limit or prohibit our ability to finance capital expenditures and repay maturing long-tenn debt. Our liquidity
needs could exceed our short-term credit availability and lead to defaults on various financing arangements. We would also likely be prohibited from paying
dividends on our common stock.
Performance ofthe financial markets could also result in significant declines in the ma*et values ofassets held by ourpension plan and/ora significant
increase in the pension liability (which impacts the funded status ofthe plan) and could increase future funding obligations and pension expense.
We rely on credit from financial institutions for short-term borrowings. We need adequate levels ofcredit with financial institutions for short-
term liquidity. We have a $400.0 million committed line of credit that expires in April 2021. Oursubsidiary AEL&P has a $25.0 million commiued line of
credit that expires in November 20 I 9. There is no assurance that we will have access to credit beyond these expiration dates. The committed line ofcredit
agreements contain customary covenants and default provisions.
Any default on the lines ofcredit or other financing anangements ofAvista Corp. or any ofour "significant subsidiaries," ifany, could result in cross-defaults
to other agreements ofsuch entity, and/or to the line ofcredit or other financing arrangements ofany other ofsuch entities. Any defaults could also induce
vendors and other counterparties to demand collateral. In the event ofany such default, it would be difficult for us to obtain financing on reasonable tsrms to
pay creditors or fund operations. We would also like ly be prohibited from paying dividends on our common stock.
We hedge a portion of our interest rate risk with financial derivative instruments, which may include interest rate swap derivatives and U.S.
Treasury lock agreements. Ifmarket interest rates decrease below the interest rates vr'e have locked in, this will result in a liability related to our interest rate
swap derivatives, which can be significant. As ofDecember 3 I , 20 I 6, we had a net interest rate swap derivative liability of$60.9 million, reflecting a decline
in interest rates since the time we entered into the agreements. We did not have any U.S. Treasury lock agreements outstanding as of December 3 l, 2016. We
may be required to post cash or letters ofcredit as collateral depending on fluctuations in the fair value ofthe derivative instruments. Settlement ofinlerest
rate swap derivative instruments in a liability position could require a significant amount ofcash, which could negatively impact our liquidity and short-term
credit availability and increase interest expense over the term ofthe associated debt.
Downgrades in our credit ratings could impede our ability to obtain financing, adversely alfect the terms offinancing and impact our ability to
transact for or hedge energy resources. Ifwe do not maintain our investment grade credit rating with the major credit rating agencies, we could expect
increased debt service costs, limitations on our ability to access capital markets or obtain other financing on reasonable terms, and requirements to provide
collateral (in the form ofcash or letters ofcredit) to lenden and counterparties. ln addition, credit rating downgrades could reduce the number of
counterparties willing to do business with us or result in the termination ofoutstanding regulatory authorizations for certain financing activities.
21
o
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Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule'1, Page 28 ol 177
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AVISTA CORPORATION
Credit risk may be affected by industry concentration and geographic concentration.
We have concentrations ofsuppliers and customers in the electric and natural gas industries including:
' electric and natural gas utilities,
. electric generators and transmission providers,
. oil and natural gas producers and pipelines,
. financial institutions including commodity clearing exchanges and related parties, and
' energy marketing and trading companies.
We have concentrations ofcredit risk related to our geographic location in the westem United States and westem Canada energy markets. These
concentrations ofcounterparties and concentrations ofgeographic location may affect our overall exposure to credit risk because the counterparties may be
similarly aflected by changes in conditions.
Utility Regulator.t Risk Facton
Regulators may not grant rates that provide timely or sufficient recovery of our costs or allow a reasonable rate of return for our shareholders.
Avista Utilities' annual operating expenses and the costs associated with incremental investments in utility assets continue to grow at a faster rate than
revenue grov'/th. Our ability to recover these expenses and capital costs depends on the amount and timeliness ofretail rate changes allowed by regulatory
agencies. We expect to periodically file for rate increases with regulatory agencies to recover our expenses and capital costs and provide an opportunity to
eam a reasonable rate ofretum for shareholders. Ifregulators do not grant rate increases or grant substantially lower rate increases than our requests in the
future or ifrecovery ofdefened expenses is disallowed, it could have a negative effect on our operating revenues, net income and cash flows. During
December 20 I 6, the UTC denied our most recent electric and natural gas general rate requests and granted zero rate relief. Pending before the UTC is our
petition for reconsideration and altemately for rehearing (Petition) ofour 20 I 6 general rate cases to arrive at new electric and natural gas rales. The UTC has
provided notice that it expects to rule on the Petition on or before March I 6, 201 7. If our efforts to obtain rates that are fair, just, reasonable and sufficient are
not successful,our20lT eamings are expected to decrease by $0.20 to $0.30perdiluted sharc ascomparedto 2016 actual results. See furtherdiscussion in
"Item 7. Management's Discussion and Analysis - Regulatory Matte6."
In the future, we may no longer meet the criteria for continued application ofregulatory accounting practices for all or a portion ofour regulated
operations.
Ifwe could no longer apply regulatory accounting, we could be:
. required to write offour regulatory assets, and
. precluded from the future deferral ofcosts or decoupled revenues not recovered thrcugh rates at the time such amounts are incurred, even ifwe are
expected to recover these amounts from customers in the future.
See further discussion at 'Note I of the Notes to Consolidated Financial Statements - Regulatory Deferred Charges and Credits."
Enersv Commodin Risk Factors
Energy commodity price changes affect our cash flows and results ofoperations.
Energy commodity prices crn be volatile. We rely on energy markets and other counterparties for energy supply, surplus and optimization
transactions and commodity price hedging. A combination offactors exposes our operations to commodity price risks, including:
. our obligation to serve our retail customers at rates set through the regulatory process - we cannot change retail rates to reflect current
energy prices unless and until we receive regulatory approval,
. customer demand, which is beyond our control because ofweather, customer choices, prevailing economic conditions and other factors,
. some ofour energy supply cost is fixed by the nature ofthe energy-producing assets or through contractual an-angements (however, a
significant portion ofour energy resource costs are not fixed), and
a1
a
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1 , Page 29 ol 177
a
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Tabl€ of Contents
AVISTA CORPORATION
. the potential non-performance by commodity counterparties, which could lead to replacement ofthe scheduled energy ornatural gas at
lrigher prices.
Because we must supply the amount ofenergy demanded by our customers and we must sell it at fixed rates and only a portion ofour energy supply costs are
fixed, we are subject to the risk ofbuying energy at higher prices in wholesale energy markets (and the risk ofselling energy at lower prices ifwe are in a
surplus position). Electricity and natural gas in wholesale markets are commodities with historically high price volatility. Changes in wholesale energy prices
affect, among other things, the cash requirements to purchase electricity and natural gas for retail customers or wholesale obligations and the market value of
derivative assets and liabilities.
When we enter into fixed price energy commodity transactions for future delivery, we are subject to credit terms that may require us to provide collateral to
wholesale counterparties related to the difference between current prices and the agreed upon fixed prices. These collateral requirements can place significant
demands on our cash flows or borrowing arrangements. Price volatility can cause collateral requirements to change quickly and significantly.
Cash flow deferrals related to energy commodities can be signilicanl We are permitted to collect from customers only amounts approved by
regulatory commissions. However, our costs to provide energy service can be much higher or lower than the amounts currently billed to customers. We are
permitted to defer income statement recognition and recovery from customers for some ofthese differences, which are reconded as deferred charges with the
opportunity for future recovery through retail rates. These deferred costs arc subject to review forprudence and potential disallowance by regulators, who
have discretion as to the extent and timing offuture recovery orrefund to customers.
Power and natural gas costs higher than those recovered in retail rates reduce cash flows. Amounts that are not allowed for deferral or which are not approved
to become part ofcustomer rates affect our results ofoperations.
Even ifour regulators ultimately allow us to recover deferred power and natural gas costs, our operating cash flows can be negatively affected until these
costs are recovered from customers.
Fluctuating energy commodity prices and volumes in relation to our energy risk management process can cause volatility in our cash flows
and results ofoperations. We engage in active hedging and resource optimization practices to reduce energy cost volatility and economic exposure related
to commodity price fluctuations. We routinely enter into contracts to hedge a portion ofour purchase and sale commitments for electricity and natural gas, as
well as forecasted excess or deficit energy positions and inventories ofnatural gas. We use physical energy contracts and derivative instruments, such as
forwarrds, fi.rtures, swaps and options traded in the over-the-counter markets or on exchanges. We do not attempt to fully hedge our energy resource assets or
our forecasted net positions for various time horizons. To the extent we have positions that are not hedged, or ifhedging positions do not fully match the
corresponding purchase or sale, fluctuating commodity prices could have a material effect on our operating revenues, resource costs, derivative assets and
liabilities, and operating cash flows. In addition, actual loads and resources typically vary from forecasts, sometimes to a significant degree, which require
additional transactions or dispatch decisions that impact cash flows.
The hedges we enter into are reviewed for prudence by our various regulatorc and any deferred costs (including those as a result ofour hedging transactions)
are subject to review for prudence and potential disallowance by regulators.
Generation plants may become obsolete. We rely on a variety of generation and energy commodity market sources to fulfill ourobligation to serve
customers and meet the demands ofour counterparty agreements. There is the potential that some ofour generation sources, such as coal, may become
obsolete. This could result in higher commodity costs to replace the lost generation, as well as higher costs to retire the generation source before the end ofits
expected life.
Operational Risk Factors
We are subject to various operational and event risks.
Our operations are subject to operational and event risks that include:
. severe weath er or natural disasters, including, but not limited to, avalanches, wind storms, wildfires, earthquakes, snow and ice storms, which can
disrupt energy generation, transmission and distribution, as well as the availability and costs ofmaterials, equipment, supplies support services and
general business operations,
. blackouts or disruptions ofinterconnected transmission systems (the regional power grid),
. unplanned outages at generating plants,
23
a
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1 , Page 30 of 1 77
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AYISTA CORPORATION
. fuel cost and availability, including delivery constraints,
. explosions, fires, accidents, ormechanical breakdowns that may occurwhile operating and maintaining ourgenemtion, transmission and distribution
systems,
. damage orinjuries to third parties caused by ourgeneration, transmission and distribution systems,
. natural disasters that can disrupt energy generation, transmission and distribution, and general business operations, and
. terrorist attacks or other malicious acts that may dismpt or cause damage to our utility assets or the vendors we utilize.
Disasters may affect the general economy, financial and capital markets, specific industries, or our ability to conduct business. As protection against
operational and event risks, we maintain business continuity and disaster recovery plans, maintain insurance coverage against some, but not all, potential
losses and we seek to negotiate indemnification arrangements with contractors for certain event risks. However, insurance or indemnification agreements may
not be adequate to protect us against liability, extra expenses and operating disruptions from all ofthe operational and event risks described above. In
addition, we are subject to the risk that insurers and/or other parties will dispute or be unable to perform on their obligations to us.
Damage to facilities may be caused by severe weather, such as snow, ice, wind storms or avalanches. The cost to implement rapid or any repair to such
facilities can be significant. Overhead electric lines are most susceptible to damage caused by severe weather.
Adverse impacts may occur at our Alaska operations that could result from an extended outage oftheir hydroelectric generating resources or its
inability to deliver energy, due to their lack ofinterconnectivity to any other electrical grids and the extensive cost ofreplacement power (diesel).
AEL&P operates several hydroelectric power generation facilities and has diesel generating capacity frorn multiple facilities to provide backup service to
firm customers when necessary; however, a single hydmelectric power generation facility, the Snettisham hydroelectric prqect, provides approximately two-
thirds ofAEL&P's hydroelectric power generation. Any issues that negatively affect AEL&P's ability to generate or transmit power or any decrease in the
demand for the power generated by AEL&P could negatively affect our rezults ofoperations, financial condition and cash flows.
Comoliance Risk Factors
There have been numerous changes in legislation, related administrative rulemakings, and Executive Orders, including periodic audits of compliance
with such rules, which may adversely affect our operational and financial performance.
We expcct to continue to be affected by legislation at the national, state and local level, as well as by administrative rules and requirements published by
govemment agencies, including but not limited to the FERC, the EPA and state regulators. We are also subject to NERC and WECC reliability standards. The
FERC, the NERC and the WECC perfonn periodic audits of the Cornpany. Failure to comply with the FERC, the NERC, orthe WECC requirernents can result
in financial penalties ofup to $ I million per day per violation.
Future legislation or administrative rules could have a material adverse effect on our operations, results ofoperations, financial condition and cash flows.
Actions or limitations to address concerns over the long-term global and our utilities' service area climate changes may alfect our operations and
financial performance.
Legislative, regulatory and advocacy e{forts at the state, national and intemational levels conceming climate change and otherenvironmental issues could
have significant impacts on our operations. The electric and natural gas utility industries are frequently affected by proposals to curb greenhouse gas and
other air emissions. Various regulatory and legislative prcposals have been made to limit or further restrict byproducts ofcombustion, including that
resulting from the use ofnatural gas by our customers. Such proposals, ifadopted, could restrict the operation and raise the costs ofour power generation
resources as well as the distribution ofnatural gas to our customers.
We expect continuing activity in the future and we are evaluating the extent to which potential changes to environmental laws and regulations may:
. increase the operating costs ofgenerating plants,
. increase the lead time and capital costs forthe construction ofnew generating plants,
. require modification ofourexisting generating plants,
24
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1 , Page 31 ol 177
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AVISTA CORPORATION
. require existing generating plant operations to be curtailed orshut down,
. reduce the amount ofenergy available from our generating plants,
. restrict the types ofgenerating plants that can be built orcontracted with,
. require construction ofspecific types ofgeneration plants at higher cost, and
. increase the cost ofdistributing natural gas to customers.
We have contingent liabilities, including certain matters related to potential environmental liabilities, and cannot predict the outcome of these matters.
In the normal course ofour business, we have matters that are the subject ofongoing litigation, mediation, investigation and/or negotiation. We cannot
predict the ultimate outcome or potential impact ofany particular issue, including the extent, ifany, ofinsurance coverage or that amounts payable by us
may be recoverable through the ratemaking process. We are subject to environmental regulation by federal, state and local authorities related to our past,
present and future operations. See "Note l 9 ofthe Notes to Consolidated Financial Statements" for further details ofthese matters.
Technolosu Risk Factors
Cyber attacks, terrorism or other malicious acts could disrupt our businesses and have a negative impact on our results ofoperations and cash flows.
In the course ofour operations, we rely on interconnected technology systems for operation ofour generating plants, electric transmission and distribution
systems, natural gas distribution systems, customer billing and customer service, accounting and other administrative processes and compliance with various
regulations. In addition, in the ordinary course ofbusiness, we collect and retain sensitive information including penonal information about our customers
and employees.
There are various risks associated with technology systems such as hardware or software failure, comrnunications failure, data distortion or destruction,
unauthorized access to data, misuse ofproprietary or confidential data, unauthorized control through electronic means, programming mistakes and other
deliberate or inadvertent human errors. ln particular, cyber attacks, terrorism or other malicious acts could damage, destroy or disrupt these systems.
Additionally, the facilities and systems ofclients, supplien and third party service providen could be vulnerable to these same risks and, to the extent of
interconnection to our technology, may impact us. Any failure, unexpected, or unauthorized use oftechnology systems could result in the unavailability of
such systems, and could result in a loss ofoperating revenues, an increase in opemting expenses and costs to repair or replace damaged assets. Any ofthe
above could also result in the loss or release ofconfidential customer and/or employee information or other proprietary data that could adversely affect our
reputation and competitiveness, could result in costly litigation and negatively impact our results ofoperations. As these potential cyber attacks become
more common and sophisticated, we could be required to incur costs to strengthen our systems and respond to emerging concems.
Terrorist attacks could also be directed at physical electric and natural gas facilities, as well as technology systems.
We may be adversely affected by our inability to successfully implement certain technology projects.
We are currently planning to replace all of our electric meter infastrucrure in Washington state with two-way communication advanced metering
infrastructure (AMI). There is the risk that regulators will not allow the full recovery of new AMI. In addition, there are inherent risks associated with
replacing and changing these types ofsystems, such as incorrect or nonfunctioning metering and/or delayed or inaccurate customer bills or unplanned
outages, which could have a material adverse effect on our results ofoperations, financial condition and cash flows. Finally, there is the risk that we
ultimately do not complete the project and will incur contract cancellation or other costs, which could be significant.
Stratesic Risk Factors
Our strategic business plans, which rnay be affected by any or all ofthe foregoing, may change, including the entry into new businesses and/or the exit
from existing businesses and the ertent ofour business development efforts where potential future business is uncertain.
Our strategic business plans could be affected by or result in any ofthe following:
. dismptive innovations in the marketplace may outpace our ability to compete or manage our risk,
. potential diificulties in integrating acquired operations and in realizing expected opportunities, diversions ofmanagement resources and losses of
key employees, challenges with respect to operating new businesses and other unanticipated risks and liabilities,
25
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1 , Page 32 oI 177
Table of Contents
a AVISTA CORPORATION
. market or other conditions may adversely affect our operations or require changes to our business strategy, which could result in a nonrash
goodwill impairment charge that would reduce assets and reduce our net income, and
. potential reputational risk arising from repeated general rate case filings, degradation in the quality ofservice, or from failed strategic investments
and opportunities, which could erode shareholder, customer and community satisfaction with our Company.
External Mandates Risk Facrors
Extemal mandate risk involves forces outside the Company, which may include significant changes in customer expectations, disruptive technologies that
result in obsolescence of our business model and govemment action that could impact our Company. See "Item 7. Management's Discussion and Analysis -
Environmental Issues and Contingencies" and "Forward-Looking Statements" for discussion ofor reference to extemal mandates which could have a material
adverse effect on our results ofoperations, financial condition and cash flows.
ITEM IB. T]IIRESOL!'ED STA}'F COMMENTS
As ofthe filing date ofthis Annual Repo( on Form l0-K, we have no unresolved comments from the staffof the SEC.
26
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 33 ot 177
o
Table 0f Contcnts
AVISTA CORPORATIONI
ITEM 2. PROPERTIES
AVISTAUTILITIES
Substantially all ofAvista Utilities'properties are subject to the Iien ofAvista Corp.'s mortgage indenture.
Our utility electric properties, located in the states of Washington, Idaho, Montana and Oregon, include the following
Generation Properties
No. of
Units
Hydroelectrie Generating Stations @ivet)
Washington:
Long Lake (Spokane)
Little Falls (Spokane)
Nine Mile (Spokane) (3)
Upper Falls (Spokane)
Monroe Street (Spokane)
Idaho:
Cabinet Gorge (Clark Fork) (4)
Post Falls (Spokane)
Monlana:
Noxon Rapids (Clark Fork)
Total Hydroelectric
Thermal Generating Stations (cycle, fuel source)
Washington:
Kettle Falls GS (combined-cycle, wood waste) (5)
Kettle Falls CT (combined-cycle, natural gas) (5)
Northeast CT (simplerycle, natural gas)
Boulder Park GS (simple.cycte, natural gas)
Idaho:
Rathdrum CT (simple-cycle, natural gas)
Montana:
Colstrip Units 3 & 4 (simple-cycle, coal) (6)
Oregon:
Coyote Springs 2 (combined-cycle, natural gas)
Total Thermal
Total Generation Properti es
Nmeplate
Rating
(Mw)(r)
Prcsent
Capability
(Mul (2)
88.0
35.6
29.0
10.2
15.0
273.0
t5.4
562.4
1,028.6
487.8
o 50.7
7.2
6t.8
24.6
166.5
233.4
295.0
839.2 83 3.3
1,770.4 I ,861 .9
(l)
(2)
Nameplate rating, also referred to as "installed capacity," is the manufacturer's assigned power capability under specified conditions.
Present capability is the maxirnum capacity ofthe plant under standard test conditions without exceeding specified lirnits oftemperature, stress and
environmental conditions. Information is provided as ofDecember 3 I , 20 1 6.
The project to replace Units I and 2 was completed during 20 I 6. The present capability shown is the maximum plant generation we have seen given
the water we have had available, because we have not yet had peak water conditions since Units I and 2 went into service. As conditions change, we
will test plant capability and revise this number accordingly.
For Cabinet Gorge, we have water rights permitting generation up to 265 MW. However, if natural stream flows will allow for generation above our
water rights, we are able to generate above our water rights. If natural stream flows only allow for generation at or below 265 MW, we are limited to
genetation of265 MW. The present capability disclosed above represents the capability based on maximum stream flow conditions when we are
allowed to generate above ourwaterrights.
(3)
(4)
O
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I7-_
M. Thies, Avista
27
Schedule 1, Page 34 of 177
4
4
4
1
I
4
6
5
1
I
2
6
2
2
I
70.0
32.0
36.8
10.0
14.8
265.O
14.8
931.2
53.5
6.9
64.8
24.6
166.5
222.0
295.0
o
Teble of Contents
AVISTA CORPORATION
These generating stations can operate as separate single-cycle plants or combined-cycle v/ith the natural gas plant providing exhaust heat to the
wood boiler to increase efficiency.
Jointly owned; data refers to our I 5 percent interest.
Electric Distribution and Transmission Plant
Avista Utilities owns and operates approximately 19,000 miles ofprimary and secondary electric distribution lines providing service to retail customers. We
have an electric transmission system of 685 miles of 230 kV line and I ,565 miles of I I 5 kV line. We also own an I 1 percent interest in approximately 500
miles of a 500 kV line between Colstrip, Montana and Townsend, Montana. Our transmission and distribution systems also include numerous substations
with transformers, switches, monitoring and metering devices, and other equipment.
The 23 0 kV lines are the backbone ofour transmission grid and are used to transmit power &om generation resources, including Noxon Rapids, Cabinet
Gorge and the Mid-Columbia hydroelectric projects, to the major load centers in our service area, as well as to transfer power between points of
interconnection with adjoining electric transmission systems. These lines interconnect at various locations with the BPA, Grant County PUD, PacifiCorp,
NorthWestem Energy and Idaho Power Company and serve as points ofdelivery for power from generating facilities outside ofour service area, including
Colstrip, Coyote Springs 2 and the Lancaster Plant.
These lines also provide a means for us to optimize resources by entering into shon+erm purchases and sales ofpower with entities within and outside ofthe
Pacific Northwest.
The I I 5 kV lines provide for transmission ofenergy and the integration ofsmaller generation facilities with our service-area load centers, including the
Spokane River hydroelectric projects, the Kettle Falls projects, Rathdrum CT, Boulder Park GS and the Northeast CT. These lines interconnect with the BPA,
Chelan County PUD, the Grand Coulee Project Hydroelectric Authority, Grant County PUD, NorthWestem Energy, PacifiCorp and Pend Oreille County PUD.
Both the I I 5 kV and 230 kV interconnections with the BPA are used to transfer energy to facilitate service to each other's customers that are connected
through the other's transmission system. We hold a long-term transmission agreement with the BPA that allows us to serve our native load customers that are
connected through the BPA's transmission system.
Natural Gas Plant
Avista Utilities has natural gas distribution mains of approximately 3,400 miles in Washington,2,000 miles in Idaho and 2,300 miles in Oregon. We have
natural gas transmission mains of approximately 75 miles in Washington and 50 miles in Oregon. Ournatural gas system includes numerous regulator
stations, service distribution lines, monitoring and metering devices, and other equipment.
We own a one-third interest in Jackson Prairie, an underground naturdl gas storage field located near Chehalis, Washington. See "Part I - Item I . Business -
Avista Utilities - Natural Gas Operations" for further discussion ofJackson Prairie.
28
(s)
(6)
o
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 35 of 177
Table of Contents
AVISTA CORPORATIONo
ALASKA ELECTRJC LIGHT AND POWER COMPAI{Y
Substantially all of AEL&P's utility prope(ies are subject to the lien of the AEL&P mortgage indenture
AEL&P's utility electric properties, located in Alaska include the following:
Generation Properties and Transmission and Distribution Lines
Hydroelectric Cenerating Stations
Snettisham (3)
Lake Dorothy
Salmon Creek
Annex Creek
Gold Creek
Total Hydroelectric
Diesel Generating Stations
Lemon Creek
Auke Bay
Gold Creek
Industrial Blvd. Plant
Total Diesel
Total Generation Propenies
No. of
Units
Nameplate
Rating
(M!v) (l)
Present
Capability
(M!\) (2)
3
I
I
)
3
78.2
14.3
8.4
4.1
1.6
106.6
6t.4
28.4
8.2
23.5
78.2
14.3
5.0
3.6
1.6
102.7
ll
3
5
I
5l.8
25.2
7
23.5
121.5
228.1 210.2
L$7.5
o (l ) Nameplate rating, also referred to as "installed capacity," is the manufacturer's assigned power capability under specified conditions.
(2) Present capability is the maximum capacity ofthe plant under standard test conditions without exceeding specified limits oftemperature, stress and
environmental conditions. Information is provided as ofDecember 3 I , 20 I 6.
(3) AEL&P does not own th is generating facility but has a PPA under which it has the right to purchase, and the obligation to pay for (whether or not
energy is received), all ofthe capacity and energy ofthis facility. See further information at "Part 1 . Item I . Business - Alaska Electric Light and
Power Company."
ln addition to the generation properties above, AEL&P owns approximately 6 I miles oftransmission lines, which are primarily comprised of69 kV line, and
approximately 184 miles of distribution lines.
ITEM 3. LEGAL PROCEEDINGS
See "Note l 9 ofNotes to Consolidated Financial Statements" for information with respect to legal proceedings.
ITEM 4. MINE SAFETY DISCLOSI,]RES
Not applicable.
PART II
ITEM s.MARKET FORREGISTRANT'S COMMONEOI,[TY.RELATED STOCKHOLDERMATTERSANDISSI,JERPURCHASES OF EOUITY
SECTruTIES
Avista Corp. Market Inlomation and Dividend Policy
Avista Corp.'s cornmon stock is listed on the New York Stock Exchange under the ticker symbol "AVA." As of January 3 I , 201 7, there were 8,41 0 registered
shareholders ofour common stock.
Avista Corp.'s Board of Drectors considers the level of dividends on our common stock on a regular basis, taking into account numerous factors including,
without limitation:
' ourresults ofoperations, cash flows and financial condition,
the success ofourbusiness strategies, and
general economic and competitive conditions.
29
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule t , Page 36 of 1 77
o
O
Tabl€ of Contents
AVISTA CORPORATION
Avista Corp.'s net income available for dividends is generally derived from our regulated utility operations (Avista Utilitie s and AEL&P).
The payment of dividends on corrmon stock could be limited by:
. certain covenants applicable to the Company's outstanding long+erm debt and committed line ofcredit agreements (see "ltem 7.
Management's Discussion and Analysis - Capital Resources" for compliance with these covenants),
. the lrydroelectric licensing requirements ofsection I 0(d) ofthe FPA (see "Note 1 ofNotes to Consolidated Financial Statements"),
. certain requirements under the OPUC approval of the AERC acquisition in 2014 . The OPUC's AERC acquisition order requires Avista
Utilities to maintain a capital structure ofno less than 40 percent common equity (inclusive of short-term debt). This limitation may be
revised upon request by the Company with approval llom the OPUC, and
. certain covenants applicable to preferred stock (when outstanding) contained in the Company's Restated Articles oflncorporation, as
amended (cunently there are no preferred shares outstanding).
On February 3, 201 7, Avista Corp.'s Board of Directors declared a quarterly dividend of S0.3575 per share on the Company's cornmon stock. This was an
increase of$0.01 50 pershare, or4.4 percent tom the previous quarterly dividend of$0.3425 pershare.
For additional information, see "Notes l, I 7 and I 8 ofNotes to Consolidated Financial Statements."
The following table presents quarterly high and low stock prices as reported on the consolidated reporting system, as well as dividend information
Three Months Ended
June
30
September
30
March
3l
December
3l
03425 $0.3425 $03425 $0.3425
44.97 42.63
39.11
41 .t2 s
34.6',7 $
44.80 $
38.70 $
s
$
Dividendspaidpercommon share $ 0.33 $ 0.33 $ 0.33 $ 0.33
Trading price range per common share:
lligh $ 38.30 I 34.25 $ 33.99 $ 36.05
Low$32.22530.41 $29.93$32.86
Forinformation with respect to securities authorized for issuance underequity compensation plans, see "Item 12. Security Ownership ofCertain Beneficial
Orvners and Management and Related Stockholder Matters."
30
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1 , Page 37 o'f 177
2016
Teble 0f Cotrtents
AVISTA CORPORATIONo
o
ITEM 6. SELECTED FINANCIAL DATA
(in thoumnds, except per share data and ratios)
Opegting Revonues:
Avista Utilities
AEL&P
Other
I[teregtn€nt elirninations
Total
Income (Loss) from Operations (pre+ax):
Avista Utilities
AEL&P
Other
Total
Net income from continuing operalions
Net income from discontinuetl operations
Yers Ended Deccmber 3 l,
2016 2015 20t3 2012
$1,3'72,638 $
46276
23,569
I ,41 I ,863 S
44:778
2 8,68 5
(s50)
1 ,413,499 $
21,644
39,219
(r,800)
1,403,995 $ 1,354,185
39,549
(1,800)
1R q51
(1,800)
s 1,442,483 $ 1,484,776 $ 1,472,562 S 1,441,744 $ 1,391,338
s 2',77,070 $
ls434
(2,7 0t)
241,228 S
t4,072
(2,086)
239,97 6 $
6,221
6,391
232,572 $ 188,778
(l,483)(r,680)
$ 289,803
$ 137,3 16 S
g 253,214 $252,588
I 19,866
72,411
i____3114!2_
$ 104,333
7,961
$ 187,098
7 6,803
t,99'.1
118,170 $
5,14',7
$
Net income $
Net inoome attributable to noncontrolling interests $
Net Income (Loss) attributable to Avista Corporation shareholders:
Avista Utilities $
AEL&P
Ecova - Discontinued operations
Other
137,316 $
(88) $
123,317 $
(e0) $
I 13,360 $
6,64r
5,147
(1,92t)
192,27',7 $
(236) S
tr3,263 S
I t5'
72,390
3,236
I12,294 S
(1217) $
78,800
(5e0)
1,825
(5,3 l 9)
132A90 S
7.968
108,598 $ 81,704
7,129
(4,6s 0)(3230)
Average common shares outstanding, basic 63,508
Average common shares outstanding, diluted 63,920
Common shares outstanding at year-end 64,1 88
Eamings per common share attributable to Avista Corp. shareholders. basic:
Earningspercommon sharc from continuing opcrations S 2.16
Eamings per common share from discontinued operations
Total eamings per common share attributable to Avista
Corp. shareho lders. basic
Net income attributable to Avista Corp. shareholders $ 137,228 $ 123,227 s 192,041 $ I 11,077 $78,210
62,30t
62,708
62,313
1.90
0.08
1.74 $
O.I I
5 9,02 8
59,201
59,813
1.30
0.02
61,632
61,887
62,243
1.94 S
1.18
59,960
s9,997
60,077
2.16 $1.98 $3.12 $1.85 $t.32
Eamings per common share attributable to Avista Corp. shareholders, diluted
Eamings per common share from continuing operations $ 2.1 5 $ I .89 $ I 93
Eamings per common share fiom discontinued operations 0.08 1.17
Total eamings per common share attributable to Avista
Corp. shareholders, diluted
3r
s 1.74
0.1 1
1.30
0.02
$
2.15 $1.97 $3.10 s 1.85 $1.32
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I 7-_
M. Thies, Avista
o
Schedule 1 , Page 38 of 1 77
7014
$s
$
Tablc 0f Contents
AVISTA CORPORATIONo
o
(in thousands, cxcept per share data and ratios)
Dividends declared per common share
Book value per common share
Total Assets at Year-End:
Avista Utilities
AEL&P
Other
Total (l )
AEL&P
Years Ended December 3 l,
2016
s 4,601 ,708 s
265,735
1q r06
s 4,106,64'
2014 2013
$ r,431 $ 17,838 $
s 51,547 $ 5 r,547 $
$ 1A83,671 S 1 ,298,266 $
3.39 3.02
2015 2012
$
4,97 5,555
273,770
60,43 0
$ s,309,755
il,5;
1,648,'127
3.32
1.37 $
25.69 $
1.32
24.53
1.27
23.84
b
$
$
s 2r.61 $
4,357,760 $
263,070
80,1 4 1
3,930,251 $ 3,883,602
81,282 95,638
s 4,700,9'11 $ 4,0t I,533 fi 3,979,240
Long-TermDebtandCapitalLeases(includingcurrentportion) g 1,682,004 1,573,278 S 1A87,t26 $ 1,262,036 $ r,217,520
Nonrecourse Long-Term Debt ofSpokane Energy (including
current portion)
Long-Term Debt to Affiliated Trusts
Total Avista Corp. Shareholders' Equity
Ratio of Eamings to Fixed Charges (2)
$
$
$
$
$
$
$
32,803
51 ,547
1,259,477
2.48
( I ) The total assets at year-end for the yean 201 3 and 2012 exclude the total assets associated with Ecova of $3 3 9.6 million and $322.7 mil lion,
respectively.
(2) See Exhibit I 2 for computations.
ITEM 7. MANAGEMENT'S DISCT]SSION AND ANALYSIS OF FINANCIAL CONDITION AND RESI,JLTS OF OPERATIONS
Business Sesments
As of December 3 I , 201 6, we have two reportabl e business segments, Avista Utilities and AEL&P. We also have other businesses which do not represent a
reportable business segment and are conducted by various direct and indirect subsidiaries ofAvista Corp. See "Part I, Item l. Business - Company Ovewiew"
for further discussion ofour business segments.
The following table presents net income (loss) attributable to Avista Corp. shareholders for each ofour business segments (and the other businesses) for the
year ended Decenrber 3 I (dollars in thousands):
2016 201 5 2014
Avista Utilities $132.490 S
'7,968
1 13,360 $
6,641
5,147
(1,92t)
113263
3,152
72,390
3,236
Ecova - Discontinued operations (1 )
Other (3,23 0)
Net income attributable to Avista Corporation shareholders $ r 37.228 $123,227 g 192,041
(l) TheresultsfortheyearendedDecember3l,20l4includethenetgainonsaleofEcovaof$69.7million.
Executive Level Summarv
Overall Results
Net income attributable to Avista Corp. shareholden was $ I 37.2 million for 2016, an increase from $ I 23.2 million for 201 5. Avrsta Utilities' eamings
increased primarily due to an increase in electric and natural gas gross margin as a result ofgeneral rate increases and the implementation ofdecoupling
mechanisms in Idaho and Oregon. See "Results of Operations - Avista Utilities - Non-GAAP Financial Measures" for further discussion of gross margin. Also,
there was a reduction in the electric provision for eamings sharing (which is an olfset to revenue). Retail electric loads decreased as compared to prior year
and retail natural gas loads increased as compared to prior year, but the impact ofchanges in load as compared to norrnal for electric and natural gas was
mostly offset by decoupling mechanisms.
In addition to the fluctuations in gross margin, there were increases in other operating expenses, depreciation, and interest expense. There was also an
increase in eamings at AEL&P offset by an increase in the net loss at the otherbusinesses.
More detailed explanations ofthe fluctuations are provided in the results ofoperations and business segment discussions (Avista Utilities, AEL&P, and the
other businesses) that follow this section.
o
32
Exhibit No. 3
Case Nos. AVU-E-I7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 39 of '177
l .16
2t.06
51,547
t,528,626
3.1 3
Table of Contents
AVISTA CORPORATIONo
o
201 6 ll/ashington General Rate Coses
In December 20 I 6, the UTC issued an order related to our Washington electric and natural gas general rate cases that were originally fiied with the UTC in
February 20 1 6. The UTC onder denied the Company's proposed electric and natural gas rate increase requests totaling $43.0 million. Accordingly, our current
electric and natural gas retail rates will remain unchanged in Washington State.
In December 201 6, we filed a Petition for Reconsideration or, in the altemative, Rehearing @etition) with the UTC. The UTC provided notice inviting parties
to respond to ourPetition, stating that it expects to rule on the Petition on orbefore March 16,201'1. Ifourefforts to obtain rates that are fair,just, reasonable
and sufficient are not successful, our 2017 eamings will suffer a significant adverse impact. We believe the UTC order will not allow us to eam a reasonable
retum on investments that we have already made in our infastructure. ln addition, the order will provide no opportunity for us to eam the retum on equity
authorized by the UTC or a fair retum for shareholders. In the order, the UTC did not specifically disallow any ofour capital projects, and we continue to
believe these investments are necessary and will be recoverable in rates in the future.
In 20 I 7, we expect our operating costs to continue to grow along the same trend we have been experiencing recently; however, ifour current Washington
rates remain in effect, we expect to eam below our currently authorized retum on equity (ROE). The order will result in regulatory lag, and, accordingly, we
expect to experience eamings contraction in 20 I 7 ofS0.20 to S0.30 per diluted share as compared to 20 I 6 actual results.
See "Item 7. Management's Discussion and Analysis - Regulatory Matters" for additional discussion surrounding this general rate case and all ofour other
outstanding general rate cases.
Alaska Energy and Resources Company Acquisition
On July 1 , 2014, we acquired AERC, based in Juneau, Alaska. The completion of this transaction limits the comparability of the financial rcsults for 20 I 6 and
20 I 5 to those for 2014 since the first halfof20 I 4 does not contain any financial results from AERC. This transaction resulted in the recording of$52.4
million in goodwill. For additional information regarding the AERC transaction, including pro forma financial comparisons, see "Note 4 of the Notes to
Consolidated Financial Statements."
Ecova Dispositiot
On June 30, 20 I 4, Avista Capital completed the sale ofits interest in Ecova for a sales price of$335.0 million in cash, less the payment ofdebt and other
customary closing adjustments. The sale ofEcova provided total cash proceeds to Avista Corp., net ofdebt, payment to option and minority holders, income
taxes and transaction expenses, of $143.7 million and resulted in a net gain of $74.8 million. Most of the net gain was recognized in 2014 with some minor
true-ups during 20 1 5.
Thecompletionofthistransactionlimitsthecomparabilityofthefinancialresultsfor20l6and20l5tothosefor20l4sincethefirsthalfof2Ol4contains
the financial results ofEcova (in discontinued operations) and 20 1 5 and 20 I 6 do not have any material results from Ecova. For additional information
regarding the Ecova disposition, see "Note 5 ofthe Notes to Consolidated Financial Statements."
Regulatory Matters
General Rale Cases
We regularly review the need for electric and natural gas rate changes in each state in which we provide service. We will continue to file for rate adjustments
to:
. seek recovery ofoperating costs and capital investments, and
. seek the opportunity to eam reasonable retums as allowed by regulaton.
With regards to the timing and plans for future filings, the assessment ofour need for rate reliefand the development ofrate case plans takes into
consideration short-term and long-term needs, as well as specific factors that can affect the timing ofrate filings. Such factors include, but are not limited to,
in-service dates ofmajor capital investments and the timing ofchanges in major revenue and expense items.
Avista Utilities
ll/ashington General Rate Cases
2014 General Rate Cases
In November 201 4, the UTC approved an all-party settlement agreement related to our electric and natural gas general rate cases filed in February 20 I 4 and
new rates became effective on January I , 201 5. The settlement was designed to increase annual electric base revenues by $ I 2.3 million, or 2.5 percent. The
settlement was designed to increase annual natural gas base
33
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule '1, Page 40 of 177
o
Table of Contetrts
AVISTA CORPORATION
revenues by $8.5 million, or 5.6 percent. The settlement agreement also included the implementation ofdecoupling mechanisms for electric and natural gas
and a related after+he-fact eamings test. See "Decoupling and Eamings Sharing Mechanisms" below for further discussion of these mechanisms.
Specific capital structure ratios and the cost ofcapital components were not agreed to in the settlement agreement. The revenue increases in the settlement
were not tied to the 7.32 percent rtrte ofretum on rate base (ROR) used in conjunction with the after-the fact eamings test discussed under "Decoupling and
Eamings Sharing Mechanisms" below. The electric and natural gas revenue increases were negotiated numbers, with each party using its own set of
assumptions underlying its agreement to the revenue increases. The parties agreed that the 7.32 percent ROR will be used to calculate the AFUDC and will be
used for other purposes.
201 5 General Rale Cases
In January 20 1 6, we received an order (Order 05) that concluded our electric and natural gas general rate cases that were originally filed with the UTC in
February 201 5. New electnc and natural gas rates were effective on January I I , 20 I 6.
The UTC-approved rates are designed to provide a I .6 percent, or $8.1 million decrease in e lectric base revenue, and a 7 .4 percent, or $ I 0.8 million increase
in natural gas base revenue. The UTC also approved an ROR of7.29 percent, with a conmon equity ratio of48.5 percent and a 9.5 percent ROE.
WC Order Denyirrg Industial Cuslomers of Northwest Utilities / Public Cowtsel Joint Motion for Clarification, WC Staff Motiotr to Reconsider
and WC Staff Motion to Reopen Record
On January 19,2016,the Industrial Customers ofNorthwest Utilities (ICNLI) and the Public Counsel Unit of the Washington State Office of the
Attomey General @C) filed a Joint Motion for Clarification with the UTC. In the Motion for Clarification, ICNU and PC requested that the UTC
clarifo the calculation ofthe electric attrition adjustment and the end-result revenue decrease of$8.1 million. ICNU and PC provided their own
calculations in their Motion, and suggested that the revenue decrease should have been $ I 9.8 million based on their reading ofthe UTC's Order.
On January 19,2016, the UTC Stafiwhich is a separatepaty in the general rate case proceedings fromthe UTC Advisory Staff, filed a Motion to
Reconsider with the UTC. In its Motion to Reconsider, the Staffprovided calculations and explanations that suggested that the electric revenue
decrease should have been a revenue decre ase of $27 .4 million instead of $8.1 million, based on its reading of the UTC's Order. Further, on February
4,2016,the UTC Stafffiled a Motion to Reopen Record for the Limited Purpose of Receiving into Evidence lnstruction on Use and Application of
Staffs Attrition Model, and sought to supplement the record "to incorporate all aspects of the Cornpany' Power Cost Update." Within this Motion,
UTC Staffupdated its suggested electric revenue decrease to $19.6 million.
None of the parties in their Motions raised issues with the UTC's decision on the natural gas revenue increase of $ 10.8 million.
On February 19,2016, the UTC issued an order (Order 06) denying the Motions summarized above and a{firmed Order 05 including an $ 8.1 million
decrease in electric base revenue.
PC Petitionfor Judicial Review
On March 1 8, 20 1 6, PC filed in Thurston County Superior Court a Petition for Judicial Review ofthe UTC's Order 05 and Order 06 described above
that concluded our 20 I 5 electric and natural gas general rate cases. In its Petition for Judicial Review, PC seeks judicial review offive aspects of
Order 05 and Order 06, alleging, among other things, that (l ) the UTC exceeded its statutory authority by setting rates for our natural gas and electric
sewices based on amounts forutility plant and facilities that are not "used and useful" in providing utility service to customers; (2) the UTC acted
arbitrarily and capriciously in granting an attrition adjustment for our electric operations after finding that the we did not meet the newly articulated
standard regarding attrition adjustments; (3) the UTC erred in applying the "end results test" to set rates for our electric operations that are not
supported by the recond; (4) the UTC did not correct its calculation ofour electric rates after significant erron were brought to its attention; and (5)
the UTC's calculation ofour electric rates lacks substantial evidence.
PC is requesting that the Court (1 ) vacate or set aside portions ofthe UTC's orden; (2) identi$ the errors contained in the UTC's orders; (3) find that
tlre rates approved in Order 05 and reaffirmed in Order 06 are unlawfrtl and not fair, just and reasonable; (4) remand the matter to tlre UTC for further
proceedings consrstent with these rulings, including a determination ofour revenue requirement for electric and natural gas services; and (5) find the
customers are entitled to a refund.
34
o
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 1, Page 41 ot '177
o
Table of Contents
AVISTA CORPORATION
On April I 8, 2 01 6, PC filed an application with the Thurston County Superior Court to certif this matter for review directly by the Court of Appeals,
an intermediate appellate court in the State ofWashington. Afterbriefing and argument, the matterwas certified on April 29,2016 and accepted by
the Court ofAppeals on luly 29,2016. The parties are providing briefs to the Court, after which the Court will set the matter for argument. A decision
from the Court is not expected until late 20 I 7, at the earliest.
The new rates established by Order 05 will continue in effect while the Petition for Judicial Review is being considered. We believe the UTC's Order
05 and Order 06 finalizing the electric and natural gas general rate cases provide a reasonable end result for all parties. Ifthe outcome ofthe judicial
review were to result in an electric rate reduction greater than the decrease ordered by the UTC, it may not provide us wrth a reasonable opportunity to
eam the rate ofretum authorized by the UTC.
20 1 6 General Rale Cases
On December I 5, 20 I 6, the UTC issued an order related to our Washington electric and natural gas general rate cases that were originally filed with the UTC
in February 2016. The UTC order denied the Company's proposed electric and natural gas rate increase requests of $38.6 million and $4.4 million,
respectively. Accordingly, our current electric and natural gas retail rates will remain unchanged in Washington State.
Our original requests were based on a proposed ROR of 7.64 percent with a common equity ratio of 48.5 percent and a 9.9 percent ROE.
On December 23, 2016 we filed a Petition for Reconsideration or, in the altemative, Rehearing @etition) with the UTC related to our 2016 general rate cases.
The UTC's Order and Avista Corp.'s Response
Tbe primary reason given by the UTC in reaching its conclusion is that, in our request, we did not follow an "appropriate methodology" to show the
existence ofattrition, as between historical data and current and projected data. Further, the order states that, among other things, we did not
demonstrate, as a necessary condition to being allowed an attrition adjustment, that we have suffered from chronic under-eaming caused by
circumstances beyond our ability to control. We disagree with the UTC as to various questions of fact and law.
In support ofits decision, the UTC stated that we did not demonstrate that our current revenue is insufficient for covering costs and providing the
opportunity to eam a reasonable retum during the 20 I 7 rate period. The UTC also stated that we did not demonstrate that our capital expenditures
and increased operating costs are both necessary and immediate.
Our Petition responding to the UTC's orderpoints to evidence in the case that demonstrates, contrary to the UTC's findings, the following:
. Current retail rates are not sufficient for the 20 I 7 rate period, and therefore a revenue increase is necessary. In previously filed testimony, UTC
Staffagreed that current rates were not sufficient.
. The costs associated with the growth in rate base and operating expenses are growing at a fasterpace than revenue from retail sales, and
therefore a revenue adjustment is necessary to close this gap. The revenue adjustment to close this gap is sometimes called an attrition
adjustment. In previously filed testimony, UTC Staffagreed tlrat a revenue adjustment is necessary to close this gap.
. All ofthe capital projects and operating expenses we included in the case are necessary in the time frame proposed in order for us to continue
to provide safe, reliable service to customers. No party in the case identified a single capital project that should not be completed in the time
frame we proposed (other than Public Counsel's general opposition to AMI).
. We presented all ofthe studies and analyses in this case, consistent with our previous filings with the UTC, and the UTC Staffacknowledged
in previously filed testimony, that we provided such studies.
. We eamed close to our allowed retum on equity during each of the years 201 3 through 201 5, and into 201 6. This opportunity was possible
only with the revenue increases related to attrition adjustments, and an attrition adjustment is also necessary for 20 I 7.
ln previously filed testimony, the UTC Staffsupported electric and natural gas revenue increases totaling $28.4 million. CommissionerJones
dissented and did not support the decision. ln his dissent, Commissioner Jones supported an electric revenue increase of$26.0 million, and a natural
gas increase of$2.4 million, based on UTC Staffs analysis.
35
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 'l , Page 42 of '177
o
o
o
Tabh of Contcnts
AVISTA CORPORATION
Ir response to our Petition, on December 27, 20 1 6 the UTC issued a "Notice ofOpportunity to File Answers to Petition for Reconsideration or
Rehearing." In its Notice the UTC requested parties to the case to file written answers to our Petition and all interested parties filed written answers to
the Petition in January 20 I 7. The UTC's notice indicated that it expects to enter an order resolving the Petition no later than March I 6, 2 0l 7.
In UTC Staffs Answer to our Petition, UTC Staffessentially abandoned its previous recommendations to the UTC, and supported no electric and
natural gas revenue increases. In our Motion to Respond, and Response Comments, to the Answers ofthe parties, filed January 20,2017 ,we noted the
inappropriateness ofUTC Staffs changed position, which was without any basis in new or changed facts or circumstances. The other parties generally
supported the UTC decision in their Answers to our Petition.
Future General Rate Case Filings
We plan to file new electric and natural gas general rate cases in Washington in the second quarter of 201 7. We will address the issues raised by the
UTC in the most recent rate order, including, but not limited to, multi-year rate plans to address the concems over frequency offilings, the necessity
ofan attrition adjustment for the opportunity to eam our allowed retum in a period when grouth rates in investment in plant and operating expenses
outpace growth in energy sales, and whether our current spending levels are both necessary and immediate to provide safe and reliable service to our
customers.
We may also seek an order from the UTC allowing for the defen-al for later recovery of ongoing costs associated with AMI.
Accounting Order to DeJbr Existing llashington Eleclric Meters
In March 201 6, the UTC granted our Petition for an Accounting Order to defer and include in a regulatory asset the undepreciated value ofour existing
Washington electric meters for the opportunity for later recovery. This accounting treatment is related to our plans to replace approximately 253,000 ofour
existing electric meters witlr new two-way digital meters and the related software and support services through our AMI project in Washington State.
Replacement ofthe meters is expected to begin in the second half of2017 .
The prudence ofthe overall AMI project and ultimate recovery ofthe regulatory assets and the costs ofthe new meters will be addressed in a future regulatory
proceeding. The undepreciated value estimated for the existing meters is approximately $ I 9. I million. For ratemaking purposes, the existing electric meters
won't be recorded as regulatory assets until they are physically removed from service, but for GAAP purposes, they are regulatory assets upon the commitment
by management to retire the meters.
Idaho General Rate Cases
201 5 General Rate Cases
In December 20 1 5, the IPUC approved a settlement agreement between Avista Utilities and all interested parties related to our electric and natural gas general
rate cases, which were originally filed with the IPUC on June I , 20 I 5. New rates were effective on January I , 20 I 6.
The settlement agreement is designed to increase annual electric base revenues by $ I .7 million or 0.7 percent and annual natural gas base revenues by $2.5
million or 3.5 percent. The settlement is based on an ROR of 7.42 percent with a common equity ratio of 50 percent and a 9.5 percent ROE.
The settlemenl agreement also reflects the following:
. the discontinuation ofthe after-the-fact eamings test (provision for eamings sharing) that was originally agreed to as part ofthe settlement of
o',tr2012 electric and natural gas general rate cases, and
. the implementation ofelectric and natural gas Fixed Cost Adjustment mechanisms, as discussed below.
2016 General Rale Cases
In Decenrber 20 1 6, the IPUC approved a settlement agreement between us and other parties in our electric general rate case, concluding our Idaho electric
general rate case originally filed in May 20 I 6. New rates took effect on January I , 20 I 7 under the settlement agreement. We did not file a natural gas genenl
rate case in 20 I 6.
The settlement agreement increases annual electric base rates by 2.6 percent (designed to increase annual electric revenues by $6.3 million). The settlement
revenue increase is based on a ROR of7.58 percent with a common equity ratio of50 percent and a 9.5 percent ROE.
36
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 43 oI 177
o
o
o
O
Table of Contents
AVISTA CORPORATION
In addition to the agreed upon increase in electric revenues to recover costs primarily driven by our increased capital investments in infrastructure to serve
customers, the settlement agreement includes the continued recovery of approximately $4.1 million in costs related to the Palouse Wind Project through the
PCA mechanism rather than through base rates.
In ouroriginal requestwe requested an overall increase in base electric rates of6.3 percent (designed to increase annual electricrevenuesby $15.4 million),
effective January l,2Ol7.
Our original request was trased on a proposed ROR of 7.78 percent with a colnmon equity ratio of 50 percent and a 9.9 percent ROE.
Oregon General Rate Cases
201 3 General Rate Case
In January 2D14,the OPUC approved a settlement agreement in ournatural gas general rate case (originally filed in August 2013). As agreed to in the
settlement, new rates were implemented in two phases: February I , 201 4 and November I , 20 I 4. Eflective February I , 20 14, rates increased for Oregon
natural gas custorners on a billed basis by an overall 4.4 percent (designed to increase annual revenues by $3.8 million). Effective November I , 201 4, rates for
Oregon natural gas cuslomers were to increase on a billed basis by an overall 1 .6 percent (designed to increase annual revenues by $ 1.4 million).
The billed rate increase on November 1,2014 was dependent upon the completion ofProject Compass and the actual costs incurred through September 30,
20l4,andthe actual costs incurred through June 30,2014 related to the Company's Aldyl A distribution pipeline replacement program. Project Compass was
completed in February 201 5. The November 1 , 2014 rate increase was reduced from $ I .4 million to $0.3 million due to the delay of Project Compass.
The approved settlement agreement provided an authorized ROR of 7.47 percent, with a common equity ratio of 48 percent and a 9.65 percent ROE.
2014 General Rdle Case
In March 201 5, we filed an all-party settlement agreement with the OPUC related to our natural gas general rate case, which was originally filed in September
20 I 4. The settlement agreement was designed to increase base natural gas revenues by $5.3 million. Included in this base rate increase is $0.3 million in base
revenues that we were already receiving from customers through a separate mte adjustment. Therefore, the net increase in base revenues was $5.0 million, or
4.9 percent on a billed basis. The parties requested that new retail rates become effective on April I 6, 201 5. On April 9, 20 I 5, the OPUC issued an Order
approving the settlement agreement as filed.
This settlement agreement provided for an overall authorized ROR of 7.516 percent with a common equity ratio of 5l percent and a 9.5 percent ROE.
20 I 5 General Rate Case
On February 29,2016, the OPUC issued a preliminary order (and a final order on March I 5, 201 6) concluding our natural gas general rate case, which was
originally filed with OPUC in May 20 1 5. The OPUC order approved rates designed to increase overall billed natural gas rates by 4.9 percent (designed to
increase annual natural gas revenues by $4.5 million). New rates went into effect on March 1 , 20 1 6. The final OPUC onder incorporated two partial settlement
agreements which were entered into during November 20 I 5 and January 20 I 6.
The OPUC onder provided an authorized ROR of7.46 percent with a common equity ratio of50 percent and a 9.4 percent ROE.
The November 201 5 partial settlement agreement, approved by the OPUC, included a provision for the implementation of a decoupling mechanism, similar
to the Washington and Idaho mechanisms described below. See further description and a summary of the balances recorded under this mechanism below.
2016 General Rale Case
On November 30, 20 I 6 we filed a natural gas general rate case with the OPUC. We have requested an overall increase in base natural gas rates of I 4.5 percent
(designed to increase annual natural gas revenues by $8.5 million). Our request is based on a proposed ROR of7.83 percent with a common equity ratio of50
percent and a 9.9 percent ROE. The OPUC has up to I 0 months to review our request and issue a decision.
Alaska Electrtc Liphl and Power Comnony
Alaska General Rate Case
ln September 2016, AEL&P filed an electric general rate case with the RCA. AEL&P was granted a refundable interim base rate increase of 3.86 percent
(designed to increase electric revenues by $ 1.3 million), that took effect in November 20 I 6.
37
Exhibit No. 3
Case Nos. AVU-E-'! 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 44 ot 177
o
Teble of Contents
AVISTA CORPORATION
AEL&P has also requested a peilnanent base rate increase of an additional 4.24 percent (designed to increase electric revenues by $ I .5 mi llion), which, if
approved, could take effect in February 2018. This represents a combined total rate increase of8.1 percent (designed to increase electric revenues by $2.8
million).
Included in the general rate case are additional annual revenues of$2.9 million from the Crreens Creek Mine, which offsets a portion ofthe rate increase to
retail customers that would otherwise occur.
The RCA must rule on permanent rate increase requests within 450 days (approximately 15 months) from the date of filing, unless otherwise extended by
consent ofthe parties. The statutory timeline for the AEL&P GRC, with the consent ofthe parties, has been extended to February 8, 20 I 8.
The rate request is based largely on the addition ofa new backup generation plant (lndustrial Blvd. Plant) to rate base.
Avista Utilities
Purchased Gas Adj uslments
PGAs are designed to pass through changes in natural gas costs to Avista Utilities'customers with no change in gross margin (operating revenues less
resource costs) or net income. ln Oregon, we absorb (cost or benefit) 1 0 percent ofthe difference between actual and projected natural gas costs included in
retail rates for supply that is not hedged. Total net deferred natural gas costs among all jurisdictions were a liability of$30.8 million as ofDecember 3 1, 20 I 6
and a liability of$ I 7.9 million as ofDecember 3 I , 20 I 5, and these deferred natural gas costs balances represent amounts due to customers.
The following PGAs went into effect in our various jurisdictions durin g 2014,2O15 and 20 I 6:
Percentage Incrcae / (Decreuc)
Jurisdiction PGA Effective Date in Billed Rates
November 1,2014
Novemberl.2015
November 1,2016
t aol
(ts.0)%
(8.0)%
Idaho November 1.2014
Novemberl.2015
November 1 20r6
(2.1)%
(14.s)%
(78)%o Oregon November l,8.3o/o
Novemberl,20l5 (14.1)%
Novernbbr 1,2016 (6.0)%
Power Cost Deferrals and Recovery Mechanisms
The ERM is an accounting method used to track certain differences between Avista Utilities'actual power supply costs, net ofwholesale sales and sales of
fuel, and the amount included in base retail rates for our Washington customers. Total net deferred power costs under the ERM were a liability of $21 .3
millionasofDecember3l,20l6comparedtoaliability$l8.0millionasofDecember3l,20l5,andthesedeferredpowercostbalancesrepresentamounts
due to customers-
The difference in net power supply costs under the ERM primarily results from changes in:
. short-term wholesale market prices and sales and purchase volumes,
. the level and availability ofhydroelectric generation,
. the level and availability ofthermal generation (including changes in fuel prices), and
. retail loads.
Under the ERM, Avista Utilities absorbs the cost or receives the benefit from the initial amount ofpower supply costs in excess ofor below the level in retail
rates, which is referred to as the deadband. The annual (calendaryear) deadband amount is $4.0 million.
38
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 45 of 177
Washington
Teble of Contents
AVISTA CORPORATIONo
The following is a summary ofthe ERM
Annual Po*'er Suoolv Cost Variabiliw
within +/- $0 to $4 million (deadband)
higher by 54 million to S I 0 million
Iowerby $4 million to $10 million
higher or lower by over $ I 0 million
Defmed for Future
Surchrge or Rebate
to Customers
Expense or Bmefit
to fte Compmy
0%
50%
75%
90%
toa%
50%
25%
10%
o
Under the ERM, Avista Utilities makes an annual filing on or before April I of each year to provide the opportunity for the UTC staffand other interested
parties to review the prudence ofand audit the ERM deferred power cost transactions for the prior calendar year. We made our annual filing on March 3 I ,
20 1 6. The ERM provides for a 90-day review period for the filing; however, the period may be extended by agreement ofthe parties or by UTC order. The
20 I 5 ERM deferred power costs transactions were approved by an order from the UTC.
Avista Utilities has a PCA mechanism in Idaho that allows us to modiS electric rates on October I ofeach year with IPUC approval. Under the PCA
mechanism, we defer 90 percent ofthe difference between certain actual net power supply expenses and the amount included in base retail rates for our Idaho
customers. The October 1 rate adjustments recover or rebate power supply costs deferred during the preceding July-June twelve-month period. Total net
power supply costs deferred under the PCA mechanism were a liability of $2.2 million as of December 3l , 201 6 compared to an asset of $0.2 million as of
December 3 l, 201 5.
Decoupling and Earnings Sharing Mechanisms
Decoupling is a mechanism designed to sever the link between a utility's revenues and consumers' energy usage. ln each ofAvista Utilities'jurisdictions, each
month Avista Utilities' electric and natural gas revenues are adjusted so as to be based on the number ofcustomers in certain customer rate classes, rather than
kilowatt hour and therm sales. The difference between revenues based on the number ofcustomen and revenues based on actual usage is deferred and either
surcharged or rebated to customers beginning in the following year.
Washington Decoupling and Earnings Sharing
In Washington, the UTC approved our decoupling mechanisms for electric and natural gas for a five-year period beginning January I , 20 I 5. Electric and
natural gas decoupling surcharge rate adjustments to customers are limited to 3 percent on an annual basis, with any remaining surcharge balance carried
forward for recovery in a future period. There is no limit on the level ofrebate rate adjustments.
The decoupling mechanisms each include an after-the-fact eamings test. At the end ofeach calendar year, separate electric and natural gas eamings
calculations are made for the prior calendar year. These eamings tests reflect actual decoupled revenues, nornalized power supply costs and other
normalizing adjustments.
. If we have a decoupling rebate bal ance for the prior year and eam in excess of the authorized ROR (7.32 percent for 201 5 and,7 .29 percent for 201 6), the
rebate to customers would be increased by 50 percent ofthe eamings in excess ofthe authorized ROR.
. Ifwe have a decoupling rebate balance for the prior year and our eamings are equal to or less than the authorized ROR, only the base amount ofthe
rebate to customers would be made.
. Ifwe have a decoupling surcharge balance for the prior year and eam in excess ofthe authorized ROR, the surcharge to customers would be reduced by
50 percent ofthe eamings in excess ofthe authorized ROR (or eliminated). If50 percent ofthe eamings in excess ofthe authorized ROR exceeds the
decoupling surcharge balance, the dollar amount that exceeds the surcharge balance would create a rebate balance for customers.
. Ifwe have a decoupling surcharge balance for the prior year and our eamings are equal to or less than the authorized ROR, the base amount ofthe
surcharge to customers would be made.
See below for a summary of cumulative balances under the decoupling and eamings sharing mechanisms.
Idaho FCA and Earaings Sharing Mechanisms
In Idaho, the IPUC approved the implementation ofFCAs for electric and natural gas (similar in operation and effect to the Washington decoupling
mechanisms) for an initial term of three years, beginning January I , 201 6.
39
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avisla
Schedule 1 , Page 46 ol '177
o
o
O
Table 0f Cont€nts
AVISTA CORPORATION
For the period 20 I 3 through 20 1 5, we had an after-the-fact eamings test, such that ifAvista Corp., on a consolidated basis for electric and natural gas
operations in Idaho, eamed more than a 9.8 percent ROE, we were required to share with customers 50 percent of any eamings above the 9.8 percent. There
was no provision for a surcharge to customers ifour ROE was less than 9.8 percent. This after+he-fact eamings test was discontinued as part ofthe settlement
ofour20l5 Idaho electric and natural gas general rates cases (discussed in furtherdetail above).
See below for a summary of cumulative balances under the decoupling and eamings sharing mechanisms.
Orego n Deco up I ing Mechanism
In February 2016, the OPUC approved the implementation of a decoupling mechanism fornatural gas, similarto the Washington and Idaho mechanisms
described above. The decoupling mechanism became effective on March l, 20 I 6. There will be an opportunity for interested parties to review the mechanism
and recommend changes, ifany, by September 20 I 9. An eamings review is conducted on an annual basis, which is filed by us with the OPUC on or before
June I ofeach year for the prior calendar year. ln the annual eamings review, ifwe eam more than I 00 basis points above our allowed retum on equity, one-
third ofthe eamings above the 1 00 basis points would be deferred and later retumed to customers. See below for a summary ofcumulative balances under the
decoupling and eamings sharing mechanisms.
Cumulative Decoupling and Earnings Sharing Mechanism Balances
As ofDecember 31 ,201 6 and December 3 I , 20 I 5, we had the following cumulative balances outstanding related to decoupling and eamings sharing
mechanisms in our variousjurisdictions (dollars in thousands):
December 31, December 31,
20t6 2015
Washington
Decoupling surcharge
Provision for eamings sharing rebate
3 0,408 S
(5,1 13)
10,933
(3,422)
Idaho
Decoupling surolrarge $ 8,292 rla
Provision foreamings sharing rebate (5,184) (8,814)
,Oregon
Decoupling surcharge S 2,021 nla
Provision for eamings sharing robate
(n/a) This rrechanism did not exist during this time period.
See "Results ofOperations - Avista Utilities" for further discussion ofthe amounts recorded to operating revenues in 20 I 5 and 20 I 6 related to the decoupling
and eamings sharing mechanisms.
Results ofOperations - Overall
The following provides an overview ofchanges in our Consolidated Statements oflncome. More detailed explanations are provided, particularly for
operating revenues and operating expenses, in the business segment discussions (Avista Utilities, AEL&P, Ecova - Discontrnued Opemtions and the otlrer
businesses) that fol low this section.
As discussed in "Executive Level Summary," Ecova was disposed of as of June 30,2014. As a result, in accordance w'ith GAAP, all of Ecova's operating
results were removed from each line item on the Consolidated Staternents ofllcome and reclassified into discontinued operations for all periods presented.
The discussion ofcontinuing operations below does not include any Ecova amounts. For our discussion ofdiscontinued operations and Ecova, see "Ecova -
Discontinued Operations."
The balances included below for utility operations reconcile to the Consolidated Statements oflncome. Beginning on July 1,2014, AEL&P is included in
the overall utility results.
40
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 47 ol 177
$
o
o
Table of Contents
AVISTA CORPORATION
2016 compared to 2015
ThefollowinggraphshowsthetotalchangeinnetincomefromcontinuingoperationsfortheyearendedDecember3l,20l5totheyearendedDecember3l,
201 6, as well as the various factors that caused such change (dollars in millions):
$10s.5
trg 1
$(12.5)${10.6)
s{17.0)
s3.s
${s 1)9{7.s)
Total ChanSe in
s(37.2)
uility R*nu6 No-utlity
Revduct Erf ng
other
Ndln(ffiarrom
Contnuiog
Ofratlon,
Ullity R6ourc€ UtilityoFEung t t'lity Nd-Utility
Coi! Expen* Dcpcdrton.nd Orcting
Affi..totr ErpeG.nd
Oapreti!ton &d
Amftntm
Utility revenues decreased due to a decrease at Avista Utilities, partially offset by a slight increase in AEL&P's revenues. Avista Utilities'electric revenues
decreased primarily due to lower retail electric loads caused by weather fluctuations throughout the period, a general rate decrease in Washington and lower
wholesale revenues resulting from lower volumes and lower wholesale prices. These revenue decreases were partially offset by a general rate increase in
Idaho, the expiration ofthe ERM rebate to customers in Washington, increased decoupling revenues and a lowerprovision for eamings sharing. Natural gas
revenues decreased primarily due to a decrease in wholesale activity (both a decrease in volumes and prices) and lower retail revenues due to lower prices,
partially offset by higher natural gas heating volumes. The decreases in natural gas revenues were partially offset by general rate increases and higher
decoupling revenues.
Non-utility revenues decreased due to the long-tem fixed rate electric capacity contract that was previously held by Spokane Energy being transferred to
Avista Corp. during the second quarter of20 1 5. The capacity revenue from this contract was included in non-utility revenues when it was held by Spokane
Energy during the first quarter of20 1 5. After the transfer, the revenue is included in Avista Utilities' revenues. The contract expired during December 20 I 6.
Utility resource costs decreased due to a decrease at Avista Utilities. Avista Utilities'electric resource costs decreased primarily due to a decrease in purchased
power (from lower volumes purchased and lower wholesale prices) and a decrease in fuel for generation (due in part to increased hydroelectric generation).
Natural gas resource costs decreased due to a decrease in natural gas purchased resulting from lower volumes and lower prices.
Utility operating expenses increased due to an increase at Avista Utilities and a slight increase at AEL&P. Avista Utilities' portion ofother operating
expenses increased due to an increase in medical costs of$3.0 million, electric generation operating and maintenance expenses of$6.8 million, natural gas
distribution expenses of$2.2 million and otherpostretirement benefit expenses of$2.0 million.
Utility depreciation and amortization increased $ I 7.0 million driven by additions to utility plant.
Income tax expense increased primarily due to an increase in income before income taxes, partially offset by excess tax benefits of$ 1 .6 million during 20 I 6
relating to the settlement ofshare-based payment awards. See "I.,lote 2 ofthe Notes to Consolidated Financial Statements" for further discussion ofthe excess
tax benefits. Oureffective tax rate was 36.3 percent forboth 2016 and 2015.
Otherwas primarily related to an increase in interest expense, due to additional debt being outstanding during 201 6 as compared to 201 5 and partially due to
an increase in the overall interest rate. Also, there were losses on investments at our subsidiaries, mainly due to initial organization costs and management
fees associated with a new investment.
4t
5
ItDA}
{D
o
mg,
='
(fr(Dor.)-io
=.Oao(n(D
o
Exhibit No. 3
Case Nos. AVU-E-'! 7-_ / AVU-G-17-_
M. Thies, Avista
o
Schedule 1, Page 48 ol 177
I
I
I
I
o
Table of Contents
AVISTA CORPORATION
201 5 compared to 2014
ThefollowinggraphshowsthetotalchangeinnetincomefromcontinuingoperationsfortheyearendedDecember3l,20l4totheyearendedDecember3l,
201 5, as well as the various factors that caused such change (dollars in millions):
Su1
s21_3
$(l 7)
stlo-s)s(10.s,
I
I
I
I
Tot.l change lnrtfiility R*rnu6
Nd lncomcfrom
Contihulng
Oprr6tions
9(13.e)
$4.8
so.E
s(16.4)
Nm-Utilny tlillty Rcsure Utillty Opccflng uilttyR!6c5 Costi ExFns D.pGd.tfi Md
Amiuzlton
Nm-Utlfry
Op6.ting
ErpanE.nd
Oepccialion lndAffiirition
lncomeTax
Erf nE
ffier
o Utility revenues increased due to an increase at AEL&P, partially offset by a decrease at Avista Utilities. AEL&P's revenues increased $23.1 million due to a
full year of AEL&P results in 201 5 as compared to six months in 2014. Avista Utilities' electric revenues decreased due to lower loads from warmer weather,
which were partially offset by the decoupling mechanism in Washington, a general rate increase in Washington and a decrease in the provision for eamings
sharing (which is an offset to revenue). Avista Utilities'natural gas revenues decreased due to lower heating loads from significantly warmer weather that was
partially offset by the decoupling mechanism in Washington and general rate increases.
Othernon-utility revenues decreased primarily due to the long-term fixed rate electric capacity contract that \rr'as previously held by Spokane Energy being
transferred to Avista Corp. during the second quarter of20 I 5. The capacity revenue from this contract was included in non-utility revenues when it was held
by Spokane Energy. After the transfer, the revenue is included in Avista Utilities'revenues.
Utility resource costs decreased due to a decrease at Avista Utilities, partially offset by an increase at AEL&P. AEL&P's resource costs increased $6.1 million
due to a full year of AEL&P results in 201 5 as compared to six months in 2014. Avista Utilities' electric resource costs decreased primarily due to a decrease
in purchased power (from lower volumes purchased, partially offset by higher wholesale prices) and a decrease in other fuel costs. Natural gas resource costs
decreased due to a decrease in natural gas purchased resulting from lowerprices, partially offset by highervolumes.
Utility operating expenses increased due to an increase at Avista Utilities and at AEL&P. Avista Utilities'portion ofother operating expenses increased $ I I . I
million and AEL&P's other operating expenses increased $5.3 million due to a full year of AEL&P results in 2015 as compared to six months in 2014. Avista
Utilities incurred increased generation, transmission and distribution operating expenses of$5.7 million, increased administrative and general wages of$9.8
million and increased pension and other post-retirement benefit expenses of$ I 0.0 million. In addition, Avista Utilities incurred incremental storm restoration
costs associated with the November20l5 wind storm ofapproximately $2.9 million. These increases were partially offset by decreases in outside services and
generation maintenance of $7.8 million.
Utility depreciation and amortization increased due to additions to utility plant and the inclusion ofa full year ofAEL&P depreciation as compared to only
six rnonths of AEL&P in 2014.
Income tax expense decreased and our effective tax rate was 36.3 percent for 20 I 5 compared to 37.6 percent for 20 1 4. The decrease in expense was primanly
due to a decrease in income before income taxes.
Other was primarily related to an increase in interest expense, due to additional debt being outstanding during 201 5 as compared to 2014. Al so, there were
losses on investments at our subsidiaries.
42
ra
=(Di.o,
d6(D
o
om(Dq,O
i(D=.o)6tI!(}
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1 , Page 49 ol 177
o
o
Tabl€ of Contents
AVISTA CORPORATION
NonCAAP Financial Measures
The following discussion for Avista Utilities includes two financial measures that are considered "non-GAAP financial measures," electric gross margin and
natural gas gross margin. In the AEL&P section, we include a discussion of electric gross margin, which is also a non-GAAP financial measure.
Generally, a non-GAAP financial measure is a numerical measure ofa company's financial performance, financial position or cash flows that excludes (or
includes) amounts that are included (excluded) in the most directly comparable measure calculated and presented in accordance with GAAP. The
presentation ofelectric gross margin and natural gas gross margin is intended to supplement an undentanding ofoperating performance. We use these
measures to determine whether the appropriate amount ofrevenue is being collected from our customers to allow for the recovery ofenergy resource costs and
operating costs, as well as to analyze how changes in loads (due to weather, economic or other conditions), rates, supply costs and other factors impact our
results ofoperations. In addition, we present electric and natural gas gross margin separately below for Avista Utilities since each business has different cost
sources, cost recovery mechanisms and jurisdictions, such that separate analysis is beneficial. These measures are not intended to replace income from
operations as determined in accordance with GAAP as an indicator ofoperating performaoce. The calculations ofelectric and natural gas gross margins are
presented below.
Results of Onerations - Avista Utilities
2016 compared to 2015
The following table presents Avista Utilities' operating revenues, resource costs and resulting gross margin for the years ended December 3 I (dollars in
millions):
Electric Natural Gas Intlacompany Total
20t6 20],5 2016 2015 2016
$ ,11,813 $ 4?oS% $ srlplo $ (rs2lt
400,910 273,976 351,101 (9s,215)
2015
(107,020) $
(l 07,020)
2016
1,372,638 $
539,352
Operating revenues $996,9s9
360,59 l
$1411,863
644,991Resource costs
Gross margin $ 636,368 $596,963
The gross margin on electric sales increased $39.4 million and the gross margin on natural gas sales increased $27.0 million. The increase in electric gross
margin was primarily due to general rate increases, lower resource costs, the implementation ofdecoupling in Idaho and a $6.6 million decrease in the
provision for eamings sharing (which is an offset to revenue), partially offset by lower electric loads. The weather was warmer than the prior year in April and
May (which decreased electric heating loads) and cooler than the prior year June through August (which decreased electric cooling loads). This was partially
offset by the effect ofweather that was cooler than the prior year in the first and fourth quarters (which increased electric heating loads). Ovenll, weather was
warmer than normal for most of the year. Retail electric loads decreased as compared to prior year and the impact as compared to normal was mostly offset by
decoupling mechanisms. See the table below for a comparison ofthe amounts recorded for decoupling by jurisdiction. For 20 I 6, we recognized a pre-tax
benefit of $5.1 million under the ERM in Washington compared to a benefit of $6.3 million for 201 5.
The increase in natural gas gross margin was primarily due to general rate increases in each ofourjurisdictions, lower natural gas resources costs, the
implementation ofdecoupling mechanisms in Idaho and Oregon, and higher natural gas retail loads. Weather was cooler in the first quarter (which increased
natural gas heating loads), warmer in April and May (which reduced natural gas heating loads) and cooler in the fourth quarter (which increased natural gas
heating loads) as compared to the prior year. The period June through September typically does not have significant natural gas retail loads. Overall, retail
natural gas loads increased as compared to prior year and the impact as compared to normal (lower loads) was mostly offset by decoupling mechanisms. See
the table below for a comparison ofthe amounts recorded for decoupling by jurisdiction.
Intracompany revenues and resource costs represent purchases and sales ofnatural gas between our natural gas distribution operations and our electric
generation operations (as fuel for our generation plants). These transactions are eliminated in the presentation oftotal results for Avista Utilities and in the
condensed consolidated financial statements but are included in the separate results for electric and natural gas presented below.
43
$ 196,918 $ 169,909 S - $ -$833,286 $ 766,872
o
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 50 of 1 77
o
201 s
o
Table of Contents
AVISTA CORPORATION
The following graphs present Avista Utilities' electric operating revenues and megawatt-hour (MWh) sales for the years ended December 3 I (dollars in
millions and MWrs in thousands):
f,lectric Operating Revenues
tiii, : Si.i3 {,
S14rl fr Sllll:
il!l r Slll r slr: r $tl? tII TI s7* I $l,J;I si-l r stt: II-
tgsrie$ts\ ( or+$r€{c$\ r,r+rt#d rriho\c*'aF So\cr
ol l:$e\ other \\\
2016 I ror5
o
(l ) Other electric revenues in the graph above includes public street and highway lighting, which is considered part of retail electric revenues.
Electric Energv MWh Sales
i.slr.3. t7r
B*'tlt*ttt*t Corrttrcrir'a\\+drr*rrrt\$ttofcs'rw
I 2016 I :015
44
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 51 of 177
o
i_le?i, I rli i.r{t:..I,ll
t.?(,: l.tl.i
o
Trble of Contents
AVISTA CORPORATION
The following table presents Avista Utilities'decoupling and customer eamings sharing mechanisms by jurisdiction that are included in utility electric
operating revenues for the years ended Decernber 3 I (dollars in thousands):
Electric Operating
Revmucs
2016 2015
Washington
Decoupling surcharge
Provision for eamings sharing (l )
Idaho
Decoupling surcharge
Provision for eamings sharing (2)
s
$'t 1 ,324 $
))t
6,025
7tl
4,7 40
Q,423)
n/a
(2, l 98)
o
( I ) The provision for eamings sharing in Washington in 201 6 resulted from a $2.5 million reduction in the 201 5 provision for eamings sharing (which
increased 20 I 6 revenues) offset by a $2.3 million provision for eamings sharing for 20 I 6 electric operations.
(2) The provision for eamings sharing in Idaho in 20 I 6 resulted from a reduction in the 20 I 5 provision for eamings sharing (which increased 20 I 6
revenues). Beginning in 20 I 6 there is no longer an eamings sharing mechanism in Idaho.
(n/a) This mechanism did not exist during this time period.
Total electric revenues decreased $0.9 million for2016 as compared to 2015, affected by the following:
. a $3.0 million decrease in retail electric revenues due to a decrease in total MWhs sold (decreased revenues $9.5 million), pattially offset by an
increase in revenue per MWh (increased revenues $6.5 million).
. The increase in revenue per MWh was primarily due to a general rate increase in Idaho and the expiration of the ERM rebate to customers in
Washington, patially offset by a genenl rate decrease in Washington.
. The decrease in total retail MWhs sold was the result of weather that was cooler in the first quarter (higher electric heating loads), warmer in
April and May (ower electric heating loads), cooler June through August (lower electric cooling loads) and cooler in the fourth quarter
(higher electric heating loads) as compared to the prior year (which overall decreased electric loads). Compared to 20 I 5, residential electric
use per customer decreased I percent and commercial use per customer decreased I percent. Heating degree days in Spokane were I I
percent below normal and 3 percent above 20 I 5. The impact from increased heating loads was offset by decreased cooling loads in the
sunrmer. 20 I 6 cooling degree days were 29 percent above normal (mostly in June). However, cooling degree days were 4 I percent below
the prior year. The overall decrease in use per customer was partially offset by growth in the nurnber ofcustomers.
. There has been a decline in residential use per customer during the last three years and is primarily due to weather fluctuations but also due
in par1 to energy efficiency measures adopted by customers. See "ltem l. Business - Avista Utilities Operating Statistics" forthe three-year
summary ofresidential use per customer.
. a $ I 5.2 million decrease in wholesale electric revenues due to a decrease in sales volumes (decreased revenues $5.5 million) and a decrease in sales
prices (decreased revenues $9.7 million). The fluctuation in volumes and prices was primarily the result ofour optimization activities.
. a $4.6 million decrease in sales offuel due to a decrease in sales ofnatural gas fuel as part ofthermal generation resource optimization activities. For
20 I 6, S44.0 million ofthese sales were made to our natural gas operations and are included as intracompany revenues and rcsource costs. For 20 I 5,
$50.0 million ofthese sales were made to ournatural gas operations.
. a $l 2.6 million increase in electric revenue due to decoupling, which reflected the implementation ofa decoupling mechanism in Idaho effective
January 1,2016 and lowerretail revenues in 2016 as compared to 2015.
. a $6.6 million decrease in the electric provision for eamings sharing (which increases revenues) due to a $2.5 million reduction in the 20 I 5
provision foreamingssharing in Washington and a $0.7 million reduction in the 2015 provision foreamingssharing in Idaho recorded in 2016. For
20t 6 electric operations, we recorded a $2.3 million provision for eamings sharing.
45
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 52 ot 177
O
Tabk of Contents
o AVISTA CORPORATION
The following graphs present Avista Utilities'natural gas operating revenues and therms delivered for the years ended December 3 I (dollan in millions and
therms in thousands):
Natural Gas Operating Revenues
ilus"3 str3 tr $l([.]
srJl..t
sr3.{l s9(' XII $:e.:sl6. III
R*'dtttt*\Corr*rrctcrt\r-qro\etrr\e O{t"{\\\
2016 I 30 t5
(i) Othernatural gas revenues in the graph above includes intemrptible and industrial revenues, which are considered part ofretail natural gas revenues.
o Therms Delivered
$ln.I _il
(,r(.l.3t 7
lll(r.56i t?6.61i lll9.(;ln l7{.Dl
I l.l..r$6 lltT.tl.rt
tcsii'edrd C r'*r't'trtrsfil'r\\.1$o\$so\e o$lc{
I tol6 I rors
46
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 53 ot 177
o
o
o
Table of Contents
AVISTA CORPORATION
The following table presents Avista Utilities'decoupling and customer eamings sharing mechanisms by jurisdiction that are included in utility natural gas
operating revenues for the years ended Decernber 3 I (dollars in thousands):
Natural Gas
Operating Revenues
2016 20t5
Washington
Decoupling surcharge
Provisi.otr for eamings sharing
Idaho
Decoupling surcharge
Provision for eamings sharing
Oregon
Decoupling surcharge
Provision for eamings sharing
(n/a) Thismechanismdid notexistduring thistimepenod.
Tolal natural gasrevenuesdecreasedS50.l millionfor20l6ascomparedto20l5duetothefollowing:
. a $3.4 million decrease in retail natural gas revenues due to lower retail rates (decreased revenues $ I 8.4 million), partially offset by an increase in
volumes (increased rcvenues $15.0 million).
. Lower retail rates were due to PGAs, which passed through lower costs ofnatural gas, partially offset by general rate increases.
" We sold more retail natural gas in 2016 as compared to 201 5 primarily due to cooler weather in the first and fourth quarters, as well as
customer growth. Compared to 20 I 5, residential use per customer increased 5 percent and commercial use per customer increased 3 percent.
Heating degree days in Spokane were I I percent below historical average for 20 I 6, and 3 percent above 20 I 5. Heating degree days i n
Medford were I 2 percent below historical average for 20 I 6, and 3 percent above 20 I 5.
. a $50.8 million decrease in wholesale natural gas revenues due to a decrease in prices (decreased revenues $22.8 rnillion) and a decrease in volumes
(decreased revenues $28.0 million). In 20 I 6, $5 I .2 million ofthese sales were made to our electric generation operations and are included as
intracompany revenues and resource costs. In 2015, $57.0 million of these sales were rnade to our electric generation operations. Dfferences
between revenues and costs from sales ofresources in excess ofretail load requirements and from resource optimization are accounted for through
the PGA mechanisms.
. a $6.3 million increase fornatural gas decoupling revenues due primarily to the implementation ofdecoupling mechanisms in Idaho and Oregon, as
well as an increase in the decoupling surcharge in Washington.
. a $2.8 mil lion increase in the provi sion for eamings sharing (which decreases revenues) representing the 201 6 provision for Washington natural gas
operations.
The following table presents Avista Utilities' average number ofelectric and natural gas retail customers for the years ended December 3 1 :
$8,191 $
(2,767)
2,206
nla
|,912
6,004
n/a
n/a
$
Electric
Customers
Nanrral Gas
Customers
2016
330,699
41,785
201 5
327,05?
4t,296
1,353
s29
300,883
34,868
37
255
296,005
34,229
35
261
330,530
20t6 2015
Residential
Commercial
Interruptible
Industrial
Public street and highway lighting
Total retail customers
I,342
558
374,384 370,235 336,043
4'7
O
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1 , Page 5,4 ol 177
Table of Contents
AVISTA CORPORATIONO
The following graphspresent Avista Utilities'resource costs forthe years ended December3l (dollars in millions):
o
Electric Resourrc Costs
11,{' 6
Sl{ll.l
li l:il.$tl tr' lt
t{,.1.') $7:'{
${.r.1Ir $.lt. IIr
t"'-'$$'
gesr:ruilorr l.'$ "l;ttt'L)\he{
1:sc\ to(61tt$
I ?016 t r{itJ
Natural Gas Resource Cost$
$i.tt.t
$151..1
s:].6 $l') r'
Natunrl gss purchrtsctl Olhg
1016 I r0l-5
Total resource costs in the graphs above include intracompany resource costs of$95.2 million and $ I 07.0 million for 20 I 6 and 20 I 5, respectively.
Total electric resource costs decreased $40.3 million for 201 6 as compared to 201 5 due to the following:
. a $26.1 million decrease in powerpurchased due to a decrease in the volume ofpowerpurchases (decreased costs $9.3 million) and a decrease in
wholesale prices (decreased costs $ I 6.8 million). The fluctuation in volumes and prices was primarily the result ofour optimization activities.
. a $14.8 million decrease in fuel for generation primarily due to a decrease in thermal generation (due in part to increased hydroelectric generation)
and a decrease in natural gas fuel prices.
. a $7.5 million decrease in other fuel costs.
. a $3.0 million decrease from amortizations and deferrals ofpower costs.
. a $5.6 million increase in other electric resource costs primarily due to a benefit that was recorded during 20 I 5 related
o
48
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I7-_
M. Thies, AViSta
Schedule 1 , Page 55 of 1 77
I
o
Table of Contents
AVISTA CORPORATION
to a capacity contmct ofSpokane Energy. This benefit was mostly deferred for probable future benefit to customers through the ERM and PCA.
. a $5.4 million increase in otherregulatory amortizations.
Total natural gas resource costs decreased $77.1 million for 201 6 as compared to 201 5 due to following:
. an $80-l million decrease in natural gas purchased due to a decrease in the price ofnatural gas (decreased costs $52.6 million) and a decrease in total
therms purchased (decreased costs $27.5 million). Total therms purchased decreased due to a decrease in wholesale sales, partially offset by an
increase in retail sales.
. a $ l.6 million decrease from amortizations and deferrals ofnatural gas costs. This reflects lower natural gas prices and the deferral oflower costs for
future rebate to customers, as well as current rebates to customers through PGAs.
. a $4.6 million increase in otherregulatory amortizations.
2015 compared to 2014
The following graphs presents Avista Utilities'operating revenues, resource costs and resulting gross margin for the years ended December 3 I (dollars in
millions):
Electric Natural Ga Intracompany Total
20t5
$ 998,988 $
4 I 8,541
2015
521,010 s
35l,l0l
2014
5s6,664 $
3 95,956
(107,020) $
(r 07,020)
(142,1s3) $
(t 42,t s3)
1,41 I ,863 $
644,991
1,413,499
672,344
201 5 20t5 2014
Operating revenues $ 997,873
Resource costs 400,91 0
o
Gross rnargin $ 596,963 $ 5 80,447 $169,909$160,708$-$*$766,8'72$741,1s5
The gross margin on electric sales increased $ I 6.5 million and the gross margin on natural gas sales increased $9.2 million. The increase in electric gross
margin was primarily due to a general rate increase in Washington, lower net power supply costs and a $ I .9 million decrease in the provision for eamings
sharing (which is an offset to revenue). We experienced weather that was significantly warmer than normal and warmer than the prior year, which decreased
heating loads in the first quarter and increased cooling loads in the second quarter. Loads in the third quarter were slightly higher than the prior year. Loads
for the fourth quarterwere lower than the prior year, particularly for residential and industrial customers. For 20 I 5, the decoupling mechanism in Washington
had a positive effect on each ofelectric revenues and gross margin as did the decrease in the overall provision for eamings sharing (see the details by
jurisdiction in the table below). For 20 I 5, we recognized a pre-tax benefit of$6.3 million under the ERM in Washington compared to a benefit of$5.4
million for 20 I 4. This change represents a decrease in net power supply costs primarily due to lower natural gas fuel and purchased power prices in 20 I 5,
partially offset by lowerhydroelectric generation (due to warm and dry conditions in the second and third qua(ers).
The increase in natural gas gross margin was primarily due to a decrease in natural gas resource costs and a decrease in the provision for eamings sharing,
partially offset by a decrease in natural gas rcvenues. The decrease in natural gas revenues r€sulted from lower heating loads primarily from significantly
warmer weather that was partially offset by general rate increases. The eamings impact ofthe decrease in heating loads was partially offset by the decoupling
mechanism in Washington, which had a positive eflect on natural gas revenues and gross margin (see the details by jurisdiction in the table below).
Intracompany revenues and resource costs r€present purchases and sales ofnatural gas between our natural gas distribution operations and our electric
generation operations (as fuel for our generation plants). These transactions are eliminated in the presentation oftotal results for Avista Utilities and in the
consolidated financial statements but arr reflected in the presentation ofthe separate results for electric and natural gas below.
49
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1,Page56 ol 177
o
2014 20t4
o
Table of Contents
AVISTA CORPORATION
The following graphs present Avista Utilities' electric operating revenues and megawatt-hour (MWh) sales for the years ended December 3 I (dollars in
millions and MWlrs in thousands):
f, lectric Operating Revenues
SiiS 6 (iili ?s}{t: sqil t
tllll( Sllrn sr:? r llix:II II $,,a: (, r\t ?TI $1: I s:r r
:I
gsrr0e$\s\ co,."r,.*c*$ \rrgrrrttrt\ rlhi$cgrE ss\er o{t$c\ or\et \\\
f lor5 f 3or.l
o
(l ) Other electric revenues in the graph above includes public street and highway lighting, which is considered part ofretail electric revenues.
Electric Energy MWh Sales
-r.t7l ,1.69+,1.686
Sest0so\tlt\C orllrtrctc't\\o*Io-ttto\l.,lf.rr\css\e
I Irr5 I ror,r
50
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 57 ol 177
o
3. l'r7 I ta)i.1t!
Lfift3Lxt 1
o
Table of Contents
AVISTA CORPORATION
The following table presents Avista Utilities'decoupling and customer eamings sharing mechanisms by jurisdiction that are included in utility electric
operating revenues for the years ended December 3 I (dollan in thousands):
Electric Operating
Revcnues
201 5 20t4
Washington
Decoupling $ 4,740 nla
Provision for eamings sharin g GA23) nla
Idaho
Decoupling r.la nla
Provision for eamings sharing (2,198) (7,503)
(n/a) This mechanism did not exist during this time period.
Total electric revenues decreased $ I .1 million for 201 5 as compared to 2014, affected by the following:
. a $5.7 million increase in retail electric revenues due to an increase in revenue per MWh (increased revenues $2 I .0 million), partially offset by a
decrease in total MWhs sold (decreased revenues $ I 5.3 million). The increase in revenue per MWh was primarily due to a general rate increase in
Washington. The decrease in total MWhs sold was primarily the result of weather that was significantly warmer than normal and warmer than the
pnor year, which decreased the electric heating load in the first quarter. Compared to 20 I 4, residential electric use per customer decreased 5 percent
and commercial use per customer decreased 2 percent. Heating degree days in Spokane were I 4 percent below normal and I 0 percent below 20 14.
The impact from reduced heating loads was partially offset by increased cooling loads in the summer. Year-to-date cooling degree days were I 4 I
percent above normal and 28 percent above the prior year.
. a $ I 0.9 million decrease in wholesale electric revenues due to a decrease in sales volumes (decreased revenues $21 .9 million), partially offset by an
increase in sales prices (increased revenues $ 1 I .0 million). The fluctuation in volumes and prices was primarily the result ofour optimization
activities.
. a $0.9 million decrease in sales offuel due to a decrease in sales ofnatural gas fuel as part ofthermal generation resource optimization activities. For
2015, $50.0 million ofthese sales were made to ournatural gas operations and are included as intracompany revenues and resource costs. For20l4,
$67.4 million ofthese sales wer€ made to our natural gas operations.
. a$4.7 million increase in electric revenue due to decoupling, which reflected decreased heating loads in the first and fourth quarters, partially o{Iset
by increased cooling loads in tlte second and third quarters.
. a $ I .9 million decrease in the provision for eamings sharing, primarily due to a decrease of $5.3 million for our Idaho electric opentions, partially
offset by an increase of $3.4 million for our Washington electric operations. In 2014, we recorded a provision for eamings sharing of $7.5 million for
Idaho electric customers with $5.6 million representing our estimate for 201 4 and $ I .9 million representing an adjustment to our 20 I 3 estimate.
5l
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 'l , Page 58 of 177
o
o
Tablc of Contents
AVISTA CORPORATION
The following graphs present Avista Utilities' natural gas operating revenues and therms delivered for the yean ended December 3 I (dollars in millions and
therms in thousands):
Natural Gas Operating Revenues
$::8.1
St,)t n $:l)3.'l $:lH.i
$'}{,.ll $l(|-i.:I I 116 I $ll.eII
g*tttP"\d C orrt$ercr'a\{l$o\eF'$e Ot\et \\)
I lor-5 I lor4
o
(1 ) Other natural gas revenues in the graph above includes intemrptible and industrial revenues, which are considered part ofretail natural gas revenues.
Therms Delivrretl
t{1}). I il
5{5.{t:o
l?6.613 le()'l 7l t?I.7)l t7.i_J{ril{}7,$.rl I l(r?-lll
Ba'-dtntto\C orrtort{c'l'$\,$a\eslr\e 0t\rr:t
f rori f ror4
52
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
O
Schedule 1, Page 59 of '177
o
O
Table of Contcnts
AVISTA CORPORATION
The following table presents Avista Utilities'decoupling and customer eamings sharing mechanisms by jurisdiction that are included in utility natural gas
operating revenues for the years ended Decernber 3 I (dollars in thousands):
Natural Gas
Operating Rcvenues
2014
Washington
Decoupling
Provision for eamings sharing
Idaho
Decoupling
Provision for eamings sharing
(n/a) This mechanism did not exisl during this time period.
Total natural gasrevenucs dccreased $35.7 million for20l5 ascompared to 2014 due to the following
a $ 1 6.4 million decrease in retail natural gas revenues due to a decrease in volumes (decreased revenues $23.6 million), partially offset by higher
retail rates (increased revenues $7.2 million). Higher retail rates were due to PGAs implemented in November 20 I 4, which passed through higher
costs ofnatural gas, and general rate cases. This was partially offset by PGA rate decreases implemented in November 20 I 5, which passed through
lower costs. We sold less retail natural gas in 201 5 as compared to 20 I 4 primarily due to weather that was warmer than normal and warmer than the
prior year. Compared to 2014, residential use per customer decreased 9 percent and commercial use per customer decreased 9 percent. Heating
degree days in Spokane were l4 percent below historical average for 201 5, and I 0 percent below 2014. Heating degree days in Medford were 1 5
percent below historical average for20l5, and 4 percent above 2014.
a $23.9 million decrease in wholesale natural gas revenues due to a decrease in prices (decreased revenues $90.4 million), partially offset by an
increase in volumes (increased revenues $66.5 million). In 20 I 5, $57.0 million ofthese sales were made to our electric generation operations and are
included as intracompany revenues and resource costs. ln 2014,$74.7 million ofthese sa'les were made to our electric generation operations.
Differences between revenues and costs from sales ofresources in excess ofretail Ioad requirements and from resource optimization are accounted for
through the PGA mechanisms.
a $6.0 million increase for natural gas decoupling revenues due primarily to significantly warmer than normal weather and the impact on heating
loads.
The following table presents Avista Utilities'average number ofelectric and natural gas retail customers for tlre years ended December 3 I
Electric
Custome rs
Natural Gas
Customers
nla
(221)
20t5 201,4 2015 2014
Residential
Commercial
Intemrptible
Industrial
Public street and highway lighting
Total retail customers
327,O57
41,296
1,353
529
324,r 8840,e88 'o,r:z t^o::
I ,3 85 261 264
367,092 330,530 326,276
296,005 291,928
370,235
53
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule l, Page 60 of 177
o
201 5
6,004$
Table of Contents
AVISTA CORPORATIONo
The following graphs present Avista Utilities' resource costs for the years ended December 3 I (dollars in millions):
o
Electric Resource Costs
$llt5.l,
$l(rtt.r'
ll!0.8 $t tf,.{II $?1..1 $8:..1I l{t I }i'l 7r:
\t"t*IA ."$,I$$os
',r$rbs$es
tue\tor
';-Ir\t\co6s ()r\rcr
Otbc{
I mr5 I :orl
Natura! Gas Resource Costs
$97.7
$i l.:
$19,6
----il.7
Nalur*l gils purchastd 0ther
Itolj :0 t.t
Total resource costs in the graphs above include intracompany resource costs of$ I 07.0 million and $ I 42.2 million for 20 I 5 and 20 I 4, respectively.
Total electric resource costs decreased $ I 7.6 million for 20 I 5 as compared to 20 I 4 due to the following:
. an $ I 8.3 million decrease in power purchased due to a decrease in the volume ofpower purchases (decreased costs $23.6 million), partially offset by
an increase in wholesale prices (increased costs $5.3 million). The fluctuation in volumes and prices was primarily the result ofour overall
optimization activities.
. a $4.4 million increase in fuel forgeneration primarily due to an increase in thermal generation (due in part to decreased hydroelectric generation),
partially offset by a decrease in natural gas fuel prices.
. a $ 10.0 million decrease in other fuel costs.
a $ I 4.2 million increase from amortizations and deferrals ofpower costs.
a $7.7 million decrease in other electric r€source costs primarily due to the benefit from a capacity contract ofSpokane
54
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 61 of 177
o
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Table of Contents
AVISTA CORPORATION
Energy, which was mostly defened for probable future benefit to customers through the ERM and PCA.
Total natural gas resource costs decreased $44.9 million for 20 I 5 as compared to 20 I 4 due to the following:
. a$66.1 milliondecreaseinnaturalgaspurchasedduetoadecreaseinthepriceofnaturalgas(decreasedcosts$138.3million),partiallyoffsetbyan
increase in total therms purchased (increased costs $72.2 million). Total therms purchased increased due to an increase in wholesale sales, partially
offset by a decrease in retail sales.
. a $21 .8 million increase from amortizations and deferrals of natural gas costs. This reflects lower natural gas prices and the deferral of lower costs for
future rebate to customers.
Results ofOperations - Alaska Electric Liqht and Po\ryer Company
AEL&P was acquired on July I , 201 4 and only the results for the second half of 2014 are included in the actual overall results of Avi sta Corp. The discussion
below is only for AEL&P's eamings that were included in Avista Corp.'s overall eamings.
2016 compared to 201 5
Net income for AEL&P was $8.0 million for the year ended December 3 1, 201 6, compared to $6.6 million for 2015. The increase in eamings for 201 6 was
primarily due to an increase in gross margin and an increase in equity-related AFLIDC (increased eamings) due to the construction ofan additional back-up
generation plant which was completed during the fourth quarter of20 I 6.
The increase in gross margin was primarily related to a decrease in costs associated with the Snettisham hydroelectric project (due to a refinancing transaction
dunng the second halfof20 I 5 which lowered interest costs under the take-or-pay power purchase agreement), as well as an interim rate increase effective in
November 201 6. These were partially offset by a slight decrease in sales volumes to commercial and govemment customers and an increase in other resource
costs.
AEL&P has a relatively stable load profile as it does not have a large population ofcustomers in its service territory with electric heating and cooling
requirements; therefore, its revenues are not as sensitive to weather fluctuations as Avista Utilities. However, AEL&P does have higher winter rates for its
customers during the peak period ofNovember through May ofeach year, which drives higher revenues during those periods.
2015 compared to 2014
Net income for AEL&P was $6.6 million for the year ended December 31,2015, compared to $3.2 million for the second half of20l4. Since AEL&P was
acquired on July I , 20 1 4, the results for 20 I 5 are not comparable to 2014 as 2014 only includes results for the second halfofthe year.
Results ofOperations -Ecova - Discontinued Ooerations
Ecova was disposed ofas ofJune 30, 201 4. As a result, in accordance with GAAP, all ofEcova's operating results were removed from each line itern on the
Consolidated Statements oflncome and reclassified into discontinued operations for all periods presented. In addition, since Ecova was a subsidiary of
Avista Capital, the net gain recognized on the sale ofEcova was attributable to our other businesses. However, in accordance wrth GAAP, this gain is
included in discontinued operations; therefore, we included the analysis ofthe gain in the Ecova discontinued operations section rather than in the other
businesses section.
2016 compared to 2015 and 2014
There was zero net income or loss for 20 I 6. Ecova's net income was $5.1 million for 201 5, compared to net income of 572/ million for 2014. The net income
for 20 I 5 was primarily related to a tax benefit during 20 I 5 that resulted from the reversal ofa valuation allowance against net operating losses at Ecova
because the net operating losses were deemed realizable under the current tax code. Additionally, there were some minor true-ups to the gain recognized on
the sale due to the settlement ofthe working capital and indemnification escrow accounts during 20 1 5. The results for 20 I 4 included $69.7 million oftlre net
gain recognized on the sale ofEcova.
Results ofOoerations - Other Businesses
2016 compared to 2015
Thenetlossfromtheseoperationswas$3.2rnillionfor20l6comparedtoanetlossof$l.9millionfor20l5.Netlossesfor20l6wereprimarilyrelatedan
increase in losses on investments due to initial organization costs and management fees associated with a new investment, as well as an impairment recorded
on a building we own. This was partially offset by a slight decrease in corporate costs (including costs associated with exploring strategic opportunities) and
a slight increase in net income at METALft for the year-to-date.
55
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
o
Schedule 1, Page 62 ol 177
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Table of Contents
AVISTA CORPORATION
2015 compared to 2014
The net loss from these operations was $1.9 million for20l5 compared to net income of $3.2 million for20l4. The decrease in net income cornpared to 2014
was primarily due to the settlement of the Califomia powermarkets litigation in 2014, where Avista Energy received settlement proceeds from a litigation
with various California parties related to the prices paid for power in the Califomia spot markets during the yean 2000 and 2001 . Thrs settlement resulted in
an increase in pre-tax eamings of approximately $ I 5.0 million. This was partially offset by a pre-tax contribution of $6.4 million of the proceeds to the
Avista Foundation.
In addition, the decrease in eamings for 20 I 5 related to an increase in net losses on investments, partially offset by an increase in net income at METALfX
and a slight decrease in corporate costs, including costs associated with exploring strategic opportunities.
Accountinq Standards to be Adooted in 201 7
At this time, we are not expecting the adoption ofaccounting standards to have a material impact on our financial condition, results ofoperations and cash
flows in 2017. However, we will be adopting ASU No. 201449 "Revenue from Contracts with Customers (Topic 606)" in 2018 upon its effective date. This is
a significant new accounting standard that requires an extensive amount oftime and effort to implement. We currently expect to use a modified retrospective
method of adoption, which would require a cumulative adjustment to opening retained eamings, as opposed to a full retrospective app'lication. The Company
is not far enough along in the adoption process to determine the amount, ifany, ofcumulative adjustment necessary.
Since the vast majority ofAvista Corp.'s revenue is from rate regulated sales ofelectricity and natural gas to retail customers and revenue is recognized as
energy is delivered to these customers, we do not expect a significant change in operating revenues or net income due to adopting this standard.
The Company is in the process ofreviewing and analyzing certain contracts with customers (most ofwhich are related to wholesale sales ofpower and natural
gas) but has not yet identified any significant differences in revenue recognition between current GAAP and the new revenue recognition standard.
There are unresolved issues associated with implementing this standard, including the presentation ofCIACs, the presentation ofutility taxes on a gross basis
and determining collectibility of sales to Iow income customers. We are monitoring utility industry implementation guidance as it relates to unresolved
issues to determine ifthere will be an industry consensus regarding accounting and presentation ofthese items.
For information on accounting standarrds adopted in 20 I 6 and accounting standands expected to be adopted in future periods, see "Note 2 ofthe Notes to
Consolidated Financial Statements."
Critical Accounting Policies and Estimates
The preparation ofour consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts
reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material
effect on our consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. The following accounting
policies represent those that our management believes are particularly important to the consolidated financial statements and require the use ofestimates and
assumptions:
. Regulatory accounting,which requires that certain costs and/or obligations be reflected as deferred charges on our Consolidated Balance Sheets and
are not reflected in our Consolidated Statements ofkrcome until the period during which matching revenues are recognized. We also have
decoupling revenue deferrals. As opposed to cost deferrals which are not recognized in the Consolidated Statements oflncome until they are
included in rates, decoupling revenue is recognized in the Consolidated Statements oflncorne during the period in which it occun (i.e. during the
period ofrevenue shortfall orexcess due to fluctuations in customerusage), subject to certain limitations, and a regulatory asset/liability is
established which will be surcharged or rebated to customers in future periods. GAAP requires that for any altemative regulatory revenue program,
like decoupling, the revenue must be expected to be collected from customers within 24 months ofthe deferral to qualifl, for recognition in the
current period Consolidated Statement oflncome. Any amounts included in the Company's decoupling program that are not expected to be
collected from customers within 24 months are not reconded in the financial statements until the period in which revenue recognition criteria are
met. This could ultimately result in more decoupling revenue being collected from customers over the life ofthe decoupling program than what is
defened and recognized in the current period financial statements. We make estimates regarding the amount ofrevenue that will be collected within
24 months of deferral. We also make the assumption that there are regulatory precedents formany of ourregulatory items and that we will be
56
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Exhibit No. 3
Case Nos. AVU-E-17-_/ AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 63 of 177
o
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Table of Contents
AVISTA CORPORATION
allowed recovery ofthese costs via retail rates in future periods. Ifwe were no longer allowed to apply regulatory accounting or no longer allowed
recovery ofthese costs, we could be required to recognize significant write-offs ofregulatory assets and liabilities in the Consolidated Statements of
Income. See 'Notes 1 and 20 ofthe Notes to Consolidated Financial Statements" for further discussion ofour regulatory accounting policy.
. Utility energy commodity derivative asset and liability accounting,where we estimate the fairvalue of outstanding commodity derivatives and we
offset energy commodify derivative assets or liabilities with a regulatory asset or liability. This accounting treatment is intended to defer the
recognition ofmark-to-market gains and losses on energy commodity transactions until the period ofdelivery. This accounting treatment is
supported by accounting orders issued by the UTC and IPUC. Ifwe were no longer allowed to apply regulatory accounting or no longer allowed
recovery ofthese costs, we could be required to recognize significant changes in fair value ofthese energy commodity derivatives on a regular basis
in the Consolidated Statements oflncome, which could lead to significant fluctuations in net income. See "Notes 1 and 6 ofthe Notes to
Consolidated Financial Statements" for further discussion ofour energy derivative accounting policy.
. Intercst rate swap derivative asset and liability accounting, where we estimate the fair value ofoutstanding interest rate swap derivatives, and U.S.
Treasury lock agreements and offset the derivative asset or liability with a regulatory asset or liability. This is similar to the treatment ofenergy
commodity derivatives described above. Upon settlement ofinterest rate swap derivatives, the regulatory asset or liability is amortized as a
component ofinterest expense over the term ofthe associated debt. Ifwe no longer applied regulatory accounting or were no longer allowed
recovery ofthese costs, we could be required to recognize significant changes in fair value ofthese interest rate swap derivatives on a regular basis in
the Consolidated Statements oflncome, which could lead to significant fluctuations in net income.
. Pension Plans and Aher Postretiremenl Benefit Plans, discr;,ssed in further detail below.
. Contingencies; related to unresolved regulatory, legal and tax issues for which there is inherent uncertainty for the ultimate outcome ofthe
respective matter. We accrue a loss contingency if it is probable that an asset is impaired or a liability has been incurred and the amount of the loss or
impairment can be reasonably estimated. We also disclose losses that do not meet these conditions for accrual, if there is a reasonable possibility that
a potential loss may be incurred. Forall material contingencies, we have made ajudgment as to the probability ofa loss occurring and as to whether
or not the amount ofthe loss can be reasonably estimated. Ifthe loss recognition criteria are met, liabilities are accrued or assets are reduced.
However, no assurance can be given to the ultimate outcome ofany particular contingency. See 'Notes ! and I 9 ofthe Notes to Consolidated
Financial Statements" for further discussion ofour commitments and contingencies.
Pension Plans and Other Postretiremenl Benefil Plans - Avista Utililies
We have a defined benefit pension plan covering substantially all regular fulltime employees at Avista Utilities that were hired prior to January I , 201 4. For
substantially all regular non-union full+ime employees at Avista Utilities who were hired on or after January 1 ,2014, a defined contribution 401 ft) plan
replaced the defined benefit pension plan.
The Finance Committee ofthe Board ofDirectors approves investment policies, objectives and strategies that seek an appropriate retum for the pension plan
and it reviews and approves changes to the investment and funding policies.
We have contracted with an independent investment consultant who is responsible formanaging/monitoring the individual investment managers. The
investment managers' performance and related individual fund performance is reviewed at least quarterly by an intemal benefits committee and by the
Finance Committee to monitor compliance with our established investment policy objectives and strategies.
Our pension plan assets are invested in debt securities and mutual funds, trusts and partnerships that hold marketable debt and equity securities, real estate
and absolute retum funds. In seeking to obtain the desired retum to fund the pension plan, the investment consultant recommends allocation percentages by
asset classes. These recommendations are reviewed by the intemal benefits committee, which then recommends their adoption by the Finance Committee.
The Finance Committee has established target investment allocation percentages by asset classes and also investment ranges for each asset class. The target
investment allocation percentages are typically the midpoint ofthe established range. During 20 I 6, we revised the target investment allocation percentages.
See "Note I 0 ofthe Notes to Consolidated Financial Statements" for the target investment allocation percentages and further discussion ofthe revision.
57
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Exhibit No. 3
Case Nos. AVU-E-I7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1,Pageil ol 177
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AVISTA CORPORATION
We also have a Supplemental Executive Retirement PIan (SERP) that provides additional pension benefits to our executive officers and others whose benefits
under the pension plan are reduced due to the application ofSection 4 I 5 ofthe Intemal Revenue Code of 1 986 and the deferral ofsalary under deferred
compensation plans.
Pension costs (including the SERP)were $26.8 million for20l6, $27.1 million for20l5 and $14.6 million for2014. Of ourpension costs, approximately 60
percent are expensed and 40 percent are capitalized consistent with labor charges. The costs related to the SERP are expensed. Our costs for the pension plan
are determined in part by actuarial formulas that are dependent upon numerous factors resulting from actual plan experience and assumptions offuture
experience.
Pension costs are affected by among other things:
. employee demographics (including age, compensation and length ofservice by employees),
. the amount ofcash contributions we make to the pension plan,
. the actual retum on pension plan assets,
' expected retum on pension plan assets,
. discount rate used in determining the projected benefit obligation and pension costs,
' assumed rate ofinctease in employee compensation.
. life expectancy ofparticipants and otherbeneficiaries, and
. expected method ofpayment (ump sum or annuity) ofpension benefits.
Any changes in pension plan obligations associated with tlrese factors may not be immediately recognized as pension costs in our Consolidated Statement of
Income, but we generally recognize the change in firture years over the remaining average service period ofpension plan participants. As such, our costs
recorded in any period may not reflect the actual level ofcash benefits provided to pension plan participants.
We revise the key assumption ofthe discount rate each year. In selecting a discount rate, we consider yield rates at the end ofthe year for highly rated
corporate bond portfolios with cash flows from interest and maturities similar to that ofthe expected payout ofpension benefits. In 20 I 6, the pension plan
discount rate (exclusive ofthe SERP) was 4.26 percent compared to 4.58 percent in 2015 and,4.21 percent in 20 I 4. These changes in the discount rate
increased the projected benefit obligation (exclusive ofthe SERP) by approximately 527.7 million in 201 6 and decreased the obligation by $3 1.0 million in
2015.
The expected long-term rate ofretum on plan assets is reset or confirmed annually based on past performance and economic forecasts for the types of
investments held by ourplan. We used an expected long-term rate ofretum of5.40 percent in 2016,5.30 percent in 2015 and 6.60 percent in 2014. This
change decreased pension costsby approximately $0.5 million in 20l6.The actual retum onplan assets,netoffees,was again ofS43.2 million (or8.l
percent)for2016, a loss of$4.3 million (or0.8 percent) for20l5 and a gain of$56.0 million (or I 1.6 percent)for2014.
The following chart reflects the sensitivities associated with a change in certain actuarial assumptions by the indicated percentage (dollan in thousands):
Change in
Assumption
Effect on Projected
Benefit Obligation
Effect on
Pmsion CostAcurial Assumption
Expected long-term retum on plan assets
Expected long-term return on plan asscts
Discount rate
Discount rate
(0.s)%
0.5 %
(0.5)%
0.5 %
$*$2,551
(2,5 5 1)
3,842
(3,441)
47,738
(42,462)
+ Changes in the expected retum on plan assets would not affect ourprojected benefit obligation.
We provide certain health care and life insurance benefits for substantially all of our retired employees. We accrue the estimated cost of postretirement benefit
obligations during the years thal employees provide service. Assumed health care cost trend rates have a significant effect on the amounts reported for our
postretirement plans. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase our accumulated postretirement
benefit obligation as ofDecember 31,2016 by $8.6 million and the sewice and interest cost by $ I .0 million. A one-percentage-point decrease in the assumed
health
58
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
o
Schedule 1 , Page 65 of 1 77
o
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Tabl€ of Cont€pts
AVISTA CORPORATION
care cost trend rate for each year would decrease our accumulated postretirement benefit obligation as ofDecember 3 I , 20 I 6 by $6.7 million and the service
and interest cost by $0.7 million.
Liouidiw and CaDital Resources
Overall Liguiditv
Avista Corp.'s consolidated operating cash flows are primarily derived from the operations of Avista Utilities. The primary source of operating cash flows for
Avista Utilities is revenues from sales ofelectricity and natural gas. Significant uses ofcash flows from Avista Utilities include the purchase ofpower, fuel
and natural gas, and payment ofother operating expenses, taxes and inlerest, with any excess being available for other corporate uses such as capital
expenditures and dividends.
We design operating and capital budgets to control operating costs and to direct capital expenditures to choices that support immediate and long-term
strategies, particularly for our regulated utility operations. In addition to operating expenses, we have continuing commitments for capital expenditures for
construction and improvement of utility facilities.
Our annual net cash flows from operating activities usually do not fully support the amount required for annual utility capital expenditures. As such, from
time-to-time, we need to access long-term capital markets in order to fund these needs as well as fund maturing debt. See further discussion at "Capital
Resources."
We periodically file for rate adjustments for recovery ofoperating costs and capital investments and to seek the opportunity to eam reasonable retums as
allowed by regulators. ln December 20 I 6, the UTC issued an order related to our Washington electric and natural gas general rate cases that were originally
filed with the UTC in February 201 6. The UTC order denied the Company's proposed electric and natural gas rate increase requests totaling $43.0 million. If
this order is not changed as a result ofreconsideration, rehearing orjudicial review, we expect it will have a negative impact on our net income in 20 I 7. See
further details in the section "Regulatory Matters."
For Avista Utilities, when power and natural gas costs exceed the levels cunently recovered from retail customers, net cash flows are negatively affected.
Factors that could cause purchased power and natural gas costs to exceed the levels currently recovered from our customen include, but are not limited to,
higher prices in wholesale markets when we buy energy or an increased need to purchase power in the wholesale markets, and a lack ofregulatory approval
for higher authorized net power supply costs through general rate case decisions. Factors beyond our control that could result in an increased need to
purchase power in the wholesale markets include, but are not limited to:
. increases in demand (due to eitherweatherorcustomergroMh),
. low availability of streamfl ows for hydroelectric generation,
. unplanned outages at generating facilities, and
. failure ofthird parties to deliver on energy or capacity contracts.
Avista Utilities has regulatory mechanisms in place that provide for the deferral and recovery ofthe rnajority ofpower and natural gas supply costs. However,
ifprices rise above the level curently allowed in retail rates in periods when we are buying energy, deferral balances would increase, negatively affecting our
cash flow and liquidity until such time as these costs, v/ith interest, are recovered from customers.
In addition to the above, Avista Utilities enters into derivative instruments to hedge our exposure to certain risks, including fluctuations in commodity
mad<et prices, foreign exchange rates and intercst rates (forpurposes ofissuing long-term debt in the future). These derivative instruments often require
collateral (in the form ofcash or letters ofcredit) or other credit enhancements, or reductions or terminations ofa portion ofthe contract through cash
settlement, in the event ofa downgrade in the Company's credit ratings or changes in market prices. In periods ofprice volatility, the level ofexposure can
change significantly. As a result, sudden and significant demands may be made against the Company's credit facilities and cash. See "Enterprise Risk
Management - Demands for Collateral" below.
We monitor the potential liquidity impacts of changes to energy commodity prices and other increased operating costs for our utility operations. We believe
that we have adequate liquidity to meet such potential needs through our committed lines ofcredit.
As of December 31, 2016, we had $245.6 million of available liquidity underthe Avista Corp. committed line of credit and $25.0 million under the AEL&P
committed line of credit. With our $400.0 million credit facility that expires in April 2021 and, AEL&P's $25.0 million credit facility that expires in
November 20 I 9, we believe that we have adequate liquidity to meet our needs for the next I 2 months.
59
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1 , Page 66 of 1 77
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Table of Contetrts
AVISTA CORPORATION
Review ofConsolidated Cash Flow Statement
Overall
During 20 I 6, cash flows from operating activities were $3 58.3 million, proceeds from the issuance oflong-term debt were $245.0 million (including a $70.0
million bridge loan that was repaid in December 2016), net proceeds from our committed line of credit were $15.0 million and we received $67.0 million
from the issuance ofcommon stock. Cash requirements included utility capital expenditures of$406.6 million, the payment oflong-term debt of$l 63.2
million (including the $70.0 million bridge loan), dividends of$87.2 million and cash paid for the settlernent ofinterest rate swap derivatives of$54.0
million.
201 6 compared to 201 5
Consolidated Ooeratins Activities
Net cash provided by operating activities was $358.3 million for 201 6 compared to $375.6 million for 20 I 5. The decrease in net cash provided by operating
activities was primarily related to the cash settlement ofinterest rate swap derivatives in the third quarter of20 I 6 totaling $54.0 million. The interest rate
swap derivatives were settled in connection with the pricing offirst mortgage bonds that were issued in December 20 I 6. In addition, our accounts receivable
balances increased during 20 I 6 (which reduces operating cash flow), due to higher sales during the fourth quarter of20 I 6 due to colder weather as compared
to the fourth quarter of20l 5 and due to the timing ofcollections.
The cash flowdecreaseswerepartially offsetby highernet income afternon-cash adjustments of$446.4 million in 2016, compared to $392.3 million in
2015.
There was also a decrease in collateral posted for derivative instruments in 20 I 6 (primarily due to an increase in the fair value ofoutstanding energy
commodity derivatives, which required less collateral) as compared to an increase in collateral posted during 201 5.
Pension contributionswere $12.0 million forboth 2016 and20l5.
Net cash received from income tax refunds increased to $ 13.5 million for 2016 compared to $ 10.0 million for 201 5. In addition, the income tax receivable
increased $33.9 million in 201 6. We are in a refund position with regards to income taxes because the Company generated a net operating loss for tax
purposes in 201 6 primarily due to bonus depreciation on utility plant placed in service during the year and the settlement ofinterest rate swaps. The
Company intends to carryback the net operating loss against prior year tax retums and expects the net operating loss to be fully utilized through the
carryback. Additionally, the Company generated $19.4 million of federal investment income tax credits in 2016; $9.6 million will be carried back against a
priortax retum with the remaining $9.8 million to be carried forward to future federal tax periods.
The provision for deferred income taxes was $ I 24.5 million for 201 6, compared to $51 .8 mil'lion for 2015. The change in the provision for deferred income
taxes was primarily related to deferred taxes on property, plant and equipment, investment tax credits associated with our capital projects, deferred taxes on
the decoupling regulatory assets and deferred taxes on interest rate swap derivatives.
Consolidated Investins Activities
Net cash used in investing activities was $432.5 million for 2016, an increase compared to $387.8 million for 201 5. During 2016, we paid $406.6 million for
utilitycapital expenditures,comparedto$393.4millionfor20l5.[naddition,during20l6,oursubsidiariesdisbursed$10.1 millionfornotesreceivableto
third parties and received $5.0 million in repayments on these notes receivable. Our subsidiaries also made $7.8 million in investments and purchased
buildings and otherproperty as investments for $5.3 million.
During 20 I 5, we received cash proceeds (related to the settlement ofthe escrow accounts) of$ I 3.9 million from the sale ofEcova.
Consolidated Financing Activities
Net cash provided by financing activities was $72.2 mitlion for 201 6 compared to net cash provided of $0.5 rnillion for 201 5. In 201 6 we had the following
signifi cant transactions:
. borrowing of $70.0 million pursuant to a term loan agreement in August, which was used to repay a portion ofthe $90.0 million in first mortgage
bonds that matured in August 20 1 6,
60
a
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 67 of 177
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Table of Contetrts
AVISTA CORPORATION
issuance and sale of $ I 75.0 million of Avista Corp. fint mortgage bonds in December 2016, the proceeds of which were used to repay the $70.0
million term loan, with the remainderbeing used to pay down a portion ofour committed line of credit,
payment of $163.2 million forthe redemption and maturity oflong-term debt (including the $70.0 million term loan),
increase in cash dividendspaid to $87.2 million (or$1.37 pershare) for20l6 from $82.4 million (or$1.32 pershare) for20l5,
$15.0 million net increase in the balance of ourcommitted line of credit, and
issuance of$67.0 million ofcommon stock (net ofissuance costs).
See below for a Iist ofsignificant financing transactions occurring in 20 I 5.
201 5 compared to 2014
Consolidated Oneratins Activities
Net cash provided by operating activities was $375.6 million for 20 I 5 compared to $267 .3 million for 20 I 4. The increase in cash provided by operating
activities was due to higher net income after non-cash adjustments of $3 92.3 rnilli on in 201 5, compared to $34 8.2 million in 2014. Tlte gross gain on the sale
ofEcova of$0.8 million for 20 1 5 is deducted in reconciling net income to net cash provided by operating activities. The cash proceeds from the sale (which
includes the gross gain) is included in investing activities. This is compared to the gross gain recognized in 20 I 4 of$ I 60.6 million.
Net cash used by certain current assets and liabilities was $4.1 million for 20 I 5, compared to net cash used of$50.0 million for 20 I 4. The net cash used
during 20 I 5 primarily reflects cash outflows from changes in accounts payable, collateral posted for derivative instruments and accounts receivable. This was
partially offset by inflows from changes in natural gas stored and income taxes receivable.
The provision for defened income taxes was $5 l.8 million for 2015 compared to $ 144.3 million for 2014. The decrease in 2015 was primarily due to the
combination ofimplementation by the Company ofupdated federal tax tangible property regulations and increased deductions related to bonus depreciation
in 2014.
Contributions to our defined benefit pension plan were $ 12.0 million for 2015 corrpared to $32.0 million in 2014.
Net cash received for income taxes was $ 10.0 million for 201 5 compared to net cash paid of $45.4 million for 2014
Consolidated Investi ns Activities
Net cash used in investing activities was $3 87.8 million for 20 I 5, an increase compared to $ I 03.7 million for 20 I 4. During 20 I 5, we received cash proceeds
(related to the settlement ofthe escrow accounts) of$ I 3.9 million for the sale ofEcova. We received the majority ofthe proceeds ($229.9 million) from the
sale ofEcova duing 2014. The proceeds received in 20 14 were used to pay offthe balance ofEcova's long-term bonowings and make payments to option
holders and noncontrolling interests (included in financing activities). We also used a portion ofthese proceeds to pay our $74.8 million tax liability
associated with the gain on sale and to fund corlmon stock repurchases. Utility property capital expenditures increased by $67.9 million for 20 1 5 as
compared to 2014. During 201 4, we received $ I 5.0 mill ion in cash (net of cash paid) related to the acquisiti on of AERC.
Consolidated Financinp Activities
Net cash provided by financing activities was $0.5 million for 2015 compared to net cash used of $224.0 million for 2014. In 201 5 we had the following
signifi cant transactions:
. issuance and sale of $ 1 00.0 million of Avista Corp. first mortgage bonds in December 20 I 5,
. paymert of $2.9 million for the redemption and maturity of long-term debt,
. cash dividendspaid increased to $82.4 million (or$1.32 pershare) for20l5 from $78.3 million (or$1.27 pershare) for20l4,
. issuance of$1.6 million ofcommon stock (net ofissuance costs), and
. repurchase of $2.9 million of our common stock.
In 2014, we had the following significant transactions:
6l
o
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 68 of 177
o
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Table of Contents
AVISTA CORPORATION
. issuance of$150.0 million of long-term debt ($60.0 million of Avista Corp. first mortgage bonds, $75.0 million ofAEL&P first rnortgage bonds and
a S 15.0 million AERC unsecured note tepresenting a term loan),
. a decrease of $66.0 million in short-term borrowings on Avista Corp.'s committed line of credit,
. a decrease of $46.0 million on Ecova's committed line of credit with $6.0 million in payments throughout the year and $40.0 million related to the
close ofthe Ecova sale,
. payment of $40.0 million for the redemption and maturity of long-term debt (primarily related to AEL&P paying offits existing debt),
. cash payments of$54.2 million to noncontrolling interests and $20.9 million to stock option holders and redeemable noncontrolling interests of
Ecova related to the Ecova sal e in 2014,
. issuance of $4.1 million of common stock (net of issuance costs) excluding issuances related to the acquisition of AERC. We issued $ 1 5 0.1 million
ofcommon stock to AERC shareholders, and this is reflected as a non-cash financing activity,
. repurchase of$79.9 million ofour common stock during 2014 using the proceeds from our sale ofEcova, and
. a $ I 6.2 million increase in cash related to the fluctuation in the balance ofcustomer fund obligations at Ecova.
Caoital Resources
Our consolidated capital structure, including the current portion oflong-term debt and short-term borrowings, and excluding noncontrolling interests,
consisted of the following as of December 3 1 ,2016 and 201 5 (dollars in thousands):
December3l,20l6 December 3 l. 201 5
Amount
Perc€nt
of rotal
Percent
of rotal
Current portion oflong-term debt and capilal leases
Short-term borrowings
Long-term debt to affiliated trusts
Long+erm debt and capital leases
Total debt
Total Avista Corporation shareholders' equity
$3,287
120,000
51,547
|,678,7 t7
0.1% $
3.4%
1.5%
4'.7.9%
Amount
93,167
r05,000
51,547
1,480,111
t,729,825
1,528,626
2.9%
3.2%
t.6%
45.4%
l ,853,551
|,648,727
52.9%
47.t%
53.1%
46.9%
Total $ 3..502,278 100.0% $100.0%
Our shareholders' equity increased $ 1 20. I trillion during 20 I 6 primarily due to net income, the issuance ofcommon stock and stock compensation net of
minimum tax withholdings, partially offset by dividends.
We need to finance capital expenditures and acquire additional funds for operations from time to time. The cash requirements needed to service our
indebtedness, both short-term and long-term, reduce the amount ofcash flow available to fund capital expenditures, purchased poweq fuel and natural gas
costs, dividends and other requirements.
Committed Lines of Credil
Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million. We exercised a two-year option in May
201 6 to extend the maturity of the credit facility agreement to April 2021 . As of Decernber 3 1, 2016, we had $245.6 million of available liquidity under this
line ofcredit.
The Avista Corp. credit facility contains customary covenants and default provisions, including a covenant which does not permit our ratio of"consolidated
total debt" to "consolidated total capitalization" to be greater than 65 percent at any time. As ofDecember 3 I , 20 I 6, we were in compliance with this
covenant with a ratio of52.9 percent.
AEL&P has a $25.0 million committed line of cre dit that expires in November 201 9. As of December 3 I , 201 6, there were no bonowings or letters of credit
outstanding under this credit facility.
The AEL&P credit facility contains customary covenants and default provisions including a covenant which does not permit the ratio of"consolidated total
debt at AEL&P" to "consolidated total capitalization at AEL&P," (including the impact ofthe Snettisham obligation) to be greater than 67.5 percent at any
time. As of December 31,2016, AEL&P was in compliance with this covenant with a ratio of 55.6 percent.
62
I
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule '1, Page 69 of 177
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AVISTA CORPORATION
Balances outstanding and interest rates ofborrowings (excluding letters ofcredit) under Avista Corp.'s committed line ofcredit were as follows as ofand for
the year ended December 3 I (dollars in thousands):
2016 201 5 2014
Balance outstanding at end ofyear
Letters ofcredit outstanding at end ofyear
Maximum balance outstanding during the year
Average balance outstanding during the year
Average interest rate during the year
Avcrage interest rate at end ofyear
s
$
$
$
120,000 $
34,3s3 $
280,000 s
l 7l ,090 s
1.26%
1 .50o/o
105,000 $
44,s95 $
180,000 $
95_s73 $
0.98%
1 .lgo/o
105,000
1) S7q
r 7l ,000
62,088
t.0t%
0.93%
o
As ofDecember 3 I , 20 I 6, Avista Corp. and its subsidiaries were in compliance with all ofthe covenants oftheir financing agreements, and none ofAvista
Corp.'s subsidiaries constituted a "significant subsidiary" as defined in Avista Corp.'s committed line of credit.
Long-Term Debt Borrowings
In August 201 6, we entered into a term loan agreement with a commercial bank in the amount of $70.0 million with a maturity date of December 30,2016.
We borrowed the entire $70.0 million available under this agreement, which was used to repay a portion of the $90.0 million of first mortgage bonds that
matured in August 201 6. We repaid this term loan in its entirety in December using the proceeds from first mortgage bonds that were issued in December
2016.
ln December 201 6, we issued and sold $ I 75.0 million of 3.54 percent first mortgage bonds due in 205 I pursuant to a bond purchase agreement with
institutional investon in the private placement market. In connection with the pricing ofthe first mortgage bonds in August 20 1 6, the Company cash-settled
seven interest rate swap derivatives (notional aggregate amount of$125.0 rnillion) and paid a total of$54.0 million, which will be amortized as a component
ofinterest expense overthe life ofthe debt. The effective interest rate ofthe first mortgage bonds is 5.6 percent, including the effects ofthe settled interest
rate swap derivatives and estimated issuance costs.
The total net proceeds from the sale ofthe new bonds was used to repay the $70.0 million term loan and to repay a portion ofthe borrowings outstanding
under our $400.0 million committed line of credit.
Equity Transactions
Sto c k Repurchase Programs
During 20 l4 and 20 I 5, Avista Corp.'s Board ofDirectors approved programs to repurchase shares ofour outstanding corilnon stock. The number ofshares
repurchased and the total cost ofrepurchases are disclosed in the Consolidated Statements ofEquity and Redeemable Noncontrolling Interests. The average
repurchase price was $3 I .57 in 20 I 4 and $32.66 in 20 I 5. All repurchased sharcs reverted to the status ofauthorized but unissued shares.
We did not repurchase any ofour outstanding common stock during 20 1 6.
Equity Issuances
In March 201 6, we entered into four separate sales agency agreements under which Avista Corp.'s sales agents may offer and sell up to 3.8 million new shares
of Avista Corp.'s comnon stock, no parvalue, from time to time. The sales agency agreements expire on February 29,2020.In 2016, 1.6 million shares were
issued under these agreements resulting in total net proceeds of$65.3 million, lea'ting 2.2 million shares remaining to be issued.
In 20 1 6, we also issued $ 1 .7 million (net ofissuance costs) ofcommon stock under the employee plans.
2 0 1 7 Liq uidity Exp e ctatio ns
In the second half of 201 7, we expect to issue approximately $ I 10.0 million of long-term debt and up to $70.0 million of common stock in order to fund
planned capital expenditures and maintain an appropriate capital structure.
After considering the expected issuances oflong-term debt and common stock during 201 7, we expect net cash flows from operating activities, togetherwith
cash available under our committed line ofcredit agreements, to provide adequate resources to fund capital expenditures, dividends, and other contractual
commitments.
63
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1 , Page 70 of 177
o
o
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Table of Contetrts
AVISTA CORPORATION
Limitations on Issuances ofPrefened Stock and First Mongage Bonds
We are restricted under our Restated Articles oflncorporation, as amended, as to the additional preferred stock we can issue. As ofDecember 3 I , 20 I 6, we
could issue $ I .5 billion ofadditional preferred stock at an assumed dividend rate of6.3 percent. We are not planning to issue preferred stock.
Under the Avista Corp. and the AEL&P Mortgages and Deeds of Trust securing Avista Corp.'s and AEL&P's first mortgage bonds (including Secured
Medium-Term Notes), respectively, each entity may issue additional first mortgage bonds in an aggregate principal amount equal to the sum ot
. 66-2/3 percent ofthe cost or fairvalue (whichever is lower) ofproperty additions ofthat entity which have not previously been made the
basis ofany application under tlrat entity's Mortgage, or
. an equal principal amount ofretired first mortgage bonds ofthat entity which have not previously been made the basis ofany application
under that entityts Mortgage, or
' deposit ofcash.
However, Avista Corp. and AEL&P may not individually issue any additional first mortgage bonds (with certain exceptions in the case ofbonds issued on
the basis ofretired bonds) unless the particular entity issuing the bonds has "net eamings" (as defined in the respective Mortgages) for any period of I 2
consecutive calendar months out ofthe preceding 1 8 calendar months that were at least twice the annual interest requirements on that entity's mortgage
securities at the time outstanding, including the first mortgage bonds to be issued, and on all indebtedness ofpdor rank. As ofDecember 3 I , 20 I 6, property
additions and retired bonds would have allowed, and the net eamings test would not have prohibited, the issuance of$ t .2 billion in aggregate principal
amount of additional first mortgage bonds at Avista Corp. and $20.8 million at AEL&P. We believe that we have adequate capacity to issue first mortgage
bonds to meet our financing needs over the next several yean.
Caoital Exoenditures
We are making capital investments in generation, transmission and distribution systems to preserve and enhance service reliability for our customers and
replace aging infrastructure. The following table summarizes ouractual and expected capital expenditures as ofand forthe yearended December31,2016 (in
thousands):
2016 Actual capital experditures
Capital cxpenditures (per thc Consolidated Statement ofCash Flows) (l )
Avista Utilities AEL&P
Expected total annual capital expenditures @y year)
2At7
201 8
2019
390,690
405,000
405,000
405,000
t5,954
6,900
6,700
t 2,900
(1) Actual annualcapitalexpenditurespertheConsolidatedStatementofCashFlowsmaydifferfromourexpectedannualaccrual-basiscapitalexpenditures
due to the timing ofcash payments, the capital expenditure amounts accrued in accounts payable at the end ofeach period and the inclusion ofAFUDC
in our expected amounts, but excluded from the cash flow amounts.
Most ofthe capital expenditures at Avista Utilities are for upgrading our existing facilities and technology, and not for construction ofnew facilities.
64
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
Schedule I , Page 71 oI 177
Tabl€ of Contcnts
AVISTA CORPORATIONo
o
The following graph shows the Avista Utilities'capital budget for2017:
Cnpital Budget for Avista tftilities for l0l7
(dollam in nillions)
Other: $.ll
Enr,irrurnenlal SlI Transrnissiorr &
fJistrihution Sl ST
Nntulnl Cns. ${0
Cierrcratron: $59
lnfonrrnt lon Technologl''
$50
Custonrer Grosth $47
These estimates ofcapital expenditures are subject to continuing review and adjustment. Actual capital expenditures may vary from our estimates due to
factors such as changes in business conditions, construction schedules and environmental requircments.
OIf-Balance Sheet Arranqements
As of December 31, 2016, we had $34.4 million in letters of credit outstanding under our $400.0 million committed line of credit, compared to $44.6 million
as ofDecember 3 l. 201 5.
Pension Plan
We contributed $12.0 million to thepension plan in 2016. We expect to contribute atotal of $l10.0 million to thepension plan in theperiod 2017 through
202 I , with an annual contribution of$22.0 million over that period.
The final determination ofpension plan contributions for future periods is subject to multiple variables, most ofwhich are beyond our control, including
changes to the fair value ofpension plan assets, changes in actuarial assumptions (in particular the discount rate used in determining the benefit obligation),
or changes in federal legislation. We may change our pension plan contributions in the future depending on changes to any variables, including those listed
above.
See 'Note I 0 of the Notes to Consolidated Financial Statements" for additional information regarding the pension plan.
Credit Ratinss
Our access to capital markets and our cost ofcapital are directly affected by our credit ratings. In addition, many ofour contracts for the purchase and sale of
energy commodities contain terms dependent upon our credit ratings. See "Enterprise Risk Management - Credit Risk Liquidity Considerations" and "Note
6 ofthe Notes to Consolidated Financial Statements." The following table summarizes our credit ratings as of Febmary 21,2017:
Standard & Poor's (l)Moody's (2)
Corponte/Issuer ratin g
Senior secured debt
Senior unsecured debt
A2A-
BBB
BBB
Baal
Baal
Standard & Poor's lowest "investment grade" credit rating is BBB-.
Moody's lowest "investment grade" credit rating is Baa3.
o
(l)
(2)
65
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule '1, Page 72 ot 177
o
Table of Contcnts
AVISTA CORPORATION
A security rating is not a recommendation to buy, sell or hold securities. Each security rating is subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating agency has its own methodology for assigning ratings, and, accordingly, each rating should be considered in the
context ofthe applicable methodology, independent ofall other ratings. The rating agencies provide ratings at the request ofAvista Corp. and charge fees for
their services.
Dividends
On February 3,2O77 , Avista Corp.'s Board of Directors declared a quanerly dividend of $0.3575 per share on the Company's common stock. This was an
increase of$0,0 I 5 per share, or 4.4 percent from the previous quarterly dividend of$0.3425 per share.
See "ltern 5. Market for Registrant's Common Equity, Related Stocklrolder Matters and Issuer Purchases ofEquity Securities" for a detailed discussion ofour
dividend policy and the factors which could limit the payment ofdividends.
Contractual Oblisations
The following table provides a summary ofour future contractual obligations as ofDecember 3 I , 20 I 6 (dollars in millions):
2017 201 8 20t9 2020 2021 Thereafter
Avista Utilities:
Long-term debt maturities
Long-term debt to affiliated trusts
Interest payments on long+erm debt (l )
Short-term borrowings
Energy purchase contracts (2)
Operating lease obligations (3)
Othcr obligations (4)
Inlo-rrnation technology contracts (5 )
Pension plan funding (6)
Unsettled interest rate swap derivatives (7)
AERC (consolidated) total contractual commitments (8)
Avista Capital (consolidated) total cohtractual commitments
(e)
Total contractual obligations
(l )
l6
4
(l ) Represents our estimate ofinterest payments on long-term debt, which is calculated based on the assumption that all debt is outstanding until
maturity. lnterest on variable rate debt is calculated using the rate in effect at December 3 1, 20 I 6.(2) Energy purchase contracts were entered into as part ofthe obligation to serve ourretail electric and natural gas customers' energy requirements. As a
result, costs are generally recovered either through base retail rates or adjustments to retail rates as part ofthe power and natural gas cost adjustment
mechanisms.
(3) Includes the interest component ofthe lease obligation.
(4) Represents operational agreements, settlements and other contractual obligations for our generation, transmission and distribution facilities. These
costs are generally recovered through base retail rates.
(5) Includes information service contracts which are recorded to otller operating expenses in the Consolidated Statements oflncome.
(6) Represents our estimated cash contributions to pension plans and otherpostretirement benefit plans through 202l.We cannot reasonably estimate
pension plan contributions beyond 2021 at this time and have excluded them from the table above.
(7) Represents the net mark-to-market fair value of outstanding unsettled interest rate swap derivatives as of December 3 I , 201 6. Negative values in the
table above represent contractual amounts that are owed to Avista Corp. by the counterparties. The values in the table above will change each period
depending on fluctuations in rnarket interest rates and could become either assets or liabilities. Also, the amounts in the table above are not
reflective ofcash collateral of$34.9 million and letters ofcredit of$3.6 million that are already posted with counterparties against the outstanding
interest rate swap denvatives.
58
32
63
33
22
(3)
$273$
70
252
I
29
I
22
54
l6
90s s2$1,124
52
836
1,125
)
189
$
o
;
120
298
I
34
2
22
t2
228
31
7
l5l
15
22
(2)
295
I 8 4
$ 593 $ 726 $ 471 $ 332 $ 247 $ 3,626
66
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 73 ot 177
$
56
126
27
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Table of Contents
AVISTA CORPORATIONO
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(8)
(e)
Primarily relates to long-term debt and capital lease maturities and the related interest. AERC contractual commitments also include contractually
required capital project funding and operating and maintenance costs associated with the Snettisham hydroelectric project. These costs are generally
recovered through base retail rates.
Primarily relates to operating lease commitments and a commitment to fund a limited liability company in exchange for equity ownership, made by
a subsidiary ofAvista Capital.
The above contractual obligations do not include income tax payments. Also, asset retirement obligations are not included above and payments associated
with these have historically been less than $ I million per year. There are approximately $ I 5.5 million remaining asset retirement obligations as of
December3l,20l6.
In addition to the contractual obligations disclosed above, we will incur additional operating costs and capital expenditures in future periods for which we
are not contractually obligated as part ofour normal business operations.
Comnetition
Our utility electric and natural gas distribution business has historically been recognized as a natural monopoly. ln each regulatoryjurisdiction, our rates for
retail electric and natural gas services (other than specially negotiated retail rates for industrial or large commercial customers, which are subject to regulatory
review and approval) are generally determined on a "cost ofservice" basis. Rates are designed to provide, after recovery ofallowable operating expenses and
capital investments, an opportunity for us to eam a reasonable retum on investment as allowed by our regulators.
In retail markets, we compete with various rural electric cooperatives and public utility districts in and adjacent to our service territories in the provision of
service to new electric customers. Altemative energy technologies, including customer-sited solar, wind or geothermal generation, may also compete with us
for sales to existing customers. While the risk is currently small in our service territory given the small numbers ofcustomers utilizing these technologies,
advances in power generation, energy efficiency, energy storage and other altemative energy technologies could lead to more wide-spread usage ofthese
technologies, thereby reducing customer demand for the energy supplied by us. This reduction in usage and demand would reduce our revenue and
negatively impact our financial condition including possibly leading to our inability to fully recover our investments in generation, transmission and
distribution assets. Similarly, our natural gas distribution operations compete with other energy sources including heating oil, propane and other fuels.
Certain natural gas customers could bypass our natural gas system, reducing both revenues and recovery offixed costs. To reduce the potential for such
bypass, we price natural gas services, including transportation contracts, competitively and have varying degrees offlexibility to price transportation and
delivery rates by means ofindividual contracts. Tlrese individual contracts are subject to state regulatory review and approval. We have long-term
transportation contracts with several of our largest industrial customers under which the customer acquires its own commodity while using our infrastructure
for delivery. Such contracts reduce the risk ofthese customers bypassing our system in the foreseeable future and minimizes the impact on our eamings.
Also, non-utility businesses are developing new technologies and services to help energy consumers manage energy in new ways that may improve
productivity and could alter demand forthe energy we sell.
In wholesale markets, competition for available electric supply is influenced by the:
. localized and system-wide demand for energy,
. type, capacity, location and availability ofgeneration resources, and
. variety and circumstances ofmarket pafticipants.
These wholesale markets are regulated by the FERC, which requires electric utilities to:
. transmit powerand energy to orforwholesale purchasers and sellers,
. enlarge orconstruct additional transmission capacity forthe purpose ofproviding these services, and
. transparently price and offer transmission services without favor to any party, including the merchant functions ofthe utility.
Participants in the wholesale energy markets include:
. otherutilities,
' federalpowermarketingagencies,
' energy marketing and trading companies,
67
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 74 ot 177
O
Table of Contents
AVISTA CORPORATIONo
o
independent power producers,
financial institutions, and
commodity brokers.
Economic Conditions and Utility Load Growth
The general economic data, on both national and local levels, contained in this section is based, in part, on independent govemment and industry
publications, reports by market research firms or other independent sources. While we believe that these publications and other sources are reliable, we have
not independently verified such data and can make no representation as to its accuracy.
Avista Utilities
We track multiple economic indicators affecting the three largest metropolitan statistical areas in our Avista Utilities service area: Spokane, Washington,
Coeur d'AIene, Idaho, and Medford, Oregon. Several key indicators are employment change, unemployment rates and foreclosure rates. On a year-over-year
basis, December 201 6 showed positive job growth and lower unemployment rates in all three metropolitan areas. However, the unemployment rates in
Spokane and Medford are still above the national average. Except for Medford, foreclosure rates are in line with or below the U.S rate in all areas, and key
leading indicators, initial unemployment claims and residential building permits signal continued growth over the next I 2 months. Th erefore, in 201 7, we
expect economic growth in our service area to be somewhat stronger than the U.S. as a whole.
Nonfarm employment (seasonally adjusted) in our eastem Washington, northem Idaho, and southwestem Oregon metropolitan service areas exhibited
moderate growth between December 201 5 and December 201 6. In Spokane, Washington employment growth was 3.6 percent with gains in all major sectors
except manufacturing and leisure and hospitality. Employment increased by 2.5 percent in Coeur d'Alene, Idaho, reflecting gains in all major sectors except
mining and logging and professional and business sewices. ln Medforrd, Oregon, employment growth was 3.8 percent, with gains in all majorsectors except
mining and logging. U.S. nonfarm sectorjobs grew by I .5 percent in the same l 2-rnonth period.
Seasonally adjusted unemployment rates went down in December 20 1 6 from the year earlier in Spokane, Coeur d'Alene, and Medford. In Spokane the rate
was 6.5 percent in December2015 and declined to 6.3 percentin December20l6; in Coeurd'Alene theratewent from4.9 percentto 4.5 percent; and in
Medford the rate declined from 6.7 percent to 5.3 percent. The U.S. rate declined from 5.0 percent to 4.7 percent in the same period.
Except for the Medford area, the housing market in our Avista Utilities service area continues to experience foreclosure rates in line with the national
average. The December 20 I 6 national rate was 0.07 percent, compared to 0.07 percent in Spokane County, Washington; 0.02 percent in Kootenai County
(Coeurd'Alene), Idaho; and 0.13 percent in Jackson County (Medford), Oregon.
Alaska Electric Light and Power Company
Our AEL&P service area is centered in Juneau. Although Juneau is Alaska's state capital, it is not a metropolitan statistical area. This means breadth and
frequency ofeconomic data is more limited. Therefore, the dates ofJuneau's economic data may significantly lag the period ofthis filing.
The Quarterly Census ofEmployment and Wages for Juneau shows employment declined 1 .2 percent between second quarter 20 1 5 and second quarter 20 I 6.
The employment decline was centered in govemment; construction; manufacturing; financial activities; and professional and business services. Govemment
(including active duty military personnel) accounts for approximately 37 percent oftotal employment. Employment declines also occurred in natural
resources and mining; education and health services; and other services. Between December 20 I 5 and December 20 I 6 the non-seasonally adjusted
unemployment rate decreased fuom 4.7 percent to 4.5 percent.
The Juneau foreclosure rate is below the U.S. rate. The December 201 6 rate was 0.02 pcrcent compared to 0.07 percent for the U.S.
Forecasted Customer and Load Growth
Based on our forecast for 201 7 through 2020 for Avista Utilities' service area, we expect annual electric customer growth to average 1 .1 percent, within a
forecast range of0.7 percent to 1 .5 percent. We expect annual natural gas customer growth to average I .3 percent, within a forecast range of0.8 percent to I .8
percent. We anticipate retail electric load growth to average 0.6 percent, within a forecast range of0.3 percent and 0.9 percent. We expect natural gas load
growth to average l 2 percent, within a forecast range of0.7 percent and 1 .7 percent. The forecast ranges reflect ( I ) the inherent uncertainty associated with
the economic assumptions on which forecasts are based and (2) the historic variability ofnatural gas customer and load growth.
68
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule '1, Page 75 ot 177
o
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Teble of Contents
AVISTA CORPORATION
In AEL&P's service area, we expect residential customer growth near 0 percent (no residential customer growth) for 2Ol7 through 2020. We also expect no
significant growth in commercial and govemment customers over the same period. We anticipate average annual total load growth will be in a narrow range
around 0.3 percent, with residential load growh averaging 0.6 percent, commercial growth near 0 percent (no load growth); and govemment growth near 0
percent.
The forwardJooking statements set forth above regarding retail load growth are based, in part, upon purchased economic forecasts and publicly available
population and demographic studies. The expectations regarding retail load growth are also based upon various assumptions, including:
. assumptions relating to weather and economic and competitive conditions,
. intemal analysis ofcompany-specific data, such as energy consumption pattems,
. intemal business plans,
. an assumption that we will incurno material loss ofretail customers due to seligeneration orretail wheeling, and
. an assumption that demand for electricity and natural gas as a fuel for mobility will for now be immaterial.
Changes in actual experience can vary significantly from our projections.
See also "Competition" above for a discussion ofcompetitive factors that could affect our results ofoperations in the future.
Environmental Issues and Continqencies
We are subject to environmental regulation by federal, state and local authorities. The generation, transmission, distribution, service and storage facilities in
which we have ownership interests are designed and operated in compliance with applicable environmental laws. Furthermore, we conduct periodic reviews
and audits ofpertinent facilities and operations to ensure compliance and to respond to or anticipate emerging environmental issues. The Company's Board
ofDirectors has established a committee to oversee environmental issues.
We monitor legislative and regulatory developments at all levels of govemment for environmental issues, panicularly those with the potential to impact the
operation and productivity ofour generating plants and other assets.
Environmental laws and regulations may:
. increase the operating costs ofgenerating plants;
. increase the lead time and capital costs forthe construction ofnewgenerating plants;
. require modification ofourexisting generating plants;
. require existing generating plant operations to be curtailed or shut down;
. reduce the amount ofenergy available from our generating plants;
. restrict the types ofgenerating plants that can be built or contracted with;
. require construction ofspecific types ofgeneration plants at higher cost; and
. increase costs ofdistributing natural gas.
Compliance with environmental laws and regulations could result in increases to capital expenditures and operating expenses. We intend to seek recovery of
any such costs through the ratemaking process.
Clean Air Act (CAA)
We must comply with the requirements under the CAA in operating our thermal generating plants. The CAA currently requires a Title V operating permit for
Colstrip (expires in 2017), Coyote Springs 2 (expires in 2018), the Kettle Falls GS (application has been made for a new permit), and the Rathdrum CT
(application has been made for a new permit). Boulder Park GS, Northeast CT, and other activities only require minor source operating or registration permits
based on their limited operation and emissions. T} e Title V operating permits are renewed every five yean and updated to include newly applicable CAA
requirements. We actively monitor legislative, regulatory and program developments within the CAA that may impact our facilities.
On March 6,2013, the Sierra Club and Montana Environmental Information Center, filed a Complaint (Complaint) in the United States District Court forthe
District of Montana, Billings Division, against the owners of Colstrip. The Complaint alleged certain violations of the Clean Air Act. On July t 2, 201 6, all of
the parties to this action filed a Consent Decree with the
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Case Nos. AVU-E-17-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 1, Page 76 ot 177
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Court settling all claims contained in the Cornplaint. See "Sierra Club and Montana Environmental Information Center Litigation" in "Note I 9 of the Notes
to Consolidated Financial Statements" for further information on this matter.
Hazardous Air Pollatants (fAPs)
The EPA regulates hazardous air pollutants from a published list ofindustrial sources referred to as "source categories" which must meet control
technology requirements if they emit one or more of the pollutants in significant quantities. In 2012,the EPA finalized the Mercury Air Toxic Standards
(MATS) for the coal and oil-fired source category. At the time of issuance in 20l2,we examined the existing emission control systems of Colstrip Units 3
& 4,the only units in which we are a minority owner, and concluded that the existing emission control systems should be sufficient to meet mercury
limits. For the remaining portion ofthe rule that utilized Particulate Matter as a surrogate for air toxics (including metals and acid gases), the Colstrip
owners reviewed recent stack testing data and expected that no additional emission control systems would be needed for Units 3 & 4 MATS compliance.
Regional Haze Program
The EPA set a national goal ofeliminating man-made visibility degradation in Class I areas by the year 2064. States are expected to take actions to make
"reasonable progress" through I 0-year plans, including application ofBest Available Retrofit Technology (BART) requirements. BART is a retrofit
program applied to large emission sources, including electric generating units built between I 962 and 1977 . In the case where a State opts out of
implementing the Regional Haze program, the EPA may act directly. On September I 8,201 2, the EPA finalized the Regional Haze federal
implementation plan (FIP) for Montana. The FIP includes both emission limitations and pollution controls for Colstrip Units I & 2. Colstrip Units 3 & 4,
the only units ofwhich we are a minority owner, are not currently affected, but will be evaluated for Reasonable Progress at the next review period. We
do not anticipate any material impacts on Units 3 & 4 at this time.
C o al A sh M a nagement/Disp o sa I
OnApril lT,20l5,theEPApublishedafinalruleregardingcoalcombustionresiduals(CCRs),alsotermedcoalcombustionbyproductsorcoalashinthe
FederalRegister,andthisrulebecameeffectiveonOctoberl5,20l5.Colstrip,ofwhichweareal5percentownerofUnits3&4,producesthisbyproduct.
The rule establishes technical requirements for CCR landfills and surface impoundments under Subtitle D of the Resource Conservation and Recovery Act,
the nation's primary law for regulating solid waste. We, in conjunction with tlre other owners, are developing a multi-year compliance plan to strategically
address the new CCR requirements and existing state obligations while maintaining operational stability. During 2015, the operatorofColstrip pmvided an
initial cost estimate ofthe expected retirement costs associated with complying with the new CCR rule and based on the initial assessments, Avista Corp.
recorded an increase to its asset retirement obligations of$12.5 million with a corresponding increase in the cost basis ofthe utility plant. During 2016, due
to additional information andupdated estimates,we increased the assetretirement obligation (ARO)to $l3.6million (including accretion of$0.7 million).
See "Note 9 ofthe Notes to Consolidated Financial Statements" for additional information regarding AROs.
In addition to an increase to ourARO, it is expected that there will be significant compliance costs at Colstrip in the future, both operating and capital costs,
due to a series of incremental infrastructure improvements which are separate from the ARO. Due to the preliminary nature of available data, we cannot
reasonably estimate the future compliance costs; however, we will update our ARO and compliance cost estimates when data becomes available.
The actual asset retirement costs and future compliance costs related to the CCR Rule requirements may vary substantially from the estimates used to record
the increased ARO due to uncertainty about the compliance strategies that will be used and the prelirninary nature ofavailable data used to estimate costs,
such as the quantity ofcoal ash present at certain sites and the volume offill that will be needed to cap and cover certain impoundments. We will coordinate
with the plant operators and continue to gather additional data in future periods to make decisions about compliance strategies and the timing ofclosure
activities. As additional information becomes available, we will update the ARO and future nonretirement compliance costs for these changes in estimates,
which could be material. We expect to seek recovery of any increased costs related to complying with the new rule through customer rates.
Climate Change
Concerns about long+erm global climate changes could have a significant effect on our business. Our operations could also be affected by changes in laws
and regulations intended to mitigate the risk of, or alter global climate changes, including restrictions on the operation ofour power generation resources and
obligations imposed on the sale ofnatural gas. Changing temperatures and precipitation, including snowpack conditions, affect the availability and timing
ofstreamflows, which impact hydroelectric generation. Extreme weather events could increase service intemrptions, outages and maintenance costs.
Changing temperatures could also increase or decrease customer demand.
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Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule '1, Page 77 oI 177
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Our Climate Policy Council (an interdisciplinary team of management and other employees):
. facilitates intemal and extemal communications regarding climate change issues,
. analyzes policy effects, anticipates opportunities and evaluates strategies forAvista Corp., and
. develops recommendations on climate related policy positions and action plans.
Climate Change - Federal Regalatory Aclions
The EPA released the final rules for the Clean Power Plan (Final CPP) and the Carbon Pollution Standards (Final CPS) on August 3, 20 I 5. The Final CPP
and the Final CPS are both intended to reduce the carbon dioxide (CO2) emissions fiom cefiain coal-fired and natural gas electric generating units
(EGUs). These rules were published in the Federal Register on October 23, 201 5 and were immediately challenged via lawsuits by other parties.
The Final CPP was promulgated pursuant to Section I I I (d) of the CAA and applies to CO2 emissions from existing EGUs. The Final CPP is intended to
reduce national CO2 emissions by approximately 32 percent below 2005 levels by 2030. The Final CPS rule was issued pursuant to Section I 1 I (b) ofthe
CAA and applies to the emissions ofnew, modified and reconstructed EGUs. The two rules are the first rules ever adopted by the U.S. federal govemment
to comprehensively control and reduce CO2 emissions from the power sector. The EPA also issued a proposed Fedeml Implementation Plan (Proposed
FIP) for the Final CPP. The Final FIP that the EPA adopts could be imposed on states by the EPA, should a state decide not to develop its own plan.
The Final CPP establishes individual state emission reduction goals based upon the assumed potential for (l ) heat rate improvements at coal-fired units,
(2) increased utilization ofnatural gas-fired combined cycle plants, and (3) increased utilization oflow or zero carbon emitting generation resources. As
expressed in the final rule, states had until September 20 1 6 to submit state compliance plans, with a potential for two-year extensions. A stay granted by
the U.S. Supreme Court, and described below, pushed this date out pending the results ofthe case. Avista Corp. owns two EGUs that are subject to the
Final CPP: its portion (1 5 percent ofUnits 3 & 4) ofCotstrip in Montana and Coyote Springs 2 in Oregon. States may adopt rate-based or mass-based
plans, and may choose to focus compliance on specific EGUs or adopt broader measures to reduce carbon emissions from this sector. The states in which
Avista Utilities generates or delivers electricity, Washington, Idaho, Montana and Oregon, are at differing stages ofevaluating options for developing
state plans, which will define compliance approaches and obligations. Alaska was exempted in the Final CPP. The EPA may consider rulemaking for
Alaska and Hawaii, both states which lack regional grid connections in the future.
In a separate but related rulemaking, the EPA finalized CO2 new source performance standards (NSPS) for new, modified and reconstructed fossil fuel-
fired EGUs under CAA section I I I (b). These EGUs fall into the same two categories ofsources regulated by the Final CPP: steam generating units (also
known as "utility boilers and IGCC units"), which primarily bum coal, and stationary combustion turbines, which primarily bum natural gas.
GHG emission standarrds could result in significant compliance costs. Such standards could also preclude us from developing, operating or contracting
with certain types of generating plants. Additionally, tlre Climate Action Plan requirements related to preparing the U.S. forthe impacts of climate
change could affect us and othen in the industry as transmission system modifications to improve resiliency may be needed in order to meet those
requirements.
The promulgated and proposed GHG rulemakings mentioned above have been legally challenged in multiple venues. On February 9, 201 6, the U.S.
Supreme Court granted a request for stay, halting implementation ofthe CPP. Given this development and related ongoing legal challenges, we cannot
fully predict the outcome or estimate the extent to which our facilities may be impacted by these regulations at this time. We intend to seek recovery of
any costs related to compliance with these requirements through the ratemaking process.
Climate Change - State Legislation and State Regulatory Activilies
The states ofWashington and Oregon have adopted non-binding targets to reduce GHG emissions. Both states enacted their targets with an expectation
ofreaching the targets through a combination ofrenewable energy standards, and assorted "complementary policies," but no specific reductions are
mandated.
Washington and Oregon apply a GHG emissions performance standard (EPS) to electric generation facilities used to serve retail loads in their
jurisdictions. The EPS prevents utilities from constructing or purchasing generation facilities, or entering into power purchase agreements offive years or
longer duration to purchase energy produced by plants, that in any case, have emission levels higher than 1,1 00 pounds ofGHG per MWh. The
Washington State Department of Commerce (Commerce) initiated a process to adopt a lower emissions perfonnance standard in 2012; any new standard
will be applicable until at least 2017. Commerce published a supplemental notice ofproposed rulemaking on January 16,
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Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1 , Page 78 ol 177
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2013 with a new EPS of 970 pounds of GHG per MWh. We will engage in the next process to revise the EPS, which should occur in 2017.
Washington
Energy Independence Act @IA)
The EIA in Washington requires electric utilities with over 25,000 customers to acquire qualified renewable energy resources andlor renewable energy
credits equal to I 5 percent ofthe utility's total retail load in Washington in 2020. I-937 also requires these utilities to meet biennial energy conservation
targets beginnin g in 2012. The renewable energy standard increased from three percent in 2012 to nine percent in 2016. Failure to comply with
renewable energy and efficiency standards could result in penalties of $50 per MWh or greater assessed against a utility for each MWh it is deficient in
meeting a standard. We have met, and will continue to meet, the requirements of EIA through a variety of renewable energy generating means, including,
but not limited to, some combination ofhydro upgrades, wind, biomass and renewable energy credits. ln 20 1 2, EIA was amended in such a way that our
Kettle Falls GS and certain other biomass energy facilities, which commenced operation before March 3l ,1999, are considered resources that may be
used to meet the renewable energy standards.
Clean Air Rule
In September 201 6, the Washington State Department of Ecology @cology) adopted the Clean Air Rule (CAR) to cap and reduce GHG emissions across
the State ofWashington in pursuit of the State's GHG goals, which were enacted in 2008 by the Washington State Legislature (Legislaturt). The CAR
applies to sources ofannual GHG emissions in excess of I 00,000 tons for the fint compliance period of20 I 7 through 20 I 9; this threshold incrementally
decreases to 70,000 metric tons beginning in 2035. The rule affects stationary sources and transportation fuel supplien, as well as natural gas distribution
companies. Ecology has identified approximately 30 entities that would be regulated under the CAR. Parties covered by the regulation must reduce
emissions by 1.7 percent annually until 2035. Compliance can be demonstrated by achieving emission reductions and/or surrendering Ernission
Reduction Units (ERLI), which are generated by parties that achieve reductions greater than required by the rule. ERUs can also take the form of
renewable energy credits from renewable resources located in Washington, carbon emission offsets, and allowances acquired from an organized cap and
trade market, such as that operating in Califomia. In addition to the CAR's applicability to our buming of fuel as an electric utility, the CAR applies to us
as a natural gas distribution company, for the emissions associated with the use ofthe natural gas we provide our customers who are not already covered
under the regulation.
In September20l6, Avista Corp., Cascade Natural Gas Corp.,NWNatural and Puget Sound Energy @SE) (collectivcly, Petitioners) jointly filed an
action in the U.S. District Court for the Eastem Dstrict of Washington challenging Ecology's recently promulgated CAR. The four companies also filed
litigation in Thurston County Superior Court.
Petitioners believe that the reduction ofGHG emissions is a matter that needs to be addressed, but the CAR is not the solution. Each utility represented in
this case provided feedback and public comment to improve the rule, but ideas put forward were not incorporated in the final rule. They are asking the
U.S Dstrict Court and the Thurston County Superior Court to find that the CAR is invalid.
In their State claim, Petitionerc assert that:
. Ecology lacks statutory authority to regulate natural gas utilities because the CAR holds them responsible for the indirect emissions oftheir
customers;
. Ecology does not have the authority to create an emission reduction trading program (ERUs);
. Ecology failed to comply with the requirements ofthe State Environmental Policy Act; and
. the CAR is arbitrary and capricious.
Petitioners'Federal claim asserts that the CAR violates the dormant Commerce Clause ofthe U.S. Constitution by discriminating against interstate
commerce, regulating extraterritorially and unduly burdening interstate commerce by restricting the use ofERU's (allowances) generatsd from outside
Washington State for compliance purposes. The case in U.S. District Court has been tolled while the state court case proceeds, with oral arguments
scheduled for the spring of2Dl'l .
Initiative I-732
An Initiative to the Legislature (l-732)to impose a carbon tax on fossil-fueled generation and natural gas distribution, as well as on transportation fuels,
was submitted to the Legislature in January 20 I 6. The Legislature failed to act upon the
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M. Thies, Avista
Schedule 1, Page 79 ot 177
Table of Contents
AVISTA CORPORATIONo
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measure and I-732 was referred to the November 20 I 6 General Election ballot, where it failed to gain enough votes for enactment.
Colstrip 3 &4 Considerations
On February 6,2014, the IJTC issued a letterfinding that PSE's 2013 Electric Integrated Resource Plan meets the requirements ofthe Revised Code of
Washington and the Washington Administrative Code. In its letter, however, the UTC expressed concem regarding the continued operation of the
Colstrip plant as a resource to serve retail customers. Although the UTC recognized that the results ofthe analyses presented by PSE "differed
significantlybetween[Colstrip]Unitsl&2andUnits3&4,"theUTCdidnotlimititsconcemssolelytoColstripUnitsl&2.TheUTCrecommended
that PSE "consult with UTC staffto consider a Colstrip Proceeding to determine the prudency of any new investment in Colstrip before it is made or,
altematively, a closure orpartial-closure plan." As part ofthe Sierra Club litigation that was settled in 2016, Units 1 &2 are scheduled to close by July
2022. See'Note I 9 ofthe Notes to Consolidated Financial Statements" for further discussion ofthe Sierra Club litigation. As a I 5 percent owner of
Colstrip Units 3 & 4, we cannot estimate the effect ofsuch proceeding, should it occur, on the future ownership, operation and operating costs ofour
shareofColstripUnits3&4.OurremaininginvestmentinColstripUnits3&4asofDecember3l,20l6was$l3l.0million.
In Oregon, legislation was enacted in 20 I 6 which requires Portland General Electric and PacifiCorp to remove coal-fired generation from their Oregon
rate base by 2030. This legislation does not directly relate to Avista Corp. because Avista Corp. is not an electric utility in Oregon. HoweveE because
thsse two utilities, along with Avista Corp., hold minority interests in Colstrip, the legislation could indirectly impact Avista Corp., tlrough specific
impacts cannot be identified at this time. While the legislation requires Portland General Electric and PacifiCorp to eliminate Colstrip fiom their rates,
they would be permitted to sell the output oftheir shares ofColstrip into the wholesale market or, as is the case with PacifiCorp, reallocate the plant to
other states. We cannot predict the eventual outcome ofactions arising Aom this legislation at this time or estimate the effect thereofon Avista Corp.;
however, we will continue to seek recovery, through the ratemaking process, ofall operating and capitalized costs related to our generation assets.
Threatened and Endangered Species and Wildlile
A number ofspecies offish in the Northwest are listed as threatened or endangered under the Federal Endangered Species Act (ESA). Efforts to protect these
and other species have not significantly impacted generation levels at any ofour hydroelectric facilities, nor operations ofour thermal plants or electrical
distribution and transmission system. We are implementing fish protection measures at our hydroelectric prqect on the Claft Fo* River under a 45-year
FERC operating license for Cabinet Gorge and Noxon Rapids (issued March 200 I ) that incorporates a comprehensive seltlement agreement. The restoration
ofnative salmonid fish, including bull trout, is a key part ofthe agreement. The result is a collaborative native salmonid restoration program with the U.S.
Fish and Wildlife Service, Native American trbes and the states of Idaho and Montana on the lower Clark Fork Riveq consistent with requirements of the
FERC license. The U.S. Fish & Wildlife Service issued an updated Critical Habitat Designation for bull trout in 201 0 that includes the lower Clark Fork
River, as well as portions ofthe Coeur d'Alene basin within our Spokane River Project area, and issued a final Bull Trout Recovery Plan under the ESA. Issues
related to these activities are expected to be resolved through the ongoing collaborative effort ofour Clark Fork and Spokane River FERC licenses. See "Fish
Passage at Cabinet Gorge and Noxon Rapids" in "Note l 9 ofthe Notes to Consolidated Financial Statements" for further information.
Various statutory authorities, including the Migratory Bird Treaty Act, have established penalties for the unauthorized take ofmigratory birds. Because we
operate facilities that can pose risks to a variety ofsuch birds, we have developed and follow an avian protection plan.
We are also aware ofother threatened and endangered species and issues related to them that could be impacted by our operations and we make every effort
to comply with all laws and regulations relating to these threatened and endangered species. We expect all costs associated with these compliance efforts to
be recovered through the future ratemaking process.
Other
For other environmental issues and other contingencies see 'Note I 9 ofthe Notes to Consolidated Financial Statements."
Enternrise Risk Manasement
The material risks to our businesses are discussed in "Item I A. Risk Factors," "Forward-Looking Statements," as well as "Environmental Issues and
Contingencies." The following discussion focuses on our mitigation processes and procedures to address these risks.
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Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 80 of 177
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We considerthe management ofthese risks an integral part ofmanaging our core businesses and a key element ofour approach to corporate govemance.
Risk management includes identifting and measuring various forms ofrisk that may affect the Company. We have an enterprise risk management process for
managing risks throughout our organization. Our Board ofDirectors and its Cornmittees take an active role in the oversight ofrisk affecting the Company.
Our risk management department facilitates the collection of risk information across the Company, providing senior management with a consolidated view of
the Company's major risks and risk mitigation measures. Each area identifies risks and implements the related mitigation measures. The enterprise risk
process supports management in identifying, assessing, quanti$ing, managing and mitigating the risks. Despite all risk mitigation measures, however, risks
are not eliminated.
Our primary identified categories ofrisk exposure are:
. Financial
. Utility regulatory
. Energy commodity
. Operational
Financiel Risk
Financial risk is any risk that could have a direct material impact on the financial performance or financial viability ofthe Company. Broadly, financial risks
involve variation ofeamings and liquidity. Underlying risks include, but are not limited to, those described in "Item lA. Risk Factors."
We mitigate financial risk in a variety of ways including through oversight from the Finance Committee of our Board of Directors and from senior
management. Our Regulatory department is also critical in risk mitigation as they have regular communications with state commission regulators and staff
and they monitor and develop rate strategies for the Company. Rate strategies, such as decoupling, help mitigate the impacts ofrevenue fluctuations due to
weathel conservation or the economy. We also have a Treasury department that monitors our daily cash position and future cash flow needs, as well as
monitoring market conditions to determine the appropriate coune ofaction for capital financing and/or hedging strategies.
Weather Risk
To partially mitigate the risk offinancial underperlonnance due to weather-related facton, we developed decoupling rate mechanisms that were approved by
the Washington, Idaho and Oregon commissions. Decoupling mechanisms are designed to break the link between a utility's revenues and consumers' energy
usage and instead provide revenue based on the number ofcustomers, thus mitigating a large portion ofthe risk associated with lower customer loads. See
"Regulatory Matten" for further discussion of our decoupling mechanisms.
Access lo Capilal Markets
Our capital requirements rely to a significant degree on regular access to capital markets. We actively engage with rating agencies, banks, investors and state
public utility commissions to understand and address the factors that suppo( access to capital markets on reasonable terms. We manage our capital structure
to maintain a financial risk profile that we believe these parties will deem prudent. We forecast cash requirements to determine liquidity needs, including
sources and variability ofcash flows that may arise from our spending plans or from extemal forces, such as changes in energy prices or interest rates. Our
financial and operating forecasts consider various metrics that affect credit ratings. Our regulatory strategies include working with state public utility
commissions and filing forrate changes as appropriate to meet financial performance expectations.
Interest Rate Risk
Uncertainty about future interest rates causes risk related to a portion ofour existing debt, our future borrowing requirements, and our pension and other post-
retirement benefit obligations. We manage debt interest rate exposure by limiting our variable rate debt to a percentage oftotal capitalization ofthe
Company. We hedge a portion of our interest rate risk on forecasted debt issuances with financial derivative instruments, which may include interest rate
swaps and U.S. Treasury lock agreements. The Finance Committee of our Board of Drectors periodically reviews and discusses interest rate risk management
processes and the steps management has undertaken to control interest rate risk. Our RMC also reviews our interest rate risk management plan. Additionally,
interest rate risk is managed by monrtoring market conditions when timing the issuance oflong-term debt and optional debt redemptions and establishing
fixed rate long-term debt with varying maturities.
Our interest rate swap derivatives are considered economic hedges against the future forecasted interest rate payments ofour long+erm debt. Interest rates on
our long-term debt are generally set based on underlying U.S. Treasury rates plus credit
74
. Compliance
. Technology
. Strategic
. Extemal Mandates
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1 , Page 81 of 1 77
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spreads, which are based on our credit ratings and prevailing market prices for debt. The interest rate swap derivatives hedge against changes in the U.S.
Treasury rates but do not hedge the credit spread.
Even though we work to manage our exposure to interest rate risk by locking in certain long-tenn interest rates through interest rate swap derivatives, if
market interest rates decrease below the interest rates we have locked in, this will result in a liability related to our interest rate swap derivatives, which can be
significant. However, through our regulatory accounting practices similar to our energy commodity derivatives, any interim mark-to-market gains or losses
are offset by regulatory assets and liabilities. Upon settlement ofinterest rate swap derivatives, the regulatory asset or liability is amortized as a component of
interest expense overthe term ofthe associated debt.
The following table summarizes ourinterest rate swap derivatives outstanding as ofDecember3l,2016 and December31,20l 5 (dollars in thousands):
Deccmber 3l
2016
33
s00,000
2017 b2A22
1 1S1
5 1S?
(6,02s)
(28,705)
December 3 I
2015
23
$ 455,000
2016 to 2022
23
(19,264)
(30,67e)
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(l) ThereareoffsettingregulatoryassetsandliabilitiesfortheseitemsontheConsolidatedBalanceSheetsinaccordancewithregulatoryaccounting
practices.
(2) ThebalanceasofDecember3l,20l6andDecember3l,20l5reflectstheoffsettingof$34.9millionand$34.0million,respectively,ofcashcollateral
against the net derivative positions where a legal right ofoffset exists.
We estimate that a I 0-basis-point increase in forward LIBOR interest rates as of December 3 I , 201 6 would decrease the interest rate swap derivative net
liability by $ 10.4 million, while a t 0-basis-point decrease would increase the interest rate swap derivative net liability by $ 10.7 million.
Weestimatedthatal0-basis-pointincreaseinforwardLIBORinterestratesasofDecember3l,20l5wouldhavedecreasedtheinterestrateswapderivative
net liability by $9.8 million, while a I O-basis-point decrease would increase the interest rate swap derivative net liability by $ I 0.1 million.
The interest rate on $51 .5 million of long-term debt to affiliated trusts is adjusted quarterly, reflecting current market rates. Amounts borrowed under our
committed line ofcredit agreements have variable iflterest rates.
The following table shows our long-term debt (including current portion) and related weighted-average interest rates, by expected maturity dates as of
December 31, 2016 (dollars in thousands):
201'1 20 I 8 20 I 9 2020 2021 Thereafter Total Fair Value
Number ofagreements
Notional amount
Mandatory cash settlement dates
Short-term derivative assets (l )
Long-term derivative assets (1 )
Short{erm derivative liability (1 ) (2)
Long-term derivative liability (1 ) (2)
Fixed rate long-term
debt (1 )
Wcighted-avcragc
interest rate
Variable rate lon g-1gnn
debt to affiliated
trusts
Weighted-average
intcrest rate
$$ 272,500 $
6.O7%
52,000 $
3.89%
$ 1,198J00 $
4.91%
1,628$00 $ t,723,912
5.09%
105,000 $
5.22%
1.81%
(1) These balances include the fixed mte long-term debt of Avista Corp., AEL&P and AERC.
Our pension plan is exposed to interest rate risk because the value ofpension obligations and other post-retirement obligations vary directly with changes in
the discount rates, which are derived from end-of-yearmarket interest rates. In addition, the value ofpension investments and potential income on pension
investments is partially affected by interest rates because a portion ofpension investments are in fixed income securities. The Finance Committee ofthe
Board of Directors approves investment
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Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
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policies, objectives and strategies that seek an appropriate retum forthe pension plan and it reviews and approves changes to the investment and funding
policies. We manage interest rate risk associated with our pension and other post-retirement benefit plans by investing a targeted amount ofpension plan
assets in fixed income investments that have maturities with similarprofiles to future projected benefit obligations. See "Note l0 of the Notes to
Consolidated Financial Statements" for further discussion ofour investment policy associated with the pension assets.
Credit Risk
Cou n terparty Non-Performance Risk
Counterparty non-performance risk relates to potential losses that we would incur as a result ofnon-performance ofcontractual obligations by counterparties
to deliver energy or make financial settlements.
Changes in market prices may dramatically alter the size ofcredit risk with counterpadies, even when we establish conservative credit limits. Should a
counterpafiy fail to perform, we may be required to honor the underlying commitment or to replace existing contracts with contracts at then-cuffent market
prices.
We enter into bilateral transactions with various counterparties. We also trade energy and related derivative instruments through clearinghouse exchanges.
We seek to mitigate credit risk by:
' transactingthroughclearinghouseexchanges,
. entering into bilateral contracts that specifu credit terms and protections against default,
. applying credit limits and duration criteria to existing and prospective counterparties,
. actively monitoring current credit exposures,
. asserting our collateral rights with counterparties, and
. carrying out transaction settlements timely and effectively.
The extent oftransactions conducted through exchanges has increased as many market participants have shown a preference toward exchange trading and
have reduced bilateral transactions. We actively monitor the collateral required by such exchanges to effectively manage our capital requirements.
Counterparties' credit exposure to us is dynamic in normal markets and may change significantly in more volatile markets. The amount ofpotential default
risk to us from each counterparty depends on the extent offorward contracts, unsettled transactions, interest rates and market prices. There is a risk that we do
not obtain sufficient additional collateral from counterparties that arr unable or unwilling to provide it.
C red it Ris k Liq u id ity Con s id eralio ns
To address the impact on our operations ofenergy market price volatility, our hedging practices for electricity (including fuel for generation) and natural gas
extend beyond the curent operating year. Executing this extended hedging program may increase credit risk and demands for collateral. Our credit risk
management process is designed to mitigate such credit risks through limit setting, contract protections and counterpaily diversification, among other
practices.
Credit risk affects demands on our capital. We are subject to limits and credit terms that counterparties may assert to allow us to enter into transactions with
them and maintain acceptable credit exposures. Many ofour counterparties allow unsecured credit at limits prescribed by agreements or their discretion.
Capital requirements for certain transaction types involve a combination ofinitial margin and market value margins without any unsecured credit threshold.
Counterparties may seek assurances ofperformance from us in the form ofletters ofcredit, prepayment or cash deposits.
Credit exposure can change significantly in periods ofcommodity price and interest rate volatility. As a result, sudden and significant demands may be made
against our credit facilities and cash. We actively monitor the exposure to possible collateral calls and take steps to minimize capital requirements.
As ofDecember 3 I , 20 1 6, we had cash deposited as collateral of$ I 7.1 million and letters ofcredit of$24.4 million outstanding related to our energy
derivative contracts. Price movements and/or a downgrade in our credit ratings could impact further the amount ofcollateral required. See "Credit Ratings"
forfurtherinformation. Forexample, in addition to limiting ourability to conduct transactions, ifourcredit ratingswere lowered to below "investment
grade" based on our positions outstanding at December 3 l, 201 6, we would potentially be required to post additional collateral ofup to $6.0 rnillion. This
amount is
76
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 83 of 177
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Table of Contents
AVISTA CORPORATION
different from the amount disclosed in "Note 6 ofthe Notes to Consolidated Financial Statements" because, while this analysis includes contracts that are not
considered derivatives in addition to the contracts considered in Note 6, this analysis also takes into account contractual threshold limits that are not
considered in Note 6. Without contractual threshold limits, we would potentially be required to post additional collateral of $8.2 million.
Under the terms ofinterest rate swap derivatives that we enter into periodically, we may be required to post cash or letters ofcredit as collateral depending on
fluctuations in the fair value of the instrument. As of December 3 I , 20 1 6, we had interest rate swap agreements outstanding with a notional amount totaling
$500.0 million and we had deposited cash in the amount of$34.9 million and letters ofcredit of$3.6 million as collateral forthese interest rate swap
derivatives. Ifour credit ratings were lowered to below "investrnent grade" based on our interest rate swap derivatives outstanding at December 3 I , 20 I 6, we
would have to post $21.1 million of additional collateml.
Foreign Currency Risk
A significant portion ofour utility natural gas supply (including fuel for electric generation) is obtained from Canadian sources. Most ofthose transactions
are executed in U.S. dollars, which avoids foreign currency risk. A portion ofour short-term natural gas transactions and long-term Canadian transportation
contracts are committed based on Canadian cunency prices. The short-term natural gas transactions are typically settled within sixty days with U.S. dollars.
We economically hedge a portion ofthe foreign currency risk by purchasing Canadian cuffency exchange contracts when such commodity transactions are
initiated. This risk has not had a material effect on our financial condition, results ofoperations or cash flows and these differences in cost related to curency
fluctuations are included with natural gas supply costs forratemaking.
Further information for derivatives and fair values is disclosed at "Note 6 ofthe Notes to Consolidated Financial Statements" and "Note I 6 ofthe Notes to
Consolidated Financial Statements."
Utilitv Regulator.v Risk
Because we are primarily a regulated utility, we face the risk that regulators may not grant rates that provide timely or sufficient recovery of our costs or allow
a reasonable rate ofretum for our shareholders. This includes costs associated with our investment in rate base, as well as commodity costs and other
operating and financing expenses. During December 20 I 6, the UTC denied our most recent electric and natural gas general rate requests and granted zero rate
relief. We are currently in the process ofpursuing remedies toward a reasonable end result. Ifour efforts to obtain rates that are fair,just, reasonable and
sufficient are not successful, we expect our 2017 eamings will be adversely impacted. See further discussion at "ltem 7. Management's Dscussion and
Analysis of Financial Condition and Results of Operations - Regulatory Matten."
We mitigate regulatory risk through oversight from our Board of Directors and from senior management. We have a separate regulatory group which
communicates with commission regulators and staffregarding the Company's business plans and concems. The regulatory group also considers the
regulator's priorities and rate policies and makes recommendations to senior management on regulatory stmtegy for the Company. See "Regulatory Matters"
for further discussion ofregulatory matters affecting our Company.
Enersv Commoditv Risk
Energy commodity risks are associated with fulfilling our obligation to serve customers, managing variability ofenergy facilities, rights and obligations and
fulfilling the terms of our energy commodity agreements with counterparties. These risks include, arrong other things, those described in "Itern I A. Risk
Factors."
We mitigate energy commodity risk primarily through our energy resources risk policy, which includes oversight from the RMC and oversight from the Audit
Committee and the Environmental, Technology and Operations Committee of our Board of Directors. In conjunction with the oversight committees, our
management team develops hedging strategies, detailed resource procurement plans, resource optimization strategies and long+erm integrated resource
planning to mitigate some ofthe risk associated with energy commodities. The various plans and strategies are monitored daily and developed with
quantitative methods.
Our energy resources risk policy includes our wholesale energy markets credit policy and control procedures to manage energy commodity price and credit
risks. Nonetheless, adverse changes in commodity prices, generating capacity, customer loads, regulation and other factors may result in losses ofeamings,
cash flows and/or fair values.
We measure the volume ofmonthly, quarterly and annual energy imbalances between projected power loads and resources. The measurement process is based
on expected loads at fixed prices (including those subject to retail rates) and expected resources to the extent that costs are essentially fixed by virtue of
known fuel supply costs or projected hydroelectric conditions. To the extent that expected costs are not fixed, either because ofvolume mismatches between
loads and resources or because fuel cost is not locked in through fixed price contracts or derivative instruments, our risk policy guides the process to manage
this open
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 'l , Page 84 ol 177
o
o
Table of Conterts
AVISTA CORPORATION
forward position over a penod oftime. Normal operations result in seasonal mismatches between power loads and available resources. We are able to vary the
operation ofgenerating resources to match parts ofintra-hour, hourly, daily and weekly load fluctuations. We use the wholesale power markets, including the
natural gas market as it relates to power generation fuel, to sell projected rEsource surpluses and obtain resources when deficits are projected. We buy and sell
fuel for thermal generation facilities based on comparative power market prices and marginal costs offueling and operating available generating facilities
and the relative economics ofsubstitute market purchases for generating plant operation.
To address the impact on our operations ofenergy market price volatility, our hedging practices for electricity (including fuel for generation) and natural gas
extend beyond the current operating year. Executing this extended hedging program may increase our credit risks. Or:r credit risk management process is
designed to mitigate such credit risks through limit setting, contract protections and counterparty diversification, among other practices.
Ourprojected retail natural gas loads and resources are regularly reviewed by operating management and the RMC. To manage the impacts ofvolatile natural
gas prices, we seek to procure natural gas through a divenified mix ofspot market purchases and forward fixed price purchases from various supply basins
and time periods. We have an active hedging program that extends into future years with the goal of reducing price volatility in our natural gas supply costs.
We use natural gas storage capacity to support high demand periods and to procure natural gas when price spreads are favorable. Securing prices througlrout
the year and even into subsequent years mitigates potential adverse impacts ofsignificant purchase requirements in a volatile price environment.
The following table presents energy commodity derivative fair values as a net asset or (liability) as ofDecember 3 l, 20 I 6 that are expected to settle in each
respective year (dollars in thousands):
Purchases Sales
Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivatives
Yea
20t7
2018
2019
2020
2021
$ (4,274\ $
(s,5 98)
(3,123)
Financial ( I )Pltysical (l )Finmcial (l)Financial (l) Physical (l) Financial (l)
$ 576 $ (2,036) $ (3,440)
854 (e10) ',709
97s (927) 103
(1,288)
(86e)
(4,005)
(2,170)
(3,132)
u3
Physical (1 )
$ (225)
(33)
(40)(23s)
(266)
o Thereafter
The following table presents energy commodity derivative fair values as a net asset or (liability) as ofDecember 3 1 , 20 1 5 that were expected to settle in each
respective year (dollars in thousands):
Purchases Sales
Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivativcs
Year
20t6
2017
201 8
2019
2020
Thereafter
Physical ( I )
$ (6,928)
(6,403)
(s,614)
(3,072)
$ (14,988) $
1
(5,8es) $(41 ,006)
(e,473)
(3,ss4)
(1,964)
(1 8)
Fiuancial (l) Physical (l) Financial (l)Physical ( I )
$82
(23)
(s0)
(44)
Financial (l )Physical ( I )
$ 173
(t,l 25)
(1,17 2)
(t,720)
(1,1 30)
(67e)
Financial ( I )s 22,445
313
(162)
$28,857
3,97 1,050)
(22\
35
(l
(l ) Physical transactions represent comnodity transactions where we will take delivery ofeither electricity or natural gas and financial transactions
represent derivative instruments with no physical delivery, such as futures, swaps, options, or forward contracts.
The above electric and natural gas derivative contracts will be included in either power supply costs or natural gas supply costs during the period they are
delivered and will be included in the various recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to eventually
be collected through retail rates from customerc.
See"Iteml.Business-ElectricOperations,""lteml.Business-NaturalGasOperations,"and"ItemlA.RiskFacton"foradditionaldiscussionoftherisks
associated with Energy Commodities.
78
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 85 of 177
o
Physical (l )
1,939 $$
o
o
Tabl€ of Cont€nts
AVISTA CORPORATION
Ooerational Risk
Operational risk involves potential disruption, losses, or excess costs arising from external events or inadequate or failed intemal processes, people and
systems. Our operations are subject to operational and event risks that include, but are not limited to, those described in "Item I A. Risk Factors."
To manage operational and event risks, we maintain emergency operating plans, business continuity and disaster recovery plans, maintain insurance
coverage against some, but not all, potential losses and seek to negotiate indemnification arrangements with contractors for certain event risks. ln addition,
we design and follow detailed vegetation managemeflt and asset management inspection plans, which help mitigate wildfire and storm event risks, as well as
identi$r utility assets which may be failing and in need of repair or replacement. We also have an Emergency Operating Center, which is a team of employees
that plan for and train to deal with potential emergencies orunplanned outages at our facilities, resulting from natural disasters or other events. To prevent
unauthorized access to our facilities, we have both physical and cyber security in place.
To address the risk related to fuel cost, availability and delivery restraints, we have an energy resources risk policy, which includes our wholesale energy
markets credit policy and control procedures to manage energy commodity price and credit risks. Development ofthe energy resources risk policy includes
planning for sufficient capacity to meet our customer and wholesale energy delivery obligations. See further discussion ofthe energy resources risk policy
above.
Oversight ofthe operational risk management process is performed by the Environmental, Technology and Operations Committee ofour Board ofDirectors
and from seniormanagement with input from each operating department.
Comnliance Risk
Compliance risk is the potential consequences oflegal or regulatory sanctions or penalties arising from the failure ofthe Company to comply with
requirements ofapplicable laws, rules and regulations. We have extensive compliance obligations. Our primary compliance risks and obligations include,
among others, those described in "Item lA. Risk Factors."
We mitigate compliance risk through oversigl'tt from the Environmental, Technology and Operations Corrunittee and the Audit Committee of our Board of
Directon and from senior management. We also have separate Regulatory and Environmental Compliance departments that monitor legislation, regulatory
orden and actions to determine the overall potential impact to our Company and develop stmtegies for complying with the various rules and regulations. We
also engage outside attorneys, and consultants, when necessary, to help ensure compliance with laws and regulations.
See "Item I . Business, Regulatory Issues" through "Item I . Business, Reliability Standards" and "Environmental Issues and Contingencies" for further
discussion ofcompliance issues that impact our Company.
Technolosv Risk
Our prirnary technology risks are described in "Item I A. Risk Factors."
We mitigate technology risk through trainings and exercises at all levels ofthe Company. The Environmental, Technology and Operations Committee ofour
Board ofDirectors along with senior management are regularly briefed on security policy, programs and incidents. Annual cyber and physical training and
testing ofemployees are included in our enterprise security program as are business continuity testing and data breach response exercises.
Technology govemance is led by senior management, which includes new technology strategy, risk planning and major project planning and approval. The
technology project management office and enterprise capital planning group provide project cost, timeline and schedule oversight. ln addition, there are
independent third party audits ofour critical infrastructure security program and our business risk security controls.
We have a Technology department dedicated to securing, maintaining, evaluating and developing our information technology systems. There are regular
training sessions for the technology and security team. This group also evaluates the Company's technology for obsolescence and makes recommendations
for upgrading or replacing systems as necessary. Additionally, this group monitors for intrusion and security events that may include a data breach.
Stratesic Risk
Strategic risk relates to the potential impacts resulting from incorrect assumptions about extemal and intemal factors, inappropriate business plans,
ineffective business strategy execution, or the failure to respond in a timely manner to changes in the regulatory, macroeconomic or competitive
environments. Our primary strategic risks include, among others, those described in "Item 1 A. Risk Factors."
79
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G- 17-_
M. Thies, Avista
Schedule 1, Page 86 of 177
o
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Table of Cont€trts
AVISTA CORPORATION
We mitigate strategic risk through detailed oversight from the Board of Directors and from senior management. We also have a Chief Strategy Officer that
leads strategic initiatives, to search for and evaluate opportunities for the Company and makes recommendations to senior management. We not only focus
on whether opportunities are financially viable, but also consider whether these opportunities fall within our core policies and our core business strategies.
We mitigate our reputational risk primarily through a focus on adherence to our core policies, including our Code ofConduct, rnaintaining an appropriate
Company culture and tone at the top, and through communication and engagement ofour extemal stakeholders.
External Mandates Risk
Extemal mandate risk involves forces outside the Company, which may include significant changes in customer expectations, disruptive technologies that
result in obsolescence ofour business model and govemment action that could impact the Company. See "Environmental Issues and Contingencies" and
"Forward-Looking Statements" for a discussion ofor reference to our extemal mandates risks.
We mitigate extemal mandate risk through detailed oversight from the Environmental, Technology and Operations Committee of our Board of Directors and
from senior management. We have a Climate Council which meets intemally to assess the potential impacts of climate policy to our business and to identiry
strategies to plan for change. We also have employees dedicated to actively engage and monitor federal, state and local govemment positions and legislative
actions that may affect us or our customers.
To prevent the threat ofmunicipalization, we work to build strong relationships with the communities we serve through, among other things:
. communication and involvement with local business leaders and community organizations,
. providing customers with a multitude of limited income initiatives, including energy fairs, senior outreach and low income workshops, mobile
outreach strategy and a Low Income Rate Assistance Plan,
. tailoring our internal company initiatives to focus on choices for our customers, to increase their overall satisfaction with the Company, and
. engaging in the legislative process in a manner that fosters the interests of our customers and the communities we sewe.
ITEM 7A. OUANTITATIVE AND OUALITATII'E DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth in the Enterprise Risk Management section of "Item 7. Management's Discussion and Analysis" and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND STJPPLEMENTARY DATA
The Report oflndependent Registered Public Accounting Firm and Financial Statements begin on the next page.
80
o
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 87 of 177
Table of Cortents
o REPORT OF INDEPENDENT REGISTERED PTIBLIC ACCOTINTING FIRM
To the Board ofDirectors and Shareholders of
Avista Corporation
Spokane, Washington
We have audited the accompanying consolidated balance sheets ofAvista Corporation and subsidiaries (the "Company") as ofDecember 3 I , 20 I 6 and 201 5,
and the related consolidated statements ofincome, comprehensive income, equity and redeemable noncontrolling interests, and cash flows for each ofthe
three years in the period ended December 3l ,2016. These financial statements are the responsibility ofthe Company's management. Our responsibiliry is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standalds ofthe Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position ofAvista Corporation and subsidiaries at
December3l,20l 6 and 201 5, and the results oftheir operations and theircash flows for each ofthe three years in the period ended December 3 1,2016, in
conformity with accounting principles generally accepted in the United States ofAmerica.
We have also audited, in accordance with the standards ofthe Public Company Accounting Oversight Board (United States), the Company's intemal control
over financial reporting as ofDecember 3 1 , 20 I 6, based on the criteria established in Internal Control - Integrated Framework (20,13l issued by the
Committee ofSponsoring Organizations ofthe Treadway Commission, and our report, dated February 21,201'7 expressed an unqualified opinion on the
Company's intemal control over financial reporting.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 21,2017
8l
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 88 of 177
o
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Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
Avista Corporation
For the Yean Ended December 3 I
Dollars in thousands, except per sharc amounts
20t6 20t5 2014
revenues $ 1y'18,914 $ 1,4s6,091 $ l
Total revenues 1,442,483 1484,776
Other
Taxes other than income taxes
315,795
98,735
303,221
97,65'7
286,832
94,300
Other 25,501 29,s26 30,418
Total operating expenses t,231,562 I ,219,97 4
@Et
Interest expense
Capitalized interest
Income from continuing operations before income taxes 215,402 1 85,619 192,106
o Net income from
Net income
Net income attributable to Avista Corp. shareholders s t37 ,228 $ t23,227 $ 192,041
The Accompanying Notes are an Integral Part ofThese Statemenls.
82
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule"1, Page 89 of 177
o
t,4't2,562
Interest expense to afllliated tmsts
289,803
86,496
634
(2,6s1)
(r 0,078)
253214
79,968
473
(3,546)
(9,300)
252,588
7 5 ,302
450
(3,924)
(t 1 ,346)
137.316 r18,170 119,866
137.3 16 123,317 192.217
(88) (e0) (236)
o
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME (continued)
Avisla Corporation
For the Years Ended December 3 I
Dollars in thousands, except per share amounts
2016 2015 2014
$il $ ll9,8l7s 137
$ 137,228 $ I $1
common shares diluted 63,920
Eamings common share from
Total eamings per common share attributable to Avista Corp. shareholders, basic S
2.16 $
2.16 $
1.90 $
1.98 s
1.94
3.12
percommon share from
Total eamings per common share attributable to Avista Corp. shareholders, diluted $
2.ts s 1.89 $
2.15 $t.97 $3.10
The Accompanying Notes are an Integral Part ofThese Statements.
83
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I7-_
M. Thies, Avista
o
Schedule 1, Page 90 of '177
Amounts attributable to Avista Corp. shareholders:
Net income from continuing operations
Net income.from discontinued operations
Net income attnbutable to Avista Corp. shareholders
Weighted-average common shares outstanding (thousands), basic
$
62,301
62,708
0.08
61,632
61,887
$1.93
1.1'7
s 1.37 $1.32 $1.27
o
Tabl€ of Contents
C ONSOLIDATED STATEMENTS OF COMPRET{ENSIVE INCOME
Avisla Corporation
For the Years Ended December 3 I
Dollars in thousands
2016 2015 2014
Other Comprehensive Income (Loss):
Reclassification adjustment for realized gains on investment securities included in net
income - net oftaxes of$0, $0 and
Change in unfunded benefit obligation for pension and other postretirement benefit plans -
net oftaxes of$(495), $667 and $(l (el8)1,238
Comprehensive income
Comprehensive income attributable to Avista Corporation shareholders $ 136,310 $ 124,465 $ 189,972
The Accompanying Notes are an Integral Part ofThese Statements.
84
o
o
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 1, Page 91 of 177
$ 137,316 $ 123,317 S 192,277
Unrealized investment gains - net oftaxes of$0, $0 and $664, respectively i,126
(2)
462
(3,6s 5)
(e18)t,238 (2,069)
136,398
(88)
\24,555
(e0)
190,208
(236)
I
Table of Contents
CONSOLIDATED BALANCE STIEETS
Avista Corporation
As ofDecember 3 I
Dollars in thousands
Assets:
Current Assets:
Cash and cash equivalents
Accounts and notes receivableJess allowances ofS5,026 and $4,530, respectively
Regulatory asset for energy commodity derivatives
Materials and supplies, fuel stock and stored natural gas
Income taxes receivable
Other current assets
Total current assets
Net Utility Properry:
L'tility plant in service
Construction work in progress
Total
Less: Accurnulated depreciation and arnortization
Total net utility property
Other Non-current Assets:
Investmenl in affiliated trusts
Goodwill
Long-term energy contract receivable
Other property and investments-net and other non-current assets
Total cither non-current assets
Defened Charges:
Regulatory assets for deferred income tax
Regulatory assets for pensions and other postrctircment benefits
Other regulatory assets
Regulatory asset for interest rate swaps
Non'curr"ont rEgulatory asset for energy commodity derivatives
Other defcrrcd charges
Total deferred charges
Total assets
$10,484
169,413
t7,260
54,148
24,121
30,620
8Jo7 $
180,265
r 1,36s
53,3 t 4
48,265
49,625
3 06,046
5,506,499 5,129,192
150,474 202,683
5,656,973 5,331,875
|,509,4'13 | ,433,286
4,t47,500 3,898,5 89
o
11,547
57,672
l 09,853
240,114
135,751
I 6l ,508
t6,919
5,326
11,547
57,672
14,694
5q 71?
l0l ,240
23 5,009
99,798
83,973
32120
5,928
6691'11 558,368
$ 5,309,755 $ 4,906,649
The Accompanying Noles are an Integral Part ofThese Statements.
85
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 92 ot 177
o
2016 2015
351 ,341
72224
141 A43 143,646
a
Table of Contents
CONSOLIDATED BALANCE SHEETS (continued)
Avista Corporation
As ofDecember 3 1
Dollars in thousands
Liabilities and Equitl :
Cunent Liabilities:
Accounts payable
Current portion oflong-term debt and capital leases
Short-term borrowings
Energy commodity derivative liabilities
Accrued interest
Accmed taxes other than income taxes
Defened natural gas costs
Current portion ofpensions and other postretirement benefits
Otl.rer current liabil iti es
Total currcnt liabilities
Long+erm debt and capital leases
Long-term debt to affiliated trusts
Regulatory liability forutility plant retirement costs
Pensions and othcr postrctirement benefits
Defened income taxes
Non-current interest rate swap derivative liabilities
Other non-current liabilities, regulatory liabilities and deferred credits
Total liabilities
Commitments and Contingelcies (See Notes to Consolidated Financial Statements)
Equity:
Avista Corporation Shareholders' Equity:
Common stock, no par value; 200,000,000 shares authorized;64,187,934 and 62,312,651 shares issued and
outstanding as of December 3 l, 20 I 6 and December 3 l, 20 i 5, respectively
Accumulated other comprehensive loss
Retained eamings
Total Avista Corporation shareholders' equ i ty
Noncontrol I in g Intercsts
Total equity
Total liabilities and equity
The Accompanying Noles are an Integral Part ofThese Statemenls.
, 2016 201 5
lt4,349
93,167
105,000
t4,268
I 5,378
3 0,978
17,880
10,233
73127
407,528
I ,67 8,7 l7
5t,547
273,983
226,552
840,928
28,705
153,319
3,661,2'.79
47 4,680
l y'80,1 I I
51,547
261,594
201,453
747,477
30,679
l 30,82 1-
3,378,362
O
I ,075,2 8 l
(7,568)
581,014
1,004,336
(6,6s0)
530,940
1,528,626
(339)
1,648,727
(251)
1,648,476 1,528,287
$ 5,309,755 $ 4,906,649
86
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
Schedule 1, Page 93 of 177
$115,545
3,287
120,000
7 01S
15,869
30,820
t0,994
70,604
$
o
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
Avista Corporatio,t
For the Years Ended December 3 I
Dollan in thousands
'Operatirrg Activiti es:
Net income
Non-cash items included in net income:
Depreciation and amortization
Provi sion for defened income taxes
Power and natural gas cost amortizations (deferrals), net
Amortization of, debt exponse
Amortization ofinvestment in exchange power
Stock-based cornpensation expense
Equity-related AI'UDC
Pension and otherpostredrement benefit expense
Amortizati on of Spokane Energy contract
Gain on sale ofEcova
Other regulatory assets and liabilities and dcfened dcbits and credrts
Change in decoupling regulatory defenzl
Other
Contributiots to defined benefit pension plan
Cash paid for settlernent ofinterest rate swap derivatives
Chalges in certain ounsnt assets and liab,ilities:
Accounts and notes receivable
Materials and supplies, frrel stock and stored natural gas
Collateral posted for derivative instruments
Income taxes receivable
Other current assets
Accounxs payable
Other current liabilities
Net cash provided by operating activities
lnvesting Activities:
Utility property capital expenditures (excludin g equi ty-related AFTIDC)
Other capital expenditures
Cash received (paid) in acquisition, net
Issuance ofnotes receivablc at subsidiaries
Repayments from notos receivabie at subs,idiaries
Investments made by subsidiaries
Increase in funds held for clients
Purchase ofsecurities available for sale
Sale and maturity ofsecurities available for sale
Proceeds from sale ofEcova, net ofcash sold
Other
Net cash used in investing activities
(7,278)
$ (432,466) $ Q8'.1 ,827) $ (103,736)
137,316 $
. 2014
138,337
144,269
04,821)
3,692
2,450
8,1 I4
(8,8 08)
22,943
12,417
(160,612)
1,906
201 5
123,317 $ 192,2't7
t64,925
124,543
16,835
3,477
2,450
7.89'
(8,47s)
3 8,786
14,694
(26,24s)
(2e,78e)
5 557
( 12,000)
(53,966)
147,835
5 l ,801
21,358
3,526
2,450
6,914
(8,331)
37,050
13,508
(777)
4,569
(10,e33)
(5 l7)
(12,000)
I ,103
(32,000)
o
(t 7,1 70)
834
10,712
Q3,923)
(3,907)
5,17 6
10,546
358267 37 5,640 267,268
(r0,s38)
t2,208
(13,301)
19,712
2,338
(8,r 38)
(6,4'1't)
16,425
(l e,3e4)
(23,301 )
(36,1 l 0)
(7 ,t t7)
(t2,562)
32,060
(406,644)
(353 )
(r 0,094)
5,000
(r 3,097)
(393,42s)
(885)
(es)
(2,301)
(1.944)
(325,516)
(6,427)
r 5,007
(1,200)
13,856
(3,027)
(1,072)
(r 8,931)
(12,267)
14,612
229,903
2,155
The Accompanyiag Notes are an Integral Pat ofThese Statements
o
87
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 94 ol 177
2016
o
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Avista Corporatiot
For the Years Ended December 3 I
Dollan in thousands
2016 20t5 20 t4
Net increase (decrease) in borrowings from committed line of credit s r 5,000 $$ (66,000)
Proceeds from issuance oflong-term debt 245,000 r 00,000 150,000
ofnonrecourse debt ofSpokane Energy (1,43
holders and redeemable interests for sale ofEcova (20,871)
Net cash provided by (used in) financing activities la aaa 528 (223
82,57 4
s 86,3 19 $ 79,673 $
o
Valuation adjustment for redeemable interests
Non-cash stock issuance for acquisition ofAERC I 50,1 l9
The Accompanying Notes are aa Integral Part ofThese Slatements.
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule '1 , Page 95 of 177
-
@
o
Issuance ofcommon stock, net ofissuance costs
Repurchase of common stock
Cash dividends paid
Increase in client fund obligarions
Payment to noncontroliling interests for sale ofEcova
Other
Not d.e,crease in cash and cash equivalents
Cash and cash equivalents at beginning ofyear
Cash and cash equivalents at end.ofyoar
Supplemental Cash Flow Information:
Cash paid (received) during the year:
Interest
Inoorne taxes (net oftotal refunds of $18,861, $37,200 and $3'5,573, respectively)
Non-cash financing and investing activities:
88
$ 8,507 $ |AAU $ 22,143
(87,154)
(4.4 r 0)(11,379\
(t;9'17)
r 0,484
(11,6s9)
22,143
30,252 35,248
73,526
45,416
o
Trble of Contents
CONSOLIDATED STATEMENTS OF EQUTY AND REDEEMABLE NONCONTROLLING INTERESTS
Avisla Corporatiott
For the Years Ended December 3 I
Dollars in thousands
Common Stock, Shares:
Shares outstanding at beginning ofyear
,Ehares issued *rrough equity oompensation plans
Shares issued through Employee Investment Plan (401 -K)
Shares issued through Dividend Reinvestment Plail
Shares issued through sales agency agreements
Shares issued for acquisition
Shares repurchased
Sharps outstanding at end ofyear
Common Stock, Amount:
Balance at beginning ofyear
Equity compensation expcnse
Issuance ofcommon.stock through equity compensation plans
Issuance of common stock through Employee Investment Plan (401-K)
Issuanco ofcomrhon stock through Dividend Reinvestment Plan
Issuance ofcommon stock through sales agency agreements, net ofissuance costs
Issuance ofcornmon stock for acquisition, net ofissu,rnce costs
Payment of minimum tax withholdings for share-based payment awards
Repurchase of common stock
Equity transactions of consolidated subsidiaries
Payment to option hold€$ arrd redeemable no[controlling interests for sale ofEcova
Excess tax benefits
Balance at end ofyear
Accumulated Other Comprehensive Loss:
Balatce at beginning ofyear
Other comprehensive income (1oss)
Balance at end ofyear
Retained Eamings:
Balance at beginning ofyear
Net income attributable to Avista Corporation shareholders
Cash dividends paid (cornnon stock)
Repurchase of common stock
Valuation adjustments and other noncontmlling interests activity
Balance at end ofyear
Total Avista Corporation shareholders' equity
The Accompauying Noles are an Integral Parl ofThese Stalemenls.
581 ,014 53 0,940 491,599
$ 1,648,727 $ 1,528,626 S I A83,671
62,312,651
243,72'V
26,556
62,243,374
t2s,620
33,057
2016 201 5 2014
60,07 6,7 52
51,121
3 3,1 68
r t 0,501
l ,645,000
(89,400)
4,s01441
(2,s29,6ts)
64,18't ,934 62,312,651 62,243,374
$1,004,3 3 6 $
7,065
624
I ,061
65,267
(3,072)
999,960 $
6,035
462
1,099
896,993
7,676
108
1,005
3441
149,625
(40,486)
(1,062)
(20,871)
3,531
(1,832)
(1,43r)
43aI ,075,281 1,004,33,6 999,960
(6i650)
(el8)
(7,888)
t,238
(5,81 9)
(2,069)
(7,568)(6.6s0)(7,888)
530,940
t37,228
(87,1 54)
49t,599
123,227
(82,397)
(r,489)
407,092
192,041
(78,314)
(3 9,3 70)
I 0,1 50
89
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1 , Page 96 of 1 77
o
o
Trbl€ of Contcuts
CONSOLIDATED STATEMENTS OF EQUTTY AND REDEEMABLE NONCONTROLLING INTERESTS (continued)
Avista Corporation
For the Years Ended December 3 I
Dollars in thousands
2016 2015 20t4
Deconsolidation ofnoncontrolling interests related to sale ofEcova
$ 20,00 r
(23,612)
Balance at end ofyear
Redeemable Noncontrollin g lnterests:
Net income attributable to interests
Valuation adjustments and other interests
The Accompanying Notes are an Integral Part ofThese Statements.
90
5,873
a
Exhibit No. 3
Case Nos. AVU-E- t7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 97 oI 177
o
Noncontrolling Interests:
Balance at beginning ofyear
Net income attributable to noncontrolling interests
Balance at beginning ofyear
Purchase of subsidiary noncontrolling interests
Balance at end ofyear
$
$
s
(25 1)(33e)(42e)
$ r,648376 $ 1,528,287 S 1,483,242
$ 15,889
(42e)
90
$(33e)
88
(4)
(12)
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AVISTA CORPORATIONo
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o
NOTE I. SI]]\,IMARY OF SIGMFICANT ACCOT]NTING POLICIES
Nature ofBusiness
Avista Corp. is primarily an electric and natural gas utility with certain other business ventures. Avista Utilities is an operating division ofAvista Corp.,
comprising the regulated utility operations in the Pacific Northwest. Avista Utilities provides electric distribution and transmission, and natural gas
distribution services in parts ofeastem Washington and northem Idaho. Avista Utilities also provides natural gas distribution service in parts ofnortheastem
and southwestem Oregon. Avista Utilities has electric generating facilities in Washington, Idaho, Oregon and Montana. Avista Utilities also supplies
electricity to a small number of customers in Montana, most of whom are employees who operate Avista Ulilities'Noxon Rapids generating facility.
AERC is a wholly-owned subsidiary of Avista Corp. The primary subsidiary of AERC is AEL&P, which comprises Avista Corp.'s regulated utility opemtions
in Alaska. AERC was acquired by Avista Corp. on July I , 2014 and there are no AERC eamings included in tlre overall results of Avista Corp. prior to that
date. See Note 4 for information regarding the acquisition of AERC.
Avista Capital, a wholly owned non-regulated subsidiary ofAvista Corp., is the parent company ofall ofthe subsidiary companies in the non-utility
businesses, with the exception of AJT Mining Properties, which is a subsidiary of AERC. During the first half of 2014 and prior, Avista Capital's subsidiaries
included Ecova, which was an 80.2 percent owned subsidiary priorto its disposition on June 30,2O14. See Note 5 for information regarding the disposition
ofEcova and Note 2 I for business segment information.
Basis of Reporting
The consolidated financial statements include the assets, liabilities, revenues and expenses ofthe Company and its subsidiaries and other majority owned
subsidiaries and variable interest entities for which the Company or its subsidiaries are the primary beneficiaries. Ecova's revenues and expenses are included
in the Consolidated Statements oflncome in discontinued operations; however, as ofJune 30,2014 and for all subsequent reporting periods there are no
balance sheet amounts included for Ecova. All tables throughout the Notes to Consolidated Financial Statements that present information related to the
Consolidated Statements oflncome were revised to include only the amounts from continuing operations. Intercompany balances were eliminated in
consolidation. The accompanying consolidated financial statements include the Company's proportionate share ofutility plant and related operations
resulting from its interests in jointly owned plants (see Note 7).
Use of Estimates
The preparation ofthe consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
amounts reported for assets and liabilities and the disclosure ofcontingent assets and liabilities at the date ofthe financial statements and the reported
amounts ofrevenues and expenses during the reporting period. Significant estimates include:
. determining the market value ofenergy commodity derivative assets and liabilities,
. pension and otherpostretirement benefit plan obligations,
' contingent liabilities,
. goodwill impairment testing,
. recoverability ofregulatory assets, and
. unbilled revenues.
Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on the consolidated financial statements and
thus actual results could differ from the amounts reported and disclosed herein.
Syslent ofAccounts
The accounting records ofthe Company's utility operations are maintained in accordance with the uniform system ofaccounts prescribed by the FERC and
adopted by the state regulatory commissions in Washington, Idaho, Montana, Oregon and Alaska.
9l
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 98 of "177
o
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AVISTA CORPORATION
Regulation
The Company is subject to state regulation in Washington, Idaho, Montana, Oregon and Alaska. The Company is also subject to federal regulation primarily
by the FERC, as well as various other federal agencies with regulatory oversight ofparticular aspects ofits operations.
Utility Revenues
Utility revenues related to the sale ofenergy are recorded when service is rendered or energy is delivered to customers. Revenues and resource costs from
Avista Utilities' settled energy contracts that are "booked out" (not physically delivered) are reported on a net basis as part ofutility revenues. AEL&P does
not have booked out transactions. The determination ofthe energy sales to individual customers is based on the reading oftheir meters, which occu6 on a
systematic basis throughout the month. At the end ofeach calendar month, the amount ofenergy delivered to customers since the date ofthe last meter
reading is estimated and the corresponding unbilled revenue is estimated and recorded. Our estimate ofunbilled revenue is based on:
' the numberofcustomers,
' current rates,
' meterreading dates,
' actual native load forelectricity,
. actual throughput fornatural gas, and
. electric line losses and natural gas system losses.
Any difference between actual and estimated revenue is automatically corrected in the following month when the actual meter reading and customer billing
occurs.
Accounts receivable includes unbilled energy revenues ofthe following amounts as ofDecember 3 I (dollars in thousands):
2016 20r 5
Unbi lled accounts receivable $ 72,377 S 62,003
O
Aher Non-Utility Revenues
Revenues from the other businesses are primarily derived from the operations of AM&D, doing business as METALft, and are recognized when the risk of
loss transfers to the customer, which occurs when products are shipped. In addition, prior to Spokane Energy's dissolution in 20 I 5, there were revenues at
Spokane Energy related to a long-term fixed rate electric capacity contract. This contract was transferred to Avista Corp. during the second quarterof20l5
and the revenues frorn this contract subsequent to the transfer are included in utility revenues.
Depreciation
For utility operations, depreciation expense is estimated by a method ofdepreciation accounting utilizing composite rates for utility plant. Such rates are
designed to provide for retirements ofproperties at the expiration oftheir service lives. For utility operations, the ratio ofdepreciation provisions to average
depreciable property was as follows for the years ended December 3 I :
2016 2015 20t4
Avista Utilities
Ratio ofdepreciation to average depreciable property
Alaska Electric Light and Power Company
Ratro ofdepreciation to average depreciable property
92
3.11%
2.39%
3.09%
2.420
2.97%
2.430/0
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1 , Page 99 of 1 77
o
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AVISTA CORPORATIONo
The average service lives for the following broad categories ofutility plant in service are (in years):
Electric thermal/other production
Hydroelectric production
Electric transmissiorr
Electric distribution
Natural gas distribution property
Other shorter-lived general plant
Avista Utilities
Alaska Electric Light and
Power Company
4t
78
57
35
45
9
4t
42
4t
40
N/A
l5
Taxes Aher Than Income Taxes
Taxes otherthan income taxes include state excise taxes, city occupational and fi-anchise taxes, real and personal property taxes and certain othertaxes not
based on income. These taxes are generally based on revenues or the value ofproperty. Utility related taxes collected from customers (primarily state excise
taxes and city utility taxes) arc recorded as operating r€venue and expense. Taxes otherthan income taxes consisted ofthe following items forthe years
ended December 3 l (dollars in thousands):
20t6 201 5 20t4
Utility related taxes
Propcrty taxes
Other taxes
Total
57.745 $
3 8,5 05
2,485
59,173 $
35,948
2,536
58,250
33,932
2,118
$98,'735 $97,657 $ 94,300
O
Allowancefor Funds Used During Construction
AFUDC represents the cost ofboth the debt and equity funds used to finance utility plant additions during the construction period. As prescribed by
regulatory authorities, AFUDC is capitalized as a part ofthe cost ofutility plant. The debt component ofAFUDC is credited against total interest expense in
the Consolidated Statements oflncome in the line item "capitalized interest." The equity component ofAFUDC is included in the Consolidated Statement of
lncome in the line item "other income-net." The Company is permitted, under established regulatory rate practices, to recover the capitalized AFUDC, and a
reasonable retum thereon, through its inclusion in rate base and the provision for depreciation afler the related utility plant is placed in service. Cash inflow
related to AzuDC does not occur until the related utility plant is placed in service and included in rate base. The eflective AFUDC rate was the following for
the years ended December 3 I :
2016 2015 2014
Avista Utillties
Effective AIUDC rate
Alaska Electric Light and Power Company
Eflective AFUDC rate
7.29%732Yo 7.640/o
9.40%9.31%10.37%
Income Taxes
Deferred income tax assets represent future income tax deductions the Company expects to utilize in future tax retums to reduce taxable income. Deferred
income tax liabilities represent futurc taxable income the Company expects to recognize in future tax retums. Deferred tax assets and liabilities arise when
there are temporary differences resulting from differing treatment ofitems fortax and accounting purposes (such as depreciation). A deferred income tax asset
or liability is determined based on the enacted tax rates that will be in effect when the temporary differences between the financial statement carrying
amounts and tax basis ofexisting assets and liabilities are expected to be reported in the Company's consolidated income tax retums. The deferred income
tax expense for the period is equal to the net change in the deferred income tax asset and liability accounts from the beginning to the end ofthe period. The
effect on deferred income taxes from a change in tax rates is recognized in income in the period that includes the enactment date unless a regulatory order
specifies deferal ofthe effect ofthe change in tax rates over a longer period oftime. The Company establishes a valuation allowance when it is more likely
than not that all, or a portion, ofa deferred tax asset will not be realized. Deferred income tax liabilities and regulatory assets are established for income tax
benefits flowed through to customers. The Company did not incur any penalties on income tax
93
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page '100 of '177
o
$
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AVISTA CORPORATION
positions in 2016,2015 or20l4. The Company would recognize interest accrued related to income tax positions as interest expense and any penalties
incurred as other operating expense.
Stock-Based Compensalio n
The Company curently issues three types ofstock-based compensation awards - restricted shares, market-based awards and performance-based awards.
Historically, these stock compensation awards have not been material to the Company's overall financial results. Compensation cost relating to share-based
payment transactions is recognized in the Company's financial statements based on the fair value ofthe equity or liability instruments issued and recorded
over the requisite service period.
The Company recorded stock-based compensation expense (included in other operating expenses) and income tax benefits in the Consolidated Statements of
Income ofthe following amounts for the years ended December 3 1 (dollan in thousands):
2015 2014
Stock-based compensation expense
lncome tax benefits (l )
?,891 $
4,359
6,914 $
2,420
6,007
2,102
o
(l) lncometaxbenefitsfor2016include$l.6millionassociatedwithexcesstaxbenefitsonsettledshare-basedemployeepayments.Theexcesstaxbenefits
were recognized in the Statement oflncome for 20 I 6 due to the adoption ofASU 20 I 6{9, effective January 1 ,2016. See Note 2 for further discussion.
Restricted share awards vest in equal thirds each year over a three-year period and are payable in Avista Corp. common stock at the end ofeach year ifthe
service condition is met. ln addition to the service condition, the Company must meet a retum on equity target in order for the Chief Executive Officer's
restricted shares to vest. Restricted stock is valued at the close ofmarket ofthe Company's common stock on the grant date.
Total Shareholder Retum (TSR) awards are market-based awards and Cumulative Eamings Per Share (CEPS) awards are performance awards. CEPS awards
were first granted in 20 I 4. Both types ofawards vest affer a period ofthree yean and are payable in cash or Avista Corp. common stock at the end ofthe
three-yearperiod. The method ofsettlement is at the discretion ofthe Company and historically the Company has settled these awards through issuance of
Avista Corp. common stock and intends to continue this practice. Both types ofawands entitle the recipients to dividend equivalent rights, are subject to
forfeiture under certain circumstances, and are subject to meeting specific market orperformance conditions. Based on the level ofattainment ofthe market or
performance conditions, the amount ofcash paid or common stock issued will range from 0 to 200 percent ofthe initial awards granted. Dividend equivalent
rights are accumulated and paid out only on shares that eventually vest and have met the market and performance conditions.
For both the TSR awards and the CEPS awards, the Company accounts for them as equity awards and compensation cost for these awards is recognized over
the requisite service period, provided that the requisite service period is rendered. For TSR awards, ifthe market condition is not met at the end ofthe three-
year service period, there will be no change in the cumulative amount ofcompensation cost recognized, since the awards are still considered vested even
though the market metric was not met. For CEPS awards, at the end of the three-year service period, ifthe intemal performance metric of cumulative eamings
per share is not met, all compensation cost for these awards is reversed as these awards are not considered vested.
The fair value ofeach TSR award is estimated on the date ofgrant using a statistical model that incorporates the probability ofmeeting the market targets
based on historical retums relative to a peer group. The estimated fair value ofthe equity component ofCEPS awards was estimated on the date ofgrant as the
share price ofAvista Corp. common stock on the date ofgrant, less the net present value ofthe estimated dividends over the three-year period.
94
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
o
Schedule 1, Page 101 of 177
20t6
o
Table of Contents
The following table summarizes the number ofgrants, vested and unvested shares, eamed shares (based on market metrics), and other pertinent information
related to the Company's stock compensation awards for the years ended December 3 I :
2016 2015 2014
Restricted Shares
Shares granted during the year
Shares vested during the year
Unvested shares at end ofyear
Unrecognized compensation expense at eltd ofyear (in thousands)
TSR Awards
TSR shares granted during the year
TSR shares vested during the year
TSR shares earned based on market metrics
Unvested TSR shares at end ofyear
Unrecognized compensation expense (in thousands)
CEPS Awards
CEPS shares granted during the year
CEPS shares vested during the year
CEPS shares eamed based on mad<et metdcs
Unvested CEPS shares at end ofyear
Unrecognized compensation expense (in thousands)
58,259 59,025
s
$
$
58,610
(s2,385)
109,806
1,853 $
t16l35
(l r 1,665)
I 32,887
222,228
3AAe $
57,52r
(s5,835)
90,460
| 10,452
1,671 $
58,307
(60,379)
106,091
r,705 $
1t6,435
(171 ,334)
222,734
223,697
3,219 $
I I 1,887
1,840 $
62,07 5
(52,899')
112,042
1,349
I 17,550
(l 67,584)
97,199
287,834
2,833
58,017
|,577
o
Outstanding TSR and CEPS share awards include a dividend component that is paid in cash. This component ofthe share grants is accounted for as a liability
award. These liability awands are revalued on a quarterly basis taking into account the number ofawards outstanding, historical dividend rate, the change in
the value of the Company's comrnon stock relative to an extemal benchmark (TSR awards only) and the amount of CEPS eamed to date compared to
estimated CEPS over the performance period (CEPS awards only). Over the life ofthese awards, the cumulative amount ofcompensation expense recognized
will match the actual cash paid. As ofDecember 31 ,2016 and 20 I 5, the Company had recognized cumulative compensation expense and a liability of$ I .5
million, respectively, related to the dividend component on the outstanding and unvested share grants.
Aher Income - Net
Other lncome - net consisted ofthe following items for the years ended December 3 1 (dollars in thousands):
2016 2015 2014
Interest. income
lntcrest on regulatory defcrrals
Equity-related AFUDC
Net gain (loss) on investments
Other income
Total
$1,823 $
1,308
8A7s
(2,ts2)
624
653 $
48
8,331
(637)
905
987
220
8,808
276
I,055
S 10,078 $9,300 $11,346
Earnitgs per Common Share Attributable to Avista Corporation Shareholders
Basic eamings per corrmon share attributable to Avista Corp. shareholders is computed by dividing net income attributable to Avista Corp. shareholders by
the weighted-average number of common shares outstanding for the period. Diluted eamings per common share attributable to Avista Corp. shareholders is
calculated by dividing net income attributable to Avista Corp. shareholders (adjusted for the effect ofpotentially dilutive securities issued to noncontrolling
interests by the Company's subsidiaries) by diluted weighted-average common shares outstanding during the period, including common stock equivalent
shares outstanding using the treasury stock method, unless such shares are antidilutive. Common stock equivalent shares include shares issuable upon
exercise ofstock options and contingent stock awards. See Note 1 8 for eamings per common share calculations.
95
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule I, Page '102 ol 177
o
AVISTA CORPORATION
o
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AVISTA CORPORATION
Cash and Cash Equivalenls
For the purposes of the Consolidated Statements of Cash Flows, the Company considers all temporary investments with a maturity of three months or less
when purchased to be cash equivalents.
A I I o w anc e lo r Do ab tful A c c o unt s
The Company maintains an allowance for doubtful accounts to provide for estimated and potential losses on accounts receivable. The Company determines
the allowance for utility and other customer accounts receivable based on historical write-offs as compared to accounts receivable and operating revenues.
Additionally, the Cornpany establishes specific allowances for certain individual accounts. The following table presents the activity in the allowance for
doubtful accounts during the years ended December 3 I (dollars in thousands):
20t6 201 5
$4,530
6,053
(5.5s7)
$ 4,888
s,802
(6,1 60)
s 5,026 $4,530 $4,888
(l) During20l4,theCompanyreceived$l5.0millioningrossproceedsrelatedtothesettlementofitsCalifomiawholesalepowermarketslitigation.The
gross proceeds effectively settled all outstanding receivables and payables at Avista Energy (which had been fully reserved against since 2001). As a
result ofthe settlement, the Company reversed $ 1 5.0 million ofthe allowance, which was recorded as a reduction to non-utility other operating expenses
on the Consolidated Statements oflncome, and the remainder ofthe receivables, payables and allowance of$24.5 million were removed from the
Consolidated Balance Sheets (and had no effect on net income).
Materials and Supplies, Fuel Stock and Stored Nalural Gas
Inventories ofmaterials and supplies, fuel stock and stored natural gas are recorded at average cost for our regulated operations and the lower ofcost or
market fot out non-regulated operations and consisted ofthe following as ofDecember 3 I (dollars in thousands):
2016 2015
Allowance as ofthe beginning ofthe year
Additions expensed during the year
Net deductions (1 )
Allowance as ofthe cnd ofthc year
Materials and supplies
Fuel stock
Stored natural gas
Total
2014
$ 4430'
5,296
(44,7 t7)
$40,700
4,5 85
8,029
37,1 01
4,273
12,77 4
$
$53,3t4 $ s4,148
Utility Plant in Semice
The cost ofadditions to utility plant in service, including an allowance for funds used during construction and replacements ofunits ofproperty and
improvements, is capitalized. The cost ofdepreciable units ofproperty rctired plus the cost ofremoval less salvage is charged to accumulated depreciation
Asset Retirement Obligations
The Company records the fair value ofa liability for an ARO in the period in which it is incurred. When the liability is initially recorded, the associated costs
ofthe ARO are capitalized as part ofthe carrying amount ofthe related long-lived asset. The liability is accreted to its present value each period and the
related capitalized costs are depreciated over the useful life ofthe related asset. In addition, ifthere are changes in the estimated timing or estimated costs of
the AROs, adjustments are recorded during the period new information becomes available as an increase or decrease to the liability, with the offset recorded
to the related longJived asset. Upon retirement ofthe asset, the Company either settles the ARO for its recorded amount or incurs a gain or loss. The
Company records regulatory assets and liabilities forthe difference between asset retirement costs eurrently recovered in rates and AROs recorded since asset
retirement costs are recovered through rates charged to customers (see Note 9 for further discussion ofthe Company's asset retirement obligations).
96
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 103 of 177
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AVISTA CORPORATION
The Company recovers certain asset retirement costs through rates charged to customers as a pofiion ofits depreciation expense forwhich the Company has
not recorded asset retirement obligations. The Company has recorded the amount ofestimated retirement costs collected from customers (that do not
represent legal or contractual obligations) and included them as a regulatory liability on the Consolidated Balance Sheets in the following amounts as of
December 31 (dollan in thousands):
20t6 2015
Regulatory Iiability forutility plant retirement costs 273,983 $ 261,594
Goodwill
Goodwill arising frorn acquisitions represents the future economic benefit arising from other assets acquired in a business combination that are not
individually identified and separately rrcognized. The Company evaluates goodwill for impairment using a qualitative analysis (Step 0) for AEL&P and a
cornbination ofdiscounted cash flow models and a market approach for the other subsidiaries on at least an annual basis or more frequently ifimpairment
indicators arise. The Company completed its annual evaluation ofgoodwill for potential impairment as ofNovember 30, 20 I 6 and detennined that goodwill
was not impaired at that time.
The changes in the carrying amount ofgoodwill are as follows (dollars in thousands):
Accumulated
AEL&P orher 'tl:'#."nt Total
Balance as ofJanuary 1, 20 I 5
Adjustmcnts
Balance as ofthe December 3 I , 201 5
Balance as ofthe December 3 I , 20 I 6
$52,730 $
(304)
52,426
12,9',79 $(7,733) S 57,976
(304)
12,979 {7,733)57,672
$ s2,426 $12,979 $(7,733) $57,672
o
Accumulated impairment losses are attributable to the other businesses. The goodwill adjustments recorded during 20 I 5 relate to the final true-up ofincome
tax es associated with the acquisition of AERC, which occurred on July 1 , 2014. See Note 4 for information regarding this business acquisition and Note 2 I
regarding the Company's reportable segments.
Derivalive Assets and Liabilities
Derivatives are recorded as either assets or liabilities on the Consolidated Balance Sheets measured at estimated fair value.
The UTC and the IPUC issued accounting orders authorizing Avista Corp. to offset energy commodity derivative assets or liabilities with a regulatory asset or
liability. This accounting treatment is intended to defer the recognition ofmark-to-market gains and losses on energy commodity transactions until the
period of delivery. Realized benefits and costs result in adjustments to retail rates through PGAs, the ERM in Washington, the PCA mechanism in ldaho, and
periodic general rates cases. The resulting regulatory assets have been concluded to be probable ofrecovery through future rates.
Substantially all forward contracts to purchase or sell power and natural gas are recorded as derivative assets or liabilities at estimated fair value with an
offsetting regulatory asset or liability. Contracts that are not considered derivatives are accounted for on the accrual basis until they are settled or realized
unless there is a decline in the fair value of the contract that is determined to be other-than-tempomry.
For interest rate swap derivatives, Avista Corp. records all mark-to-market gains and losses in each accounting period as assets and liabilities, as well as
offsetting regulatory assets and liabilities, such that there is no income statement impact. The interest rate swap derivatives are risk management tools similar
to energy commodity derivatives. Upon settlement ofinterest rate swap derivatives, the regulatory asset or liability is amortized as a component ofinterest
expense over the term ofthe associated debt. The Company records an offset ofinterest rate swap derivative assets and liabiiities with regulatory assets and
liabilities, based on the prior practice ofthe commissions to provide recovery through the ratemaking prccess.
As of December 3 I , 2016, the Company has multiple master netting agrcements with a variety of entities that allow for cross-commodity netting of derivative
agreements with the same counterparty (i.e. power derivatives can be netted with natural gas derivatives). In addition, some master netting agreements allow
for the netting ofcommodity derivatives and interest rate swap derivatives for the same counterparty. The Company does not have any agreements which
allow for cross-affiliate netting among multiple affiliated legal entities. The Company nets all derivative instruments when allowed by the agreement for
presentation in the Consolidated Balance Sheets.
97
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
o
Schedule 1, Page 104 oI 177
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AVISTA CORPORATION
Fair Volue Measuremenls
Fair value represents the price that would be received when selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between
market participants at the measurcment date. Energy commodity derivative assets and liabilities, defened compensation assets, as well as derivatives related
to interest rate swap derivatives and foreign curency exchange derivatives, are reported at estimated fairvalue on the Consolidated Balance Sheets. See Note
I 6 for the Company's fair value disclosures.
Regulatory Defened Charges and Credits
The Company prepares its consolidated financial statements in accordance with regulatory accounting practices because:
. rates for regulated services are established by or subject to approval by independent third-party regulators,
. the regulated rates are designed to recoverthe cost ofproviding the regulated services, and
. in vierr ofdemand for the regulated services and the level ofcompetition, it is reasonable to assume tlrat rates can be charged to and
collected from customers at levels that will recover costs.
Regulatory accounting practices require that certain costs and/or obligations (such as incurred power and natural gas costs not currently included in rates, but
expected to be recovered or refunded in the future), are reflected as deferred charges or credits on the Consolidated Balance Sheets. These costs and/or
obligations are not reflected in the Consolidated Statements oflncome until the period during which matching revenues are recognized. The Company also
has decoupling revenue deferrals. Decoupling revenue deferrals are recognized in the Consolidated Statements oflncome during the period they occur (i.e.
during the period ofrevenue shortfall or excess due to fluctuations in customer usage), subject to certain limitations, and a regulatory asset/liability is
established which will be surcharged or rebated to customers in future periods. GAAP requires that for any altemative regulatory revenue program, like
decoupling, the revenue must be expected to be collected from customers witlrin 24 months ofthe deferral to quali$ for recognition in the current period
Consolidated Statement oflncome. Any amounts included in the Company's decoupling program that are not expected to be collected from customers within
24 months are not recorded in the financial statements until the period in which revenue recognition criteria are met. This could ultimately result in
decoupling revenue being recognized in a future period.
Ifat some point in the future the Company determines that it no longer meets the criteria for continued application ofregulatory accounting practices for all
or a portion ofits regulated operations, the Company could be:
. required to wdte offits regulatory assets, and
. precluded fiom the future deferral ofcosts ordecoupled revenues not recovered through rates at the time such amounts are incurred, even if
the Company expected to recover these amounts from customers in the future.
See Note 20 for further details ofregulatory assets and liabilities.
Un am o rti ze d De b t E xp e nse
Unamortized debt expense includes debt issuance costs that are amortized over the life ofthe related debt. These costs are recorded as an offset to Long-Term
Debt and Capital Leases on the Consolidated Balance Sheets.
Unamortized Debt Repurchase Costs
For the Company's Washington regulatory jurisdiction and for any debt repurchases beginnin g in 2O07 in all jurisdictions, premiums paid to repurchase debt
are amortized over the remaining life ofthe original debt that was repurchased or, ifnew debt is issued in connection with the repurchase, these costs are
amortized over the life ofthe new debt. In the Company's other regulatory jurisdictions, premiums paid to repurchase debt prior to 2007 are being amortized
over the average remaining maturity ofoutstanding debt when no new debt was issued in connection with the debt repurchase. These costs are recovered
through retail rates as a component ofinterest expense.
A c cumulatu d Ahe r Co mp re hensive Lo ss
Accumulatedothercomprehensiveloss,netoftax,consistedofthefollowingasofDecember3l (dollarsinthousands):
2016 201 5
Unfunded benefit obligation for pensions and other postretirement benefit plans - net oftaxes of$4,075 and $3,580,
respeclively
o
$7,568 $6,650
98
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 105 of 177
O
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AVISTA CORPORATION
Details about Accumulated Other Comprehensive Loss Components 20t5 2014
Affected Line Item in Statement
of Income
Realized gains on investment seourities
Realized losses on invesrrnent securities
Amortization of defined benefit pension items
Arnortization of net prior sewice cost
Amortization of nel loss
Adjustment due to effects ofregulation
$(3) (a)
735 (a)
7t2
(272)
Total before tax
Tax expense (a)
Net oftax
(b)
(b)
(b)
Total before tax
Tax benefit (expense)
Net of tax
2015
$460$
(1,171) $
(7,602)
7,360
3t $
2,623
(74e)
(t,0e4)
(83.301)
78,',|73
(r ,41 3)
495
1,905
(667)
(s,622)
1,961
1,238 $(3,65s)
These amounts were included as part ofnet income from discontinued operations for all periods presented (see Note 5 for additional details).
These accumulated other comprehensive loss components are included in the computation ofnet periodic pension cost (see Note I 0 for additional
details).
$(e1 8) $
(u)
(b)
o
Approprial ed R etai ned E arning s
In accordance with the hydroelectric licensing requirements ofsection I 0(d) ofthe Federal Power Act (FPA), the Company maintains an appropriated retained
eamings account for any eamings in excess ofthe specified rate ofretum on the Company's investment in the licenses for its various hydroelectric projects.
Per section t 0(d) of the FPA, the Company must maintain these excess eamings in an appropriated retained eamings account until the termination of the
licensing agreements or apply them to reduce the net investment in the licenses ofthe hydroelectric projects at the discretion ofthe FERC. The Company
typically calculates the eamings in excess ofthe specified rate ofretum on an annual basis, usually during the second quarter.
In addition to the hydroelectric project licenses identified above forAvista Utilities, the requirements ofsection l0(d) ofthe FPA also apply to the AEL&P
licenses for Lake Dorothy and Annex Creek/Salmon Creek (combined).
The appropriated retained eamings amounts included in retained eamings were as follows as of December 3l (dollars in thousands):
20t6
Appropriated retained eamings $ 25,564 $ 21,A30
Operaling Leases
The Company has multiple lease arrangements involving various assets, with minimum terms ranging from I to 45 years. Future minimum lease payments
required under operating leases having initial or remaining noncancelable lease terms in excess ofone year were not traterial as ofDecernber 3 I , 20 1 6.
Capilal Leases
The Company has two capital leases, one at Avista Corp. and one at AEL&P. The capital lease at Avista Corp. expires in 201 8 and is not material to the
financial statements as ofDecember 3 I , 20 1 6. The capital lease at AEL&P is a PPA (treated as a lease for accounting purposes) related to the Snettisham
Hydroelectric Project that expires in 2034. While the two leases are treated as capital leases for accounting purposes, for ratemaking purposes these
agreements are treated as operating leases with a constant level ofannual rental expense (straight line expense). Because ofthis regulatory treatment, any
difference between the operating lease expense for ratemaking purposes and the expenses recognized under capital lease treatment (interest and depreciatron
ofthe capital lease asset) is recorded as a regulatory asset and amortized during the later yean ofthe lease when
99
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 't , Page 106 of 1 77
ThefollowingtabledetailsthereclassificationsoutofaccumulatedothercomprehensivelossbycomponentfortheyearsendedDecember3l (dollarsin
thousands):
Amounts Reclsified from Accumulated Other Comprelrensive Los
2016
$s
$
$
o
O
Tabl€ of Contents
AVISTA CORPORATION
the capital lease expense is less than the operating lease expense included in base rates. See Note I 4 for further discussion ofthe Snettisham capital lease.
Conlingencies
The Company has unresolved regulatory, legal and tax issues which have inherently uncertain outcomes. The Company accrues a loss contingency ifit is
probable that a liability has been incurred and the amount ofthe loss or impairment can be reasonably estimated. The Company also discloses losses that do
not meet these conditions for accrual, ifthere is a reasonable possibility that a material loss may be incurred. As ofDecember 3l,2016, the Company has not
recorded any significant amounts related to unresolved contingencies. See Note I 9 for further discussion ofthe Company's commitments and contingencies.
NOTE 2. NEW ACCOI,]NTING STANDARDS
ASU No. 20 1 4-09, "Revenue from Contracts \9ith Customers Qopic 606)"
In May 20 I 4, the FASB issued ASU No. 20 1 4-09, which outlines a single comprehensive model for entities to use in accounting for revenue arising from
contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core princip'le ofthe revenue
model is that an entity should identify the various performance obligations in a contract, allocate the transaction price among the performance obligations
and recognize revenue when (or as) the entity satisfies each performance obligation. This ASU was originally effective for periods beginning after December
15,2016 and early adoption was not permitted. ln August 201 5, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606):
Defenal ofthe Effective Date," which defened the effective date ofASU No. 2014-09 for one yeaq with adoption as ofthe original date permitted.
The Company has fonned a revenue r€cognition standard implementation team that is working through several implementation issues described below. The
Company has evaluated this standard and is planning to adopt this standard in 201 8 upon its effective date. The Company is currently expecting to use a
modified retrospective method of adoption, which would require a cumulative adjustment to opening retained eamings, as opposed to a full retrospective
application. The Company is not far enough along in tlte adoption process to determine the amount, ifany, ofcumulative adjustment necessary.
Since the vast majority ofAvista Corp.'s revenue is from rate-regulated sales ofelectricity and naturdl gas to retail customers and revenue is recognized as
energy is delivered to these customers, the Company does not expect a significant change in operating revenues or net income. The Company is in the
process ofreviewing and analyzing certain contracts with customers (most ofwhich are related to wholesale sales ofpower and natural gas), but has not yet
identified any significant differences in revenue recognition between curent GAAP and ASU 2014-09.
During the implementation process, the Company has identified several unresolved issues, the most significant ofwhich are as follows based on our current
assessment:
Contributions in Aid ol Construction - There is the potential that CIACs could be recognized as revenue upon the adoption ofASU 20 I 4{9. Under current
GAAP, CIACs are accounted for as an offset to the cost ofutility plant in service.
Utili4) Related Taxes Collected from Customers - There are questions on the presentation ofutility related taxes collected from customers (primarily state
excise taxes and city utility taxes) on a gross basis. Undercurrent GAAP, the Company is allowed to record these utility related taxes on a gross basis in
revenue when billed to customers with an offset included in taxes other than income taxes in operating expenses. The Company is evaluating whether this
presentation is appropriate under ASU 20 l4-09 or whether they should be presented on a net basis. To qualifo for gross presentation under the new guidance,
the Company must perform an analysis to determine ifit is the principal or the agent in regards to utility related taxes.
Collectibilit! -There are questions regarding the requirement that collection ofa sale be probable and how, or if, utilities should consider bad debt collection
mechanisms (riders, base rate adjustments, etc.) in assessing probability of collection on sales to low income customers. Within the utility industry, there is
support for and against considering these recovery mechanisms when assessing collectibility ofa sale. Ifthe bad debt recovery mechanisms cannot be
considered, there is the potential that certain sales to low income customers cannot be recognized as revenue until payment is received from the customers,
which could result in revenues being recognized in periods other than when the energy was delivered to customem or not recognized at all.
The Company is monitoring utility industry implementation guidance as it relates to unresolved issues to determine ifthere will be an industry consensus
regarding accounting and presentation ofthese items.
100
a
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1,Page 1O7 ol 177
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AVISTA CORPORATION
ASIJ No. 20 1 5-02, "Consolidation (lopic 8 1 0): Amendmenls to the Consolidation Analysis"
In February 201 5, the FASB issued ASU No. 2015-02. This ASU changes the consolidation analysis required under GAAP, including the identification of
variable interest entities ft{E). The ASU also removes th€ deferral ofthe VIE analysis related to investments in certain investment funds, which results in a
different consolidation evaluation for these types of investments. The Company adopted this standard effective January 1 ,2016. The adoption ofthis
standard resulted in the identification ofseveral Avista Corp. investments in limited pa(nerships (or a functional equivalent) that are now considered VIEs
under the new standard. Consolidation ofthese VIEs by Avista Corp. is not required because the Company does not have majority ownership in any ofthe
entities, it does not have the power to direct any activities ofthe entities and it does not have the power to appoint executive leadership (including the board
of directors). Avista Corp.'s total investment in these entities is not material and it does not have any additional commitments to these VIEs beyond the initial
investment. See Note 3 foradditional discussion of MEs.
ASU No. 20 1 6-02 "Leases (Topic 842)."
In February 2016, the FASB issued ASUNo. 2016-02. This ASU introduces a new lessee model that requires most leases to be capitalized and shown on the
balance sheet with corresponding lease assets and liabilities. The standard also aligns certain ofthe underlying principles ofthe new lessor model with those
in Topic 606, the FASB's new revenue recognition standard. Furthermore, this ASU addresses other issues that arise under the cunent lease model; for
example, eliminating the required use ofbright-line tests in current GAAP for determining lease classification (operating leases versus capital leases). This
ASU also includes enhanced disclosures surrounding leases. This ASU is effective for periods beginning on or after December I 5, 20 I 8; however, early
adoption is permitted. Upon adoption, this ASU must be applied using a modified retrospective approach to the earliest period presented, which will likely
require restatements ofpreviously issued financial statem€nts. The modified retrospective approach includes a number ofoptional practical expedients that
entities may elect to apply. The Company evaluated this standard and determined that it will most likely not early adopt this standard before its effective date
in 2019. The Company has formed a lease standard implementation team that is working through the implementation process. The most significant
implementation challenge identified thus farrelates to identiffing a complete population ofleases and potential leases underthe new lease standard. Also,
the Company is monitoring utility industry implementation guidance as it relates to several unresolved issues to determine if there will be an industry
consensus, including whether righlof-ways are considered leases. The Company cannot, at this time, estimate the potential impact on its future financial
condition, results ofoperations and cash flows.
ASIJNo.20l6-09 "Compensation-StockCompensation Oopic 718): Improwments to Employee Share-Based Payment Accounting."
In March 20 I 6, the FASB issued ASU No. 2Ol6-09 . This ASU simplifies several aspects ofthe accounting for employee share-based payment transactions
including:
. allowing excess tax benefits ortax deficiencies to be recognized as income tax benefits orexpenses in the Consolidated Statements oflncome rather
than in Additional Paid in Capital (APIC),
. excess tax benefits no longer represent a financing cash inflow on the Consolidated Statements ofCash Flows and instead will be included as an
opefating activity,
. excess tax benefits and tax deficiencies will be excluded from the calculation ofdiluted eamings per share, whereas under current accounting
guidance, these amounts must be estimated and included in the calculation,
. allowing forfeitures to be accounted for as they occur, instead ofestimating forfeitures, and
. changing the statutory tax withholding requirements for share-based payments.
This ASU is effective for periods beginning after December 1 5, 20 I 6 and early adoption is permitted. The Company early adopted this standard during the
second quarter of20 I 6, with a retrospective effective date ofJanuary 1,2016. The adoption ofthis standard resulted in a recognized income tax benefit of
$1.6 million in 2016 associatedwith excesstaxbenefitson settled share-based employeepayments. h addition,the Consolidated StatementofCash Flows
for 20 I 6 included the excess tax benefits as an operating activity rather than as a financing activity. Periods prior to 201 6 were not restated for the adoption
ofthis accounting standard as the Company has adopted this standard on a prospective basis beginning January I , 201 6.
l0l
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 108 of 177
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AVISTA CORPORATION
NOTE 3. VARIABLE INTEREST f,NTITIES
Lancaster Power Purchase Agreemenl
The Company has a PPA for the purchase ofall the output ofthe Lancaster Plant, a 270 MW natural gas-fired combined cycle combustion tuftine plant
located in Kootenai County, Idaho, owned by an unrelated third-party (Rathdrum Power LLC), through 2026.
Avista Corp. has a variable interest in the PPA. Accordingly, Avista Corp. made an evaluation ofwhich interest holders have the powerto direct the activities
that most significantly impact the economic performance ofthe entity and which interest holders have the obligation to absorb losses or receive benefits that
could be significant to the entity. Avista Corp. pays a fixed capacity and operations and maintenance payment and certain rnonthly variable costs under the
PPA. Under the terms ofthe PPA, Avista Corp. makes the dispatch decisions, provides all narural gas fuel and receives all ofthe electric energy output fiom
the Lancaster Plant. However, Rathdrum Power LLC (the owner) controls the daily operation ofthe Lancaster Plant and makes operating and maintenance
decisions. Rathdrum Power LLC controls all ofthe rights and obligations ofthe Lancaster Plant after the expiration ofthe PPA in 2026 and Avista Corp. does
not have any further obligations after the expiration. It is estimated that the plant will have l5 to 25 years of useful life after that time. Rathdrum Power LLC
bears the maintenance risk ofthe plant and will receive the residual value ofthe Lancaster Plant. Avista Corp. has no debt or equity investments in the
Lancaster Plant and does not provide financial support through liquidity arrangements or other commitments (other than the PPA). Based on its analysis,
Avista Corp. does not consider itselfto be the primary beneficiary ofthe Lancaster Plant. Accordingly, neither the Lancaster Plant nor Rathdrum Power LLC
is included in Avista Corp.'s consolidated financial statements. The Company has a future contractual obligation of approximately $283.6 million under the
PPA (representing the fixed capacity and operations and maintenance payments through 2026) and believes this would be its maximum exposure to loss.
However, the Company believes that such costs will be recovered through retail rates.
Limited Partnerships and Similar Entities
The Company adopted ASU No.20l 5-02 effective January 1,2016. As a result ofthe adoptron ofthis ASU, the Company evaluated all ofits existing
investments to determine ifany entities would be considered VIEs under the new guidance and whether consolidation would be required. Under the ASU, a
limited partnership or similar legal entity that is the functional equivalent of a Iimited partnership would be considered a VIE regardless of whether ir
otherwise qualifies as a voting interest entity unless a simple majority or lower threshold ofthe "unrelated" limited partners (i.e., parties other than the
general partner, entities under common control with the general partner, and other parties acting on behalfofthe general partner) have substantive kick-out
rights (including liquidation rights) or participating rights.
The Company has six investments in limited partnenhips (or the functional equivalent) where Avista Corp. is a limited partner investor in an investment fund
where the general partner makes all ofthe investment and operating decisions with regards to the partnership and fund. To remove the general partner from
any ofthe funds, approval from greater than a simple majority ofthe limited partners is required. As such, the limited partners do not have substantive kick-
out rights and these investments are considered VIEs. Consolidation ofthese VIEs by Avista Corp. is not required because the Company does not have
majority ownership in any ofthe funds, it does not have the power to direct any activities ofthe funds, and it does not have the power to appoint executive
leadership, including the board ofdirectors.
Avista Corp. participates in profits and losses ofthe investment funds based on its ownership percentage and its losses are capped at its total initial
investment in the funds. For five of the six WEs, Avista Corp. does not have any additional commitments beyond its initial investment. For the sixth VIE,
Avista Corp. has up to a $25.0 million total commitment, and as of December 3 I , 2016, has invested $2.1 million, leavtng $22.9 million remaining to be
invested. In addition, the Company is not allowed to withdraw any capital contributions from the investment funds until after the funds'expintion dates and
all liabilities ofthe funds are settled. The expiration datcs range from 201 7 to 2032, with one investment lraving no tennination date (as it is perpetual). As of
December 31, 2016, the Company has a total carrying amount in these investment funds of $7.0 million.
NOTE 4. BUSrl\rESS ACQUTSTTIONS
Alaska Energy and Resources Company
On July I , 2014, the Company acquired AERC, based in Juneau, Alaska, and as of that date, AERC became a wholly-owned subsidiary of Avista Corp.
The primary subsidiary of AERC is AEL&P, a regulated utility which provides electric services to approximately 17,000 customers in Juneau, Alaska. In
addition to the regulated utility, AERC owns AJT Mining, which is an inactive mining company holding certain properties.
102
o
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Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 109 of 177
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AVISTA CORPORATION
The purpose ofthe acquisition was to expand and diversifu Avista Corp.'s energy assets and deliver long-term value to its customers, communities and
investors.
ln connection with the closing, Avista Corp. issued 4,50 I ,44 I new shares ofcommon stock to the shareholders ofAERC based on a contractual formula that
resulted in a price of$32.46 per share, reflecting a purchase price of$ I 70.0 million, plus acquired cash, less outstanding debt and other closing adjustments.
Avista Corp. also paid $4.8 million in cash. The total fairvalue of all consideration transferred was $154.9 million and resulted in goodwill of$52.4 million,
which is not deductible for tax purposes.
The fair value of assets acquired and liabilities assumed as of July I , 20 l4 (after consideration of a working capital adjustment and income tax true-ups
during the second quarter of20l 5) were as follows (in thousands):
July l, 2014
Assets acquired:
Curent Assets:
Cash
Accounts receivable - gross totals $3,928
Materials and supplies
Other current assets
Total current assets
Utility Property:
Utility plant in serviee
Utility property under long-term capital lease
Construction work in progress
Total utility prcperty
Other Non-current Assets:
Non-utility property
Eleotric plant h.eld for future use
Goodwill (l )
Otherdeferred charges and non-current assets
TotaI other non-current assets
Total assets
26,571
I 88,41 I
283,r47
$19,704
3,85 1
2,017
999
113,964
71 ,007
3,440
a
6,660
3,'7 tl
52,426
s,368
6 8,1 65
$
Liabllities Assumed:
Cunent Liabilities:
Accounts payable
Current portion oflong-term debt and capital lease obligations
Other current liabilities (l)
Total current liabilities
Long-term debt
Capital lease obligations
Other non-current liabilities and defened credits (1 )
Total Iiabilities
$700
3,773
2,807
7,280
\7 )11
68,840
r 4,889
$128,236
Total net assets acquired 154,91l
(l) Duringthesecondquarterof20l5,theCompanyrecordedareductiontogoodwillofapproximately$0.3millionduetoincometaxrelatedadjustments.
The majority ofAERC's operations are subject to the rate-setting authority ofthe RCA and are accounted for pursuant to GAAP, including the accounting
guidance for regulated operations. The rate-setting and cost recovery provisions curently in place for AERC's regulated operations provide revenues derived
from costs, including a retum on investment, ofassets and
$
103
O
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 'l , Page 1 10 of 't 77
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Tabl€ of Contents
AVISTA CORPORATION
liabilities included in rate base. Due to this regulation, the fair values ofAERC's assets and liabilities subject to these rate-setting provisrons were assumed to
approximate their carrying values. There were not any identifiable intangible assets associated with this acquisition. The excess ofthe purchase consideration
over the estimated fair values ofthe assets acquired and liabilities assumed was recognized as goodwill at the acquisition date. The goodwill reflects the
value paid for the expected continued growth ofa rate-regulated business located in a defined service area with a constructive regulatory environment, the
attractiveness ofstable, growing cash flows, as well as providing a platform for potential future growth outside ofthe rate-regulated electric utility in Alaska
and potential additional utility investment.
The following table summarizes the supplemental pro forma information for the years ended December 3l related to the acquisition of AERC as ifthe
acquisition had occurred on January 1,2013 (dollan in thousands -unaudited):
2016 201 5 2014
Actual Avista Corp. revenues frorn continuin! operations (excluding AERC)
Supplcmental pro forma AERC revenucs (l )
Total pro forma revenues
Actual AERC revenues included in Avista Corp. revenues (1 )
Actual Avista Corp. net income from continuing operations attributable to Avista Corp. shareholders
(excluding AERC)
Actual Avista Corp. net income from discontinued operations attributable to Avista Corp.
shareholders
Adjustrnent to Avista Corp.'s net income foracqujsition costs (net of tax) (2)
Supplemental pro forma AERC net income (l)
To'tal pro forma net income
Actual AERC net income included in Avista Corp. net income (1)
$ r,395,989 $
46,494
| ,439,807 $
44,969
1 ,450,91 8
46,46',7
1,484,776 1,497 ,385
46,494 44,969 2t,644
t29,505 11t ,772 116,665
5,147
22
6,308
1) ))A
870
8,8067,',|23
137,228 123,249 198,565
$ 7,'123 $ 6,308 S 3,t52
a (l) AERCwasacquiredonJulyl,20l4; therefore,alltherevenuesandnetincomeforthesecondhalfof20l4through20l6areactualamountsthatare
included in Avista Corp.'s overall results. All revenue and net income amounts prior to July t , 2014 are supplemental pro forma amounts and are
excluded from Avista Corp.'s overall results.
(2) This adjustment is to treat all transaction costs as ifthey occurred on January I , 20 I 3 and to remove them frorn the periods in which they actually
occurred. The transaction costs were expensed and presented in the Consolidated Statements oflncome in other operating expenses within utility
operating expenses. Since the start ofthe transaction through December 3 I , 20 I 6, Avista Corp. has expensed $3.0 million (pre-tax) in total transaction
fees. ln addition to the amounts expensed, through December 3 1, 20 1 6, Avista Corp. has included $0.4 million in fees associated with the issuance of
common stock for the transaction as a reduction to common stock. These fees do not impact the supplemental pro forma information above.
NOTE 5. DISCONTIIIL'ED OPERATIONS
On June 30, 20 I 4, Avista Capital, completed the sale ofits interest in Ecova to Cofely USA Inc., an unrelated party to Avista Corp. The sales price was
$335,0 million in cash, less the payment ofdebt and other customary closing adjustments. At the closing ofthe transaction on June 30, 20 I 4, Ecova became
a wholly-owned subsidiary of Cofely USA Inc. and the Company has not had and will not have any further involvement with Ecova after such date.
The purchase price of$335.0 million, as adjusted, was divided among all the security holders ofEcova pro rata based on ownership. After consideration ofall
escrow amounts received, the sales transaction provided cash proceeds to Avista Corp., net ofdebt, payrnent to option and minority holders, income taxes
and transaction expenses, of $143.7 million, and resulted in a net gain of $74.8 million. Almost all of the net gain was recognized in 2014 with some true-ups
during 2015.
to4
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1,Page 111 ot 177
o
a
Table of Contcnts
AVISTA CORPORATION
Prior to the completion ofthe sales transaction, Ecova was a reportable business segment. The following table presents amounts that were included in
discontinued operations forthe years ended December3 l, 201 5 and 2014 (dollars in thousands):
201 5 2014
$Revenues
Gain on sale ofEcova (l )
Transaction expenses and accolerated emptoyee benefits (2)
Gain on sale ofEcova, net oftransaction expenses
lncome before income taxcs
Income tax expense (b€nefit) (3)
Net income from discontinued operations
Net income attributatrle to noncontrolling interests
Net income fiorn discontinued operations attributable to Avista Corp. shareholders
$87,534
160,612
9,062
7'7',|
7l
706
706
(444r)
r5r,550
156,025
83,61 4
o
5,147 72,4t 1
(r 87)
$5,t47 $72,224
(1) Thisrepresentsthegrossgainrecordedtodiscontinuedoperations.Thetotalgainnetoftaxesandtransactionsexpenseswas$T4.8rnillion,ofwhich
$69.7 million was recognized during 2014.
(2) Avista Corp.'s portion ofthe total transaction expenses was $9.1 million (including amounts which were withheld from the transaction net proceeds). All
transaction expenses paid on the Ecova sale (including Avista Corp.'s portion and the portion attributable to the minority inlerest holders ofEcova) were
S I 1 .1 million, of u'hich $5.5 million was withheld from the net proceeds and the remainder was paid during 2014. The transaction expenses were for
legal, accounting and other consulting fees, and the accelerated employee benefits related to employee stock options which were settled in accordance
with the Ecova equity plan.
(3) Thetaxbenefitduring20l5primarilyresultedfromthereversalofavaluationallowanceagainstnetoperatinglossesatEcovabecausethenetoperating
losses were deemed realizable after further evaluation.
NOTE 6. DERIVATII'ES AND RISK MANAGEMENT
Energy Commo dily Deivalives
Avista Utilities is exposed to market risks relating to changes in electricity and natural gas commodity prices and certain other fuel prices. Market risk is, in
general, the risk of fluctuation in the market price of the commodity being traded and is influenced primarily by supply and demand. Market risk includes the
fluctuation in the market price of associated derivative commodity instruments. Avista Utilities utilizes derivative instruments, such as forwards, futures,
swaps and options in order to manage the various risks relating to these commodity price exposures. The Company has an energy resources risk policy and
control procedures to manage these risks.
As part ofthe Company's resource procurement and management operations in the electric business, the Company engages in an ongoing process ofresource
optimization, which involves the economic selection from available energy resources to sewe the Company's load obligations and the use ofthese resources
to capture available economic value. The Company transacts in wholesale markets by selling and purchasing electric capacity and energy, fuel for electric
generation, and derivative contracts related to capacity, energy and fuel. Such transactions are part ofthe process ofmatching resources with load obligations
and hedging the related financial risks. These transactions range from terms ofintra-hour up to multiple years.
As part ofits resource procurernent and management ofits natural gas business, the Company makes continuing projections ofits natural gas loads and
assesses available natural gas resources including natural gas storage availability. Natural gas resource planning typically includes peak requirements, low
and average monthly requirements and delivery constraints from natural gas supply locations to the Company's distribution system. However, daily
variations in natural gas demand can be significantly different than monthly demand projections. On the basis ofthese projections, the Company plans and
executes a series oftransactions to hedge a portion ofits projected natural gas requirements through forward market transactions and derivative instruments.
These transactions may extend as much as four natural gas operating years (Novernber through October) into the future. Avista Corp. also leaves a significant
portion ofits natural gas supply requirements unhedged forpurchase in short-term and spot markets.
The Company is required to plan for suffcient natural gas delivery capacity to serve its retail customers for a theoretical peak day event. The Company
generally has more pipeline and storage capacity than what is needed during periods other than a peak
105
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 1'12 ol 177
a
o
Table of Contetrts
AVISTA CORPORATION
day. The Company optimizes its natural gas resources by using market opportunities to generate economic value that helps mitigate fixed costs. Avista
Utilities also optimizes its natural gas storage capacity by purchasing and storing natural gas when prices are traditionally lower, typically in the summer, and
withdrawing during higher priced months, typically during the winter. However, ifmarket conditions and prices indicate that the Company should buy or sell
natural gas during other times in the year, the Company engages in optimization transactions to capture value in the marketplace. Natural gas optimization
activities include, but are not limited to, wholesale market sales ofsurplus natural gas supplies, purchases and sales ofnatural gas to optimize use ofpipeline
and storage capacity, and participation in the transportation capacity release market.
The following table presents the underlying energy commodity derivative volumes as ofDecember 3 1 , 20 I 6 that are expected to be settled in each respective
year (in thousands of MWhs and mmBTUs):
Purchares Sales
Electric Derivativcs Gas Derivatives Elecfic Derivatives Gas Derivatives
Physical ( I )
MWh
Financial ( I )
MWh
Physical (l )
mmBTUs
Financial ( I )
mmBTUs
Physical ( I )
MWh
Financial (l )
MWh
Physical ( I )
mmBTUs
Financial (l)
mmBTUsYear
2011
201 8
2019
5r0 wl 15,4?5 110"380 316
52,7 55
29,475
) ?1(
1,552
1,244
982
4,165
1,360
1,345
1,430
r,060
73,1 l 0
15,1 13
4,020
397
235 610
9r0
The following table presents the underlying energy commodity derivative volumes as ofDecember 3 l, 20 I 5 that were expected to be settled in each
respective year (in thousands of MWhs and mmBTUs):
Purchases Sales
Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivatives
O Physical (l )
MWh
Financial (1) Physical (l) Financial (l) Physical (l)
MWh mmBTUS mmBTUs MWh
Finmcial (1)
MWh
Physical (l) Financial (1)
mmBTUs mmBTUsYear
2016
zotT
201 I
2019
2020
Thereafter
407
397
397
235
1,9s4 112s2 r42,693
49,200
l5,t 18
6 q15
905
280
255
286
158
2,656 3,182
1,360
1,360
t,345
1 430
1,060
112,233
26,965
2,738
483
(1) Physical transactions represent cornmodity transactions in which Avista Utilities will take ormake delivery ofeitherelectricity ornatural gas;
financial transactions represent derivative instruments with delivery ofcash in the amounl ofbenefit orcost but with no physical delivery ofthe
commodity, such as futures, swaps, options, or forward contracts.
The electric and natural gas derivative contracts above will be included in either power supply costs or natural gas supply costs during the period they are
settled and will be included in the various recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to be collected
through retail rates Aom customers. Any transactions that result in gains will be used to reduce retail rates charged to customen in the future.
F o rei g n C urrency Exc hang e De ivatives
A significant portion ofAvista Utilities' natural gas supply (including fuel for power generation) is obtained fiom Canadian sources. Most ofthose
transactions are executed in U.S. dollars, which avoids foreign curency risk. A portion ofAvista Utilities' short-tem natural gas transactions and long-term
Canadian transportation contracts are committed based on Canadian currency prices and settled within 60 days with U.S. dollars. Avista Utilities hedges a
portion ofthe foreign currency risk by purchasing Canadian currency exchange derivatives when such comrnodity transactions are initiated. The foreign
curency exchange derivatives and the unhedged foreign cunency risk have not had a material effect on the Company's financial condition, results of
operations or cash flows and these differences in cost related to currency fluctuations are included \Mith natural gas supply costs for ratemaking.
106
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 113 ol 177
o
675
305
455
97
Table of Cont€nts
AVISTA CORPORATIONo
The following table summarizes the foreign cunency hedges that the Company has entered into as ofDecember 3 I (dollars in thousands):
2016
Number ofcontracts
Notional amount (in United States dollars)
Notional amount (in Canadian dollars)
$
21
2,819
3,754
2015
24
$ 1,463
2,002
Interest Rale Swap Derivarives
Avista Corp. is affected by fluctuating interest rates related to a portion ofits existing debt, and future borrowing requirements. The Company hedges a
portion ofits interest rate risk with financial derivative instruments, which may include interest rate swap derivatives and U.S. Treasury lock agreements.
These interest rate swap derivatives and U.S. Treasury lock agreements are considered economic hedges against fluctuations in future cash flows associated
with anticipated debt issuances.
The following table summarizes the unsettled interest rate swap derivatives that the Company has outstanding as ofthe balance sheet date indicated below
(dollars in thousands):
Balance Sheet Date Number of Contracts Notional Amount Mmdatory Cash Scttlement Date
December31,2016 6
l4
6
2
5
75,000
275,O00
70,000
20,000
60,000
2017
201 8
2019
2020
2022
December 3 1,2015 6
J
1l
2
I
I15,000
45,000
245,O00
3 0,000
20,000
2016
2017
o
201 8
2019
2022
During the third quarter 20 I 6, in connection with the execution ofa purchase agreement for bonds that the Company issued in December 20 I 6, the Company
cash-settled seven interest rate swap derivatives (notional aggregate amount of$ I 25.0 million) and paid a total of$54.0 million. The interest rate swap
derivatives were settled in connection with the pricing of$ I 75.0 million ofAvista Corp. first mortgage bonds that were issued in December 20 I 6 (see Note
I 4). Upon settlement ofinterest rate swap derivatives, the cash payments made or received are recorded as a regulatory asset or liability and are subsequently
amortized as a component ofinterest expense over the life ofthe associated debt. The settled interest rate swap derivatives are also included as a part ofthe
Company's cost ofdebt calculation for ratemaking purposes.
The fairvalue ofoutstanding interest rate swap derivatives can vary significantly from period to period depending on the total notional amount ofswaps
outstanding and fluctuations in market interest rates compared to the interest rates fixed by the swaps. The Company would be required to make cash
payments to settle the interest rate swap derivatives ifthe fixed rates are higher than prevailing market rates at the date ofsettlement. Convenely, the
Company receives cash to settle its intercst rate swap derivatives when prevailing market rates at the time ofsettlement exceed the fixed swap rates.
Summary of Outstanding Derivative Instruments
TheamountsrecordedontheConsolidatedBalanceSheetasofDecember3l,20l6andDecember3l,20l5reflecttheoffsettingofderivativeassetsand
liabilities where a legal right ofoffset exists.
107
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
Schedule 1,Page 114 ol 177
I
o
Tabl€ of Contents
AVISTA CORPORATION
The following table presents the fair values and locations ofderivative instruments recorded on the Consolidated Balance Sheet as ofDecember 3 1 , 20 1 6 (in
thousands):
Fair Value
Gross Collateral
Net Asset
(Liability)
in Balmce SheetDerivative md Balmce Sheet Location Liability Netting
Foreign currency exchange derivatives
Other current liabilities
Interest rate srvap derivatives
Other current assets
Otherproperty afld investments-net and othernon-current assets
Other current liabilities
Non-current interest rate swap derivative liabilities
Energy commodity derivatives
Other current assets
Current energy commodity derivative I i abil ities
Other non-current liabilities, regulatory Iiabilities and deferred credits
Total dcrivativc instrumcnts recorded on the balancc shect
Gross
Asset
s
3,951
18,682
16,335
13,071
(28) $
(3e7)
(15,'7 56)
(s'7,82s)
(16,187\
(29,s98)
(29,990)
9,731
25,169
(23)
1101
5,357
(6,02s)
(28,705)
1,895
(7,03 s )
(r 3,28e)
5$s
3,3 93
5,7 54
6,228
3,630
$ 6t,191 $ (1s0,381) s 44,7s8 g (44,432)
The following table presents the fair values and locations ofderivative instruments recorded on the Consolidated Balance Sheet as ofDecember 3 I , 20 I 5 (in
thousands):
Fair Value
Dcrivative md Baluce Sheet Location
Gros
Aset
Cross
Liabitity
Collateral
Netting
Net Asset
(Liability)
in Balace Sheet
f,'oreigr currency exchange derivatives
Other current liabilities
Interest rate swap deriYatives
Other property and investments-net and other non-current assets
Other current liabilities
Non-current interest rate swap derivative liabilities
Energy commodity derivatives
Other current assets
Current energy commodity derivative liabilities
Other non-current liabilities, regulatory liabilities and deferred credits
Total derivative instruments recorded on the balanc€ sheet
$
1,236
67,466
6,6t3
(re) $
(23,262)
(62,236)
(ss3)
(8sloe)
(39,033)
3,880
3 0,1 50
3,67 5
10,851
(17)
23
(19,264)
(30,679)
683
(14,268)
(21,s6e)
2$s
2)
118
1,407
s 76,86s $ (210,512) $ 48,ss6 $ (8s,o9l)
Exposure lo Demandsfor Collateral
The Company's derivative contracts often require collateral (in the form ofcash or letters ofcredit) or other credit enhancements, or reductions or terminations
ofa portion ofthe contract through cash settlement, in the event ofa downgrade in the Company's credit ratings or changes in market prices. In periods of
price volatility, the level ofexposure can change significantly. As a result, sudden and significant demands may be made against the Company's credit
facilities and cash. The Company actively monitors the exposure to possible collateral calls and takes steps to mitigate capital requirements.
108
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 115 ot 177
o
o
Table of Contents
AVISTA CORPORATION
The following table presents the Company's collateral outstanding related to its derivative instruments as of as of December 3 I (in thousands):
2016
Energy comrrodity derivatives
Cash collateral posted
Letters of credit outstanding
Balance sheet offsetting (cash collateral against net derivative positions)
2015
Interest rate s\ryap derivatives
Cash collateral posted 34,900 34,030
Letters ofcredit outstandrng 3,600 9,600
Balance sheet offsetting (cash collateral against net derivative positions) 34,900 34,030
Certain of the Company's derivative instruments contain provisions that require the Company to maintain an "investment grade" credit rating from the major
credit rating agencies. Ifthe Company's credit ratings wcre to fall below "investment gmde," it would be in violation ofthese provisions, and the
counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing collateralization on derivative instruments
in net Iiability positions.
The following table prescnts thc aggregate fair value ofall derivative instruments with credit-nsk-rclated contingent features that are in a liability posrtion
and the amount ofadditional collateral the Company could be required to post as ofDecember 3 I (in thousands):
20t6 2015
Energy commodity derivatives
Liabilities with credit-risk-related contingent features
Additional collateral to post 1,046
Interest rate swap derivatives
Liabilities with credit-risk-related contingent features 73,978 85,498
Additional collateral to post 21,100 1 8,750
NOTE 7. JOINTLY OWNED ELECTRIC FACILITIES
The Company has a I 5 percent ownership interest in a twin-unit coal-fired generating facility, Colstrip, located in southeastern Montana, and provides
financing for its ownership interest in the project. The Company's share ofrelated fuel costs as well as operating expenses for plant in service are included in
the corresponding accounts in the Consolidated Statements oflncome. The Company's share ofutility plant in service for Colstrip and accurnulated
depreciation (inclusive ofthe ARO assets and accumulated amortization) were as follows as ofDecember 3 I (dollars in thousands):
2016
$
t7,134
24,400
9,858
28,716
28,200
| 4,526
7,090
6,980
362,199
(243,363)
o
Utility planl in service
Accumulated depreciation
See Note 9 for further discussion of AROs.
$380,406 $
(249,359\
109
Exhibit No. 3
Case Nos. AVU-E-'t 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 116 ol 177
o
$
201 5
o
o
Table of Contents
AVISTA CORPORATION
NOTE 8. PROPERTY, PLANT AND EQTIIPMENT
Thebalancesofthemajorclassificationsofproperty,plantandequipmentaredetailedinthefollowingtableasofDecember3l (dollarsinthousands):
Avista Utilities:
Electnc production
Electric transmission
Electric distribution
Electric construction work-in-progress (CWIP) and other
Elcctnc total
Natural gas underground storage
Natural gas distribution
Natural gas CWIP and other
Natural gas total
Common plant (including CWIP)
Total Avista Utilities
AEL&P:
Electric production
Electric transmission
Electnc distribution
Electric production held under long-term capital lease
Electric CWIP and other
Electrio total
Common plant
Total AEL&P
Other (1)
Total
$t,346,332 $
682,529
1 ,525,17 5
296,912
|,211 ,t79
640,586
1,468,157
35 8,846
3,85 0,94 8 3,684,768
44,672
954,298
57,601
43,080
878,982
62,024
r,056,5 7l 984,086
s27 As8 456,796
5,434,977
94,83 9
20,252
20,057
'7 t,047
7,190
5,125,650
1) )O)
I8,8r7
19,005
'71907
16,971
t98,092
8,1 33
213,345
8,65 r
221,996
30,764
206,225
75,',709
$ s,687,737 $ s,3s7,s84
(l )Included in other property and investments-net and other non-current assets on the Consolidated Balance Sheets. Accumulated depreciation was
$l1.2 million as of December 31,2016 and $10.6 million as of December3l,20l5 forthe otherbusinesses.
NOTE 9. ASSET RETIREMENT OBLIGATIONS
The Company has recorded liabilities for future AROs to:
. restore coal ash containment ponds at Colstrip,
. cap a landfill at the Kettle Falls Plant,
. remove plant and restore the land at the Coyote Springs 2 site at the termination ofthe land lease, and
' dispose of PCBs in certain transformers.
Due to an inability to estimate a range of settlement dates, the Company cannot estimate a liability for the:
. removal and disposal ofcertain transmission and distribution assets, and
. abandonment and decommissioning ofcertain hydroelectric generation and natural gas storage facilities.
On April 17 ,2015, the EPA published a final rule regarding coal combustion residuals (CCR), also termed coal combustion byproducts or coal ash, in the
Federal Register, and this rule became effective on October 15, 20t 5. Colstrip, of which Avista Corp. is a l5 percent ou.ner ofunits 3 & 4, produces this
byproduct. The rule established technical requirements for CCR landfills and surface impoundments under Subtitle D ofthe Resource Conservation and
Recovery Act, the nation's primary law for regulating solid waste. The Company, in conjunction with the other Colstrip owners, developed a multi-year
compliance plan to strategically address the CCR requirements and existing state obligations while maintaining operational stability. During 201 5, the
operator ofColstrip provided an initial cost estimate ofthe expected retirement costs associated with cornplying with
I l0
o
Exhibit No. 3
Case Nos. AVU-E-'| 7-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 1, Page 117 ol 177
o
o
AVISTA CORPORATION
the new CCR rule. Based on the initial assessments, Avista Corp. recorded an increase to its ARO of $ I 2.5 million during 201 5 with a corresponding increase
in the cost basis ofthe utility plant. During 20 I 6, due to additional infonnation and updated estimates, the ARO increased to $ I 3.6 million (including
accretion of $0.7 million).
The actual asset retirement costs related to the CCR rule requirements may vary substantially from the estimates used to record the increased ARO due to
uncertainty about the compliance strategies that will be used and the preliminary nature ofavailable data used to estimate costs, such as the quantity ofcoal
ash present at certain sites and the volume offill that will be needed to cap and cover cefiain impoundments. Avista Corp. will coordinate with the plant
operator and continue to gather additional data in future periods to make decisions about compliance strategies and the timing ofclosure activities. As
additional information becomes available, Avista Corp. will update the ARO for these changes in estimates, which could be material. The Company expects
to seek recovery ofany increased costs related to complying with the new rule through customer rates.
The following table documents the changes in the Company's asset retirement obligation during the years ended December 3 I (dollars in thousands):
20t6 2015 2014
Asset retirement obligation at beginning ofyear
Liabilities incurred
Liatrilities settled
Accretion expense
Asset retirement obligation at end ofyear
$ 15,997 $$ ,3s,
(41)
210
3,028
430
{r52e)
617
3,02 8
12,539
(2e)
459
$ 15,sr5 S 1s,997 $
NOTE IO. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
The pension and other postretirement benefit plans described below only relate to Avista Utilities. AEL&P (not discussed below) participates in a defined
contribution multiemployer plan for its union workers and a defined contribution money purchase pension plan for its nonunion workers. METALfr (not
discussed below) has a defined contribution 401 ft) savings plan. None ofthe subsidiary retirement plans, individually or in the aggregate, are significant to
Avista Corp.
Avista Utilities
The Company has a defined benefit pension plan covering the majority ofall regular full+ime employees at Avista Utilities that were hired prior to January 1,
20 I 4. Individual benefits under this plan are based upon the employee's years ofservice, date ofhire and average compensation as specified in the plan. Non-
union employees hired on or after January I , 20 I 4 participate in a defined contribution 40 1 (k) plan in lieu ofa defined benefit pension plan. The Company's
funding policy is to contribute at least the minimum amounts that are required to be funded under the Employee Retirement Income Security Act, but not
more than the maximum amounts that are currently deductible for income tax purposes. The Company contdbuted $ 1 2.0 million in cash to the pension plan
in 2016, $ 12.0 million in 2015 and $32.0 million in 2014. The Company expects to contribute $22.0 million in cash to the pension plan in 2017 .
The Company also has a SERP that provides additional pension benefits to executive officers and certain key employees ofthe Company. The SERP is
intended to provide benefits to individuals whose benefits under the defined benefit pension plan are reduced due to the application of Section 4 I 5 ofthe
Intemal Revenue Code of I 986 and the deferral ofsalary under deferred compensation plans. The liability and expense for this plan are included as pension
benefits in the tables included in this Note-
The Company expects that benefit payments under the pension plan and the SERP will total (dollan in thousands):
20t7 201 8 20t9 2020
Expected benefi t payments $ 30,9 71 $ 32,014 $ 33,047 $ 34,545 $ 35,892 $ 196,322
The expected long-term rate ofretum on plan assets is based on past performance and economic forecasts for the types ofinvestments held by the plan. In
selecting a discount rate, the Company considers yield rates for highly rated corporate bond po(folios with maturities similar to that ofthe expected term of
pension benefits.
The Company provides certain health care and life insurance benefits for eligible retired employees that were hired prior to January I , 2014. The Company
accrues the estimated cost ofpostretirement benefit obligations during the years tlrat employees provide services. The liability and expense ofthis plan are
included as other postretirement benefits. Non-union employees hired on or after January 1 , 20 I 4, will have access to the retiree medical plan upon
retirement; Irowever, Avista Corp. will no longer provide a contribution toward their rnedical premium.
111
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page '118 ot 177
o
Table of Contents
202t Total 2022-2026
o
a
Table of Contents
AVISTA CORPORATION
The Company has a Health Reimbursement Arrangement (HRA) to provide employees with tax-advantaged funds to pay for allowable medical expenses
upon retirement. The amount eamed by tlre employee is fixed on the retirement date based on the employee's years of service and the ending salary. The
liability and expense ofthe HRA are included as otherpostretirement benefits.
The Company provides death benefits to beneficiaries ofexecutive officers who die during their term ofoffice or after retirement. Under the plan, an
executive officer's designated beneficiary will receive a payment equal to twice the executive ofEcer's annual base salary at the time ofdeath (or ifdeath
occurs after retirement, a payment equal to twice the executive officer's total annual pension benefit). The liability and expense for this plan are included as
other postretirement benefi ts.
The Company expects that benefit payments under other postretirement benefit plans will total (dollars in thousands):
20t'l
$ 6911
201 8 2019 2020 2021 Total 2022-2026
Expected benefi t payments
Change in benefit obligation:
Benefit obligation as ofbeginning ofyear
Seilice cost
Interest cost
Acluarial fuain)/loss
Plan change
Cumulative adjustment to reclassiSr liability
Benefits pard
Benefit obligation as ofend ofyear
Change in plan assets:
Fairvalue ofplan assets as ofbeginning ofyear
Actual retum on plan assets
Employer contributions
Benefits paid
Fairvalue ofplan assets as ofend ofyear
Funded status
Unrecognized net actuarial loss
Unrecognized prior service cost
Prepaid (accrued) benefit cost
Additional liability
Accrued benefit liability
Accumulated pension benefi t obligation
Accumulated postretiremenl benefi t obligation:
For retirees
For fully eligible employees
For other participants
$ 7,302 $ 7,580 $6,A',t9 $ 6,67s $
The Company expects to contribute $7.0 million to other postr€tirement benefit plans in 20 I 7, representing expected benefit payments to be paid during the
year excluding the Medicare Part D subsidy. The Company uses a December 3 1 measurement date for its pension and other postretirement benefit plans.
The following table sets forth the pension and otherpostretirerlent benefit plan disclosures as ofDecember3l,20l 6 and 2015 and tlre components ofnet
periodic benefit costs for the years ended December 3 1 ,2016,2Ol 5 and 2014 (dollan in thousands):
Other Post-
retirement Benefits
2016 2015 2016 201 5
$6l 3,503 $
18,302
27,544
39,997
(32,874)
s 666,472
$ 517,234 $
43,212
12,000
634,67 4 $
19,791
26,117
(35,7e0)
(228)
539,31 I S
(4,30s)
12,000
(2e.772)
r 38,79s $
320s
6,1 l0
(3,648)
(t,042)
(3 1,06r) (6,967)
$ 613,503 $ 136,453
t27,989
? or{
5,158
12,668
(1,000)
(t,s2t)
(7,424)
$ 1 38,795
30,868 $
2,49'.?
31,112
(444)
$ 517.234 S 33,36s $ 30,868
$(r 25,5s8) $
I 78,783
/)
(96,269) $
t62,s6t
25
(l 03,088) s
81979
(8,981 )
(t07,927)
92433
(l 0,1 80)
$ (125,5s8) $ (96,269)$ (103,088) $ (107,927)
53,248
(1 78,806)
66J 1',7
(162,e86)
(30,090)
(72,998)
60,6'7 0 $
34,429 $
(25,6',14)
(82,2s3)
65,652
34,498
$ s83,498 $ 542,209
$
$
$41,354 $ 38,645
o
112
Exhibit No. 3
Case Nos. AVU-E-I7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 119 of 177
34,704
Pension Benefits
Table of Contents
AVISTA CORPORATIONO
Pension Benefits
Other Post-
retirenrent Benefits
15 $
2015
16
105,925
2016 201 5
Included in accumulated other comprehensive loss (income) (net oftax):
Unrecognized prior service cost
Unrecognized net actuarial loss
Total
.Less regulatory asset
Accumulated other comprehensive loss for unfunded benefit obligation for
pensions and other postretirement benefi t plans
Weighted-average assumptions as of December 3I:
Discount ratc for bencfit obligation
Discount rate for annual expense
Expected long-term retum on plan assets
Rate of compensation increase
Medical cost trend prc-age 65 - initial
Medical cost trend pre-age 65 - ultimate
Ultimate medical cost trend year pre-age 65
Medical cost trend post:age 65 - inilial
Medical cost trend post-age 65 - ultimate
tlltimate medical cost trend year post-age 65
Pension Bencfits
$$ (s,854) $ (6,6 r 7)
53,303 60,08 r
47 ,449 53,464
(4?,202) (53,341)
I16,209
116,224
(l 08,903)
I 05,94 I
(99,414)
7,321 $6,52'7 $247 $123
Pension Benefits
Other Post-
retirement Benefits
20t6 2015 2016 2015
4.26%
4.57%
5.40%
4.78%
4.57%
4.21o/o
5.30%
4.87o/o
4.23o/o
457%
6.03%
7.00%
5.00%
2023
7.00%
5.00%
2024
Other Post-retirement Bcnefi ts
4.57%
4.16%
6.36%
7.00%
5.00%
2022
7.00%
s.00%
2023o
2016 2015 2014 2016 201 5 2014
Components ofnet periodic benefit cost:
Service cost
lnterest cost
Expected retum on plan assets
Amortization of prior sewice cost
Net loss recognition
Net periodic benefit cost
$18,302 $
2'.1,544
(27,s47\
.,
8,51 r
19,79t $
26,111
(28,2e9)
2
9,451
1,844
5,226
(1,903)
(r,ll6)
4,289
15,7 57 $
26224
(32,13 t)
22
4,731
3,205 $
6,1 l0
(l ,861 )
(1,208)
5,7 28
2,925 $
5,1 58
(1 ,991 )
(r,1 ee)
5,095
$ 26,812 $ 27 ,A62 $ 14,603 g tl ,97 4 $ 9,988 $ 8,340
Plan Assets
The Finance Committee ofthe Company's Board ofDirectors approves investment policies, objectives and strategies that seek an appropriate retum for the
pension plan and other postretirement benefit plans and reviews and approves changes to the investment and funding policies.
The Company has contracted with investment consultants who are responsible for managing/monitoring the individual investment managers. The investment
managers' performance and related individual fund performance is periodically reviewed by an intemal benefits committee and by the Finance Committee to
monitor compliance with investment policy objectives and strategies.
Pension plan assets are invested in mutual funds, trusts and partnerships that hold marketable debt and equity securities, real estate, absolute retum and
commodity funds. ln seeking to obtain the desired retum to fund the pension plan, the investment consultant recommends allocation percentages by asset
classes. These recommendations are reviewed by the intemal benefits committee, which then recomrnends their adoption by the Finance Committee. The
Finance Committee has established target
o
113
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 120 ol 177
2016
$
O
o
Table of Contents
AYISTA CORPORATION
investment allocation percentages by asset classes and also investment ranges for each asset class. The target investment allocation percentages are typically
the midpoint ofthe established range. The target investment allocation percentages by asset classes are indicated in the table below:
2016 201 5
Equity securities
Debt secunties
Real estate
Absolute retum
37%
45%
8%
t0%
27o/o
58o/o
6%
9%
The 201 6 target investment allocation percentages were revised in the fourth quarter of20 I 6 and the pension plan assets were subsequently reinvested
during the fourth quarter of20 I 6 and first quarter of20 I 7 to move toward the new target investment allocation percentages. The target asset allocation
percentages were modi fied to better align the asset allocations with the funded status ofthe pension plan. Future contributions to the plan will also be
increased to improve the funded status of the plan.
The fair value ofpension plan assets invested in debt and equity securities was based primarily on fair value (market prices). The fair value ofinvestment
securities traded on a national securities exchange is determined based on the reported last salesprice; securities traded in the over-tlre-countermarket are
valued at the last reported bid price. Investment securities for which market prices are not readily available or for which market prices do not represent the
value at the time ofpricing, the investment manager estimates fair value based upon other inputs (including valuations ofsecurities that are comparable in
coupon, rating, maturity and industry). lnvestments in common/collective trust funds are presented at estimated fair value , which is determined based on the
unit value of the fund. Unit value is determined by an independent trustee, which sponsors the fund, by dividing the fund's net assets by its units outstanding
at the valuation date. The Company's investments in common/collective trusts have redemption limitations that permit quarterly redemptions following
notice requirements of45 to 60 days. The fair values ofthe closely held investments and partnership interests are based upon the allocated share ofthe fair
value ofthe underlying assets as well as the allocated share ofthe undistributed profits and losses, including realized and unrealized gains and losses. Most
of the Company's investments in closely held investments and pannership intetests have redemption limitations that range from bi-monthly to semi-annually
following redemption notice requirements of60 to 90 days. One investment in a partnership has a lock-up forredemption currently expiring in 2022 and is
subject to extension.
The fair value ofpension plan assets invested in real estate was determined by the investment manager based on three basic approaches:
. properties are extemally appraised on an annual basis by independent appraisers, additional appraisals may be performed as warranted by
specific asset or market conditions,
. property valuations are reviewed quarterly and adjusted as necessary, and
. loans are reflected at fairvalue.
The fair value ofpension plan assets was determined as ofDecember 3 I , 20 I 6 and 20 1 5.
Pension plan other postretirement plan assets whose fair values are measured using net asset value (NAV) are excluded fiom the fair value hierarchy and are
included as reconciling items in the tables below.
114
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page '121 ol 177
o
o
Table of Contents
AVISTA CORPORATION
The fol lowing table discloses by level with in the fair value hierarchy (see Note I 6 for a description of the fair value h ierarchy) of the pension plan's assets
measured and reported as ofDecember 3 | ,2016 at fair value (dollars in thousands):
Levell Level2 Level3 Totals-s 10,179 $Cash equivalents
Fixed income securities:
U.S. govemment issues
Corporate issues
Intemational issues
Municipal issues
Mutual firnds:
U.S. equity securities
Intemational equity securities
Absolute rctum (l)
Plan assets measured at NAV (not subject to hierarchy disclosure)
Common/collective trusts:
Real estate
Inremational equity securities
Partnership/closely held investments:
Absolute retum (1 )
Private equity funds (2)
Real estate
Total
Cash equivalents
Fixed income securities:
U.S- govemment issues
Corporate issues
Intemational issues
Municipal issues
Mutual funds;
U.S. equity securities
lntemational cquity securitics
Absolute retum (1 )
Plan assets measured at NAV (not subject to hierarchy disclosure)
Common/collective trusts:
Real estate
Partnenhip/closely held investments:
Absolute retum (1)
Pnvate equity funds (2)
Real estate
Total
(1)
Level I Level 2
$ 86 $ 10s41
47,845
t87,308
344s8
22,416
87,678
40,343
t3,996
30,919
r93,563
34,145
18,888
10,179
30,919
193,563
34,145
t 8,888
120,856
30,025
6,622
t9,779
29,140
39,077
72
7,649
I 20,856
30,025
6,622
287,694 $$ 540,914oThe following table discloses by level within the fair value hierarchy (see Note I 6 for a description ofthe fair value hierarchy) ofthe pension plan's assets
measured and reponed as ofDecember 3 1, 20 I 5 at fair value (dollars in thousands):
Level 3 Total
s 10,727$
47,845
187,308
344s8
22,416
87,678
40,343
13,996
24,t47
3 8,3 02
73
9,941
142,t03 s 302,668 $517,234
This category invests in multiple strategies to diversifo risk and reduce volatility. The stntegies include: (a) event driven, relative value,
convertible, and fixed income albitrage, (b) distressed investments, (c) long/short equity and fixed income, and (d) market neutral strategies.
This category includes private equity funds that invest primarily in U.S. companies.
o
(2)
I l5
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 122 ol 177
o
Table of Contents
AVISTA CORPORATION
The fair value ofother postretirement plan assets invested in debt and equity securities was based primarily on market prices- The fair value ofinvestment
securities traded on a national securities exchange is determined based on the last reported sales price; securities traded in the over-the-counter malket are
valued at the last repofied bid price. Investment securities for which market prices are not readily available are fair-valued by the investment manager based
upon other inputs (including valuations ofsecurities that are comparable in coupon, rating, maturity and industry). The target asset allocation was 60 percent
equity securities and 40 percent debt securities in both 201 6 and 20 1 5.
The fair value ofother postretirement plan assets was determined as ofDecember 3 I , 20 I 6 and 20 I 5.
The following table discloses by level within the fair value hierarchy (see Note I 6 for a description ofthe fair value hierarchy) ofother postretirement plan
assets measured and repoded as ofDecember 3 | ,2O16 at lair value (dollars in thousands):
Levell Level2 Level3 Total
Cash equivalents
Mutual funds:
Balanced index tund (1)
Total
$6
$$33,365
(l) Thebalancedindexfl:ndisasinglemutualfundthatincludesapercentageofU.S.equitysecurities,fixedincomesecuritiesandlntemationalsecurities.
The following table discloses by level within the fair value hiemrchy (see Note I 6 for a description of the fair value hierarchy) of other postretirement plan
assets measured and reported as ofDecember 3 1,2015 at fair value (dollars in thousands):
Level I Level2 Level 3 Total
Cash equivalents
Mutual funds:
Fixed income securities
U.S. equity securities
Intemational equity securities
Total
9$9
$6$
33,3 59
$ 33,359
1? 15S
$6
o
12,000
13,224
5,635
12,000
13,224
5,635
$ 30,859 $9 $s 30,868
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point increase in the
assumed health care cost rend rate for each year would increase the accumulated postretirement benefit obligation as ofDecember 3 1 , 20 1 6 by $8.6 million
and the service and interest cost by $ I .0 million. A one-percentage-point decrease in the assumed health care cost trend rate for each year would decrease the
accumulated postretirement benefit obligation as ofDecember 3 1, 20 1 6 by $6.7 million and the service and interest cost by $0.7 million.
401 (k) Plans and Executive Deferral Plan
Avista Utilities and METALft have salary deferral 40 1 (k) plans that are defined contribution plans and cover substantially all employees. Employees can
make contributions to their respective accounts in the plans on a pre-tax basis up to the maximum amount permitted by law. The respective company matches
a portion ofthe salary deferred by each participant according to the schedule in the respective plan.
Employer matching contributions were as follows for the years ended December 3 1 (dollars in thousands):
20t6 2015 2014
Employer 40 I (k) matching contributions $8,7r0 $8,011 $6,862
The Company has an Executive Deferral Plan. This plan allows executive officers and otherkey employees the opportunity to deferuntil the earlieroftheir
retirement, termination, disability or death, up to 75 percent of their base salary and/or up to I 00 percent of their incentive payments. Deferred compensation
funds are held by the Company in a Rabbi Trust.
116
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 1, Page 123 ol 177
o
$
o
Table of Contents
AVISTA CORPORATION
There were deferred compensation assets included in other property and investments-net and corresponding defened compensation liabilities included in
other non-current liabilities and deferred credits on the Consolidated Balance Sheets ofthe following amounts as ofDecember 3 I (dollan in thousands):
20t6 20t5
NOTE I I. ACCOTJNTING FOR INCOME TA)(ES
Income tax expense consisted ofthe following for the years ended December 3 I (dollars in thousands):
2016 2015 20t4
Defened income tax expense 124,543 55,237 139,299
State income taxes do not represent a significant portion oftotal income tax expense on the Consolidated Statements of Income for any periods presented.
A reconciliation offederal income taxes derived from statutory federal tax rates (35 percent in 2016,2O1 5 and 20 I 4) applied to income before income taxes
as set forth in the accompanying Consolidated Statements oflncome is as follows for the years ended December 3 1 (dollars in thousands):
2016 2015 2014
1,316 1,012
o
117
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 124 ot 177
o
Deferred compensation assets and liabilities $ 7,679 $8,093
Current income tax expense Oenefit)
$ 78,086 $ 67,449 $ 72,240
Federal income taxes at statutory rates
Increase (decrease) in tax resulting from:
Tax offect ofregu,latory treatrnent ofutiliS, plant
difietences
Stat€ income tax expense
Settlem€nt o:f prior year tax letums andl adju$ment of tax
res€rves
Manufacturi n g deducti on
Settlement of equity awards
Other
Total incotne tax expense
$ 75,391 35.0 % $ 64,967 35.0 % $ 67,217 35.0%
4,008
(334)(6e8)
$ 78,086 36.3 % $ 61A49 36.3 % S 72,24A 3'.7.6%
2.1
0.2
0.6
(0.1)
(0.2)
506
2.3
0.5
1.5
0.6
(0.7)
(0.1 )
13
(1,s97)
(ee2)
(r,198)
(0.s)
(0 6)
(0.4)
1,104
,,?
o
O
Table of Contents
AVISTA CORPORATION
Defened income taxes reflect the net tax effects oftemponry differences between the carrying amounts ofassets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and tax credit carryforwards. The total net deferred income tax liability consisted ofthe following as
ofDecember 3 I (dollars in thousands):
2016 2015
Deferred Income tax assetsl
Unfu nded benefi t obligation
Derivatives
Regulatory deferred tax credits
Tax credits
Power and natural gas deferrals
Deferred compensation
Other
Total gross deferred income tax agsets
Valuation allowances for defened tax assets
Total deferred income tax assets aftervaluation allowances
Deferred income tax Iiabilities:
Differences between book and tax basis ofutility plant
Regulatory asset on utility, property plant and equiprnent
Regulatory asset for pensions and other postretirement benefits
Utility energy commodity derivatives
Long-tehh debt and borrowing costs
Scttlement with Coeur d'Alenc Tribe
Otherregulatory assets
Other
Total deferred income tax liabilities
Net long-term deferred income tax liability
207 ,34'.t 187,565
1,048,275 935,042
$ 80,230 S 75,716
31,8'12 47,009
t 5,192
27 ,911 15,01 I
19,415 t2,866
r 1,141 10J54
29,5t2 29,4',11
2t5,291 r90A27
(7,946) (2,862)
812,916
37,301
84,040
3 I ,871
3l,955
1 1,71 I
30,1 83
8,298
723,661
36,9t'7
82,253
47,010
14,A27
12,084
I I,691
7,399
$ 840,928 $ 747A77
The realization ofdeferred income tax assets is dependent upon the ability to generate taxable income in future periods. The Company evaluated available
evidence supporting the realization ofits defened income tax assets and determined it is more likely than not that deferred income tax assets will be realized.
As of December 3 I , 2016, the Company had $ 17. t million of state tax credit carryforwards of which it is expected $7.9 million may expire unused; the
Company has reflected the net amount of$9.2 million as an asset at December 3 1,201 6. State tax credits expire from 201 9 to 2028.
The Company and its eligible subsidiaries file consolidated federal income tax rctums. The Company also files state income tax retums in cenain
jurisdictions, including Idaho, Oregon and Montana. Subsidiaries are charged or credited with the tax effects oftheir operations on a stand-alone basis. The
Intemal Revenue Service (IRS) has completed its examination ofall tax years through 20 I I and all issues were resolved related to these years. The statute of
limitations for the IRS to review the 20 I 2 tax year has expired, leaving the 20 I 3 through 20 1 5 tax yean still open for review. The Company believes that any
open tax years for federal or state income taxes will not result in adjustrnents that would be significant to the consolidated financial statements.
The Company had net regulatory assets related to the probable recovery ofcertain defened income tax liabilities from customes through future rates as of
December 3 1 (dollars in thousands):
20t6 20t5
Regulatory assets for deferred income taxes
Regulatory I iabi li ti es for deferred income taxes
$109,85 3 $
28,966
101,240
t] ,609
NOTE I2. ENERGY PU'RCHASE CONTRACTS
The below discussion only relates to Avista Utilities. The sole energy purchase contract at AEL&P is a PPA for the Snettisham hydroelectric project and it is
accounted for as a capital lease. AEL&P does not have any other signilicant operating agreements or contractual obligations. See Note I 4 for further
discussion ofthe Snettisham PPA.
Avista Utilities has contracts for the purchase offuel for thermal generation, natural gas for resale and various agreements for the purchase or exchange of
electric energy with other entities. The remaining term ofthe contracts rango from one month to twenty-five years.
o 118
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 125 of 177
o
Tabl€ of Conterts
AVISTA CORPORATION
Total expenses for power purchased, natural gas purchased, fuel for generation and other fuel costs, which are included in utility resource costs in the
Consolidated Statements oflncome, were as follows for the years ended December 3 I (dollars in thousands):
Utility power resources
2016 2015 2014
$ s1 1,937 $ 556915
The following table details Avista Utilities' future contractual commitments for power resources (including transmission contracts) and natural gas resources
(including transportation contracts) (dollars in thousands):
2017 201 8 20t9 2020 2021 Thercafter Total
t7428s $ lorf?8 $Power resources
Natural gas resources
Total
$202494
95,549
187,080 $
65,230 53,860 41,340
9648s
29,306
77 5,548
349,468
s$$ 1,s45,770
634,7 53
$ 298,043 $ 252,310 s 228,145 $ l5r,2l8 g tz5,791 $l ,125,016 $ 2,180,523
o
These energy purchase contracts were entered into as part ofAvista Utilities' obligation to serve its retail electric and natural gas customers' energy
requirements, including contracts entered into for resource optimization. As a result, these costs are recovered either through base retail rates or adjustments
to retail rates as part ofthe power and natural gas cost deferral and recovery mechanisms.
The above future contractual commitments for power resources include fixed contractual amounts related to the Company's contracts with certain PUDs to
purchase portions ofthe output ofcertain generating facilities. Although Avista Utilities has no investment in the PUD generating facilities, the fixed
contracts obligate Avista Utilities to pay certain minimum amounts whether or not the facilities are operating. The cost ofpower obtained under the contracts,
including payments made when a facility is not operating, is included in utility resource costs in the Consolidated Statements oflncome. The contractual
amounts included above consist ofAvista Utilities' share ofexisting debt service cost and its proportionate share ofthe variable operating expenses ofthese
projects. The minimum amounts payable under these contracts are based in part on the proportionate share ofthe debt service requirements ofthe PUD's
revenue bonds for which the Company is indirectly responsible. The Company's total future debt sewice obligation associated with the revenue bonds
outstanding at December 3 1 , 201 6 (principal and interest) was $65.2 million.
In addition, Avista Utilities has operating agreements, settlements and other contractual obligations related to its generating facilities and transmission and
distribution services. The expenses associated with these agreements are reflected as other operating expenses in the Consolidated Statements oflncome. The
following table details future contractual commitments under these agreements (dollars in thousands):
2017 201 8 20t9 2020 2021 Thereafter Total
Contractual obligations $ 33,922 $ 28,783 $ 32,160 $27,019 $ 189,000 r ___343,4n_
NOTE 13. COMMITTED LI}IES OF CREDIT
Avista Corp.
Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million. A two-year option was exercised by the
Company in 201 6 to extend the maturity of the facility agreement to April 202 I .
The committed line ofcredit agreement contains customary covenants and default provisions. The credit agreement has a covenant which does not permit the
ratio of"consolidated total debf' to "consolidated total capitalization" ofAvista Corp. to be greater than 65 percent at any time. As ofDecember 3 I , 20 I 6,
the Company was in compliance with this covenant.
Balances outstanding and interest rates ofborrowings (excluding letters ofcredit) under the Company's revolving committed lines ofcredit were as follows
as ofDecember 3 I (dollars in thousands):
2016 201 5
.Balance outstanding at end ofperiod $ I 20,000 $ I 05,000
Letters ofcredit outstanding at end ofperiod $ 34,353 $ 44,595
Average interest mt6 at end ofperiod 1.50o/o 1.18%
As of December 3 I , 2016 and 201 5, the borrowings outstanding under Avista Corp.'s committed line of credit were classified as short-term borrowings on the
Consolidated Balance Sheet.
I 19
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 126 ot 177
o
Table of Conlents
AVISTA CORPORATION
AEL&P
AEL&P has a committed line of credit in the amount of $25.0 million that expires in Novernber 2019. As of December 3 I , 201 6 and 201 5, there were no
borrowings or letten ofcredit outstanding under this committed line ofcredit.
The committed line ofcredit agreement contains customary covenants and default provisions. The credit agreement has a covenant which does not permit the
ratio of"consolidated total debt at AEL&P" to "consolidated total capitalization at AEL&P," including the impact ofthe Snettisham bonds to be greater than
67.5 percent at any time. As of December 3 I , 201 6, AEL&P was in compliance with this covenant.
120
a
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 127 ot 177
o
Table of Contents
AVISTA CORPORATIONo
a
NOTE 14. LONG-TERM DEBT AND CAPITAL LEASES
Thefollowingdetailslong-termdebtoutstandingasofDecember3l (dollarsinthousands):
Maturity
Ycar
Avista Corp. Secured Long-Term Debt
2016 First Mortgage Bonds (l )
2018 First l\dortgage Bonds
2018 Secured Medium-Term Notes
2}lg First Mortgage Bonds
2020 First Mortgage Bonds
2022 Firsl Mortgage Bonds
2023 Secured Medium-Tenn Notes
2028 Secured Medium-Terr-n Notes
2032 Secured Pollution Control Bonds (2)
2034 Secured Pollution Control Bonds (2)
2035 First Mortgage Bonds
2037 First Mortgag€ Bonds
2040 First Mortgage Bonds
2041 Firct Mortgage Bonds
2044 First Mortgage Bonds
2045 Fint Mortgage Bonds
2047 First Mortgage Bonds
2051 First Mortgage Bonds (3)
Total Avista Corp. secured long+erm debt
Alaska Electric Light and Power Company Secured Long-Term Debt
2044 First Mortgage Bonds
Total seewed long-term debt
Alaska Energy and Resources Company Unsecured Long-Term Debt
2Ol9 UnsecuredTermLoan
Total secured and unsecured long-term debt
Other Long-Term Debt Comporents
Capital lease obligations
Settled interest rate swap derivatives (4)
Unamortized debt discount
Unamortized long-term debt issuarce costs
Total
Secured Pollution Control Bonds held by Avista Corporation (2)
Current portion oflong-term debt and capital leases
Total long-term debt and capital leases
(l)
Interest
Rate 2016 2015
0.840/o
5.95%
7 .39%-7.45%
5.45%
3.89%
5.13%
7.18%-7.54%
6.37%
(2)
Q)
6.25%
5.70%
5.55%
4.45%
4.11%
437%
4.23o/o
1.s4%
250,000
22,500
90,000
52,000
250,000
I 3,5 00
25,000
66,700
17,000
150,000
150,000
3 5,000
85,000
60,000
100,000
80,000
175,000
90,000
250,000
22,500
90,000
5 2,000
250,000
r 3,500
25,000
66,700
17,000
l 50,000
150,000
3 5,000
85,000
60,000
100,000
80,000
$$
1,621,700
75,000
1,536,700
7 5,0004.54%
3.85%
1.696,700
15,000
i ,61 1 ,700
15,000
1,626,700
(7e2)
(t 0,639)
68,601
(26,5 r s)
(es6)
(l 0,852)
I ,7 65,'7 04
(83,700)
(3,287)
t,656,978
(83,700)
(93,167)
$ 1,678,717 $ 1380,1l l
ln August 2016, Avista Corp. entered into a term loan agreement with a commercial bank in the amount of $70.0 million with a maturity date of
December 30, 20 1 6. Loans under this agreement were unsecured and had a variable annual interest rate. The Company borrowed the entire $70.0
million available under this agreement, which was used to repay a portion of the $90.0 million in first mortgage bonds that matured in August 2016.
This term loan was subsequently repaid in full in December using the proceeds from the first mortgage bonds issued in December 20 I 6 (discussed
below).
o
121
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 1, Page 128ot 177
t,711,700
65,435
Table of Contents
AVISTA CORPORATIONo
o
In December 201 0, $66.7 million and $ I 7.0 million of the City of Forsyth, Montana Pollution Control Revenue Refunding Bonds (Avista
Corporation Colstrip Project) due in 2032 and 2034, respectively, which had been held by Avista Corp. since 2008 and 2009, respectively, were
refunded by new bond issues (Series 20 I 0A and Series 20 I 0B). The new bonds were not offered to the public and were purchased by Avista Corp.
due to market conditions. The Company expects that at a later date, subject to market conditions, these bonds may be remarketed to unaffiliated
investors. So long as Avista Corp. is the holder ofthese bonds, the bonds will not be reflected as an asset or a liability on Avista Corp.'s
Consolidated Balance Sheets.
InDecember20l6,AvistaCorp.issuedandsold$lT5.0millionof3.54percentfirstmortgagebondsduein205l pursuanttoabondpurchase
agreement with institutional investors in the private placement market. The total net proceeds Aom the sale ofthe bonds were used to repay the
$70.0 million term loan discussed above and to repay a portion of the borrowings outstanding under the Company's $400.0 million committed line
ofcredit. In connection with the execution ofthe bond purchase agrcement, the Company cash-settled seven interest rate swap derivatives (notional
aggregate amount of $125.0 million) and paid a total of $54.0 million.
Prior to December 3 I , 20 I 6, settled interest rate swap derivatives were included as part oflong-term debt on the Consolidated Balance Sheets
because they were considered similarto a debt discount orpremium. During 2016, the Company reevaluated the presentation ofsettled interest rate
swap derivatives and determined that since they are regulatory assets and liabilities that are being recovered through the ratemaking process, the
more appropriate classification is as regulatory assets and liabilities rather than as a component oflong-term debt. As such, as ofDecember 3 I , 20 I 6,
the Company has included unamortized settled interest rate swap derivatives of$9 I .9 million in regulatory assets and $ I 2.4 million in regulatory
liabilities. The Company did not reclassif any arnounts as ofDecember 3 I , 20 1 5 and prior because the amounts are not material to the financial
statements. The increase in settled interest rate swap derivatives during 2016 is due to the cash settlement ofinterest rate swap derivatives discussed
in detail above. There is no impact to the Consolidated Statements oflncome and the Consolidated Statements ofCash Flows for any periods as a
result ofthe balance sheet reclassification.
The following table details future long-term debt maturities including long-term debt to affliated trusts (see Note l5) (dollars in thousands):
(4)
(2)
(3)
Debt maturities
201'7 201 8
b - " -r,t*
2020 2021
tr4r*b-
201 9
$ 105,000
Thereafter Total
$ I,250,047 $r,67 9,547
Substantially all ofAvista Utilities'and AEL&P's owned prope(ies are subject to the lien oftheirrespective mortgage indentures. Underthe Mortgages and
Deeds of Trust (Mortgages) securing their fint mortgage bonds (including secured medium-term notes), Avista Utilities and AEL&P may each issue
additional first mortgage bonds under their specific mortgage in an aggregate principal amount equal to the sum of:
66-213 percent ofthe cost or fair value (whichever is lower) ofproperty additions ofthat entity which have not previously been made the basis of
any application under that entity's Mortgage, or
an equal principal amount ofretired first mortgage bonds ofthat entity which have not previously been made the basis ofany application under that
entity's Mortgage, or
deposit ofcash.
However, Avista Utilities and AEL&P may not individually issue any additional first rnortgage bonds (with certain exceptions in the case ofbonds issued on
the basis ofretired bonds) unless the particular entity issuing the bonds has "net eamings" (as defined in that entity's Mortgage) for any period of I 2
consecutive calendarmonths out ofthe preceding I 8 calendarmonths that were at least twice the annual interest requirements on all mortgage securities at
the time outstanding, including the first mortgage bonds to be issued, and on all indebtedness ofprior rank. As ofDecember 3 1, 20 I 6, property additions and
retired bonds would have allowed, and the net eamings test would not have prohibited, the issuance of$ I .2 billion in aggregate principal amount of
additional first mortgage bonds at Avista Utilities and $20.8 million at AEL&P.
Snellisham C ap ita I Le a se Ob ligation
Included in long-term capital leases above is a power purchase agreement between AEL&P and AIDEA, an agency ofthe State ofAlaska, under which
AEL&P has a take-or-pay obligation, expiring in December 2038, to purchase all the output ofthe 78 MW Snettisham Hydroelectric Project. For accounting
purposes, this powerpurchase agreement is treated as a capital lease.
122
o
Exhibit No. 3
Case Nos. AVU-E- 17-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 1, Page 129 of 177
Table of Contents
AVISTA CORPORATIONo
o
The balances related to the Snettisham capital lease obligation as ofDecember 3 I were as follows (dollars in thousands):
Capital lease obligation (t )
Capital lease assct (2)
Accumulated amoitization ofoapital lease asset (2)
(l) ThecapitalleaseobligationamountisequaltotheamountofAlDEA'srevenuebondsoutstanding.
(2) These amounts are included in utility plant in service on the Consolidated Balance Sheets.
z0t6 2015
62,160 $
7 t ,007
9,104
64,455
7 | ,007
5,462
lnterest on the capital lease obligation and amortization ofthe capital lease asset are included in utility resource costs in the Consolidated Statements of
Income and totaled the following amounts for the years ended December 3 I (dollan in thousands):
2016 201 5
Intetest on capital lease obligation
Amortization of capital leasc asset
s 3,157 $
3,642
3,587
3,641
AIDEA issued $ I 00.0 million ofrevenue bonds in 1 998 to finance its acquisition ofthe project and the payments by AEL&P were designed to be sufficient
to enable the AIDEA to pay the principal ofand interest on its revenue bonds, which bore interest at rates ranging from 4.9 percent to 6.0 percent and were set
to mature in January 2034.
In August 20 I 5, AIDEA issued $65.7 million ofnew revenue bonds for the purpose ofrefunding all ofthe remaining outstanding revenue bonds for the
Snettisham Hydroelectric Project. The new revenue bonds have interest rates ranging from 4.0 percent to 5.0 percent and mature in January 2034. The capital
lease obligation on Avista Corp.'s Consolidated Balance Sheet at any given time is equal to the amount ofrevenue bonds outstanding at that time. AEL&P is
scheduled to make its last capital lease payment to AIDEA in December 2033. The payments by AEL&P under the PPA between AEL&P and AIDEA are
unconditional, notwithstanding any suspension, reduction or curtailment ofthe operation ofthe project. The bonds are payable solely out ofAIDEA's
receipts underthe powerpurchase agreement. AEL&P is also obligated to operate, maintain and insure the project. The PPA did not change as a result ofthe
refunding, other than lower capital lease payments, and the lower capital lease payments that resulted from the refunding will be passed through to AEL&P's
customers. AEL&P's payments for power under the agreement are between $ I 0.0 million and $ 10.5 million per year, including the capital lease principal and
interest ofapproximately $5.5 million per year.
Snettisham Electric Company, a non-operating subsidiary ofAERC, has the option to purchase the Snettisham project with certain conditions at any time for
the principal amount ofthe bonds outstanding at that time.
While the power purchase agreement is treated as a capital lease for accounting purposes, for ratemaking purposes this agreement is treated as an operating
lease with a constant level ofannual rental expense (straight line expense). Because ofthis regulatory treatment, any difference between the operating lease
expense for raternaking purposes and the expenses recognized under capital lease treatment (interest and depreciation ofthe capital lease asset) is reconded as
a regulatory asset and amortized during the later years ofthe lease when the capital lease expense is less than the operating lease expense included in base
rates.
The Company evaluated this agrcement to determine if it has a variable interest which must be consolidated. Based on this evaluation, AIDEA will not be
consolidatedunderASC8l0"Consolidation"becauseAIDEAisagovemmentagencyandASC8l0hasaspecificscopeexceptionwhichdoesnotallowfor
the consolidation of govemment organizations.
The following table details future capital lease obligations, including interest, under the Snettisham PPA (dollars in thousands):
201? 201 8 2019 2020 2021 Thereafter Total
Principal
Interest
Total
$2,415 $
3,042
2,53s $
2,921
2,660 $
I 70 <
2,800 $
2,662
2,935 $
') {r)
48,81 5 $
| 6,67 4
62J64
3 0,61 6
$ 5,4s5 $ 6sy'89 $92,716
NOTE I5. LONG-TERM DEBT TO AFFILIATED TRUSTS
In t 997, the Company issued Floating Rate Junior Subordinated Deferrable Interest Debentures, Series B, with a principal amount of $51.5 million to Avista
Capital II, an affiliated business trust formed by the Company. Avista Capital II issued $50.0 million of Prefened Trust Securities with a floating distribution
rate ofLIBOR plus 0.875 percent, calculated and reset quarterly.
123
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule '1 , Page I 30 of 177
$
Table of Contents
AVISTA CORPORATIONO
The distribution rates paid were as follows during the years ended December 3 I
Low distribution rate
High distnbution ratc
Distribution rate at the end ofthe year
2016 201 5 20t4
1.29o/o
1.81%
1.81o/o
l.t t%
1.29%
1.29%
1.t0%
l.t1%
1 .l lo/o
o
Concurrent with the issuance of the Prefened Trust Securities, Avista Capital II issued $ 1 .5 million of Common Trust Securities to the Company. These debt
securities may be redeemed at the option ofAvista Capital II at any time and mature on June I , 2037. In December 2000, the Company purchased $ I 0.0
million ofthese Preferred Trust Securities.
The Company owns I 00 percent ofAvista Capital II and has solely and unconditionally guaranteed the payment ofdistributions on, and redemption price
and liquidation amount for, the Prefened Trust Securities to the extent that Avista Capital II has funds available for such payments from the respective debt
securities. Upon maturity or prior redemption ofsuch debt securities, the Preferred Trust Securities will be mandatorily redeemed. The Company does not
include these capital trusts in its consolidated financial statements as Avista Corp. is not the primary beneficiary. As such, the sole assets ofthe capital trusts
are $5 I .5 million ofjunior subordinated deferrable interest debentures ofAvista Corp., which are reflected on the Consolidated Balance Sheets. lnterest
expense to affiliated trusts in the Consolidated Statements of Income represents interest expense on these debentures.
NOTE l6.FAIRVALI,]E
The carrying values ofcash and cash equivalents, accounts and notes receivable, accounts payable and short-term borrowings are reasonable estimates of
their fair values. Long-term debt (including cunent portion and material capital leases) and long-term debt to affiliated trusts are reported at carrying value on
the Consolidated Balance Sheets.
The fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level I measurements) and the lowest priority to fair values derived from unobservable inputs (Level 3
measurements).
The three levels ofthe fair value hierarchy are defined as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities. Active marftets are those in whi ch transactions for the asset or
liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Pricing inputs are other than quoted prices in active markets included in Level I , but which are either directly or indirectly observable as of
the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily
industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current
market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all ofthese assumptions are
observable in the marketplace throughout the full term ofthe instrument, can be derived from observable data or are supported by observable levels at which
transactions are executed in the marketplace.
Level 3 - Pricing inputs include significant inputs that are generally unobservable from objective sources. These inputs may be used with intemally
developed methodologies that result in management's best estimate of fair value.
Financial assets and liabilities are classified in their entirety based on the lowest level ofinput that is significant to the fairvalue measurement. The
Company's assessment ofthe significance ofa particular input to the fair value measurement requiresjudgment, and may affect the valuation offair value
assets and liabilities and their placement within the fair value hierarchy levels. The determination ofthe fair values incorporates various factors that not only
include the credit standing ofthe counterparties involved and the impact ofcredit enhancements (such as cash deposits and letters ofcredit), but also the
impact of Avista Corp.'s nonperformance risk on its liabilities.
124
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
Schedule 1, Page 131 of 177
o
Table of Cont€trts
AVISTA CORPORATION
The following table sets forth the carrying value and estimated fairvalue of the Company's financial instruments not reported at estimated fairvalue on the
Consolidated Balance Sheets as ofDecernber 3 I (dollars in thousands):
201 6 2015
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
Long-term debt (Level 2)
Long-term debt (Level 3)
Snettisham capital lease obligation (Level 3)
Long-term debt to affiliated trusts (Level 3)
December 31,2016
Assets:
Energy commodity derivatives
Level 3 energy commodily derivatives:
Natural gas exchange agreements
Power exchange agreement
Foreign cunency exchange derivatives
Interest rate swap derivatives
Defened compen sation assets:
Fixcd income securities (2)
Equity securities (2)
Total
Liabilities:
Energy comrrodity derivatives
Level 3 energy commodity derivatives:
Natural gas exchange agreement
Power exchange agreement
Power option agreement
Interest rate swap derivatives
Foreign currency exchange derivatives
Total
7,270 $61 ,097 $
$ (46i099) $1 ,895
(6e)
(2s)
(5)
(4,348)8,750
l ,789
5,481
_q______(5 0,54 6)_ j______I,r r 5_
$ (ss,es7) $ el4
5,885
13,449
76
(39,248)
(s)
34,730
23
$951,000 $
677,000
62,160
5t,547
1,048,661 $
67 5,251
62,800
3 8,660
Level 3
951,000 $
5 92,000
64A5s
5t,547
1 ,055,797
595,018
63,ts}
3 6,083
Total
These estimates of fair value of long{enn debt and long-term debt to affiliated tnrsts were primarily based on available market information, wlrich generally
consists of estimated ma*et prices from third party brokers for debt with similar risk and terms. The price ranges obtained from the third party brokers
consisted ofpar values of 75.00 to I 22.59, where a par value of I 00.00 represents the carrying value recorded on the Consolidated Balance Sheets. Level 2
long-term debt represents publicly issued bonds with quoted market prices; however, due to their limited trading activity, they are ciassified as Level 2
because brokers must genente quotes and make estimates using comparable debt with similar risk and terms ifthere is no trading activity near a period end.
Level 3 long-term debt consists ofprivate placement bonds and debt to affiliated trusts, which typically have no secondary trading activity. Fair values in
Level 3 are estimated based on market prices from third party brokers using secondary market quotes for debt with similar risk and terms to generate quotes
for Avista Corp. bonds. Due to the unique nature ofthe Snettisham capital lease obligation, the estimated fair value ofthese items was determined based on a
discounted cash flow model using available market infomation. Prior to December 3 1 , 2016, the Snettisham capital lease obligation was discounted to
present value using the Moody's Aaa Corporate discount rate as published by the Federal Reserve. This rate was discontinued during the fourth quarter of
201 6, as such going forward, the Company is using the Morgan Markets A Ex-Fin discount rate, which is the closest approximation to the rate previously
used.
The following table discloses by level within the fair value hierarchy the Company's assets and liabilities measured and reported on the Consolidated
BalanceSheetsasofDecember3l,20l6and20l5atfairvalueonarecurringbasis(dollarsinthousands):
o Level 1 Level2
Counterparty
and Cash
Collateral
Netting (l )
$$ 47,994 $
69
25
1,?89
5y'81
s
$
94
$56,87r S
73,978
28
5 q54
13,474
76
(6e)
(25)
$$ l 30,877 S l 9,504 $ (9s,304) S 55,077
t25
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 132 ot 177
5
13,098
Table of Contents
AVISTA CORPORATIONo
Level I Level 2 Level 3
Counterparty
and Cash
Collateral
Netting (l )Total
December 31,201 5
Assets!
Energy commodity derivatives
Level 3 energy commodity derivalives:
Natural gas exchange agreement
Foreign currency exchange derivatives
lnterest rate swap derivatives
Deferred compensation assets:
Fixed income securities (2)
Equity securities (2)
Total
Liabilities:
Energy commodity derivatives
Level 3 energy commodity derivatives:
Natural gas exchange agreement
Power exchange agreement
Power option agreement
Foreign currency exchange derivatives
Interest rate swap derivatives
Total
$ 74,637 $$ (73,9s4) $683
678 (678)
(2),)
1,548 1,548
1,727
5,7 61
1,727
5,7 61
$7A88 $76,187 $678 $ (74,634) $9,7 l9
8,713
5,039
21,961
124
t7
85,498
$$97,193 $$(88,480) $
(678)5,7 t'1
21,961
124
19
85,4 9 8
Q\
o $$ 182,710 S 27,802 $ (89,1 60) S l2i .3s2
(l) TheCompanyispennittedtonetderivativeassetsandderivativeliabilitieswiththesamecounterpartywhenalegallyenforceablemasternetting
agr€ement exists. In addition, the Company nets derivative assets and derivative liabilities against any payables and receivables for cash collateral held
orplaced with these same counterparties.
(2) These assets are trading securities and are included in otherproperty and investments-net and othernon-current assets on the Consolidated Balance
Sheets.
The difference between the amount ofderivative assets and liabilities disclosed in respective levels in the table above and the amount ofderivative assets
and liabilities disclosed on the Consolidated Balance Sheets is due to netting arrangements witlr certain counterparties. See Note 6 for additional discussion
ofderivative netting.
To establish fair value for energy commodity derivatives, the Company uses quoted market prices and forward price curves to estimate the fair value ofutility
derivative commodity instruments included in Level 2.ln particular, electric derivative valuations are performed using market quotes, adjusted forperiods in
between quotable periods. Natural gas derivative valuations are estimated using New York Mercantile Exchange (NYMEX) pricing for similar instruments,
adjusted forbasin differences, using martet quotes. Where observable inputs are available for substantially the full term ofthe contract, the derivative asset or
liability is included in Level 2.
To establish fair values for interest rate swap derivatives, the Company uses forward market curves for interest rates for the term ofthe swaps and discounts the
cash flows back to present value using an appropriate discount rate. The discount rate is calculated by third party brokers according to the terms ofthe swap
derivatives and evaluated by the Company for reasonableness, with consideration given to the potential non-performance risk by the Company. Future cash
flows ofthe interest rate swap derivatives are equal to the fixed interest rate in the swap compared to the floating market interest rate multiplied by the
notional amount for each period.
To establish fair value for foreign currency derivatives, the Company uses forward market curves for Canadian dollars against the US dollar and multiplies the
difference between the locked-in price and tlre market price by the notional amount ofthe derivative. Forward foreign currency market curves are provided by
third party brokers. The Company's credit spread is factored into the locked-in price ofthe foreign exchange contracts.
Deferred compensation assets and liabilities represent funds held by the Company in a Rabbi Trust for an executive deferral plan. These funds consist of
actively traded equity and bond funds with quoted prices in active markets. The balance disclosed
o
126
Exhibit No. 3
Case Nos. AVU-E-I7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 133 ol 177
$
o
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Table of Contents
AVISTA CORPORATION
inthetableaboveexcludescashandcashequivalentsofS0.4millionasofDecember3l,20l6and$0.6millionasofDecember31,20l5.
Level 3 FairValue
Under the power exchange agreement the Company purchases power at a price that is based on the average operating and maintenance (O&M) charges from
three surrogate nuclearpowerplants around the country. To estimate the fairvalue ofthis agreement the Company estimates the difference between the
purchase price based on the future O&M charges and forward prices for energy. The Company compares the Level 2 brokered quotes and forward price curves
described above to an intemally developed forward price which is based on the average O&M charges from the three surrogate nuclear power plants for the
current year. Because the nuclear powerplant O&M charges are only known for one year, all forward years are estimated assuming an annual escalation. In
addition to the forward price being estimated using unobservable inputs, the Company also estimates the volumes ofthe transactions that \ryill take place in
the future based on histoncal average transaction volumes per delivery year (November to April). Significant increases or decreases in any ofthese inputs in
isolation would result in a significantly higher or lower fair value measurement. Generally, a change in the current year O&M charges for the sunogate plants
is accompanied by a directionally similar change in O&M charges in future years. There is generally not a correlation between extemal market prices and the
O&M charges used to develop the intemal forward price.
For the power cornmodity option agreement, the Company uses the Black-Scholes-Merton valuation model to estimate the fair value, and this model includes
significant inputs not observable or corroborated in the market. These inputs include: I ) the strike price (which is an intemally derived price based on a
combination ofgeneration plant heat rate factors, natural gas market pricing, delivery and other O&M charges), 2) estimated delivery volumes, and 3)
volatility rates. Significant increases or decreases in any ofthese inputs in isolation would result in a significantly higher or lower fair value measurement.
Generally, changes in overall commodity market prices and volatility rates are accompanied by directionally similar changes in the strike price and volatility
assumptions used in the calculation.
For the natural gas commodity exchange agreement, the Company uses the same Level 2 brokered quotes described above; however, the Company also
estimates the purchase and sales volumes (within contractual limits) as well as the timing of those transactions. Changing the timing of volume estimates
changes the timing ofpurchases and sales, impacting which brokered quote is used. Because the brokered quotes can vary significantly fom period to period
the unobservable estimates ofthe timing and volume oftransactions can have a significant impact on the calculated fair value. The Company currently
estimates volumes and timing oftransactions based on a most likely scenario using historical data. Historically, the timing and volume oftransactions have
not been highly correlated with ma*et prices and market volatility.
The following table presents the quantitative information which was used to est'imate the fair values ofthe Level 3 assets and liabilities above as of
December 3 1, 201 6 (dollars in thousands):
Fair Value (Net) at
December3l,20l6 ValuationTechnique Unobservable Input Range
Power exchange agreement (13;449\Surrogate facility
pricing
O&M charges
Escalation factor
Transaction volumes
$33.s9-$49.1 5/r\.{W} (r )
3% - 2017 to 2019
24r,558 -396,984 MWhs
Power option agreement (7 6)Black-Scholes-
Merton
Strike price
Delivery volumes
s37.83/MWh -2019
s54.40/MWh - 2018
157,517 - 285,979 MWhs
0.20 Q)Volatil rates
Natural gas exchange
agrcement
(s Intemally derived Forward
prices
Forward sales prices
Purchase volumes
Sales volumes
$1.83 - $3.06/mmBTU
$I.90 - $5.14/rffnBTU
I I 5,000 - 3 10,000 mmBTUs
60.000 - 310,000 rnmBTUs
(l ) The average O&M charges for the delivery year beginning in November 2016 were $39.22 per MWh. For ratemaking purposes the average 0&M charges
to be included for recovery in retail rates vary slightly between regulatory jurisdictions. The average O&M charges for the delivery year beginning in
2016 were $44.33 forWashington and $39.22 forldaho.
(2) The estimated volatility rate of 0.20 is compared to actual quoted volatility rates of 0.3 5 for 2017 to 0.26 in December 201 8.
127
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-'l7-_
M. Thies, Avista
Schedule 1, Page 134 ol 177
oost ofgas
o
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Table of Contents
AVISTA CORPORATION
The valuation methods, significant inputs and resulting fairvalues described above were developed by the Company's management and are reviewed on at
least a quarterly basis to ensure they provide a reasonable estimate offair value each reporting period.
The following table presents activity for energy commodity derivative assets (liabilities) measured at fair value using significant unobservable inputs (Level
3 ) for the years ended December 3 I (dollars in thousands):
Natural GasExchange PowerExchange PowerOption
AgreementAgreement Agreemenl Total
Year endeil December 3l, 2016:
Balance as ofJanuary 1,20 I 6
Total gains or fl osses) (realized/unrealized):
Included in regulatory assets/liabilities (l )
Settlements
Ending balance as ofDecember 3 I ,201 6 (2)
Year ended December 31, 2015:
Balancc as ofJanuary l. 20 I 5
Total gains or (losses) (realizedlunrealized):
Included in regulatory assets/liabilities (l )
Settlements
Ending balance as ofDecember 3 I,2015 (2)
Ycar ended December 31, 2014:
Balance as ofJanuary I , 20 I 4
Total gains or (osses) (realizedlunrealized):
Included in regulatory assets/liabilities (l )
Settlernents
Ending balance as ofDecember 3 1,2014 Q)
(1,1 05)8,1 l2
(s,885) $ (13,449)$ (19,410)
(424) $ (23,7s8)
259 400 48
$ (76)
707
7,00'7
$
$(3s) $ (23,2ee) $
(6,008)
1,004
(6,1 9 8)
7,536
(r r,906)
8,540
s (5,039) $ (21,e6r) $(t24\ $ (27,t24)
$(1,219\ $ (14,441) $(77s) $ (16,435)
3,873
(2,689)
(r 0,002)
1,144
351 (5,77 8)
(r,s4s)
$(3s) $ (23,2ee) $(424) $ (23,7s8)
t.27
(l) Allgainsandlossesareincludedinotherregulatoryassetsandliabilities.Therewerenogainsandlossesincludedineithernetincomeorother
comprehensive income during any ofthe periods presented in the table above.
(2) There were no purchases, issuances or transfers from other categories ofany derivatives instmments during the periods presented in the table above.
NOTE IT.COMMONSTOCK
The payment of dividends on common stock could be limited by:
. cetain covenants applicable to preferred stock (when outstanding) contained in the Company's Restated Articles oflncorporation, as
amended (currently there are no prefened shares outstanding),
. certain covenants applicable to the Company's outstanding long+erm debt and committed line ofcredit agreements,
. the hydroelectric licensing requirements of section I 0(d) of the FPA (see Note I ), and
. certain requirements under the OPUC approval of the AERC acquisition in 2014. The OPUC's AERC acquisition order requires Avista
Utilities to maintain a capital structure of no less than 40 percent common equity (inclusive of short-term debt). This limitation may be
revised upon request by the Company with approval from the OPUC.
The Company declared the following dividends for the year ended December 3 1 :
2016 201 5 20t4
Dvidends paid per common share $1.37 $1.32 $
o
128
Schedule'1, Page 135 of 177
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
$ (s,039) $ (21 ,961) $(124) S (2't,124)
300
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AVISTA CORPORATION
Under the most restrictive ofthe dividend limitations discussed above, which are the requirements ofthe OPUC approval ofthe AERC acquisition, the
amount available for dividends at December 3 1, 2016 was limited to $263.4 million.
The Company has I 0 million authorized shares ofpreferred stock. The Company did not have any preferred stock outstanding as ofDecember 3 l, 20 I 6 and
201 5.
Stock Repurchase Programs
During 2014 and 201 5, Avista Corp.'s Board of Directors approved programs to repurchase shares of the Company's outstanding common stock. The number
ofshares repurchased and the total cost ofrepurchases are disclosed in the Consolidated Statements ofEquity and Redeemable Noncontrolling Interests. The
average repurchase price was $3 I .57 in 2Ol4 and $32.66 in 201 5. All repurchased shares reverted to the status of authorized but unissued shares.
Equity Issuances
In March 2016, the Company entered into fourseparate sales agency agreements underwhich Avista Corp.'s sales agents may offer and sell up to 3.8 million
new shares of Avista Corp.'s colnmon stock, no par value, from time to time. The sales agency agreements expire on February 29,2020.In 201 6, I .6 million
shares were issued under these agreements resulting in total net proceeds of $65.3 million, leaving 2.2 million shares remaining to be issued.
In 2016, the Company also issued $1.7 million (net ofissuance costs) ofcommon stock underthe employee plans.
NOTE 18. EARMNGS PER COMMON SHARE ATTRIBUTABLE TO A\,'ISTA CORPORATION SHAREHOLDERS
The following table presents the computation ofbasic and diluted eamings per cornmon share attributable to Avista Corp. shareholders for the yean ended
December 3 1 (in thousands, except per share amounts):
2016 2015 2014
Numerator:
Net income from continuing operations attnbutable to Avista Corp. shareholders
Net income from discontinued operations attributable to Avista Corp. sharelrolders
Subsidiary eamings adjustment for dilutive securities (discontinued operations)
Adjusted net income from discontinued operations attributable to Avista Corp. shareholders for
computation of diluted eamings per common share
Denominator:
Weighted-average number of common shares outstanding-basic
Effect of dilutive securities:
Performanoe and restricted stock awards
Weighted-average number of comrnon shares outstanding-diluted
Earnings per common share attributable to Avista Corp. shareholders, basic:
Eamings per common share from continuing operations
Eamings per common share from discontinued operations
Total eamings per common share attributable to Avista Corp. shareholders, basic
Earnings per common share attributable to Avista Corp. shareholders, diluted:
Eamings per cornmon share from continuing operations
Eamings per common share from discontinued operations
Total earnings per common share attributable to Avista Corp. shareholderc, diluted
There were no shares excluded from the calculation because they were antidilutive.
5,147
179
$ t37,228 $ 118,080 $ ll9,8l7
72,224
5
s-
63,508
412
62,301
407
61,632
63,920 62,708 61,887
$
$
2.r5 1.89 s
0.08 $
t.93
t.t7
s 0.08
1.90 1.94
1.t 8
$
$.
$1.98 $3.t2
$
$
$
$
$2.15 $1.97 $3.1 0
o
Exhibit No. 3
Case Nos. AVU-E-17-_ /AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 136 ot 177
5,147 $ 72,229
2.16 $
2.16 $
o
o
Table of Contents
AVISTA CORPORATION
NOTE 19. COMMITMENTS AND CONTINGENCIES
In the course ofits business, the Company becomes involved in various claims, controvenies, disputes and other contingent matters, including the items
described in this Note. Some ofthese claims, controversies, disputes and other contingent matters involve litigation or other contested proceedings. For all
such matters, the Company intends to vigorously protect and defend its interests and pursue its rights. However, no assuftlnce can be given as to the ultimate
outcome ofany particular matter because litigation and other contested proceedings are inherently subject to numerous uncertainties. For matters that affect
Avista Utilities' or AEL&P's operations, the Company intends to seek, to the extent appropriate, recovery ofincurred costs through the ratemaking process.
C alifo rnia Refund Pro c e edi ng
In February 201 6, APX, a market maker in the Califomia Refund Proceedings in whose markets Avista Energy participated in the summer of 2000, asserte d
that Avista Energy and its other customer/participants may be responsible for a share ofthe disgorgement penalty APX may be found to owe to Pacific Gas &
Electric @G&E), Southem California Edison, San Diego Gas & Electric, the Califomia Attomey General (AG), the Califomia Departrnent of Water Resources
(CERS), and the Califomia Public Utilities Commission (together, the "Califomia Parties"). The penalty arises as a result of the FERC's finding that APX
committed violations in the Califomia market in the summer of 2000. APX is making these assertions despite Avista Energy having been dismissed in FERC
Opinion No. 53 6 from the on-going administrative proceeding at the FERC regarding potential wrongdoing in the Califomia markets in the summer of 2000.
APX has identified Avista Energy's share ofAPX's exposure to be as much as $ I 6.0 million even though no wrongdoing allegations are specifically
attributable to Avista Energy. Avista Energy believes its settlement with the Califomia Parties in 20 I 4 insulates it from any such liability and that as a
dismissed party it cannot be drawn back into the litigation. Avista Energy intends to vigorously dispute APX's assettions ofindirect liability, but cannot at
this time predict the eventual outcome.
Pacific Northwest Refund Proceeding
In July 200 I , the FERC initiated a preliminary evidentiary hearing to develop a factual record as to whether prices for spot market sales ofwholesale energy
in the Pacific Northwest between December 25,2000 and June 20,2001 werejust and reasonable. ln June 2003, the FERC terminated the Pacific Northwest
refund proceedings, after finding that the equities do notjustiff the imposition ofrefunds. In August 2007, the Ninth Circuit found that the FERC had failed
to take into account new evidence ofmarket manipulation and that such failure was arbitrary and capricious and, accordingly, remanded the case to the
FERC, stating that the FERC's findings must be reevaluated in light ofthe new evidence. The Ninth Circuit expressly declined to direct the FERC to grant
refunds. On October 3, 20 I I , the FERC issued an Order on Remand and on April 5, 201 3 expanded the temporal scope ofthe proceeding to permit parties to
submit evidence on transactions during the period &om January l, 2000 through and including June 20, 200 I .
On July 1 1, 2012 and March 28, 2013, Avista Energy and Avista Corp. filed settlements of all issues in this docket with regard to the claims made by the City
of Tacoma and the Califomia AG (on behalf of the Califomia Department of Water Resources). The FERC approved the settlements and they are final.
The remaining direct claimant against Avista Corp. and Avista Energy in this proceeding was the City of Seattle, Washington (Seattle). An evidentiary, trial
type hearing before an Administrative Law Judge (ALI) to permit parties to present evidence ofunlaufi:l market activity was conducted in 20 I 3.
Withregardtotheseattleclaims,onMarch28,20l4,thePresidingALJissuedanlnitialDecisionfindingthat: l)Seattlefailedtodemonstratethateither
Avista Corp. or Avista Energy engaged in unlaufirl market activity and also failed to identif any specific contracts at issue; 2) Seattle failed to demonstrate
that contracts with either Avista Corp. or Avista Energy imposed an excessive burden on consumers or seriously harmed the public interest; and that 3)
Seattle failed to demonstrate that either Avista Corp. or Avista Energy engaged in any specific violations ofsubstantive provisions ofthe FPA or any filed
tariffs or rate schedules. Accordingly, the ALJ denied all of Seattle's claims under botl section 206 and section 309 of the FPA. On May 22,2015,the FERC
issued its Order on I-nitial Decision in which it upheld the ALJ's Initial Decision denying all of Seattle's claims against Avista Corp. and Avista Energy.
Seattle filed a Request for Rehearing ofthe FERC's Order on Initial Decision which was denied on December J 1 , 20 I 5. Seattle appealed the FERC's decision
to the Ninth Circuit. In October 201 6, Seattle settled all of the matters with the remaining parties and withdrew its appeal at the Ninth Circuit. All the
remaining parties signed the settlement agreement and a petition to dismiss the case was filed with the Ninth Circuit on October 27, 2016. There are no
remaining claims outstanding underthis proceeding. The settlement did not have a material adverse effect on the Company's financial condition, rcsults of
operations or caslr flows.
Exhibit No. 3
Case Nos. AVU-E- l7-_ / AVU-G-17-_
M. Thies, Avista
o
Schedule 1, Page 137 ot 177
130
o
o
Table of Contcnts
AVISTA CORPORATION
Sierra Club and Montana Environmental Information Center Litigalion
In 2013, the Sierra Club and Montana Environmental Information Center (MEIC) (collectively "Plaintiffs"), filed a Complaint in the United States District
Court for the District ofMontana, Billings Division, against the Owners of the Colstrip Generating Project ("Colstrip"); Avista Corp. owns a I5 percent
interest in Units 3 & 4 of Colstrip. The other Colstrip co-Owners are Talen Montana, LLC (formerly PPL Montana, LLC, an indirect subsidiary of Talen
Energy Corporation), Puget Sound Energy, Portland General Electric Company, NorthWestem Energy and PacifiCorp. The Complaint alleged certain
violations ofthe Clean Air Act, including the New Source Review, Title V and opacity requirements with respect to post-January 1 , 200 I Colstrip projects.
The Plaintiffs requested that the Court grant injunctive and declaratory relief, orderremediation ofalleged environmental damages, impose civil penalties,
require a beneficial environmental project in the areas affected by the alleged air pollution and require payment ofPlaintiffs' costs oflitigation and attomey
fees.
The liability trial was scheduled to start on May 3 I , 201 6. The parties engaged in settlement discussions with the Plaintiffs to resolve the claims raised in the
litigation. On July 12, 2016, the parties filed a proposed Consent Decree with the court which contained the terms of the settlement of the matter with respect
to all fourunits at Colstrip. The settlement does not include any monetary payments by any pa(y, dismisses all claims against all fourunits, and provides for
the shut-down ofunits I & 2 (which are owned solely by Talen Montana, LLC and Puget Sound Energy) no later than luly,2022. The Consent Decr€e was
entered on September 6, 20 1 6. The parties have petitioned the Court for costs and attomeys' fees. The Court denied the defendant's claim for fees and reduced
the plaintiffs claimed fees from approximately $3.0 million to $ I .6 million. On February l5,2Ol'1 the Court issued an Order adopting th'is resolution in full
and closing the case.
The Cornpany does not expect that this matter will have a material adverse effect on its financial condition, results ofoperations or cash flows.
Cabinet Gorge Total Dissolved Gas Abatement Plan
Dissolved atnrospheric gas levels (refened to as "Total Dissolved Gas" or "TDG") in the Clark Fork River exceed state ofIdaho and federal water quality
numeric standards downstream ofCabinet Gorge particularly during periods when excess river flows must be diverted overthe spillway. Underthe terms of
the Clark Fork Settlement Agreement (CFSA) as incorporated in Avista Corp.'s FERC license for the Clark Fork Project, Avista Corp. has worked in
consultation with agencies, tribes and other stakeholders to address this issue. Under the terms ofa gas supersaturation mitigation plan, Avista is reducing
TDG by constructing spill crest modifications on spill gates at the dam, and the Company expects to continue spill crest modifications over the next several
years, in ongoing consultation with key stakeholders. Avista Corp. cannot at this time predict the outcome or estimate a range ofcosts associated with this
contingency; however, the Company will continue to seek recovery, thmugh the ratemaking process, ofall operating and capitalized costs related to this
i ssue.
Fish Passage at Cabinet Gorge and Noxon Rapids
In 1999, the United States Fish and Wildlife Service (USFWS) listed bull trout as threatened under the Endangered Species Act. In 201 0, the USFWS issued a
revised designation ofcritical habitat forbull trout, which includes the lowerClark Fork River. The USFWS issued a final recovery plan in October20l 5.
The CFSA describes programs intended to help restore bull trout populations in the project area. Using the concept ofadaptive management and working
closely with the USFWS, the Company evaluated the feasibitity offish passage at Cabinet Gorge and Noxon Rapids. The results ofthese studies led, in part,
to tlre decision to move forward with development ofpermanent facilities, among other bull trout enhancement efforts. Parties to the CFSA are working to
resolve several issues. The Company believes its ongoing efforts through the CFSA continue to e{Iectively address issues related to bull trout. Avista Corp.
cannot at this time predict the outcome or estimate a range ofcosts associated with this contingency; however, the Company will continue to seek recovery,
through the ratemaking process, ofall operating and capitalized costs related to fish passage at Cabinet Gorge and Noxon Rapids.
C o llective B argaining Ag reements
The Company's collective bargaining agreements with the IBEW represent approximately 45 percent ofall ofAvista Utilities' employees. A new three-year
agreement with the Iocal union in Washington and Idaho representing the majority (approximately 90 percent) ofthe Avista Utilities'bargaining unit
employees was approved in March 2016 and expires in March 2019.
A three-year agreement in Oregon, which covers approximately 50 employees was set to expire in March 20 I 7. A new three-year agreement has been
approved by the IBEW membership that will expire in March 2020. It is still awaiting approval from the National IBEW.
l3l
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 'l , Page 138 of 177
o
o
Table of Cont€nts
AVISTA CORPORATION
A collective bargaining agreement with the local union of the IBEW in Alaska expires in March 2Ol7.The collective bargaining agreement with the IBEW in
Alaska represents approximately 50 percent ofall AERC employees. The remainder ofAERC's employees are non-union.
There is a risk that ifcollective bargaining agreements expire and new agreements are not reached in each ofourjurisdictions, employees could strike. Given
the magnitude ofemployees that are covered by collective bargaining agreements, this could result in disruptions ofour operations. However, the Company
believes that the possibility ofthis occurring is remote.
Other Contingencies
In the normal course ofbusiness, the Company has various other legal claims and contingent matters outstanding. The Company believes that any ultimate
liability arising from these actions will not have a material impact on its financial condition, results ofoperations or cash flows. It is possible that a change
could occur in the Company's estimates ofthe probability or amount ofa liability being incurred. Such a change, should it occur, could be significant.
The Company routinely assesses, based on studies, expert analyses and legal reviews, its contingencies, obligations and commitments for remediation of
contaminated sites, including assessments ofranges and probabilities ofrecoveries from other responsible parties who either have or have not agreed to a
settlement as well as recoveries from insurance carriers. The Company's policy is to accrue and charge to current expense identified exposures related to
environmental remediation sites based on estimates ofinvestigation, cleanup and monitoring costs to be incurred. For matters that affect Avista Utilities' or
AEL&P's operations, the Company seeks, to the extent appropriate, recovery ofincurred costs through the ratemaking process.
The Company has potential liabilities under the Endangered Species Act for species offish, plants and wildlife that have either already been added to the
endangered species list, listed as "threatened" or petitioned for listing. Thus far, measures adopted and implemented have had minimal impact on the
Company. However, the Company will continue to seek recovery, through the ratemaking process, ofall operating and capitalized costs related to these
issues.
Under the federal licenses for its hydroelectric projects, the Company is obligated to protect its prope(y rights, including water rights. In addition, the
company holds additional non-hydro water rights. The state ofMontana is examining the status ofall water right claims within state boundaries through a
general adjudication. Claims within the Clark Fork Riverbasin could adversely affect the energy production ofthe Company's Cabinet Gorge and Noxon
Rapids hydroelectric facilities. The state ofldaho has initiated adjudication in northem Idaho, which will ultimately include the lower Clark Fork River, the
Spokane River and the Coeur d'Alene basin. The Company is and will continue to be a participant in these and any other relevant adjudication processes.
The complexity ofsuch adjudications makes each unlikely to be concluded in the foreseeable future. As such, it is not possible for the Company to estimate
the impact ofany outcome at this time. The Company will continue to seek recovery, through the ratemaking process, ofall operating and capitalized costs
related to this issue.
132
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule '1, Page 139 of 177
o
Table of Contents
AVISTA CORPORATIONo
o
NOTE 20. REGT]LATORY MATTERS
Regulatory Assets and Liabilities
The following table presents the Company's regulatory assets and liabilities as ofDecember 3 I , 20 I 6 (dollars in thousands):
Receiving
Rcgulatory Treatment
(2)
Expected
Recovery or
Refund
Regulatory Assets:
Investment in exchange pou'er-net
Regulatory assets for deferred income tax
Regulatory assets for pensions and other
postretirement benefi t plans
Current regulatory asset for energy
commodity derivatives
Unamortizcd debt repurchase costs
Regulatory asset for settlement with Coeur
d'Alene Tribe
Demand side management programs
Deferred maintenance costs
Decoupling surcharge
Regulatory asset for utility plant to be
abandoned
Regulatory asset for interest rate swaps
Non-current regulatory asset for energy
corrmodity derivatives
Other regulatory assets
Total regulatory assets
Regulatory Liabilities:
Natural gas deferrals
Power deferrals
Regulatory liability for utility plant
retirement costs
Income tax related liabilities
Regulatory liability for interest rate swaps
Provision for eamings sharing rebate
Decoupling rebate
Other regulatory liabilities
Total regulatory liabilities
s
(4)
123,596
3,633 4,585
$ 270,641 $ 301,006 $ 128,181 $
$
273,983
28,966
12A42
3,69',1
Remaining
Amortization
Period
(l)
Eming
A Retum
Not
Eaming
A Retum
Total
2016
Total
2015
8,983
101 240
17,260
15,520
46,576
3,1 68
4,823
13,3t2
83,973
32A20
t7,348
2019 $
(3)
6,533 S
tat 372
I 3,700
4s26s
43,t26
19,1 00
37,912
8,481
240,114
1 lJ65
15,700
2,672
16,9i9
5,',1 55
$6,s33 S
109,853
r 1,365
I 3,700
45,265
I 5,700
2,672
43,126
I 9,i00
161,508
240,1r4 235,009
(5)
(3)
16,919
13,97 3
(5)
(6)
(7)
(8)
699,828 $579,632
(e)
(3)
(8)
(3)
2017
(3)
30,820 $
23,528
2,405
2,505
(3) $
(3)
$30,820 $
23,528
r 7,880
18,7 4'l
261 ,594
t7,609
23
12,237
2,373
3,420
273,983
28,966
21,191
t0,297
2A0s
5,7 623,257
$ 345,683 $ 35,920 S 15,349 $ 396,952 $ 333,883
(l ) Eaming a retum includes either interest on the regulatory asset/liability or a retum on the investment as a component ofrate base at the allowed rate
ofretum.
(2) Expected recovery is pending regulatory treatment including regulatory assets and liabilities with prior regulatory precedence.
(3) Remaining amortization period varies depending on timing ofunderlying transactions.
(4) As the Company has historically recovered and currently recovers its pension and other postretirement benefit costs related to its regulated
operations in retail rates, the Company records a regulatory asset for that portion ofits pension and other postretirement benefit funding deficiency.
r33
o
Exhibit No. 3
Case Nos. AVU-E-'l7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 140 ot 177
2059
(3)
201 8
201 8
8,'.?49
6,600
o
o
(5)
(6)
(7)
Table of Conterts
AVISTA CORPORATION
(8)
The UTC and the IPUC issued accounting orders authorizing Avista Corp. to offset energy corrunodity derivative assets or liabilities with a
regulatory asset or liability. This accounting treatment is intended to defer the recognition ofmark-to-market gains and Iosses on energy commodity
transactions until the period ofsettlement, subject to approval for recovery through retail rates. Realized gains and losses, subject to regulatory
approval, result in adjustments to retail rates through purchased gas cost adjustments, the ERM in Washington, the PCA mechanism in ldaho, and
periodic general rates cases.
For the Company's Washington jurisdiction and for any debt repurchases beginning in 2O07 in all jurisdictions, premiums paid to repurchase debt
are amortized over the remaining life ofthe original debt that was repurchased or, ifnew debt is issued in connection with the repurchase, these costs
are amortized over the life ofthe new debt. In the Company's other regulatory junsdictions, premiums paid to repurchase debt prior to 2007 are
being amortized overthe average remaining maturity ofoutstanding debt when no new debt was issued in connection with the debt repurchase.
These costs are included in the Company's cost ofdebt calculation for ratemaking purposes and are recovered through retail rates.
In March 20 1 6, the UTC granted the Company's Petition for an Accounting Order to defer and include in a regulatory asset the undepreciated value
of its existing Washington electric meters for the opportunity for later recovery. This accounting treatment is related to the Company's plan to
replace approximately 253,000 ofits existing electric meters with new two-way drgital meters and the related software and suppott services through
its AMI project in Washington State. Replacement of the meten is expected to begin in the second half of 2017. Forratemaking purposes, the
existing electric meters won't be recorded as regulatory assets until they are physically removed from service, but for GAAP purposes, they are
regulatory assets upon the commitment by management to retire the meters.
For interest rate swap derivatives, each period Avista Utilities records all mark-to-market gains and losses in each accounting period as assets and
liabilities and recolds offsetting regulatory assets and liabilities, such that there is no income statement impact. This is similar to the treatment of
energy commodity derivatives described above. Upon settlement ofinterest rate swap derivatives, the regulatory asset or liability is amortized as a
component ofinterest expense overthe term ofthe associated debt and are also included as a part ofthe Company's cost ofdebt calculation for
ratemaking purposes. See Note l4 regarding a reclassification ofsettled interest rate swap derivatives during 2016. Settled interest rate swap
derivatives which have been through a general rate case proceeding are classified as eaming a retum in the table above, whereas all unsettled interest
rate swap derivatives and settled interest rate swap derivatives which have not been included in a general rate case are classified as expected
rccovery.
This amount is dependent upon the cost ofremoval ofunderlying utility plant assets and the life ofutility plant.(e)
Power Cost Deferrals and Recovery Mechanisms
Deferred power supply costs are recorded as a deferred charge on the Consolidated Balance Sheets for future prudence review and recovery through retail
rates. The power supply costs deferred include certain differences between actual net power supply costs incurred by Avista Utilities and the costs included in
base retail rates. This difference in net power supply costs primarily results from changes in:
. short-term wholesale market prices and sales and purchase volumes,
. the level and availability ofhydroelectnc generation,
. the level and availability ofthermal generation (including changes in fuel prices), and
. retail loads.
In Washington, the ERM allows Avista Utilities to periodically increase or decrease electric rates with UTC approval to reflect changes in power supply costs.
The ERM is an accounting method used to track certain differences between actual power supply costs, net ofwholesale sales and sales offuel, and the
amount included in base retail rates for Washington customers. The Washington ERM calculation is subject to certain deadbands and sharing bands. For
2016, the Company recognized a pre-tax benefit of $5.1 million under the ERM in Washington compared to a benefit of $6.3 million for 201 5. Total net
deferredpowercostsundertheERMwerealiabilityof$2l.3millionasofDecember3l,20l6comparedtoaliabilityof$lS.0millionasofDecember3l,
20 I 5, and these deferred power cost balances represent amounts due to customers.
Avista Utilities has a PCA mechanism in Idaho that allows it to modify electric rates on October I of each yearwith IPUC approval. Under the PCA
mechanism, Avista Utilities defers 90 percent ofthe difference between certain actual net power supply expenses and the amount included in base retail rates
for its Idaho customers. The October I rate adjustments recover or rebate power costs defened during the preceding July-June twelve-month period. Total net
power supply costs deferred under the PCA mechanism were a liability of$2.2 million as ofDecember 3 l , 20 1 6 compared to an asset of$0.2 million as of
December3l,20l5.
t34
T
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1,Page 141 ol 177
o
o
Table of Contents
AVISTA CORPORATION
Natural Gas Cost Delenals and Recovery Mechanisms
Avista Utilities files a PGA in all three states it serves to adjust natural gas rates for: 1) estimated commodity and pipeline transportation costs to serve natural
gas customers for the coming year, and 2) the difference between actual and estimated commodity and transportation costs for the prior year. Total net
defenednaturalgascoststoberefundedtocustomerswerealiabilityof$30.8millionasofDecember3l,20l6comparedtoaliabilityof$lT.9millionasof
December 3 l, 201 5.
Decoupling and Earnings Sharing Mechanisms
Decoupling is a mechanism designed to sever the link between a utility's revenues and consumers'energy usage. In each ofAvista Utilities'jurisdictions, each
month Avista Utilities'electric and natural gas revenues are adjusted so as to be based on the number ofcustomers in certain customer rate classes, rather than
KWh and therm sales. The diflerence between revenues based on the number ofcustomen and revenues based on actual usage is defened and either
surcharged or rebated to customers beginning in the following year.
llashington Decoupling and Earnings Sharing
In Washington, the UTC approved the Company's decoupling mechanisms for electric and natural gas for a five-year period beginning January I , 20 I 5.
Electric and natural gas decoupling surcharge rate adjustments to customerc are limited to 3 percent on an annual basis, with any remaining surcharge
balance carried forward forrecovery in a future period. There is no limit on the level ofrebate rate adjustments.
The electric and natural gas decoupling mechanisms each include an after-the-fact eamings test. At the end ofeach calendar year, separate electric and natural
gas eamings calculations will be made for the prior calendar year. These eamings tests will reflect actual decoupled revenues, nonnalized power supply costs
and other normalizing adjustments. See below for a summary of cumulative balances under the decoupling and eamings sharing mechanisms.
Idaho Fixed Cost Adjustment (FCA) ond Earnings Sharing Mechanisms
In Idaho, the IPUC approved the implementation ofFCAs for electric and natural gas (similar in operation and effect to the Washington decoupling
mechanisms) for an initial term ofthree years, beginning January I , 20 I 6.
For the period 201 3 through 201 5 the Company had an after-the-fact eamings test, such that if Avista Corp., on a consolidated basis for electric and natural
gas operations in ldaho, eamed more than a 9.8 percent ROE, the Company was required to share with customers 50 percent of any eamings above the 9.8
percent. There was no provision for a surcharge to customers ifthe Company's ROE was less than 9.8 percent. This after-the-fact eamings test was
discontinued as part ofthe settlement ofthe Company's 20 1 5 Idaho electric and natural gas general rates cases. See below for a summary ofcumulative
balances under the decoupling and eamings sharing mechanisms.
Ore go n Dec oup I in g Mec h an is m
In February 2016, the OPUC approved the implementation of a decoupling mechanism fornatural gas, similarto the Washington and Idaho mechanisms
described above. The decoupling mechanism became effective on March I , 201 6 and there will be an opportunity for interested parties to review the
mechanism and recommend changes, ifany, by September 201 9. An eamings review is conducted on an annual basis, which is filed by the Company with the
OPUC on or before June 1 ofeach year for the prior calendar year. In the annual eamings review, ifthe Company eams more than 1 00 basis points above its
allowed retum on equity, one-third ofthe eamings above the I 00 basis points would be deferred and later retumed to customers. The eamings review is
separate from the decoupling mechanism and was in place prior to decoupling. See below for a summary ofcumulative balances under the decoupling and
eamings sharing mechanisms.
135
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avisla
Schedule 't, Page 142 ol 177
O
o
o
Table of Cont€nts
AVISTA CORPORATION
Cumulative Decoupling and Earnings Sharing Mechanism Balances
AsofDecember3l,20l6andDecember3l,20l5,theCompanyhadthefollowingcumulativebalancesoutstandingrelatedtodecouplingandeamings
sharing mechanisms in its variousjurisdictions (dollars in thousands):
December 31, December 31,
2016 20r 5
Wrshington
Decouplingsurcharge $ 30,408 $ 10,933
Provision for eamings shari.ng rebate (5,1 I 3) 0,422)
Idaho
Decoupling surcharge $ 8,292 nla
Provision for eamings sharing rebate (5,184) (8,814)
Oregon
Decoupling surcharge $ 2,021 nla
Provision for eamings sbaring rebate
(n/a) This mechanism did not exist dunng this time period.
NOTE 2I . INFORMATION BY BUSINESS SEGMENTS
The business segment presentation reflects the basis used by the Company's management to analyze performance and detemine the allocation ofresources.
The Company's lranagement evaluates performance based on income (loss) fiom operations before incotne taxes as well as net income (loss) attributable to
Avista Corp. shareholderc. The accounting policies ofthe segments are the same as those described in the summary ofsignificant accounting policies. Avista
Utilities'business is managed based on the total regulated utility operation; therefore, it is considered one segment. AEL&P is a separate reportable business
segment as it has separate financial reports that are reviewed in detail by the Chiefoperating Decision Maker and its operations and risks are sufficiently
different iiom Avista Utilities and the otherbusinesses at AERC that it cannot be aggregated wrth any other operating segments. The Other category, which is
not a reportable segment, includes other investments and operations ofvarious subsidiaries, as well as certain other operations ofAvista Capital.
The following table presents infonnation for each ofthe Company's business segments (dollars in thousands):
For the year ended December 31,2016:
Operating revenues
Resource costs
Other operating expenses
Depreciation and amorti zation
lncome (loss) from operations
Interest expense (2)
Income taxes
Net income (loss) from continuing operations
attributable to Avista Corp. shareholders
Capital expenditures (3 )
Alaska Electric IntersegmcntAvista Light ud Power Eliminations
Utilities Company Total Utility Other ( 1 ) Total
sl,3?2,638$46,276$1,418,914$23,569S-$1,442,483
539)52 12,014 551 ,366 55 r ,366
304,644 I l,l5l 315,795 25,501 341,296
155,162 5,352 160,514 769 161,283
277,070 1s,434 292,s04 (2,701) 289,803
83,070 3,584 86,654 608 (132) 87,130
74,121 5,321 79,442 (1,3s6) 78,086
t]2390
390,690
7,968
15,954
136
140,458
406,644
(3,23o)
353
137,228
406,997
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 143 ol 177
Table of Contents
AVISTA CORPORATIONo
o
Avista
Utilities
1 ,41 l ,863 $
644,991
292,096
138,236
241,228
7610s
64,489
I 13,360
38t ,17 4
113,263
323,931
Alaska Electric
Light ud Power
Company
Intersegment
Eliminations
44,778 $
11,9'73
1t ,125
s263
14,072
3,si8
4,202
6,641
t2,25t
21,644 $
5,900
5,868
2,583
6,221
1,382
1,8 l6
3,152
I ,585
Total Utility
1,456,641 $
656,964
303,221
143,499
255,300
19,963
68,691
I 20,00 r
393,425
| ,435,143 $
678,244
286,832
129,57A
246,197
'15,132
69,450
t t6At 5
325,516
(ssO) s
oro,
(132\
Total
1 ,484,7',7 6
656,964
332,7 47
144,t94
253,2t 4
8 0,441
67,449
I I 8,080
394,3t0
1,472,562
678,244
317,250
r 30,1 80
252,588
75,7 52
72,240
ll9,8t7
325,922
$ 5,309,755
s 4,906,649
$ 4,700,971
Other
28,685
30,07 6
695
(2,08 6)
610
(t,242)
(l)
For the year ended December 3lr20l5:
Operating revenues
Resource costs
Other operating expenses
Depreciation and amortization
Income (loss) from operations
Interest expense (2)
Income taxes
Net income (loss) from continuing operations
attributable to Avista Corp. shareholders
Capital expenditures (3)
For the year ended December 31,2014:
Operating revenues
Resource costs
Other operating expenses
Deprecia.tion and amortization
Income liom operations
Interest expense (2)
Income taxes
Net income ftom continuing operations attributable
to Avista Corp. shareholders
Capital expenditures (3)
Total Assets:
As ofDecember 31,2016
As ofDecember 31,2015
As ofDecember 3l,2014
I ,413,499 $
672.344
280,964
126,987
239,9'16
73,-150
67,634
32,218
6r0
6,391
r,004
2,790
$
(1,921\
885
$39,219 S (1,800) $
(1,800)
(384)
?,236
406
166
s 4,975,555 S 273,770 $ 5,249,325 $ 60,430 $
$ 4,60r,708 $ 265,73s S 4,567143 $ 39,206 $
$ 4,3s7,760 $ 263,070 S 4,620,830 $ 80,141 $
(l ) Intersegment eliminations reported as operating revenues and r€source costs represent intercompany purchases and sales ofelectric capacity and
energy between Avista Utilities and Spokane Energy (included in other). Intersegment eliminations reported as interest expense and net income
(loss) attributable to Avista Corp. shareholders represent intercompany interest.(2) Including interest expense to affiliated trusts.(3) The capital expenditures for the other businesses are included as other capital expenditures on the Consolidated Statements ofCash Flows. The
remainder ofthe balance included in other capital expenditures on the Consolidated Statements ofCash Flows for 20 I 4 are related to Ecova.
NOTE 22. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The Company's energy operations are significantly affected by weather conditions. Consequently, there can be large variances in revenues, expenses and net
income between quarters based on seasonal factors such as, but not limited to, temperatures and streamflow conditions.
13'7
Exhibit No. 3
Case Nos. AVU-E-I7-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 1, Page 144o1177
o
Table of Contetrts
AVISTA CORPORATIONo
A summary ofquarterly operations (in thousands, except per share amounts) for 20 I 6 and 20 I 5 follows:
March 3l
2016
Operating revenues
Operating expenses
Income frorn operations
Net income (l)
Ncr incomc attnbutablc to noncontrolling interests
Net income attributable to Avista Corpotation shareholders (l)
Outstanding common stock :
weighted-average, basic
weighted-average. diluted
Eamings per common sharc attributablc to Avista Corp. shareholders,
diluted (1 )
$
Three Months Ended
June 30 September 30 December 3 I
418,173 $
3 12,088
318,838 $
257,247
303,349 $
263,755
402,123
3 r 9,590
$ 106,085 s 6l ,591 $39,594 S 82,533
57,665
(1 6)
2'7,287
(33)
12,261
(27)
40,1 03
(l 2)
$ s7,649 $ 27 ,254 $ 12234 g 40,09 r
$
62,60s
62,907
0.92 $
63,386
63,783
63,857
64,325
0.43 $0.r9 $
Three Months Ended
64,r 85
64,620
0.62
March 3l June 30 September 30 December 3 I
2015
Operating revenues from continuing operati on s
Operating expenses from continuing operations
Income frorn continuing operations
Net iucome from continuing operatiotrs
Net income from discontinued operations
Net income
Net income attributable to noncontrolling interests
Net income attributable to Avista Corporation shareholders
Amounts athibutable to Avista Corp. shareholders:
Net income from continuing operations attributable to Avista Cory.
shareholders
Net income from discontinued operations attributable to Avista Corp
shareholders
Net income attributable to Avista Corp. shareholders
Outstanding common stock :
wei ghted-average, basic
weighted-average, diluted
Eamings per conrmon share attributable to Avista Corp. shareholdgrs,
diluted:
Eamings per common share frorn continuing operations
Eamings per common share fiom discontinued operations
Total eamings per common share attributable to Avista Corp.
shareholders, diluted
46,449 $ 25,246 $13,01 r $ 38,52r
$446,490 S
356,915
337,332 S
2',79,972
313,649 $
277,737
3 87,3 05
316,93.8
$89,575 $ 57,360 $35,912 $ 70,367o$ 46A62 S 25,078 $
196
12,7 54 $
289
33,876
4,662
46,462
(r 3)
25,274
(28)
11,043
(32)
38,538
(1i)
$
$ 46,449 $25,050 $
196
12,722 $
289
33,859
4,662
$ 46,449 $ 2s,246 $ 13,011 $ 38,s21
$
62,3t8
62,889
62,281
62,600
62299
62,688
62,308
62,'.758
0.07
0.74 $0.40 $0.2t $0.54
$0.74 $0.40 $0.21 $0.61
(l) TheCompanyadoptedASU20l6-09duringthesecondquarterof20l6,witharetrospectiveeffectivedateofJanuaryl,20l6.Theadoptionofthis
standard resulted in a recognized income tax benefit of$ I .6 million in 20 1 6 associated with excess tax benefits on settled share-based employee
payments. Because this standard was adopted in the second quarter of20 1 6, but has a retrospective effective date ofJanuary 1 , 20 I 6, the effects from the
adoption were pushed back to the first quarter of20 I 6 and the results for that quarter were recast in the presentation above. kr all future reports which
include the first quarter of20 I 6, the results for that quarter will be recast to include the effects ofthe excess tax benefits recognized.
r38o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 145 of 177
o
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Table of Contents
AVISTA CORPORATION
Item 9. Chanses in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A, Controls and Procedures
Conclusion Regarding the Effectiveness ofDisclosute Controls and Procedures
The Company has disclosure controls and procedures (as defined in Rules I 3a-l 5(e) and I 5d-l 5(e) under the Securities Exchange Act of I 934, as amended
(Act) that are designed to ensure that information required to be disclosed in the reports it files or submits under the Act is recorded, processed, summarized
and reported on a timely basis. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. With
the participation ofthe Company's principal executive officer and principal financial o{ficer, the Company's management evaluated its disclosure controls
and procedures as ofthe end ofthe period covered by this report. There are inherent limitations to the effectiveness ofany system ofdisclosure controls and
procedures, including the possibility ofhuman error and the circumvention or overriding ofthe controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance ofachieving their control objectives. Based upon this evaluation, the Company's
principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective at a reasonable
assurance level as ofDecember 3 I , 20 I 6.
Managemenl's Report on lrl,temal Control Over Financial Reporting
The Company's management, together with its consolidated subsidiaries, is responsible for establishing and maintaining adequate intemal control over
financial reporting (as defined in Rule I 3a-l 5(f) under the Securities Exchange Act of 1 934). The Company's intemal control over financial reporting is a
process designed under the supewision ofthe Company's principal executive officer and principal financial officer to provide reasonable assurance
regarding the reliability offinancial reporting and the prepamtion ofthe Company's financial statements for extemal reporting purposes in accordance with
accounting principles generally accepted in the United States ofAmerica.
The Company's internal control over financial reporting includes policies and procedures that pertain to the maintenance ofrecords that, in reasonable detai[,
accumtely and fairly reflect transactions and dispositions ofassets; provide reasonable assurances that transactions are recorded as necessary to permit
preparation offinancial statements in accordance with accounting principles generally accepted in the United States ofAmerica, and that receipts and
expenditures are being made only in accordance with authorizations ofmanagement and the directors ofthe Company; and provide reasonable assurance
regarding prevention or timely detection ofunauthorized acquisition, use or disposition ofthe Company's assets that could have a material effect on the
Company's fi nancial statements.
Under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial
officer, the Company conducted an assessment ofthe effectiveness ofthe Company's intemal control over financial reporting based on the framework
established in Intemal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management determined that the Company's intemal control over financial reporting as ofDecember 3 I , 20 I 6 is effective at a reasonable
assurance level.
The Company's independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on the Company's intemal control
over financial reporting as ofDecember 3 1,2016.
Changes in Inlernal Conlrol Over Financial Reporting
There have been no changes in the Company's intemal control over financial reporting that occurred during the Company's last fiscal quarter that lras
materially affected, or is reasonably likely to materially affect, the Company's intemal control over financial reporting.
t39
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-'|7-_
M. Thies, Avista
Schedule 1, Page 146 of 177
o
Table of Contents
AVISTA CORPORATIONo
o
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOTINTING FIRM
To the Board ofDirectors and Shareholders of
Avista Corporation
Spokane, Washington
We have audited the intemal control over financial rcporting of Avista Corporation and subsidiaries (the "Company") as of December 3 I , 2016, based on
criteria establish ed in Internal Control - htegrated Framework (2013) issued by the Committee ofSponsoring Organizations ofthe Treadway Commission.
The Company's management is responsible for maintaining effective intemal control over financial reporting and for its assessment ofthe effectiveness of
intemal control over financial reporting, included in the accompanying Management's Report on hlernal Control Over Financial Reporting. Onr
responsibility is to express an opinion on the Company's intemal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective intemal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding ofintemal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness ofintemal control based on the assessed risk, and performing such otherprocedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's intemal control over financial reporting is a process designed by, or under the supervision of the company's principal executive and principal
financial officers, orpersons performing similar functions, and effected by the company's board ofdirectors, management, and otherpersonnel to provide
reasonable assurance regarding the reliability offinancial reporting and the prepamtion offinancial statements for extemal purposes in accordance with
generally accepted accounting principles. A company's intemal control over financial reporting includes those policies and procedures that (l ) pertain to the
maintenance ofrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions ofthe assets ofthe company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations ofmanagement and
directors ofthe company; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of
the company's assets that could have a material effect on the financial statements.
Because ofthe inherent limitations ofintemal control over financial reporting, including the possibility ofcollusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections ofany evaluation ofthe
effectiveness ofthe intemal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective intemal control over financial reporting as ofDecember 3 I , 20 1 6, based on the
criteria establish ed in lnternal Control - Integrated Framework (20l3) issued by the Committee ofSponsoring Organizations ofthe Treadway Commission.
We have also audited, in accordance with the standards ofthe Public Company Accounting Oversight Board (United States), the consolidated financial
statements as ofand for the year ended December 3 I , 20 I 6 ofthe Company and our report dated February 21 ,2017 expressed an unqualified opinion on
those fi nancial statements.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 21,2017
140
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 147 ol 177
O
o
Table of Contents
AVISTA CORPORATION
Item oB. Other Information
None.
PART III
Item 10. Directors. Executive Officers and Corporate Governance
The information required by this Item (other than the information regarding executive officers and the Company's Code ofBusiness Conduct and Ethics set
forth below) is omitted pursuant to General Instruction G to Form l0-K. Such information is incorporated herein by reference as follows:
. on and afterthe date offiling with tlre SEC the Registrant's definitive Proxy Statement relating to its Annual Meeting ofShareholders scheduled to
be held on May t l, 2017,from such Proxy Statement; and. prior to such date, from the Registrant's definitive Proxy Statement, dated March 31,2016, relating to its Annual Meeting of Shareholders held on
May 12,2016.
Executive Officers of the Registrant
Name Business Experience
Scott L. Morris
Age
63
59 Chairman,PresidentandChiefExecutiveOfficereffectiveJanuary l,2008.DirectorsinceFebruary9,
2007; President and ChielOperating Officer May 2006 - December 2007; Senior Vice President February
2002 - May 2006; Vice President November 2000 - February 2002; President - Avista Utilities August
2000 - December 2008; General Manager- Avista Utilities forthe Oregon and Califomia opemtions
October l 99 l - August 2000; various other management and staffpositions with the Company since
1981.
53 Treasurersince January 2013; SeniorMce President and ChiefFinancial Officer(Principal Financial
Officer) since September 2008; prior to employment with the Company held the following positions with
Black Hills Corporation: Executive Vice President and Chief Financial Officer March 2003 to January
2008; SeniorVice President and ChiefFinancial OfficerMarch 2000 to March 2003; ControllerMay
1997 to March 2000.
6t
Senior Vice President, General Counsel and ChiefCompliance Officer since November 2005; Corporate
Secretary since May 20 I 6; Senior Vice President and General Counsel August 2005 - November 2005;
prior to employment with the Company: held several legal positions with United Air Lines, Inc. from 1995
to August 2005, most recently served as Vice President Deputy General Counsel and Assistant Secretary.
Senior Vice hesident ofHuman Resources since November 2005; Corporate Secretary November 2005 -
April 20 I 6; Vice President ofHuman Resources and Corporate Secretary March 2003 - November 2005;
Vice President of Human Resources and Corporate Services February 2002 - March 2003; various human
resources positions with the Company April 1998 - February 2002.
Senior Mce President since January 20 I 0; Vice President July 2007- December 2009; President - Avista
Utilities since January 2009; Vice President of Energy Resources and Optimization - Avista Utilities July
2007 - December 2008; President and ChiefOperating Olficer ofAvista Energy February 2001 - July
2007; various othermanagement and staffpositions with the Company since 1985.
Senior Vice President since January 20 I 4; Vice President ofEnergy Resources since December 20 I 2; Vice
President ofCustomer Solutions - Avista Utilities June 201 2 - December 201 2; Vice President ofEnergy
Delivery April 201 I - December2012; Vice President ofFinance June 2009 - April 201 1; various other
management and staffpositions with the Company since 1996.
Vice President, Controller and Principal Accounting Officer since October 20 I 5; various other
management and staffpositions with the Company since 2001 .
Vice President of Customer Solutions since February 2015; various other management and staffpositions
with the Cornpany since 2005.
Vice President and Chief Information Officer since January 2007; Chief Information Officer February 2001
- December 2006; various other management and staffpositions with the Company since I 996.
Vice President and Chief Counsel for Regulatory and Govemmental Aflairs since February 2004; Senior
Vice President and General Counsel September 1 998 - February 2004.
55
141
Mark T. Thies
Marian M. Durkin
Karen S. Feltes
Dennis P. Vemillion
Jason R. Thackston
Ryan L. Krasselt
Kevin J. Christie
James M. Kensok
David J. Meyer
47
47
49
58
63
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 1, Page 148 ol 177
o
Table of Contents
AVISTA CORPORATION
Executive Officers of the Registrant
Nme
Kelly O. Norwood
Heather L. Rosentrater
Edward D. Schlect Jr.
Age Busines Experience
58 Vice President since November 2000; Vice President ofState and Federal Regulation - Avista Utilities
since March 2002; Vice President and General Manager of Energy Resources - Avista Utilities August
2000 - March 2002; various other management and staffpositions with the Company since 1981 .
39 Vice President of Energy Delivery since December 201 5; various other management and staffpositions
with the Company since 1996.
5 6 Vice President and Chief Strategy Officer since September 201 5; prior to employment with the Company,
Executive Vice President of Corporate Development at Ecova, Inc.
o
All olthe Company's executive officers, witlr the exception of James M. Kensok, David J. Meyer, Kelly O. Norwood, Kevin J. Christie and Heather L.
Rosentrater were officers or directors of one or more of the Company's subsidiaries in 2016. The Company's executive officers are elected annually by the
Board ofDirectors.
The Company has adopted a Code ofConduct for directors, officers (including the principal executive officer, principal financial oflcer and principal
accounting officer), and employees. The Code of Conduct is available on the Company's website at www.avistacorp.com and will also be provided to any
shareholderwithout charge upon written request to:
Avista Corp.
General Counsel
P.O. Box 3727 MSC-12
Spokane, Washi ngton 99220 -31 27
Ary changes to orwaivers forexecutive officers and directon ofthe Company's Code ofConduct will be posted on the Company's website.
Item I l. Executive Comoensadon
The information required by this Item is omitted pursuant to General lnstruction G to Form I 0-K. Such information is incorporated herein by reference as
follows:
. on and after the date of filing with the SEC the Registrant's definitive Proxy Statement relating to its Annual Meeting of Shareholders
scheduled to be held on May I 1,2017, from such Proxy Statement; and. prior to such date, from the Registrant's definitive Proxy Statement, dated March 3 I , 201 6, relating to its Annual Meeting of Shareholders
held on May 12,2016.
Item 12. Securitv Ownershio of Certain Benelicial Owrrers and Manaqement and Related Stockholder Matters
(a) Security ownership ofcertain beneficial owners (owning 5 percent ormore ofRegistrant's voting securities):
Information regarding security ownership ofcertain beneficial owners (owning 5 percent or more ofRegistrant's voting securities) has been
omitted pursuant to General Instruction G to Form 1 0-K. Such information is incorporated herein by reference as follows:
. on and afterthe date of filing with the SEC the Registrant's definitive Proxy Statement relating to its Annual Meeting of Shareholders
scheduled to be held on May I I , 201 7, from such Proxy Statement; and
. prior to such date, from the Registrant's definitive Proxy Statement, dated March 3 I , 201 6, rclating to its Annual Meeting of
Shareholders held on May 12,2016; reference also being made to Schedules 1 3G, as amended, in file with the SEC v/ith respect to the
Registrant's voting securities (the information contained in such schedules I 3G, as amended, not being incorporated herein by
reference).
(b) Security ownership of management:
The information required by this Item regarding the security ownership ofmanagement is omitted pursuant to General Instruction G to Form
I 0-K. Such information is incorporated herein by reference as follows:
. on and after the date of filing with the SEC the Registrant's definitive Proxy Statement re lating to its Annual Meeting of Shareholden
scheduled to be held on May I l, 201 7, frorn such Proxy Statement; and. priorto such date, from the Registrant's definitive hoxy Statement, dated March 3l ,2016, relating to its Annual Meeting of
Shareholders held on MaY 12,2016.
142
o
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1 , Page 149 oI 177
o
Tablc of Contents
AVISTA CORPORATION
(c)
(d)
Changes in control:
None.
Securities authorized for issuance under equity compensation plans as ofDecember 3 I , 20 I 6:
(a)
Number of securities to be
ismed upon exercise of
outstanding options,
wanants and rights
(l )
Plan category
Equity compensation plans approved by security
holders (2)$
(b)
Weighted average
exercise price of
outstanding options,
warrants and rights
(c)
Number of securities remaining
availablc for futurc issuance under
equity compensation plans
(excluding securities reflected in
column (a))
1,7 52,979
o
(l ) Excludes unvested restricted shares and performance share awards granted under Avista Corp.'s Long-Term Incentive Plan. At Decernber 3 I , 201 6,
1 09,806 Restricted Share awards were outstanding. Performance and market-based share awards may be paid out at zerc shares at a minimum
achievement level; 332,680 shares at target level; or 665,360 shares at a maximum level. Because there is no exercise price associated with restricted
shares or performance and markel-based share awards, such shares are not included in the weighted-average price calculation.(2) Includes the Long-Term Incentive Plan approved by shareholders in I 998 and the Non-Employee Director Stock Plan approved by shareholden in
1996. In February 2005, the Board of Drectors elected to terminate the Non-Employee Director Stock Plan.
Item I 3. Certain Relationshins and Related Transactions. and Director IndeDendence
The information required by this Item is omitted pursuant to General Instruction G to Form l0-K. Such information is incorporated herein by reference as
follows:
. on and after the date offiling with the SEC the Registrant's definitive Proxy Statement relating to its Annual Meeting ofShareholden
scheduled to be held on May 11, 2017,from such Proxy Statement; and. prior to such date, from the Registrant's definitive Proxy Statement, dated March 31 ,2016, relating to its Annual Meeting of Shareholders
held on May 12,2016.
Item 14. Princioal Accounting Fees and Services
The information required by this Item is omitted pursuant to General lnstruction G to Form 1 0-K. Such information is incorporated herein by reference as
follows:
. on and after the date of filing with the SEC the Registrant's definitive Proxy Statement relating to its Annual Meeting of Shareholders
scheduled to be held on May I 1,2017, from such Proxy Statement; and. prior to such date, from the Registrant's definitive Proxy Statement, dated March 3 I , 201 6, relating to its Annual Meeting of Shareholders
held on May 12,2016.
t43
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 150 of 177
Table of Contents
AVISTA CORPORATIONO
o
PART IV
Item I 5. Exhibits. Financial Statement Schedules
(a) i. Financial Statements (Included in Part II ofthis report):
Report oflndependent Registered Public Accounting Firm
Consolidated Statements oflncome for the Yean Ended December 31,2016,20 I 5 and 20 I 4
Consolidated Statements ofComprehensive Income for the Years Ended December 3 1,2016,2015 and 2Ol4
Consolidated Balance Sheets as ofDecember 3 I , 20 1 6 and 20 I 5
Consolidated Statements ofCash Flows for the Yean Ended December 3 I ,20\6,2015 and 20 I 4
Consolidated Statements ofEquity and Redeemable Noncontrolling Interests for the Years Ended December 3 l, 2016,2015 and 2014
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules:
None
(a) 3.Exhibits:
Reference is made to the Exhibit Index commencing on page 147. The Exhibits include the management contracts and compensatory
plans or anangements required to be filed as exhibits to this Form I 0-K pursuant to Item I 5(b).
144
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
o
Schedule 1, Page 151 ol 177
Tabl€ of Cont€nts
AVISTA CORPORATIONo
o
SIGNATI]RES
Pursuant to the requirements ofSection I 3 or I 5(d) ofthe Securities Exchange Act of I 934, the Registrant has duly caused this report to be signed on
its behalfby the undersigned, thereunto duly authorized.
AVISTA CORPORATION
February 21,201'7 By /s/ Scott L. Morris
Date Scott L. Morris
Chairman ofthe Board, President and ChiefExecutive Officer
Pursuant to the requirements ofthe Securities Exchange Act of I 934, this report has been signed below by the following persons on behalfofthe
Registrant and in the capacities and on the dates indicated.
Sisnature Title Datc
/s/ Scott L. Morris Principal Executive Offi cer Febnrary 2l,20l'l
Scott L. Morris
Chairman ofthe Board, President
and Chief Executive Officer
/s/ Ma* T. Thies Principal Financial Offi cer February 2 I, 201 7
Mark T. Thies (Senior Vice President,
Chief Financial Officer, and Treasurer)
/s/ Ryan L. Krasselt Principal Accounting Offi cer February 21,2017
Ryan L. Krasselt (Vice President,
Controller and Principal Accounting OIficer)
/s/ Erik J. Anderson Director February 2l,2Ol7
Erik J. Alderson
/s/ Kristianne Blake Director February 21,2017
Kristianne Blake
/s/ Donald C. Burke Director February 21,2017
Donald C. Burke
/s/ John F Director February 2l,2Ol7
John F. Kelly
/si Rebecca A. Klein Director February 21,2017
Rebecca A. Klein
/s/ Marc F. Racicot February 21,2017
Marc F. Racicot
145
Director
Schedule 1, Page 152 ot 177
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Table of Contents
AVISTA CORPORATIONo
/s/ Heidi B. Stanley
R. John Taylor
/s/ Janet D. Widmann
Director
Director
Director
Director
February 21,2017
February 21,2017
February 21,2017
February 21,2017
Janet D. Widmann
/s/ Scott H. Maw
Scott H. Maw
146
Heidi B. Stanley
/s/ R. John Taylor
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-'| 7-_
M. Thies, Avista
Schedule 1, Page 153 of 177
o
Table of Contents
AVISTA CORPORATIONo
3.1 (with June 30,2012 Form l0Q) 3.1
3.2 3.7
EX]IBIT INDEX
Restated Articles oflncorporation ofAvista Corporation, as amended and restated June
6,20t2.
Bylaws of Avista Corporation, as amended November 14,2O14.
Mortgage and Deed of Trust, dated as of June 1, 1939.
First Supplemental Indenture, dated as ofOctober | ,1952.
Second Supplemental Indenture, dated as ofMay I, I 953.
Third Supplemental Indenture, dated as ofDecember 1, 1955.
Fourth Supplemental Indenture, dated as ofMarch 1 5, 1967 .
Fifth Supplemental lndenture, dated as ofJuly I , 1 957.
Sixth Supplemental Indenture, dated as ofJanuary l, I 958.
Seventh Supplemental Indenture, dated as ofAugust I , I 958.
Eighth Supplemental Indenture, dated as ofJanuary l, I 959.
Ninth Supplemental Indenture, dated as ofJanuary 1 , I 960.
Tenth Supplemental lndenture, dated as ofApril l,1964.
Eleventh Supplemental Indenture, dated as of March I , I 965.
Twelfth Supplemental Indenture, dated as ofMay l, I 966.
Thirteenth Supplemental Indenture, dated as ofAugust I , I 966.
Fourteenth Supplemental Indenture, dated as ofApril 1 , 197 0.
Fifteenth Supplemental Indenture, dated as of May l, 1973.
Sixteenth Supplemental Indenture, dated as ofFebruary 'l ,191 5.
Seventeenth Supplemental Indenture, dated as ofNovember 1,1976.
Eighteenth Supplemental lndenture, dated as ofJune l, I 980.
Nineteenth Supplemental Indenture, dated as ofJanuary I , I 98 I .
Twentieth Supplemental Indenture, dated as ofAugust l, I 982.
Twenty-First Supplemental Indenture, dated as ofSeptember l, I 983
Twenty-Second Supplemental lndenture, dated as ofMarch 1, I 984.
r4'7
Previously Filed (l)
F-xhibit
wirh
Reg istratio n
Number
As
Exhibit
4.1
4.2
4.3
4.5
4.6
4.7
4.8
4.9
4.10
4.tl
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.2t
4.22
4.23
B-3
4(c)
2b>2
4(b)"3
4(bH
2(b}s
2(b\6
2(b>7
20)"8
2(b)-e
2(b)-10
2(b!1 l
2@>12
2(b)-1 3
2(b>14
2(bll5
2(bll6
2b>t7
2(b)-l 8
4(a\20
4(a)21
4(aY22
(with Form 8-K filed as of
November 14,2014)
24077
2-9812
2-60728
2-13421
2-13421
2-60728
2-60728
2-60728
240728
2-60728
2-60728
240728
240728
240728
2-60728
2-60728
240728
2-60728
2-69080
(with 1980 Form I 0-K)
2-795'71
(with Form 8-K dated
September 20, 1 983)
2-94816
4.4
o
a@)23
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 1 , Page 154 ol 177
o
o
Trble of Contents
AVISTA CORPORATION
Previously Filed (l)
with
Reg i stration
Number Exhibit
As
Exhibit
4.24
4.25
4.26
4.28
4.29
4.30
4.31
4.32
4.33
(with 1986 Form l0-K) 4(a\24
(with 1987 Form l0-K) 4(a\25
(with 1989 Form I 0-K) 4(a)-26
33-51669 4(a\27
(Yrith 1993 Form lO-K) 4(a)-28
(with 2001 Form l0-K) 4(a\29
333-82s02 4(b)
(with June 30,2002 Form l0{) 4(f)
333-3955 l 4(b)
(with September30,2003 Form 10- 4(0
a)
333-64652 4(a)33
(with Form 8-K dated as of 4.1
December 1 5, 2004)
(with Form 8-K dated as of 4.2
December 15,2004)
(with Form 8-K dated as of 4.3
December 15,2004)
(with Form 8-K dated as of 4.4
December 15,2004)
(with Form 8-K dated as of May 12, 4.1
2005)
(with Form 8-K dated as of 4.1
November l'7,2005)
(with Form 8-K dated as of April 6, 4.1
2006)
(with Form 8-K dated as of 4.1
December 15,2006)
(with Form 8-K dated as ofApril 3, 4.1
2008)
(with Form 8-K dated as of 4.1
November 26, 2008)
(with Form 8-K dated as of 4.1
December 1 6, 2008)
(with Form 8-K dated as of 4.3
December 30, 2008)
(with Form 8-K dated as of 4.1
September I 5, 2009)
(with Fonn 8-K dated as of 4.1
November 25, 2009)
(with Form 8-K dated as of 4.5
December I 5, 20 I 0)
(with Form 8-K dated as of 4.1
December 20, 20 I 0)
Twenty-Third Supplernental Indenture, dated as ofDecember 1, I 986.
Twenty-Fourth Supplemental Indenture, dated as ofJanuary 1, I 988.
Twenty-Fifth Supplemental Indenture, dated as ofOctober l, I 989.
Twenty-Sixth Supplemental Indenture, dated as ofApril l, I 993.
Twenty-Seventh Supplemental Indenture, dated as ofJanuary I , 1994.
Twenty-Eighth Supplemental lndenture, dated as of September I , 200 1
Twenty-Ninth Supplemental Indenture, dated as ofDecember 1,2001.
Thirtieth Supplemental lndenture, dated as of May l,2OO2.
Thirty-First Supplemental Indenture, dated as of May I , 2003.
Thirty-Second Supp'lemental Indenture, dated as ofSeptember l, 2003.
Thirty-Third Supplemental Indenture, dated as of May 1,2004.
Thirty-Fourth Supplemental Indenture, dated as ofNovember 1,2004.
Thiny-Fifth Supplemental Indenture, dated as ofDecember 1,2004.
Thirty-Sixth Supplemental Indenture, dated as ofDecember I,2004.
Thirty-Seventh Supplemental Indenture, dated as ofDecember l,2OO4.
Thirty-Eighth Supplemental Indenture, dated as of May 1,2005.
Thifiy-Ninth Supplemental Indenture, dated as ofNovember 1, 2005.
Fortieth Supplemental Indenture, dated as ofApril I , 2006.
Forty-First Supplemental Indenture, dated as ofDecember l, 2006.
Forty-Second Supplemental Indenture, dated as of April l, 2008.
Forty-Third Supplemental lndenture, dated as ofNovember 1,2008.
Forty-Fourth Supplemental Indenture, dated as ofDecember 1, 2008.
Forty-Fifth Supplemental Indenture, dated as ofDecember l, 2008.
Forty-Sixth Supplemental lndenture, dated as ofSeptember 1,2009.
Forty-Seventh Supplernental Indenture, dated as ofNovember I ,2009.
Forty-Eighth Supplemental Indenture, dated as ofDecember I , 20 I 0.
Forty-Ninth Supplemental Indenture, dated as ofDecember I , 20 I 0.
4.34
4.35
o
4.36
4.37
4.3 8
4.39
4.40
4.41
4.42
4.43
4.44
4.45
4.46
4.47
4.48
4.49
4.50
148
o
Exhibit No. 3
Case Nos. AVU-E-17-_/ AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 155of177
Table of Cont€nts
AVISTA CORPORATIONo
a
Previously Filcd (l)
with
Registration
Exhibit Number
As
Exhibit
4.51
4.52
4.53
4.54
4.55
4.56
4.57
4.58
4.59
4.60
4.6t
4.62
4.63
4.64
4.65
4.66
4.67
4.68
4.69
10.1
(with Form 8-K dated as of
December 30, 201 0)
(with Form 8-K dated as of
February ll,20ll)
(with Form 8-K dated as of
August 16,2011)
(with Form 8-K dated as of
Decernber 14,2011)
(with Form 8-K dated as of
November 30, 20 I 2)
(with Form 8-K dated as ofAugust
14,2013)
(with Form 8-K dated as of April
18,2014)
(with Form 8-K dated as of
December 18,2014)
(with Fonn 8-K dated as of
December 16,2015)
(with Form 8-K dated as of
December 16,2O16)
(with Form 8-K dated as of
December 15,2004)
333-82 I 65
(with Form 8-K dated as of
December I 5, 20 I 0)
(with Form 8-K dated as of
December I 5, 201 0)
(with Form 8-K dated as of
December 15,2010)
(with Fonn 8-K dated as of
December 1 5, 20 I 0)
(with June 30,2012 Form 10-Q)
(with Form 8-K filed as of
November 14,2O14)
(Form l0/A)
(with Form 8-K dated as of
February I 1,201 l)
4.1
4.1
4.1
4.1
4.1
4.1
4.1
4.1
4.1
4.t
4.5
4(a)
4.1
4.3
Fiftieth Supplemental Indenture, dated as ofDecember 1, 20 I 0.
Fifty-First Supplemental Indenture, dated as ofFebruary 1 , 20 I I
Fifty-Second Supplemental lndenture, dated as ofAugust 1,201 1
Fifty-Third Supplemental Indenture, dated as ofDecember 1,201 I
Fifty-Fourth Supplemental Indenture, dated as ofNovember I , 20 I 2
Fifty-Fifth Supplemental Indenture, dated as ofAugust 1, 20 I 3
Fifty-Sixth Supplemental Indenture, dated as ofApril I,2014.
Fifty-Seventh Supplemental krdenture, dated as ofDecember 1,2O14.
Fifty-Eighth Supplemental Indenture, dated as ofDecember I , 20 1 5
Fifty-Ninth Supplemental Indenture, dated as ofDecember 1,2016.
Supplemental Indenture No. I , dated as ofDecember l, 2004 to the Indenture dated as of
Apnl I , 1998 between Avista Corporation and JPMorgan Chase Bank, N.A.
Indenture dated as ofApril 1, I 998 between Avista Corporation and The Bank ofNew
York, as Successor Trustee.
Loan Agreement between City of Forsyth, Montana and Avista Corporation
$66,700,000 City ofForsyth, Montana Pollution Control Revenue Refunding Bonds
(Avista Corporation Colstrip Project) Series 20 I 0A dated as ofDecember I , 20 I 0.
Trust Indenture between City of Fonyth, and the Bank ofNew York Mellon Trust
Cornpany, N.A., as Trustee, $66,700,000 City ofForsyth, Montana Pollution Control
Revenue Refunding Bonds (Avista Corporation Colstrip Project) Series 2010A, dated as
ofDecember 1,2010.
Loan Agreement between City of Forsyth, Montana and Avista Corporation
$ 17,000,000 City oiFonyth, Montana Pollution Control Revenue Refunding Bonds
(Avista Corporation Colstnp Project) Series 201 0B dated as ofDecember 1,201 0.
Trust Indenture between City of Forsyth, and the Bank of New York Mellon Trust
Company, N.A., as Trustee, $ 1 7,000,000 City of Forsyth, Montana Pollution Control
Revenue Refunding Bonds (Avista Corporation Colstrip Project) Series 201 0B, dated as
ofDecemberl,20l0.
Restated Articles oflncorporation ofAvista Corporation, as amended and restated June
6,2012 (see Exhibit 3.1 herein).
Bylaws of Avista Corporation, as amended November 14, 2014 (see Exhibit 3.2 herein).
Post-Effective Amendment No. 1 on Form l0/A, filed February 26,2015,to Registration
Statement on Form 10, filed September 1952.
Credit Agreement, dated as of February 1 1 , 201 1 , among Avista Corporation, the Banks
Party hereto, The Bank of New York Mellon, Keybank National Association, and U.S.
Bank National Association, as Co-Documentation Agents, Wells Fargo Bank National
Association as Syndication Agent and an Issuing Bank, and Union Bank N.A. as
Administrative Agent and an Issuing Bank.
4.2
4.4
3.1
3.2
N/A
10.1
o
149
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 1, Page 156 ol 177
a
Trble of Contents
AVISTA CORPORATION
Previously Filed ( I )
Exhibit
Wirh
Reg istrati o n
Number
As
Exhibit
t0.2
10.3
t0.4
I 0.5 (with 2002 Form l0-K)1o@)-3
10.6 (with 2002 Form l0-K)l 0(b)4
l0;7 (with 2002 Form 10-K)10(b)-s
2-60728 5(g)
240728 5(eI1
2-60728 s(h)
240728 5(h)"1
(with September30,1985 Form 10- I
a)
10.13 (with l98l Form lO-K)I 0(s)'7
Second Amendment to Credit Agreement, dated as of April 18,2O14, among Avista
Corporation, Wells Fargo Bank, National Association, as an Issuing Bank, Union Bank,
N.A. as Administrative Agent and an Issuing Bank, and the financial institutions
identified hereofas Continuing Lenders and Exiting Lender.
Bond Delivery Agreement, dated as of April I 8, 2014, between Avista Corporation and
Union Bank, N.A.
First Amendrnent and Waiver Thereunder, dated as of December 14, 201 I , to the Credit
Agreement dated as ofFebnr ary I 1,201 I , among Avista Corporation, the Banks Party
hereto, Wells Fargo Bank National Association as an Issuing Bank, and Union Bank
N.A. as Administrative Agent and an Issuing Bank.
Priest Rapids Project Product Sales Contract executed by Public Utility District No.2 of
Crant County, Washington and Avista Corporation dated December l2,20Ol (effective
November I , 2005 for the Priest Rapids Development and Novernber I , 2009 for the
Wanapum Development).
Priest Rapids Project Reasonable'Portion Power Sales Contract executed by Public
Utility District No.2 of Grant County, Washington and Avista Corporation dated
December 12,2001 (effective November 1,2005 for the Priest Rapids Development and
November I , 2009 for the Wanapum Development).
Additional Product Sales Agreement (Priest Rapids Project) executed by Public Utility
District No. 2 of Grant County, Washington and Avista Corporation dated December 12,
200 I (effective November l, 2005 for the Priest Rapids Development and November I ,
2009 for the Wanapum Development).
Power Sales Contract (Wells Project) with Public Utility District No. I of Douglas
County, Washington, dated as of September 1 8, 1963.
Amendment to Power Sales Contract (Wells hoject) with Public Utility District No. I of
Douglas County, Washington, dated as ofFebruary 9, I 965.
Reserved Share Power Sales Contract (Wells Project) with Public Utility District No. I of
Douglas County, Washington, dated as of September I 8, I 963 .
Amendment to Reserved Share Power Sales Contract (Wells Project) with Public Utility
Dstrict No. I of Douglas County, Washington, dated as of February 9, 1965.
Settlement Agreement and Covenant Not to Sue executed by the United States
Department of Energy acting by and through the Bonneville Power Administration and
the Company, dated as ofseptember I 7, 1 985, describing the settlement ofProject 3
litigation.
Ownenhip and Operation Agreement for Colstrip Units No. 3 & 4, dated as of May 6,
1981.
Avista Corporation Executive Deferral Plan. (3)
Avista Corporation Executive Deferral Plan. (3)(8)
Avista Corporation Supplemental Executive Retirement Plan. (3)(8)
Avista Corporation Supplemental Executive Retirement Plan. (3)(8)
The Company's Unfunded Supplemental Executive Disability Plan. (3)
Income Continuation Plan of the Company. (3)
150
(with Form 8-K dated as of
April 18,2014)
(with Form 8-K dated as of
April 18,2014)
(with Form 8-K dated as of
December 14,2011)
(with 2011 Form lO-K)
(with 201 1 Form l0-K)
(with 201 I Form l0-K)
(with 2011 Form l0-K)
(with 1992 Form l0-K)
(with 2007 Form l0-K)
I0.t
10.2
10.1
o 10.8
10.9
10.10
10.1 I
10.12
10.14
10.1 5
10.1 6
10.17
10.18
I 0.19
10.15
r 0.16
10.17
10.1 8
1 0(t)"1 I
10.34
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 157 ol 177
Table of Contents
AVISTA CORPORATIONo
Previously Filed (l)
Registration
With
AsExhibit Number Exhibit
Appendix A Avista Corporation Long-Term Incentive Plan. (3)
Avista Corporation Performance Award Plan Summary- (3)
Avista Corporation Performance Award Agreement 2014. (3)
Avista Corporation Performance Award Agreement 2015. (3)
Avista Corporation Performance Award Agreement 201 6. (3)
Employment Agreement between the Company and Marian Durkin in the form of a
Letter of Employment. (3)
Employment Agreement between the Company and Mark T. Thies in the form of a
Letter of Employment. (3)
Non-Offi cer Employee Long-Term Incentive Plan.
Form of Change of Control Agreement between the Company and its Executive Officers.
(3Xs)
Form of Change of Control Agreement between the Company and its Executive Officers.
(3X6)
Form of Change of Control Agreement between the Company and its Executive Officerc.
(3X7)
Form of Change of Control Agreement between the Company and its Executive Officers.
(3X7)
Avista Corporation Non-Employee Director Compensation.
Statement Re: computation of ratio of eamings to fixed charges.
Subsidiaries of Registrant.
Consent oflndependent Registered Public Accounting Firm.
Certification ofChiefExecutive O{ficer (Pursuant to 1 8 U.S.C. Section I 350, as
Adopted Punuant to Section 302 ofthe Sarbanes-Oxley Act of2002).
Certification of Chief Financial Officer @ursuant to I 8 U.S.C. Section I 350, as Adopted
Pursuant to Section 302 ofthe Sarbanes-Oxley Act of2002).
Certification ofcorporate Officers (Pursuant to I 8 U.S.C. Section I 350, as Adopted
Pursuant to Section 906 ofthe Sarbanes-Oxley Act of2002).
The following financial information from the Annual Report on Form 10 K for the
period ended December 3 I , 2016, formatted in XBRL (Extensible Business Reporting
Language) and filed electronically herewith: (i) the Consolidated Statements oflncome;
(ii) Consolidated Statements of Comprehensive Income; (iii) the Consotidated Balance
Sheets; (iv) the Consolidated Statements ofCash Flows; (v) the Consolidated
Statements ofEquity and Redeemable Noncontrolling lnterests; and (vi) the Notes to
Consolidated Financial Statements.
10.21
t0.22
10.23
10.24
10.25 l0.l
10.1
99.1
10.32
12
2l
23
31.1
10.20
10.26
10.27
r 0.28
10.29
10.30
10.31
31.2
32
101
(with 2010 Definitive Proxy
Statement fi led March 3 l, 2010)
(with 2010 Form l0-K)
(with 2014 Form l0-K)
(with 2015 Form 10-K)
Q)
(with Form 8-K dated June 21,
200s)
(with Form 8-K dated August 13,
2008)
33347290
(with 201 0 Form I 0-K)
o
(urith 201 0 Form l0-K)
(with 2010 Form l0-K)
(with 201 0 Form l0-K)
Incorporated herein by reference.
Filed herewith.
Management contracts or compensatory plans filed as exhibits to this Form I 0-K pursuant to Item I 5(b).
Fumished herewith.
Applies to James M. Kensok, David J. Meyer, Kelly O. Norwood, Jason R. Thackston and Dennis P. Vermillion.
Applies to Marian M. Durkin, Karen S. Feltes, Scott L. Morris, and Mark T. Thies.
Applies to executive officers appointed after October I , 20 I 0. This applies to Kevin J. Christie, Ryan L. Krasselt, Ed D. Schlect and Heather L.
Rosentrater.
l5l
(2)
(2)
Q)
a)
(2)
Q)
(4)
(2)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Exhibit No. 3
Case Nos. AVU-E-17-_/ AVU-G-17-_
M. Thies, Avista
Schedule 'l , Page 158 of 177
O
10.23
10.30
10.3 I
Table of Contents
AVISTA CORPORATIONo
o
(8)Applies to executive officers appointed after February 4,2011 . This applies to Kevin J. Christie, Ryan L. Krasselt, Ed D. Schlect and Heather L.
Rosentrater.
152
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1 , Page '1 59 of 177
o
o
Exhibit 10.24
AVISTA CORPORATION PE RFORMAN C E AWARD AGRE EME NT
This Performance Award Agreement (the "Agreement') is made by and between Avista Corporation, a Washington Corporation (the
"Company") and the individual named in section 1 (the "Participant") as designated by the Avista Corporation Compensation and
Organization Committee (the "Plan Administratod).
WHEREAS, Performance Awards are granted under the January 19, 2016 amended and restated Avista Corporation Long-Term
lncentive Plan (the "Plan"). The terms and conditions of the Performance Awards are set forth below and in the Plan, which is
incorporated into this Agreement by reference.
NOW, THEREFORE, in consideration of the premises contained herein and in the Plan, it is agreed as follows:
Terms of Performance Awards. The terms of the Performance Awards are set forth as follows:
(a) The "Participant" is (Participant's name)
The "Grant Date" is February 4,2016.
The total target number of eligible "Performance Awards" shall be (# of) units. "Performance Awards" granted under
this Agreement are units that will be reflected in a book account maintained by the Company or a third party
administrator during the Performance Clcle, and that will be settled in cash or shares of Avista Corporation
Common Stock ("Common Stock") to the extent provided in this Agreement and the Plan.
(d) The "Performance Cycle" is the period beginning on January 1, 2016 and ending on December 31,20'18.
2. Conditions to Award. Pursuant to this Award, the number of Performance Awards eamed will depend upon the
Company's performance against specific performance melrics. The performance metrics are (i) Relative Total Shareholder Retum,
which accounts for (# of) units of the total target award as set forth in section 1(c), and (ii) Cumulative Eamings Per Share ('CEPS')
which accounts for (# of) units of the total target award set forth in section 1(c). The total number of shares of Stock that will be
issued in the settlement of this Award, based upon the Company's satisfaction of the metrics, will be determined by multiplying the
Target Number of units allocated for each metric set forth in this section 2 by the applicable Payout Factor in accordance wlth the
provisions of Exhibit 1 and Exhibit 2, which is attached to and forms a part of this Agreement.
3. Settlement of Performance Awards. The Company shall deliver to the Participant one share of Common Stock (or cash
equal to the Fair Market Value of one share of Common Stock) for each Performance Award eamed by the Participant, as
determined in accordance with the provisions of Exhibit 1 and Exhibit 2, which is attached to and forms a part of this Agreement.
The eamed Performance Award payable to the Participant shall be paid in shares of Common Stock or in cash (based on the Fair
Market Value of the Common Stock as of the date the Plan Administrator certifies the attainment of the
Page I of 10
(b)
(c)
o
Exhibit No. 3
Case Nos. AVU-E-'| 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 160 of 177
o
l'ivtsta
o
o
perfornance goals), or in a combination of the two, as determined by the Plan Administrator in its sole discretton, except that cash may be
distributed in lieu of any fractional share of Common Stock.
All Performance Awards and any Dividend Equivalents (as described in Section 5 below) eamed by a Participant under this Agreement are
subject to the Recoupment Policy adopted by the Company's Board of Directors as amended from time to time ("Recoupment Policy"). lf a
Participant becomes subject to the Recoupment Policy any Performance Award and associated Dividend Equivalent may be forfeited in whole or
in part and all or part of any distribution payable to a Participant or his or her beneficiary under this Agreement may be recovered by the Company
pursuant to the Recoupment Policy.
4. Time of Payment. Except as otheruise provided in this Agreement, payment of Performance Awards eamed will be delivered as soon
as feasible after the end of the Performance Cycle and after the Plan Administrator certifies the attainment of the performance goals.
5. Dividend Equivalent RighB. Any Performance Awards may, in the Plan Administrato/s dlscretion, eam Dividend Equivalent Rights.
ln respect of any PerformanceAward that is outstanding on the dividend record date for Common Stock, the Participant may be credited with an
amount equal to the cash distributions that would have been paid on the shares of Common Stock covered by such Award had such covered
shares been issued and outstanding on such dividend record date. Dividend Equivalent Rights are to be paid in cash based on the total number of
Performance Awards eamed at the end of the Performance Cycle and delivered as soon as feasible after the Performance Cycle and after the
Plan Administrator certifies the attainment of the performance goals. Dividend Equivalent Rights are subject to all applicable taxes, which are the
responsibility of the Participant. The Dividend Equivalent Rights in respect of any Performance Awards that are not eamed as of the end of a
Performance Cycle, shall be forfeited as of the end of the Performance Cycle.
6. Termination of Employment during Performance Cycle. Except as otherwise provided in section 7, this section 6 shall apply if the
Participant's employment terminates during a Performance Cycle. lf the Participant's employment with the Company and/or Subsidiaries
terminates during the Performance Cycle because of Retirement, Disability, or Death, the Participant shall be entitled to a prorated value of the
Performance Award eamed in accordance with Exhibit 1 and Exhibit 2, determined at the end of the Performance Cycle, and based on the ratio of
the number of whole months the Participant was employed during the Performance Cycle to the total number of months in the Performance Cycle
(36). lf a Participant's employment or services with the Company and/or Subsidiaries terminate on or as of the last day of a Performance Cycle,
such Participant will be deemed to have terminated after the end of such Performance Cycle. lf the Participant's employment with the Company
and/or Subsidiaries terminates during the Performance Cycle for any reason other than Retirement, Disability, or Death, the Performance Award
granted under this Agreement will be forfeited on the Date of Termination (as defined in section 9(b)); provided, however, that in such
circumstances, the Plan Administrator; in its sole discretion, may determine that the Participant will be entitled to receive a prorated or olher
portion of the Performance Award. ln case of termination for Cause, the Performance Award granted shall automatically terminate upon first
notification to the Participant of such termination, unless the Plan Administrator determines otherwise. lf a Participant's employment with the
Company is suspended pending an investigation of whether the Participant shall be terminated for Cause, all the Participant's nghts under any
Award likewise shall be suspended during the period of investigation. The effect of a Company-approved leave of absence on the terms and
conditions of an Award shall be determined by the Plan Administrator, in its sole discretion.
7. Change in Control. lf a Change in Control occurs during the Performance Cycle, and the Participant's Date of Termination (as defined
in section 9(b)) does not occur before the Change in Control date, the Participant shall be entitled to a prorated value of the Performance Award
that would have been eamed by the Participant in accordance with Exhibit 'l and Exhibit 2, determined as of the date of the Change in Control,
prorated based on the ratio of the number of whole months the Participant is employed during the Performance Cycle through the date of the
Change in Control, to the total number of months in the Performance Cycle; provided, however, that a Payout Factor of at least 100% as set forth
04105116 Page 2 of10
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
Schedule 1, Page 161 of 177
litnsra
o
o
in Exhibit 1 and Exhibit 2 for the Performance Cycle shall be deemed to have been achieved as of the date of the Change in Control.
Notwithstanding the provisions of sections 3 (with the exception of the application of the Recoupment Policy), 4, and 5, the value of the
Performance Award, and any Dividend Equivalent Right, eamed in accordance with the foregoing provisions of this section shall be delivered to
the Participant in a lump sum cash payment as soon as feasible after the occurence of a Change in Control, with the value of a Performance
Award equal to the Fair Markel Value of a share of Common Stock determined under the provislon of section 3 as of the date of the Change in
Control. Distributlons to the Participant under sections 3 and 5 shall not be affected by payments under this section, except that the number of
Performance Awards and Dividend Equivalent Rlghts eamed by and payable to the Participant shall be reduced by the number of Performance
Awards and Dividend Equivalent Rights with respect lo which payment was made to the Participant under this section.
8. Taxes. The Participant is liable for any and all taxes, including withholding taxes, ansing out of the grant, vesting, payment or
settlement of any Performance Awards and Dividend Equivalent Rights. The Company shall have lhe right to require the Participant to remit to
the Company, or to withhold awarded shares of Common Stock, or from any Dividend Equivalent Rights or other amounts due to the Participant,
as compensation or otheruise, an amount sufficient to satisfy all federal, state and local withholding tax requirements.
9. Definitions. For purposes of this Agreement, the terms used in this Agreement shall be subject to the following:
(a)Chanoe in Control. The term "Change in Control" is defined in section 2.4 of the amended and restated Avista Corp. Long Term
lncentive Plan.
(b)Date of Termination. The Participant's "Date of Termination" shall be the first day occuning on or after the Grant Date on wtrich
the Participant is not employed by the Company or any Subsidiary, regardless of the reason for the termination of employment;
provided that a termination of employment shall not be deemed to occur by reason of a transfer of the Participant between the
Company and a Subsidiary or between two Subsidiaries; and further provided that the Participant's employment shall not be
considered terminated while the Participant is on a leave of absence from the Company or a Subsidiary approved by the
Participant's employer. lf, as a result of a sale or other transaction, the Participant's employer ceases to be a Subsidiary (and
the Participant's employer is or becomes an entity that is separate from the Company), and the Participant is not, at the end of
the 30day period following the transaction, employed by the Company or an entity that is then a Subsidiary, then the occurence
of such transaction shall be treated as the Participant's Date of Termination caused by the Participant being discharged by the
employer.
(c)Disabilitv. "Disability" means "disability" as that term is defined for purposes of the Company's Long Term Disability Plan or
other similar successor plan applicable to employees.
(d) Retirement. "Retirement" of the Partlcipant shall mean retirement as of the individual's retirement date under the Retirement Plan
for Employees of Avista Corporation or other simllar successor plan applicable to employees.
10. Assignability. No Performance Award or Dividend Equivalent Right granted or awarded under the Plan may be assigned or transfened
by the Participant other than by will or by the applicable laws of descent and distribution, and, during the Participant's lifetime, settlements of
such Awards may be payable only to the Participant or a permitted assignee or transferee of the Participant (as provided below). Notwithstanding
the foregoing, the Plan Administrator, in its sole discretion, may permit such assignment or transfer and may permit a Participant of such
Performance Awards or Dividend Equivalent Rights to designate a beneficiary who may receive compensation settlement under the Performance
04105116 Page 3 of10 ./lirtsra
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 162 ol 177
O
o Award after the Participant's death; provided, however, that any amount so assigned or transfened shall be subject to all the same terms and
conditions contained in this Agreement.
11. General
11.1 Award Agreements. Performance Awards granted under the Plan shall be evidenced by a written agreement that shall contain
such terms, conditions, limitations and restrictions as the Plan Administrator shall deem advisable and that are not inconsistent with the Plan.
1 1.2 Continued Employment or Services; Rights in Awards. Nothing contained in this Agreement, the Plan, or any action of the Plan
Administrator taken under the Plan or this Agreement shall be construed as giving any Participant or employee of the Company any right to be
retained in the employ of the Company or any Subsidiary or to limit the Company's or any Subsidiary's right to terminate the employment or
services of the Participant.
'1 1.3 Registration. At the present time, the Company has an effective registration statement with respect to the shares. The Company
intends to maintain this registration but has no obligation to do so. ln the event that such registration ceases to be effective, the Participant wlll
not receive a Performance Award settlement or payment unless exemptions from registration under federal and state securities laws are
available; such exemptions from registration are very limited and might be unavailable. By accepting the Agreement, the Participant hereby
acknowledges that he/she has read the section of the Plan and this Agreement entitled Registration.
11.4 No Rights as a Shareholder. No Award under this Agreement shall entitle the Participant to any dividends (except to the extent
provided in an award of Dividend Equivalent Rights), voting or any other right of a shareholder unless and until the date of issuance under the
Plan of the shares that are the subject of such Performance Award, are free of all applicable restrictions.
1 1 .5 Compliance with Laws and Regulations. Notwithstanding anything in the Plan to the contrary, the Board of Directors, in its sole
discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Participants who are officers or
directors subject to Section '16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Participants.
1 1.6 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity and enforceability of
any other provision of this Agreement. lf any provision of the Agreement is determined to be invalid, illegal or unenforceable in any jurisdiction, or
as to any person, orwould disqualify any PerformanceAward underany lawdeemed applicable by the PlanAdministrator, such provision shall be
construed or deemed amended by the Plan Administrator to conform to applicable laws, or, if the Plan Administrator determines that the provision
cannot be so construed or deemed amended without materially altering the intent of the Plan or the Performance Award, such provision shall be
stricken as to such jurisdiction, person or Performance Award, and lhe remainder of the Agreement and any such Performance Award shall
remain in full force and effect.
12. Administration. The authority to manage and control the operation and administration of this Agreement shall be vested in the Plan
Administrator, and the Plan Administrator shall have all powers with respect to this Agreement as it has with respect to the Plan. Any
interpretation of the Agreement by the Plan Administrator and any decision made by it with respect to the Agreement are final and binding.
13. Construction. This Agreement is subject to and shall be construed in accordance with the Plan, the terms of which are explicitly
made applicable hereto. Unless otherwise defined herein, capitalized terms in this Agreement shall have the same definitions as set forth in the
Plan. ln the event of any conflict between the provisions hereof and those of the Plan, the provisions of the Plan shall govem.
04/05t16 Page 4 of10
o
liisrsra
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 163 of 177
a 14. Arnendment. This Agreement may be amended by written agreement of the Participant and the Company, without the consent of any
other person.
15. Governing Law. The validity, construction, interpretation and enforceability of this Agreement shall be determined and govemed by
the laws of the State of Washington without giving effect to the principles of conflicts of laws. For the purpose of litigating any dispute that arises
under this Agreement, the parties hereby consent to exclusive jurisdiction in Washington State and agree that such litigation shall be conducted
in the courts of Spokane County, Washington or the federal courts of the United States for the eastem district of Washington.
16. Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or othenrise to
all or substantially all of the business and/or assets of the Company) to agree in writing to assume the Company's obligations under this
Agreement and to perform such obligations in the same mannerand to the same extent that the Company is required to perform them. As used in
this Agreement, "Company" shall mean the Company and any successor to its business and/or assets that assumes and agrees to perform the
Company's obligations under the Agreement by operation of law or otherwise.
lN WITNESS WHEREOF, the Participant has executed this Agreement, and the Company has caused these presents to be executed in its name
and on its behalf, all effective as of the Grant Date.
AVISTA CORPORATION
By: Scott L. Monis
Chairman of the Board, President and Chief Executive Officer
04105116 Page5ofl0 l,Tqsra
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 1, Page 164 ot 177
o
-
o EXHIBIT,I
Performance Award Plan
Relative Total Shareholder Return Metric and Goals
2016 - 2018 Performance Cycle
The following graph and table represent the relationship between the Company's relative three-year Total Shareholder Retum ("TSR") commencing
January 1,2016 and ending Decembet31,2018 and the target award opportunity. The number of shares delivered at the end of the three-year
Performance Cycle can range from zero lo 20oo/o of the target number of units allocated under this metric. The actual issuance of shares depends
on Avista's three-year TSR performance compared to the retums of the peer companies reported in the S&P 400 Utilities lndex and how we rank
amongthem. To receive 100o/o of theAward allocated underthis metric,Avista must perform at the 50th percentile among the companies in the
S&P
400 Utilities lndex. To receive 200o/o of the Award, Avista must rank at the I0Ornpercentile. lf Avista ranks below the 4Orhpercentile, no stock
awards or cash Dividend Equivalent Rights will be eamed. Dividend
Equivalent Rights are calculated and paid out in cash when and to the extent the Performance Awards are issued. The following graph
demonstrates the relationship between TSR ranking and various payout factors. Performance Awards are interpolated on a straight line for
performance results between the figures shown.
3-year Relatirze TSR Percentile Rank
200o/r
150%
!00a/o
5Oo/o
Oolo 40th 45th 50rh
Target
70th 85th
Fz
k
&
oo.
=
Min
Relative TSR Percentile
loorh
8 5th
70tl'
50rh
45rh
40th
<4orh
l0oth
Max
Payout Factor
200o/o
t50%
125%
100%
,70%
40%
No Award
O
Maximum
Target
Threshold
TSR is calculated using S&P Research lnsight and reflects share price appreciation plus the impact of dividend distributions and the
reinvestment of such dividends. To compute the TSR, an adjusted price is calculated by applying a monthly retum factor to the average closing
share prices on the last trading day of November and December for the start and end of the Performance Cycle.
04105116 Page 6 of10 /iig,rsta
Exhibit No. 3
Case Nos. AVU-E-17-_ /AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 165 of 177
o
o From one year to the next, if S&P drops a company out of the index and adds another, the new company will be included in the ranking and the
dropped company will be excluded. When a new company is added, they will be added to the ranking as if they had been in the ranking from the
beginning - provided that there is pricing and dividend data at the beginning of the cycle. When a company is dropped everything related to that
company will be excluded from the ranking as if the company was never part of the ranking.
Settlement Form ula Example:
Assuming that 970 Performance Award units were allocated under this metric at the beginning of the three-year Performance Cycle and Avista's
TSR ranked at the 4St percentile after lhe three-year Performance Cycle, the Participant would receive 70% of 970 or 679 shares of Avista
common stock plus
cash dividend equivalents.
Payout Factor
(Yo of Target)
Target Number of Performance Awards
70o/o x 9',70 679 shares plus cash dividends
Percentile Ranking Methodology:
The percentile rank is calculated using the PERCENTRANK function in MS Excel, excluding Avista from the list and rounding all results to the
nearest whole percentile.
The calculation can be replicated by ananging the TSR data from highest to lowest for all peers except Avista. A percentile ranking is calculated
for each data point assuming '100.0th %ile for the highest data point, 0.0 %ile for the lowest data point, and the conesponding percentile for every
other data point with an equal difference in percentile ranking for each data point. The TSR forAvista is calculated by determining Avista's rank in
the list and inlerpolating between the percentile rankings for the companies immediately above and below based on the differences in TSR. An
example, based on sample data is as follows:
Granted Final Number of Common Stocks Issued
Comnanv Rankinp
I
2
47 (ABC Corp)
48 (XYZ Corp)
56
57
TSR
201.6%
t35.9%
20.3%
16.0%
'3.3o/o
-10.5%
Percentile Rank
100.0%
98.2.%
17.8%
16.0%
1.7%
0.0o/oolf a company's TSR is 18.9%, the resulting percentile ranking would be'l7o/o, calculated as follows: 17o/o = 16.00/o + [(18.9% - 16.0%) I (2O.3Vo -
16.0%) - (17.8% - 16.0%)l
Total Shareholder Return (ISR) Methodology:
For purposes of this Agreement, a methodology for calculating a total retum to shareholder with dividend reinvestment was established. Retums
are calculated daily based on stock price changes and dividend payments and then accumulated over the Performance Cycle. Below are
additional assumptions used in Avista's calculation for TSR.
General Assumptions:
The starting and ending prices are determined by averaging the closing price on the last trading day of November and the last trading day of
December at the beginning and the end of the Performance Cycle.
An example, based on sample data is as follows: the stock price forthe start of the Performance Cycle forAvista is $34.90, which is the average
of $35.35 (1213112014\ and $34.45 (1112812014). Dividends are reinvested on a daily basis. For this example, a fictional exdate for dividends per
share is used for
04/05/r6 Page 7 ofl0
Exhibit No. 3
Case Nos. AVU-E-'l 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page '166 of 177
o
Attsta
a
o
demonstration purposes. Daily retums are calculated over the performance cycle and added together resulting in the Cumulative TSR for the
performance cycle.
D+ Closing Price Dividend
tll21l20t4 33.90 0
tt/2412014 33.80 0
1112512014 34.06 0.3175
1l/26120t4 34.29
tt/2?/2014 34.29
tl28/2014 34.45 0 0.46660/,
Cumulative TSR 11/21/2014 to 1l/28/2014 2.5555%
* [(34.06 + 0.3 l7s) i 33.80] -l
EXHIBIT 2
Performance Award Plan
Gumulative Eamings Per Share Metric and Goals
2016 - 2018 Performance Period
The following graph and table represent the relationship between the Company's Cumulative Eamings Per Share ('CEPS') commencing January
1, 2016 and ending December 31, 2018 and the target award opportunity. The number of shares delivered at the end of the three-year
Performance Cycle can range from zero lo 2o0o/o of the target number of units allocated under this metric. The actual issuance of shares depends
on Avista's CEPS growth performance over the three-year Performance Cycle. To receive 100% of the Performance Award allocated under this
metric, Avista must achieve CEPS compounded groMh ol 4.50o/o based on eamings guidance. To receive 200o/o of the Award, Avista must
achieve CEPS compounded growth of 6.00%. lf Avista's CEPS compounded growth is less than 3.00%, no stock awards or cash Dividend
Equivalent Rights will be eamed. Dividend Equivalent Rights are calculated and paid oul in cash when and to the extent the Performance Awards
are issued. The following graph demonstrates the relationship between CEPS and various payout factors. Performance Awards are interpolated on
a straight line for performance results between the figures shown.
3-year Cumulative Grorq'th EPS
20OYo
1507o
1.00Y0
50%
0o/o
3.75o/o 5.25Yo 6%
Max
041051 16 Page 8 of10
Daily TSR
z
F.
o-ro
E
3o/o
Min
4.50/6
Target
Austa
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 167 of 177
o
o Maximum
Target
Threshold
Performance is tracked over a three.year Performance Cycle thereby focusing on sustainability
The performance metric CEPS provides for Performance Awards if the Company's cumulative EPS grows at a certain rate on a compounded
annual basis. Cumulative EPS is fully diluted eamings per share determined in accordance with generally accepted accounting principles, and
may be adjusted to remove the effects of such items as regulatory charges, income tax legislative changes and/or items of a non- routine or
items of an extraordinary nature as determined by the Plan Administrator.
Settlement Formula Example:
Assuming that 485 Performance Award units were allocated under this melric at the beginning of the Performance Cycle and Avista's cumulative
EPS grew 4.875o/o over three years, the Participant would receive 125o/o of 485 or 607 shares of Avista common stock plus dividend equivalents
in cash.
3-Year Cumulative Grouth
6.0%
5.625%
5.25%
4.87 5%
4.5%
4.125%
3.75%
3.375%
3%
<3yo
Pavout Factor
200%
1 7 5o/o
150%
125%
700o/o
85%
7A%
55o/o
40%
No Award
Number of Common Stocks Issued
Payout Factor
(Vo of Target)
Target Number of Performance Awards
Granted
x 607 shares plus oash
Number of Common Stocks Issued
125%
Using the exampleformulas in Exhibit 1 and Exhibit 2, the Participant would receive in total 88o/o of '1,455 (total target # of PerformanceAwards
granted) ot 1,286 Shares of Common Stock plus cash dividend equivalents.o
Payout Factor
(7o ofTarget)
Target Number of Performance
Awards Granted
TSR
CEPS
Total
70o/o
t25%
880
x
x
x
970
485
1,455
Page 9 ofl0
679
607
1,286
04105116 /!iinsra
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 168 of '177
o
o ACCEPTANCE AND ACKNOWLEDGMENT
l, a resident of the state of_, accept the Performance Award described in this Agreement and in the Plan, and acknowledge that
I have received a copy of this Agreement and the Plan. I have read and understand the Plan, and I hereby make the
representations, wananties and acknowledgments, and undertake the indemnity and other obligations, therein specified.
Dated:
Social Security Number Signature of Employee
Printed Name
041051t6 Page l0 of10
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page 169 of '177
o
o
./Iststa
o
o
Exhibit 1032
Avista Corporation
Non-Employee Director Compensation - 2016
Prior to August 17 ,2016, directors who were not employees ofthe Company received an annual retainer of$ I 40,000 with $65,000 ofthe total retainer to be
paid in stock each year. Directors had the option oftaking the remaining $75,000 in cash, stock or a combination ofbotlr cash and stock. The cash portion of
the retainer is paid quarterly. Directors were also paid $1,500 for each meeting of the Board or any Comrnittee meeting of the Board. Directors who served as
Board Committee Chairs received an additional $7,500 annual retainer, with the exception of the Audit Committee Chair, who received an additional
S13,000 annual retainer and the Compensation Committee Chair, who received an additional $10,000 annual retainer. The Lead Director received an
additional annual retainer of $20,000.
Each year, the Govemance Committee reviews all components of director compensation. During 2016, the Govemance Committee engaged Meridian
Compensation Partners LLC ("Meridian") to assist in this review. The information provided by Meridian was used to compare the Cornpany's current director
compensation with peer companies in the utility industry and general industry companies of similar size (the "Director Peer Group"). The companies
comprising the Director Peer Group are those companies in the S&P 400 Utilities Index.
At its August 17,20l6 meeting, the Board reviewed survey results from Meridian regarding current pay practices for director compensation. The Board
approved an increase in the annual retainerofan additional $5,000, effective September 1,2016. The total annual retainerisnow $145,000 with $70,000 of
the total retainer to be paid in stock each year. Directors will have the option oftaking the remaining $75,000 in cash, stock or a combination ofboth cash
and stock. The Committee chair retainers were also increased to the following amounts: Compensation & Organization Committee Chair is now $12,500,
Audit Committee Chair is now $15,000, GovemanceArlominating Committee Chair is now $10,000, Environmental, Technology & Operations Committee
Chair is now $ 10,000 and the Finance Committee Chair Retainer is now $ I 0,000.
Each director is entitled to reimbursement ofreasonable out-of-pocket expenses incurred in connection with meetings ofthe Board or its Cornmittees and
related activities, including director education courses and materials. These expenses include travel to and from the meetings, as well as any expenses they
incur while attending the meetings.
The Company has a minimum stock ounership expectation for all Board members. Outside directors are expected to achieve a minimum investment of five
times tlre minimum portion of their equity retaincr payable in Company cormnon stock within five years of becoming a Board member, and retain at least that
level ofinvestment during hisftier tenure as a Board member. Shares previously defened under the former Non- Employee Director Stock Plan count for
purposes of determining whether a director has achieved the ownership expectation. Directors are prohibited from engaging in short-sales, pledging, or
hedging the economic interest in their Company shares.
The ownership expectation illustrates the Board's philosophy of the importance of stock ownenhip for directors to further strcngthen the commonality of
interest between the Board and shareholders. The Govemance Committee annually reviews director holdings to detemine whether they meet ownership
expectations. All directors currently comply based on their years ofservice completed on the Board.
There were no annual stock option grants or non-stock incentive plan compensation payments to directors for services in 2016 and none are currently
contemplated under the current compensation structure. The Company also does not provide a retirement plan or deferred compensation plan to its directors.
Listed below is compensation paid to each non-employee director who served during any part ofthe 20 I 6 fiscal year.
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 170 ol 177
o
o Exhibit 12
2012
AVISTA CORPORATION
Computation of Ratio ofEamings to Fixed Charges
Consolidated
(Thousands ofDollars)
2016
Years Ended December 3 I
20t5 2014 2013
Interest $ 86,897 $ 80,613 $ 74,02s 73,7',72 $ 71,843
lnterest ofrentals 1,324 1,287 t,187 1,146
Total fixed charges s 91,612 $ 85,3 ls $ 78,847 $ 78,731 S 7
Pre-tax income from $ 2r5,402 $ 185,619 $ r92,106 $ 162,347 $ il6,567
(2,6s1 (3,e24) (3,67 6) (2,401)
o Ratio of eamings to fixed charges 3.32 3.13 3.39 3.O2
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1,Page 171 ot 177
2.48
o
Fixed charges, as defined:
Eamings, as dcfined:
Add (deduct):
Capitalized interest
Total fixed charges above
Total eamings
78,847 78,731 76,940
$ 3M,363 $ 267,388 $ 26'?,029 $ 23?,402 $ 191,106
(3,546)
85,3 r 5
Exhibit 21oAVISTA CORPORATION
STJBSIDIARIES OF REGISTRANT
Subsidiary
State or Country
oflncorporation
Avista Capital, Inc.
Avista Development, Inc.
Avista Energy, lnc.
Avista Northwest Resources, LLC
Pentzer Corporation
Pentzer Venture Holding II, Inc.
Bay Area Manufacturing, Inc.
Advanced Manufacturing and Development, Inc.
Avista Capital tr
Steam Plant Square, LLC
Steam Plant Brew Pub, LLC
Courtyard Office Center, LLC
Alaska Energy and Resources Company
Alaska Electric Light and Power Company
AJT Mining Properties, Inc.
Snettisham Electric Company
Salix, Inc.
Washington
Washington
Washington
Washington
Washington
Washington
Washington
Califomia
Delaware
Washington
Washington
Washington
Alaska
Alaska
Alaska
Alaska
Washington
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 1, Page '172 ot '177
o
o
o Exhihit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-33190,333-126577 ,333-179042 and 3 33-208986 on Form S-8 and in
Registration Statement Nos. 333-187306 and 333-2097 14 on Form S-3, relating to the consolidated financial statements ofAvista Corporation and
subsidiaries, and the effectiveness ofAvista Corporation's intemal control over financial reporting, appearing in this Annual Report on Fonn 1 0-K ofAvista
Corporation for the year ended December 3 I , 20 I 6.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 21,201'7
Exhibit No. 3
Case Nos. AVU-E- 1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 173 of 177
o
o
o Exhibit 31.1
CERTIFICATION
I, Scott L. Morris, certiE/ that:
l. I have reviewed this report on Form l0-K ofAvista Corporation;
Based on my knowledge, this report does not contain any untrue statement ofa material fact or omit to state a rnaterial fact necessary to make
the statements made, in light ofthe circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results ofoperations and cash flows ofthe registrant as of, and for, the periods presented in this report;
The registrant's other certi$ing officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules I 3a-l 5(e) and I 5d-1 5(e)) and intemal control over financial reporting (as defined in Exchange Act Rules I 3a-l 5(f) and
I 5d-l 5(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material inforrnation relating to the registrant, including its consolidated subsidiaries, is made knou,n to
us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such intemal control over financial reporting, or caused such intemal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of
financial statements for extemal purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness ofthe registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness ofthe disclosure controls and procedures, as ofthe end ofthe period covered by this report based on such
evaluation; and
d. Disclosed in this report any change in the registrant's intemal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case ofan annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's intemal control over financial reporting; and
The registrant's other certifoing offrcer and I have disclosed, based on our most recent evaluation ofintemal control over financial reporting, to
the registrant's auditors and the audit committee ofthe registrant's board ofdirectors (orpersons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation ofintemal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involve s management or other employees who have a significant role in the registrant's
intemal control over financial reporting.
Date: February 2l ,2017 /s/ Scott L. Morris
Scott L. Morris
Chairman ofthe Board, President
and Chief Executive Offi cer
(Principal Executive Offi cer)
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 174 ol 177
2
J.
4.
5.
O
o
o
o
o
Exhibit 31.2
CERTIFICATION
I, Mark T. Thies, ceni! that:
I . I have reviewed this report on Form I 0-K ofAvista Corporation;
Based on my knowledge, this report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results ofoperations and cash flows ofthe registrant as of, and for, the periods presented in this report;
The registrant's other cediling officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules I 3a-l 5(e) and I 5d-1 5(e)) and intemal control over financial reporting (as defined in Exchange Act Rules 1 3a-l 5(0 and
I 5d-l 5(0) forthe registrant and have:
2
3
4
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
Designed such intemal control over financial repo(ing, or caused such intemal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of
financial statements for extemal purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness ofthe registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness ofthe disclosure controls and procedures, as ofthe end ofthe period covered by this report based on such
evaluation; and
d. Disclosed in this report any change in the registrant's intemal control overfinancial reporting that occurred during the registrant's
most recent fiscal quaner (the registrant's fourth fiscal quarter in the case ofan annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's intemal control over financial reporting; and
The registrant's other certifring oIficer and I have disclosed, based on our most recent evaluation ofintemal control over financial reporting, to
the registrant's auditors and the audit committee ofthe registrant's board ofdirectors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation ofinternal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, surnmarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
intemal control over financia[ reporting.
Date: February 21 ,2017 /s/ Mark T. Thies
Mark T. Thies
Senior Vice President
Chief Financial Officer, and Treasurer
(Principal Financial Offi cer)
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 1, Page 175 ol 177
b
5.
O
Exhibit 32
A1'ISTA CORPORATION
CERTIFICATION OF CORPORATE OFFICERS
(Fumished Pursuant to I 8 U.S.C. Section I 350, as Adopted Pursuant to Section 906 ofthe
Saft anes-Oxley Act of 2002)
Each ofthe undenigned, Scott L. Morris, Chairman ofthe Board, President and ChiefExecutive Officer ofAvista Corporation (the "Company"), and Ma*
T. Thies, Senior Vice hesident and ChiefFinancial Officer ofthe Company, hereby certifies, pursuant to 1 8 U.S.C. Section I 350, as adopted pursuant to
Section 906 ofthe Sartanes-Oxley Act of2002, that the Company's Annual Report on Form l0-K forthe yearended December3l,20l6 fully complieswith
the requirements of Secti on I 3 (a) of the Securities Exchange Act of 1 934, as amended, and that the information contained therein fairly presents, in all
material respects, the financial condition and results ofoperations ofthe Company.
Date: February 2l ,2017
/s/ Scott L. Morris
Scott L. Morris
Chairman of the Board, President
and Chief Executive Officer
/s/ Mark T. Thies
Mark T. Thies
Senior Vice President,
Chief Financial Officer, and Treasurer
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
o
Schedule 1, Page 176 ol 177
a
o
Exhibit No. 3Case Nos. AVU-E-1 7-_ / AVU-G-1 7-
M. Thies, Aviiii
Schedute .l, page 177 of 177
o
o
I.]NITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C,20549
Form 10-Q
(Muk One)
E QUARTERLYREPORTPIIRSUANTTOSECTION13 ORls(d)OFTHESECURITIESEXCTTANGE ACT OF 1934
FOR THE QUARTERLY PERIOD EIIDED June 30. 201 7 OR
tr TRANSITTONREPORT PURSUANTTOSECTTON13 OR15(d)OFTIrE SECURTTIESEXCHANGEACT OF 1934
FORTHE TRANSITION PERIODFROM TO
Commission file number !!fl!!
AVISTA CORPORATION
7J
rJ9
fil
i,Y:
-._ 1
:3p
@xact name of Registrant as specilied in its charter)
Washington
(State or other jurisdiction of
incorporation or organization)
141I East Mission Avenue, Spokane, Washington
(Address of principal erecutive offices)
Registrant's telephone number, including area code: 5!!!E!05IXI
Web site: http://www.avistacorp.com
r-a
914462470
(I.RS. Employer
Identification No.)
99202-2600
(Zip Code)
o
None
(Former name, former address and former Iiscal year, if changed since last report)
Indicate by check mark whether the registrant ( I ) has filed all reports required to be filed by Section I 3 or I 5 (d) of the Securities Exchange Act of I 934
during the preceding I 2 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirementsforthepastg0days: Yes E No E
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, ifany, every hteractive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T ($232.405 of this chapter) during the preceding l2 months (or for such shorter period that
the registmnt was required to submit and post such files). Yes El No E
lndicate by check matk whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of"large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company"
in Rule I 2b-2 ofthe Exchange Act.
Large accelerated filer tr Accelerated filer D
Non-accelerated filer E @o not check if a smallerreporting company) Smallerreporting company D
Emerging growth company tr
Ifan emerging groMh company, indicate by check mark ifthe registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section I 3(a) ofthe
Exchange Act E
Indicate by check mark whether the Registrant is a shell company (as defined in Rule I 2b-2 ofthe Exchange Act): Yes tr No E
As of July 31,2017 ,64A11 ,244 shares of Registrant's Common Stock, no par value (the only class of common stock), were outstanding.
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
Schedule 2, Page I ot 71
Table of Contents
AVISTA CORPORATIONo
o
AVISTA CORPORATION
INDEX
Item No.
Forward-Lookin g Statements
Avarlable Information
Part I. Financial Information
Iteur l. Condensed Consolidated Financial Statements
Condensed Consolidated Statements oflncome -
Three and Six Months Ended June 30. 20 I 7 and 20 I 6
Condensed Consolidated Statements of Comorehensive Income -
Three and Six Months Ended June 30.20 I 7 and 2016
Condensed Consolidated Balance Sheets -
June 30. 20 I 7 and December 3 I . 201 6
Condensed Consolidated Statements ofCash Flows -
Six Months Ended June 30. 20 I 7 and 20 I 6
Condensed Consolidated Statements ofEouitv -
Six Months Ended Junc 30. 201 7 and 20 I 6
Notes to Condensed Consolidated Financial Statements
Note l. Summary ofSipnificant Accountine Policies
Note 2. New Accountins Standards
Note 3. Derivatives and Risk Management
Note 4. Pension Plans and Other Postretirement Benefit Plans
Note 5. Committed Lines of Credit
Note 6. Lons-Term Debt and Caoital Leases
Note 7. Long-Term Debt to Affiliated Trusts
Note 8. FairValue
Note 9. Common Stock
Note 10. Eamines oerCommon Share Attributable to Avista Comordtion Shareholderc
Note I 1. Commitments and Continqencies
Note 12. Information by Business Seqmcnts
Note 13. Subsequent Events
Reoort oflndependent Reeistered Public Accountinq Firm
Item2 Manasement's Discussron and Analvsis of Financial Condition and Results of Operations
Business Seements
Executive Level Summary
Regulatorv Matters
Results ofOoerations - 0verall
Non-GAAP Financial Measures
Results of Onerations - Avista Utilities
Results of Ooerations - Alaska Electric Lisht and Power Comnany
Results of Ooerations - Otlter Businesses
Critical Accountins Policies and Estimates
Liouidity and Caoital Resources
Overall Liquiditv
Review of Cash Flow Slatement
Capital Resources
Caoital Expenditures
OfI-Balance Sheet Arraneements
Pension Plan
Contractual Oblisations
Page
No.
f
!
5
5
6
1
2
ll
12
12
14
l-6
20
21
22
21
,1
27
28
28
,)o
31
32
33
33
JJn
49
a
v.
54
54
55
55
55
55
a7
57
51
57o
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2, Page 2 ot 71
Table of Contsnts
AVISTA CORPORATIONo
Environmental Issues and Other Contingencres
Entemrise Risk Manaqement
Item 3. Ouantitative and Oualitative Disclosures about Market Risk
Item 4. Controls and Procedures
Part II. Other In formation
Item l. Leqal Proceedinqs
Item I A. Risk Factors
Item2.
Item 4.
Item 6.
Unresistered Sales ofEouitv Securities and Use ofProceeds
Mine Safety Disclosures
Exhibits
Signature
\7
58
t2
l9
5S
52
60
60
6l
62
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 3 of 71
o
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Table of Contents
AVISTA CORPORATION
ForlYard-Lookins Sta tements
From time to time, we make forwardJooking statements such as statements regarding projected or future:
' financial performance;
. cash flows;
. capital expenditures;
. dividends;
. capital structure;
' other financial items;
. strategic goals and objectives;
. business environment; and
' plans foroperations.
These statements are based upon underlying assumptions (many ofwhich are based, in tum, upon further assumptions). Such statements are made both in our
reports filed under the Securities Exchange Act of 1 934, as amended (including this Quarterly Report on Form I 0-Q), and elsewhere. ForwardJooking
statements are all statements except those ofhistorical fact including, without limitation, those that are identified by the use ofwords that include "will,"
ForwardJooking statements (including those made in this Quarterly Report on Form I 0Q) are subject to a variety ofrisks, uncertainties and other factors.
Most ofthese factors are beyond our control and may have a significant effect otr our operations, results ofoperations, financial condition or cash flows,
which could cause actual results to differ materially from those anticipated in our statements. Such risks, uncertainties and other factors include, among
others:
Financial Risk
weather conditions (temperatures, precipitation levels and wind pattems), which affect both energy demand and electnc generating capability,
including the effect ofprecipitation and temperature on hydroelectric resources, the effect ofwind pattems on wind-generated power, weather-
sensitive customer demand, and similar effects on supply and demand in the wholesale energy markets;
our ability to obtain financing through the issuance ofdebt and/or equity securities, which can be affected by various factors including our credit
ratings, interest rates and other capital market conditions and the global economy;
changes in interest rates that affect bonowing costs, our ability to effectively hedge interest rates for anticipated debt issuances, variable interest rate
bonowing and the extent to which we recover interest costs through retail rates collected from customers;
changes in actuarial assumptions, interest rates and the actual return on plan assets for our pension and other postretirement benefit plans, which can
affect future funding obligations, pension and other postretirement benefit expense and the related liabilities;
deterioration in the creditworthiness ofour customers;
the outcome oflegal proceedings and other contingencies;
economic conditions in ourservice areas, including the economy's effects on customerdemand forutility services;
declining energy demand related to customer energy efficiency and/or conservation measures;
changes in the long-term global and our utilities' service area climates, which can affect, among other things, customer demand pattems and the
volume and timing of streamflows to our lrydroelectric resources;
AfiUry Regulatory Risk
state and federal regulatory decisions or related judicial decisions that affect our ability to recover costs and eam a reasonable retum including, but
not limited to, disallowance or delay in the recovery ofcapital investments, operating costs and commodity costs and discretion over allowed retum
on investment;
possibility that our integrated resource plans for electric and natural gas will not be acknowledged by the state commissions;
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 4 ol 71
o
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I
O
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Table of Contents
AVISTA CORPORATION
Energy Commodity Risk
. volatility and illiquidity in wholesale energy markets, including the availability ofwilling buyers and sellers, changes in wholesale energy prices
that can affect operating income, cash requirements to purchase electricity and naturaI gas, value received for wholesale sales, collateral required of
us by counterparties in wholesale energy transactions and credit risk to us from such transactions, and the market value ofderivative assets and
liabilities;
. default or nonperformance on the part ofany parties from whom we purchase and/or sell capacity or energy;
. potential environmental regulations affecting our ability to utilize or resulting in the obsolescence ofour power supply resources;
Operational Risk
. severc wealher or natural disasters, including, but not limited to, avalanches, wind storms, wildfires, earthquakes, snow and ice storms, that can
disrupt energy generation, transmission and distribution, as well as the availability and costs ofmaterials, equipment, supplies and support services;
. explosions, fires, accidents, mechanical breakdowns or other incidents that may impair assets and may disrupt operations ofany ofour generation
facilities, transmission, and electric and natural gas distribution systems or other operations and may require us to purchase replacement powel
. wildfires caused by our electric transmission or distribution systems that may result in public injuries or property damage;
. public injuries or damage arising from or allegedly arising from our operations;
. blackouts ordisruptions ofinterconnected transmission systems (the regional powergrid);
. terrorist attacks, cyberattacks orothermalicious acts that may dismpt orcause damage to ourutility assets orto the national orregional economy in
general, including any effects ofterrorism, cyber attacks or vandalism that damage or disrupt information technology systems;
. work force issues, including changes in collective bargaining unit agreements, strikes, work stoppages, the loss ofkey executives, availability of
workers in a variety ofskill areas, and our ability to recnrit and retain employees;
. increasing costs ofinsurance, more r€strictive coverage terms and ourability to obtain insurance;
. delays or changes in construction costs, and/or our ability to obtain required permits and materials for present or prospective facilities;
. increasing health care costs and cost ofhealth insurance provided to our employees and retirees;
. third party construction of buildings, billboand signs, towe6 or other structures within our rights of way, or placement of fuel receptacles within
close proximity to our transformers or other equipment, including overbuild atop natural gas distribution lines;
. the loss ofkey suppliers formaterials orservices ordisruptions to the supply chain;
. adverse impacts to our Alaska operations that could result tom an extended outage of its hydroelectric generating resources or their inability to
deliver energy, due to their lack ofinterconnectivity to any other electrical grids and the extensive cost ofreplacement power (diesel);
. changing riverregulation at hydroelectric facilities not owned by us, which could impact ourhydroelectric facilities donnstream;
Compliance Risk
. compliance with extensive federal, state and local legislation and regulation, including numerous environmental, health, safety, infrastructure
protection, reliability and other laws and regulations that affect our operations and costs;
. the ability to comply with the terms ofthe licenses and permits for our hydroelectric or thermal generating facilities at cost-effective levels;
Technology Risk
. cyber attacks on us or our vendon or other potential lapses that result in unauthorized disclosure ofprivate information, which could result in
liabilities against us, costs to investigate, remediate and defend, and damage to our reputation;
2
Exhibit No. 3
Case Nos. AVU-E-17-_/ AVU-G-I7-_
M. Thies, Avista
Schedule 2, Page 5 oI 71
o
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Table of Contents
AVISTA CORPORATION
. disruption to or breakdowns ofinformation systems, automated controls and other technologies that we rely on for our operations, communications
and customer service;
. changes in costs that impede our ability to effectively implement new information technology systems or to operate and maintain current production
technology;
. changes in technologies, possibly making some ofthe current technology we utilize obsolete orthe introduction ofnew technology that may create
new cyber security risk;
. insufficient technology skills, which could lead to the inability to develop, modiff or maintain our information systems;
Strategic Risk
. growth or decline ofour customer base and the extent to which new uses for our services may materialize or existing uses may decline, including,
but not limited to, the effect ofthe trend toward distributed generation at customer sites;
. the potential effects ofnegative publicity regarding business practices, whether true or not, which could result in litigation or a decline in our
common stock price;
. changes in our strategic business plans, which may be affected by any or all ofthe foregoing, including the entry into new businesses and/or the exit
from existing businesses and the extent ofour business development efforts where potential future business is uncertain;
. non-regulated activities may increase eamings volatility;
. failure to complete the proposed merger transaction could negatively impact the market price of Avista Corp.'s common stock or result in
termination fees that could have a material adverse effect on our results ofoperations, financial condition, and cash flows;
. the announced merger transaction could result in shareholder class action lawsuits against the Company, its management team and board of
directors;
External Mandates Risk
. changes in environmental laws, regulations, decisions and policies, including present and potential environmental remediation costs and our
compliance with these matters;
. the potential effects oflegislation or administrative rulemaking at the federal, state or local levels, including possible effects on our generating
resources ofrestrictions on greenhouse gas emissions to mitigate concems over global climate changes;
. political pressures or regulatory practices that could constrain or place additional cost burdens on our distribution systems through accelerated
adoption ofdistributed generation or electric-powered transportation or on our energy supply sources, such as campaigns to halt coal-fired power
generation and opposition to other thermal generation, wind turbines or hydroelectric facilities;
. wholesale and retail competition including altemative energy sources, growth in customer-owned powerresource technologies that displace utility-
supplied energy or that may be sold back to the utility, and altemative energy suppliers and delivery arrangements;
. failure to identiff changes in legislation, taxation and regulatory issues which are detrimental or beneficial to our overall business;
. policy and/or legislative changes resulting from the new presidential administration in various regulated areas, including, but not limited to,
potential tax reform, environmental regulation and healthcare regulations; and
. the risk ofmunicipalization in any ofourservice tenitories.
Our expectations, beliefs and projections are expressed in good faith. We believe they are reasonable based on, without limitation, an examination of
historical operating trends, our records and other information available from third parties. There can be no assurance that our expectations, beliefs or
projections will be achieved or accomplished. Furthermore, any forwardJooking statement speaks only as of the date on which such statement is made. We
undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which such
statement is made or to reflect the occurence ofunanticipated events. New risks, uncertainties and other factors emerge from time to time, and it is not
possible for us to predict all such factors, nor can we assess the effect ofeach such factor on our business or the
o
3
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 6 of 71
Table of Contents
AVISTA CORPORATIONo
extent that any such factor or combination offactom may cause actual results to differ materially from those contained in any forwardJooking statement.
Available Information
Our website address is www.avistacorp.com. We make annual, quarterly and cunent reports available at our website as soon as practicable after electronically
filing these reports with the U.S. Securities and Exchange Commission. Information contained on ourwebsite is not part ofthis report.
4
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 7 of 71
o
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Table of Contents
Item 1. Condensed Consolidated Financial Statements
CON'DENSED CONSOLIDATED STATEMENTS OF INCOME
Avisla Corporation
PART I. Financial Information
Dollars in thousands, except per share amounts
(Unaudited)
Operating Revenues:
Utility revenues
Non-utility revenues
Total operating revenues
Operating Expeirses:
Utility operating expenses:
Resource costs
Other operating cxpenses
Depreciation and amortization
Taxes other than income taxes
Non-uti lity operating ex penses:
Other opcrating cxpenses
Depreciation and amortization
Total operating exPenses
lncome from operations
lnterest expense
Interest expens6 to affliated trusts
Capitalized interest
Other income-net
Income before income taxes
Income tax expense
Net income
Net loss (income) attributable to nonconffolling interests
Net income attributable to Avista Corp. shareholders
Weighted-averlrge common shares outstanding (thousands), basic
Weighted-average common shares outstanding (thousands), diluted
Three months ended June 30,Six months ended June 30,
201'7 2016
308,729 $
< 11)
312,888 S
5,950
739,266 $
I 1,705
725,681
I1,330
314,501 318,838 750,971 ',737,011
6,281
t92
7,086
15'7
13,265
345
12,106
380
102,7 5t
8 t,965
42,643
23,802
r 09,815
78,666
39,6',78
22.615
6 r ,591
21,3 l8
154
(837)
(3,041 )
268,337
156,449
84,628
56,464
271,534
| 54,445
78,870
52,000
o
56,09'7
23,670
200
(8e0)
(1,656)
34,77 3
I 3,051
171,483
47.2t5
385
(1,6r4)
(4,7 5't)
t67,676
42,591
292
(l,7s l )
(5,463)
43,997
16,7 t0
130.254
46,395
132,007
47,055
$ 2t,771 $ 27,2s4 S 83,887 $ 84,903
21,'122
49
64,401
64,553
27,287
(33)
83,859
28
84,952
(49\
63,386
63,783
64,382
64,5 I 1
62,995
63,3 68
$ 0.34 $ 0.43 $ r.30 $ 1.35
s 0.34 $ 0.43 $ 1.30 $ 1.34
0.7150 $ 0.6850$ 0.3s75 S 0.3425 $
The Accompanying Noles are an Integral Parl ofThese Statements
o
Exhibit No. 3
Case Nos. AVU-E-'!7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 8 oI 71
258404 257,24't s79,488 569,335
Eamings per common share attributable to Avista Corp. shareholders:
Basic
Diluted
Dividends deelared per common share
5
o
Teble of Contents
CONDENSED CONSOLIDATED STATEMENTS OF COMPRE}IENSME INCOME
Avista Corporation
Doliars in thousands
(Unaudited)
Three monOs ended June 30,Six months ended June 30,
20t7 2016 2017 2016
Other Comprehensive Income (Loss):
Total other comprehensive income (loss)183 140
I I
attributable to interests
The Accoupanying Notes are an Integral Part ofThese Statements-
6
a
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 9 of 71
o
Change in unfunded benefit obligation for pension and other postretirement benefit
plans - net oftaxes of$99, $7 6,$197 and $(587) respectively
$ 21,722 $27,28"t s 83,8s9 $ 84,9s2
140183 (1,089)
366 (1,089)
21,905
49
$ 21,954
27 427 84,225(33) 28
$ 27,194 $ 84,253
83,863
(4e)
i____8341_
o
Teble of Contents
CONDENSED CONSOLIDATED BALANCE SIIEETS
Assets:
Current Assets:
Cash and cash equivalents
Accounts and notes receivableless allowances of$5,607 and $5,026, respectively
Regulatory asset for energy commodity derivatives
Matcnals and supplies. fuel stock and stored natural gas
lncome taxes receivable
Other current assets
Total curent assets
Net Utility Property:
Utility plant in service
Construction work in progress
Total
Less: Accumulated depreciation and amortization
Total net uti'lity prope(y
Other Non-current Assets:
Investment in affiliated trusts
Goodwill
Other property and investments-net and other non-current assets
Total other non-current assets
Deferred Charges:
Regulatory assets fordeferred income tax
Regulatory assets forpensions and other postretirement benefits
Other regulatory assets
Regulatory asset for int€rest rate swaps
Non-current regulatory asset forenergy commodity derivatives
Otherdeferred charges
Total deferred charges
Total assets
Avi.lo Cornorntinrt
Dollars in thousands
(Unaudited)
June 30 December 3 I
20162017
13,410 $
133,946
13,982
61,187
3s,808
8,507
180,265
r 1,365
53,3t4
48,265
62,403 49,625
320,736 35r,34r
o
5,617,233
169,000
5,186,233
I,558,773
4,227,460
11,547
57,672
79,48',7
148 706
s,s06A99
150,47 4
5,656,973
I 509 471
4,147,500
r 09,853
240,114
135,7 5l
151 ,508
I 6,91 9
5,326
I 18,984
234,046
134,533
168,084
15,023
5,432
676,t02
$ 5,373,004
669,471
$ 5,309,755
The Accompanying Notes arc an Integrul Part ofThese Slatements.
7
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
Schedule 2, Page '10 ol 71
$
11,547
57,672
1' ))A
141,443
a
Table of Contents
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
Avista Corporation
Dollam in thousands
(Unaudited)
Liabilities and Equity:
Current Liabilities:
Aocounts payable
Current portion oflong-tcrm debt and capital leases
Short+emr borrowings
Energy commodity derivative liabilities
Accrued interest
Accrued taxes other than income taxes
Defened natura.l gas costs
Current portion ofpensions and other postretirement benefits
Current interest rate swap derivative liabilities
Otlter current liabilities
Total cunent liabilities
Long-term debt and capital leases
Long-Ieml debt to amliated tru.sts
Regulatory liability for utility plant retirement costs
Pensions and other postretiremont benefits
Defened income taxes
Non-€urrent interest rate swap derivative liabilities
Other non-current liabilities, regulatory liabilities and defened credits
Total liabilities
Commitments and Contingencies (See Notes to Condensed Consolidated Financial Statements)
Equity:
Avista Corporation Shareholders' Equity:
Common stock, no par value; 200,000,000 shares authorized; 64J08,983 and 64,187 ,934 shares issued and
outstanding as ofJune 30,2017 and December 3 1 , 20 I 6, respectively
Accumulated other comprehensive loss
Retained eamings
Total Avista Corpolation shareholders' equity
Noncontrolling lnterests
Total equity
Total liabilities and equitY
The Accompanying Noles are an Inlegral Part ofThese Statenents.
June 30,
201'7
Decembcr 31
2016
t 69,1 65 $
277,814
r 36.398
8,3 08
r 6,128
33,1 69
28973
| | ,235
36,507
64,417
1 r 5,545
3,287
120,000
7,03 5
15,869
33,37 4
30.820
10,994
6,025
64,57 9
682,114
1,403,064
51,547
280,5 80
219,584
886,727
336
162,158
407,s28
1 ,67 8,717
51,547
27 3 ,983
226,552
840,928
28,705
153,3 l9o3,686,1 l0 3,661,279
1 ,07 5 ,667
(7 2o2)
618,708
I ,075,28 l
(7,568)
581,014
1,686,894
$ 5,373,004
1,687,1'73
(27e)
1,648,727
(25 1)
1,648,476
$ s,309,755
Exhibit No. 3
Case Nos. AVU-E-'! 7-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 2,Page 11 ol7'l
a
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Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Avista Corporation
Forthe Six Months Ended June 30
Dollars in thousands
(Unaudited)
201'7 20 t6
$ 83,859 S 84,952
and amortization 8 I ,071
Power and natural cost amortizations, net 9,9s8
Amortization of investment in exchange 1,225
Allowance for Funds Used Construction (AFUDC)(4,368)
Amortization of Spokane contract 7,t92
Change in deferral 10,365 (24,787)
Contributions to defined benefit
Accounts and notes receivable
(r 4,800)
45,37 5
(8,000)
50,062
Collateral posted for derivative instruments (s,460)(83,499)o Other current assets
Other cunent liabilities 3,197
equity-related AFUDC)77,714 (l 82,8 r 5)
investments made by subsidiaries (10,347)(6,988)
Other
The Accompanying Notes are an Inlegral Parl ofThese Statements
9
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 12 ot 71
a
Operating Activities:
Net income
Non-cash items ineluded in net income:
Investing Activities:
86,790
36,169
6,366
t,627
I,225
2,643
(3,292)
18,539
228,526 155,951
(7, l s3)
(1 89,s89)Q06,624)
o
Tabl€ of Contents
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Avisla Corporation
Forthe Six Months Ended June 30
Dollars in thousands
(Unaudited)
201'7 2016
Net increase in short-term borrowings (16,000 $ 55,000
Issuance ofcommon stock, net ofissuance costs I,247 4'7,173
The Accompanying Notes are an Inlegral Parl ofThese Statements.
10
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G- 17-_
M. Thies, Avista
Schedule 2, Page 13 oI 71
O
Financing Activities:
Cash dividends paid
Other
. Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning ofperiod
Caslr and cash equivalents at end ofperiod
(34,034)53,711
4,903 3,038
8,507 10384
$ 13,410 $13,522
o
Table of Cont€trts
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Avisla Corporatiort
For the Six Months Ended June 3 0
Dollars in thousands
(tlnaudited)
2017 2016
Shares 64,187,934 62,312,651
Shares outstanding at end ofperiod
Balance at $ 1,075,281 $ 1,004,336
Issuance ofcommon stock, net ofissuance costs 1,247 47,173
Balance at end ofperiod
Balance at beginning ofperiod
Balance at end ofperiod ,202)(7,739)
Balance at 530,940
Cash dividends on comrnon stock
o Total Avista Corporation shareholders' equity 1,027
Balance at (33e)
Balance at end ofperiod
The Accompanying Notes are an Inlegral Part ofThese Statements.
ll
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 14 ot 71
64,408,983 63,704,295
t ,07 5,667
(7,s68)(6,650)
(1,089)366
581,014
83,887
(46,193)
6l 8,708 572,576
t,687 ,173
(251)
(28)49
(27e)(2eo)
$ 1,686,894 $ 1,616,737
t Tabl€ of Contents
AVISTA CORPORATION
o
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The accompanying condensed consolidated financial statements ofAvista Corporation (Avista Corp. or the Company) as ofand for the interim periods ended
June 3 0, 2017 and June 30, 20 I 6 are unaudited; however, in the opinion ofmanagement, the statements reflect all adjustments necessary for a fair statement
ofthe results for the interim periods. All such adjustments are ofa normal recurring nature. The condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States ofAmenca (GAAP) for interim financial information and with the
instructions to Form I 0Q and Rule I 0-0 I ofRegulation S-X. The Condensed Consolidated Statements oflncome for the interirn periods are not necessarily
indicative ofthe results to be expected for the full year. These condensed consolidated financial statements do not contain the detail or footnote disclosure
conceming accounting policies and other matters which would be included in full fiscal year consolidated financial statements; therefore, they should be
rtad in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 1 0-K for the year
ended December 3l ,2016 (20 I 6 Form I 0-K). Please refer to the section "Acronyms and Terms" in the 20 I 6 Form I 0-K for definitions ofcertain terms not
defined herein. The acronyms and terms are an integral part ofthese condensed consolidated financial statements.
NOTE I. SI.]MMARYOF SIGNIFICANT ACCOUIYTING POLICIES
Nature ofBusiness
Avista Corp. is primarily an electric and natural gas utility v/ith certain other business ventures. Avista Utilities is an operating division ofAvista Corp.,
comprising the regulated utility operations in the Pacific Northwest. Avista Utilities provides electric distribution and transmission, and natural gas
distribution services in parts ofeastem Washington and northem Idaho. Avista Utilities also provides natural gas distribution service in parts ofnortheastem
and southwestem Oregon. Avista Utilities has electric generating facilities in Washington, Idaho, Oregon and Montana. Avista Utilities also supplies
electricity to a small number of customers in Montana, most ofwhom are employees who operate Avista Utilities'Noxon Rapids generating facility.
Alaska Energy and Resources Company (AERC) is a wholly-owned subsidiary ofAvista Corp. The primary subsidiary of AERC is Alaska Electric Light and
Power Company (AEL&P), which comprises Avista Corp.'s regulated utility operations in Alaska. Avista Capital, Inc. (Avista Capital), a wholly owned non-
regulated subsidiary ofAvista Corp., is the parent company ofall ofthe subsidiary companies in the non-utility businesses, with the exception ofAJT
Mining Properties, Inc., which is a subsidiary ofAERC.
Basis ofReporting
The condensed consolidated financial statements include the assets, liabilities, revenues and expenses ofthe Company and its subsidiaries and other majority
owned subsidiaries and variable interest entities for which the Company or its subsidiaries are the primary beneficiaries. Intercompany balances were
eliminated in consolidation. The accompanying condensed consolidated financial statements include the Company's proportionate share ofutility plant and
related operations resulting fiom its interests in jointly ouned plants.
Taxes Other Than Income Taxes
Taxes other than income taxes include state excise taxes, city occupational and fi'anchise taxes, real and personal property taxes and certain other taxes not
based on income. These taxes are generally based on revenues or the value ofproperty. Utility related taxes collected fiom customers (primarily state excise
taxes and city utility taxes) are recorded as operating revenue and expense. Taxes other than income taxes consisted ofthe following items forthe three and
six rnonths ended June 30 (dollars in thousands):
Three months ended June 30, Six months ended June 30,
20t'7 2016 2017 20t6
Utility related taxes
Property taxes
Other taxes
Total 52,000
t2
$13"552 $
9.432
8r8
12,573 $
9290
'152
35,1 36
19,83 8
1,490
30,938
19,71 0
1,152
$
$ 23,802 $22,615 S 56,464 $
Exhibit No. 3
Case Nos. AVU-E-'| 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 15 ol 71
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AVISTA CORPORATION
Malerials and Supplies, Fuel Stock and Slored Natural Gas
lnventories ofmaterials and supplies, fuel stock and stored natural gas are recorded at average cost for our regulated operations and the lower ofcost or net
realizable value for our non-regulated operations and consisted ofthe following as ofJune 30,2017 and December 3 I , 20 I 6 (dollars in thousands):
June 30, December 3 l,
201'7 20t6
Materials and supplies
Fuel stock
Stored natural gas
Total
$41A92 $
5,921
l3 7'14
40,700
4,5 85
8,029
$61,187 $53,314
Derivative Assets and Liabilities
Derivatives are recorded as either assets or liabilities on the Condensed Consolidated Balance Sheets measured at estimated fair value.
The Washington Utilities and Transpofiation Commission (UTC) and the Idaho hrblic Utilities Commission (IPUC) issued accounting orders authorizing
Avista Corp. to offset energy commodity derivative assets or liabilities with a regulatory asset or liability. This accounting treatment is intended to defer the
recognition ofmark-to-market gains and losses on energy commodity transactions until the period ofdelivery. Realized benefits and costs result in
adjustments tb retail rates through purchased gas cost adjustments, the Energy Recovery Mechanisrn (ERM) in Washington, the Power Cost Adjustment
(PCA) mechanism in Idaho, and periodic general rate cases. The resulting regulatory assets have been concluded to be probable ofrecovery through future
rates.
Substantially all forward contracts to purchase or sell power and natural gas are recorded as derivative assets or liabilities at estimated fair value with an
offsetting regulatory asset or liability. Contracts that are not considercd derivatives are accounted for on the accrual basis until they are settled or realized
unless there is a decline in the fair value ofthe contract that is determined to be other-than-temporary.
For inter€st rate swap derivatives, Avista Corp. records all mark-to-market gains and losses in each accounting period as assets and liabilities, as well as
offsetting regulatory assets and liabilities, such that there is no income statement impact. The interest rate swap derivatives are risk management tools similar
to energy commodity derivatives. Upon settlement ofinterest rate swap derivatives, the regulatory asset or liability is amortized as a component ofinterest
expense over the term ofthe associated debt. The Company records an offset ofinterest rate swap derivative assets and liabilities with regulatory assets and
liabilities, based on the prior practice ofthe commissions to provide recovery through the ratemaking process.
As ofJune 30, 20 1 7, the Company has multiple master netting agreements with a variety ofentities that allow for cross-commodity netting ofderivative
agreements with the same counterparty (i.e. power derivatives can be netted with natunl gas derivatives). In addition, some master netting agreements allow
for the netting ofcommodity derivatives and interest rate swap derivatives for the same counterparty. The Company does not have any agreements which
allow for cross-affiliate netting among multiple affiliated legal entities. The Company nets all derivative instruments when allowed by the agreement for
presentation in the Condensed Consolidated Balance Sheets.
Fqir Value Measurements
Fair value represents the price that would be received when selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between
market participants at the measurement date. Energy commodity derivative assets and liabilities, deferred compensation assets, as well as derivatives related
to interest rate swaps and foreign currency exchange contracts, are reported at estimated fair value on the Condensed Consolidated Balance Sheets. See Note
8 for the Cornpany's fair value disclosures.
t3
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 2, Page 16 of 71
I
I
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Table of Conterts
AVISTA CORPORATION
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net oftax, consisted ofthe following as ofJune 30,2017 and December 3 1 , 20 I 6 (dollan in thousands):
June 30,
2017
Unfunded benefit obligation for pensions and other posketirernent benefit plans - net oftaxes ofS3,878 and $4,075,
respectively s 7,202 S
December 3 l,
2016
7,568
The following table details the reclassifications out ofaccumulated other comprehensive loss by component for the three and six months ended June 30
(dollars in thousands).
Amounts Reclassified from Accumulated Other Comprehensive Loss
Thrce months ended June 30, Six months ended June 30,
Dctails about Accurnulated Other Conrprehensivc Loss Componcnts 20 I 7 20 I 6
Amortization of defined benefit.pension items
Affected Line Itm in Statement
of Income
$ (2ee) $ (311) S (5e8) $ (622) (a)
3,638 3,642 $ 7,276 $ 7,284 (a)
(3,057) (3,1 I s) (6,1 1 5) (8,338) (a) (b)
282 216 563 (1,616\ Totalbeforetax
(99) (76) (197) 587 Tax benefit (expense)
(a) These accumulated other comprehensive loss components are included in the computation ofnet periodic pension cost (see Note 4 for additional
details).
(b) TheadjustmentfortheeffectsofregulationduringthesixmonthsendedJune30,20l6includesapproximately$2.1 millionrelatedtothe
reclassification ofa pension regulatory asset associated with one ofourjurisdictions into accumulated other comprehensive loss.
Contingencies
The Company has unresolved regulatory, legal and tax issues which have inherently uncertain outcomes. The Company accrues a loss contingency ifit is
probable that a liability has been incurred and the amount ofthe loss or impairment can be reasonably estimated. The Company also discloses loss
contingencies that do not meet these conditions for accrual ifthere is a reasonable possibility that a material loss may be incuned. As ofJune 30, 20 I 7, the
Company has not recorded any significant amounts related to unresolved contingencies. See Note I I for further discussion of the Company's commitments
and contingencies.
NOTE 2. NEW ACCOT,]NTING STANDARDS
ASU No. 201 4-09, "Revenuefrom Contracts with Cuslomers (Topic 606)"
In May 20 14, the FASB issued ASU No. 20 I 4-09, which outlines a single comprehensive model for entities to use in accounting for revenue arising from
contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle ofthe revenue
model is that an entity should identif, the various perforrnance obligations in a contract, allocate the transaction price among the performance obligations
and recognize revenue when (or as) the entity satisfies each performance obligation. This ASU is effective for periods beginning after December I 5, 20 I 7.
The Company has a revenue recognition standard implementation team that is working through implementation issues. The Company has evaluated this
standard and is planning to adopt this standard in 201 8 upon its effective date. The Company is expecting to use a modified retrospective method of
adoption, which would require a cumulative adjustment to opening retained eamings, as opposed to a full retrospective application. Based on work
performed to date, the Company has not identified any material cumulative adjustments necessary.
14
2017
Amortrzation ofnet prior service cosl
Amortization of net loss
Adjustrnent due to effects ofregulation
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 17 of 71
2016
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AVISTA CORPORATION
Since the majority ofAvista Corp.'s revenue is from rate-regulated sales ofelectricity and natural gas to retail customers and revenue is recognized as energy
is delivered to these customers, the Company does not expect a significant change in operating revenues or net income. The Company is in the process of
reviewing and analyzing cefiain contracts with customers (most ofwhich are related to wholesale sales ofpower and natural gas) and has not yet identified
any significant differences in revenue recognition between current GAAP and ASU No. 2014-09.
During the implementation process, the Company has identified several issues, the most significant ofwhich are as follows based on our current assessment:
Conlributions in Aid of Construction - There was the potential that contributions in aid ofconstruction (CIAC) could be recognized as revenue upon the
adoption ofASU No. 2014-09. Under current GAAP, CIACs are accounted for as an oIlset to the cost ofutility plant in service. Current preliminary
implementation guidance indicates that CIACs will continue to be accounted for as an offset to utility plant in service.
Utilit!-Related Taxes Collected from Customers - There were questions on the presentation ofutility related taxes collected from customers (primarily state
excise taxes and city utility taxes) on a gross basis. Under current GAAP, the Company is allowed to record these utility related taxes on a gross basis in
revenue when billed to customem vrith an offset included in taxes other than income taxes in operating expenses. The Company evaluated whether this gross
presentation is appropriate under ASU 20 I 4-09 and the Company's preliminary assessment indicates that tbere will be no material changes to current
presentation,
Collectibili4, -There were questions regarding the requirement that collection ofa sale be probable and how, or if, utilities should consider bad debt
collection mechanisms (riders, base rate adjustments, etc.) in assessing probability ofcollection on sales to low income customers. Current preliminary
implementation guidance indicates that bad debt collection mechanisms should be considered; therefore, the Company does not expect a change to its
current presentati on going forward.
The Company is monitoring utility industry implementation guidance as it relates to certain issues to determine if there will be an industry consensus
regarding accounting and presentation ofthese items.
In addition to the issues described above, the Company also expects significant changes to its revenue-related footnote disclosures. The Company continues
to evaluate what information would be most useful forusers ofthe financial statements, including information already provided elsewhere in the document
outside the footnote disclosures. These additional disclosures could include the disaggregation ofrevenues by geographic location, type ofservice, source of
revenue or customer class. Also, the Company expects enhanced disclosures regarding its revenue recognition policies and elections-
ASU No. 20 I 6-02 "Leases (Topic 842). "
In February 20 I 6, the FASB issued ASU No. 2O16-02. This ASU introduces a new lessee model that requires most leases to be capitalized and shou.n on the
balance sheet with corresponding lease assets and liabilities. The standard also aligns certain ofthe underlying principles ofthe new lessor model with those
in Topic 606, the FASB's new revenue recognition standard. Furthermore, this ASU addresses other issues that arise under the current lease model; for
example, eliminating the required use ofbrightJine tests in current GAAP for determining lease classification (operating leases versus capital leases). This
ASU also includes enhanced disclosures surrounding leases. This ASU is effective for periods beginning on or after December I 5, 201 8; however, early
adoption is permitted. Upon adoption, this ASU must be applied using a modified retrospective approach to the earliest period presented, which will likely
require restatements ofpreviously issued financial statements. The modified retrospective approach includes a number ofoptional practical expedients that
entities may elect to apply. The Company evaluated this standard and determined that it will most likely not early adopt this standarrd before its effective date
in 2019. The Company has formed a lease standard implementation team that is working through the implementation prccess. The most significant
implementation challenge identified thus far relates to identifuing a complete population ofleases and potential leases under the new lease standard. Also,
the Company is monitoring utility industry implementation guidance as it relates to several unresolved issues to determine ifthere will be an industry
consensusr including whether right-of-ways are considered leases. The Company has not yet estimated the potential impact on its future financial condition,
results ofoperations and cash flows.
ASU No. 201 6-09 "Compensation-Stock Compensation Oopic 7 1 8): Improvements to Employee Share-Based Payment Accounting."
In March 20 1 6, the FASB issued ASU No. 2O1 6-09. This ASU simplified several aspects ofthe accounting for employee share-based payment transactions
including:
15
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2,Page 18o171
a
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AVISTA CORPORATION
allowing excess tax benefits or tax deficiencies to be recognized as income tax benefits or expenses in the Condensed Consolidated Statements of
lncome rather than in Additional Paid in Capital (APIC),
excess tax benefits no longer represent a financing cash inflow on the Condensed Consolidated Statements ofCash Flows and instead will be
included as an operating activity,
requiring excess tax benefits and tax deficiencies to be excluded from the calculation ofdiluted eamings per share, whereas under previous
accounting guidance, these amounts had to be estimated and included in the calculat:ion,
allowing forfeitures to be accounted for as they occur, instead ofestimating forfeitures, and
changing the statutory tax withholding requirements for share-based payments.
The Company early adopted this standard during the second quarter of 20 16, with a retrospective ellective date of January I , 201 6. The adoption of this
standard resulted in a recognized income tax benefit of$ 1.6 million in 20 1 6 associated with excess tax benefits on settled share-based employee payments.
Because this standard was adopted in the second quarter of 201 6, but had a retrospective effective date of January I , 201 6, the effects fiom the adoption were
reflected in the first quarter of20 I 6 and the Condensed Consolidated Financial Statements for that quarter were recast from those presented when the
financial statements were originally iszued.
ASU No. 20 1 7-07 "Compensation-Retirement BeneJits (Topic 7 ) 5): Improving the Presentation oJ Net Periodic Pension Cost and Net Periodic
P o stret irement B enefit C ost "
In Marclr 2017 , the FASB issued ASU No. 201 7-07, which amends the income statement presentation of the components of net period benefit cost for an
entity's defined benefit pension and other postretirement plans. Under current GAAP, net benefit cost consists ofseveral components that reflect different
aspects ofan employer's financial arrangements as well as the cost ofbenefits eamed by employees. These components are aggregated and reported net in the
financial statements. ASU No. 20 I 7{7 requires entities to (1 ) disaggregate the current service-cost component from the other components ofnct benefit cost
(other components) and present it with other current compensation costs for related employees in the income statement and (2) present the other components
elsewhere in the income statement and outside ofincome from operations.
In addition, only the service-cost component ofnet benefit cost is eligible for capitalization (e.g., as part ofutility plant). This is a change from current
practice, under which entities capitalize the aggregate net benefit cost to utility plant when applicable, in accordance with Federal Energy and Regulatory
Commission (FERC) accounting guidance. Avista Corp. is a rate-regulated entity and all components ofnet benefit cost are currently recovered from rate
payers as a component ofutility plant and under tlre new ASU these costs will continue to be recovered from rate payers in the same manner over the
depreciable lives ofutility plant. As all such costs are expected to continue to be recoverable, the components that are no longer eligible to be recorded as a
component ofplant for GAAP will be recorded as regulatory assets.
This ASU is effective for periods beginning after December I 5, 2017 and early adoption is permitted. Upon adoption, entities must use a retrospective
transition method to adopt the requirement for separate presentation in the income statement and a prospective transition method to adopt the requirement to
limit the capitalization ofbenefit costs to the service-cost component. The Company does not expect to early adopt this standard and does not expect a
material impact on its future financial condition, results ofoperations or cash flows upon adoption ofthis standard.
NOTE 3. DERIVATIVES AI\D RISK MANAGEMENT
The disclosures below in Note 3 apply only to Avista Corp. and its operating division Avista Utilities; AERC and its primary subsidiary AEL&P do not enter
into derivative instruments.
Energy Co mmodity Derivotives
Avista Corp. is exposed to market risks relating to changes in electricity and natural gas commodity prices and certain other fuel prices. Market risk is, in
general, the risk of fluctuation in the market price of the commodity being traded and is influenced primarily by supply and demand. Market risk includes the
fluctuation in the market price of associated derivative commodity instruments. Avista Corp. utilizes derivative instruments, such as forwards, futures, swap
derivatives and options in order to manage the various risks relating to these commodity price exposures. Avista Corp. has an energy resources risk policy
and control procedures to manage ttrese risks.
As part ofAvista Corp.'s resource procurement and management operations in the electric business, Avista Corp. engages in an ongoing process ofresource
optimization, which involves the economic selection from available energy resources to sewe Avista Corp.'s load obligations and the use ofthese resources
to capture available econornic value. Avista Corp. transacts in wholesale markets by selling and purchasing electric capacity and energy, fuel for electric
generation, and derivative contracts related to capacity, energy and fuel. Such transactions are part ofthe process ofmatching resources with load obligations
and hedging a portion ofthe related financial risks. These transactions range from terms ofintralrour up to multiple years.
l6
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 2, Page 1 I of 71
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AYISTA CORPORATION
As part ofits resource ptocurcment and management ofits natural gas business, Avista Corp. makes continuing projections ofits natural gas loads and
assesses available natural gas resources including natural gas storage availability. Natural gas resource planning typically includes peak requirements, low
and average monthly requirements and delivery constraints from natural gas supply locations to Avista Corp.'s distribution system. However, daily variations
in natural gas demand can be significantly different than monthly demand projections. On the basis ofthese projections, Avista Corp. plans and executes a
series oftransactions to hedge a portion ofits projected natural gas requirements through forward market transactions and derivative instmments. These
transactions may extend as much as four natural gas operating years (November through October) into the future. Avista Corp. also leaves a significant
portion ofits natural gas supply requirements unhedged for purchase in short-term and spot ma*ets.
Avista Corp. plans for sufficient natural gas delivery capacity to serve its retail customers for a theoretical peak day event. Avista Corp. generally has more
pipeline and storage capacity than what is needed during periods other than a peak day. Avista Corp. optimizes its natural gas resources by using market
opportunities to generate economic value that helps mitigate fixed costs. Avista Corp. also optimizes its natural gas storage capacity by purchasing and
storing natural gas when prices are traditionally lower, typically in the summer, and withdrawing during higher priced rnonths, typically during the winter.
However, ifmarket conditions and prices indicate that Avista Corp. should buy or sell natural gas at other times during the year, Avista Corp. engages in
optimization transactions to capture value in the marketplace. Natural gas optimization activities include, but are not limited to, wholesale market sales of
surplus natural gas supplies, purchases and sales ofnatural gas to optimize use ofpipeline and storage capacity, and participation in the transportation
capacity release market.
The following table presents the underlying energy commodity derivative volumes as ofJune30,2017 that are expected to be delivered in each respective
year (in thousands of MWrs and mmBTUs):
Purchases Sales
Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivatives
Yer
Remainder20lT 185
201 8 397
2X52019
2020
Physical (l)
MWH
Financial (1 )
MWH
999
307
'737
Physical (l) Financial (l) Physical (l) Financial (l)mmBTUs mmBTUs MWH MWH
7 ,418 63,423 154 1,129
78,488 254 1,244
610 42,715 1s8 982
910 3,635
Physical ( I )
mmBTUs
3,378
1,360
1,345
1,430
1,049
Financial ( I )
mmBTUs
43,940
46,805
26,590
o 2021
Thereafter
The following table presents the underlying energy commodity derivative volumes as ofDecember 3 1, 201 6 that are expected to be delivered in each
respective year (in thousands of MWhs and mmBTUs):
Sales
Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivatives
Physical ( I )
MWH
Finmcial (l )
MWH mmBTUs
15,4'',t5
Physical (l) Financial (l) Physical (l) Financial (l)Physical (1 )
mmBTUs
Financial ( I )
mmBTUsmmBTUsMWHMWHYear
2017
201 8
20t9
2020
2021
Thereafter
510
397
235 610
910
l 10,380
52,7 55
29,4'.75
) 1)\
316
286
158
1,552
1,244
982
4,165
1,360
1,345
t,430
1,060
73,1 10
l5,t l3
4,020
( I ) Physical transactions represent commodity transactions in which Avista Corp. will take or make delivery of either electricity or natural gas; financial
transactions represent derivative instruments with delivery ofcash in the amount ofthe benefit or cost but with no physical delivery ofthe commodity,
such as futures, swap derivatives, options, or forward contracts.
The electric and natural gas derivative contracts above will be included in either power supply costs or natural gas supply costs during the period they are
delivered and will be included in the various recovery mechanisms @RM, PCA, and Purchased Gas Adjustments (PGA)), or in the general rate case process,
and are expected to be collected through retail rates from customers.
o
17
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2,Page20ol71
Purchases
907
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AVISTA CORPORATION
Foreign Currency Exchange Derivarives
A significant portion ofAvista Corp.'s natural gas supply (including fuel for power generation) is obtained from Canadian sources. Most ofthose transactions
are executed in U.S. dollars, which avoids foreign currency risk. A portion ofAvista Corp.'s short-tenn natural gas transactions and long-term Canadian
transportation contracts are committed based on Canadian currency prices and settled within 60 days with U.S. dollars. Avista Corp. hedges a portion ofthe
foreign currency risk by purchasing Canadian currency exchange derivatives when such commodity transactions are initiated. The foreign culrency exchange
derivatives and the unhedged foreign cunency risk have not had a material effect on Avista Corp.'s financial condition, results ofoperations or cash flows
and these differences in cost related to currency fluctuations are included with natural gas supply costs forratemaking.
The following table summarizes the foreign curency exchange derivatives that Avista Corp. has outstanding as ofJune 30,2017 and December 3 1,201 6
(dollars in thousands):
June 30,
2011
December 3 l,
2016
21
$ 2,819
3,7 54
Number ofcontracts
Notional amount (in United States dollars)
Notional amount (in Canadian dollars)
$
24
7,588
10,075
Interest Rate Derivatives
Avista Corp. is affected by fluctuating interest rates related to a portion ofits existing debt, and future borrowing requirements. Avista Corp. hedges a portion
ofits interest rate risk with financial derivative instruments, which may include interest rate swap derivatives and U.S. Treasury lock agreements. These
interest rate swap derivatives and U.S. Treasury lock agreements are considered economic hedges against fluctuations in future cash flows associated with
anticipated debt issuances.
The following table summarizes the utrsettled interest rate swap derivatives that Avista Corp. has outstanding as ofJune 30, 20 I 7 and December 3 l, 20 1 6
(dollan in thousands):
Balance Sheet Date Numb€r of Contracts Notional Amount Mandatory Cash Settlement Date
June 30, 20 I 7 6 $o l4
6
3
5
75,000
27 5,000
70,000
3 0,000
60,000
2017
201 8
2019
2020
2022December3r'2016 :, t ,li,lll ;il:r
6 70,000 2019
2 20,000 2020
5 60,000 2022
The fairvalue ofoutstanding interest rate swap derivatives can vary significantly from period to period depending on the total notional amount ofswap
derivatives outstanding and fluctuations in market interest rates compared to the interest rates fixed by the swaps. Avista Corp. is required to rnake cash
payments to settle the interest rate swap derivatives when the fixed rates are higher than prevailing market rates at the date ofsettlement. Conversely, Avista
Corp. receives cash to settle its interest rate swap denvatives when prevailing market rates at the time ofsettlement exceed the fixed swap rates. Upon
settlement ofinterest rate swaps, the cash payments made or received are recorded as a regulatory asset or liability and are amortized as a component of
interest expense over the life ofthe associated debt. The settled interest rate swaps are also included as a part ofthe Company's cost ofdebt calculation for
ratemaking purposes.
l8
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2,Page21 ol71
o AVISTA CORPORATION
Summary of Outsranding Derivative Instuments
The amounts recorded on the Condensed Consolidated Balance Sheet as ofJune 30,2017 and December 3 1, 20 I 6 reflect the offsetting ofderivative assets
and liabilities where a legal right ofoffset exists.
The following table presents the fair values and locations ofderivative instnrments recorded on the Condensed Consolidated Balance Sheet as ofJune 30,
2017 (in thousands):
Fair Value as ofJune 30,201 7
Derivative ud Balance Sheet Location
Net Asset
(Liability)
on Balance
Sheet
Gross
Aset
Gros
Liability
Collateral
Netted
Foreign currency exchange derivatives
Other current assets
Interest rate swap derivatives
Other current assets
Otherproperty and investments-net and othernon-cutrent assets
Current interest rate swap derivative liabilities
Non-current interest rate swap derivative liabilities
Energy commodity derivatives
Other current assets
Cunent energy commodity derivatrve liabilities
Other non-current liabilities, regutatory Iiabilities and defened credits
Total derivative instrurrents recorded on tlre balance sheet
Derivative ad Balance Sheet Location
Forei gn currency exchange derivatives
Other cunent liabilities
Interest rate swap derivatives
Other current assets
Otherproperty aod investments-net and othernon-current assets
Current interest rate swap derivative liabilities
Non-current interest rate swdp derivative liabilities
Energy commodity derivatives
Other currert assets
Current energy commodity derivative liabilities
Other non-current Iiabilities, regulatory Iiabilities and deferred credits
Total derivative inslruments recorded on the balance sheet
$
5,626
5,6',16
168
)) <11
12,532
(208)
(1,645)
(78,077)
(336)
(11)
(16,716)
(27,sss)
41 ,570
5,8;
3,9t6
187
5,41 8
4,031
(3 6,s 07)
(336)
157
(8,3 08)
il r,087)
187 $$$
$ 46,766 S (144,s48) $ s1,337 $ (46,44s)
o The following table presents the fair values and locations ofderivative instruments recorded on the Condensed Consolidated Balance Sheet as of
December 3 l, 201 6 (in thousands):
Fair Value as of December 3 I , 20 1 6
Gross
Asset
Cros
Liability
Collatcral
Netted
Net Asset
(Liability)
on Balance
Sheet
$
3,393
sJ54
3,951
18,682
16,335
I 3,071
(28) S
(397)
(l 5,756)
(s7,825)
(l 6,787)
(29,s 98)
(29,990)
9,731
25,169
6,228
3,630
(23)
3,393
5,357
(6,025)
(28,705)
1,895
(7,03s)
(13,289)
5S $
$ 61,191 $ (rs0,381) $ 44,758 $ (44,432)
Exposwe to Defitandsfor Collateral
Avista Corp.'s derivative contracts often rcquire collateral (in the form ofcash or letters ofcredit) or other credit enhancemcnts, or reductions or terminations
ofa portion ofthe contract through cash settlement. In the event ofa downgrade in Avista Corp.'s credit ratings or changes in market prices, additional
collateral may be required. ln periods ofprice volatility, the level ofexposure can change significantly. As a result, sudden and significant demands may be
made against Avista Corp.'s credit
o
l9
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 22 ol 71
Table of Contents
o
Table of Contents
AVISTA CORPORATTON
facilities and cash. Avista Corp. actively moniton the exposure to possible collateral calls and takes steps to mitigate capital requirements.
The following table presents Avista Corp.'s collateral outstanding related to its derivative instruments as ofJune 30, 20 I 7 and Decernber 3 l, 20 I 6 (in
thousands):
June 30,
2017
December 3 l,
20t6
Certain ofAvista Corp.'s derivative instruments contain provisions that require Avista Corp. to maintain an "investment grade" credit rating from the major
credit rating agencies. IfAvista Corp.'s credit ratings were to fall below "investment grade," it would be in violation ofthese provisions, and the
counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing collateralization on derivative instruments
in net liability positions.
The following table presents the aggregate fair value ofall derivative instruments with credit-risk-related contingent features that are in a liability position
and the amount ofadditional collateral Avista Corp. could be required to post as ofJune 30,2017 and December 3 I , 20 I 6 (in thousands):
Energy commodity derivatives
Cash collateral posted
Letters of credit outstanding
Balance sheet offsetting (cash collatcral against nct derivativc positions)
Interest rate swap derivatives
Cash collateral posted
Letters olcredit outstanding
Balance sheet offsetting (cash collateral against net derivative positions)
Energy commodity derivatives
Liabilities with credit-risk-related contingent features
Additional collateral to post
Interest rate swap derivatives
Liabilities with credit-risk-related contingent features
Additional collateral to post
15,924 S
37,250
9,'7 67
41,570
13,100
41,570
t'7,t34
24,400
9,85 8
34,900
3,600
34,900
1,124
1 p46
73,9't8
21,100
June 30,
2017
December 31,
20t6o$$648
648
80,266
11,210
NOTE 4, PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
Avista Utilities
Avista Utilities'pension and otherpostretirement plans have not changed during the six months ended June 30,2017. The Company's funding policy is to
contribute at least the minimum amounts that are required to be funded under the Employee Retirement Income Security Act, but not more than the maximum
amounts that are curently deductible for income tax purposes. The Cornpany contributed $ 1 4.8 million in cash to the pension plan for the six months ended
June 30,2017 and expectsto contributea total of$22.0 million in 2017.The Company contributed $12.0 million in cash to the pension plan in 2016.
20
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2, Page 23 oI 71
o
$
o
Table of Contentr
AVISTA CORPORATION
TheCompanyusesaDecember3l measurementdateforitsdefinedbenefitpensionandotherpostretirementbenefitplans.Thefollowingtablesetsforththe
components ofnet periodic benefit costs for the tltree and six months ended June 30 (dollars in thousands):
Pension Benefits Other Post-retirement Benefi ts
20t7 20t6 2017 2016
Three months ended June 30:
Service cost
Interest cost
Expected retum on plan assets
Amortization of prior service cost
Net loss recognition
Net periodic benefit cost
Six months ended June 30:
Service cost
Intcrest cost
Expected retum on plan assets
Amortization ofprior service cosl
Net loss recognition
Net pcnodic benefit cost
Borrowings outstanding at end ofperiod
Letters ofcredit outstandrng at end ofperiod
Averago interest rates at end ofpenod
$5,092 S
6,976
(7,e00)
2,317
4,569 $
6,900
(6,87 s)
2,201
799 S
1,374
(47 s)
(3 12)
1,320
804
1,534
(47s)
(3 l2)
1,494
$ 6,48s $ 6J9s
$
$ 2,706 S 3,045
10,134 $
13,92't
(t s,800)
9,088 $
13,800
{t3,62s)
1,623 $
2,773
(e50)
(624)
2,593
1,583
3,093
(es0)
(624)
2,859
$ 13 "124
4,091
$ 13,354
4,863
$ 5,415 S 5,96r
O
Total net periodic benefit costs in the table above are recorded to the same accounts as labor expense. Labor and benefits expense is reconded to various
projects based on whether the wor* is a capital project or an operating expense. Approximately 40 percent ofall labor and benefits is capitalized to utility
property and 60 percent is expensed to other operating expenses.
NOTE 5. COMMITTED LIIIES OF CREDIT
Avista Corp,
Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million that expires in April 2021 . The
committcd line ofcredit is secured by non-transferable first mortgage bonds ofthe Company issued to the agent bank that would only become due and
payable in the event, and then only to the extent, that the Company defaults on its obligations under the committed line ofcredit.
Borrowings outstanding and interest rates of borrowings (excluding letters of credit) under the Company's revolving committed line of credit were as follows
as ofJune 30,2017 and December 3 I , 20 I 6 (dollars in thousands):
June 30, December 3 l,
20t'7 20t6
$136,000
56,'t03
1.99%
120,000
14 t51
1.50%
$
s
As of June 30,2017 and December 3 I , 201 6, the borrowings outstanding under Avista Corp.'s committed line of credit were classified as short-term
bonowings on the Condensed Consolidated Balance Sheet. The additional short-term borrowings outstanding as ofJune 30,2017 on the Condensed
Consolidated Balance Sheet relate to a short-term note payable by a subsidiary for the acquisition ofland that will be repaid in early 20 1 8.
AEL&P
AEL&P has a committed line of credit in the amount of $25.0 million that expires in November 2019. As of June 30,2017 and December 3 l, 2016, there were
no borrowings or letters ofcredit outstanding under this committed line ofcredit. The committed line ofcredit is secured by non-transferable first mongage
bonds ofAEL&P issued to the agent bank that would only become due and payable in the event, and then only to the extent, that AEL&P defaults on its
obligations under the committed line of credit.
2t
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
Schedule 2, Page 24 ol 71
O
Table of Conteots
AVISTA CORPORATION
NOTE 6. LONG-TERM DEBT AND CAPITAL LEASES
The following details long-term debt outstanding as ofJune 30,2017 and December 3 I , 20 I 6 (dollars in thousands):
Maturity Intercst
Year Derription Rate
Junc 30,
20t't
December 3 I
2016
Avista Corp. Secured Lorg-Term Debt
2018 First Mortgage Bonds
2018 SecuredMedium-TermNotes
2019 First Mortgage Bonds
2020 First Mortgage Bonds
2022 First Mortgage Bonds
2023 Secured Medium-Terrn Notes
2028 Secured Medium-Tenn Notes
2012 Secured Pollution Control Bonds (l)
2034 Secured Pollution Control Bonds (l)
2035 First Mortgage Bonds
2037 First Mortgage Bonds
2040 First Mortgage Bonds
2041 First Mortgage Bonds
2044 First Mortgage Bonds
2045 First Mortgage Bonds
2047 First Mortgage Bonds
2051 First Mortgage Bonds
Total Avista Corp. secured long-term debt
Alaska Electric Light and Power Company Secured Long-Term Debt
2044 First Mortgage Bonds
Total secured long-term debt
Alaska f,nergy a,nd Resources Company Unsecured Long-Term Debt
2019 Unsecured Term Loan
Total secured and unsecured long-tem debt
Other Long-Term Debt Components
Capital lease obligations
Unamortized debt discount
Unamortized long-term debt issuance costs
Total
Secured Pollution Control Bonds held by Avista Corporation (l )
Current portion oflongterm debt and capital leases
Total long-term debt and capital leases
(t)
5.95%
7.39a/o-7.45Yo
5.45%
3.89%
5.13%
7.180/o:l.54Vo
637%
(l)
(l )
6.25%
5.70%
5.55%
4.45%
4.11%
4.370/o
4.23%
3.54%
250,000 s
22,500
90,000
52,000
250,000
13,5 00
25,000
66,700
17,000
150,000
l 5 0,000
35,000
85,000
60,000
100,000
80,000
175,000
250,000
22,500
90,000
52,000
250,000
13,500
25,000
66,700
17,000
150,000
150,000
35,000
85,000
60,000
100,000
80,000
I ?5,000
$
o 1,621,700
75,000
I,696,700
I 5,000
1,621,700
75,000454%
3.85%
1 ,696,7 00
15,000
I ,711,7 00 1,711,700
63,791
(7oe)
(r 0,204)
65,435
(7e2)
(1 0,639)
I,7 64,57 8
(83,700)
(277,814)
1 ,7 65,7 04
(83,700)
(3,287)
$ 1,403,064 g 1 ,67 8,717
In Decernber 2010, S66.7 million and $17.0 million of the City ofForsyth, Montana Pollution Control Revenue Refunding Bonds (Avista
Corporation Colstrip Project) due in 2O32 and2034, respectively, which had been held by Avista Corp. since 2008 and 2009, respectively, were
refunded by new variable rate bond issues (Series 20 I 0A and Series 20 I 0B). The new bonds were not offered to the public and were purchased by
Avista Corp. due to market conditions. The Company expects that at a later date, subject to market conditions, these bonds may be remarketed to
unaffiliated investon. So long as Avista Corp. is the holder of these bonds, the bonds will not be reflected as an asset or a liability on Avista Corp.'s
Consolidated Balance Sheets.
22
O
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 25 of 71
a
o
Table of Contents
AVISTA CORPORATION
NOTE 7. LONG.TERM DEBT TO AFFILIATED TRUSTS
In 1997, the Company issued Floating Rate Junior Subordinated Deferrable Interest Debentures, Series B, with a principal amount of $5 I .5 million to Avista
Capital II, an affiliated business trust formed by the Company. Avista Capital II issued $50.0 million ofPrefened Trust Securities with a floating distribution
rate ofLIBOR plus 0.875 percent, calculated and reset quarterly.
The distribution rates paid were as follows during the six months ended June 30,2017 and the year ended December 3 I , 20 I 6:
June 30, December 31,
2017 20t6
Low disttibution rate
High distribution rate
Distribution rale at the end ofthe period
181%
2.O8%
2.08%
n,
l.8l%
l.8t%
Concurrent with the issuance of the Prefened Trust Securities, Avista Capital II issued $ 1.5 million of Common Trust Securities to the Company. These debt
securities may be redeemed at the option ofAvista Capital II at any time and mature on June I ,2037 . ln December 20O0, the Company purchased $ I 0.0
million ofthese Preferred Trust Securities.
The Company owns I 00 percent ofAvista Capital II and has solely and unconditionally guaranteed the payment ofdistributions on, and redemption price
and liquidation amount for, the Preferred Trust Securities to the extent that Avista Capital tr has funds available for such payments from the respective debt
securities. Upon maturity or prior redemption ofsuch debt securities, the Preferred Trust Securities will be mandatorily redeemed. The Company does not
include these capital trusts in its consolidated financial statements as Avista Corp. is not the primary beneficiary. As such, the sole assets of the capital trusts
are $5 I .5 million ofjunior subordinated deferrable interest debentures ofAvista Corp., which are reflected on the Condensed Consolidated Balance Sheets.
Interest expense to affiliated trusts in the Condensed Consolidated Statements oflncome represents interest expense on these debentures.
NOTE 8. FAIRVALUE
The carrying values ofcash and cash equivalents, accounts and notes receivable, accounts payable, and short-term borrowings are reasonable estimates of
their fair values. Long-tenn debt (including current portion and material capital leases) and long-term debt to affiliated trusts are reported at carrying value on
the Condensed Consolidated Balance Sheets.
The fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to fair values derived from unobservable inputs (Level 3
measurement).
The three levels ofthe fair value hierarclry are defined as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities. Active markets are those in which transactions for the asset or
liability occur with sufficient Aequency and volume to provide pricing information on an ongoing basis.
Level 2 - Pricing inputs are other than quoted prices in active markets included in Level I , but which are either directly or indirectly observable as of
the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily
industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and cunent
market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all ofthese assumptions are
observable in the marketplace throughout the full term of the instrument, can be derived from obsewable data or are supported by observable levels at which
transactions are executed in the marketplace.
Level 3 - Pricing inputs include significant inputs that are generally unobservable Aom objective sources. These inputs may be used with intemally
developed methodologies that result in management's best estimate offair value.
Financial assets and liabilities are classified in their entirety based on the lowest level ofinput that is significant to the fair value measurement. The
Company's assessment ofthe significance ofa particular input to the fair value measurement requiresjudgment, and may affect the valuation offair value
assets and liabilities and their placement within the fair value hierarchy levels. The determination ofthe fair values incorporates various factors that not only
include the credit standing ofthe counterparties involved and the impact ofcredit enhancements (such as cash deposits and letters ofcredit), but also the
impact of Avista Corp.'s nonperformance risk on its liabilities.
23
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2,Page26ot71
o
o
Table of Contents
AVISTA CORPORATION
The following table sets forth the carrying value and estimated fair value of the Company's financial instrumenl.s not reported at estimated fair value on the
Condensed Consolidated Balance Sheets as ofJune 30, 201 7 and December 3 I , 20 I 6 (dollars in thousands):
June 30, 201 7 December3l,20l6
Carying Canying
ValueValue
s ,51p00
677,000
60,953
5 t ,547
Level2
1,07 6,925 $
701 ,924
62,600
43,042
Level 3
951,000
677,000
62,160
5t,547
Estimated
Fair Value
$ 1p48r6l
67 5,251
62,800
3 8,660
Total
t57
187
9449
1 ,716
6,067
Estimared
Fair Value
These estimates of fair value of long-term debt and long-term debt to affliated trusts were primarily based on available market information, which generally
consists ofestimated market prices from third party brokers for debt with similar risk and terms. The price ranges obtained from the third party brokers
consisted of par values of 83 .5 0 to I 2 8.87, where a par value of I 00.0 represents the carrying value recorded on the Condensed Consolidated Balance Sheets.
Level 2 long-term debt represents publicly issued bonds with quoted market prices; however, due to their limited trading activity, they are classified as Level
2 because brokers must generate quotes and make estimates ifthere is no trading activity near a period end. Level 3 long-term debt consists ofprivate
placement bonds and debt to amliated trusts, which typically have no secondary trading activity. Fair values in Level 3 are estimated based on market prices
from third party brokers using secondary market quotes for debt with similar risk and terms to generate quotes for Avista Corp. bonds. Due to the unique
nature ofthe Snettisham capital lease obligation, the estimated fair value ofthese items was determined based on a discounted cash flow model using
available market information. The Snettisham capital lease obligation was discounted to present value using the Morgan Markets A Ex-Fin discount rate as
published on June 30, 20 I 7.
The followtng table discloses by level within the fairvalue hierarchy the Company's assets and liabilities measured and reported on the Condensed
Consolidated Balance Sheets as ofJune 30,2017 and December 3 1,2016 at fair value on a recuring basis (dollars in thousands):
Longtern debt (Level 2)
Long-term debt (Level 3)
Snettisham capital lease obligation (Levei 3)
Long-term debt to affiliated trusts (Level 3)
June 30, 201 7
Assets:
Energy comnrodity derivatives
Level 3 energy commodity derivatives:
Natural gas exchange agreement
Foreign currency exchange derivatives
lnterest rate swap derivatives
Deferred cornpensati on assets:
Fixed income securities (2)
Equity securities (2)
Total
Liabilities:
Energy comrnodity derivatives
Level 3 energy commodity derivatives:
Natural gas exobange agreement
Power exchange agreement
Power option agreernent
Interest mte swap derivatives
Total
$7,',183 $ 46,687 $'79 $ (36,973) S t'7 ,57 6
o Level I
Counterparty
and Cash
Collateral
Netting (l)
35.1 98 S
187
11,302
$ (35,04r) $
(l,8s3)
(7e)79
1,716
6,067
$$ 46,203 $$ (44,808) $1,395
80,266 (43,423)
4,173
13,784
43
36,843
s 126,469 $18,07e $ (88,310)$ 56238
a )<)
t 3,7 84
43
{7e)
o
24
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2,Page27 ol71
$
$
o
Table of Contents
AVISTA CORPORATION
Level I Level2 Level 3
Counterparty
and Cash
Collateral
Netting (l)Total
Decemtrer 3l, 201 6
Assets:
Energy commodity derivatives
Level 3 energy commodity derivatives:
Natural gas exchange agreement
Power exchange agreemcnt
Foreign curency exchange derivatives
lnterest rate swap derivatives
Defsrred compensalion assets:
Fixed income securities (2)
Equity securities (2)
Total
Liabilities:
Energy commodity derivatives
Level 3 energy comrnodity derivatives:
Natural gas exchange agreement
Power exchange agreement
Power option agreemenl
Forei gn currency exchan ge derivatives
Interest rate swap derivatives
Total
$$ 47,994 $$ (45,0e9) $I ,895
69
25
(6e)
(2s\
(s)
(4,348)
5
13,098
1,'1f39
5,481
8,750
1,789
5,481
s 7,270 $ 6l ,097 $94$(50,546) $17,9t5
$56,871 $
28
73,978
$(ss,es7) s
(s)
(39,248\
914
5,954
13,4't4
76
5,885
13,449
76
23
34,7 30
(6e)
(2s)
o $$ 13.0,877 $ 19,504 $ (9s,304)$ ss,077
(l) TheCompanyispermittedtonetderivativeassetsandderivativeliabilitieswiththesamecounterpartywhenalegallyenforceablemasternetting
agreement exists. In addition, the Company nets derivative assets and derivative liabilities against any payables and receivables for cash collateral held
orplaced with these same counterparties.(2) These assets are trading securities and are included in otherproperty and investments-net and othernon-current assets on the Condensed Consolidated
Balance Sheets.
The difference between the amount ofderivative assets and liabilities disclosed in respective levels in the table above and the amount ofderivative assets
and liabilities disclosed on the Condensed Consolidated Balance Sheets is due to netting arrangements with certain counterparties. See Note 3 for additional
discussion of derivative netting.
To establish fair value for energy commodity derivatives, the Company uses quoted market pnces and forward price curves to estimate the fair value of
energy commodity derivative instruments included in Level 2. In particular, electric derivative valuations are performed using market quotes, adjusted for
periods in between quotable periods. Natural gas derivative valuations are estimated using New York Mercantile Exchange (NYMEX) pricing for similar
instruments, adjusted for basin differences, using market quotes. Where observable inputs are available for substantially the full term ofthe contract, the
dcrivative asset or liability is included in Level 2.
To establish fair values for interest rate swap derivatives, the Company uses forward market curves for interest rates for the term ofthe swaps and discounts the
cash flows back to present value using an appropriate discount rate. The discount rate is calculated by third party brokers according to the terms ofthe swap
derivatives and evaluated by the Company for reasonableness, with consideration given to the potential non-performance risk by the Company. Future cash
flows ofthe interest rate swap derivatives are equal to the fixed interest rate in the swap compared to the floating market interesl rate multiplied by the
notional amount for each period.
To establish fair value for foreign currency derivatives, the Company uses forward mar*et curves for Canadian dollars against the US dollar and multiplies the
difference between the locked-in price and the market price by the notional amount ofthe derivative. Forward foreign currency market curves are provided by
third party brokers. The Company's credit spread is factored into the locked-in price ofthe foreign exchange contracts.
o
25
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 28 ot 71
$
o
o
Table of Contents
AVISTA CORPORATION
Deferred compensation assets and liabilities represent funds held by the Company in a Rabbi Trust for an executive deferral plan. These funds consist of
actively tnded equity and bond funds with quoted prices in active markets. The balance disclosed in the table above excludes cash and cash equivalents of
$0.2 million as of June 30,2017 and $0.4 million as of December 3 I , 201 6.
Level 3 FairValue
Under the power exchange agreement the Company purchases power at a price that is based on the average operating and maintenance (O&M) charges from
three surrogate nuclear power plants around the country. To estimate the fair value ofthis agreement the Company estimates the difference between the
purchase price based on the future O&M charges and forward prices for energy. The Company compares the Level 2 brokered quotes and forward price curves
described above to an intemally developed forward price which is based on the average O&M charges from the three surrogate nuclear power plants for the
current year. Because the nuclear power plant O&M charges are only known for one year, all forward years ar€ estimated assuming an annual escalation. In
addition to the forward price being estimated using unobservable inputs, the Company also estimates the volumes ofthe transactions that will take place in
the furure based on historical average transaction volumes per delivery year (November to April). Significant increases or decreases in any ofthese inputs in
isolation would result in a significantly higher or lower fair value measurement. Generally, a change in the current year O&M charges for the surrogate plants
is accompanied by a directionally similar change in O&M charges in future years. There is generally not a correlation between extemal market prices and the
O&M charges used to develop the intemal forward price.
For the power commodity option agreement, the Company uses the Black-Scholes-Merton valuation model to estimate the fair value, and this model includes
significant inputs not observable or corroborated in the market. These inputs include: I ) the strike price (which is an intemally derived price based on a
combination ofgeneration plant heat rate factors, natural gas market pricing, delivery and other O&M charges) and 2) estimated delivery volumes.
Significant increases or decreases in these inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, changes in
overall commodity market prices are accompanied by directionally similar changes in the strike price assumptions used in the calculation.
For the natural gas commodity exchange agreement, the Company uses the same Level 2 brokered quotes described above; however, the Company also
estimates the purchase and sales volumes (within contrachral limits) as well as the timing of those transactions. Changing the timing of volume estimates
changes the timing ofpurchases and sales, impacting which brokered quote is used. Because the brokered quotes can vary significantly from period to period,
the unobservable estimates ofthe timing and volume oftransactions can have a significant impact on the calculated fair value. The Company curently
estimates volumes and timing oftransactions based on a most likely scenario using historical data. Historically, the timing and volume oftransactions have
not been highly correlated with market prices and market volatility.
The following table presents the quantitative information which was used to estimate the fair values ofthe Level 3 assets and liabilities above as ofJune 30,
20 I 7 (dollan in thousands):
Fair Value (Net) at
June 30,2017
Unobservable
Valuation Technique Input Range
Power exchange agreement $(l 3,784)Surrogate facility
pricing
O&M charges
Escalation lactor
Transaction volumes
$33.59-$49.1 s/N{Wh ( l )
3%-2017 to2019
396,984 MWhs
Power option agreement $(43)Black-Scholes-
Merton
Strike price
Delivery volumes
s35.92lMWh -2019
s48.39/MWh - 2018
128,6t1 -2s4,363 MWlrs
Natural gas exchange
agreement
$ (4,1 73) Intemally derived Forward purchase
weighted average prices
cost ofgas Forward sales prices
Purchase volumes
Sales volumes
$1.66 - $2.3S/mmBTU
$1.67 - $3.29lmmBTU
I 15,000 - 3 10,000 mmBTUs
60,000 -310,000mmBTUs
(l ) The average O&M charges for the delivery year beginning in November 2016 arc $39.22 per MWh. For ratemaking purposes the average O&M charges to
be included for recovery in retail rates vary slightly between regulatory jurisdictions. The average O&M charges for the delivery year beginning in 20 I 6
are $44.33 for Washington and $39.22 for Idaho.
26
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 2,Page29of71
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Table of Conteots
AVISTA CORPORATION
The valuation methods, significant inputs and resulting fair values described above were developed by the Company's management and are reviewed on at
least a quarterly basis to ensure they provide a reasonable estimate offairvalue each reporting period.
The following table presents activity forenergy commodity derivative assets (liabilities) measured at fairvalue using significant unobservable inputs (Level
3) for the three and six months ended June 30 (dollan in thousands):
Natural Gas
Exchange
Agreement
Power Exchange
Agreement
Power Option
Agreement Total
Three months ended June 30, 201 7:
Balance as ofApril l, 20 I 7
Total gains or (losses) (realizedlunrealized):
Included in regulatory assets/liabilities (l )
Settlements
Ending balance as ofJune 30,2017 (2)
Three months ended June 30,2016:
Balance as ofApril 1,201 6
Total gains or (osses) (realized/unrealized):
Includcd in regulatory assets/liabilities (l )
Settlefnents
Ending balance as ofJune 30,2016 (2)
Six months ended June 30, 2017:
Balance as ofJanuary l, 201 7
Total gains or (losses) (realizediunrealized):
Included in regulatory assets/liabilities (l )
Settl.ements
Ending balance as ofJune 30,2017 (2)
Six months ended June 30,2016:
Balance as ofJanuary l, 201 6
Total gains or (losses) (realized/unrealized):
lncluded in regulatory assets/liabilities (1 )
Settlements
Ending balance as ofJune 30,2016 (2)
$
(l e5)
300
(672)
1,307
(266) $
223
(4,278) $ (14,419) S (r 8,963)
(644)
1,607
(43) $ (18,000)s (4,173) $(13,784) $
$(6,006) s (20,193) $(e7) $ (26,2e6)
(r,551)
700
4,400
1,179
2,841
1,879
(8)
s (6,857) $ (t4,614) $(10s) $ (21,576)
s (5,88s) $ (13,44e) $(76) $ (le,4r0)
O 1,817
(r 0s)
(5,16s)
4,830
(3,3 l5)
4,725
s (4,173) S (13,784) S (43) $ (r 8,000)
$(5,039) $ (21,96r) S (124\ S (27,124)
(l,30e)
6,857
(3,2e6)
|,478
1,968
s,3't9
s (6,8s7) $ (14,614) S (105) $ (21,576)
(l) Allgainsandlossesareincludedinotherregulatoryassetsandliabilities.Therewerenogainsandlossesincludedineithernetincomeorother
comprehensive income during any ofthe periods presented in the table above.
(2) There were no purchases, issuances or transfers from other categories ofany derivatives instruments during the periods presented in the table above.
NOTE 9. COMMON STOCK
In March 201 6, the Company entered into four separate sales agency agreements under which Avista Corp.'s sales agents may offer and sell up to 3.8 million
new shares ofAvista Corp.'s common stock, no par value, from time to time. The sales agency agreements expire on February 29,2020. As ofJune 30,2017 ,
I .6 million shares have been issued under these agreements, I eaving 2.2 million shares remaining to be issued. No shares were issued under these agreements
in the six months ended June30,2017.
In the six months ended June 30, 2017, Avista Corp. issued 0.2 million shares of common stock, most ofwhich were under employee incentive plans. The
Company also issued a small number ofshares under the 40 I (k) employee investment plan. Total net proceeds for all issuances were $ I .2 million.
27
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 30 ot71
o
33
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Table of Contetrts
AVISTA CORPORATION
NOTE I t). EARMNGS PER COMMON SHARE ATTRIBUTABLE TO AVISTA CORP. SIIAREHOLDERS
The following table presents the computation of basic and diluted eamings per common share attributable to Avista Corp. shareholders for the three and six
months ended June 30 (in thousands, except per share amounts):
Three months ended June 30, Six months ended June 30.
20t7 20t6 20t7 2016
Numerator:
Net income attributable to Avista Corp. shareholders
Denominator:
Weighted-average number of common shares outstanding-basic
Effect of dilutive securities:
Pedormance and restricted stock awards
Weighted-average number of common shares outstanding-diluted
Errnings per common share rttributable to Avista Corp. shareholders:
Basic
Diluted
Thcre were no shares excluded fiom the calculation becausc they wcre antidjlutivc.
$ 0.34 $ 0.43 $ 1.30 S 1.35
$ 0.34 $ 0.43 S 1.30 $ 1.34
$ 21,77r $?av $ 83,887 $84,903
64Agt 63,3 86 64,382
t29
62,995
373152 397
64,553 63,783 64,511 63,368
NOTE 1 I. COMMITMENTS AND CONTINGENCIES
In the course ofits business, the Company becomes involved in vanous claims, controversies, disputes and other contingent matters, including the items
described in this Note. Some ofthese claims, controversies, disputes and other contingent matters involve litigation or other contested proceedings. For all
such matters, the Company intends to vigorously protect and defend its interests and pumue its rights. However, no assurance can be given as to the ultimate
outcome ofany particular matter because litigation and other contested proceedings are inherently subject to nurnerous uncertainties. For matters that affect
Avista Utilities' or AEL&P's operations, the Company intends to seek, to the extent appropriate, recovery ofincurred costs through the ratemaking process.
California Refund Pro cee ding
In February 201 5, APX, a market maker in the California Refund Proceedings in whose markets Avista Energy participated in the summer of 2000, asserted
that Avista Energy and its other customer/participants may be responsible for a share of the disgorgement penalty APX may be found to owe to the Califomia
Parties (as defined in the 20 I 6 Form I 0-K). The penalty arises as a result ofthe Federal Energy and Regulatory Commission's (FERC) finding that APX
committed violations in the Califomia market in the summer of 2000. APX is making these assertions despite Avista Energy having been dismissed in FERC
Opinion No. 536 from the on-going administrative proceeding at the FERC regarding potential wrongdoing in the Califomia markets in the summer of 2000.
APX has identified Avista Energy's share ofAPX's exposure to be as much as $ 1 6.0 million even though no wrongdoing allegations are specifically
attributable to Avista Energy. Avista Energy believes its 2014 settlement with the Califomia Parties insulates it from any such liability and that as a
dismissed party it cannot be drawn back into the litigation. Avista Energy intends to vigorously dispute APX's assertions ofindirect liability, but cannot at
this time predict the eventual outcome.
Cabinet Gorge Total Dissolved Gas Abatement Plan
Dissolved atmospheric gas levels (refened to as "Total Dissolved Gas" or "TDG") in the Clark Fork River exceed state ofldaho and federal water quality
numeric standards downstream ofCabinet Gorge particularly during periods when excess river flows must be diverted overthe spillway. Under the terms of
the Clark Fork Settlement Agreement (CFSA) as incorporated in Avista Corp.'s FERC license for the Clark Fork Project, Avista Corp. has worked in
consultation with agencies, tribes and other stakeholders to address this issue. Under the terms ofa gas supersaturation mitigation plan, Avista is reducing
TDG by constructing spill crest modifications on spill gates at the dam, and the Company expects to continue spill crest modifications over the next several
years, in ongoing consultation with key stakeholders. Avista Corp. cannot at this time predict the outcome or estimate a range ofcosts associated with this
contingency; however, the Company will continue to seek recovery, through the ratemaking process, ofall operating and capitalized costs related to this
issue.
28
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
Schedule 2, Page 31 ol7'l
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AVISTA CORPORATION
Fish Passage at Cobinet Gorge and Noxon Rapids
In I 999, the United States Fish and Wildlife Service (USFWS) listed bull trout as threatened under the Endangered Species Act. In 2010, the USFWS issued a
revised designation ofcritical habitat forbull trout,which includesthe lowerClark Fork River. TheUSFWS issued a final recoveryplan in October20l5.
The CFSA describes programs intended to help restore bull trout populations in the project area. Using the concept ofadaptive management and working
closely with the USFWS, the Company evaluated the feasibility of fish passage at Cabinet Gorge and Noxon Rapids. The results of these studies led, in part,
to the decision to move forward with development of permanent facilities, among other bull trout enhancement efforts. Parties to the CFSA are working to
resolve several issues. The Company believes its ongoing efforts through the CFSA continue to effectively address issues related to bull trout. Avista Corp.
cannot at this time predict the outcome or estimate a range ofcosts associated with this contingency; however, the Company will continue to seek recovery,
through the ratemaking process, ofall operating and capitalized costs related to fish passage at Cabinet Gorge and Noxon Rapids.
Aher Contingencies
ln the normal course ofbusiness, the Company has various other legal claims and contingent matters outstanding. The Company believes that any ultimate
liability arising from these actions will not have a material impact on its financial condition, results ofoperations or cash flows. It is possible that a change
could occur in the Company's estimates ofthe probability or amount ofa liability being incurred. Such a change, should it occur, could be significant. See
'Note I 9 ofthe Notes to Consolidated Financial Statements" in the 20 1 6 Form I 0-K for additional discussion regarding other contingencies.
NOTE 12.INT'ORMATION BY BUSINESS SEGMENTS
The business segment presentation reflects the basis used by the Company's management to analyze performance and determine the allocation ofresources.
The Company's management evaluates performance based on income (loss) from operations before income taxes as well as net income (loss) attributable to
Avista Corp. shareholders. The accounting policies ofthe segments are t}re same as those described in the summary ofsignificant accounting policies. Avista
Utilities'business is managed based on the total regulated utility operation; therefore, it is considered one segment. AEL&P is a separate reportable business
segm€nt as it has separate financial reports that are reviewed in detail by the ChiefOperating Decision Maker and its operations and risks are sufficiently
diilerent from Avista Utilities and the other businesses at AERC that it cannot be aggregated with any other operating segments. The Other category, which is
not a reportable segment, includes other investments and operations ofvarious subsidiaries, as well as certain other operations ofAvista Capital.
The following table presents information for each ofthe Company's business segments (dollars in thousands):
Alaska Electric
Light md Power
Company
Inlersegment
Eliminations(l)Total
For the three months ended June 30,2017:
Opcrating revenues
Resource costs
Other operating expenses
Depreciation and amortization
Income (loss) fiom operations
lnterest expense (2)
Income taxes
Net income (loss) attributable to Avista Corp.
shareholders
Capital expenditures (3)
$s
(2'.1)
296,747 S
9et6t
78,970
41,195
53,97 I
22,826
12,892
11,982 $
3,290
2,995
1,448
3,597
895
1,07 5
I ,681
2,339
29
Toral Utility
308,729 $
102,'t5t
8l ,965
42,643
5 7,5 68
23,',l21
13,967
23,446
90,951
5,772 S
7,086
15',7
(t,4'71)
1'.76
(el6)
(1,67 s)
134
314,501
142,75t
89,051
42,800
56,097
23,870
l 3,05 l
21,771
91 ,08 5
21,165
88,612
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2, Page 32 ot 71
O
Teble of Contents
AVISTA CORPORATIONo
Avista
Intersegmenl
Eliminations
Utilities Company Total Utility Other (l ) _Total
302,64t S
t46,607
7 5,7 90
3 8,35 l
59,862
20462
16,349
26,171
88,048
712,128 S
262,074
150,682
81,',113
162,606
45,309
43,909
Alaska Electric
Light and Power
6'76
1,058
5,889
312,888 $
109,81 5
78,666
39$78
62,114
21,357
t7,025
27,829
93,937
739,266 $
268,337
t56,449
84,628
173,388
47,298
47,44't
318,838
l09,8l s
84,947
39,870
6l ,591
21,472
I 6,710
For the thre€ months ended June 30, 2016:
Operating revenues
Resource costs
Other operating expenses
Depreciation and amoilization
Income (loss) from operations
lnterest expense (2)
Income taxes
Net income (loss) attributable to Avista Corp.
shareholders
Capital expenditures (3)
For the six months ended June 30,2017:
Operating revenues
Resource costs
Other operatin g expenses
Depreciati on and amoft ization
Income (loss) from operations
Interest expense (2)
Income taxes
Net income {loss) attributable to Avista Corp.
shareholders
Capital expenditures (3)
For the six months ended June 30,2016:
Operating revenues
Resource costs
Other operating expenses
Depreciation and amortization
hcome (loss) Ilom operations
Interest expense (2)
Income taxes
Net income (loss) attributable to Avista Corp.
shareholders
Capital expenditures (3)
Total Assets:
As ofJune 30,2017:
AsofDecember3l,20l6:
5,95 0
6,281
192
(s23)
149
(3 ls)
27,138
6,263
5,7 67
2,89s
10,782
1,789
3,538
(s75)
46
I 1,705 $
13,265
345
(1,90s)
343
(r,052)
(l,8sl)
169
I r,330 $
12,106
380
(1,1 s6)
310
(s37)
(87 4)
165
59,7 56 $
60,430 $
27,254
9 3,983
7 50,97 |
268,337
169,714
84,973
171 ,483
47,600
46,395
$
(41)
o 80204
17 4,0t5
s,534
3,699
22,893 $
5,849
5 1qg
2,653
11)\
1,790
2,571
4,019
10,332
85,738
177,',|t4
725,681 $
271,534
154,445
78,870
I 68,832
42,670
47,592
85,7'.|7
r 82,81 5
83,887
177,883
737,0|
271 ,534
l 66,s51
79,250
167,676
42,883
47 055
84,903
182,980
s 5,373,004
$ 5,309,755
702,788
265,685
149,046
76217
I 6l ,107
40,880
45,021
(e7)
81,758
t'12,483
s 5,034,7'7 8 $
$ 4,975,555 $
278,470 S 5,3 13,248 $
273,770 $ s249,325 $
(l ) Intersegment eliminations reported as interest expense represent intercompany interest.(2) Including interest expense to affiliated trusts.(3) The capital expenditures for the other businesses are included in other investing activities on the Condensed Consolidated Statements ofCash Flows.
30
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 33 of 71
o
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$
$
$
$
$
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AVISTA CORPORATION
NOTE t3. SLIBSEQIJENT EVENT
On July I 9, 201 7, Avista Corp. entered into an Agreement and Plan of Merger (Merger Agreement), by and among Hydro One Limited (Hydro One), Olympus
Holding Corp., a wholly owned subsidiary of Hydro One (US parent), and Olympus Corp., a wholly owned subsidiary of US parent (Merger Sub). Hydro One,
based in Toronto, is Ontario's largest electricity transmission and distribution providerwith more than 1.3 million customers, C$25.0 billion in assets and
annual revenues ofover C$6.5 billion.
The Merger Agreement provides for Avista Corp. to become an indirect, wholly-owned subsidiary of Hydro One. At the effective time of the merger, each
share ofAvista Corp. Common Stock issued and outstanding, other than Dissenting Shareholder Shares (as defined in the Merger Agreement) and shares of
Avista Corp. Common Stock that are owned by Hydro One, US Parent or Merger Sub or any oftheir respective subsidiaries, will be converted autornatically
into the right to receive an amount in cash equal to $53.00, without interest.
Consummation ofthe merger is subject to the satisfaction or waiver ofspecified closing conditions, including, but not limited to, (i) the approval ofthe
merger by the holders ofa majority ofthe outstanding shares ofAvista Corp. Common Stock, (ii) the receipt ofregulatory approvals required to consummate
the Merger, including approval from the FERC, the Committee on Foreign lnvestment in the United States (CFIUS), the Federal Communications
Commission (FCC), the UTC, IPUC, Public Service Commission of the State of Montana (MPSC), OPUC, and the RCA, and (iii) the expiration or termination
of the applicable waiting period under the Hart-Scott-Rodino Antitrust hnprovements Act of 1976, as amended. Avista Corp. expects to file for all necessary
approvals within 45 to 60 days from the date ofthe Merger Agreement and the merger is expected to close during the second halfof20 I 8.
The Merger Agreement also contains customary representations, warranties and covenants of Avista Corp., Hydro One, US Parent and Merger Sub. These
covenants include, among others, an obligation on behalfofAvista Corp. to operate its business in the ordinary course until the Merger is consummated,
subject to certain exceptions. In addition, the parties are required to use reasonable best efforts to obtain any required regulatory approvals.
Avista Corp. has made certain additional customary covenants, including, among others, and subject to certain exceptions, (a) causing a meeting ofAvista
Corp.'s shareholders to be held to consider approval ofthe Merger Agreement and (b) a customary non-solicitation covenant prohibiting Avista Corp. from
soliciting, providing non-pubhc information or entering into discussions or negotiations conceming proposals relating to altemative business combination
transactions, except as and to the extent permitted under the Merger Agreement with respect to an unsolicited written Takeover Proposal (as defined in the
Merger Agreement) made prior to the approval of the Merger by Avista Corp.'s shareholders if, among other things, Avista Corp.'s board of directors
determines in good faith that such Takeover Proposal is or could be reasonably expected to lead to a Superior Proposal (as defined in the Merger Agreement)
and that failure to take such actions would reasonably be expected to be inconsistent with its fiduciary duties under applicable law.
The Merger Agreement may be terminated by Avista Corp. and Hydro One by mutual consent and by either Avista Corp. or Hydro One under certain
circumstances, including ifthe Merger is not consummated by September 30,201 8 (subject to an extension ofup to six months by eitherpaily ifall ofthe
conditions to closing, other than the conditions related to obtaining required regulatory approvals, the absence ofa law or injunction preventing the
consummation of the Merger and the absence of a Burdensome Condition (as defined in the Merger Agreement) in any required regulatory approval, have
been satisfied). The Merger Agreement also provides for certain additional termination rights for each of Avista Corp. and Hydro One. Upon termination of
the Merger Agreement under certain specified circumstances, including (i) termination by Avista Corp. in order to enter into a definitive agreement with
respect to a Superior Proposal, or (ii) termination by Hydro One following a withdrawal by Avista Corp.'s board or directors of its recommendation of the
MergerAgreement, Avista Corp. will be required to pay Hydro One a termination fee of $103.0 million (Company Termination Fee). Avista Corp. will also be
required to pay Hydro One the Company Termination Fee in the event Avista Corp. signs or consummates any specified altemative transaction within twelve
months following the terrnination of the Merger Agreement under certain circumstances. In addition, if the Merger Agreement is terminated under certain
circumstances due to the failure to obtain required regulatory approvals, the imposition ofa Burdensome Condition with respect to a required regulatory
approval, or the breach by Hydro One, US Parent or Merger Sub oftheir obligations in respect ofobtaining regulatory approvals, Hydro One will be required
to pay Avista Corp. a termination fee of $103.0 million.
3l
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2,Page3/ of 71
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REPORT OF INDEPEN'DENT REGISTERED PT-IBLIC ACCOUNTING FIRM
To the Board ofDirectors and Shareholders of
Avista Corporation
Spokane, Washington
We have reviewed the accompanying condensed consolidated balance sheet ofAvista Corporation and subsidiaries (the "Company") as ofJune 30,2017,
and the related condensed consolidated statements ofincome and comprehensive income for the three-month and six-month periods ended June 30, 20 I 7
and2Ol6 and the related condensed consolidated statements ofequity and cash flows forthe six-month periods ended June 30, 2017 and 2016. These intenm
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). A review ofinterim
financial information consists principally ofapplying analytical procedures and making inquiries ofpersons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the standards ofthe Public Company Accounting Oversight Board
(United States), the objective ofwhich is the expression ofan opinion regarding the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our reviews, we are not aware ofany material modifications that should be made to such condensed consolidated interim financial statements for
therr to be in conformity with accounting principles generally accepted in the United States oiAmerica.
We have previously audited, in accordance with the standands ofthe Public Company Accounting Oversight Board (United States), the consolidated balance
sheet ofAvista Corporation and subsidiaries as ofDecember 3 l, 20 1 6, and the related consolidated statements ofincome, comprehensive income, equity and
redeemable noncontrolling interests, and cash flows for the year then ended (not presented herein); and in our report dated February 21,2017 ,we expressed
an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated
balance sheet as ofDecember 3 I , 20 1 6 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
Seattle, Washington
August 1,2017
32
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Exhibit No. 3
Case Nos. AVU-E- t 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 35 of 71
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AVISTA CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Ooerations
Management's Discussion and Analysis ofFinancial Condition and Results ofOperations has been prepared in accordance with GAAP for interim financial
information and with the instructions to Form 10-Q. The interim Management's Discussion and Analysis ofFinancial Condition and Results of Operations
does not contain the full detail or analysis which would be included in a full fiscal year Form I 0-K; therefore, it should be read in conjunction with the
Company's 2016 Form 10-K.
Business Sesments
Our business segments have not changed during the six months ended June 30,2017 . See the 20 1 6 Form 1 0-K as well as "Note 1 2 ofthe Notes to Condensed
Consolidated Financial Statements" forfurtherinformation regarding ourbusiness segments.
The following table presents net income (loss) attributable to Avista Corp. shareholden for each ofour business segments (and the other businesses) for the
three and six months ended June 30 (dollars in thousands):
Three months ended June 30,Six months ended June 30,
2017 2016 2017 2016
^Avista Utilities
AEL&P
Other
Net income attributable to Avista Corp. shareholders
$21,765 S
1,681
(r,675)
26,711 $
1,058
(575)
&0,204 s
5,534
(r,851)
81,758
4,0t9
(874)
$2l ,'771 $27,254 $83,887 $84,903
Executive Level Summarv
0verall Resulls
Net income attributable to Avista Corp. shareholders was $21 .8 million for the three months ended June 30, 201 7, a decrease liom $27.3 million for the three
months ended June 30, 201 6. Net income attributable to Avista Corp. shareholders was $83.9 million for the six months ended June 30, 20 I 7, a decrease from
$84.9 million for the six months ended June 30, 201 6.
The decrease in eamings forboth the second quarterand first halfof2OlT wasdueto adecrease in eamings at AvistaUtilitiesand an increase in lossesat our
otherbusinesses, partially offset by an increase in eamings at AEL&P.
Avista Utilities' eamings decreased for both the second quader and year-to{ate 20 1 7 due to an increase in other operating expenses, primarily due to an
increase in generation, transmission and distribution maintenance costs, and increased depreciation and amortization and interest Bxpense. As previously
discussed, our 20 I 6 requests for general rate increases in Washington were denied; thereforc, we are not receiving regulatory recovery ofthe increase in
expenses. In addition, there were also merger transaction costs incurred during the second quarter of20 I 7, which are not being passed through to customers.
The increase in costs was partially offset by an increase in gross margin (operating revenues less resource costs) as a result ofgeneral rate increases in Idaho
and Oregon, customer growh and lower electric resource costs. See "Results of Operations - Overall - Non-GAAP Financial Measures" for further discussion
of gross margin.
AEL&P eamings increased for the second quarter and year-to-date 20 I 7 primarily as a result ofan increase in electric gross margin (operating revenues less
resource costs), due to an interim gcneral rate increase and higher loads due to colder weather in the first quarter, partially offset by an increase in operating
expenses and a decrease in AFUDC and capitalized interest due to the construction ofan additional back-up generation plant in 201 6.
The increase in losses at our other businesses for both the second quarter and year-to-date 20 I 7 was primarily related to renovation expenses and increased
compliance costs at one ofour subsidiaries and additional losses on investments as compared to 20 I 6.
More detailed explanations ofthe fluctuations are provided in the results ofoperations and business segment discussions (Avista Utilities, AEL&P, and the
other businesses) that follow this section.
Recent Development
On July 19, 2017, Avista Corp. entered into a Merger Agreement that provides for Avista Corp. to become an indirect, wholly-owned subsidiary of Hydro
One. Subject to the satisfaction or waiver ofspecified closing conditions, the merger is expected to close during the second halfof20 I 8. At the effective time
ofthe merger, each share ofAvista Corp. Common Stock issued and outstanding otherthan Dissenting Shareholder Shares (as defined in the Merger
Agreement) and shares of Avista Corp. Common Stock that are owned by Hydro One, US Parent or Merger Sub or any of their respective subsidiaries, will be
converted automatically into the right to receive an amount in cash equal to $53.00, without interest. For further information, see "Note 1 3 ofthe Notes to
Condensed Consolidated Financial Statements" and Avista Corp.'s Current Report on Form 8-K filed with the SEC on July I 9,201 7.
33
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 36 of71
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AVISTA CORPORATION
Resulatorv Matters
General Rate Cases
We regularly review the need for electric and natural gas rate changes in each state in which we provide service. We expect to continue to file for rate
adjustments to:
. seek recovery ofoperating costs and capital investments, and
. seek the opportunity to eam reasonable retums as allowed by regulators.
With regards to the tirning and plans for future filings, the assessment ofour need for rate reliefand the development ofrate case plans takes into
consideration shoil-term and long-term needs, as well as specific factors that can affect the timing ofrate filings. Such factors include, but are not limited to,
in-service dates ofmajor capital investments and the timing ofchanges in majorrevenue and expense items.
Avista Utilities
llashington General Rale Cases
20 1 5 General Rate Cases
In January 201 6, we received an order (fuer 05) that concluded our electric and natural gas general rate cases that were originally filed with the UTC in
February 2015. New electric and natural gas rates were effective on January I 1 ,2016.
The UTC-approved rates were designed to provide a I .6 percent, or $ 8.1 million decrease in electric base revenue, and a 7.4 percent, or $ 1 0.8 million increase
in natural gas base revenue. The UTC also approved a mte ofretum (ROR) on rate base of7.29 percent, with a corrmon equity ratio of48.5 percent and a 9.5
percent retum on equity @OE).
UTC Order Derrying Industial Customers of Northwest Utilities / Public Counsel Joint Motion for Clarification, WC Staff Motion to Reconsider
and WC Staff Motion to Reopen Record
On January I 9, 2016, the Industrial Customers ofNorthwest Utilities flCNU) and the Public Counsel Unit of the Washington State Office of the
Attomey General (PC) filed a Joint Motion for Clarification with the tlTC. In the Motion for Clarification, ICNU and PC requested that the UTC
clarify the calculation of the electric attrition adjustment and the end-result revenue decrease of $ 8.1 million. ICNU and PC provided their own
calculations in their Motion, and suggested that the revenue decrease should have been $ 19.8 million based on their reading of the UTC's Order.
On January 1 9, 201 6, the UTC Staff, which is a separate party in the general rate case proceedings from the UTC Advisory Staff, filed a Motion to
Reconsider with the UTC. In its Motion to Reconsider, the Staffprovided calculations and explanations that suggested that the electric revenue
decrease slrould have been a revenue decrease of$27.4 rnillion instead of$8.1 million, based on its reading ofthe UTC's Order. Further, on February
4,2016, the UTC Stafffiled a Motion to Reopen Record for the Limited Purpose of Receiving into Evidence lnstruction on Use and Application of
StaIIs Attrition Model, and sought to supplement the record "to incorporate all aspects of the Company's Power Cost Update." Within this Motion,
UTC Staffupdated its suggested electric revenue decrease to $ I 9.6 million.
None of the parties in their Motions raised issues with the UTC's decision on the natural gas revenue increase of $ I 0.8 million.
On February 19,2016, the UTC issued an order (Order 06) denying the Motions summarized above and affirming Order 05, including an $8.1 rnillion
decrease in electric base revenue.
PC Petitionfor Judicial Review
On March I 8, 201 6, PC filed in Thurston County Superior Court a Petition for Judicial Review of the UTC's Order 05 and Order 06 described above
that concluded our 20 I 5 electric and natural gas general rate cases. In its Petition for Judicial Review, PC seeks judicial review offive aspects of
Order 05 and Order 06, alleging, among other things, that (l ) the UTC exceeded its statutory authority by setting rates for our natural gas and electric
services based on amounts for utility plant and facilities that are not "used and useful" in providing utility service to customers; (2) the UTC acted
aftitrarily and capriciously in granting an attrition adjustment for our electric operations after finding that the we did not meet the newly articulated
standard regarding attrition adjustments; (3) the UTC erred in applying the "end results test" to set rates for our electric operations that are not
supported by the record; (4) the UTC did not correct its calculation ofour electric rates after significant errors were brought to its attention; and (5)
the UTC's calculation ofour electric rates lacks substantial evidence.
34
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2, Page 37 ot 71
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AVISTA CORPORATION
PC is requesting that the Court (l ) vacate or set aside portions ofthe UTC's orders; (2) identifu the errors contained in the UTC's orders; (3) find that
the rates approved in Order 05 and reaffirmed in Order 06 are unla{drl and not fair, just and reasonable; (4) remand the matter to the UTC for further
proceedings consistent with these rulings, including a determination ofour revenue requirement for electric and natural gas services; and (5) find the
customem are entitled to a refund.
On April I 8, 20 I 6, PC filed an application with the Thurston County Superior Court to certify this matter for review directly by the Court ofAppeals,
an intermediate appellate court in the State ofWashington. The matterwas certified on April 29,2016 and accepted by the Court ofAppeals on July
29,2016. The parties provide briefs to the Court, after which the Court will set the matter for argument. On July 7, 20 I 7, ICNU filed a briefin support
ofPC. The UTC and Avista Corp. will respond on or before August 7, 20 I 7. Oral argument has been set for September l2,2ol7 before the court. A
decision from the Court is not expected until late 201 7, at the earliest.
In its briefto the Court, the UTC, while defending the use ofits attrition adjustment nevertheless requested a partial remand back to the llTC to
reevaluate the implementation ofour power cost update as part ofthe general rate case on appeal, doing so by means ofa supplemental evidentiary
hearing. The power cost update at issue represents approximately $ 1 2.0 million ofcosts.
The new rates established by Order 05 will continue in effect while the Petition for Judicial Review is being considered. We believe the UTC's Order
05 and Order 06 finalizing the electric and natural gas general rate cases provide a reasonable end result for all parties. Ifthe outcome ofthe judicial
review were to result in an electric rate reduction grcater than the decrease ordered by the UTC, it may result in a refund liability to customers ofup to
$9.5 million, *fiich is net of an approximately $2.5 million refund for Washington electric customers related to the 2016 provision for eamings
sharing that we have already accrued.
20 I 6 General Rate Cases
On December I 5, 20 I 6, the UTC issued an order related to our Washington electric and natural gas general rate cases that were originally filed with the UTC
in February 201 6. The UTC order denied the Company's proposed electric and natural gas rate increase requests of $38.6 million and $4.4 million,
respectively. Accordingly, our current electric and natural gas retail rates remained unchanged in Washington State, following the order.
Our original requests were based on a proposed ROR of 7.64 percent with a common equity ratio of 48.5 percent and a 9.9 percent ROE.
On December 23, 20 I 6 we filed a Petition for Reconsideration or, in the altemative, Relrearing (Petition) with the UTC related to our 20 I 6 general rate cases.
On February 27,201'l,wercceived an order from the UTC denying ourPetition and confirming its previous order in the case. In its order denying the
Petition, the UTC generally referred back to its prior findings and conclusions. See the 20 I 6 Form 1 0-K for a detailed discussion surrounding UTC's prior
findings and the information included in our Petition.
We determined that an appeal ofthe UTC's decision to the courts would involve a significant amount ofuncertainty regarding the level ofsuccess ofsuch an
appeal, as well as the timing ofany value that might come following a process that would take between one and two years. The Company believes greater
long-term value can be achieved through focusing on new general rate cases than through appealing the UTC's decision in the courts.
Following the conclusion of the 201 6 case, we met with the Commissionen to better understand their concems and their expectations going forward. The
Company also met with members of the Commission Staffand other parties to discuss needs and expectations prior to filing the next general rate case. While
these meetings with the Commissioners and Staffwere constructive, there can be no assurance as to the outcome ofany future general rate case.
2017 General Rate Cases
On May 26,2017 ,we filed two requests with the UTC to recover costs related to power supply and system maintenance as well as capital investments made
since the last determination ofour rate base in the 20 1 5 Washington general rate cases.
The fwo filings are summarized as follows:
Power Cosl Rale Adjuslmenl
The first filing is an electric only power cost rate adjustment that would update and reset power supply costs, effective September 1,201 7. We
requested an overall increase in billed electric rates of2.9 percent (designed to increase annual electric revenues by $ 1 5.0 million). The key driven
behind this request are related to the expiration ofa capacity sales
35
Exhibit No. 3
Case Nos. AVU-E-I7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 38 of 71
o
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Table of Cont€ots
AVISTA CORPORATION
agreement with another utility and an increase in the price ofnatural gas to fuel our generating plants. Any new rates resulting from the power cost
rate adjustment would expire upon the conclusion ofthe electric general rate case (discussed in further detail below), ifapproved.
On June I 6, 20t 7, ICNU filed a Motion with tbe UTC to dismiss the power cost rate adjustment filing, or in the altemative, consolidate the filing with
the pending general rate case filing. The UTC Staffand PC filed responses supporting ICNU's Motion. We expect the UTC to address the power cost
rate adjustment by August 10,2017 , at which time they will either approve or deny the request or indicate additional steps that may be necessary.
General Rate Requests
The second request relates to electric and natural gas general rate cases. We filed three-year rate plans for electric and natural gas and have requested
the following for each year (dollars in millions):
Electric Natural Gas
Proposed Revenue Proposed Base Proposed Revenue
Effective Date Increase Rate Increase Increase
Proposed Base
Rate Increase
May 1,2018(1)
May l, 2019 (2)
May 1,2020 Q)
$
$
$
61.4
14.0
14.4
83
4.2
4.4
9.3%
4.4%
4.4%
12.5% $
2.5% $
2.5o/o $
o
(l) The$6l.4millionelectricrevenueincreaseincludesthe$l5.0millionpowercostrateadjustmentdiscussedabove.
(2) As a pan ofthe electric rate plan, we have proposed to update power supply costs through a Power Supply Update, the effects ofwhich would
alsogointoeffectonMayl,20l9andMayl,2020.Therequestedrevenueincreasesfor20l9and2020donotincludeanypowersupply
adjustments.
Ourrequest is based on a proposed ROR of7.76 percent with a corlmon equity ntio of50.0 percent and a 9.9 percent ROE.
As a part ofthe three-year rate plan, ifapproved, we would not file another general rate case until June I , 2020, with new rates effective no earlier than
May 1,2021.
The major drivers ofthese general rate case requests is to recover the costs associated with our capital investments to replace infrastructure that has
reached the end ofits useful life, as well as respond to the need for reliability and technology investments required to maintain our integrated energy
services grid. Among the capital investments included in the filings are:
. Major hydroelectric investments at the Little Falls and Nine Mile hydroelectric plants.
. Generator maintenance at the Kettle Fal ls biomass plant that will ensure efficient generation and operations.
. The ongoing project to systematically replace portions ofnatural gas distribution pipe in our service area that were installed priorto I 987, as
well as replacement ofothernatural gas service equipment.
. Transmission and distribution system and asset maintenance, such aswood pole replacements, feederupgrades, and substation and transmission
line rebuilds to maintain reliability for our customers.
. Technology upgrades that support necessary business processes and operational efficiencies that allow us to effectively manage the utility and
serve customers.
. A refresh olthe customer-facing website, providing relevant information, greater accessibility on mobile devices, easier navigation, and a
streamlined payment experience.
The UTC has up to I I months to review the general rate case filings and issue a decision.
AMI Projecl in l|/ashington State
In March 20 I 6, the UTC granted our Petition for an Accounting Order to defer and include in a regulatory asset the undepreciated value ofour existing
Washington electric meters for the opportunity for later recovery. This accounting treatment is related to our plans to replace approximately 253,000 of our
existing electric meters with new two-way digital meters and the related software and support sewices through our AMI project in Washington State.
Replacement ofthe meten is expected to
36
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 39 of 7'l
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AVISTA CORPORATION
begin in the second halfof20 I 8. As ofJune 30, 20 I 7, the estimated undepreciated value for the existing meters is $ I 9.8 million.
In April 201 7, we identified approximately 70,000 natural gas encoder rcceiver transmitten (ERTs) that will need to be replaced as part ofthe AMI project. In
May 201 7, we filed a Petition with the UTC requesting deferred accounting treatment for the investment costs associated with the Washington AMI project,
including components such as meter communication networks, information management systems and the natural gas ERTs. The Petition requests the deferral
and inclusion in a regulatory asset of all AMI investment costs over the multi-year implementation period, until the costs can be reviewed for prudence in a
future regulatory proceeding and recovered in retail rates. The undepreciated value ofthe natural gas ERTS is approximately $3.7 million.
Idaho General Rate Cases
20 I 6 General Rate Case
In December 20 I 6, the IPUC approved a settlement agreement between us and other parties in our electric general rate case, concluding our Idaho electric
general rate case originally filed in May 201 6. New rates took effect on lawary 1,2017 under the settlement agreement. We did not file a natural gas general
rate case in 20 I 6.
The settlement agreement increased annual electric base rates by 2.6 percent (designed to increase annual electric revenues by $6.3 million). The settlement
rcvenue increase is based on a ROR of 7.58 percent with a common equity ratio of 50 percent and a 9.5 percent ROE.
In addition to the agreed upon increase in electric revenues to recover costs primarily driven by our increased capital investments in infrastructure to serve
customers, the settlement agreement includes the continued recovery of approximately $4.I million in costs related to the Palouse Wind Project through the
Power Cost Adjustment (PCA) mechanism rather than through base rates.
In ouroriginal request we requested an overall increase in base electric rates of6.3 percent (designed to increase annual electric revenues by $15.4 million),
effective January 1,2017 .
Our original request was based on a proposed ROR of7.78 percent with a common equity ratio of50 percent and a 9.9 percent ROE.
20 I 7 General Rate Cases
On June 9, 20 I 7, we filed electric and natural gas general rate requests with the IPUC to recover increased power supply costs and capital investments made
since the last determination ofour rate base in the 20 I 6 Idaho electric general rate case and the 20 I 5 Idaho natural gas general rate case.
We filed two-year rate plans for electric and natural gas and have requested the following for each year (dollars in millions):
Electric Natural Gas
Proposed Revenue Proposed Base Proposed Revenue
Increase Rate Increase Increase
January 1,2O18 $ .18.6 ?.5% S 3.5 8.8%
January 1,2019(l) $ 9.9 3.7yo $ 2.1 5.0%
(l ) We are not proposing to update base power supply costs for year two ofthe rate plan, but rather have any differences flow through the PCA mechanism.
Our requests are based on a proposed ROR of 7.81 percent with a common equity ratio of 50.0 percent and a 9.9 percent ROE.
As a part ofthe two-year rate plan, ifapproved, we would not file a new general rate case for a new rate plan to be effective priorto January 1,2020.
The major drivers ofthese general rate case requests is to recover the costs associated with our capital investments to replace infrastructure that has reached
the end ofits useful life, as well as respond to the need for reliability and technology investments required to maintain our integrated energy services grid.
Arnong the capital investments included in the filings are:
. Generatormaintenance at the Kettle Falls biomass plant that lvill ensure efficient generation and operations.
. The ongoing project to systematically replace portions ofnatural gas distribution pipe in our service area that were installed prior to 1 987, as well as
replacement of other natural gas service equipment.
37
Proposed Base
Rate lncrease
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 40 ol 71
o
Effective Date
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Table of Contelts
AVISTA CORPORATION
. Transmission and distribution system and asset maintenance, such as wood pole replacements, feederupgrades, and substation and transmission line
rebuilds to maintain reliability for our customen.
. Technology upgrades that support necessary business processes and operational efficiencies that allow us to effectively manage the utility and sewe
customers.
. A refresh ofthe customer-facing website, providing relevant information, greater accessibility on mobile devices, easier navigation, and a
streamlined payment experience.
A procedural schedule has been agreed to by the parties in the case, and recommended to the IPUC, which would result in an IPUC decision on orbefore
January 1,2018.
(hegon General Rate Cases
201 5 General Rate Case
On February 29,2016, the OPUC issued a preliminary order (and a final order on March 1 5, 20 I 6) concluding our natural gas general rate case, which was
originally filed with the OPUC in May 20 1 5. The OPUC order approved rates designed to increase overall billed natural gas rates by 4.9 percent (designed to
increase annual natural gas revenues by $4.5 million). New rates went into elfect on March 1, 20 1 6. The final OPUC order incorporated two partial settlement
agreements which were entered into during November 20 I 5 and January 20 I 6.
The OPUC orderprovides for an overall authorized ROR of 7.46 percent with a cornmon equity ratio of 50 percent and a 9.4 percent ROE.
The November 2015 partial settlement agreement, approved by the OPUC, included a provision for the implementation of a decoupling mechanism, similar
to the Washington and Idaho mechanisms described below. See further description and a summary of the balances recorded under this mechanism below.
20 I 6 General Rate Case
On May 16,2017, an all-party settlement agreement was filed with the OPUC, which, if approved by the OPUC, would resolve all issues in the case and new
rates would take effect on October I , 20 I 7.
The settlement proposes that, effective October l, 201 7, we would receive an increase in rates designed to increase annual base revenues by 5.9 percent or
$3.5 million. In addition, in the settlement agreement, we agreed to non-recovery ofcertain utility plant expenditures, which resulted in a *rite-offof
approximately $0.8 million in the second qual1.er of2017.
The proposed settlement agreement reflects a 7.35 ROR with a corrmon equity ratio of 50 percent and a 9.4 percent ROE.
Alaska Electric Light and Power Comoanv
Alaska General Rate Case
In September 201 6, AEL&P filed an electric general rate case with the RCA. AEL&P was granted a refundable interim base rate increase of 3.86 percent
(designed to increase electric revenues by $ I .3 million), which took effect in November 20 I 6. AEL&P has also requested a permanent base rate increase ofan
additional 4.24 percent (designed to increase electric revenues by $1.5 million), which, ifapproved, could take effect in February 201 8. This represents a
combined total rate increase of8.l percent (designed to increase electric revenues by $2.8 million).
Included in the general rate case are additional annual revenues of$2.9 million from the Greens Creek Mine, which offsets a portion ofthe rate increase to
retail customem that would otherwise occur.
The RCA must rule on permanent rate increase requests within 450 days (approximately l5 months) Aom the date of filing, unless otherwise extended by
consent ofthe paties. The timeline for the AEL&P general rate case, with the consent ofthe parties, was extended to February 8, 20 I 8.
The rate request is based largely on the addition ofa new backup generation plant (lndustrial Blvd. Plant) to rate base.
Avista Utilities
Purchased Gas Adj ustments
PGAs are designed to pass through changes in natural gas costs to Avista Utilities' customers with no change in gross margin or net income. ln Oregon, we
absorb (cost or benefit) I 0 percent ofthe difference between actual and projected gas costs included in retail rates for supply that is not hedged. Total net
deferred natural gas costs among all jurisdictions were a liability of $29.0 million as of Jun e 30,201'l and a liability of $30.8 million as of December 3l ,
2016. These balances represent amounts due to customers.
38
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 4'l o'f 71
o
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Table of Contetrts
AVISTA CORPORATION
Power Cost Defenals and Recovery Mechanisms
The ERM is an accounting method used to track certain differences between Avista Utilities'actual power supply costs, net ofwholesale sales and sales of
fuel, and the amount included in base retail rates for our Washington customers and defer these differences (over the $4.0 million deadband and sharing
bands) for future surcharge or rebate to customers. See the 20 1 6 Form I 0-K for a full discussion ofthe mechanics ofthe ERM and the vanous sharing bands.
Total net defened power costs under the ERM was a liability of $23.5 million as of June 3 0, 2017, compared to a liability of $21 .3 million as of December 3 I ,
20 I 6. These deferred power cost balances represent amounts due to customers.
Avista Utilities has a PCA mechanism in Idaho that allows us to modi! electric rates on October I of each yearwrth IPUC approval. Underthe PCA
meclranism, we defer 90 percent ofthe difference between certain actual net power supply expenses and the amount included in base retail rates for our Idaho
customers for future surcharge or rebate to customers. The October I rate adjustments recover or rebate power supply costs deferred during the preceding July-
June twelve-month period. Total net power supply costs deferred under the PCA mechanism were a liability of$7.4 million as ofJune 30,2017 and a liability
of$2.2 million as ofDecember 3l ,201 6. These defened power cost balances rcpresent amounts due to customers.
Decoupling and Earaings Sharing Mechanisms
Decoupling is a mechanism designed to sever the link between a utility's revenues and consumers' energy usage. In each ofAvista Utilities'jurisdictions, each
month Avista Utilities' electric and natural gas revenues are adjusted so as to be based on the number ofcustomers in certain customer rate classes and
assumed "normal" kilowatt hour and therm sales, rather than being based on actual kilowatt hour and therm sales. The difference between revenues based on
the number ofcustomers and revenues based on actual usage is deferred and either surcharged or rebated to customerc beginning in the following year. Only
the residential and commercial customer classes are included in our decoupling mechanisms described below.
llashington Decoupling and Earnings Sharing Mechanisms
In Washington, the UTC approved our decoupling mechanisms for electric and natural gas for a five-year period beginning January I , 201 5. Electric and
natural gas decoupling surcharge rate adjustments to customers are limited to a 3 percent increase on an annual basis, with any remaining surcharge balance
carried forward for recovery in a future period. There is no limit on the level ofrebate rate adjustments.
The decoupling mechanisms each include an after-the-fact eamings test. At the end ofeach calendar year, separate electric and natural gas eamings
calculations are made for the calendar yearjust ended. These eamings tests reflect actual decoupled revenues, nonnalized power supply costs and other
normalizing adjustments. The operation of the Washington decoupling and eamings sharing mechanisms has not changed for the six months ended June 30,
201 7. These decoupling and eamings sharing mechanisms are more fully described in the 20 I 6 Form I 0-K. See below for a summary of cumulalive balances
underthe decoupling and eamings sharing mechanisms.
Idaho Fixed Cost Adjustment (FCA) and Earnings Sharing Mechanisms
In Idaho, the IPUC approved the implementation ofFCAs for electric and natural gas (similar in operation and effect to the Washington decoupling
mechanisms) for an initial term ofthree years, beginning January 1, 201 6.
For the period 20 I 3 through 20 I 5, we had an after-the-fact eamings test such that ifAvista Corp., on a consolidated basis for electric and natural gas
operations in ldaho, eamed more than a 9.8 percent ROE, we were required to share with customers 50 percent of any eamings above the 9.8 percent. This
after-the-fact eamings test was discontinued, effective January I , 20 I 6, as part ofthe settlement ofour 20 I 5 Idaho electric and natural gas general rates cases.
See below for a summary of cumulative balances under the decoupling and eamings sharing mechanisms.
Oregon Decoupling Mechanism
In February 2016, the OPUC approved the implementation of a decoupling mechanism for natural gas, similar to the Washington and Idaho mechanisms
described above. The decoupling mechanism became effective on March I , 20 I 6. There will be an opportunity for interested parties to review the mechanism
and recommend changes, ifany, by September 20 I 9. An earnings review is conducted on an annual basis, which is filed by us with the OPUC on or before
June I ofeach year for the prior calendar year. In the annual eamings review, ifwe eam more than I 00 basis points above our allowed retum on equity, one-
third of the eamings above the 1 00 basis points would be defened and later retumed to customers. See below for a summary of cumulative balances under the
decoupling and eamings sharing mechanisms.
39
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 42 ot 71
o
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Trbl€ of Contetrts
AVISTA CORPORATION
Cumulative Decoupling and Earnings Sharing Mechanism Balances
As ofJune 30, 20 I 7 and December 3 I , 20 I 6, we had the following cumulative balances outstanding related to decoupling and eamings sharing mechanisms
in our variousjurisdictions (dollars in thousands):
June 30, December 3 l,
2017 20t6
Washington
Decouplingsurcharge $ 24,031 $ 30,408
Provision for eamings sharing r€bate (5,860) (5,1 13)
Ideho
Decoupling Surcharge $ 6,345 $ 8292
Provision for eamings sharing rebate (3,731) (5,184)
,0regon
Decoupling surcharge (rebate) $ (l 9) $ 2,021
See "Results of Operations - Avista Utilities" for further discussion of the amounts recorded to operating revenues in 2017 and 20 I 6 related to the decoupling
and eamings sharing mechanisms.
Results of Operations - Overall
The following provides an overview ofchanges rn our Condensed Consolidated Statements oflncome. More detailed explanations are provided, particularly
for operating revenues and operating expenses, in the business segment discussions (Avista Utilities, AEL&P, and the otherbusinesses) that follow this
section.
The balances included below for utility operations reconcile to the Condensed Consolidated Statements oflncome.
Three months ended June 30,2017 compared to the three months ended June 30,2016
The following graph shows the total change in net income attributable to Avista Corp. shareholders for the second quarter of20l 6 to the second quarter of
20 I 7, as well as the various factors that caused such change (dollars in millions):
S7.1
53.7
s(0.2)
sto.E)
s(3.3)s(3.0)
5(4.21 sll.E)
0he.
s(s.sl
Iotalchange in Net Util[yReend6
Costr
UlilltyOFatq UtilityOeprecbdh ilon-Udliry lncmeTar€peoe
ErFne! endArcfrlzaion OrrdiryEpens€s
and Der*lrfon
and Amonldion
Utility revenues decreased due to a decrease at Avista Utilities, partially offset by an increase at AEL&P. Avista Utilities'revenues decreased primarily due to
a decrease in electric and natural gas wholesale sales and a change in the electric provision for eamings sharing. These revenue decreases were partially offset
by an electric general rate increase in Idaho, a natural gas general rate increase in Oregon and higher retail electric and natural gas heating loads due to
customer growth and weather that was cooler than the prior year. There wer€ electric decoupling surcharges during both the second quarter o f2017 and 2016
and natural gas decoupling surcharges during the second quarter of20 I 6, but there was a natural gas decoupling rebate during the second quarter of20 1 7.
The surcharges were larger in 201 6 because weather was warmer than normal during that period. AEL&P's revenues increased primarily due to a general rate
increase and higher retail heating loads due to weather that was cooler than the prior year. There was also a slight increase in the number ofcustomers at
AEL&P.
Utility resource costs decreased due to a decrease at Avista Utilities, partially offset by a slight increase at AEL&P. Avista
-5o :-.1
=o-'sddo
mOao
=.O=60!o
o
40
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 43 ot 7'l
o
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AVISTA CORPORATION
Utilities'electric resource costs decreased due to a decrease in purchased power, resulting from a decrease in volumes and a decrease in wholesale prices, as
well as a decrease in fuel for generation resulting from higher hydroelectric generation and lower thermal generation.
The increase in utility other operating expenses was due to an increase at Avista Utilities and a slight increase at AEL&P. The increase at Avista Utilities'was
the result ofan increase in generation, transmission and distribution maintenance costs, as well as a write-offin Oregon ofutility plant associated with a
general rate case settlement. There were also merger transaction costs incuned during the second quarter of20 1 7, which are not being passed through to
customers. The increased costs were partially oilset by decreases in pension, other postretirement benefit and medical expenses.
Utility depreciation and amortization increased due to additions to utility plant.
Non-utility other operating expenses increased primarily due to renovation expenses and increased compliance costs at one ofour subsidiaries.
Income taxes decreased due to a decrease in income before income taxes. Our effective tax rate was 37.5 percent for the second quarter of20 1 7 cornpared to
38.0 percent for the second quarter of20l 6.
Other was primarily related to an increase in interest expense, due to additional debt being outstanding during 20 I 7 as compared to 20 I 6 and partially due to
an increase in the overall interest rate. Also, there was an increase in utility taxes other than income taxes primarily due to revenue related taxes and property
taxes. Lastly, there was an increase in losses on investments at our subsidiaries.
Six months ended June 30,2017 compared to the six months ended June 30,2016
The following graph shows the total change in net income attributable to Avista Corp. shareholders forthe six months ended June 30,2016 to the six months
ended June 30,201 7, as well as the various factors that caused such change (dollars in millions):
s13.5
s(1.01
5{10 o)
TotalchanSe in Nd UtilhyR*€ng
C6t!
s3.2
50.?s[,4
su.rJ
s(2.0)
5{5.8)
ftiltyOFadng UilityOqredaton Non-Utlity lncomeTarErpen*&Fnss .ndAmod.atl6 OprstinS€rynres
and Dsrdaoon.ndAmdlr.th
Utility revenues increased due to increases at both Avista Utilities and AEL&P. Avista Utilities'revenues increased primarily due to an electric general rate
increase in Idaho, a natural gas general rate increase in Oregon and higherretail electric and natural gas heating loads due to customergrowth and weather
that was cooler than the prior year. The increased utility revenues were partially offset by decoupling rebates in the first halfof20 I 7 due to weather that was
cooler than normal. This compares to decoupling surcharges during the first halfof20 I 6. These increases were partially offset by a change in the electric
provision for eamings sharing, which increased revenue during 20 1 6 (due to a reduction to the 20 1 5 provisions in Washington and Idaho recorded in 20 I 6).
AEL&P's revenues increased primarily due to a general rate increase and higher retail heating loads due to weather that was cooler than the prior year.
Utility resource costs decreased due to a decrease at Avista Utilities, pa(ially offset by a slight increase at AEL&P. Avista Utilities'electric resource costs
decreased due to a decrease in purchased power, resulting from a decrease in wholesale prices, partially offset by an increase in volumes, and a decrease in
fuel for generation resulting from higher hydroelectric generation and lower thermal generation.
The increase in utility other operating expenses was due to an increase at Avista Utilities and a slight increase at AEL&P. The increase at Avista Utilities'was
the result ofan increase in generation, transmission and distribution maintenance costs, as well
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Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 44o171
o
o
Table of Contents
AVISTA CORPORATION
as a write-offin Oregon ofutility plant associated with a general rate case settlement. There were also merger transaction costs incurred during the second
quarter of20 I 7, which are not being passed through to customers. The increased costs were partially offset by decreases in pension, other postretirement
benefit and medical expenses.
Utility depreciation and amortization increased due to additions to utility plant.
Non-utility other operating expenses increased primarily due to renovation expenses and increased compliance costs at one ofour subsidiaries.
Income taxes decreased primarily due to a decrease in income before income taxes. Our effective tax rate was 35.6 percent for the first six months of20 I 7 and
2016.
Other was primarily related to an increase in interest expense, due to additional debt being outstanding during 20 I 7 as compared to 20 I 6 and partially due to
an increase in the overall interest rate. Also, there was an increase in utility taxes other than income taxes primarily due to revenue related taxes and property
taxes. Lastly, there was an increase in losses on investments at our subsidiaries.
Non-GAAP Financial Measures
The following discussion for Avista Utilities includes two financial measurcs that are considered "non-GAAP financial measures," electric gross margin and
natural gas gross rnargin. In the AEL&P section, we include a discussion ofelectric gross margin, which is also a non-GAAP financial measure.
Generally, a non-GAAP financial measure is a numerical measure ofa company's financial performance, financial position or cash flows that excludes (or
includes) amounts that are included (excluded) in the most directly comparable measure calculated and presented in accordance with GAAP. The
presentation ofelectric gross margin and natural gas gross margin is intended to supplement an understanding ofoperating performance. We use these
measures to determine whether the appropriate amount ofrevenue is being collected from our customers to allow for the recovery ofenergy resource costs and
operating costs, as well as to analyze how changes in loads (due to weather, economic or other conditions), rates, supply costs and other factors impact our
results ofoperations. In addition, we present electric and natural gas gross margin separately below for Avista Utilities since each business has different cost
sources, cost recovery mechanisms andjurisdictions, such that separate analysis is beneficial. These measures are not intended to replace income from
operations as determined in accordance with GAAP as an indicator ofoperating perfonnance. The calculations ofelectric and natural gas gross margins are
presented below.
Results of Onerations - Avista Utilities
Three monlhs ended June 30, 20 I 7 compared to the three months ended June 30, 201 6
The following table presents Avista Utilities' operating revenues, resource costs and resulting gross margin for the three months ended June 30 (dollars in
thousands):
Electric Natural Gas Intracompany Total
Operating revenues
Resource costs
Gross margin
20t'l
$ 230,558
69,427
$ t6r,l3l
2016
$ 234,791 $
73,350
80,430 $
44,27 5
80,955 $
46,362
20t6 20t7 lul b 20t'7 2016
{14,24t) $ (r 3,1 os) $296,747 $
99,461
302,641
106,607(14,24t)(l 3,1 05)
$ l6ly'4r $ 36,1s5 $ 34,593 $$s 197 286 $ 196,034
The gross margin on electric sales decreased $0.3 million and the gross margin on natural gas sales increased $ 1 .6 million in the second quarter of20 I 7
compared to the second quarter of20 I 6. The slight decrease in electric gross margin was primarily due to a change in the provision for eamings sharing
(which reduced electric gross margin by $2.0 million for 2017 as compared to 20 I 6), mostly offset by a general rate increase in Idaho, customer growth and
lower resource costs. For the second quarter of20 1 7, we had a $0.6 million pre-tax benefit under the ERM in Washington, compared to a $0.2 million pre-tax
expense for the second quarter of20 I 6. For the full year of20 I 7, we expect to be in an expense position under the ERM within the $4 million deadband
because power supply costs were not reset for 2O77 since our 20 I 6 request for a general electric rate increase in Washington was denied. Ifpower supply costs
are reset in our Power Cost Rate Adjustment request, we would expect to be in a benefit position under the ERM within the $4 million deadband for the full
year of 2017 . See further discussion of the Washington order in "Item 2. Management's Discussion and Analysis - Regulatory Matters."
The increase in natural gas gross margin was primarily due to a general rate increase in Oregon and customer growth.
Intracompany revenues and resource costs represent purchases and sales ofnatural gas between our natural gas distribution operations and our electric
generation operations (as fuel for our generation plants). These transactions are eliminated in the presentation oftotal results for Avista Utilities and in the
condensed consolidated financial statements but are included in the separate results for electric and natural gas presented below.
42
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2,Page45of 71
I
2017
Tabl€ of Contents
o AVISTA CORPORATION
The following graphs present Avista Utilities'utility electric operating revenues and megawatt-hour (MWh) sales for the three months ended June 30 (dollars
in rnillions and MWhs in thousands):
f, lectric Operating Reven ues
$71 $s?l..l $73.7so7.5
$27 1 S:6e $1? ?$21.e S:0.s$ 17.0 $r5.8 $18-:
Beside{r\$\ C$rrri+slits\ lr*\tr*rrrt\ s,lhows'$e St\cr ol $ue\n;1;\ll$"
2017 I 3016
(1) Thisbalanceincludespublicstreetandhighwaylighting,whichisconsideredpatofretailelectricrevenuesanditalsoincludesrevenuesandrebates
from decoupling.
o Electric Energy MWh Sales
8t.l
S.t'd*nt'o\Ccirrrnrercr$\\rrdulis\$\$$o\si"$e
20ti f 20t6
43
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
o
Schedule 2, Page 46 of 71
758 7(775t101 ?t0
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Table of Contents
AVISTA CORPORATION
The following table presents Avista Utilities'decoupling and customer eamings sharing mechanisms by jurisdiction that are reflected in utility electric
operating revenues for the three months ended June 30 (dollars in thousands):
Electric Operating
Revonues
20t'7 2016
Washington
Decoupling surcharge $ 3,661 $ 4,553
Provision forearnings sharing (l) (130) l,l 19
Idaho
Decoupling surcharge $ 862 $ 2,651
Provision for earnings sharing (2) n/a 'll1
( I ) The provi sion for eamrngs sharing in Washington for the second quarter of 201 7 represents an adj ustment of the 201 6 provision for eamings sharing.
We are not expecting a provision for eamings sharing in Washington relating to 201 7 eamings. The provision for eamings sharing in Washington in
the second quarterof20l6 resulted from a $1.2 million reduction in the 201 5 provision foreamings sharing (which increased 201 6 revenues), partially
offset by a $0. I million provision for the second quarter of20 I 6.
(2) The provision for eamings sharing in Idaho in the second quarter of20 I 6 resulted from a reduction in the 20 I 5 provision for eamings sharing (which
increased 20 I 6 revenues). Beginning in 20 I 6 there is no longer an eamings sharing mechanism in Idaho.
Total electric revenuesdecreased $4.2 rrillion forthe second quarterof20lT ascompared to the second quarterof20l6 primarily reflecting tlre following:
. a $7.0 million increase in retail electric revenue due to an increase in total MWhs sold (increased revenues $3.8 million) and an increase in revenue
per MWh (increased revenues $3.2 million).
. The increase in total retail MWhs sold was the result ofweather that was cooler than the prior year (which increased electric heating loads,
partially offset by a decrease in cooling loads), as well as customer growth. Compared to the second quarter of20 I 6, residential electric use
per customer increased 6 percent and commercial use per customer decreased 2 percent. Heating degree days in Spokane were I 2 percent
belownormal, but 45 percent above the second qua(erof20l6. Cooling degree days in Spokane were 54 percent above normal, but i2
percent below the second quarter of20 I 6.
" The increase in revenue perMWh was primarily due to a general rate increase in Idaho and a greaterportion ofretail revenues from
residential customers in the second quarter of20l 7.
. a $10.1 million decrease in wholesale electric revenues due to a decrease in sales prices (decreased revenues $7.2 million) and a decrease in sales
volumes (decreased revenues $2.9 million). The fluctuation in volumes and prices was primarily the result of our optimization activities.
. a $ I .l million increase in sales of fuel due to an increase in sales of natural gas fuel as part of thermal generation rcsource optimization activities. For
the second quarter of20 1 7, $5.3 million ofthese sales were made to our natural gas operations and are included as intracompany revenues and
resource costs. Forthe second quarterof20l6, $8.0 million ofthese sales were made to ournatural gas operations.
. a 52.7 mil lion decrease in electric revenue due to decoupling. Weather was gen erally warmer than normal in both periods, which resulted in
decoupling surcharges for both the second quarter of20 I 7 and 20 I 6; however, the surcharges were larger during 20 I 6 since the weather differed
more from normal in 20 1 6 than it did in 20 1 7. Decoupling mechanisms are not impacted by fluctuations in weather compared to prior year, they are
only impacted by weather fluctuations as compared to normal weather.
44
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2, Page 47 ot 71
o
o
Table of Contents
AVISTA CORPORATION
The following graphs present our utility natural gas operating revenues and therms delivered for the three months ended June 30 (dollars in millions and
therms in thousands):
Natural Gas Operating Revenues
$.iJ I
$t?,('sle.6
$:1 0
fl67 Slll {r sr0l
$.1 t)
*crtde[tt$\C orrrt'rtrtr'a\N\tt'\es$e $'i\ll}l''
I lorT f :0t6
o
(l) Thisbalanceincludesintemtptibleandindustrialrevenues,whichareconsideredpartofretailnaturalgasrevenuesanditalsoincludesrevenuesand
rebates from decoupling.
Therms Delivered
l.il.oll
9e.$81
j I.s7l
J5,614 {t.07{
t:.]qs l0,f{,7 I 5.16.t
Baut0tntt*\C orrrtrrtfcr'$ItUo\est\e o\hc\
I rorz I lO l6
45
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 48 ol 71
O
o
o
Tabl€ of Contents
AVISTA CORPORATION
The following table presents Avista Utilities'decoupling and customer eamings sharing mechanisms by jurisdiction that are reflected in utility natural gas
operating revenues for the three months ended June 30 (dollars in thousands):
Natural Gas Operating
Revenues
201'7
Washingtoo
Decoupling surcharge
Provision for eamings sharing
Idaho
Deeoupling surcharge (rebate)
Oregon
Decoupling surcharge (rebate)
Residential
Commercial
Intemrptible
Industrial ( I )
$30
201 6
15q5
(320)
$
$
(617)
(106) $
(121) $
589
1,690
Total natural gas revenues decreased $0.5 million for the second quarter of20 1 7 as compared to the second quarter of20 I 6 primarily reflecting the
following:
. a $ I 0.3 million increase in natural gas retail revenues due an increase in volumes (increased revenues $ I 4.4 million), partially offset by lower retail
rates (decreased revenues $4.1 million).
. We sold more retail natural gas in the second quarter of20 I 7 as compared to the second quarter of20 1 6 due to weather that was cooler than
the prior year. Compared to the second quarter of20 I 6, residential natural gas use per customer increased 3 9 percent and commercial use
per customer increased 33 percent. Heating degree days in Spokane were I 2 percent below normal, but 45 percent above the second quarter
of 20 I 6. Heating degree days in Medford were I I percent below normal, but 60 percent above the second quarter of 201 6.
" Lower retail rates were due to PGAs, partially offset by a general rate increase in Oregon.
. a $4.7 million decrease in wholesale natural gas revenues due to a decrease in volumes (decreased revenues $l 3.0 million), partially offset by an
increase in market prices (increased revenues $8.3 million). In the second quarter of20 I 7, $9.0 million ofthese sales were made to our electric
generation operations and are included as intracompany revenues and resource costs. In the second quarter of 201 6, $5.1 million of these sales were
made to our electric generation operations. Differences between revenues and costs from sales ofresources in excess ofretail load requirernents and
from resource optimization are accounted for through the PGA mechanisms.
. a $6.1 million decrease in natural gas revenue due to decoupling. Weather was generally warmer than normal during the second quarter 201 7;
however, due to tlre shape ofthe normal usage cuwe for natural gas in the decoupling mechanism, this resulted in a small rebate during the second
quarter in Idaho and Oregon and a small net surcharge in Washington. This compares to significant decoupling surcharges in the second quarter of
201 6. Decoupling mechanisms are not impacted by fluctuations in weather compared to prior year, they are only impacted by weather fluctuations
as compared to normal weather.
The following table presents our average number ofelectric and natural gas retail customers for the three months ended June 30:
Electric
Customers
Natural Gas
Cuslomers
201'7
333,465
42,074
329,55t
41,7 32
1,346
559
373,1 88
2016 2017 2016
306,23 8
35,197
38
250
299,860
34,867
37
2551,328
Public street and highway lighting 558
Total retail customers 377,425 34t,'723 33 5,019
(l ) The decrease in electric industrial customers as comparcd to the second quaner of20 I 6 is primarily related to a decrease in Washington irrigation
customers.
46
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2, Page 49 oI71
o
Table of Contents
AVISTA CORPORATION
The following
Electric Resource Costs
$3t.:
$2.1.r)
$lt 5
$rq.5 $ts.o sl5 a
$l(to $s7
totle{'
ptu$++co
.;err*ouO l\\c\c0615 Ot\et
tsc\ {or Odter
I :ot7 I ?016
Natural Gas Resource Costs
$,1{ 5
$-r9 t
$7 -l
-$0 1
Naturnl gits purchasetl Oth*r
I lorT :01 6
Total resource costs in the graphs above include intracompany resource costs of $ I 4.2 million and $ I 3.1 million for the three months ended June 3 0, 201 7
and June 30,2016, respectively.
Total electric resource costs decreased $3.9 million for the second quarter of20 I 7 as compared to the second quarter of20 I 6 reflecting the following:
. a $7.3 million decrease in purchased power due to a decrease in the volume of power purchases (decreased costs $ I .1 million) and a decrease in
wholesale prices (decreased costs $6.2 million). The fluctuation in volumes and prices was primarily the result ofour optimization activities during
the quarter.
. a $5.5 million decrease in fuel forgeneration primarily due to a decrease in thermal generation (due in part to increased hydroelectric generation).
. a $ I .5 million increase in other fuel costs. This represents fuel and the related derivative instruments that were purchased for generation but were
later sold when conditions indicated that it was more economical to sell the fuel as
ended June 30 in mil
o
o
4'7
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 50 of 71
I
a
Tabl€ of Contents
AVISTA CORPORATION
part of the resource optimization process. When the fuel orrelated derivative instruments are sold, that revenue is included in sales of fuel.
. a $7.0 million increase frorn amortizations and defenals of power costs. This change was primarily to result of lower net power supply costs.
. a $0.2 million net increase from otherregulatory amortizations and otherelectric resource costs.
Total natural gas resource costs decreased $2.1 million for the second quarrer of20 I 7 as compared to the second quarter of20 1 6 reflecting the following:
. a S5.4 million increase in natural gas purchased due to an increase in the market price ofnatural gas (increased costs $l 6.0 million), patially offset
by a decrease in total therms purchased (decreased costs $ I 0.6 million). Total therms purchased decreased due to a decrease in wholesale sales,
partially offset by an increase in retail sales.
. a $0.8 million increase in otherregulatory amortizations.
. an $8.3 million decrease from amortizations and deferrals ofnatural gas costs. This reflects lower natural gas prices compared to our authorized PGA
rates and the deferral ofthese lower costs, which occurred in the current quarter for future rebate to customers.
Six months ended June 30, 201 7 compared to the six ,nonths ended June 30, 201 6
The following table presents our operating revenues, r€source costs and resulting gross margin for the six months ended June 30 (dollars in thousands):
Electric Natural Gas Intracompany Total
201'1 2016 2017
Operatingrevenues$ 4r4276S4yr,5%5rfl,64,s 236,36s $ (32,790) $
20t6 20t7
Resource costs
2016 2017 20t6
160,302 t67,702 134,562 t29,1s3 (32,7e0)
(31,170) $
(3 1 ,1 70)
'n2,128 $
262,074
1'02,788
265,685
Grossmargin j__:1ifl1_ g_l?:,8e1_ j__rr6{9t j__l!l!_13_$s 4s0,054 $ 437,103
The gross margin on electric sales increased $4.1 million and the gross margin on natural gas sales increased $8.9 million. The increase in electric gross
margin was primarily due to a general rate increase in Idaho, customer growth and lower resource costs, partially offset by a change in the provision for
eamings sharing (which reduced electric gross margin by $3.0 million for201'1 as compared to 2016). Forthe six months ended June 30,2017, we recognized
a pre-tax benefit of $4.6 million under the ERM in Washington compared to a benefit of $4.2 million for the six months ended June 30, 2016.
The increase in natural gas gross margin was primarily due to a general rate increase in Oregon and customer growth.
Intracompany revenues and resource costs represent purchases and sales ofnatural gas between ournatural gas distribution operations and ourelectric
generation operations (as fuel for our generation plants). These transactions are eliminated in the presentation oftotal results for Avista Utilities and in the
condensed consolidated financial statements but are included in the separate results for electric and natural gas presented below.
48
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 51 of 71
o
Table of Contents
o AVISTA CORPORATION
The following graphs present ourutility electric operating revenues and megawatt-hour (MWh) sales forthe six months ended June 30 (dollars in millions
and MWhs in thousands):
o
Electric Operating Reven ues
t le4.e
s168.0 $l5l."l 11.19.p
$5.i I 55t.tt $5$ q
fiq.5 $16.s t30.0 $l{ r
s*rrduotto\ C ortrrrrersra\ urd.t#$\ $lt,or"rs\* S$cs o{ t:uE\or\i$
I sorr I 2016
Electric Energy lllt#h Salts
l.q6{
1,75{l.(r7O1.567 t.55 I t.d,i I
B*'o*ttot C,.srroretir'a\frrilrrsrrrt\.0{\ro\ei'&\€
I rorT I rilr6
49
Exhibit No. 3
Case Nos. AVU-E-17-_/ AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 52ot71
o
$l8 o
8tr7 8J(,
a
o
Table of Contents
AVISTA CORPORATION
The following table presents Avista Utilities'decoupling and customer eamings sharing mechanisms byjurisdiction that are reflected in utility electric
operating revenues for the six months ended June 30 (dollars in thousands):
Elecuic Operating
Revenues
201'7 2016
Washington
Decoupling surcharge (rebate)
Provision for eamings sharing (l )
Idaho
Decouplin g surcharge (rebate)
Provision for eamings sharing (2)
(1 ,461 ) S
(130)
(r,0e6) $
nla
8,634
2,169
$5,031
711
( I ) The provision for eamings sharing in Washington for the six months ended June 3 0, 20 I 7 represents an adjustment of the 201 6 provision for eam ings
sharing. We are not expecting a provision for eamings sharing in Washington relating to 201 7 eamings. The provision for eamings sharing in
Washington in the six months ended June 30, 201 6 resulted from a $2.5 million reduction in the 201 5 provision for eamings sharing (which increased
20 I 6 revenues), partially offset by $0.3 million provision for the six months ended June 30, 20 I 6.
(2) The provision for eamings sharing in Idaho in the six months ended June 3 0, 201 6 resulted from a reduction in the 20 I 5 provision for eamings sharing
(which increased 20 1 6 revenues). Beginning in 20 I 6 there is no longer an eamings sharing mechanism in Idaho.
(n/a) This mechanism did not exist during this time period.
Total electric revenues decreased $3.3 million forthe six months ended June 30,2017 as compared to the six months ended June 30,201 6 primarily
refl ecting the followin g :
. a $30.6 million increase in retail electric revenue due to an increase in total MWhs sold (increased revenues $22.2 million) and an increase in
revenue per MWh (increased revenues $8.4 million).
. The increase in total retail MWhs sold was the result ofweather that was cooler than the prior year (which increased electric heating loads,
partially offset by a decrease in cooling loads), as well as customer grouh. Compared to the six months ended June 30, 2016, residential
electric use per customer increased 10.6 percent and commercial use per customer increased 0.1 percent. Heating degree days in Spokane
were 6 percent above normal and 29 percent above the first six months of2016. Year-todate 201 6 cooling degree days were 54 percent
above normal (mostly in June). However, cooling degree days were I 2 percent below the prior year.
. The increase in revenue perMWh was primarily due to a general rate increase in Idaho and a greaterportion ofretail revenues fom
residential customers in 20 1 7.
. a $ I 9.4 million decrease in wholesale electric revenues due to a decrease in sales volumes (decreased revenues $6.8 million) and a decrease in sales
prices (decreased revenues $ I 2.6 million). The fluctuation in volumes and prices was primarily the result ofour optimization activities.
. a $0.8 million increase in sales offuel due to an increase in sales ofnatural gas fuel as part ofthermal generation resource optimization activities. For
the six months ended June 30,2017 , $ I 3.3 million ofthese sales were made to our natural gas operations and are inc'luded as intracompany revenues
and resource costs. For the six months ended June 30,2016, $ I 6.3 million ofthese sales were made to our natural gas operations.
. a $ I 6.2 million decrease in electric revenue due to decoupling. For the year-todate, weather was overall cooler than normal in 20 I 7, which resulted
in decoupling rebates for the first halfof2O I 7. Weather was warmer than normal in the first halfof20 I 6, which resulted in significant decoupling
surcharges. Decoupling mechanisms are not impacted by fluctuations in weather compared to prior year, they are only impacted by weather
fluctuations as compared to normal weather.
50
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
o
Schedule 2, Page 53 of 7 1
$
o
o
Table of Contents
AVISTA CORPORATION
The following graphs present our utility natural gas operating revenues and therms delivered for the six months ended June 30 (dollars in millions and therms
in thousands):
Natural Gas Operating Revenues
fl16:
$ t0.l".l
s.6{r.6 $61.6 $('1 0
S{e q
$10 i
\aa"d*ntt"\Cor$t$ircrlr\.$ho\ero\e (-)t\':{
I lorz I :olo
Therms Delivered
.] 13. I 5.r
118..i05
r:$.? 1e
.JE.599
77.t21
l05.leq q5.596
lu. la3
$or$g+ttrt C irOrrref
Ctf\
t,ttro\e+$e Or\rcr
I lorT I :oro
5l
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2, Page 54 ol 71
o
o
Table of Contents
AVISTA CORPORATION
The following table presents Avista Utilities'decoupling and customer eamings sharing mechanisms byjurisdiction that are reflected in utility natural gas
operating revenues for the six months ended June 30 (dollars in thousands):
Nanrral Gas Operating
Revmucs
Washington
Decoupling surclrarge (rebate)
Provision for eamings sharing
Idaho
Decoupliqg surcharg€ (rebate) $ (883) $ 2,126
Oregon
Decoupling surcharge (rebme) $ (2,050) $ 1,858
Total natural gas revenues increased $14.3 million forthe six months ended June 30,2017 as compared to the six months ended June 30,2016 primarily
refl ecting the following:
. a $33.5 million increase in natural gas retail revenues due to an increase in volumes (increased revenues $43.3 million), partially offset by lower
retail rates (decreased revenues $9.8 million).
. We sold more retail natural gas in the six months ended June 30,2017 as compared to the six months ended June 3 0, 20 I 6 due to cooler
weather and customer groMh. Compared to the first six months of20 I 6, residential natural gas use per customer increased 28 percent and
commercial use per customer increased 29 percent. Heating degree days in Spokane were 6 percent above normal and 29 percent above the
first six months of20 I 6. Heating degree days in Medford were 3 percent below normal, but 24 percent above the first six months of20 I 6.
" Lower retail rates were due to PGAs, partially offset by a general rate increase in Oregon.
. a $ I .0 million decrease in wholesale natural gas revenues due to a decrease in volumes (decreased revenues $22.6 million), mostly offset by an
increase in prices (increased revenues $21.6 million). ln the six months ended June 30,2017, $19.5 mitlion ofthese sales were made to ourelectric
generation operations and are included as intracompany rcvenues and resource costs. In the six months ended June 30, 20 I 6, $ I 4.9 million ofthese
sales were made to our electric generation operations. Differences betwe€n revenues and costs from sales ofresources in excess ofretail load
requirements and from resource optimization are accounted for through the PGA mechanisms.
. an $ I 8.9 mil lion decrease in natural gas !€venue due to decoupling. For the year-todate, weather was overall cooler than normal in 201 7, which
resulted in decoupling rebates for the first halfof20 I 7. Weather was warmer than normal in the first halfof20 I 6, which resulted in significant
decoupling surcharges. Decoupling mechanisms are not impacted by fluctuations in weather compared to prior year, they are only impacted by
weather fluctuations as compared to normal weather.
The following table presents our average number ofelectric and natural gas retail customers for the six rnonths ended June 30:
20t7 20 r 6
s (5,221) S 6,i66
(617) (536)
Natural Gas
Customcrs
Electric
Customers
201'7 2016
333,885
42,070
I,327
562
329,818
41,698
1,34'7
555
201'7
306,231
35,217
5l
251
2016
Residential
Commercial
Intemrptible
hdustrial (I )
Public street and highway lighting
Total retail customers
299,966
34,8'.14
38
256
335,1 34
(l ) The decrease in electric industrial customers as compared to the first half of 201 6 is primarily related to a decrease in Washington irrigation customers.
<,
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-1 7-_
M. Thies, Avista
377,844 37 3,410 341,736
o
Schedule 2, Page 55 of 71
Table of Contents
o AVISTA CORPORATION
The following graphs present our utility resource costs for the six months ended June 30 (dollars in millions):
o
f,lectric Resource Costs
s?r I
So-l I
$d3 S
tij:.3 $33 1 $10.9 s30 ?f:r e
!oNG{r
$trr$laTes
.;eocr+rrt'tt'i\r*\coBlS (Jt\.\c{
t.t$ to'olbcr
I 3or7 I tor(r
Natural Gas Resource Co$ts
$l]8.5
$11{.8
$0. I
st4 4
Nntural gas purchased Otlrr
I xorT I roro
Total resource costs in the graphs above include intracompany resource costs of $32.8 million and $3 1 .2 million for the six months ended June 30, 2017 and
June 30, 201 6, respectively.
Total electric resource costs decreased $7.4 million forthe six months ended June 30,2017 as compared to the six months ended June 30,2016 reflecting the
following:
. a $7.0 million decrease in purchased power due to a decrease in wholesale prices (decreased costs $7.5 million), partially offset by an increase in the
volume of power purchases (increased costs $0.5 million). The fluctuation in volumes and prices was primarily the result of our optimization
activities during the period.
. an $ 1 I .5 million decrease in fuel for generation primarily due to a decrease in thermal generation (due in part to increased hydroelectric generation).
. a $2.3 million increase in other fuel costs.
. an $8.2 million increase fiom amortizations and deferrals of power costs. This change was primarily to result of lower
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
53
Schedule 2, Page 56 of71
o
Table of Contents
AVISTA CORPORATION
net power supply costs.
. a $0.6 million increase in otherregulatory amortizations and other electric resource costs.
Total natural gas resource costs increased $5.4 million for the six months ended June 30, 20 1 7 as compared to the six months ended June 30, 20 I 6 reflecting
the following:
. a $l 3.7 million increase in natural gas purchased due to an incrtase in the price ofnatural gas (increased costs $24.0 million), partially offset by a
decrease in total therms purchased (decreased costs $ I 0.3 million). Total thenns purchased decreased due to a decrease in wholesale sales, partially
offset by an increase in retail sales.
. an $l 1.8 million decrease from amortizations and deferrals ofnatural gas costs. This reflects lowernatural gas prices compared to ourauthorized
PGA rates and the defenal ofthese lower costs, which occurred in the current period for future rebate to customers.
. a $3.5 million increase in otherregulatory amortizations.
Results of Operations - Aleska Electric Light and Power Comoany
Three months ended lune 30,2017 compared to the three months ended June 30,2016 and six monlhs ended June 30,2017 compared to the six months
ended June 30,2016
Net income for AEL&P was $ 1 .7 million for the three months ended June 3 0, 201 7 compared to $ I .l million for the three months ended June 3 0, 201 6. Net
income was $5.5 million for the six months ended June 30, 201 7 compared to $4.0 million for the six months ended June 30, 2016.
The increase in eamings for both the second quarter and year-to{ate was primarily due to an increase in electric gross margin which was $8.7 million for the
second quarter of20 I 7, compared to $7.0 million for the second quarter of20 I 6. For the year-to-date, electric gross margin was $20.9 million for the six
months ended June 30, 20 I 7, compared to $ I 7.0 rnillion for the six montlrs ended June 3 0, 20 I 6. The increase in electric gross margin was partially ofset by
an increase in operating expenses and a decrease in equity-related AFUDC due to the construction ofan additional back-up generation plant in 201 6.
The increase in electric gross margin was primarily related to an interim general rate increase, effective in Novemb er 2O1 6, and increases in electric heating
loads due to weather that was cooler than the prior year. There were also slight increases in residential and commercial customers. This was partially offset by
an increase in resource costs primarily due to purchased power expense, deferred power supply expenses and fuel expense.
While the cooler weather did have some effect on AEL&P revenues during 20 1 7, AEL&P has a relatively stable load profile as it does not have a large
population ofcustomers in its service territory with electric heating and cooling requirements; therefore, its revenues are not as sensitive to weather
fluctuations as Avista Utilities. However, AEL&P does have higher winter rates for its customers during the peak period of November through May of each
yeaq which drives higher revenues during those periods.
Operating expenses increased primarily due to supplies expense for the new back-up generation plant, which went into service at the end of20 I 6.
Results ofOnera6ons - Other Businesses
Net losses for our other businesses were $ I .7 million for the three months ended June 30, 20 1 7 compared to $0.6 million for the three months ended June 30,
201 6. Net losses were $ I .9 million for the six months ended June 30, 201 7 compared to $0.9 million for the six months ended June 30, 2016.
Net losses for the second quarter 20 1 7 and the six months ended June 30, 20 I 7 were primarily related to renovation expenses and increased compliance costs
at one ofour subsidiaries and additional losses on investments as compared to 20 1 6. These were partially o{Iset by a decrease in corporate costs (including
costs associated with exploring strategic opportunities).
Critical Accountinp Policies and Estimates
The preparation ofour consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts
reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material
effect on our consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. Our critical accounting
policies that require the use ofestimates and assumptions were discussed in detail in the 20 I 6 Form I 0-K and have not changed materially from that
discussion.
54
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
O
Schedule 2, Page 57 ot 7'l
a
Table 0f Contents
AVISTA CORPORATION
o
Liquiditv and Caoital Resources
Overall Liouiditv
Our sources ofoverall liquidity and the requirements for liquidity have not materially changed in the six months ended June 30, 20 I 7. See the 20 I 6 Form 1 0-
K for further discussion.
As of June 30, 2017, we had $207.3 million of available liquidity under the Avista Corp. committed line of credit and $25.0 million under the AEL&P
committed line of credit. With our $400.0 million credit facility that expires in April 2021 and AEL&P's $25.0 million credit facility that expires in
November 20 I 9, we believe that we have adequate liquidity to meet our needs for the next I 2 months.
Review of Cash Flow Statement
0verall
During the six months ended June 30, 20 I 7, positive cash flows from operating activities were $228.5 million, which included contributions to our pension
plan of $ 14.8 million. Other cash requirements included utility capital expenditures of $ I 77.7 million, dividends of $46.2 million.
Ooeratinq Activities
Net cash provided by operating activities was $228.5 million for the six months ended June 30, 20 I 7 compared to $ I 56.0 million for the six months ended
June 30, 20 I 6. The increase in net cash provided by operating activities v/as primarily related to the amount ofcollateral posted for derivative instruments
where we posted $5.5 million in the first halfof20 I 7, compared to $83.5 million posted in the first halfof20 I 6. Our collateral increased in 20 1 6 due to a
decrease in tlre fair value ofoutstanding interest rate swap derivatives at that time and also due to fewer counterparties accepting letters ofcredit as collateral.
In 20 I 7, more counterparties are accepting letters ofcredit as collateral rather than cash. In addition for the first halfof20 1 7, we had increased net income
(afterconsideration ofnon-cash items included in net income) of$235.5 million, compared to $224.0 million in 2016.
We also increased our pension contributions from $8.0 million in the first half of 2016 to $ 14.8 million in the first half of 201 7.
Investins Activi6es
Net cash used in investing activities was $ I 89.6 million for the six months ended June 30, 201 7, compared to $206.6 million for the six months ended June
30, 2016. During the first half of 201 7, we paid $ 177.7 million for utility capital expenditures compared to $ 182.8 million for the first half of 2016. Also,
during the first halfof2O I 7, our subsidiaries invested $ I 0.3 million in equity and property, compared to $7.0 million invested during the first halfof20 I 6.
Financins Activities
Net cash used by financing activities was $34.0 million for the six months ended June 30, 20 I 7, compared to net cash provided of$53.7 million for the six
months ended June 30,2016. We had the following significant transactions:
. short-term borrowings increased by $ I 6.0 million in the first half of 201 7, compared to an increase of $5 5.0 million in 201 6,
cash dividends paid to Avista Corp. shareholders increased to $46.2 million (or $0.715 pershare) forthe first halfof20l7 from $43.3 million (or
$0.685 per share) for the first halfof2O I 6, and
issuance of$ I .2 rnillion (net ofissuance costs) under share-based compensation plans. In 20 I 6, we issued $47.2 million ofcommon stock under
sales agency agreements.
55
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 2, Page 58 of 71
I Table of Contents
AVISTA CORPORATION
Canital Resources
Our consolidated capital structure, including the current portion oflong-term debt and short-term borrowings, and excluding noncontrolling interests,
consisted ofthe following as ofJune 30,2017 and December 3 1,201 6 (dollars in thousands):
June 30,2017 December 3 1, 201 6
Amount
Percent
of total Amount
Percent
of total
Current portion oflong-term debt arrd capital leases
Short-term borrowings
Long-term debt to affiliated trusts
Long-term debt and capital leases
Total debt
Total Avista Corporation shareholders' equity
Total
Borrowings outstanding at end ofperiod
Lcttcrs ofcrcdit outstanding at end ofperiod
Maximum borrowings outstanding during the period
Average borrowrngs outstanding during the period
Average interest rate on borrowings during the period
$277,814
136,398
51,547
1,403,064
7.8% S
3.8o/o
15%
39.5%
3,287
120,000
51,547
| ,678,71',7
0.1%
3.4%
1.5%
47.9%
1,687 ,173
$ 3,555,996
47.4%
100.0%
1,853.551
|,648,727
!---:5022ry-
52.9%
47.1%
100.0%
160,000
45,795
160,000
I I 8,832
1.22%
1.22%
I,868,823 52.6%
o
Our shareholders' equity increased $38.4 million during the first six months of20l 7 primarily due to net income, partially offset by dividends.
We need to finance capital expenditures and acquire additional funds for operations from time to time. The cash requirements needed to service our
indebtedness, both short-term and long-term, reduce the amount ofcash flow available to fund capital expenditures, purchased power, fuel and natural gas
costs, dividends and other rcquirements.
Committed Lines of Credil
Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million that expires in April 2021 . As of June 30,
20 I 7, there were $ I 36.0 million ofcash borrowings and $56.7 million in letten ofcredit outstanding (which were primarily issued as collateral for our energy
commodity and interest rate swap derivatives), leaving $207.3 million ofavailable liquidity underthis line ofcredit.
The Avista Corp. credit facility contains customary covenants and default provisions, including a covenant which does not permit our ratio of"consolidated
total debt" to "consolidated total capitalization" to be greater than 65 percent at any time. As ofJune 30, 20 I 7, we were in compliance with this covenant
with a ratio of 52.6 percent.
AEL&P has a $25.0 million committed line of credit that expires in November 2019. As of June 30, 2017, there were no borrowings or letters of credit
outstanding under this committed line of credit.
The AEL&P credit facility contains customary covenants and default provisions including a covenant which does not permit the ratio of"consolidated total
debt at AEL&P" to "consolidated total capitalization at AEL&P," (including the impact ofthe Snettisham obligation) to be greater than 67.5 percent at any
time. As of June 30,2017, AEL&P was in compliance with this covenant with a ratio of 54.1 percent.
Balances outstanding and interest rates ofborrowings (excluding letters ofcredit) under Avista Corp.'s committed line ofcredit were as follows as ofand for
the six months ended June 30 (dollars in thousands):
20t'7 20t6
136.000 $
56,7 03 $
136,000 $
I 05,1 57 $
1.67%
1.99%Average interest rate on borrowings at end ofperiod
There were no borrowings outstanding underAEL&P's committed line ofcredit as ofJune 30,2017 and June 30,2016.
As ofJune 30,2017, Avista Corp. and its subsidiaries were in compliance with all ofthe covenants oftheirfinancing agreements, and none ofAvista Corp.'s
subsidiaries constituted a "significant subsidiary" as defined in Avista Corp.'s committed line of credit.
Equity Issuances
See "Note 9 ofthe Notes to Condensed Consolidated Financial Statements" for a discussion ofour equity issuances during 2016 and 2017 .
56
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 59 of 71
$
$
s
$
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T.ble of Contents
AVISTA CORPORATION
201 7 Liquidity Expectations
In the second half of 2017, we expect to issue up to $90.0 million of long-term debt and up to $70.0 million of common stock in order to fund planned
capital expenditures and maintain an appropriate capital structure.
Afterconsidering the expected issuances oflong-term debt and comrnon stock during 2017,we expect net cash flows from operating activities, togetherwith
cash available under our committed line ofcredit agreements, to provide adequate resources to fund capital expenditures, dividends, and other contractual
commitments.
Canital Exoenditures
We are making capital investments in generation, transmission and distribution systems to preserve and enhance service reliability for our customers and
replace aging infrastructure. Our estimated capital expenditures for 20 I 7, 20 I 8 and 20 I t have not materially changed during the six months ended June 3 0,
2017. See the 2016 Form l0-K for further information.
Off-Balance Sheet Arransements
As of June 30, 201 7, we had $56.7 rnillion in letters of credit outstanding under our $400.0 million committed line of credit, compared to $34.4 million as of
Decembet 3 I , 20 I 6. The increase in outstanding lettem ofcredit is partially related to negotiations with interest rate swap counterparties to accept letters of
credit as collateral rather than cash collateral and also due to issuing additional letters ofcredit as collateral based on changes in the fair value ofinterest rate
swap and energy commodity derivatives during the six months ended June 30, 20 I 7.
Pension Plan
Avista Utilities
In the six months ended June 30, 201 7 rile contributed $ 14.8 million to the pension plan and we expect to contribute a total of $22.0 million in 201 7. We
expect to contribute a total of$ I I 0.0 million to the pension plan in the period 20 1 7 through 202 1, with annual contributions of$22.0 million over that
period.
The final determination ofpension plan contributions for future periods is subject to multiple variables, most ofwhich are beyond our control, including
changes to tlre fair value ofpension plan assets, changes in actuarial assumptions (in pa(icular the discount rate used in determining the benefit obligation),
or changes in federal legislation. We may change our pension plan contributions in the future depending on changes to any variables, including those listed
above.
See "Note 4 ofthe Notes to Condensed Consolidated Financial Statements" for additional information regarding the pension plan.
Contractual Oblisations
Our future contractual obligations have not materially changed during the six months ended June 30, 20 I 7. See the 20 I 6 Form I 0-K for our contractual
obligations.
Environmental Issues and Contingencies
Our environmental issues and contingencies disclosures have not materially changed except for the following during the six months ended June 30, 201 7.
See the 20 I 6 Form I 0-K for all other environmental issues and contingencies.
Climate Change - Federal Regulatory Actions
The Environmental Protection Agency @PA) released the final rules for the Clean Power Plan (Final CPP) and the Cafton Pollution Standards (Final CPS) on
August 3, 20 I 5. The Final CPP and the Final CPS are both intended to reduce the carbon dioxide (CO2) emissions from certain coal-fired and natural gas
electric generating units @GUs). These rules were published in the Federal Register on October 23, 20 I 5 and were immediately challenged via lawsuits by
other parties.
In a separate but related rulemaking, the EPA finalized CO2 new source performance standards (NSPS) for new, modified and reconstnrcted fossil fuel-fired
EGUs under CAA section I 1 1 (b). These EGUs fall into the same two categories ofsources regulated by the Final CPP: steam generating units (also known as
"utility boiters and IGCC units"), which primarily bum coal, and stationary combustion turbines, which primarily bum natural gas.
The promulgated and proposed greenhouse gas rulemakings mentioned above have been legally challenged in multiple venues. On February 9, 20 I 6, the
U.S. Supreme Court granted a request for stay, halting implementation of the CPP. On March 28,2017 , the Department of Justice has filed a motion with the
U.S. Court of Appeals for the District of Columbia Circuit @.C. Circuit) requesting that the Court hold the cases challenging the CPP in abeyance while the
EPA reviews the final rules applicable to existing, as well as to new, modified, and reconstructed electric generating units pursuant to an Executive Order
issued by President Trump. The Executive Order also instructed the EPA to review the CPP rule. On April 28,2017 the D.C.
5't
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-'| 7-_
M. Thies, Avista
Schedule 2, Page 60 of 71
a
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Ide-slEqlleE!
AVISTA CORPORATION
CircuitissuedorderstoholdthelitigationregardingtheCleanAirAct$111(d)CleanPowerPlanandthe$1ll@)NewSourcePerformanceStandardsfor
power plants in abeyance for a period of60 days with status reports due from the EPA every 30 days. The EPA has continued to ask the Court to hold the
rules in abeyance, and, as a result of its ongoing review of the Final CPP, in June 201 7 transmitted a draft proposed rule to the Office of Management and
Budget. The contents ofthat proposed rule have not been made public. Given these ongoing developments, we cannot fully predict the outcome or estimate
the extent to which our facilities may be impacted by these regulations at this time. We intend to seek recovery ofany costs related to compliance with these
requirements through the ratemaking process.
Enterorise Risk Manasement
The material risks to our businesses were discussed in our 20 I 6 Form 1 0-K and have not materially changed during the six months ended June 30,2017 .
Refer to the 20 I 6 Form 1 0-K for further discussion ofour risks and the mitigation ofthose risks.
Financial Risk
Our financial risks have not materially changed during the six months ended June 30,2017 . Refer to the 20 I 6 Form I 0-K. The financial risks included below
are required interim disclosures, even ifthey have not materially changed from December 3 1 ,2016.
Inleresl Rale Risk
We use a variety oftechniques to manage our interest rate risks. We have an interest rate risk policy and have established a policy to limit ourvariable rate
exposures to a percentage oftotal capitalization. Additionally, interest rate risk is managed by rnonitoring market conditions when timing the issuance of
long-term debt and optional debt redemptions and establishing fixed rate long-term debt with varying maturities. See "Note 3 ofthe Notes to Condetrsed
Consolidated Financial Statements" for a summary ofour interest rate swap derivatives outstanding as ofJune 30,2017 and December 3 1 ,2016.
Credit Risk
Avista Utilities' contracts for the purchase and sale ofenergy commodities can require collateral in the form ofcash or letters ofcredit. As ofJune 30, 20 1 7,
we had cash deposited as collateral in the amount of$ I 5.9 million and letters ofcredit of$37.3 million outstanding related to our energy derivative
contracts. Price movements and/or a downgrade in our credit ratings could impact further the amount ofcollateral required. See "Credit Ratings" in the 20 I 6
Form I 0-K for further information. For example, in addition to limiting our ability to conduct transactions, ifour credit ratings were lowered to below
"investment grade" based on our positions outstanding at Jun e 3 0, 201 7, we would potentially be required to post up to $4.1 million of additional collateral.
This amount is different from the amount disclosed in "Note 3 ofthe Notes to Condensed Consolidated Financial Statements" because, while this analysis
includes contracts that are not considered derivatives in addition to the contracts considered in Note 3, this analysis takes into account contractual threshold
limits that are not considered in Note 3. Without contractual threshold limits, we would potentially be required to post up to $4.7 million of additional
collateral.
Under the terms ofinterest rate swap derivatives that we enter into periodically, we may be required to post cash or letters ofcredit as collateral depending on
fluctuations in the fair value ofthe instrument. As ofJune 30, 20 I 7, we had interest rate swap derivatives outstanding with a notional amount totaling $5 I 0.0
mill ion and we had deposited cash in the amount of$4 l 6 rrillion and letters of credit of $ I 3. I million as collateral for these interest rate swap derivatives. If
our credit ratings were lowered to below "investment grade" based on our interest rate swap derivatives outstanding at June 30, 20 I 7, we would be required
to post up to $ I I .2 million ofadditional collateral.
Enersv Commoditv Risk
Our energy commodity risks have not materially changed during the six months ended June 30,2017 , except as discussed below. Refer to the 20 I 6 Form I 0-
K. The following table presents energy commodity derivative fair values as a net asset or (liability) as ofJune 30, 20 1 7 that are expected to settle in each
respective year (dollars in thousands):
Sales
Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivatives
Year
Remainder 201 7
201 8
2119
2020
2021
Thereafter
Q,48s) $
(6,8 80)
(4,321)
4s6 $
(347)
(l,r 68)
(732) $
(280)
(3s7)
(14207) $
(9,41 6)
(6,160)
(4 8e)
I,99s $
4,234
4,569
(2r3) $
(870)
(8e 1)
(1,2s6)
(840)
Physical (l) Finmcial (l) Physical (1) Finmcial (l) Physical (l) Finmcial (l) Physical (l) Finmcial (l)
$(70) $
(24)
(l e)
5,808
3,402
1,557
58
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2,Page 61 of71
Purchases
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Table of Contents
AVISTA CORPORATION
The following table presents energy commodity derivative fair values as a net asset or (liability) as ofDecembet 3l ,2O16 that are expected to be delivered in
each respective year (dollars in thousands):
Purchmes Sales
Electric Derivatives Gr Derivatives Electric Derivatives Oas Derivatives
Year
2017
201 8
2019
2020
2021
Thereafter
$(4,274) $
(5,5e8)
(3,123)
1,939
Physical(1) Financial(1) Physical(1) Financial(1) Physical(l) Financial(l)
$ e7 $ (4,005) $ (22s) $ s76 $ (2,036) $ (3,440)
(2,t70\ (33) 8s4 (9 r 0) 709
(23s) (3,732) (40) e75 (927) r03t'2 o1' - - "i3ll] -
o
( I ) Physical transactions represent commodity transactions where we will take or make delivery of erther electricity or natural gas; financial transactions
represent derivative instruments with delivery ofcash in the amount ofthe benefit or cost but with no physical delivery ofthe commodity, such as
futures, swap derivatives, options, or forward contracts.
The above electric and natural gas derivative contracts will be included in either power supply costs or natural gas supply costs during the period they are
delivered and will be included in the various recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to eventually
be collected through retail rates from customers.
Item 3. Ouantitative and Oualitative Disclosures about Market Risk
The information required by this item is set forth in the Enterprise Risk Management section of "Item 2. Management's Discussion and Analysis of Financial
Condition and Results ofOperations" and is incorporated herein by reference.
Item 4. Controls and Procedures
Conclusion Regarding the Elfectiveness ofDisclosure Conlrols and Procedures
The Company has disclosure controls and procedures (as defined in Rules I 3a-1 5 (e) and I 5d-l 5 (e) under the Securities Exchange Act of I 934, as amended)
(Act) that are designed to ensure that information requrred to be disclosed in the reports it files or submits under the Act is recorriled, processed, summarized
and reported on a timely basis. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. With
the participation ofthe Cornpany's principal executive olficer and principal financial officer, the Company's management evaluated its disclosure controls
and procedures as ofthe end ofthe period covered by this report. There are inherent limitations to the effectiveness ofany system ofdisclosure controls and
procedures, including the possibility ofhuman error and the circumvention or overriding ofthe controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance ofachieving their control objectives. Based upon this evaluation, the Company's
principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective at a reasonable
assurance level as ofJune 30,2017.
There have been no clranges in the Company's intemal control over financial reporting that occurred during the second quarter of201'7 that have rnaterially
affected, or are reasonably likely to materially affect, the Company's intemal control over financial reporting.
PART II. Other Information
Item l. Lesal Proceedinps
See "Note 1 1 ofNotes to Condensed Consolidated Financial Statements" in "Part I. Financial Information Item l Condensed Consolidated Financial
Statements."
Item lA. Risk Factors
Please refer to the 20 I 6 Form I 0-K for disclosure of risk factors that could have a significant impact on our results ofoperations, financial condition or cash
flows and could cause actual results or outcomes to differ materially from those discussed in our reports filed with the U.S. Securities and Exchange
Commission (including this Quarterly Report on Form I 0-Q), and elsewhere. These risk factors have not materially changed from the disclosures provided in
the 20 I 6 Form 1 0-I( except for the following:
59
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 62 ol 71
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Physical (l) Financial (l)
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Table of Contents
AVISTA CORPORATION
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RISKS RELATED TO THE PROPOSED MERGERWITH ITYDRO ONE
The Conditions to the Merger May Not Be Satistied.
The proposed Merger with Hydro One requires approval by the holders ofa majority ofAvista Corp.'s outstanding shares ofcommon stock and the receipt of
regulatory approvals, including from the FERC, the CFIUS, the FCC, the UTC, IPUC, MPSC, OPUC, and the RCA. Such approvals may not be obtained orthe
regulatory bodies may seek to impose conditions on the completion ofthe transaction, which could cause the conditions to the Merger to not be satisfied or
which could delay or increase the cost ofthe transaction. In addition, the failure to satisry other closing conditions could result in a termination ofthe Merger
Agreement by Hydro One or Avista Corp.
Termination Fee.
Upon termination of the Merger Agreement under certain specified circumstances, we will be required to pay Hydro One a Termination Fee of $ I 03.0 million.
We will also be required to pay Hydro One the Termination Fee in the event we sign or consummate any specified altemative transaction within twelve
months following the termination of the Merger Agreement under certain circumstances. Any fees due as a result of termination could have a material adverse
effect on our results ofoperations, financial condition, and cash flows.
Market Value of Avista Corp. Common Stock; Access to Capital,
There can be no assurance that the Merger will be consummated. Failure to consummate the Merger could (i) affect the value of Avista Corp.'s common stock,
including by reducing it to a level at or below the trading range preceding the announcement ofthe Merger and (ii) negatively affect our access to and cost of
both equity and debt financing.
Additionally, if the Merger is not consummated, we will have incurred significant costs and diverted the time and attention of management. A failure to
consummate the Merger may also re sult in negative publicity, litigation against Avista Corp. or its directors and officers, and a negative impression of Avista
Corp. in the financial markets. The occurrence ofany ofthese events individually or in combination could have a material adverse effect on our financial
condition, results ofoperations and stock price.
In addition to these risk factors, see also "Forward-Looking Statements" for additional factors which could have a significant impact on our operations,
results ofoperations, financial condition or cash flows and could cause actual results to differ materially fom those anticipated in such statements.
Item 2. Unreoistered Seles ofEouitv Securities and Use ofProceeds
(a) Not applicable
O) Not applicable
(c) Not applicable
Item 4. Mine Safetv Disclosures
Not applicable.
60
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2, Page 63 of 71
o
Table of Contents
AVISTA CORPORATION
Item 6. Exhibits
2.1 Agreement and Plan ofMerger, dated as of July 19,2017,by and among Avista Corporation, Hydro One Limited, Olympus Holding
Corp. and Olympus Corp. (l )
12 Cornputation ofratio ofeamingsto fixed charges (2)
15 Letter Re: Unaudited Interim Financial Information (2)
31.1 [e-mail]350,asAdoptedPursuanttoSection302oftheSarbanes-
Oxley Act of2002)(2)
3 I .2 Certification ofChiefFinancial Officer (Pursuant to I 8 U.S.C. Section I 350, as Adopted Pursuant to Section 302 ofthe Sarbanes-
Oxley Act of2002) (2)
32 Certification of Corporate Officers (Fumished Pursuant to l8 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of2002) (3)
I 0l The following financial information from the Quarterly Report on Form l0-Q for the period ended June 30,2017 , formatted in XBRL
(Extensible Business Reporting Language) and filed electronically herewith: (i) the Condensed Consolidated Statements oflncome;
(ii) Condensed Consolidated Statements ofComprehensive lncome; (iii) the Condensed Consolidated Balance Sheets; (iv) the
Condensed Consolidated Statements ofCash Flows; (v) the Condensed Consolidated Statements ofEquity; and (vi) the Notes to
Condensed Consolidated Financial Statements. (2)
(t ) Previously filed as exhibit 2.1 to the registnnt's Current Report on Form 8-K filed as ofJuly 19,2017 and incorporated herein by
reference.
(2) Filed herewith.
(3) Fumished herewith.
6t
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
Schedule 2, Page 64ot71
o
Table of Contents
AVISTA CORPORATION
SIGNATIJRE
Pursuant to the requirernents of the Securities Exchange Act of I 934, the registrant has duly caused this report to be signed on its behalfby the undersigned
thereunto duly authorized.
A\'ISTA CORPORATION
(Registrant)
Date: August 1,2017 /s/ Mark T. Thies
Mark T. Thies
Senior Vice President,
Chief Financial Officer, and Treasurer
(Principal Financial Offi cer)
62
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2, Page 65 of 7'1
o
o
o Exhibit l2
AVISTA CORPORATION
Computation of Ratio of Eamings to Fixed Charges
Consolidated
(Thousands ofDollars)
Six months ended
June 30,2017
Years Ended December 3 I
201 6 20r5 2014 2013 2012
$ 47,s38 $ 86,897 $ 80,613 $ 74,02s S 73,772 $ 71,843
1,324 |,287 1,187 1,146 1,294
Total fixed $ 49,'748 $ 91,612 $ 85,315 $ 78,847 $ 78,73r $ 76,940
Pre-tax income from continuing $ 130,254 S 215,402 S 185,619 $ I 06 $ 162,347 $ ll
(t,614 7 6) (2,401 )
o Ratio of eamings to fixed charges 3.5 9 3.32 2.48
o
3.1 3 3.39 3.02
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2, Page 66 of 71
Fixed charges. as defined:
lnterest charges
Amortization of debt expense and premium - net
Interest portion of rentals
Eamings, as defined:
Add (deduct):
Capitalized interest
Total fixed charges above
Total eanrings
627
(2,6s t)
91,612
(3,546)
85,3 r 5
$ 178,388 $ 304,363 $ 267,388 $ 26"t,029 $ 237A02 $ l9l,l06
o August 1,2017
To the Board ofDirectors and Shareholders ofAvista Corporation
141 1 East Mission Ave
Spokane, Washington 99202
We have reviewed, in accordance with the standands ofthe Public Company Accounting Oversight Board (Jnited States), the unaudited interim financial
information ofAvista Corporation and subsidiaries for the periods ended June 30,2017 and 20 I 6, as indicated in our report dated August 1 , 20 I 7; because
we did not perform an audit, we expressed no opinion on that infonnation.
We are aware that our report referred to above, which is included in your Quarterly
by reference in Registration Statement Nos. 333-33790,333-126577,333-179042
209'714 on Form S-3.
Report on Form I 0-Q for the quarter ended June 30, 2017 ,is incorporated
and 333-208986 on Form S-8 and in Registration Statement No.333-
O
We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1 933, is not considered a part ofthe Registration
Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and I I ofthat Act.
/s/ Deloitte & Touche LLP
Seattle, Washington
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2,Page67 ot71
o
Exhibit 15
o Exhibit 3l.l
CERTIFICATION
I, Scott L. Morris, certifr that:
I . I have reviewed thi s report on Form I 0-Q ofAvista Corporation;
5.
Date: August 1,2017
2.Based on my knowledge, this report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results ofoperations and cash flows ofthe registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules I 3a-1 5(e) and 1 5d-1 5(e)) and intemal control over financial reporting (as defined in Exchange Act Rules I 3a-l 5(f) and
I sd-l 5(0) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such intemal control over financial reporting, or caused such intemal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of
financial stat€ments for extemal purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness ofthe registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness ofthe disclosure controls and procedures, as ofthe end ofthe period covered by this report based on such
evaluation; and
d. Disclosed in this report any change in the registrant's intemal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case ofan annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's intemal control over financial reporting; and
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation ofintemal control over financial reporting, to
the registrant's auditors and the audit committee ofthe registrant's board ofdirectors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design oroperation ofintemal control overfinancial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
intemal control over financial reporting.
3.
4.
o
o
/s/ Scott L. Morris
Scott L. Morris
Chairman ofthe Board, President
and Chief Executive Officer
(Principal Executive Offi cer)
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 2, Page 68 of 71
o Exhibit 31.2
CERTIFICATION
I, Mark T. Thies, certiry that:
I . I have reviewed this report on Form I 0-Q ofAvista Corporation;
5
Date: August 1,2017
2.Based on my knowledge, this report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results ofoperations and cash flows ofthe registrant as o! and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules I 3a-l 5(e) and I 5d-l 5(e)) and intemal control over financial reporting (as defined in Exchange Act Rules I 3a-l 5(f) and
l5d-15(f1) forthe registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
Designed such intemal control over financial reporting, or caused such intemal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of
financial statements for extemal purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness ofthe registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness ofthe disclosure controls and procedures, as ofthe end ofthe period covered by ihis report based on such
evaluation; and
d. Disclosed in this report any change in the registrant's intemal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case ofan annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's intemal control over financial reporting; and
The registrant's other certifring officer and I have disclosed, based on our most recent evaluation ofintemal control over financial reporting, to
the registrant's auditors and the audit committee ofthe registrant's board ofdirectors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation ofintemal control over financial reporting which
are reasonably likely to advercely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
intemal control over financial reporting.
/s/ Mark T. Thies
3.
4.
a.
b
o
Mark T. Thies
Senior Vice President
Chief Financial Officer, and i..".o.".
(Principal Financial Offi cer)
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 69 of 71
o
o Exhibit 32
AVISTA CORPORATION
CERTTFICATION OF CORPORATE OFFICERS
(Fumished Pursuant to l8 U.S.C. Section 1350, as Adopted Punuant to Section 906 ofthe
SarbanesOxley Act of 2002)
Each of the undenigned, Scott L. Morris, Chairman of the Board, President and Chief Executive Officer of Avista Corporation (the "Company"), and Mark
T. Thies, Senior Vice hesident and ChiefFinancial Offcer ofthe Company, hereby certifies, pursuant to I 8 U.S.C. Section 1 350, as adopted pursuant to
Section 906 ofthe Sarbanes-Oxley Act of2002, that the Company's Quarterly Report on Form I 0-Q for the quarter ended June 30, 20 I 7 fully complies with
therequirementsofSection 13(a)oftheSecuritiesExchangeActofl934,asamended,andthattheinformationcontainedthereinfairlypresents,inall
material respects, the financial condition and results ofoperations ofthe Company.
Date: August 1,2017
/s/ Scott L. Monis
Scott L. Morris
Chairman ofthe Board, President
and Chief Executive Officer
/s/ Mark T. Thies
Mark T. Thies
Senior Vice President.
Chief Financial Offi cer, and Treasurer
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 2, Page 70 ol 71
o
o
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedute 2, page 7 1 of 7 1
o
EXECUTION VERSION
o
o
AGREEMENT AND PLAN OF MERGER
Dated as of July 19,2017,
by and among
HYDRO ONE LIMITED,
OLYMPUS HOLDING CORP.,
OLYI\,IPUS CORP.
and
AVISTA CORPORATION
Exhibit No. 3
Case Nos. AVU-E-I7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 1 of70
o
#5501 530. I 2
o TABLE OF CONTENTS
The Merger...
Closing
Effect on Capital Stock
Exchange of Certifi cates ................
Treatment of Performance Awards
Adjustments ................
Withholding Taxes......
Article I
Section 2.1
Section 2.2
Section 2.3
Section 2.4
Section 2.5
Pase
.....,.....2
...........2
Effective Time .........
Effects of the Merg";.............:..
Articles of Incorporation and Bylaws of the Surviving Corporation..........-2
Directors and Officers of the Surviving Corporation ................2
Post-Merger Operations ............J
Article II Effect of the Merger on Capital Stock................
2
....................,.2
...........3
...4
6
8
8
Article III Representations and Warranties of the Company.. .....................8
o Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
3.1
3.2
J.J
3.4
3.5
3.6
3.7
3.8
3.9
3. l0
3.l l
3.12
3.13
3.14
3.15
3.16
3.17
3.18
3.19
Capitalization
Authority; Non-contravention.......
Governmental Approvals................ .....................I I
Company SEC Documents; Undisclosed Liabilities ..............1 I
Absence of Certain Changes.....
Organization, Standing and Corporate Power
Legal Proceedings....
Compliance With Laws; Permits
Tax Matters...
Employee Benefits Matters.............
Environmental Matters.
Intellectual Property....
Takeover Statutes........-....
Real Property
Contracts
Labor.....
Opinion of Financial Advisor
Brokers and Other Advisors....
Company Shareholder Approval...
..9
..9
l0
l2
l3
13
..................1 3
.........1 5
......... I 6
14
t6
..,,..'.16
........t7
........17
........ I 8
........1 8
........ I 8
Article IV Representations and Warranties of Parent, US Parent and Merger
Section 4.1 Organization, Standing and Corporate Power..
i
....18
l8
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 2 of70
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#5501 530. l 2
1
Section I .l
Section 1.2
Section 1.3
Section 1.4
Section 1.5
Section 1.6
Section 1.7
TABLE OF CONTENTS (CONT'D)
Authority; Non-contravention......
Governmental Approvals................
Brokers and Other Advisors....
Ownership and Operations of Merger Sub
Sufficient Funds
Share Ownership..........
Legal Proceedings........
Conduct of Business
Preparation of the Proxy Statement; Shareholders Meeting
No Solicitation; Change in Recommendation
Reasonable Best Efforts
Public Announcements ...........
Access to Information; Confidentiality...
Takeover Laws..........
Indemnification and Insurance...
Transaction Litigation..
Section I 6...............
Employee Matters
Merger Sub and Surviving Corporation.........
No Control of Other Party's Business
Advice of Changes
Financing Cooperation
Conditions to Obligations of Parent, US Parent and Merger Sub.
Conditions to Obligations of the Company
Frustration of Closing Conditions.
Termination
Effect of Termination........
Termination Fees .....-........
No Survival of Representations and Warranties...
Fees and Expenses
Amendment or Supplement ................
Page
Section 4.2
Section 4.3
Section 4.4
Section 4.5
Section 4.6
Section 4.7
Section 4.8
Section 4.9
l9
l9
19
Non-Reliance on Company Estimates, Projections, Forecasts,
Forward-Looking Statements and Business Plans
Covenants........21
.20
.20
.20
.20
.20
.21
.24
.26
.29
Article V
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
5.r3
5.14
5.15
3t
32
32
32
34
34
34
36
37
37
...............37
Article VI Conditions Precedent.1n
Conditions to Each Party's Obligation to Effect the Merger.....................38Section 6.1
Section 6.2
Section 6.3
Section 6.4
Section 7.1
Section 7.2
Section 7.3
Section 8.1
Section 8.2
Section 8.3
.........39
.........40
.........40
Article VII
ArticleVIII Miscellaneous....................44
...............44
..,...,.,.....,44
44
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 3 of 70
#5501 530.12
ll
O
o
Section 8.4
Section 8.5
Section 8.6
Section 8.7
Section 8.8
Section 8.9
Section 8.10
Section 8.1 I
Section 8.12
Section 8.13
Section 8.14
Section 8.15
EXHIBITS
EXHIBIT A - Governance Requirements
EXHIBIT B - PostClosing Matters
TABLE OF CONTENTS (CONT'D)
Assignment .............
Counterparts............
Entire Agreement; Third-Party Benefi ciaries .....
Governing Law; Jurisdiction..........
Specifi c Enforcement.................
WAIVER OF JURY TRIAL.......
Notices......
Severability
Definitions
Transfer Taxes
Interpretation............
Page
A<
.....,,......,.,..45
.45
.45
..45
..............46
.46
,.,................47
...................48
...................48
...................57
o
57
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
#5s0r 530. I 2
lIl
Schedule 3, Page 4 of 70
o
O
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of July 19,2017 (this "Asreement"), is
entered into by and among Hydro One Limited, a corporation organized under the laws of the Province of
Ontario ("Parent"), Olympus Holding Co.p., a Delaware corporation ("U$__Eafenl"), Olympus Corp., a
Washington corporation and a wholly owned Subsidiary of US Parent ("Merser Sub"), and Avista
Corporation, a Washington corporation (the "eompany"). Defined terms used herein have the respective
meanings set forth in Section 8.13.
WITNESgETH
WHEREAS, the parties hereto intend that, at the Effective Time, Merger Sub will, in accordance
with the Washington Business Corporation Act (the "WBCA"), merge with and into the Company, with
the Company continuing as the surviving corporation (the "lV[gIgEI") on the terms and subject to the
conditions set forth in this Agreement;
WHEREAS, the board of directors of the Company (the "eompany_Bpgtd") has (a) determined
that it is in the best interests of the Company and its shareholders for the Company to enter into this
Agreement, (b) adopted the plan of merger set forth in this Agreement and approved the Company's
execution, delivery and performance of this Agreement and the consummation of the transactions
contemplated hereby (including the consummation of the Merger upon the terms and subject to the
conditions set forth in this Agreement and in accordance with the relevant provisions of the WBCA) and
(c) resolved to recommend that the shareholders of the Company approve this Agreement and the plan of
merger set forth in this Agreement and directed that this Agreement be submitted to the shareholders of the
Company for approval at a duly held meeting of such shareholders for such purpose;
WHEREAS, the board of directors of each of Parent and US Parent has (a) determined that it is in
the best interests of each of Parent and US Parent and their respective stockholders for each of Parent and
US Parent to enter into this Agreement and (b) approved Parent's and US Parent's execution, delivery and
performance of this Agreement and the consummation of the transactions contemplated hereby (including
the consummation of the Merger upon the terms and subject to the conditions set forth in this Agreement
and in accordance with the relevant provisions of the WBCA);
WHEREAS, the board of directors of Merger Sub has (a) determined that it is in the best interests
of Merger Sub and its sole shareholder for Merger Sub to enter into this Agreement, (b) adopted the plan
of merger set forth in this Agreement and approved Merger Sub's execution, delivery and performance of
this Agreement and tle consummation of the transactions contemplated hereby (including the
consummation of the Merger upon the terms and subject to the conditions set forth in this Agreement and
in accordance with the relevant provisions of the WBCA) and (c) submitted this Agreement to US Parent,
in its capacity as Merger Sub's sole shareholder, and recommended that US Parent, in such capacity,
approve this Agreement and the plan of merger set forth in this Agreement;
WHEREAS, US Parent, in its capacity as the sole shareholder of Merger Sub, has approved this
Agreement and the plan of merger set forth in this Agreement by written consent; and
WHEREAS, Parent, US Parent, Merger Sub and the Company desire to make certain
representations, warranties, covenants and agreements specified herein in connection with this Agreement.
NOW, THEREFORE, in consideration of the representations, warranties, covenants and
agreements contained in this Agreement and other good and valuable consideration, the receipt and
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
o
#5501 530. i 2
Schedule 3, Page 5 of 70
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o
sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, Parent, US Parent,
Merger Sub and the Company hereby agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merser. Upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the V/BCA, at the Effective Time, Merger Sub shall be merged with
and into the Company, and the separate existence of Merger Sub shall thereupon cease, and the Company
shall be the surviving corporation in the Merger (the "Surviviug Corporat!_sn") and shall become, as a result
of the Merger, an indirect, wholly owned subsidiary of Parent.
Section 1.2 Closine. The consummation of the Merger (the "Closins") shall take place at the
offices of Kirkland & Ellis LLP, 655 Fifteenth Street, N.W., Washington D.C. 20005 at l0:00 a.m. (local
time) on the date that is three (3) Business Days following the satisfaction or waiver (to the extent permitted
by applicable Law) of the conditions set forth in Article VI (other than those conditions that by their nature
are to be satisfied at the Closing, but subject to the satisfaction or waiver of those conditions at such time),
or on such other date and at such other time or place as is agreed to in writing by the parties hereto. The
date on which the Closing occurs is referred to herein as the "Closing Date."
Section 1.3 Effective Time. Subject to the provisions of this Agreement, on the Closing Date,
the Company shall file with the Secretary of State of the State of Washington (the "Washington_&cretary
of State") articles of merger (the "44icleS-o[-M-g1ret") executed in accordance with, and containing such
information as is required by, Section 23B. I I .050( I ) of the WBCA and, on or after the Closing Date, shall
make all other filings or recordings required under the WBCA to effectuate the Merger. The Merger shall
become effective at such time as the Articles of Merger are duly filed with the Washington Secretary of
State or at such later time as is permissible under the WBCA and is specified in the Articles of Merger (the
time the Merger becomes effective being hereinafter referred to as the "Effec!ivg.-Ii!ge"). This Agreement
together with the articles of incorporation of the Surviving Corporation shall be deemed the "plan of
mergef' under Chapter I I of the WBCA and shall be filed with the Articles of Merger pursuant to Section
23B.11.050(1) of the WBCA.
Section 1.4 Effects of the Merser. The Merger shall have the effects set forth in this
Agreement, the Articles of Merger and the applicable provisions of the WBCA.
Section 1.5 Articles of Incorporation and Bvlaws of the Surviving Corporation. At the
Effective Time, the articles of incorporation and bylaws of the Company, in each case as amended to date
and as in effect immediately prior to the Effective Time (collectively, the "Company Charter Documents"),
shall be amended as of the Effective Time to be in the form of (except with respect to the name of the
Company (which shall remain "Avista Corporation") and any changes necessary so that they shall be in
compliance with Section 5.8 and the requirements set forth on Exhibit A attached hereto) the articles of
incorporation and bylaws of Merger Sub as of the date hereof and as so amended shall be the articles of
incorporation and bylaws of the Surviving Corporation until thereafter amended as provided therein or by
applicable Law (and subject to Section 5.8).
Section 1.6 Directors and Officers of the Survivins Corporation.
(a) The directors of Merger Sub immediately prior to the Effective Time shall be the
directors of the Surviving Corporation immediately following the Effective Time, to serve until their
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G17-_
M. Thies, Avista
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#5501 530. I 2
2
Schedule 3, Page 6 of 70
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respective successors are duly elected or appointed and qualified (including in accordance with Section 1.7
and Exhibit B attached hereto) or until their earlier death, resignation or removal in accordance with the
articles of incorporation and bylaws of the Surviving Corporation;goridgd, however, that within one (l)
Business Day immediately following the Effective Time, Parent shall take, or shall cause US Parent and
the Surviving Corporation to take, all such actions as are necessary to cause the board ofdirectors ofthe
Surviving Corporation to consist of persons determined in accordance with the requirements set forth in
Exhibit B attached hereto, to serve until their respective successors are duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance with the articles of incorporation
and bylaws of the Surviving Corporation.
(b) The officers of the Company immediately prior to the Effective Time shall be the
officers of the Surviving Corporation immediately following the Effective Time, to serve until their
respective successors are duly appointed and qualified or until their earlier death, resignation or removal in
accordance with the articles of incorporation and bylaws of the Surviving Corporation.
Section 1.7 Post-Merger Operations. Parent hereby confirms that, subject to the occurrence
of the Effective Time, it intends to, or intends to cause US Parent or the Surviving Corporation to, effectuate
the matters set forth or described in Exhibit B attached hereto, subject to the approval requirements set forth
therein.
ARTICLE II
EFFECT OF THE MERGER ON CAPITAL STOCK
Section 2.1 Effect on Canital Stock. At the Effective Time, by virtue of the Merger and
without any action on the part ofthe Company, Parent, US Parent or Merger Sub or any holder of any shares
of common stock, no par value, of the Company ("Company Common Std") or any shares of capital
stock of Merger Sub:
(a) Capital Stock of Merger Sub: Issuance of Common Stock b), Surviving
Comoration. Each issued and outstanding share of capital stock ofMerger Sub shall be converted into and
become one validly issued, fully paid and non-assessable share of common stock, no par value per share,
of the Surviving Corporation. In consideration for US Parent paying, or causing to be paid the Merger
Consideration as provided herein, the Surviving Corporation shall issue ten million (10,000,000) fully paid
and non-assessable shares of common stock, no par value per share, of the Surviving Corporation to US
Parent or as otlerwise directed by US Parent.
(b) Cancellation of Parent-Owned Stock. Any shares of Company Common Stock
that are owned by Parent, US Parent or Merger Sub or any of their respective Subsidiaries, in each case
immediately prior to the Effective Time, shall be automatically cancelled and shall cease to exist, and no
consideration shall be delivered in exchange therefor.
(c) Conversion of Company Common Stock. Each issued and outstanding share of
Company Common Stock (other than Dissenting Shareholder Shares and shares to be cancelled in
accordance with Section 2.1(b)) shall thereupon be converted automatically into and shall thereafter
represent solely the right to receive an amount in cash equal to 553.00, without interest (the "MergSt
Consideration"). As of the Effective Time, all such shares of Company Common Stock shall no longer be
outstanding and shall automatically be cancelled and shall cease to exist, and the holders immediately prior
to the Effective Time of shares of Company Common Stock not represented by certificates ("Bogk-En!g
Shares") and the holders of certificates that immediately prior to the Effective Time represented any such
3
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_
M. Thies, Avista
o
#5501 530. I 2
Schedule3, PageT ol70
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shares of Company Common Stock (each, a "Ce4!ficatc') shall cease to have any rights with respect
thereto, except the right to receive the Merger Consideration to be paid in consideration therefor upon
surrender of such Book-Entry Share or Certificate in accordance with Section 2.2(b) (subject to any
withholding of applicable Tax in accordance with Section 2.5) and any "stub period" cash dividend declared
in accordance with Section 5.1(a)(iii).
(d) Dissenters' Rights. Notruithstanding anything in this Agreement to the contrary,
shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time
which are held by a shareholder who did not vote in favor of the Merger (or consent thereto in writing) and
who is entitled to demand and properly demands payment of fair value of such shares pursuant to,
and complies in all respects with, the provisions of Chapter 238.13 of the WBCA (the "Digsentirrg
Shareholder Shares", and each shareholder holding Dissenting Shareholder Shares, a "DisgenUn€
Shareholder") shall not be converted into or be exchangeable for the right to receive the Merger
Consideration, but instead such Dissenting Shareholder shall be entitled to receive such consideration as
may be determined to be due to such Dissenting Shareholder pursuant to Chapter 23B..13 of the WBCA
(and at the Effective Time, such Dissenting Shareholder Shares shall no longer be outstanding and shall
automatically be cancelled and shall cease to exist, and such Dissenting Shareholder shall cease to have any
rights with respect thereto, except the rights set forth in Chapter 23B.13 of the WBCA), unless and until
such Dissenting Shareholder shall have failed to perfect or shall have effectively withdrawn or lost rights
to demand for payment of fair value under Chapter 238.13 of the WBCA. If any Dissenting Shareholder
shall have failed to perfect or shall have effectively withdrawn or lost such right, such Dissenting
Shareholder's shares of Company Common Stock shall thereupon be treated as if they had been converted
into and become exchangeable for the right to receive, as of the Effective Time, the Merger Consideration
for each such share of Company Common Stock, in accordance with Section 2.1(c). without any interest
thereon and subject to any applicable withholding Tax. The Company shall give Parent (i) prompt notice
of any written demands for payment of fair value of any shares of Company Common Stock, attempted
withdrawals of such demands and any other written instruments served pursuant to the WBCA and received
by the Company relating to shareholders' rights to demand payment of fair value and (ii) the opportunity
to participate in all negotiations and proceedings with respect to demands for payment of fair value under
the WBCA. The Company shall not, except with the prior written consent of Parent, make any payment
with respect to any such demands for payment of fair value or settle or offer to settle any such demands.
Section 2.2 Exchanse of Certificates.
(a) Pavine Asent Investment by Payine Agent of Funds. Prior to the Effective Time,
Parent shall designate a bank, trust company or nationally recognized financial institution or transfer
services company reasonably acceptable to the Company (the "Payinglgen!") for the purpose of
exchanging shares of Company Common Stock for the Merger Consideration and enter into an agreement
reasonably acceptable to the Company with the Paying Agent relating to the services to be performed by
the Paying Agent. Parent shall cause US Parent to and US Parent shall irrevocably deposil or cause to be
deposited (subject to Section 2.2(e)), the aggregate Merger Consideration with respect to all shares of
Company Common Stock (other than Dissenting Shareholder Shares and shares to be cancelled in
accordance with Section 2.1(b)) with the Paying Agent at or prior to the Effective Time. The aggregate
Merger Consideration deposited with the Paying Agent shall, pending its disbursement to holders of shares
of Company Common Stock and as reasonably directed by Parent (on behalf of US Parent), be invested by
the Paying Agent in (i) short-term commercial paper obligations of issuers organized under the Laws of a
state of the United States of America, rated A-l or P-l or better by Moody's Investors Service, Inc. or
Standard & Poor's Ratings Service, respectively, or in certificates of deposit, bank repurchase agreements
or bankers' acceptances of commercial banks with capital exceeding $10,000,000,000, or in mutual funds
investing in such assets or (ii) shortterm obligations for which the full faith and credit of the United States
4
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 3, Page 8 of70
O
#5501 530. l 2
o of America is pledged to provide for the payment of principal and interest. Any interest and other income
from such investments shall become part of the funds held by the Paying Agent for pulposes of paying the
Merger Consideration. No investment or investrnent losses resulting from such investment by the Paying
Agent of the aggregate Merger Consideration shall relieve Parent, US Parent, the Surviving Corporation or
the Paying Agent from making the payments required by this Article II, and Parent shall cause US Parent
to and US Parent shall promptly replace any funds deposited with the Paying Agent lost through any
investment made pursuant to this Section 2.2(a); provided that any interest and other income retained
pursuant to the preceding sentence shall be used to replace such funds prior to determining Parent's
obligation to replace or causing US Parent to replace such funds. No investment by the Paying Agent of
the aggregate Merger Consideration shall have maturities that could prevent or delay payments to be made
pursuant to this Agreement. Following the Effective Time, Parent agrees to make or cause to be made
available to the Paying Agent, from time to time as needed, additional cash to pay the Merger Consideration
as contemplated by this Article II without interest.
(b) Payment Procedures. As promptly as practicable after the Effective Time (but in
no event more than three (3) Business Days thereafter), the Surviving Corporation shall cause the Paying
Agent to mail to each holder of record of shares of Company Common Stock (i) a letter of transmittal
(which, in the case of shares of Company Common Stock represented by Certificates, shall speci$ that
delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Paying Agent, and shall be in such form and have such other provisions as Parent and
the Company may reasonably agree and shall be prepared prior to Closing) and (ii) instructions for use in
effecting the surrender of the Certificates or Book-Entry Shares in exchange for payment of the Merger
Consideration. Upon surrender of Certificates for cancellation to the Paying Agent or, in the case of Book-
Entry Shares, receipt of an "agent's message" by the Paying Agent (or such other evidence, if any, of
transfer as the Paying Agent may reasonably request), together with such letter of transmittal, duly
completed and validly executed in accordance with the instructions (and such other customary documents
as may reasonably be required by the Paying Agent), the holder of such Certificates or Book-Entry Shares
shall be entitled to receive in exchange therefor, subject to any required withholding Taxes, the Merger
Consideration, for each share of Company Common Stock surrendered, and any Certificates surrendered
shall forthwith be cancelled. If payment of the Merger Consideration is to be made to a Person other than
the Person in whose name the surrendered Certificate or Book-Entry Share in exchange therefor is
registered, it shall be a condition ofpayment that (A) the Person requesting such exchange present proper
evidence of transfer and (B) the Person requesting such payment shall have paid any transfer and other
Taxes required by reason of the payment of the Merger Consideration to a Person other than the registered
holder of such Certificate or Book-Entry Share surrendered or shall have established to the reasonable
satisfaction of the Surviving Corporation that such Tax either has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.2, each Certificate and Book-Entry Share shall be deemed at
any time after the Effective Time to represent only the right to receive the Merger Consideration as
contemplated by this Article II.
(c) Transfer Books: No Further Ownership Rights in Company Common Stock. The
Merger Consideration paid in respect of shares of Company Common Stock upon the surrender for
exchange in accordance with the terms ofthis Article II shall be deemed to have been paid in full satisfaction
of all rights pertaining to the shares of Company Common Stock, and at the Effective Time, the stock
transfer books of the Company shall be closed and thereafter there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock
t}rat were outstanding immediately prior to the Effective Time. From and after the Effective Time, the
holders of Certificates or Book-Entry Shares that evidenced ownership of shares of Company Common
Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to
such shares of Company Common Stock other than the right to receive the Merger Consideration, except
5
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 9 of 70
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#5501 530. I 2
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as otherwise provided for herein or by applicable Law. If, at any time after the Effective Time, Certificates
are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as
provided in this Article II.
(d) Lost. Stolen or Destroved Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to
be lost, stolen or destroyed and, ifrequired by the Surviving Corporation, the posting by such Person ofa
bond, in such reasonable amount as Parent (on behalf of US Parent) or US Parent may direct, as indemnity
against any claim that may be made with respect to such Certificate, the Paying Agent will pay, in exchange
for such lost, stolen or destroyed Certificate, the applicable Merger Consideration to be paid in respect of
the shares of Company Common Stock formerly represented by such Certificate, as contemplated by this
Article II.
(e) Termination of Fund. At any time following the first (lst) anniversary of the
Closing Date, US Parent shall be entitled to require the Paying Agent to deliver to it or as directed by it any
funds (including any interest received with respect thereto) that had been made available to the Paying
Agent and which have not been disbursed in accordance with this Article II, and thereafter Persons entitled
to receive payment pursuant to this Article II shall be entitled to look only to US Parent or ttre Surviving
Corporation (subject to abandoned property, escheat or other similar Laws) as general creditors thereof with
respect to the payment of any Merger Consideration that may be payable upon surrender of any Company
Common Stock held by such holders, as determined pursuant to this Agreement, without any interest
thereon. Any amounts remaining unclaimed by such holders at such time at which such amounts would
otherwise escheat to or become properry of any Govemmental Authority shall become, to the extent
permitted by applicable Law, the property of US Parent, free and clear of all claims or interest of any Person
previously entitled thereto.
(0 No Liabilitv. Norwithstanding any other provision of this Agreement, none of
Parent, US Parent, Merger Sub, the Surviving Corporation, the Company or the Paying Agent shall be liable
to any Person for Merger Consideration delivered to a public offrcial pursuant to any applicable abandoned
property, escheat or similar Law.
Section 2.3 Treatment of Performance Awards and RSUs.
(a) Performance Awards. At the Effective Time, each Performance Award that is
outstanding immediately prior to the Effective Time (including any Performance Award with respect to
which the applicable performance period has ended, but which Performance Award has not been seuled)
shall be cancelled and the holder thereof shall then become entitled to receive, in full satisfaction of such
holder's rights with respect thereto, a lump-sum cash payment equal to the product of (i) the Performance
Award Amount, and (ii) the Merger Consideration, subject to any withholding Taxes required by Law to
be withheld in accordance with Section 2.5. For purposes of this Agreement, "Mrmance_&afd
Amount" means (A) with respect to any outstanding Performance Award for which the performance period
has ended as of immediately prior to the Effective Time, (l) in the case of a share-settled Performance
Award, the number of shares of Company Common Stock that would be delivered to the holder of such
Performance Award, or (2) in the case of a cash-settled Performance Award, the number of shares of
Company Common Stock that would be deemed deliverable to the holder for purposes of calculating the
cash payment due under such Performance Award, in each case of the foregoing clauses (l) and (2), based
on the actual achievement of the performance goals applicable to such Performance Award, as reasonably
determined by the Board (or a committee thereo| prior to the Effective Time, and assuming the satisfaction
of all other conditions to such delivery, and (B) with respect to any outstanding Performance Award for
which the performance period has not ended as of immediately prior to the Effective Time, (l) in the case
6
Exhibil No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 10 of70
a
#5501 530. l2
o of a share-settled Performance Award, the number of shares of Company Common Stock subject to such
Performance Award that would be delivered to the holder of such Performance Award, or (2) in the case of
a cash-settled Performance Award, the number of shares of Company Common Stock that would be deemed
deliverable to the holder for purposes of calculating the cash payment due under such Performance Award,
in each case of the foregoing clauses (1) and (2), based on deemed satisfaction of the performance goals
applicable to such Performance Award for such incomplete performance period at the target level, and in
each case, assuming the satisfaction of all other conditions to such delivery. As of the Effective Time, all
Accumulated Dividends, if any, accrued but unpaid with respect to Performance Awards shall, by virtue of
the Merger and without any action on the part of a holder thereof, automatically become fully vested and
be paid to such holder.
(b) Restricted Stock Units. At the Effective Time, each RSU that is outstanding
immediately prior to the Effective Time and which by its terms would vest before the calendar year or in
the calendar year in which the Effective Time occurs shall be cancelled and the holder thereof shall then
become entitled to receive, in full satisfaction of such holder's rights with respect thereto, a lump-sum cash
payment equal to the product of (i) the number of shares of Company Common Stock subject to such
cancelled RSU immediately prior to the Effective Time and (ii) the Merger Consideration. As of the
Effective Time, all Accumulated Dividends, if any, accrued but unpaid with respect to such cancelled RSUs
shall, by virtue of the Merger and without any action on the part of a holder thereof, automatically become
fully vested and be paid to such holder. At the Effective Time, each RSU that is outstanding immediately
prior to the Effective Time and which by its terms would vest in any calendar year following the calendar
year in which the Effective Time occurs will be adjusted as necessary to provide that, at the Effective Time,
each such RSU shall be converted into a restricted stock unit award, on the same terms and conditions as
were applicable under such RSU immediately prior to the Effective Time (including with respect to vesting,
treatrnent upon employment termination, etc.), with respect to a number of shares of common stock of
Parent determined by multiplying the number of shares of Company Common Stock subject to such RSU
immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole share (a
"Converted_RSU"), Bnd each such Converted RSU shall not be accelerated except as provided in the original
related RSU agreement issued by the Company (the "BlUlgfqe!Sg!1"). At the Effective Time, Parent
shall assume all obligations ofthe Company with respect to the Company Stock Plans and each outstanding
Converted RSU and the RSU Agreements evidencing the grants thereof. As soon as practicable after the
Effective Time, Parent shall deliver to the holders of Converted RSUs appropriate notices setting forth such
holders' rights, and the RSU Agreements evidencing the grants of such Converted RSUs shall continue in
effect on the same terms and conditions (subject to the adjustments required by this Section 2.3 after giving
effect to the Merger). The Converted RSUs will be settled in shares of common stock of Parent, which will
not be subject to any Canadian hold period and may be resold by the holder of the Converted RSU on the
TSX without any applicable U.S. restricted period having elapsed, or cash, as determined by Parent, and
Parent shall take all corporate action necessary to effectuate the foregoing. Notwithstanding the foregoing,
and for the purpose of clarity, it is understood by Parent, the Company and the Surviving Corporation that
the Converted RSUs shall be awarded and issued under Parent's equity-based long-term incentive
compensation plan (the "B4IenLLT[8"). For the avoidance of doubt, the terms and conditions applicable
to such Converted RSUs shall be the same as the terms and conditions set forth in the Company Stock Plans
and the RSU Agreements pursuant to which such Converted RSUs were granted, notwithstanding that the
Converted RSUs will be issued under the Parent LTIP.
(c) Funding. No later than the Effective Time, Parent shall provide, or shall cause to
be provided, to the Surviving Corporation all funds necessary to fulfill the obligations under this Section
2.3. All payments required under this Section 2.3 shall be made through the Surviving Corporation's
payroll not later than the later of (i) the first payroll date immediately following the Effective Time and (ii)
five (5) Business Days following the Effective Time.
.7
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Sctledule 3, Page '11 0f 70
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#5501 530. I 2
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Section 2.4 Adiustments. If at any time during the period between the date of this Agreement
and the Effective Time, any change in the outstanding shares of capital stock of the Company (or any other
securities convertible or exchangeable therefor) shall occur as a result of any reclassification, stock split
(including a reverse stock split) or combination, exchange or readjustment of shares, or any stock dividend
or stock distribution with a record date during such period, or any similar event, the Merger Consideration
shall be equitably adjusted; ptovided. however, that nothing in this Section 2.4 shall be deemed to permit
or authorize any parly hereto to effect any such change that such party is not otherwise authorized or
permitted to undertake pursuant to this Agreement.
Section 2.5 Withholdine Taxes. Notwithstanding any provision contained herein to the
contrary, Parent, US Parent, the Company, the Surviving Corporation and the Paying Agent shall be entitled
to deduct and withhold (or cause to be deducted and withheld) from the amounts otherwise payable pursuant
to this Agreement, such amounts as are required to be deducted and withheld with respect to the making of
such payments under the Code, or under any applicable provision of state, local or foreign Tax Law. To
the extent amounts are so withheld and timely paid over to the appropriate Governmental Authority, the
withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Person in
respect of which such deduction and withholding was made (excluding any such amounts required to be
withheld under Canadian federal or provincial Law as a result of Parent or any of its Subsidiaries being
resident in Canada (or any province thereof) for Canadian federal or provincial Tax purposes). IfParent,
US Parent, the Company, the Surviving Corporation, or the Paying Agent determine that any amounts are
required to be deducted or withheld (other than any deduction or withholding with respect to any payments
constituting compensation for services), Parent, US Parent, the Company, the Surviving Corporation, or the
Paying Agent shall use commercially reasonable efforts to, prior to deducting or withholding any such
amounts, notif the Person in respect of which such deduction and withholding was made and shall
reasonably cooperate in good faith to establish or obtain any exemption from or reduction in the amount of
any withholding that otherwise would be required; provided, however, that notwithstanding anything to the
contrary contained herein, Parent, US Parent, the Company, the Surviving Corporation or the Paying Agent
shall be entitled to deduct and withhold (or cause to be deducted and withheld) any amounts at the time it
is required to so deduct and withhold under the Code or under any applicable provision of state, local or
foreign Tax Law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPAII-Y
Except (a) as set forth in the disclosure schedule delivered by the Company to Parent
simultaneously with the execution of this Agreement (the "Company Disclosure Schedule") (which
schedule sets forth, among other things, items the disclosure of which is necessary or appropriate either in
response to an express disclosure requirement contained in a provision hereofor as an exception to one or
more representations or warranties contained in this Article III, or to one or more of the Company's
covenants contained in Article V, except that any information set fo(h in one section of the Company
Disclosure Schedule will be deemed to apply to all other sections or subsections thereof to the extent it is
reasonably apparent on the face ofsuch disclosure that it is applicable to such other section or subsection
notwithstanding the omission of a reference or cross reference thereto) or (b) as set forth in any of the
Company SEC Documents publicly available prior to the date hereof (excluding any disclosures set forth
in any such Company SEC Documents under the headings "Risk Factors" or "Forward Looking
Statements," or any disclosures set forth in any such Company SEC Documents in any other sections that
are predictive or primarily cautionary in nature other than historical facts included therein), the Company
represents and warrants to Parent, US Parent and Merger Sub as follows:
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
8a
#5501 s30.12
Schedule 3, Page 12 ot 70
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Section 3.1 Orsanization. Standing and Corporate Power.
(a) The Company is a corporation duly organized and validly existing under the Laws
of the State of Washington and has all requisite corporate power and authority necessary to own or lease
all of its properties and assets and to carry on its business as it is now being conducted. The Company is
duly qualified to do business and is in good standing in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties and assets owned or leased by it makes such
qualification necessary, except where the failure to be so qualified or in good standing would not reasonably
be expected to have a Company Material Adverse Effect. The Company has made available to Parent true
and complete copies of the Company Charter Documents as in effect on the date of this Agreement.
(c) Each of the Company and its Subsidiaries has all requisite entity power and
authority to enable it to own, operate, lease or otherwise hold its properties and assets and to conduct its
businesses as presently conducted, except where the failure to have such power or authority would not
reasonably be expected to have a Company Material Adverse Effect.
(d) Section 3.1(d) of the Company Disclosure Schedule sets forth a list of the
Company Joint Ventures, including the name of each entity and the Company's percentage ownership
interest thereof. The Company has made available to Parent true and complete copies of the articles of
incorporation, bylaws and limited liability agreements (or equivalent constituent documents) of each
Company Joint Venture as in effect on the date of this Agreement.
Section 3.2 Capitalization.
(a) The authorized capital stock of the Company consists of 200,000,000 shares of
Company Common Stock and 10,000,000 shares of preferred stock ("Company Preferred Std"). At the
close of business on July 78,2017,(a) 64,411,244 shares of Company Common Stock were issued and
outstanding, (b) no shares ofCompany Preferred Stock were issued and outstanding, (c) 109,089 shares of
Company Common Stock were subject to outstanding RSUs, and (d) 493,499 shares of Company Common
Stock were subject to outstanding Performance Awards, based on achievement of applicable performance
criteria at target levels.
9
#5501 530. I 2 Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page t 3 of 70
o
(b) Section 3.1ft)(i) of the Company Disclosure Schedule sets forth a list of the
Subsidiaries of the Company and their jurisdictions of organization. Each Subsidiary of the Company is
duly organized, validly existing and in good standing (where applicable) under the Laws of the jurisdiction
of its organization, except in each case as would not reasonably be expected to have a Company Material
Adverse Effect. Each Subsidiary of the Company is duly qualified to do business and is in good standing
in each jurisdiction in which the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such qualification necessary, except where the failure to
be so qualified or in good standing would not reasonably be expected to have a Company Material Adverse
Effect. All of the outstanding shares of capital stock of, or other equity interests in, each Subsidiary of the
Company have been validly issued and are fully paid and non-assessable and, except as set forth in Section
3JOGD of the Company Disclosure Schedule, are owned directly or indirectly by the Company, free and
clear ofall liens, pledges, security interests and transfer restrictions, except for such transfer restrictions as
are contained in the articles of incorporation, bylaws and limited liability company agreements (or any
equivalent constituent documents) of such Subsidiary of the Company or for such transfer restrictions of
general applicability as may be provided under the Securities Act of 1933 (the "Securities Act") and other
applicable securities Laws. The Company has made available to Parent true and complete copies of the
articles of incorporation, bylaws and limited liability agreements (or equivalent constituent documents) of
each Subsidiary of the Company as in effect on the date of this Agreement.
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(b) All outstanding shares of Company Common Stock are, and all shares of Company
Common Stock that may be issued upon the settlement of RSUs and Performance Awards, will be, when
issued, duly authorized, validly issued, fully paid and nonassessable and not subject to, or issued in violation
of, any preemptive right. Except (i) as set forth in Section 3.2(b) of the Company Disclosure Schedule, (ii)
as set forth in Section 3.2(a), or (iii) pursuant to the terms of this Agreement, as of the date hereof, there
are not issued, reserved for issuance or outstanding, and there are not any outstanding obligations ofthe
Company or any Subsidiary of the Company to issue, deliver or sell, or cause to be issued, delivered or
sold, (A) any capital stock of the Company or any Subsidiary of the Company or any securities of the
Company or any Subsidiary of ttre Company convertible into or exchangeable or exercisable for shares of
capital stock or voting securities of, or other equity interests in, the Company or any Subsidiary of the
Company or (B) any warrants, calls, options or other rights to acquire from the Company or any Subsidiary
ofthe Company, or any other obligation of the Company or any Subsidiary of the Company to issue, deliver
or sell, or cause to be issued, delivered or sold, any capital stock or voting securities of, or other equity
interests in, the Company or any Subsidiary of the Company (the items specified in the foregoing clauses
(A) and (B), collectively, "Equity Securities"). Except pursuant to the Company Stock Plans, there are not
any outstanding obligations of the Company or any Subsidiary of the Company to repurchase, redeem or
otherwise acquire any Equity Securities. There is no outstanding Indebtedness of the Company having the
right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on
which shareholders of the Company may vote. No Subsidiary ofthe Company owns any shares of Company
Common Stock. Neither the Company nor any Subsidiary of the Company is a parry to any voting
agreement with respect to the voting of any capital stock or voting securities of, or other equity interests in,
the Company.
(c) Section 3.2(c) of the Company Disclosure Schedule sets forth a complete and
accurate list of all RSUs and Performance Awards outstanding as of the date of this Agreement, including,
with respect to each such award, the holder, the grant date, and the number of shares of Company Common
Stock subject thereto (assuming the target level of attainment of the applicable performance conditions).
Section3.3 Authoritv:Non-contravention.
(a) The Company has all necessary corporate power and authority to execute and
deliver this Agreement and, subject to obtaining the Company Shareholder Approval, to perform its
obligations hereunder and to consummate the Transactions. The Company Board, at a meeting duly called
and held, unanimously adopted resolutions (i) determining that it is in the best interests of the Company
and its shareholders for the Company to enter into this Agreement, (ii) adopting the plan of merger set forth
in this Agreement and approving the Company's execution, delivery and performance of this Agreement
and the consummation of the Transactions, and (iii) resolving to recommend that the shareholders of the
Company approve this Agreement and the plan of merger set forth in this Agreement and directing that this
Agreement be submitted to the shareholders of the Company for approval at a duly held meeting of such
shareholders for such purpose (the "Company Board Recommendation"). As of the date of this Agreement,
such resolutions have not been amended or withdrawn. Except for obtaining the Company Shareholder
Approval, no other corporate action on the part of the Company is necessary to authorizethe execution and
delivery ol and performance by, the Company under this Agreement and the plan of merger set forth in
this Agreement and the consummation by it of the Transactions. This Agreement has been duly executed
and delivered by the Company and, assuming due authorization, execution and delivery hereof by the other
parties hereto, constitutes a legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except that such enforceability (A) may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and other similar laws of general application
affecting or relating to the enforcement of creditors' rights generally and (B) is subject to general principles
of equity, whether considered in a proceeding at law or in equity (the "Bankruptcv and Equitv Exception").
10
#5501 530 I 2 Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 3, Page 14o170
a
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(b) The execution and delivery of this Agreement by the Company does not, and
neither the consummation by the Company of the Transactions nor compliance by the Company with any
of the terms or provisions hereof will, (i) assuming the Company Shareholder Approval is obtained, conflict
with or violate any provision of the Company Charter Documents or the organizational documents of any
Subsidiary of the Company, (ii) assuming that each of the consents, authorizations and approvals refened
to in Section 3.4 and the Company Shareholder Approval are obtained (and any condition precedent to any
such consent, authorization or approval has been satisfied) and each ofthe filings referred to in Section 3.4
are made and any applicable waiting periods referred to therein have expired or been terminated, violate
any Law applicable to the Company or any of its Subsidiaries or (iii) assuming that each of the consents
and notices specified in Section 3.36Xiii) of the Company Disclosure Schedule is obtained or given, as
applicable, result in any breach of, or constitute a default (with or without notice or lapse of time, or both)
under, or give rise to any right of termination, amendment, acceleration or cancellation of, or right to any
payment or loss of benefit under, any Company Material Contract to which the Company or any of its
Subsidiaries is a party or any Company Permit, or result in the creation of a Lien (other than any Permitted
Lien), upon any of the properties or assets of the Company or any of its Subsidiaries, other than, in the case
of clauses (ii) and (iii), as would not reasonably be expected to have a Company Material Adverse Effect.
Section 3.4 Governmental Approvals. Except for (a) the filing with the SEC of a proxy
statement, in preliminary and definitive form, relating to the Company Shareholders Meeting (as amended
or supplemented from time to time, the "Proxy Statement"), and other filings required under, and
compliance with other applicable requirements of, the Securities Exchange Act of 1934 (the "Exghaagg
Act") and the rules of the NYSE in connection with this Agreement and the Merger, (b) the filing of the
Articles of Merger with the Washington Secretary of State pursuant to the WBCA, (c) approvals or filings
required under, and compliance with other applicable requirements of, the IPUC, MPSC, OPUC, RCA, and
WUTC, (d) the FERC Approval, (e) the FCC Approval, (f) the CFIUS Approval, and (g) filings required
under, and compliance with other applicable requirements of, the HSR Act (such approvals and filings
described in clauses (c) through (f) of this Section 3.4, (the "Required Statutory Approvals"), no consents
or approvals of, or filings, declarations or registrations with, any Govemmental Authority are necessary for
the execution and delivery of this Agreement by the Company and the consummation by the Company of
the Transactions, other than as would not reasonably be expected to have a Company Material Adverse
Effect.
Section 3.5 Comoanv SEC Documents: Undisclosed Liabilities.
(a) The Company has filed with or furnished to the SEC, on a timely basis, all
registration statements, reports, proxy statements and other documents that the Company was required to
file or furnish since January 1,2015 (collectively, and in each case including all exhibits and schedules
thereto and documents incorporated by reference therein, as such statements, reports and documents may
have been amended since the date of their filing, the "Companv SEC Documeff'). As of their respective
effective dates (in the case of Company SEC Documents that are registration statements filed pursuant to
the requirements of the Securities Act) and as of their respective filing dates (in the case of all other
Company SEC Documents), or in the case of amendments thereto, as of the date of the last such amendment
(but only amendments prior to the date of this Agreement in the case of any Company SEC Document with
a filing or effective date prior to the date of this Agreement), the Company SEC Documents complied in
all material respects with the requirements of the Exchange Act, the Securities Act or the Sarbanes-Oxley
Act of 2002 (lhe "Sarbanes-Oxley Act"), as the case may be, and the rules and regulations of the SEC
promulgated thereunder, applicable to such Company SEC Documents, and none of the Company SEC
Documents as of such respective dates (or, if amended, the date of the filing of such amendment, with
respect to the disclosures that are amended) contained any untrue statement of a material fact or omitted to
1l
#5501 530. I 2 Exhibit No. 3
Case Nos. AVU-E- 1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 15 of 70
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state a material fact required to be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) Except to the extent updated, amended, restated or corrected by a subsequent
Company SEC Document (but only updates, amendments, restatements or corrections prior to the date of
this Agreement in the case of any Company SEC Document with a filing or effective date prior to the date
of this Agreement), as of their respective dates of filing with the SEC, the consolidated financial statements
of the Company included in the Company SEC Documents (i) complied as to form in all material respects
with all applicable accounting requirements and with the published rules and regulations of the SEC with
respect thereto (except, in the case of unaudited statements, as permitted by Form l0-Q of the SEC), (ii)
have been prepared in accordance with GAAP applied on a consistent basis during the periods involved
(except (A) as may be indicated in the notes thereto or (B) as permiffed by Regulation S-X under the
Exchange Act) and (iii) present fairly, in all material respects, the consolidated financial position of the
Company and its Subsidiaries and the consolidated results of their operations and cash flows, as of each of
the dates and for the periods shown, as applicable, in conformity with GAAP.
(c) The Company has established and maintains disclosure controls and procedures
and internal control over financial reporting (as such terms are defined in paragraphs (e) and (f),
respectively, of Rule 1 3a- I 5 under the Exchange Act) as required by Rule l3a- I 5 under the Exchange Act.
The Company's disclosure controls and procedures are reasonably designed to ensure that all material
information required to be disclosed by the Company in the reports that it files or furnishes under the
Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the
rules and forms of the SEC, and that all such material information is accumulated and communicated to the
Company's management as appropriate to allow timely decisions regarding required disclosure and to make
the certifications required pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act. Based on its most
recent evaluation of its intemal control over financial reporting prior to the date hereof, the Company has
disclosed to its auditors and its audit committee (A) all significant deficiencies and material weaknesses in
the design or operation of intemal control over financial reporting (as such terms are defined in paragraphs
(e) and (f), respectively, of Rule l3a-15 under the Exchange Act) which are reasonably likely to adversely
affect its ability to record, process, summarize and report its consolidated financial information and (B) any
known fraud, whether or not material, that involves management or other employees who have a significant
role in its internal control over financial reporting.
(d) Neither the Company nor any of its Subsidiaries has any liabilities which would
be required to be reflected or reserved against on a consolidated balance sheet ofthe Company prepared in
accordance with GAAP or the notes thereto, except for liabilities (i) reflected or reserved against on the
balance sheet of the Company and its Subsidiaries as of December 31,2016 (the "Balance Sheet Date")
(including the notes thereto) included in the Company SEC Documents, (ii) incurred after the Balance Sheet
Date in the ordinary course of business, (iii) as contemplated by this Agreement or otherwise arising in
connection with the Transactions or (iv) as would not reasonably be expected to have a Company Material
Adverse Effect.
(e) All Regulatory Filings required to be made by the Company or any of its
Subsidiaries since January l, 2015 have been filed or furnished with the applicable Govemmental
Authority, and all such Regulatory Filings complied, as of their respective dates, with all applicable
requirements of the applicable Laws, except, in each case, as would not reasonably be expected to have a
Company Material Adverse Effect.
Section 3.6 Absence of Certain Chanees. From the Balance Sheet Date to the date of this
Agreement, (a) except in connection with the Transactions, the business of the Company and its
t2
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 16 of70
o
#s50r 530.12
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Subsidiaries has been conducted in all material respects in the ordinary course of business consistent with
past practice and (b) there has not been any circumstance, development, change, event, occurrence or effect
that has had or would reasonably be expected to have a Company Material Adverse Effect.
Section 3.7 Legal Proceedings. There is no pending or, to the Knowledge of the Company,
threatened, Claim against the Company or any of its Subsidiaries, nor is there any Judgment imposed upon
the Company or any of its Subsidiaries, in each case, by or before any Govemmental Authority, that would
reasonably be expected to have a Company Material Adverse Effect.
Section 3.8 Comnliance With Laws: Permits. The Company and its Subsidiaries are in
compliance with all laws, statutes, ordinances, codes, rules, regulations, rulings, and Judgments of
Governmental Authorities (collectively, "LAwl") applicable to the Company or any of its Subsidiaries,
except for instances of non-compliance as would not reasonably be expected to have a Company Material
Adverse Effect. The Company and each of its Subsidiaries hold, and are in compliance with, all licenses,
franchises, permits, certificates, approvals, variances, orders, registrations and authorizations from
Governmental Authorities required by Law for the conduct of their respective businesses as they are now
being conducted (collectively, "Company Permits"), except as would not reasonably be expected to have a
Company Material Adverse Effect.
Section 3.9 Tax Matters.
(a) Except for those matters that would not reasonably be expected to have a Company
Material Adverse Effect or as specified in the Company Disclosure Schedule: (i) each of the Company and
its Subsidiaries has timely filed, or has caused to be timely filed on its behalf (taking into account any
extension of time within which to file), all Tax Retums required to be filed by it, and all such filed Tax
Returns are true, correct and complete; (ii) all Taxes required to have been paid by the Company or its
Subsidiaries (whether or not shown to be due on such Tax Returns) have been paid; (iii) no deficiency with
respect to Taxes has been proposed, asserted or assessed against the Company or any of its Subsidiaries
which has not been fully paid or adequately reserved against in accordance with GAAP; (iv) no audit or
other administrative or court proceeding or Claim is pending before any Govemmental Authority with
respect to Taxes of the Company or any of its Subsidiaries, and no written notice thereof has been received
(other than in respect of any such proceeding that has been resolved); (v) each of the Company and its
Subsidiaries has withheld and timely remitted to the appropriate Governmental Authority all Taxes required
to be withheld from amounts owing to any employee, creditor or third parly and collected and paid all sales
Taxes required to be withheld and paid; (vi) neither the Company nor any Subsidiary of the Company has
granted any waiver of any statute of limitations with respect to, or any extension of a period for the
assessment of, any Tax which has notyet expired (excluding extensions oftime to file Tax Retums obtained
in the ordinary course); (vi) neither the Company nor any Subsidiary of the Company had any liabilities for
unpaid Taxes as of the Balance Sheet Date that had not been accrued or reserved on such balance sheet in
accordance with GAAP; (vii) neither the Company nor any Subsidiary of the Company has any liability
for Taxes of any Person (except for the Company or any Subsidiary of the Company) arising from the
application of Treasury Regulations Section 1.1502-6 or any analogous provision of state, local or foreign
Law, as a transferee or successor or by contract; (viii) neither the Company nor any Subsidiary of the
Company is a party to or is otherwise bound by any Tax sharing, allocation or indemnification agreement
or alrangement, except for such an agreement or alrangement exclusively between or among the Company
and Subsidiaries of the Company or customary Tax provisions contained in commercial agreements the
principal subject matter of which is not related to Taxes; (ix) within the past three (3) years, neither the
Company or any Subsidiary of the Company has been a "distributing corporation" or a "controlled
corporation" in a distribution intended to qualiff for tax-free treatment under Section 355 of the Code; (x)
neither the Company nor any Subsidiary of the Company has participated in any "listed transaction" as
l3
Exhibit No. 3
Case Nos. AVU-E-I 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 17 ot70
o
#5501 530. I 2
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defined in Treasury Regulations Section 1.601 l-4 in any Tax year for which the statute of limitations has
not expired; (xi) there are no Liens for Taxes on any ofthe assets ofthe Company or any or Subsidiary of
the Company (except for any Liens described in clause (a) ofthe definition ofPermitted Liens); (xii) neither
the Company nor any Subsidiary of the Company has any Tax rulings, requests for rulings, closing
agreements or other similar agreements in effect or filed with any Govemmental Authority, and (xiii)
neither the Company nor any Subsidiary of the Company has received any notice from a jurisdiction in
which it does not file a Tax Return that it is required to file any Tax Retum or pay any Taxes in such
jurisdiction. This Section 3.9 (and so much of Section 3.10 as it relates to Taxes) constitutes the sole and
exclusive representation and warranty of the Company regarding Tax matters.
(b) For purposes of this Agreement: (i) "Taxes" shall mean all federal, state, local or
foreign taxes, charges, imposts, levies or other assessments, including all income, gross receipts, business
and occupation, franchise, estimated, altemative minimum, add-on minimum, sales, use, transfer, value
added, excise, severance, stamp, customs, duties, real properfy, personal property, capital stock, social
security, unemployment, payroll, employee or other withholding, or other tax, including any interest,
penalties or additions to tax imposed by any Govemmental Authority in connection with any of the
foregoing and (ii) "Tax Retums" shall mean any return, report, claim for refund, estimate, information
return or statement or other similar document filed or required to be filed with any Governmental Authority
with respect to Taxes, including any schedule or attachment thereto, and any amendment thereof.
Section 3.10 Emnloyee Benefits Matters.
(a) Section 3.10(a) ofthe Company Disclosure Schedule sets forth a list, as of the date
of this Agreement, of each material Company Plan. The Company has made available to Parent copies of
(i) the current plan document for each Company Plan, (ii) the most recent annual reports on Form 5500
required to be filed with the Department of Labor with respect to each Company Plan (if any such report
was required), (iii) the most recent summary plan description for each Company Plan for which such
summary plan description is required and (iv) each trust agreement relating to any Company Plan. Except
as would not reasonably be expected to have a Company Material Adverse Effect, each Company Plan has
been maintained and is in compliance with its terms and the applicable provisions of ERISA, the Code and
all other applicable Laws. There are no Claims pending or, to the Knowledge of the Company, threatened
(other than claims for benefits in the ordinary course) with respect to any Company Plan that would
reasonably be expected to have a Company Material Adverse Effect. All Company Plans that are
"employee pension plans" (as defined in Section 3(3) of ERISA) that are intended to be tax qualified under
Section a0l(a) of the Code (each, a "Company Pension Plm") have received a favorable determination or
opinion letter from the IRS or has filed a timely application therefor, or is in the form of a pre-approved
document that is the subject of a favorable opinion letter from the IRS. The Company has made available
to Parent a correct and complete copy of the most recent determination letter received with respect to each
Company Pension Plan, as well as a correct and complete copy of each pending application for a
determination letter, if any.
(b) With respect to each Company Pension Plan that is subject to Title IV or Section
302 of ERISA or Section 412 or 49'71 of the Code, (i) the Company, its Subsidiaries and their respective
ERISA Affiliates have complied with the minimum funding requirements under Section 412,430 and 431
of the Code and Sections 302,303 and 304 of ERISA, whether or not waived, (ii) no reportable event within
the meaning of Section 4043 of ERISA for which the 30-day notice requirement has not been waived has
occurred, (iii) all premiums required to be paid to the PBGC under 4007 of ERISA have been timely paid,
(iv) no liability under Section 4062 through 4071 of ERISA has been or is expected to be incurred by the
Company, its Subsidiaries or any of their respective ERISA Affiliates (other than for premiums to the
PBGC) and (v) proceedings to terminate any such Company Pension Plan have not been instituted under
14
#5501 530. I 2 Exhibit No. 3
Case Nos. AVU-E-'|7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 18 of 70
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Sections 4041 or 4042 of ERISA except, in each case of clauses (i) - (v), as would not reasonably be
expected to have a Company Material Adverse Effect.
(c) Section 3.10(c) of the Company Disclosure Schedule lists each Multiemployer
Plan. Neither the Company, nor any of its ERISA Affiliates: (i) has incuned a withdrawal (either complete
or partial) (as defined in Section 4203 or 4205 of ERISA) from any Multiemployer Plan, or (ii) has incurred
a decline in contributions to any Multiemployer Plan such that, if the current rate of contributions continues,
a seventy-percent decline in contributions (as defined in Section 4205 of ERISA) will occur within the next
tfuee plan years except, in each case of clauses (i) or (ii), as would not be reasonably expected to have a
Company Material Adverse Effect. To the Knowledge of the Company, (A) no event has occurred or
circumstance exists that constitutes the termination or insolvency of any Multiemployer Plan (within the
meanings of ERISA Sections 4041A and 4245, respectively) and (B) no Multiemployer Plan is a party to
any pending merger or asset or liability transfer or is subject to any Claim brought by the PBGC, except, in
each case of clauses (A) and (B), as would not reasonably be expected to have a Company Material Adverse
Effect.
(d) Except as set forth in Section 3.10(d) of the Company Disclosure Schedule or as
otherwise required by this Agreement, the consummation of the Transactions alone, or in combination with
another event (including any termination of employment before, on or following the Effective Time) will
not, except as expressly provided in this Agreement, (i) entitle any employee of the Company to severance
pay or any other termination payment or benefit or (ii) accelerate the time of payment or vesting, or
materially increase the amount of compensation or benefits due to, any such employee.
(e) Except as set forth in Section 3.10(e) of the Company Disclosure Schedule, no
amounts payable under the Company Plans are reasonably expected to fail to be deductible for federal
income tax purposes by virtue of Section 280G of the Code. Section 3.10(e) of the Company Disclosure
Schedule lists the directors, officers, employees and service providers entitled to a gross-up, or make whole
or other payment as a result of the imposition of taxes under Section 280G, Section 4999 or Section 409A
of the Code pursuant to any agreement or arrangement with the Company or any of its Subsidiaries.
(0 This Section 3 . I 0 and Section 3. 1 6 (to the extent related to pensions and employee
benefits) constitute the sole and exclusive representation and warranty of the Company regarding pension
and employee benefit or liabilities or obligations, or compliance with Laws relating thereto.
Section 3.11 Environmental Matters. Except as would not reasonably be expected to have a
Company Material Adverse Effect, (a) each of the Company and its Subsidiaries is in compliance with all
applicable Environmental Laws, which compliance includes obtaining, maintaining or complying with all
Company Permits required under Environmental Laws for the operation of their respective businesses, and
(i) all such Company Permits are valid and in full force and effect, and (ii) neither the Company nor any of
its Subsidiaries has received any written communication from any Govemmental Authority unilaterally
seeking to modiff, revoke or terminate any such Environmental Permits in a manner that would be adverse
to the Company; (b) there is no Claim relating to or arising under Environmental Laws (including relating
to or arising from the Release, threatened Release or exposure to any Hazardous Material or alleging
violation of any Company Permit) that is pending or, to the Knowledge ofthe Company, threatened against
the Company or any of its Subsidiaries; (c) to the Company's Knowledge, there are and have been no
Releases of, or exposure to, any Hazardous Material on, at, under or from any property currently or formerly
owned, leased or operated by the Company or any of its Subsidiaries, that would reasonably be expected to
form the basis of any such Claim against the Company or any of its Subsidiaries; (d) neither the Company
nor any of its Subsidiaries have transported or arranged for the transportation of any Hazardous Materials
generated by the Company or any of its Subsidiaries to any location which is listed on the National Priorities
15
#5501 530. I 2 Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 1 9 of 70
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List under CERCLA, or any similar state list, or which is the subject of federal, state or local enforcement
actions or other investigations that would reasonably be expected to form the basis of any Claim against
the Company or any of its Subsidiaries; and (e) neither the Company nor any of its Subsidiaries has received
any written notice of, or entered into, any order, settlement, judgment, injunction or decree involving
uncompleted, outstanding or unresolved liabilities or corrective or remedial obligations arising under
Environmental Laws (including relating to or arising from the Release, threatened Release or exposure to
any Hazardous Material). This Section 3.1 I constitutes the sole and exclusive representation and warranty
of the Company regarding environmental matters, including all matters arising under Environmental Laws.
Section 3.12 Intellectual Pronertv. Except as would not reasonably be expected to have a
Company MaterialAdverse Effect, (a) (i) the conduct of the Company's and its Subsidiaries'business as
currently conducted is not infringing or otherwise violating any Person's Intellectual Property and (ii) there
is no Claim of such infringement or other violation pending, or to the Knowledge of the Company, being
threatened in writing, against the Company, and (b) (i) to the Knowledge of the Company, no Person is
infringing or otherwise violating any Intellectual Property owned by the Company or any of its Subsidiaries
and (ii) no Claims of such infringement or other violation are pending or, to the Knowledge of the Company,
being threatened in writing against any Person by the Company or any of its Subsidiaries. This Section
3.12 constitutes the sole and exclusive representation and warranty of the Company with respect to any
Intellectual Property matters.
Section 3.13 Takeover Statutes. Assuming that the representations and warranties of Parent,
US Parent and Merger Sub set forth in Section 4.7 are true and correct in all respects, the Transactions are
not subject to the restrictions on business combinations contained in Chapter 238.19 of the WBCA, or any
other similar anti-takeover Law (each, a "Takeover Statute") or any similar provision in the Company
Charter Documents.
Section 3.14 Real Pronertv.
(b) Each of the Company and its Subsidiaries has such consents, easements, rights of
way, permits, licenses and other similar real property interests (collectively, "R!!tts._gf JUay") from each
person as are sufficient to conduct its business as currently conducted, except for such Rights of Way the
absence of which have not had and would not reasonably be expected to have a Company Material Adverse
Effect. Each of the Company and its Subsidiaries has fulfilled and performed all its material obligations
with respect to such Rights of Way and conducts their business in a manner that does not violate any of the
Rights of Way, and no event has occurred that would result in, or after notice or lapse of time would result
in, revocation or termination thereof or would result in any impairment of the rights of the holder of any
such Rights of Way, except for such revocations, terminations and impairments that have not had and would
t6
#5501 530. I 2 Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 20 o'f 70
o
(a) Except as would not reasonably be expected to have a Company Material Adverse
Effect, the Company or a Subsidiary of the Company owns and has either good and marketable title in fee
or a valid leasehold interest, easement or other rights to the land, buildings, structures and other
improvements thereon and fixtures thereto necessary to permit it to conduct its business as currently
conducted, in each case free and clear of all Liens (except in all cases for Permitted Liens). Except as would
not reasonably be expected to have a Company Material Adverse Effect and except as may be limited by
the Bankruptcy and Equity Exception, all leases, Rights of Way agreements or other agreements under
which the Company or any of its Subsidiaries lease, access or use any real property or real property interest
are valid, binding and in full force and effect against the Company or any of its Subsidiaries and, to the
Knowledge of the Company, the counterparties thereto, in accordance with their respective terms, and
neither the Company nor any of its Subsidiaries are in default under any of such leases, Rights of Way or
other agreements.
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not reasonably be expected to have a Company Material Adverse Effect. All pipelines owned or operated
by the Company and its Subsidiaries are subject to Rights of Way, there are no encroachments or other
encumbrances on the Rights of Way that materially affect the use thereof, there are no encroachments of
improvements of the Company or any of its Subsidiaries outside of the boundaries of such Rights of Way
other than encroachments that have not had and would not reasonably be expected to have a Company
Material Adverse Effect and there are no gaps (including any gap arising as a result of any breach by the
Company or any of its Subsidiaries of the terms of any Rights of Way) in the Rights of Way other than gaps
that have not had and would not reasonably be expected to have a Company Material Adverse Effect.
Section3.l5 Contracts.
(a) For purposes of this Agreement, "Company Material Co " means any
Contract which is required to be filed or disclosed by the Company pursuant to the Securities Act or the
Exchange Act as a "material contract" pursuant to Item 60 I (bX I 0) of Regulation S-K under the Securities
Act.
(b) Each Company Material Contract is valid and binding on the Company and any of
its Subsidiaries to the extent the Company or such Subsidiary is a party thereto, as applicable, and to the
Knowledge of the Company, each other parly thereto, and is in full force and effect and enforceable in
accordance with its terms (subject to the Bankruptcy and Equity Exception), except where the failure to be
valid, binding, enforceable and in full force and effect would not reasonably be expected to have a Company
Material Adverse Effect. The Company and each of its Subsidiaries, and, to the Knowledge of the
Company, any other party thereto, has performed all obligations required to be performed by it under each
Company Material Contract, except where such noncompliance would not reasonably be expected to have
a Company Material Adverse Effect.
Section 3.16 Labor.
(a) Except as set forth in Section 3.16(a) of the Company Disclosure Schedule, to the
Knowledge of the Company, since January 1,2015, no laborunion or labor organization ("Union") has
been certified as the exclusive bargaining representative of any employee of the Company or its
Subsidiaries. To the Knowledge of the Company, no Union is currently seeking to organize Company
Employees for the purpose of collective bargaining. Except for the CBAs as set forth in Section 3.16(a) of
the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is, nor have been since
January 1 ,2015, a party to, bound by, or negotiating any collective bargaining agreement or other Contract
with a Union (the "CBAs") with respect to any of the respective employees of the Company or its
Subsidiaries. There is not, nor has there been since January 1,2015, any labor strike, lockout or work
stoppage, concerted refusal to work overtime or other labor dispute, or, to the Knowledge of the Company,
threat thereof by or with respect to, any employees of the Company or its Subsidiaries, except where such
strike, lockout, work stoppage, concerted refusal to work overtime or other labor dispute would not
reasonably be expected to have a Company Material Adverse Effect.
(b) Except as set forth in Section 3.16(b) of the Company Disclosure Schedule, there
are no Claims pending or, to the Knowledge of the Company, threatened by or on behalf of any employee
or former employee ofthe Company or its Subsidiaries or Union alleging violations of local, state or federal
Laws relating to labor or employment practices, except as would not reasonably be expected to have a
Company Material Adverse Effect.
(c) Since January 7, 2015, neither the Company nor any of its Subsidiaries has
engaged in any action that required notifications under the WARN Act.
17
#550t 530 l 2 Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 21 ol70
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(d) Section 3.8 and Section 3.10 (in each case, to the extent related to labor and
employment matters) and this Section 3. I 6 constitute the sole and exclusive representation and warranty of
the Company regarding labor or employment matters.
Section 3.17 Opinion of Financial Advisor. The Company Board has received the opinion of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("BofA Merrill Lynch") dated as of the date of this
Agreement, to the effect that, as of such date, and subject to the various assumptions and limitations set
forth therein, the Merger Consideration to be received in the Merger by holders of the Company Common
Stock is fair, from a financial point of view, to the holders of the Company Common Stock.
Section 3.18 Brokers and Other Advisors. Except for BofA Merrill Lynch, no broker,
investment banker, financial advisor or other Person is entitled to any broker's, finder's, financial advisor's
or other similar fee in connection with the Transactions based upon arrangements made by or on behalf of
the Company or any of its Subsidiaries.
Section 3.19 Companv Shareholder Approval. Assuming the accuracy of the representations
and warranties of Parent, US Parent and Merger Sub set forth in Section 4.7, approval of this Agreement
and the plan of merger set forth herein by the affirmative vote (in person or by proxy) of the holders of a
majority of the outstanding shares of Company Common Stock entitled to vote at the Company
Shareholders Meeting (the "Company Shareholder Approval") is the only vote or approval of the holders
of any class or series of capital stock of the Company necessary to approve this Agreement and the plan of
merger set forth in this Agreement and the Transactions.
ARTICLE IV
Except as set forth in the disclosure schedule delivered by Parent to the Company simultaneously
with the execution of this Agreement (the "Parent Disclosure Schedule") (which schedule sets forlh, among
other things, items the disclosure of which is necessary or appropriate either in response to an express
disclosure requirement contained in a provision hereof or as an exception to one or more representations or
warranties contained in this Article IV, or to one or more of Parent's, US Parent's or Merger Sub's
covenants contained in Article V, except that any information set forth in one section of the Parent
Disclosure Schedule will be deemed to apply to all other sections or subsections thereof to the extent it is
reasonably apparent on the face ofsuch disclosure that it is applicable to such other section or subsection
notwithstanding the omission of a reference or cross reference thereto), Parent, US Parent and Merger Sub
jointly and severally represent and warrant to the Company as follows:
Section 4.1 Orsanization. Standing and Cornorate Power. Parent is a corporation duly
organized and validly existing under the Laws of Province of Ontario, US Parent is a corporation duly
organized, validly existing and in good standing under the Laws of the State of Delaware, and Merger Sub
is a corporation duly organized and validly existing under the Laws of the State of Washington. Each of
Parent, US Parent and Merger Sub has all requisite corporate power and authority necessary to own or lease
all of its properties and assets and to cary on its business as it is now being conducted. Parent is duly
qualified to do business and is in good standing (where such a concept exists) in each jurisdiction in which
the nature ofthe business conducted by it or the character or location ofthe properties and assets owned or
leased by it makes such qualification necessary, except where the failure to be so qualified or in good
standing would not reasonably be expected to have a Parent Material Adverse Effect.
l8
#5501 530. I 2 Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-'| 7-_
M. Thies, Avista
Schedule 3, Page 22ot70
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Section4.2 Authoritv:Non-contravention.
(a) Each of Parent, US Parent and Merger Sub has all necessary corporate power and
authority to execute and deliver this Agreement, to perform their respective obligations hereunder and to
consummate the Transactions. The execution and delivery of and performance by Parent, US Parent and
Merger Sub under this Agreement, and the consummation by Parent, US Parent and Merger Sub of the
Transactions, have been duly authorized and approved by all necessary corporate action by Parent, US
Parent and Merger Sub (including by the Parent Board, the board of directors of US Parent and the board
of directors of Merger Sub) and approved by US Parent as the sole shareholder of Merger Sub, and no other
corporate action on the part of Parent, US Parent and Merger Sub is necessary to authorize the execution
and delivery of, and performance by Parent, US Parent and Merger Sub under, this Agreement and the plan
of merger set forth in this Agreement and the consummation by them of the Transactions. This Agreement
has been duly executed and delivered by Parent, US Parent and Merger Sub and, assuming due
authorization, execution and delivery hereof by the Company, constitutes a legal, valid and binding
obligation of each of Parent, US Parent and Merger Sub, enforceable against each of them in accordance
with its terms, subject to the Bankruptcy and Equity Exception. No vote or approval of the holders of any
class or series of capital stock of Parent is necessary to adopt or approve this Agreement and the plan of
merger set forth in this Agreement and the Transactions.
(b) The execution and delivery of this Agreement by Parent, US Parent and Merger
Sub do not, and neither the consummation by Parent, US Parent or Merger Sub of the Transactions, nor
compliance by Parent, US Parent or Merger Sub with any of the terms or provisions hereof, will, (i) conflict
with or violate any provision of the certificate of incorporation and bylaws or similar organizational
documents of Parent, US Parent and Merger Sub, in each case, as in effect on the date of this Agreement or
(ii) assuming that each of the consents, authorizations and approvals referred to in Section 4.3 is obtained
(and any condition precedent to any such consent, authorization or approval has been satisfied), and each
of the filings referred to in Section 4.3 are made and any applicable waiting periods referred to therein have
expired or been terminated, violate any Law applicable to Parent, US Parent, Merger Sub or any of their
respective Subsidiaries or (iii) result in any breach of, or constitute a default (with or without notice or lapse
of time or both) under, or give rise to any right of termination, amendment, acceleration or cancellation of,
or right to any payment or loss of benefit under, any Contract to which Parent, US Parent, Merger Sub or
any of their respective Subsidiaries is a party, except, in the case of clauses (ii) and (iii), as would not
reasonably be expected to have a Parent Material Adverse Effect.
Section 4.3 Governmental Approvals. Except for (a) the filing with the SEC of the Proxy
Statement, and other filings required under, and compliance with other applicable requirements of,
Canadian securities laws, the Exchange Act and the rules of the NYSE and the TSX in connection with this
Agreement and the Merger, (b) the filing of the Articles of Merger with the Washington Secretary of State
pursuant to the WBCA, (c) filings required under, and compliance with other applicable requirements of,
the HSR Act and (d) Required Statutory Approvals, no consents or approvals of; or filings, declarations or
registrations with, any Govemmental Authority are necessary for the execution and delivery of this
Agreement by Parent, US Parent and Merger Sub and the consummation by Parent, US Parent and Merger
Sub of the Transactions, other than as would not reasonably be expected to have a Parent Material Adverse
Effect.
Section 4.4 Brokers and Other Advisors. Except for Moelis & Company LLC, the fees of
which will be paid by Parent, no broker, investment banker, financial advisor or other Person is entitled to
any broker's, finder's, financial advisor's or other similar fee in connection with the Transactions based
upon arrangements made by or on behalf of Parent or any of its Subsidiaries.
19
#5501530 I2 Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 23 ot 70
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Section 4.5 Ownership and Onerations of Merger Sub. As of the date hereof, and subject
to the Restructuring, as of the Effective Time, (i) US Parent and one or more direct or indirect, wholly
owned Subsidiaries of Parent will collectively own beneficially and of record all of the outstanding capital
stock of Merger Sub, and (ii) a wholly owned Subsidiary of Parent owns and will own, beneficially and of
record all of the outstanding capital stock of US Parent, in each case, all of which capital stock is duly
authorized, validly issued, fully paid and non-assessable. US Parent, Merger Sub and any other direct or
indirect, wholly owned Subsidiaries of Parent that own capital stock of Merger Sub were formed solely for
the purpose of engaging in the Transactions. US Parent, Merger Sub and any other direct or indirect, wholly
owned Subsidiaries of Parent that own capital stock of Merger Sub have no assets, liabilities or obligations
and, since the date of their respective formations, have not engaged in any business activities or conducted
any operations except, in each case, as arising from the execution of this Agreement and the performance
of their covenants and agreements with respect to the Transactions.
Section 4.6 Sufficient Funds. Parent shall have, and shall cause US Parent to have, available
at or prior to the Effective Time, sufficient cash and cash equivalents and other sources of immediately
available funds to deliver the aggregate Merger Consideration and make the payments required under
Section 2.3, and any other amounts incurred or otherwise payable by Parent, US Parent, Merger Sub or the
Surviving Corporation in connection with the Transactions, with no restriction on the use of such cash for
such purposes. Parent has sufficient ability to access the capital markets such that Parent shall have, and
shall cause US Parent to have, the financial resources and capabilities to fully perform their obligations
under this Agreement. Parent, US Parent and Merger Sub acknowledge and agree that their obligations
hereunder are not subject to any conditions regarding Parent's, Merger Sub's or any other Person's ability
to obtain financing for the consummation of the Transactions.
Section 4.7 Share Ownershin. None of Parent, US Parent or Merger Sub is, individually or
together with their respective "affiliates" and "associates" (as such terms are defined in Rule l2b-2 of the
Exchange Act), a "beneficial owner" (as such term is defined in Rule l3d-3 of the Exchange Act) of a
number of shares of Company Common Stock equal to or greater than five percent (5%) of the total number
of issued and outstanding shares of Company Common Stock.
Section 4.8 Legal Proceedings. There is no pending or, to the Knowledge of Parent,
threatened, Claims against Parent, US Parent, Merger Sub or any of their respective Subsidiaries, nor is
there any Judgment imposed upon Parent, US Parent, Merger Sub or any of their respective Subsidiaries,
in each case, by or before any Governmental Authority, that would reasonably be expected to have a Parent
Material Adverse Effect.
Section 4.9 Non-Reliance on Companv Estimates. Proiections. Forecasts. Forward-
Looking Statements and Business Plans. In connection with the due diligence investigation of the
Company by Parent, US Parent, Merger Sub and their Affiliates, Parent, US Parent, Merger Sub and their
Affiliates have received and may continue to receive from the Company certain estimates, projections,
forecasts and other forward-looking information, as well as certain business plans and forward-looking
cost-related plan information, regarding the Company, its Subsidiaries and their respective businesses and
operations. Parent, US Parent and Merger Sub hereby acknowledge that there are uncertainties inherent in
attempting to make such estimates, projections, forecasts and other forward-looking information, with
which Parent, US Parent and Merger Sub are familiar, that Parent, US Parent and Merger Sub are making
their own evaluation ofthe adequacy and accuracy ofall estimates, projections, forecasts and other forward-
looking information, as well as such business plans and forward-looking cost-related plans, fumished to
them (including the reasonableness of the assumptions underlying such estimates, projections, forecasts,
forward-looking information, business plans or forward-looking cost-related plans), and that none of Parent,
US Parent or Merger Sub has relied upon or will have any claim against the Company or any of its
20
#5501530.r2 Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 24 ot70
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Subsidiaries, or any of their respective shareholders, directors, officers, employees, Affiliates, advisors,
agents or representatives, or any other Person, with respect thereto. Accordingly, each of Parent, US Parent
and Merger Sub hereby acknowledges that neither the Company nor any of its Subsidiaries, nor any of their
respective shareholders, directors, officers, employees, Affiliates, advisors, agents or representatives, nor
any other Person, has made or is making any representation or warranty, express or implied, in respect of
the Company, its Subsidiaries, or any of their respective assets, liabilities, businesses or operations other
than the representations and warranties expressly set forth in Article III hereof or has or shall have any
liability (whether pursuant to this Agreement, in tort or otherwise) with respect to such estimates,
projections, forecasts, forward-looking information, business plans or cost-related plans (including the
reasonableness of the assumptions underlying such estimates, projections, forecasts, forward-looking
information, business plans or cost-related plans) and none of Parent, US Parent, Merger Sub nor any
Affiliate of Parent, US Parent or Merger Sub has relied upon the accuracy or completeness of any express
or implied representation, warranty, statement, or information of any nature made or provided by any
Person (including in any data room, confidential information memorandum, management presentation or
projections) on behalf of the Company, other than the representations and warranties expressly set forth in
Article III (it being understood that Parent, US Parent, Merger Sub and any Affiliate of Parent, US Parent
or Merger Sub have only relied on such express representations and warranties). Each of Parent, US Parent
and Merger Sub, on its own behalf and on behalf of its Affiliates, waives all rights and claims it or they may
have against the Company, any of the Company's Subsidiaries or any of their respective Affiliates with
respect to the accuracy of, any omission or concealment of, or any misstatement with respect to, any
potentially material information regarding the Company or its Subsidiaries, or any oftheir respective assets,
liabilities, businesses or operations, except as expressly set forth in Article III (including any certificates
delivered pursuant to Section 6.2(c) with respect to same) hereof.
ARTICLE V
COVENANTS
Section 5.1 Conduct of Business.
(a) Except as contemplated or permitted by this Agreement, as required by applicable
Laws, as contemplated by any of the matters set forth in Section 5.1(a) of the Company Disclosure
Schedule, or with the prior written consent of Parent (which consent shall not be unreasonably withheld,
delayed or conditioned), during the period from the date of this Agreement until the earlier of the Effective
Time and the termination of this Agreement in accordance with Article VII, (x) the Company shall, and
shall cause each of its Subsidiaries to, use its reasonable best efforts to conduct its business in all material
respects in the ordinary course and to preserve intact its present lines of business, maintain its rights and
franchises and preserve satisfactory relationships with Govemmental Authorities, employees, customers
and suppliers, and (y) the Company shall not, and shall not permit any of its Subsidiaries to:
(i) issue, sell or grant any shares ofits capital stock, or any securities or rights
convertible into, exchangeable or exercisable for, or evidencing the right to subscribe for, any
shares of its capital stock, or any rights, warrants or options to purchase any shares of its capital
stock, or any securities or rights convertible into, exchangeable or exercisable for, or evidencing
the right to subscribe for, any shares ofits capital stock, except (A) for the issuance ofany shares
of Company Common Stock in settlement of RSUs and Performance Awards outstanding as of the
date hereof or granted after the date hereof in accordance with Section 5.1(aXviii) of the Company
Disclosure Schedule, in each case, which are subject to settlement in accordance with their terms
without regard to the Transactions, or (B) as set forth in Section 5.1(aXi) of the Company
Disclosure Schedule;
2l
Exhibit No. 3
Case Nos. AVU-E-'! 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 25of70
o
#5501 530. I 2
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(iii) (A) declare, authorize, set aside for payment or pay any dividend on, or
make any other distribution in respect of, any shares of its capital stock, other than (l) dividends
paid by any Subsidiary of the Company to the Company or to any wholly owned Subsidiary of the
Company, (2) quarterly cash dividends with respect to the Company Common Stock not to exceed
the current annual per share dividend rate by more than $0.06 per year, with record dates and
payment dates consistent with the Company's current dividend practice, or (3) a "stub period"
dividend to holders of record of Company Common Stock as of immediately prior to the Effective
Time equal to the product of (x) the number of days from the record date for payment of the last
quarterly dividend paid by the Company prior to the Effective Time, multiplied bv (y) a daily
dividend rate determined by dividing the amount of the last quarterly dividend prior to the Effective
Time by ninety-one (91) or (B) adjust, split, combine, subdivide or reclassiff any shares of its
capital stock;
(iv) incur any Indebtedness in an outstanding principal amount in excess of
$250,000,000 in the aggregate, except for Indebtedness (l) incurred to replace, renew, extend,
refinance or refund any existing Indebtedness in a principal amount not in excess of the principal
amount of the existing Indebtedness that is the subject of such replacement, renewal, extension,
refinancing or refunding, (2) for borrowed money incurred pursuant to (and up to the maximum
amount permitted under) any Contract relating to Indebtedness as in effect as of the date of this
Agreement or (3) among the Company and any of its wholly owned Subsidiaries or among any of
such wholly owned Subsidiaries;
(v) sell, pledge, dispose of, transfer, lease, license or encumber any of its
properties or assets, except (A) dispositions as to which the sales price is not in excess of
$25,000,000 in the aggregate in any calendar year, (B) pursuant to a Company Material Contract
in effect as of on the date of this Agreement, (C) dispositions of inventory, equipment or other
assets that are no longer used or useful in the conduct of the business of the Company or any of its
Subsidiaries or (D) transfers among the Company and its wholly owned Subsidiaries;
(vi) make capital expenditures, except for an aggregate amount of capital
expenditures in any calendaryear equal to the aggregate amount budgeted in the Company's current
long term plan that was made available to Parent prior to the date hereof for such year (plus a l0%
variance), excluding any acquisition expenditures permitted pursuant to Section 5.1(aX_vii);
(vii) make any acquisition (including by merger) of, or investments in, the
capital stock, equity securities, membership interests or a material portion of the assets of any other
Person, for consideration in excess of $25,000,000 in the aggregate in any calendar year, excluding
capital expenditures permitted pursuant to Section 5.1(aXvi);
(viii) (1) increase the compensation or benefits of any of its directors, executive
officers or Company Employees (gsyidgd that payments of bonuses and other grants and awards
shall be made in the ordinary course of business consistent with past practice), (2) grant to any
director or Company Employee of the Company or any of its Subsidiaries any increase in change-
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 3, Page 26 of70
o
#5501 530. I 2
22
(ii) redeem, purchase or otherwise acquire any of its outstanding shares of
capital stock, or any rights, warrants or options to acquire any shares ofits capital stock, except (A)
pursuant to Company Material Contracts set forth in Section 5.1(a)(ii) of the Company Disclosure
Schedule in effect as of the date hereof or (B) in connection with withholding of shares of Company
Common Stock to satisfr Tax obligations with respect to RSUs and Performance Awards, or
acquisitions in connection with the forfeiture of RSUs and Performance Awards;
o
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in-control, severance, retention or termination pay, or enter into or amend any change-in-control,
severance, retention or termination agreement with any Company Employee, or (3) take any action
to accelerate the time of vesting, funding or payment of any compensation or benefits under any
Company Plan, except, in each case, (A) as required pursuant to applicable Law, (B) pursuant to
the terms of Company Plans or CBAs set forth on Section 3.16(a) of the Company Disclosure
Schedule, or (C) for increases in salaries, wages and benefits of directors, executive officers or
Company Employees made in the ordinary course of business consistent with past practice
(including in connection with general merit-based increases and in connection with promotions in
the ordinary course of business consistent with past practice);
(ix) establish, adopt, amend or terminate any Company Plan (or any plan that
would be a Company Plan if in existence on the date hereof) except (A) as required by Law or (B)
for routine, immaterial or ministerial amendments;
(x) make any material change to its methods of accounting, except as required
by GAAP (or any interpretation thereof), Regulation S-X of the Exchange Act, as required by a
Govemmental Authority (including the Financial Accounting Standards Board or any similar
organization) or as required by applicable Law;
(xi) amend the Company Charter Documents or organizational documents of
any Subsidiary of the Company (except for immaterial or ministerial amendments);
(xii) adopt or consummate a plan or agreement of complete or partial
liquidation or dissolution;
(xiii) enter into, modif, or amend in any material respect, or terminate or waive
any material right under, any Company Material Contract, except for (A) entry into or modification,
amendment, termination or waiver of any Company Material Contract in the ordinary course of
business or (B) a termination without material penalty to the Company or any of its Subsidiaries;
(xiv) settle or compromise any material Claim against the Company or any of
its Subsidiaries, other than settlements or compromises that (A) with respect to the payment of
monetary damages, involve only the payment of monetary damages by the Company or any of its
Subsidiaries not exceeding $2,000,000 in the aggregate during any consecutive twelve-month
period, and (B) except as contemplated by Section 5.9, with respect to any non-monetary terms and
conditions therein, impose or require actions that would not reasonably be expected to be material
and adverse to the Company and its Subsidiaries, taken as a whole;
(xv) make or change any material Tax election, change any material method of
Tax accounting, amend any material Tax Return, settle or compromise any material Tax liability,
surrender any claim for a refund of material Taxes, enter into any closing agreements relating to
material Taxes or grant any waiver of any statute of limitations with respect to, or any extension of
any period of assessment of, any material Taxes;
(xvi) permit any material insurance policy to terminate or lapse without
replacing such policy with substantially comparable coverage;
(xvii) enter into any Derivative Transactions other than in the ordinary course of
business and in a manner consistent with and in compliance with hedging policies and procedures
Exhibit No. 3
Case Nos. AVU-E-I7-_ / AVU-G-17-_
M. Thies, Avista
o
#5501 530. I 2
23
Schedule 3, Page 27 ot 70
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existing as of the date hereof, or materially change any of its energy price or interest rate risk
management guidelines;
(xviii) enter into any new material line of business;
(xix) take any action that would reasonably be expected to prevent or materially
impede, interfere with or delay the consummation by the Company of the Transactions; or
(xx) agree in writing to take any of the foregoing actions.
(b) During the period from the date of this Agreement until the Effective Time, Parent,
US Parent and Merger Sub shall not, and Parent shall cause its Subsidiaries not to, take any action that
would reasonably be expected to prevent or materially impede, interfere with, or delay the consummation
by Parent, US Parent or Merger Sub of the Transactions.
(c) Notwithstanding anything to the contrary herein, the Company may, and may
cause any of its Subsidiaries to, take reasonable actions in compliance with applicable Law with respect to
any operational emergencies (including any restoration measures in response to any act of terrorism,
hurricane, tomado, tsunami, flood, earthquake or other natural disaster or weather-related event,
circumstance or development), equipment failures, outages or threat to the environment or the health or
safety of natural Persons.
(d) Between the date of this Agreement and the Effective Time, the Company and its
Subsidiaries (i) shall continue to make Regulatory Filings in the ordinary course of business consistent with
past practice, including those filings described in Section 5.1(d) of the Company Disclosure Schedule, (ii)
may respond (after reasonable consultation with Parent) to Regulatory Filings made by other parties in
which the Company or one or more of its Subsidiaries is an interested party, and (iii) may take any other
action contemplated by or described in any such state or federal filings or other submissions filed or
submitted in connection with Regulatory Filings in the ordinary course of business; provided. however.
that, without in any way limiting the rights of the Company and its Subsidiaries set forth in the foregoing
clauses (i), (ii) or (iii) of this Section 5.1(d), the Company shall (A) keep Parent promptly informed of any
material communications or meetings with any Governmental Authority with respect to rate cases and shall
provide copies of any written communications or materials submitted to or received from any Govemmental
Authority in connection therewith, (B) consult with Parent and give Parent a reasonable opportunity, within
the time constraints imposed in such rate cases, to comment on material written communications or
materials submitted to any Governmental Authority, in each case with respect to any rate cases, which the
Company shall consider in good faith, and (C) at the request of Parent, provide Parent a reasonable
opportunity to participate in any material meeting or communications related thereto. Parent shall have the
opportunity to review and comment on all economic aspects of any rate case filing and shall have the right
to approve (which approval shall not be unreasonably withheld, conditioned or delayed) any settlement of
any rate case and rate case filing insofar as it would reasonably be expected to result in an outcome for the
Surviving Corporation or any of its Subsidiaries that would be materially adverse to the Surviving
Corporation or any of its Subsidiaries after the Effective Time, taking into account the requests made by
the Company to the applicable Governmental Authority in connection with such rate case and the resolution
of similar recent rate cases by the Company.
Section 5.2 Prenaration of the Proxv Statement; Shareholders Meetins.
(a) As promptly as reasonably practicable following the date of this Agreement, but
in any event within sixty (60) days, the Company shall prepare and file with the SEC the preliminary Proxy
Exhibit No. 3
Case Nos. AVU-E-17-_ /AVU-G-'|7-_
M. Thies, Avista
Schedule 3, Page 28 ot 70
o
#5501530 I2
24
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Statement, and Parent shall cooperate with the Company in the preparation of the foregoing. The Company,
with Parent's cooperation, shall use commercially reasonable efforts to respond as promptly as reasonably
practicable to and resolve all comments received from the SEC or its staff conceming the Proxy Statement.
The Company agrees that (i) except with respect to any information supplied in writing to the Company by
Parent, US Parent or Merger Sub for inclusion or incorporation by reference in the Proxy Statement, the
Proxy Statement will comply in all material respects with the applicable provisions of the Exchange Act
and the rules and regulations thereunder and (ii) none of the information supplied or to be supplied by the
Company for inclusion or incorporation by reference in the Proxy Statement will, on the date it is first
mailed to shareholders of the Company and at the time of the Company Shareholders Meeting, contain any
untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under which they were made, not
misleading. The Company will cause the definitive Proxy Statement to be mailed to the Company's
shareholders, as promptly as reasonably practicable after the SEC confirms that it has no further comments
on the Proxy Statement. No filing of, or amendment or supplement to, or correspondence with the SEC
with respect to, the Proxy Statement will be made by the Company without providing Parent a reasonable
opportunity to review and comment thereon; provided. however, that the foregoing shall not apply with
respect to a Takeover Proposal, a Superior Proposal, a Company Adverse Recommendation Change or any
matters relating thereto. Each of Parent, US Parent and Merger Sub shall cooperate with the Company in
connection with the preparation and filing of the Proxy Statement, including promptly fumishing to the
Company in writing upon request any and all information relating to it as may be required to be set forth in
the Proxy Statement under applicable Law. Each of the Parent, US Parent and Merger Sub agrees that such
information supplied by it in writing for inclusion (or incorporation by reference) in the Proxy Statement
will not, on the date it is first mailed to shareholders of the Company and at the time of the Company
Shareholders Meeting, contain any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. IC at any time prior to the Effective Time,
any information relating to Parent, US Parent or Merger Sub or any of their respective Affiliates, officers
or directors, should be discovered by Parent, US Parent or Merger Sub which should be set forth in an
amendment or supplement to the Proxy Statement so that the Proxy Statement would not include any
misstatement of a material fact or omit to state any material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, Parent (or US Parent or Merger
Sub, as the case may be) shall promptly notiff the Company so that the Company may file with the SEC
an appropriate amendment or supplement describing such information and, to the extent required by Law,
disseminate such amendment or supplement to the shareholders of the Company. If, at any time prior to the
Effective Time, any information relating to the Company or any of its respective Affiliates, officers or
directors should be discovered by the Company which should be set forth in an amendment or supplement
to the Proxy Statement so that the Proxy Statement would not include any misstatement of a material fact
or omit to state any material fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, the Company shall promptly notiff Parent and the Company
shall file with the SEC an appropriate amendment or supplement describing such information and, to the
extent required by Law, disseminate such amendment or supplement to the shareholders of the Company.
(b) The Company shall, as promptly as reasonably practicable after the date of the
mailing of the definitive Proxy Statement to the Company's shareholders, in accordance with applicable
Law, the Company Charter Documents and the NYSE rules, duly give notice of, convene and hold a
meeting of its shareholders to consider the approval of this Agreement and the plan of merger set forth
herein and such other matters as may then be reasonably required (including any adjournment or
postponement thereof, the "Company Sharehold "); gevrd.gd, however, that the Company shall
be permitted to delay or postpone convening the Company Shareholders Meeting (i) with the consent of
Parent, (ii) for the absence of a quorum, (iii) to allow reasonable additional time for any supplemental or
25
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 29 o't70
o
#550r 530. l 2
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amended disclosure which the Company has determined in good faith (after consultation with outside legal
counsel) is necessary under applicable Law and for such supplemental or amended disclosure to be
disseminated and reviewed by the Company's shareholders prior to the Company Shareholders Meeting as
necessary under applicable Law or (iv) to allow additional solicitation of votes in order to obtain the
Company Shareholder Approval. Except if there has been a Company Adverse Recommendation Change
in accordance with Section 5.3(d), the Company shall use its reasonable best efforts to solicit and secure
the Company Shareholder Approval.
(c) Unless and until there has been a Company Adverse Recommendation Change in
accordance with Section 5.3, the Company shall include the Company Board Recommendation in the Proxy
Statement.
Section 5.3 No Solicitation: Change in Recommendation.
(a) The Company agrees that it shall, and shall cause its Subsidiaries and its and its
Subsidiaries respective directors, officers and employees to, and shall use its reasonable best efforts to cause
its other Representatives to, immediately cease all existing discussions or negotiations with any Person
conducted heretofore with respect to any Takeover Proposal. Except as otherwise provided in this
Agreement, from the date of this Agreement until the earlier of the Effective Time or the date, if any, on
which this Agreement is terminated pursuant to Section 7.1, the Company shall not, and shall cause its
Subsidiaries and its and its Subsidiaries respective directors, officers and employees not to, and shall use
its reasonable best efforts to cause its other Representatives not to, directly or indirectly, (i) solicit, initiate,
knowingly encourage or knowingly facilitate any Takeover Proposal or the making or consummation
thereof or (ii) enter into, or otherwise participate in any discussions (except to notiff such Person of the
existence of the provisions of this Section 5.3) or negotiations regarding, or furnish to any Person any
material non-public information in connection with, any Takeover Proposal.
(b) Notwithstanding anything to the contrary contained in this Agreement, if the
Company or any of its Subsidiaries, or any of its or their respective Representatives, receives an unsolicited
written Takeover Proposal made after the date of this Agreement and prior to the receipt of the Company
Shareholder Approval, the Company, the Company Board (or a duly authorized committee thereof) and the
Company's Representatives may engage in negotiations and discussions with, or furnish any information
and other access to, any Person making such Takeover Proposal and any ofits Representatives or potential
sources of financing if the Company Board determines in good faith, after consultation with the Company's
outside legal and financial advisors, that such Takeover Proposal is or could reasonably be expected to lead
to a Superior Proposal and that failure to take such actions would reasonably be expected to be inconsistent
with its fiduciary duties under applicable Law; provided that prior to engaging in any negotiations or
discussions with, or fumishing any material non-public information to, any such Person or its
Representatives, the Company and the Person making such Takeover Proposal shall have entered into an
Acceptable Confidentiality Agreement. The Company will promptly (and in any event within the later of
twenty-four (24) hours and 5:00 p.m. Pacific time on the next Business Day) noti! Parent in writing of the
receipt of such Takeover Proposal and the material terms and conditions of such Takeover Proposal,
including the identity of the Person making such Takeover Proposal. The Company will keep Parent
promptly informed in all material respects (and in any event within the later of twenty-four (24) hours and
5:00 p.m. Pacific time on the next Business Day) of material communications relating to such Takeover
Proposal (including any change in the price or other material terms thereof). The Company shall not
terminate, amend, modifr, waive or fail to enforce any provision of any "standstill" or similar obligation of
any Person unless the Company Board (or a duly authorized committee thereof) determines in good faith,
after consultation with its outside legal counsel, that the failure to take such action would reasonably be
expected to be inconsistent with its fiduciary duties under applicable Law.
26
Exhibit No. 3
Case Nos. AVU-E-'|7-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 3, Page 30 of70
o
#5501 530 I 2
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o
(c) Except as otherwise provided in this Agreement, neither the Company Board nor
any committee thereof shall (i)(A) withdraw, change, qualiff, withhold or modiff in a manner adverse to
Parent, or publicly propose to withdraw, change, qualiSr, withhold or modif, in a manner adverse to Parent,
the Company Board Recommendation, (B) adopt, approve or recommend, or publicly propose to adopt,
approve or recommend, any Takeover Proposal, (C) fail to include the Company Board Recommendation
in the Proxy Statement or (D) in the event a tender offer that constitutes a Takeover Proposal subject to
Regulation 14D under the Exchange Act is commenced, fail to recommend against such Takeover Proposal
in any solicitation or recommendation statement made on Schedule l4D-9 within ten (10) Business Days
after Parent so requests reaffirmation in writing (ry(g!that Parent shall be entitled to make such a written
request for reaffirmation only once for each Takeover Proposal and once for each material amendment to
such Takeover Proposal) (any action described in this clause (i) being referred to herein as a "Eompl4y
Adverse Recommendation Change") or (ii) cause or permit the Company or any of its Affiliates to execute
or enter into, any letter of intent, memorandum of understanding, agreement in principle, agreement or
commitment (other than an Acceptable Confidentiality Agreement) constituting, or that would reasonably
beexpectedtoleadtoaTakeoverProposal(a..@,,).
(d) Notwithstanding anything to the contrary in this Agreement:
(i) at any time prior to obtaining the Company Shareholder Approval, if the
Company has received a Superior Proposal other than as a result of a breach of this Section 5.3
(other than an immaterial breach), the Company Board (or a duly authorized committee thereof)
may make a Company Adverse Recommendation Change and, solely with respect to a Superior
Proposal, terminate this Agreement pursuant to Section 7.1(dXii), if (A) the Company Board (or a
duly authorized committee thereof) determines in good faith, after consultation with its outside
legal counsel, that the failure to make a Company Adverse Recommendation Change in response
to the receipt of such Superior Proposal would reasonably be expected to be inconsistent with its
fiduciary duties under applicable Law and (B) ( I ) the Company provides Parent prior written notice
of its intent to make a Company Adverse Recommendation Change and terminate this Agreement
pursuant to Section 7.1(dXii) at least four (4) Business Days prior to taking such action to the effect
that, absent any modification to the terms and conditions of this Agreement, the Company Board
has resolved to effect a Company Adverse Recommendation Change and to terminate this
Agreement pursuant to Section 7.1(d)(ii), which notice shall specify the basis for such Company
Adverse Recommendation Change and attach the most current draft of any Company Acquisition
Agreement with respect to the Superior Proposal (or, if no such draft exists, a written summary of
the material terms and conditions of such Superior Proposal) (a "Notice of Superio
Recommendation Change") (it being understood that such Notice of Superior Proposal
Recommendation Change shall not in itself be deemed a Company Adverse Recommendation
Change and that any change in price or material revision or amendment to the terms of such
Superior Proposal shall require a new notice to which the provisions of clauses (B)(l), (2) and (3)
of this Section 5.3(d)(i) shall apply mutqtis mutandis except that, in the case of such a new notice,
all references to four (4) Business Days in this Section 5.3(d)(.i) shall be deemed to be three (3)
Business Days); (2) during such four (4) Business Day period following Parent's receipt of the
Notice of Superior Proposal Recommendation Change, if requested by Parent, the Company shall
make its Representatives reasonably available to negotiate in good faith with Parent and its
Representatives regarding any modifications to the terms and conditions of this Agreement that
Parent proposes to make; and (3) at the end of such four (4) Business Day period and taking into
account any modifications to the terms of this Agreement proposed by Parent to the Company in a
written, binding and irrevocable offer, the Company Board determines in good faith (after
consultation with outside legal counsel) that the failure to make such a Company Adverse
27
#5501530 I2 Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 31 of70
o
o
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Recommendation Change would reasonably be expected to be inconsistent with its fiduciary duties
under applicable Law and that such Takeover Proposal still constitutes a Superior Proposal; and
(ii) at any time prior to obtaining the Company Shareholder Approval, the
Company Board (or a duly authorized committee thereof) may make a Company Adverse
Recommendation Change in response to the occurrence of a Company Intervening Event if (A) the
Company Board (or a duly authorized committee thereo{) determines in good faith, after
consultation with its outside legal counsel, that the failure to make a Company Adverse
Recommendation Change as a result of the occurrence of such Company Intervening Event would
reasonably be expected to be inconsistent with its fiduciary duties under applicable Law and (B)
(l) the Company provides Parent prior written notice of its intent to make a Company Adverse
Recommendation Change at least four (4) Business Days prior to taking such action to the effect
that, absent any modification to the terms and conditions of this Agreement, the Company Board
has resolved to effect a Company Adverse Recommendation Change, which notice shall describe
in reasonable detail the Company Intervening Event that is the basis for such Company Adverse
Recommendation Change (a "Notice of Interven ") (it being
understood that such Notice of Intervening Event Recommendation Change shall not in itself be
deemed a Company Adverse Recommendation Change); (2) during such four (4) Business Day
period following Parent's receipt of the Notice of Intervening Event Recommendation Change, if
requested by Parent, the Company shall make its Representatives reasonably available to negotiate
in good faith with Parent and its Representatives regarding any modifications to the terms and
conditions of this Agreement that Parent proposes to make; and (3) at the end of such four (4)
Business Day period and taking into account any modifications to the terms of this Agreement
proposed by Parent to the Company in a written, binding and irrevocable offer, the Company Board
determines in good faith (after consultation with outside legal counsel) that the failure to make such
a Company Adverse Recommendation Change would reasonably be expected to be inconsistent
with its fiduciary duties under applicable Law.
(e) Nothing contained in this Agreement shall prohibit the Company or the Company
Board (or a duly authorized committee thereof) from (i) taking and disclosing to the shareholders of the
Company a position contemplated by Rule 14e-2(a) under the Exchange Act or making a statement
contemplated by Item 1012(a) of Regulation M-A or Rule 14d-9 under the Exchange Act, (ii) making any
disclosure to the shareholders of the Company if the Company Board (or a duly authorized committee
thereof) determines in good faith, after consultation with its outside legal counsel, that the failure to make
such disclosure would be reasonably likely to be inconsistent with applicable Law, (iii) informing any
Person of the existence of the provisions contained in this Section 5.3 or (iv) making any "stop,look and
listen" communication to the shareholders of the Company pursuant to Rule 14d-9(f) under the Exchange
Act (or any similar communication to the shareholders of the Company). No disclosures under this Section
5.3(e) shall be, in themselves, a breach of Section 5.3 or a basis for Parent to terminate this Agreement
pursuant to Article VIl.
(f) As used in this Agreement, "Takeover Proposal" shall mean any bonafide inquiry,
proposal or offer from any Person (other than Parent, US Parent, Merger Sub or any of their respective
Affiliates) to purchase or otherwise acquire, directly or indirectly, in a single transaction or series of related
transactions, (i) assets of the Company and its Subsidiaries (including securities of Subsidiaries) that
account for 15o/, or more of the Company's consolidated assets or from which 15o/o or more of the
Company's revenues or earnings on a consolidated basis are derived or (ii) 15% or more of the outstanding
Company Common Stock pursuant to a merger, consolidation or other business combination, sale or
issuance of shares of capital stock, tender offer, share exchange, recapitalization or similar transaction
involving the Company, in each case other than the Merger;
28
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 32o170
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#5501530 I2
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(g) As used in this Agreement, "S-up.erior Ppp.q,sal" shall mean any unsolicited written
Takeover Proposal on terms which the Company Board (or a duly authorized committee thereof) determines
in good faith, after consultation with the Company's outside legal counsel and independent financial
advisors, to be more favorable to the holders of Company Common Stock than the Transactions (as may be
revised pursuant to Section 5.3(dXi)), taking into account, to the extent applicable, the legal, financial,
regulatory and other aspects of such proposal and this Agreement that the Company Board considers
relevant, including the prospects for receipt of any required regulatory approvals and taking into account
the agreements set forth in Section 1.6(a), Section 1.7 and Exhibit B attached hereto with respect to the
Transactions; provided that for purposes ofthe definition of Superior Proposal, the references to "l 57r" in
the definition of Takeover Proposal shall be deemed to be references to "50ol0."
Section 5.4 Reasonable Best Efforts.
(a) Subject to the terms and conditions of this Agreement, each of the Company,
Parent, US Parent and Merger Sub shall use its respective reasonable best efforts to (i) cause the
Transactions to be consummated as soon as practicable, (ii) make promptly any required submissions and
filings under applicable Antitrust Laws or to Governmental Authorities with respect to the Transactions,
(iii) promptly furnish information required in connection with such submissions and filings to such
Govemmental Authorities or under such Antitrust Laws, (iv) keep the other parties reasonably informed
with respect to the status of any such submissions and filings to such Governmental Authorities or under
Antitrust Laws, including with respect to: (A) the receipt of any non-action, action, clearance, consent,
approval or waiver, (B) the expiration or termination of any waiting period, (C) the commencement or
proposed or threatened commencement of any investigation, litigation or administrative or judicial action
or proceeding under Antitrust Laws or other applicable Laws, and (D) the nature and status of any objections
raised or proposed or threatened to be raised under Antitrust Laws or other applicable Laws with respect to
the Transactions and (v) obtain all actions or non-actions, clearances, approvals, consents, waivers,
registrations, permits, authorizations and other confirmations from any Govemmental Authority (including
the Regulatory Approvals) necessary to consummate the Transactions as soon as practicable. For purposes
hereof, "Antitrust Laws" means the Sherman Act, the Clayton Act, the HSR Act, the Federal Trade
Commission Act, and all applicable foreign Antitrust Laws and all other applicable Laws issued by a
Governmental Authority that are designed or intended to prohibit, restrict or regulate actions having the
purpose or effect of monopolization or restraint of trade or lessening of competition through merger or
acquisition.
(b) In furtherance and not in limitation of the foregoing: (i) each parfy hereto agrees
to (A) make an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect
to the Transactions as promptly as reasonably practicable following the date of this Agreement, (B) fumish
as soon as practicable any additional information and documentary material that may be required or
requested pursuant to the HSR Act and (C) use its reasonable best efforts to take, or cause to be taken, all
other actions consistent with this Section 5.4 necessary to cause the expiration or termination of the
applicable waiting periods under the HSR Act (including any extensions thereof) as soon as practicable and
(ii) each party hereto agrees to (A) make or cause to be made the appropriate filings as soon as practicable
with CFIUS, FCC, FERC, IPUC, MPSC, OPUC, RCA, and WUTC relating to the Merger, (B) supply as
soon as practicable any additional information and documentary material that may be required or requested
by CFIUS, FCC, FERC, IPUC, MPSC, OPUC, RCA, and WUTC, as applicable, in connection with the
Regulatory Approvals and (C) use its reasonable best efforts to take or cause to be taken all other actions
consistent with this Section 5.4 as necessary to obtain any necessary approvals, clearances, consents,
waivers, registrations, permits, authorizations, confirmations or other actions or non-actions from CFIUS,
FCC, FERC, IPUC, MPSC, OPUC, RCA, and WUTC, as applicable, in connection with the Regulatory
Approvals as soon as practicable.
29
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
#5501 530. I 2
Schedule 3, Page 33 of 70
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(c) The Company, Parent, US Parent and Merger Sub shall, subject to applicable Law
relating to the exchange of information: (i) promptly notify the other parties hereto of (and if in writing,
furnish the other parties with copies of) any communication to such Person from a Governmental Authority
regarding the filings and submissions described in Section 5.4(a) and permit the others to review and discuss
in advance (and to consider in good faith any comments made by the others in relation to) any proposed
written response to any communication from a Governmental Authority regarding the filings and
submissions described in Section 5.4(a), (ii) keep the others reasonably informed of any developments,
meetings or discussions with any Governmental Authority in respect of any filings, investigations, or
inquiries conceming the Transactions and (iii) not independently participate in any meeting or discussions
with a Govemmental Authority in respect of any filings, investigations or inquiries conceming the
Transactions without giving the other party or parties hereto prior notice of such meeting or discussions
and, unless prohibited by such Governmental Authority, the opportunity to attend or participate; provided,
that the Company, Parent, US Parent and Merger Sub shall be permitted to redact any correspondence,
filing, submission or communication prior to fumishing it to the other party or parties hereto to the extent
such correspondence, filing, submission or communication contains competitively or commercially
sensitive information, including information relating to the valuation of the Transactions.
(d) In furtherance and not in limitation of the foregoing, but subject to the other terms
and conditions of this Section 5.4, Parent, US Parent and Merger Sub agree to take promptly any and all
steps necessary to avoid, eliminate or resolve each and every impediment and obtain all clearances,
consents, approvals and waivers under Antitrust Laws or other applicable Laws that may be required by
any Govemmental Authority (including any Regulatory Approvals), so as to enable the parties to close the
Transactions as soon as practicable (and in any event no later than three (3) Business Days prior to the End
Date), including committing to and effecting, by consent decree, hold separate orders, trust, or otherwise,
(i) the sale, license, holding separate or other disposition of assets or businesses of Parent or the Company
or any of their respective Subsidiaries, (ii) terminating, relinquishing, modiffing, or waiving existing
relationships, ventures, contractual rights, obligations or other arrangements of Parent or the Company or
their respective Subsidiaries and (iii) creating any relationships, ventures, contractual rights, obligations or
other arrangements of Parent or the Company or their respective Subsidiaries (each a "B.ern-gdiAl_Ae1i.qn");
provided, however, that any Remedial Action may, at the discretion of the Company or Parent, be
conditioned upon consummation of the Transactions.
(e) In furtherance and not in limitation of the foregoing, but subject to the other terms
and conditions of this Section 5.4, in the event that any litigation or other administrative or judicial action
or proceeding is commenced, threatened or is reasonably foreseeable challenging any ofthe Transactions
and such litigation, action or proceeding seeks, or would reasonably be expected to seek, to prevent,
materially impede or materially delay the consummation of the Transactions, Parent shall take or cause to
be taken any and all action, including a Remedial Action, to avoid or resolve any such litigation, action or
proceeding as promptly as practicable (and in any event shall commence such action no later than three (3)
Business Days prior to the End Date). In addition, each of the Company, Parent, US Parent and Merger
Sub shall cooperate with each other and use its respective reasonable best efforts to contest, defend and
resist any such litigation, action or proceeding and to have vacated, lifted, reversed or overturned any
Judgment, whether temporary, preliminary or perrnanent, that is in effect and that prohibits, prevents,
delays, interferes with or restricts consummation of the Transactions as promptly as practicable and in any
event no later than three (3) Business Days prior to the End Date.
(D From the date hereof until the earlier of the Effective Time and the date this
Agreement is terminated pursuant to Article VII, neither Parent, US Parent nor Merger Sub shall, nor shall
they permit their respective Subsidiaries to, acquire or agree to acquire any rights, assets, business, Person
or division thereof (through acquisition, license, joint venture, collaboration or otherwise), if such
30
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 34 of70
O
#5501 530. I 2
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acquisition would reasonably be expected to materially increase the risk of not obtaining any applicable
clearance, consent, approval or waiver under Antitrust Laws or other applicable Laws (including any
Regulatory Approvals) with respect to the Transactions, or would reasonably be expected to prevent or
prohibit, or materially impede, interfere with or delay, obtaining any applicable clearance, consent, approval
or waiver under Antitrust Laws or other applicable Laws (including any Regulatory Approvals) with respect
to the Transactions.
(g) Notwithstanding the obligations set forth in this Agreement, Parent and its
Affiliates shall not be required to, in connection with obtaining any actions or non-actions, clearances,
approvals, consents, waivers, registrations, permits, authorizations and other confirmations from any
Govemmental Authority (including the Regulatory Approvals) in connection with this Agreement or the
Transactions, offer or accept, or agree, commit to agree or consent to, any undertaking, term, condition,
liability, obligation, commitment or sanction (including any Remedial Action), that constitutes a
Burdensome Condition. The Company shall not, and shall not permit any of its Subsidiaries to, in
connection with obtaining any actions or non-actions, clearances, approvals, consents, waivers,
registrations, permits, authorizations and other confirmations from any Govemmental Authority (including
the Regulatory Approvals) in connection with this Agreement or the Transactions, (x) offer to agree to any
undertaking, term, condition, liability, obligation, commitment or sanction (including any Remedial Action)
that would reasonably be expected to be material and adverse to Parent's ability to obtain the Regulatory
Approvals on substantially the terms that Parent reasonably expects, or (y) accept, or agree, commit to agree
or consent to, any undertaking, term, condition, liability, obligation, commitment or sanction (including
any Remedial Action); provided, however, the Company and its Subsidiaries shall take any Remedial
Action requested by Parent if such Remedial Action is conditioned upon the consummation of the
Transactions, it being understood that the foregoing limitations on the Company and its Subsidiaries shall
not in any manner impact the obligations of Parent, US Parent or Merger Sub pursuant to this Section 5.4.
(h) Parent shall promptly notiff the Company and the Company shall notifr Parent of
any notice or other communication from any Governmental Authority alleging that such Governmental
Authority's consent is or may be required in connection with or as a condition of the Merger.
Section 5.5 Public Announcements. The initial press release with respect to the execution of
this Agreement shall be a joint press release to be reasonably agreed upon by Parent and the Company.
Following such initial press release, Parent and the Company shall consult with each other before issuing,
and shall give each other the opportunity to review and comment upon, any press release or other public
statement with respect to the Transactions (to the extent it contains information that is different than what
is contained in the initial press release) and shall not issue any such press release or make any such public
statement prior to such consultation, except as such party may reasonably conclude may be required by
applicable Law, court process or by obligations pursuant to any listing agreement with, or requirement of,
any applicable securities exchange or securities quotation system (which shall include the NYSE in the case
of the Company and the TSX in the case of Parent in respect of the obligations of Parent to such exchange)
(and then only after as much advance notice and consultation as is feasible); provided. however, that the
restrictions set forth in this Section 5.5 shall not apply to any release or public statement (a) made or
proposed to be made by the Company in connection with a Takeover Proposal, a Superior Proposal or a
Company Adverse Recommendation Change or any action taken pursuant thereto, (b) in connection with
any dispute between the parties regarding this Agreement or the Transactions or (c) that is not inconsistent
in any material respects with any prior public disclosures regarding the Transactions.
3l
#5501 530. I 2 Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 35 of70
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Section 5.6 Access to Information: Confidentialitv.
(a) Subject to applicable Laws relating to the exchange of information, from the date
hereof until the earlier of the Effective Time or the date on which this Agreement is terminated pursuant to
Section 7. l, the Company shall afford to Parent and its Representatives reasonable access (at Parent's sole
cost and expense) during normal business hours and upon reasonable advance notice to the Company's
properties (but excluding for the conduct of Phase II environmental assessments or testing), employees,
books, Contracts and records and the Company shall fumish as promptly as reasonably practicable to Parent
such information conceming its business, properties, contracts, assets and liabilities of the Company as
Parent may reasonably request (other than any publicly available document filed by the Company and its
Subsidiaries pursuant to the requirements of federal or state securities Laws); provided that Parent and its
Representatives shall conduct any such activities in such a manner as not to unreasonably interfere with the
business or operations of the Company and its Subsidiaries or Company Joint Ventures; provided. further,
(D that the Company shall not be obligated to provide such access or information if the Company
determines, in its reasonable judgment, that doing so would violate applicable Law or a Contract or
obligation of confidentiality owing to a third party, jeopardize the protection of the attomey-client privilege,
or expose such party to risk of liability for disclosure of sensitive or personal information and (ii) the
conduct of such activities shall be subject to the rights and obligations of the Company referred to in the
final proviso of the final sentence of Section 5.4(c) hereof. Until the Effective Time, the information
provided will be subject to the terms of the confidentiality agreement, dated as of May 31,2017 between
Parent and the Company (as it may be amended from time to time, the "Confidentiali8 Ag "), and,
without limiting the generality of the foregoing, Parent and Company shall not, and Parent and Company
shall cause their respective Representatives not to, use such information for any purpose unrelated to the
consummation of the Transactions.
(b) If this Agreement is terminated pursuant to Section 7.1. the Confidentiality
Agreement shall automatically be deemed to be amended and restated such that (i) the "Standstill Period"
for all purposes of the Confidentiality Agreement shall be the period of eighteen (18) months from the date
of such termination, as if the parties hereto had never entered into this Agreement, and (ii) the other
provisions of the Confidentiality Agreement shall remain in force and effect for a period of two (2) years
after such termination, as if the parties hereto had never entered into this Agreement.
Section 5.7 Takeover Laws. If any Takeover Statute becomes applicable to the Transactions,
the Company and the Company Board will use its reasonable best efforts to ensure that the Transactions
may be consummated as promptly as practicable on the terms contemplated by this Agreement and
otherwise to minimize the effect of such statute or regulation on the Transactions.
Section 5.8 Indemnification and Insurance.
(a) From and after the Effective Time, Parent shall, and shall cause the Surviving
Corporation to, (i) indemnifu, defend and hold harmless each current and former director, officer and
employee of the Company and any of its Subsidiaries and each person who served as a director, officer,
member, trustee or fiduciary of another corporation, partnership, joint venture, trust, pension or other
employee benefit plan or enterprise if such service was at the request or for the benefit of the Company or
any of its Subsidiaries (each, an "I[denqnile.e" and, collectively, the "Indemnitees") against all claims,
liabilities, losses, damages, judgments, fines, penalties, costs (including amounts paid in settlement or
compromise) and expenses (including fees and expenses of legal counsel) in connection with any actual or
threatened claim, suit, action, proceeding or investigation (whether civil, criminal, administrative or
investigative) (each, a "Claim"), whenever asserted, arising out of, relating to or in connection with any
action or omission relating to their position with the Company or its Subsidiaries occurring or alleged to
32
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 36 of 70
o
#5501530 12
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have occurred before or at the Effective Time (including any Claim relating in whole or in part to this
Agreement or the Transactions), to the fullest extent permitted under applicable Law and (ii) assume all
obligations of the Company and its Subsidiaries to the Indemnitees in respect of limitation of liability,
exculpation, indemnification and advancement of expenses as provided in (A) the Company Charter
Documents and the respective organizational documents of each of the Company's Subsidiaries as currently
in effect and (B) any indemnification agreements with an Indemnitee (but only to the extent such
indemnification agreement was made available to Parent prior to the date hereof or entered into after the
date hereof in compliance with Section 5.1(a)), which shall in each case survive the Transactions and
continue in full force and effect to the extent permitted by applicable Law. Without limiting the foregoing,
at the Effective Time, the Surviving Corporation shall, and Parent shall, and shall cause the Surviving
Corporation to, cause the articles of incorporation and bylaws of the Surviving Corporation to include
provisions for limitation of liabilities of directors and officers, indemnification, advancement of expenses
and exculpation of the Indemnitees no less favorable to the Indemnitees than as set forth in the Company
Charter Documents in effect on the date ofthis Agreement, which provisions shall not be amended, repealed
or otherwise modified in a manner that would adversely affect the rights thereunder of the Indemnitees
except as required by applicable Law.
(b) From and after the Effective Time, Parent shall, and shall cause the Surviving
Corporation to, pay and advance to an Indemnitee any expenses (including fees and expenses of legal
counsel) in connection with any Claim relating to any acts or omissions covered under this Section 5.8 or
the enforcement of an Indemnitee's rights under this Section 5.8 as and when incurred to the fullest extent
permitted under applicable Law, provided that the Indemnitee to whom expenses are advanced provides an
undertaking to repay such expenses if it is ultimately determined by a court of competent jurisdiction that
such Indemnitee is not entitled to indemnification for such matter (but only to the extent such repayment is
required by applicable Law, the Company Charter Documents, the applicable organizational documents of
any Subsidiary of the Company or applicable indemnification agreements).
(c) For a period of six (6) years from the Effective Time, Parent shall cause to be
maintained in effect coverage no less favorable than the coverage provided by the policies ofdirectors' and
officers' liability insurance and fiduciary liability insurance in effect as of the date hereof maintained by
the Company and its Subsidiaries with respect to matters arising on or before the Effective Time either
through the Company's existing insurance provider or another provider reasonably selected by Parent;
ry!1!ed, hW,L that, after the Effective Time, none of Parent, US Parent or the Surviving Corporation
shall be required to pay annual premiums in excess of 300%o of the annual premium currently paid by the
Company in respect ofthe coverages required to be obtained pursuant hereto, but in such case shall purchase
as much coverage as reasonably practicable for such amount; plgvidgd, further, that in lieu of the foregoing
insurance coverage, the Company may purchase "tail" insurance coverage, at a cost no greater than the
aggregate amount which Parent, US Parent or the Surviving Corporation would be required to spend during
the six-year period provided for in this Section 5.8(.c), that provides coverage no less favorable than the
coverage described above to the insured persons than the directors' and officers' liability insurance and
fiduciary liability insurance coverage currently maintained by the Company and its Subsidiaries as of the
date hereof with respect to matters arising on or before the Effective Time.
(d) The provisions of this Section 5.8 are (i) intended to be for the benefit of; and shall
be enforceable by, each Indemnitee, his or her heirs and his or her representatives from and after the
Effective Time, and (ii) in addition to, and not in substitution for or limitation of, any other rights to
indemnification or contribution that any such Person may have by contract or otherwise. The obligations
of Parent, US Parent and the Surviving Corporation under this Section 5.8 shall not be terminated or
modified in such a manner as to adversely affect the rights of any Indemnitee to whom this Section 5.8
applies unless (A) such termination or modification is required by applicable Law or (B) the affected
aa-l -,
#ssOl 530. I 2 Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 37 of 70
o
o
o
Indemnitee shall have consented in writing to such termination or modification (it being expressly agreed
that the Indemnitees to whom this Section 5.8 applies shall be third party beneficiaries of this Section 5.8).
(e) In the event that Parent, US Parent, the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any other Person and is not the
continuing or surviving corporation or entity ofsuch consolidation or merger or (ii) transfers or conveys all
or substantially all ofits properties and assets to any Person, then, and in each such case, proper provision
shall be made so that the successors and assigns of Parent, US Parent and the Surviving Corporation shall
assume all of the obligations thereof set forth in this Section 5.8.
Section 5.9 Transaction Litisation. Each of Parent and the Company shall notiff the other
promptly of the commencement of any shareholder litigation relating to this Agreement or the Transactions
of which it has received notice ("TranSg9lion_Lj1lsation"), and provide the other copies of any complaints
and pleadings filed in connection therewith (to the extent the other is not a named party thereto). The
Company shall give Parent the opportunity to participate in, but not control, and shall reasonably consult
with Parent with respect to, the defense or settlement of any Transaction Litigation, and no settlement of
any Transaction Litigation shall be agreed to by the Company without Parent's prior written consent, such
consent not to be unreasonably withheld, conditioned or delayed.
Section 5.10 Section 16. Prior to the Effective Time, each of the Company, Parent, US Parent
and Merger Sub shall take all such steps reasonably necessary to cause any dispositions of Company
Common Stock (including derivative securities with respect to Company Common Stock) directly resulting
from the Merger by each individual who will be subject to the reporting requirements of Section l6(a) of
the Exchange Act with respect to the Company immediately prior to the Effective Time to be exempt under
Rule 16b-3 promulgated under the Exchange Act.
Section 5.11 Emplovee Matters.
(a) For a period of three (3) years following the Effective Time (the "C,enlinualion
Period"), Parent or its Subsidiaries shall provide, or shall cause to be provided, to each individual who is
employed by the Company or any of its Subsidiaries (including the Surviving Corporation and its
Subsidiaries) immediately prior to the Effective Time (each, a "Company Employee"), annual base salary
or hourly rate, as applicable, annual cash bonus and long-term incentive compensation opportunities
(including target bonus amounts that are payable subject to the satisfaction ofperfornance criteria in effect
immediately prior to the Effective Time) and employee benefits, in each case, that are no less favorable
than such annual base salary and base wages, annual cash bonus and long-term incentive compensation
opportunities and employee benefits provided to such Company Employee, in the aggregate, immediately
prior to the Effective Time, for the period of time during the Continuation Period in which each such
Continuing Employee is employed by the Company or an Affiliate of the Company. Notwithstanding the
foregoing, with respect to equity based long-term incentive compensation, Parent or its Subsidiaries may
provide equity based long-term incentive compensation to the Company Employees in accordance with
(and in a manner no less favorable than) its incentive objectives with respect to Parent's and its Subsidiaries'
employees, and any such equity based long-term incentive compensation shall be included in determining
whether the long-term incentive compensation opportunities set forth above have been provided as required.
(b) For all purposes (including purposes of vesting, eligibility to participate and level
of benefits but not for purposes of defined benefit pension accrual) under the employee benefit plans of
Parent and its Subsidiaries providing benefits to any Company Employee after the Effective Time
(including the Company Plans) (the "New Plans"), each Company Employee shall be credited with his or
her years of service with the Company and its Subsidiaries and their respective predecessors before the
34
Exhibit No. 3
Case Nos. AVU-E-'| 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 38 of 70
o
#5501 530 I 2
o
o
Effective Time, to the same extent as such Company Employee was entitled, before the Effective Time, to
credit for such service under any Company PIan which is analogous to a New Plan and in which such
Company Employee participated or was eligible to participate immediately prior to the Effective Time,
provided that the foregoing shall not apply to the extent that its application would result in a duplication of
benefits with respect to the same period of service. Furthermore, to the extent a Company Employee or a
"Company Retired Employee" (as defined below) becomes eligible to participate in Parent's or its
Subsidiaries' retiree medical plan, for all purposes (including purposes of vesting, eligibility to participate
and level of benefits) under the retiree medical plan of Parent and its Subsidiaries, each (i) Company
Employee and (ii) former employee of the Company or any of its Subsidiaries whose employment with the
Company or any of its Subsidiaries ended as a result of such former employee's retirement and who is
eligible to participate in the Company's retiree medical plan as of the Effective Time (which, for the
avoidance of doubt, will include any such individuals who waived participation in such retiree medical plan
but are still eligible, pursuant to the terms of such retiree medical plan as in effect on the date hereof, to
participate in such plan) (the "Company Retired Employees"), shall be credited with his or her years of
service with the Company and its Subsidiaries and their respective predecessors before the Effective Time,
to the same extent as such Company Employee or Company Retired Employee was entitled, immediately
before the Effective Time, to credit for such service under the Company's retiree medical plan as of the
Effective Time. Parent shall, or shall cause an Affiliate to, provide postretirement medical benefits
(including the employer contribution toward the cost of such postretirement medical benefits) to Eligible
Retirees (as defined below) that (A) during the Continuation Period are no less favorable than those
provided under the Company's postretirement medical program in effect as of the date of the Agreement
(the "Company Retiree Hea ") and (B) following the Continuation Period are no less favorable than
those provided to similarly situated, as applicable, employees and retirees who participate in the post-
retirement programs of Parent or its Subsidiaries (other than the Surviving Corporation). "Eligiblg.Bglig '
means Company Retired Employees and Company Employees who are or become eligible to participate in
the Company Retiree Health Plan as in effect on January 1, 2016 during or after the Continuation Period.
In addition, and without limiting the generality of the foregoing, (1) Parent shall, or cause an Affiliate to,
cause each Company Employee to be immediately eligible to participate, without any waiting time, in any
and all New Plans to the extent coverage under such New Plan is replacing comparable coverage under a
Company Plan in which such Company Employee participated immediately before the Effective Time (such
plans, collectively, the "Qld_Blans"), and (2) for purposes of each New Plan providing medical, dental,
pharmaceutical and/or vision benefits to any Company Employee, Parent shall cause (or, in the case of a
New Plan that is insured by a third party insurance company, shall use commercially reasonable efforts to
cause such insurance company to cause) all pre-existing condition exclusions and actively-at-work
requirements of such New Plan to be waived for such Company Employee and his or her covered
dependents, to the extent such conditions were inapplicable or waived under the comparable Old Plans of
the Company or its Subsidiaries in which such Company Employee participated immediately prior to the
Effective Time. Parent shall, or cause an Affiliate to, cause (or, in the case of a New Plan that is insured
by a third party insurance company, shall use commercially reasonable efforts to cause such insurance
company to cause) any eligible expenses incurred by any Company Employee and his or her covered
dependents during the portion of the plan year ofthe Old Plan ending on the date such Company Employee's
participation in the corresponding New Plan begins to be taken into account under such analogous New
Plan for purposes of satis$ing all deductible, coinsurance and maximum out-of-pocket requirements
applicable to such Company Employee and his or her covered dependents for the applicable plan year as if
such amounts had been paid in accordance with such New Plan.
(c) Without limiting the generality of Section 5.11(a), from and after the Effective
Time, Parent shall cause the Surviving Corporation and its Subsidiaries to assume, honor, and continue all
obligations under the Company Plans and compensation and severance arrangements and agreements in
accordance with their terms as in effect immediately before the Effective Time (including the Executive
35
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-'l7-_
M. Thies, Avista
Schedule 3, Page 39 of 70
o
#5501 530. I 2
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o
Change of Control Agreements), and the Transactions shall be deemed to constitute a "change in control,"
"change of control," "corporate transaction" or similar words to such effect under all such Company Plans,
arrangements or agreements.
(d) To the extent that the Effective Time occurs (i) in 2018 or (ii) following the end of
the 201 8 performance period with respect to the Company's Annual Incentive Plans or any other applicable
annual bonus plan, but, in each case, prior to payment ofthe bonuses for such 2018 performance period,
Parent shall cause the Surviving Corporation to pay to each Company Employee the bonus to which the
Company Employee would be entitled for such 2018 performance period based on actual performance, with
such payment to occur no later than March 15,2019, consistent with past practice. In addition, in the event
that the Effective Time occurs in 2019, Parent shall cause the Surviving Corporation to pay to each
Company Employee any bonus that such Company Employee would be entitled to receive under the
Company's Annual Incentive Plans and any other applicable annual bonus plan for the 2019 performance
period based on such Company Employee's actual performance for such 2019 performance period, with
such payment to occur no later than March 15,2020, consistent with past practice.
(e) Notwithstanding anything to the contrary in this Section 5.11, with respect to all
employment terms and conditions affecting Company Employees covered by a CBA, as applicable, Parent
shall or shall cause US Parent to: (l) assume any liabilities or obligations contained in the CBAs; and (2)
provide, or shall cause to be provided, to such Company Employees terms and conditions of employment,
including all compensation and benefits, as required by the applicable CBAs.
(f) Effective as of the Effective Time, Parent shall cause the Surviving Corporation to
impl'ement the executive retention program for the executives listed on Section 5.1l(fl of the Parent
Disclosure Schedule on the terms set forth therein.
(g) Notwithstanding anything to the contrary herein, the provisions of this Section 5.1 1
are solely for the benefit of the parties to this Agreement, and no provision of this Section 5.1 1 is intended
to, or shall, constitute the establishment or adoption of or an amendment to any Company Plans, and no
Company Employee or any other individual associated therewith shall be regarded for any purpose as a
third-parry beneficiary of this Agreement or have the right to enforce the provisions hereof including in
respect of continued employment (or resumed employment). Nothing contained herein shall alter the at-
will employment relationship of any Company Employee.
Section 5.12 Merser Sub and Survivins Cornoration.
(a) Parent and US Parent shall take or cause to be taken all actions necessary to (i)
cause Merger Sub and the Surviving Corporation to perform promptly their respective obligations under
this Agreement and (ii) cause Merger Sub to consummate the Merger on the terms and conditions set forth
in this Agreement. Prior to the Effective Time, US Parent and Merger Sub shall not engage in any activity
of any nature except for activities related to or in furtherance of the Transactions or the Restructuring.
(b) In the event that Parent, US Parent and Merger Sub determine to effect the
Restructuring, the Company agrees to provide reasonable cooperation to Parent, US Parent and Merger
Sub, upon request, in connection with the implementation ofthe Restructuring; orovided that any obligation
to cooperate shall be limited to the same extent provided under Section 5.15(b); plevided, further, that in
no event shall the failure to comply with this Section 5.12(b) give rise to a failure of the condition in Section
6.2(b) to be satisfied.
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 40 of 70
o
#s501 530. l 2
36
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(c) Parent shall (i) promptly reimburse the Company for all reasonable and out-of-
pocket costs or expenses (including reasonable and documented costs and expenses of counsel and
accountants) incurred by the Company, the Subsidiaries of the Company and any of its or their
Representatives in connection with any cooperation provided for in Section 5.12ft), and (ii) indemniS and
hold harmless the Company, the Subsidiaries of the Company and any of its and their Representatives
against any claim, loss, damage, injury, liability, judgment, award, penalty, fine, cost (including cost of
investigation), expense (including fees and expenses of counsel and accountants) or settlement payment
incurred as a result of, or in connection with, any cooperation provided for in Section 5.12(b) and any
information used in connection therewith, unless the Company acted in bad faith or with gross negligence
and otherthan in the case offraud
(d) At or prior to the Effective Time, Parent shall adopt the instrument set forth in
Section 5.12 ofthe Parent Disclosure Schedule, with regard to the matters set forth in Exhibit A and Exhibit
B.
Section 5.13 No Control of Other Partv's Business. Nothing contained in this Agreement is
intended to give Parent, US Parent or Merger Sub, directly or indirectly, the right to control or direct the
Company's or its Subsidiaries' operations prior to the Effective Time. Prior to the Effective Time, the
Company shall exercise, consistent with the terms and conditions of this Agreement, complete control and
supervision over its and its Subsidiaries' respective operations.
Section 5.14 Advice of Chanses. From and after the date of this Agreement until the Effective
Time, each of Parent, US Parent and the Company will, to the extent not in violation of any applicable Law,
promptly notifr the other of (a) any circumstance, development, change, event, occurrence or effect of
which it has Knowledge that has had or that would reasonably be expected to have a Parent Material
Adverse Effect or a Company Material Adverse Effect, as the case may be, or (b) any material breach of
any of its representations, warranties or covenants contained in this Agreement that would reasonably be
expected to give rise to a failure ofany condition to the obligations ofthe other party or parties to effect the
Merger set forth in Article VI to be satisfied, provided that (i) no such notification will affect the
representations, warranties or covenants of the parties or the conditions to the obligations of the parties
under this Agreement and (ii) in no event shall the failure to comply with this Section 5.14 give rise to a
failure of any condition set forth in Article VI to be satisfied.
Section 5.15 FinancinsCooneration.
(a) Between the date hereof and the Effective Time, the Company shall, and shall
cause its Subsidiaries to, use its commercially reasonable efforts to, and to cause the Representatives of the
Company and its Subsidiaries to, provide to Parent and its Affiliates all cooperation requested by Parent
and its Affiliates that is necessary, proper or advisable in connection with any financing transaction
undertaken by Parent and its Affiliates in order to finance the payment of the Merger Consideration in
connection with the Merger (or any other financing transaction undertaken by Parent or its Affiliates to the
extent Parent or any such Affiliate is required by applicable Canadian securities laws to provide financial
statement disclosure of the Company or its Subsidiaries) (the "Ein4nci.Dg"), including: (i) participating in
meetings, presentations and due diligence sessions as may be reasonably requested by Parent or its
Affiliates in connection with the Financing; (ii) assisting with the preparation of any prospectuses, offering
memorandums or other documentation required in connection with the Financing; (iii) furnishing Parent
and its Affiliates with financial statements and related financial information for such periods as may be
required in connection with the Financing, including any financial statements or other financial information
that may be required to be included in any document filed under applicable Canadian securities Laws in
connection therewith; (iv) furnishing Parent and its Affiliates such other information concerning the
37
#5501 530. I 2 Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 41 ot70
o
o
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Company and its Subsidiaries as may be reasonably necessary in order to give effect to the Financing; (v)
using commercially reasonable efforts to obtain accountants' customary comfort letters and translation
opinions if and as reasonably requested by Parent or its Affiliates (or banks, lenders or underwriters
involved in any such financing); and (vi) taking all actions reasonably necessary and appropriate to permit
the banks, lenders or underwriters involved in any such financing to complete customary pre-closing due
diligence on the Company and its Subsidiaries as is customary for transactions of a similar nature.
(b) Notwithstanding anything to the contrary contained in this Section 5.15, nothing
in this Section 5.15 shall require any such cooperation to the extent that it would (i) require the Company
to pay any commitment or other fees, reimburse any expenses or otherwise incur any liabilities or give any
indemnities prior to the Closing, (ii) unreasonably interfere with the ongoing business or operations of the
Company or any of the Subsidiaries of the Company, (iii) require the Company or any of the Subsidiaries
of the Company to enter into or approve any agreement or other documentation effective prior to the Closing
or agree to any change or modification of any existing agreement or other documentation that would be
effective prior to the Closing, (iv) require the Company or the Subsidiaries of the Company to prepare pro
forma financial statements or proforma adjustments reflecting the Financing or the Transactions (prcyidgd
that the Company shall otherwise cooperate with the preparation of such pro forma financial statements
and pro forma adjustments prepared by Parent), (v) require the Company, any of the Subsidiaries of the
Company or any of their respective boards of directors (or equivalent bodies) to approve or authorize the
Financing, or (vi) require the Company or any of its Subsidiaries to cause the delivery of ( I ) legal opinions
or reliance letters or any certificate as to solvency or any other certificate necessary for the Financing, other
than accountants' customary comfort letters as contemplated by clause (v) of Section 5.15(a), (2) any
audited financial information or any financial information prepared in accordance with Regulation S-K or
Regulation S-X underthe Securities Act of 1933, as amended, or any financial information, in each case,
in a form not customarily prepared by the Company with respect to any period (provided, that for the
avoidance ofdoubt, the foregoing clause (2) shall not be relied upon to prevent the Company or any ofits
Subsidiaries from delivering its year-end audited financial statements or quarterly unaudited financial
statements to the extent Parent or any of its Affiliates is required by applicable Canadian securities laws to
provide financial statement disclosure of the Company or its Subsidiaries) or (3) any financial information
with respect to a month or fiscal period that has not yet ended or has ended less than forfy-five (45) days,
or sixty (60) days in the case of an annual period, prior to the date of such request.
(c) Parent shall (i) promptly reimburse the Company for all reasonable and out-of-
pocket costs or expenses (including reasonable and documented costs and expenses of counsel and
accountants) incurred by the Company, the Subsidiaries of the Company and any of its or their
Representatives in connection with any cooperation provided for in this Section 5.15, and (ii) indemniff
and hold harmless the Company, the Subsidiaries of the Company and any of its and their Representatives
against any claim, loss, damage, injury, liability, judgment, award, penalfy, fine, cost (including cost of
investigation), expense (including fees and expenses of counsel and accountants) or settlement payment
incurred as a result of or in connection with, any cooperation provided for in this Section 5.15 or the
Financing and any information used in connection therewith, unless the Company acted in bad faith or with
gross negligence and other than in the case offraud.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.1 Conditions to Each Partv's Oblieation to Effect the Merger. The respective
obligations of each party hereto to effect the Closing shall be subject to the satisfaction (or waiver, if
permissible under applicable Law) on or prior to the Closing Date of the following conditions:
38
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 42 oI 70
o
#5501 530. I 2
o
O
(a) Company Shareholder Approval. The Company Shareholder Approval shall have
been obtained.
(b) Resulatory Approvals. All waiting periods (and any extensions thereof) applicable
to the Merger under the HSR Act shall have been terminated or shall have expired and each of the Required
Statutory Approvals shall have been obtained at or prior to the Effective Time (the termination or expiration
of such waiting periods and extensions thereof, together with the obtaining of the Required Statutory
Approvals, the "Rgul-a[qry_Approvab"), and such Regulatory Approvals shall have become Final Orders.
(c) No Injunctions. No Law enacted, promulgated, issued, entered, amended or
enforced by any Governmental Authority shall be in effect enjoining, restraining, preventing or prohibiting
consummation of the Merger or making the consummation of the Merger illegal.
Section 6.2 Conditions to Oblieations of Parent. US Parent and Merser Sub. The
obligations of Parent, US Parent and Merger Sub to effect the Closing are further subject to the satisfaction
(or waiver, if permissible under applicable Law) on or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. (i) Each of the representations and warranties of
the Company set forth in this Agreement (other than the representations and warranties of the Company set
forth in Section 3.2(a), Section 3.2(b), Section 3.3(a), Section 3.66) and Section 3.19) shall be true and
correct (without giving effect to any limitation as to "materiality" or "Company Material Adverse Effect"
set forth therein), except where the failure to be true and correct has not had or would not reasonably be
expected to have a Company Material Adverse Effect; (ii) each of the representations and warranties of the
Company set forth in Section 3.2(a) and Section 3.2(b) shall be true and correct, except where the failure
of any such representation or warranty to be true and correct would be de minimis; (iii) each of the
representations and warranties of the Company set forth in Section 3.3(a) and Section 3.19 shall be true and
correct in all material respects; and (iv) the representations and warranties set forth in Section 3.66) shall
be true and correct in all respects; in the case of each of clause (i), (ii), (iii) and (iv), as of the Effective
Time as though made at and as of the Effective Time (except to the extent that such representation and
warranty is expressly made as of a specified date, in which case such representation and warranty shall be
true and correct as of such specific date).
(b) Performance of Covenants and Agreements of the Company. The Company shall
have performed in all material respects all covenants and agreements required to be performed by it under
this Agreement at or prior to the Closing Date.
(c) Officer's Certificate. Parent shall have received a certificate signed on behalf of
the Company by an executive officer of the Company certiffing the satisfaction by the Company of the
conditions set forth in Section 6.2(a) and Section 6.2(b).
(d) Absence of Company Material Adverse Effect. Since the date of this Agreement,
no circumstance, development, change, event, occurrence or effect that, individually or in the aggregate,
has had or would reasonably be expected to have a Company Material Adverse Effect, shall have occurred
and be continuing.
(e) Absence of Burdensome Condition. The Final Orders with respect to the
Regulatory Approvals shall not impose or require any undertakings, terms, conditions, liabilities,
obligations, commitments or sanctions (including any Remedial Actions) that, individually or in the
aggregate, constitute a Burdensome Condition.
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 3, Page 43ot70
o
#5501530 l2
39
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Section 6.3 Conditions to Oblisations of the Comnany. The obligation of the Company to
effect the Closing is further subject to the satisfaction (or waiver, if permissible under applicable Law) on
or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. The representations and warranties of Parent, US
Parent and Merger Sub set forth in this Agreement shall be true and correct (without giving effect to any
limitation as to "materiality" or "Parent Material Adverse Effect" set forth therein) as of the Effective Time
with the same effect as though made on and as of the Effective Time (except to the extent that such
representation and warranty is expressly made as of a specified date, in which case such representation and
warranty shall be true and correct as of such specific date), except where the failure to be true and correct
has not had or would not reasonably be expected to have a Parent Material Adverse Effect.
(b) Performance of Covenants and Agreements of Parent. US Parent and Merger Sub.
Parent, US Parent and Merger Sub shall have performed in all material respects all covenants and
agreements required to be performed by them under this Agreement at or prior to the Closing Date.
(c) Officer's Certificate. The Company shall have received a certificate signed on
behalf of Parent by an executive officer of Parent certiffing the satisfaction by Parent and Merger Sub of
the conditions set forth in Section 6.3(a) and Section 6.3(b).
Section 6.4 Frustration of Closins Conditions. None of the Company, Parent, US Parent or
Merger Sub may rely on the failure of any condition set forth in Section 6.1, Section 6.2 or Section 6.3, as
the case may be, to be satisfied if such failure was primarily caused by such party's breach of this
Agreement.
ARTICLE VII
TERMINATION
Section 7.1 Termination. This Agreement may be terminated and the Transactions
abandoned at any time prior to the Effective Time:
(a) by the mutual written consent of the Company and Parent; or
(b) by either the Company or Parent
(i) if the Merger shall not have been consummated on or before September
30, 2018 (the "End Date"); plevidgd that if, prior to the End Date, all of the conditions to the
Closing set forth in Article VI have been satisfied or waived, as applicable, or shall then be capable
ofbeing satisfied (except for any condition set forth in Section 6.1(b), Section 6.1(c). or Section
6.2(e)), either the Company or Parent may, prior to 5:00 p.m. Pacific time on the End Date, extend
the End Date to a date that is not later than six (6) months after the End Date (and if so extended,
such later date shall then, for all purposes under this Agreement, be the "End Date"); plevidgd,
further, that neither the Company nor Parent may terminate this Agreement or extend the End Date
pursuant to this Section 7.1(bXi) if it (or, in the case of Parent, US Parent or Merger Sub) is in
breach of this Agreement and such breach has primarily caused or resulted in either (1) the failure
to satisfy the conditions to its obligations to consummate the Closing set forth in Article VI prior
to the End Date or (2) the failure of the Closing to have occurred by the End Date; or
40
#5501 530. I 2 Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 3, Page 44 ol70
o
o
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(ii) ifany Law having the effect set forth in Section 6. l(c) shall not have been
reversed, stayed, enjoined, set aside, annulled or suspended and shall be in full force and effect and,
in the case of any Judgment (each, a "Restra!n't"), shall have become final and non-appealable;
provided. however, that the right to terminate this Agreement under this Section 7.I (bXii) shall not
be available to the Company or Parent if the issuance of such final, non-appealable Restraint was
primarily due to a breach by such party of any of its covenants or agreements under this Agreement,
including pursuant to Section 5.4: or
(iii) if the Company Shareholder Approval contemplated by this Agreement
shall not have been obtained at the Company Shareholders Meeting duly convened (including any
adjournments or postponements thereof); or
(c) by Parent
(i) if the Company shall have breached or failed to perform any of its
representations, warranties, covenants or agreements set forth in this Agreement, which breach or
failure to perform (A) would give rise to the failure of a condition set forth in Section 6.2(a) or
Section 6.2(b), respectively, and (B) cannot be cured by the Company by the End Date or, if capable
of being cured, shall not have been cured within thirty (30) calendar days following receipt of
written notice from Parent stating Parent's intention to terminate this Agreement pursuant to this
Section 7.1(cXi) and the basis for such termination; revidgS! that Parent shall not have the right to
terminate this Agreement pursuant to this Section 7.1(cXi) if Parent, US Parent or Merger Sub is
then in material breach of this Agreement; or
(ii) if the Company Board (or a duly authorized committee thereof) shall have
effected a Company Adverse Recommendation Change; provided, however, that Parent shall not
have the right to terminate this Agreement under this Section 7.1(cXii) if the Company Shareholder
Approval shall have been obtained; or
(d) by the Company
(i) if Parent, US Parent or Merger Sub shall have breached or failed to
perform any of its representations, warranties, covenants or agreements set forth in this Agreement,
which breach or failure to perform (A) would give rise to the failure of a condition set forth in
Section 6.3(a) or Section 6.36), respectively, and (B) cannot be cured by Parent, US Parent or
Merger Sub by the End Date or, if capable of being cured, shall not have been cured within thirty
(30) calendar days following receipt of written notice from the Company stating the Company's
intention to terminate this Agreement pursuant to this Section 7.1(d)(i) and the basis for such
termination; provided that, the Company shall not have the right to terminate this Agreement
pursuant to this Section 7.1(dXi) if the Company is then in material breach of this Agreement; or
(ii) prior to the receipt of the Company Shareholder Approval, if the Company
Board (or a duly authorized committee thereof) shall have effected a Company Adverse
Recommendation Change with respect to a Superior Proposal in accordance with Section 5.3 and
shall have approved, and substantially concurrently with the termination hereunder, the Company
shall have entered into, a Company Acquisition Agreement with respect to such Superior Proposal;
provided that such termination pursuant to this Section 7.l(dXii) shall not be effective and the
Company shall not enter into any such Company Acquisition Agreement, unless the Company has
paid the Company Termination Fee to Parent or causes the Company Termination Fee to be paid
to Parent substantially concurrently with such termination in accordance with Section 7.3;
4t
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 3, Page 45 of 70
o
#5501530 I2
o
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(plgv1dgd that Parent shall have provided wiring instructions for such payment or, if not, then such
payment shall be paid promptly following delivery of such instructions).
Section 7.2 Effect of Termination. In the event of the termination of this Agreement as
provided in Section 7.1, written notice thereof shall be given to the other party or parties hereto, speciffing
the provision hereof pursuant to which such termination is made, and this Agreement shall forthwith
become null and void and have no further force or effect (other than Section 5.6(b), this Section 7.2, Section
7 .3 and Article VIII, all of which shall survive termination of this Agreement), and there shall be no liability
on the part of Parent, US Parent, Merger Sub or the Company or their respective directors, officers, other
Representatives or Affiliates, whether arising before or after such termination, based on, arising out of or
relating to this Agreement or the negotiation, execution, performance or subject matter hereof (whether in
contract or in tort or otherwise, or whether at law (including at common law or by statute) or in equity);
provided. however, that, subject to Section 7.3 (including the limitations on liability contained therein), no
party hereto shall be relieved or released from any liabilities or damages arising out of any willful and
material breach of this Agreement prior to such termination that gave rise to the failure of a condition set
forth in Article VI. The Confidentiality Agreement shall survive in accordance with its terms following
termination of this Agreement (as modified pursuant to_SeSlionl_5lb)). Without limiting the meaning of a
willful and material breach, the parties hereto acknowledge and agree that any failure by a party hereto to
consummate the Merger and the other transactions contemplated hereby after the applicable conditions to
the Closing set forth in Article VI have been satisfied or waived (except for those conditions that by their
nature are to be satisfied at the Closing, which conditions would be capable of being satisfied at the time of
such failure to consummate the Merger) shall constitute a willful and material breach of this Agreement.
Section 7.3 Termination Fees.
(a) In the event that this Agreement is terminated by the Company pursuant to Section
7.1(dxii), the Company shall pay or cause to be paid as directed by Parent the Company Termination Fee
substantially concunently with the termination of this Agreement.
(b) In the event that this Agreement is terminated by Parent pursuant to Section
7.1(c)(ii), the Company shall pay or cause to be paid as directed by Parent the Company Termination Fee
within two (2) Business Days of such termination.
(c) In the event that (i) this Agreement is terminated (A) by Parent or the Company
pursuant to Section 7.16)(i) or Section 7.16)(iii) or (B) by Parent pursuant to Section 7.1(cXi) (solely with
respect to a breach or failure to perform a covenant), (ii) a Takeover Proposal shall have been publicly
disclosed or made to the Company after the date hereof and not publicly withdrawn (x) in the case of
termination pursuant to Section 7. 1(b)(i) or Section 7. I (c)(i), prior to the date of such termination, or (y) in
the case of termination pursuant to Section 7.l(.bXiii), prior to the date of the Company Shareholders
Meeting, and (iii) within twelve (12) months of the date this Agreement is terminated, the Company enters
into a Company Acquisition Agreement or consummates a Takeover Proposal (ppyided that for purposes
of clause (iii) of this Section 7.3(c), the references to "l5ol0" in the definition of Takeover Proposal shall be
deemed to be references to "50ol0"), then the Company shall pay or cause to be paid as directed by Parent
the Company Termination Fee on the earlier of the date of entry into such Company Acquisition Agreement
and the date of consummation of such transaction.
(d)ForpurposesofthisAgreement,..@,,shallmeanan
amount equal to $103,000,000.
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 46 of 70
o
#5501 530 l 2
42
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(e) Parent shall pay or cause to be paid to the Company a fee of $ 103,000,000 in cash
(the "Parent Termination Frc") if:
(i) this Agreement is terminated by Parent or the Company
(A) pursuant to Section 7.l6Xi) and, at the time of such termination,
any of the conditions set forth in Section 6.1(b) or Section 6.1(c) (in the case of
Section 6.1(c), if and only if the applicable Restraint giving rise to such termination
arises in connection with the Regulatory Approvals), shall have not been satisfied;
or
(B) pursuant to Section 7.16)(ii) (il and only if, the applicable
Restraint giving rise to such termination arises in connection with the Regulatory
Approvals); or
(iD this Agreement is terminated by the Company pursuant to Section 7. l(dXi)
because of a failure by Parent, US Parent or Merger Sub to comply with their obligations under
Section 5.4;
plAvidgd that, at the time of any such termination described in clause (i) or (ii) of this Section 7.3(e),
the conditions to the Closing set forth in Section 6.1(a) and Section 6.2 (other than Section 6.2(c)
and Section 6.2(e)) shall have been satisfied or waived (except for any such conditions that have
not been satisfied as a result of a breach by Parent, US Parent or Merger Sub of its respective
obligations under this Agreement).
Parent shall pay or cause to be paid the Parent Termination Fee to the Company (to an account designated
in writing by the Company) no later than two (2) Business Days after the date of the applicable termination.
(0 Notwithstanding the foregoing, in no event shall the Company be required to pay
the Company Termination Fee on more than one occasion. Notwithstanding anything to the contrary in
this Agreement, the parties hereto agree that if this Agreement is terminated under circumstances in which
the Company is obligated to pay the Company Termination Fee under this Section 7.3 and the Company
Termination Fee is paid, the payment ofthe Company Termination Fee and any costs, expenses and interest
pursuant to Section 7.3(h) shall be the sole and exclusive remedy available to Parent, US Parent and Merger
Sub with respect to this Agreement and the Transactions, and, upon payment of the Company Termination
Fee pursuant to this Section 7.3 and any costs, expenses and interest pursuant to Section 7.3(h), the
Company (and the Company's Affiliates and its and their respective directors, offtcers, employees,
shareholders and other Representatives) shall have no further liability with respect to this Agreement or the
Transactions to Parent, US Parent, Merger Sub or any of their respective Affiliates or Representatives. In
no event shall Parent be required to pay or cause to be paid the Parent Termination Fee on more than one
occasion. Notwithstanding anything to the contrary in this Agreement, the parties hereto agree that if this
Agreement is terminated under circumstances in which Parent is obligated to pay or cause to be paid the
Parent Termination Fee under this Section 7.3 and the Parent Termination Fee is paid, the payment of the
Parent Termination Fee and any costs, expenses and interest pursuant to Section 7.3ft) shall be the sole
and exclusive remedy available to the Company with respect to this Agreement and the Transactions, and,
upon payment of the Parent Termination Fee pursuant to this Section 7.3 and any costs, expenses and
interest pursuant to Section 7.3ft), Parent, US Parent and Merger Sub (and their Affiliates and their
respective directors, officers, employees, shareholders and other Representatives) shall have no further
liability with respect to this Agreement or the Transactions to the Company or any of their respective
Affi liates or Representatives.
43
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 47 of 70
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#5501530 r2
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(g) Any amount that becomes payable pursuant to Section 7.3 shall be paid by wire
transfer of immediately available funds to an account designated by Parent or the Company, as applicable,
and shall be reduced by any amounts required to be deducted or withheld therefrom under applicable Law
in respect ofTaxes.
(h) Each ofthe parties hereto acknowledges and agrees that the agreements contained
in this Section 7.3 are integral parts of the Transactions and that, without these agreements, Parent, US
Parent and Merger Sub, on the one hand, and the Company, on the other hand, would not enter into this
Agreement. Each of the parties hereto further acknowledges and agrees that payment of the Company
Termination Fee and Parent Termination Fee, as applicable, if, as and when required pursuant to this Section
7.3, shall not constitute a penalty but rather will constitute liquidated damages, in a reasonable amount that
will compensate the parfy hereto receiving such amount in the circumstances in which it is payable for the
efforts and resources expended and opportunities foregone while negotiating this Agreement and in reliance
on this Agreement and on the expectation of the consummation of the Transactions, which amount would
otherwise be impossible to calculate with precision. Accordingly, (i) if Parent fails to pay the Parent
Termination Fee pursuant to Section 7.3(e) when due, and, in order to obtain such payment, the Company
commences a Claim that results in a judgment against Parent for the Parent Termination Fee, Parent shall
pay to the Company, together with the Parent Termination Fee, the Company's costs and expenses
(including reasonable attorneys' fees) in connection with such Claim, and interest on the Parent Termination
Fee from the date such payment was required to be made until the date of payment at a rate per annum
equal to the Prime Rate in effect on the date such payment was required to be made, or (ii) if the Company
fails to pay the Company Termination Fee pursuant to Section 7.3(a), Section 7.3(b) or Section 7.3(c) when
due, and, in order to obtain such payment, Parent commences a Claim that results in a judgment against the
Company for the Company Termination Fee, the Company shall pay to Parent, together with the Company
Termination Fee, Parent's costs and expenses (including reasonable attomeys' fees) in connection with
such Claim, and interest on the Company Termination Fee from the date such payment was required to be
made until the date of payment at a rate per annum equal to the Prime Rate in effect on the date such
payment was required to be made.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 No Survival of Representations and Warranties. None of the representations
and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive
the Effective Time and all rights, claims and causes of action (whether in contract or in tort or otherwise,
or whether at Law (including at common law or by statute) or in equity) with respect thereto shall terminate
at the Effective Time. This Section 8.1 shall not limit any covenant or agreement of the parties hereto that
by its terms contemplates performance in whole or in part after the Effective Time. The Confidentiality
Agreement shall (a) survive termination of this Agreement in accordance with its terms (as modified in
Section 5.66)) or (b) terminate as of the Effective Time.
Section 8.2 Fees and Expenses. Except as otherwise provided in Section 5.8, Section 7.3 and
Section 8.14, whether or not the Transactions are consummated, all fees and expenses incurred in
connection with the Transactions and this Agreement shall be paid by the parfy hereto incurring or required
to incur such fees or expenses.
Section 8.3 Amendment or Supnlement. At any time prior to the Effective Time, this
Agreement may be amended or supplemented in any and all respects, whether before or after receipt of the
Company Shareholder Approval, by written agreement of the parlies hereto and delivered by duly
44
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 48 of70
o
#5s01 530. l 2
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authorized officers of the respective parties; provided. however, that (a) following receipt of the Company
Shareholder Approval, there shall be no amendment or change to the provisions hereof which by Law would
require further approval by the shareholders of the Company without such approval and (b) after the
Effective Time, this Agreement may not be amended or supplemented in any respect.
Section 8.4 Waiver. At any time prior to the Effective Time, any party hereto may, subject to
applicable Law, (a) waive any inaccuracies in the representations and warranties of any other party hereto,
(b) extend the time for the performance of any of the obligations or acts of any other party hereto or (c)
waive compliance by any other parly hereto with any of the agreements contained herein or, except as
otherwise provided herein, waive any of such party's conditions. Notwithstanding the foregoing, no failure
or delay by the Company, Parent, US Parent or Merger Sub in exercising any right hereunder shall operate
as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right hereunder. Any agreement on the part of a parfy hereto to any
such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such
party.
Section 8.5 Assisnment. Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned, in whole or in part, by operation of Law or otherwise, by any of the parties
hereto without the prior written consent of the other parties hereto. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit oi and be enforceable by, the parties hereto and their
respective successors and permitted assigns. Any purpo(ed assignment not permitted under this Section
8.5 shall be null and void.
Section 8.6 Counternarts. This Agreement may be executed in counterparts, including by
electronic means (each of which shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement), and shall become effective when one or more counterparts have
been signed by each of the parties and delivered (by electronic communication, facsimile or otherwise) to
the other parties hereto.
Section 8.7 Entire Asreement: Third-Partv Beneficiaries. This Agreement, including the
Company Disclosure Schedule, and any exhibits hereto, together with the other instruments referred to
herein, including the Confidentiality Agreement (a) constitute the entire agreement, and supersede all other
prior agreements and understandings, both written and oral, among the parties, or any of them, with respect
to the subject matter hereof and thereof and (b) is not intended to and shall not confer upon any Person
otherthan the parties hereto any rights or remedies hereunder, except for (i) the rights of the Company's
shareholders and holders of RSUs and Performance Awards to receive the Merger Consideration and
payments pursuant to Article II, respectively, (ii) the right of the Company, on behalf of its shareholders,
to pursue damages in the event of Parent, US Parent or Merger Sub's willful and material breach of this
Agreement, in which event the damages recoverable by the Company for itself and on behalf of its
shareholders (without duplication) shall be determined by reference to the total amount that would have
been recoverable by the holders of the Company Common Stock (including "lost premium" and time value
of money) if all such holders brought an action against Parent, US Parent and Merger Sub and were
recognized as intended third party beneficiaries hereunder, which right is hereby acknowledged and agreed
by Parent, US Parent and Merger Sub and (iii) the provisions of Section 5.8.
Section 8.8 Governins Law: Jurisdiction.
(a) This Agreement shall be governed by, and construed in accordance with, the laws
of the State of Delaware, without giving effect to any choice or conflict of laws provision or rule (whether
of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any
45
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 49 of 70
o
#5501 530. l 2
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jurisdiction other than the State of Delaware, except that matters related to the fiduciary obligations of the
Company Board and mafters that are specifically required by the WBCA in connection with the
Transactions shall be governed by the laws of the State of Washington.
(b) Each of the parties hereto (i) irrevocably submits itself to the personal jurisdiction
of each state or federal court sitting in the State of Delaware, as well as to the jurisdiction of all courts to
which an appeal may be taken from such courts, in any suit, action or proceeding arising out of or relating
to this Agreement or any of the transactions contemplated herein, (ii) agrees that every such suit, action or
proceeding shall be brought, heard and determined exclusively in the Court of Chancery of the State of
Delaware (ryldgd that, in the event subject matter jurisdiction is unavailable in or declined by the Court
of Chancery, then all such claims shall be brought, heard and determined exclusively in any other state or
federal court sitting in the State of Delaware), (iii) agrees that it shall not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from such court, (iv) agrees not to bring any suit,
action or proceeding arising out of or relating to this Agreement or any of the Transactions in any other
court, and (v) waives any defense of inconvenient forum to the maintenance of any suit, action or
proceeding so brought.
(c) Each parfy hereto irrevocably consents to the service of process outside the
territorial jurisdiction ofthe courts referred to in this Section 8.8 in any such suit, action or proceeding by
mailing copies thereof by registered or certified United States mail, postage prepaid, retum receipt
requested, to its address as specified in or pursuant to this Article VIII. However, the foregoing shall not
limit the right of a parfy hereto to effect service of process on any other party hereto by any other legally
available method.
Section 8.9 Specific Enforcement. The parties hereto agree that immediate, extensive and
irreparable damage would occur for which monetary damages would not be an adequate remedy in the
event that any of the provisions of this Agreement are not performed in accordance with their specific terms
or are otherwise breached. Accordingly, the parties hereto agree that, if for any reason Parent, US Parent,
Merger Sub or the Company shall have failed to perform its obligations under this Agreement or otherwise
breached this Agreement, then the party hereto seeking to enforce this Agreement against such
nonperforming party under this Agreement shall be entitled to specific performance and the issuance of
immediate injunctive and other equitable relief without the necessity of proving the inadequacy of money
damages as a remedy, and the parties hereto further agree to waive any requirement for the securing or
posting of any bond in connection with the obtaining of any such injunctive or other equitable relief, this
being in addition to and not in limitation of any other remedy to which they are entitled at Law or in equity.
If any party hereto brings any Claim to enforce specifically the performance of the terms and provisions of
this Agreement when expressly available to such party pursuant to the terms of this Agreement, then,
notwithstanding anything to the contrary herein, the End Date shall automatically be extended by the period
of time between the commencement of such Claim and ten (10) Business Days following the date on which
such Claim is fully and finally resolved.
Section 8.10 WAMR OF JURY TRIAL. EACH PARTY HERETO HEREBY WAMS,
TO THE FULLEST EXTENT PER]VIITTED BY APPLICABLE LAW, ANY RIGHT IT MAY
HAVB TO A TRIAL BY JURY IN RESPECT OF AIIY SUIT, ACTION OR OTHER
PROCEEDING ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS. EACH
PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF
ANY OTHER PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT
SUCH PARTY WOULD NOT, IN THE EVENT OF ANY ACTION, SUIT OR PROCEEDING,
SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND
THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS
46
#5501530 l2 Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 50 of 70
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AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVER AND
CERTIFICATIONS IN THIS SECTION 8.10.
Section 8.ll Notices. All notices, requests and other communications to any party hereto
hereunder shall be in writing and shall be deemed given if delivered personally, facsimiled (which is
confirmed), e-mail (prwided, that the same is sent by ovemight courier for delivery on the next succeeding
Business Day, with acknowledgement of receipt requested) or sent by overnight courier (providing proof
of delivery) to the parties hereto at the following addresses:
If to Parent, US Parent or Merger Sub, to:
Hydro One Limited
483 Bay Street
South Tower, Sth Floor
Toronto, Ontario M5G 2P5
Attention: James Scarlett, Executive Vice President and Chief Legal Officer
Facsimile: [phone]
Email : j [e-mail]
with a copy (which shall not constitute notice) to:
Bracewell LLP
1251 Avenue of the Americas
New York, New York 10020
Attention: John G. Klauberg
Frederick J. Lark
Elena V. Rubinov
Facsimile: [phone]
Email: [e-mail]
fritz.lark@brac ewe I l. c o m
elena.rubinov@bracewell. com
If to the Company, to:
Avista Corporation
141 I East Mission Avenue
Spokane, Washington 99220
Attention: Marian Durkin, Senior Vice President, General Counsel, Corporate Secretary
and Chief Compliance Officer
Facsimile: [phone]
Email : marian. [e-mail]
47
#sso1 530. I 2 Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 3, Page 51 of 70
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with a copy (which shall not constitute notice) to
Kirkland & Ellis LLP
655 Fifteenth Street, N.W.
WashinSon, D.C.20005
Attention: George P. Stamas
Alexander D. Fine
Brendan J. Reed
Facsimile: [phone]
Emails: [e-mail]
alexander.fi [e-mail]
[e-mail]
or such other address, e-mail or facsimile number as such party may hereafter speci$ by like notice to the
other parties hereto. All such notices, requests and other communications shall be deemed received on the
date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is
a Business Day in the place of receipt. Otherwise, any such notice, request or communication shall be
deemed not to have been received until the next succeeding Business Day in the place of receipt.
Section 8.12 Severabilitv. If any term or other provision of this Agreement is determined by a
court of competent jurisdiction to be invalid, illegal or incapable of being enforced by any rule of law or
public policy, all other terms, provisions and conditions of this Agreement shall nevertheless remain in full
force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modiff this Agreement so as to effect
the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an
acceptable manner to the end that the Transactions are fulfilled to the extent possible.
Section 8.13 Definitions. As used in this Agreement, the following terms shall have the
meanings ascribed to them below:
..,,shallmeanaconfidentialifyagreement(whichneednot
prohibit the making of a Takeover Proposal) that contains provisions that are not materially less favorable
in the aggregate to the Company than those contained in the Confidentiality Agreement.
"Accumulated Divi " shall mean all dividends declared by the Company with respect to shares
of Company Common Stock, and all dividend equivalent payments, in each case, relating to RSUs and
Performance Awards that have been accumulated or retained by the Company until the vesting or settlement
of such awards.
",{ff1liafe" shall mean, as to any Person, any other Person that, directly or indirectly, controls, or is
controlled by, or is under common control with, such Person. For this purpose, "control" (including, with
its correlative meanings, "controlled by" and "under common control with") shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of management or policies of a Person,
whether through the ownership of securities or partnership or other ownership interests, by contract or
otherwise.
"Agreelqen!" shall have the meaning set forth in the Preamble.
"Annual Incentive Plans" shall mean the Company's annual cash incentive compensation plans and
arrangements, whether payable annually, quarterly or otherwise.
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 52of70
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#5501 530. I 2
48
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"Antitrust Laws" shall have the meaning set forth in Section 5.4(a).
"Articles of Merger" shall have the meaning set forth in Section 1.3.
"Balance Sheet Date" shall have the meaning set forth in Section 3.5(d).
"Bankruptcy and Equ " shall have the meaning set forth in Section 3.3(a).
"BofA Merrill Lvnch" shall have the meaning set forth in Section 3.17.
"bk-EntryShares" shall have the meaning set forth in Section 2.1(c).
"Burdensome Condit 'shall mean any undertakings, terms, conditions, liabilities, obligations,
commitments or sanctions (including any Remedial Action) that, in the aggregate, would have or would be
reasonably likely to have, a material adverse effect on the financial condition, businesses or results of
operations of the Company and its Subsidiaries, taken as a whole, or of Parent and its Subsidiaries, taken
as a whole and after giving effect to the Merger; provided that, for this purpose, Parent and its Subsidiaries
(including the Surviving Corporation and its Subsidiaries) shall be deemed to be a consolidated group of
entities of the size and scale of a hypothetical company that is 100% of the size and scale of the Company
and its Subsidiaries, taken as a whole as of immediately prior to the Effective Time; and ry4led, fufllher,
that any such undertakings, terms, conditions, liabilities, obligations, commitments or sanctions shall not
constitute or be taken into account in determining whether there has been or is such a material adverse
effect to the extent such undertakings, terms, conditions, liabilities, obligations, commitments or sanctions
are described in Section 1.6(a), Section 1.7 or Exhibit B attached hereto.
"B_uslnesg_DAy" shall mean a day except a Saturday, a Sunday or other day on which the SEC or
banks in Spokane, Washington are authorized or required by Law to be closed.
"CBA" shallhave the meaning set forth in Section 3.16(a).
"CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability
Act,42 U.S.C. $ 9601 et seq., as amended.
"e.ertifie.&" shall have the meaning set forth in Section 2.1(c).
"CFIUS" means the Committee on Foreign Investment in the United States and each member
agency thereofacting in such capacity.
"CFIUS Approval" shall mean any of the following with respect to the Transactions: (a) the parties
shall have received written notice from CFIUS that review under SectionT2l of the Defense Production
Act of 1950, as amended (50 U.S.C. $ 4565) ("Section 721") has been concluded and that either the
Transactions do not constitute a "covered transaction" under Section 721 or there are no unresolved national
security concems; (b) an investigation shall have been commenced after the initial 30-day review period
and CFIUS shall have determined to conclude all action under Section 721 without sending a report to the
President of the United States (the "Elg5ideul"), and the parties shall have received notice from CFIUS that
all action under Section 721 is concluded, and there are no unresolved national security concerns; or
(c) CFIUS shall have sent a report to the President requesting the President's decision and the President
shall have announced a decision not to take any action to suspend or prohibit the Transactions, or the time
permitted by Section 721 for such action (15 days from the date the President received such report) shall
have elapsed without the President taking any action to suspend or prohibit the Transactions.
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I7-_
M. Thies, Avista
Schedule 3, Page 53 of70
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#5501 530. I 2
49
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"Claim" shall have the meaning set forth in Section 5.8(.a).
"e]4@l_ql" shall mean the Clayton Act of 1914, as amended.
('gl@" shall have the meaning set forth in Section 1.2.
"Closing Date" shall have the meaning set forth in Section L2.
"Code" mean the U.S. Intemal Revenue Code of 1986, as amended.
"e.@y" shall have the meaning set forth in the Preamble.
"Company Acquisition Agreement" shall have the meaning set forth in Section 5.3(c).
"Company Adverse Rec " shall have the meaning set forth in Section 5.3(c).
"Compan@atd" shall have the meaning set forth in the recitals.
"Company Board Reco " shall have the meaning set forth in Section 3.3(a).
"@" shall have the meaning set forth in Section 1.5.
"Company Common Stock" shall have the meaning set forth in Section 2.1.
"Company Disclosure " shall have the meaning set forth in the Article III.
"ep![E!yfup.!eJee" shall have the meaning set forth in Section 5.11(a).
"Company Intervening Event" shall mean any circumstance, development, change, event,
occurrence or effect that (1) is unknown to or by the Company Board as of the date of this Agreement (or
if known, the magnitude or material consequences of which are not known by the Company Board as of
the date of this Agreement) and, (2) becomes known to or by the Company Board prior to obtaining the
Company Shareholder Approval; ryj1!91!, however. that neither a Takeover Proposal nor any consequence
thereof shall constitute a Company Intervening Event.
"Compan Joint Ventu " shall mean any Person that is not a Subsidiary of the Company, in which
the Company owns directly or indirectly an equity interest.
"Company Material Adverse Effect" shall mean any circumstance, development, change, event,
occurrence or effect that (a) has, individually or in the aggregate, a material adverse effect on the business,
assets, properties, results of operations or financial condition of the Company and its Subsidiaries taken as
a whole; provided that none of the following shall constitute or be taken into account in determining whether
a Company Material Adverse Effect has occurred: (i) any circumstance, development, change, event,
occurrence or effect in any of the industries or markets in which the Company or its Subsidiaries operates,
including electric generation, transmission or distribution or natural gas distribution or transmission
industries (including, in each case, any changes in the operations thereof or with respect to system-wide
changes or developments in electric generation, transmission, or distribution or natural gas distribution or
transmission systems); (ii) any enactment of, change in, or change in interpretation of, any Law or GAAP
or governmental policy; (iii) general economic, regulatory or political conditions (or changes therein) or
conditions (or changes therein) in the financial, credit or securities markets (including changes in interest
or currency exchange rates) in any country or region in which the Company or any of its Subsidiaries
50
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 54 ol 70
o
#5501530 l2
o
O
conducts business; (iv) any changes or developments in wholesale or retail electric power prices or any
change in the price of natural gas or any other raw material, mineral or commodity used or sold by the
Company or any of its Subsidiaries or in the cost of hedges relating to such prices, any change in the price
of interstate electricity or natural gas transportation services or any change in customer usage patterns or
customer selection of third-party suppliers for natural gas or electricity; (v) any acts of God, natural
disasters, terrorism, armed hostilities, sabotage, war or any escalation or worsening of acts of terrorism,
armed hostilities or war; (vi) the announcement, pendency of or performance of the Transactions, including
by reason of the identity of Parent or US Parent or any communication by Parent or US Parent regarding
the plans or intentions of Parent with respect to the conduct of the business of the Company or any of its
Subsidiaries and including the impact of any ofthe foregoing on any relationships, contractual or otherwise,
with customers, suppliers, distributors, collaboration partners, joint venture partners, employees or
regulators; (vii) any action taken by the Company or any of its Subsidiaries that is required or permitted by
the terms of this Agreement or with the consent or at the direction of Parent, US Parent or Merger Sub (or
any action not taken as a result ofthe failure ofParent to consent to any action requiring Parent's consent
pursuant to Section 5.1); (viii) any change in the market price, or change in trading volume, of the capital
stock of the Company (it being understood that the facts or occurrences giving rise or contributing to such
change shall be taken into account in determining whether there has been a Company Material Adverse
Effect); (ix) any failure by the Company or its Subsidiaries to meet internal, analysts' or other earnings
estimates or financial projections or forecasts for any period, or any changes in credit ratings and any
changes in any analysts recommendations or ratings with respect to the Company or any of its Subsidiaries
(it being understood that the underlying facts or occurrences giving rise to such failure shall be taken into
account in determining whether there has been a Company Material Adverse Effect if not otherwise falling
within any of the exceptions set forth in clauses (a)(i) through (a)(viii) or (a)(x) through (a)(xii) of this
proviso); (x) any change or effect arising from any rate cases directly related to the Company or any of its
Subsidiaries; (xi) any circumstance, development, change, event, occurrence or effect that results from any
shutdown or suspension of operations at any third-party facilities (including with respect to electricity,
power plants) from which the Company or any of its Subsidiaries obtains natural gas or electricity and (xii)
any pending, initiated or threatened Transaction Litigation, in the case ofeach ofclauses (i) through (v), to
the extent that such circumstance, development, change, event, occurrence or effect does not affect the
Company and its Subsidiaries, taken as a whole, in a materially disproportionate manner relative to other
similarly situated participants in the business and industries in which the Company and its Subsidiaries
operate; or (b) would, individually or in the aggregate, reasonably be expected to prevent or materially
impede, interfere with or delay the consummation by the Company of the Transactions.
"Company Material Cofi " shall have the meaning set forth in Section 3.15(a).
"Company Pension Plan" shall have the meaning set forth in Section 3.10(a).
"ComDany Permits" shall have the meaning set forth in Section 3.8.
"Company Plans" shall mean (a) each "employee benefit plan" (as such term is defined in section
3(3) of ERISA) that the Company or any of its Subsidiaries sponsors, participates in, is a party or contributes
to, or with respect to which the Company or any of its Subsidiaries could reasonably be expected to have
any material liability and (b) each other material employee benefit plan, program or arrangement, including
any stock option, stock purchase, stock appreciation right or other stock or stock-based incentive plan, cash
bonus or incentive compensation arrangement, retirement or deferred compensation plan, profit sharing
plan, unemployment or severance compensation plan, that the Company or any of its Subsidiaries sponsors,
participates in, is a party or contributes to, or with respect to which the Company or any of its Subsidiaries
could reasonably be expected to have any material liability, other than, in the case of (a) and (b), a
Multiemployer Plan.
5l
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
o
#5501 530 I 2
Schedule 3, Page 55 of70
o
o
"Company Prefened S 'shall have the meaning set forth in Section 3.2(a).
"Companv Retired E " shall have the meaning set forth in Section 5.1 l(b).
"Companv Retiree Hea " shall have the meaning set forth in Section 5.1 1(b).
"Company SEC Documenb" shall have the meaning set forth in Section 3.5(a).
"Company Shareholder Approval" shall have the meaning set forth in Section 3.19.
"Company Sharehold " shall have the meaning set forth in Section 5.2(b).
"e.qmpany_Stock_Plan5" shall mean the Company's Long-Term Incentive Plan, as amended and
restated, and any other equity compensation plan or arrangement of the Company.
"@" shall have the meaning set forth in Section 7.3(d).
"Confidentiality Agr " shall have the meaning set forth in Section 5.6(a).
"eonlinuali-qn_Period" shall have the meaning set forth in Section 5.11(a).
"eq$re!" means any contract, subcontract, agreement, commitment, note,, bond, mortgage,
indenture, lease, license, sublicense or other instrument, obligation or binding arrangement or
understanding of any kind or character, whether oral or in writing.
"Converted RSU" shall have the meaning set forth in Section 2.3(b).
"Dissentine Share " shall have the meaning set forth in Section 2.1(d).
"Dissenting Shareholder Shares" shall have the meaning set forth in Section 2.1(d).
"Effective Time" shall have the meaning set forth in Section 1.3.
"E!igibl9!g1;!rees" shall have the meaning set forth in Section 5.11(b).
"Encumbrances" shall mean any mortgage, deed of trust, lease, license, restriction, hypothecation,
option to purchase or lease or otherwise acquire any interest, right of first refusal or offer, conditional sales
or other title retention agreement, adverse claim of ownership or use, easement, encroachment, right of way
or other title defect, or encumbrance of any kind or nature; provided that a license of, or covenant with
respect to, Intellectual Property shall not constitute an Encumbrance.
"fu{Da!g" shall have the meaning set forth in Section 7.l6Xi).
"EnvtonmentaLlaws" shall mean all Laws relating to workplace safety or health, safety in respect
ofthe transportation, storage and delivery ofnatural gas, pollution or protection ofthe environment, natural
resources or endangered or threatened species, including Laws imposing liability for, or standards of
conduct with respect to, the exposure to, or Releases or threatened Releases of, hazardous materials,
substances or wastes, as the foregoing are enacted or in effect on or prior to Closing.
"ES!U=@I!IE" shall have the meaning set forth in Section 3.2(b).
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 56 of 70
o
#5501530 I2
52
o
o
"ERISA" shall mean the Employee Retirement Income Security Act of 1974.
"ERISA Affili-ate" shall mean each corporation or trade or business that is treated as a single
employer with the Company pursuant to Section 4001(bX1) of ERISA or Section 414(b), (c), (m) or (o) of
the Code.
"Exg,h4ogg_Act" shall have the meaning set forth in Section 3.4.
"Exchglgg_Ratie" means a fraction, the numerator of which is the Merger Consideration and the
denominator of which is the closing price per share of common stock of Parent on the TSX on the Closing
Date, converted into U.S. dollars using the reported Bank of Canada noon spot exchange rate on the Closing
Date (or as reported by such other authoritative source mutually selected by the Company and Parent).
"Executive Change o " means those certain Change of Control Agreements,
by and between the Company and certain executive officers of the Company, as set forth in Section
8.13(EC) of the Company Disclosure Schedule.
'6FCC" shall mean the Federal Communications Commission.
"FCe-ApprovAl" shall mean FCC consent pursuant to Section 310 of the Communications Act of
1934, as amended, over the transfer of control of FCC licenses that would result from the Merger.
..@,shallmeantheFederalTradeCommissionActofl9l4,as
amended.
"FERC' shall mean the Federal Energy Regulatory Commission.
"FEBC Approval" shall mean FERC authorization of the Merger pursuant to Section 203 of the
Federal Power Act of 1935, as amended.
"&Al Ortb" shall mean a Judgment by the relevant Governmental Authority that (i) is not then
reversed, stayed, enjoined, set aside, annulled or suspended and is in full force and effect, and (ii) with
respect to which, if applicable, any mandatory waiting period prescribed by Law applicable to such
Judgment before the Merger may be consummated has expired or been terminated, and (iii) as to which all
conditions precedent to the consummation of the Merger expressly set forth in such Judgment have been
satisfied.
"@giry" shall have the meaning set forth in Section 5.15(a).
"GAAB" shall mean generally accepted accounting principles in the United States
"Govemmental Authoritv" shall mean any U.S. or foreign federal, state or local, provincial or local
governmental authority, court, govemment or self-regulatory organizalion, commission, tribunal or
organization or any regulatory, administrative or other agency, or any political or other subdivision,
department or branch of any of the foregoing, including any governmental, quasi-governmental or
nongoverrrmental body administering, regulating or having general oversight over gas, electricity or
financial markets or electric reliability, or any court arbitrator, arbitration panel or other similar judicial
body.
"Hazardous Materials" shall mean any materials or substances or wastes as to which liability or
standards of conduct may be imposed under any Environmental Law.
53
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
o
#ssO1 530 12
Schedule 3, Page 57 ot70
O
o
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
"lndebtedness" shall mean, with respect to any Person, without duplication, (a) all obligations of
such Person for borrowed money (other than intercompany indebtedness), (b) all obligations of such Person
evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person evidenced
by letters of credit, bankers' acceptances or similar facilities to the extent drawn upon by the counterparty
thereto, (d) all capitalized lease obligations ofsuch Person and (e) all guarantees or other assumptions of
liability for any of the foregoing.
"lndelqnilee(S)" shall have the meaning set forth in Section 5.8(a).
"l4gll@a|Propgl[" shall mean, in any and all jurisdictions throughout the world, but, in each
case, only to the extent protectable under applicable Laws, all (a) patents and patent applications, (b)
registered and material unregistered trademarks, service marks, logos, corporate names, intemet domain
names, and any applications for registration of any of the foregoing, together with all goodwill associated
with each of the foregoing, (c) registered and material unregistered copyrights, including copyrights in
computer software, mask works and databases and (d) trade secrets and other proprietary know-how.
"IPIJ'C" shall mean the Idaho Public Utilities Commission.
"]gd.g@I" shall mean a judgment, injunction, order, decree, ruling, writ, assessment or arbitration
award of a Govemmental Authority of competent jurisdiction.
"Knowledgg" shall mean, (a) in the case of the Company, the actual knowledge after due inquiry,
as of the date of this Agreement, of the individuals listed in Section 8.13(a) of the Company Disclosure
Schedule and (b) in the case of Parent, US Parent and Merger Sub, the actual knowledge after due inquiry,
as of the date of this Agreement, of the individuals listed in Section 8.136) of the Parent Disclosure
Schedule.
"Laws" shall have the meaning set forth in Section 3.8.
"Liep5" shall mean any pledges, liens, charges, Encumbrances, options to purchase or lease or
otherwise acquire any interest, and security interests of any kind or nature whatsoever.
('MgIggI" shall have the meaning set forth in the recitals.
"M-gtgglCon5jdgralion" shall have the meaning set forth in Section 2.1(c).
"MqggISUb" shall have the meaning set forth in the Preamble.
"MPSC" shall mean the Public Service Commission of the State of Montana.
"Multiemployer Plan" shall mean any plan defined in Sections 3(37) and a00l(a)(3) of ERISA
subject to Title IV of ERISA to which Company or its ERISA Affiliates makes contributions.
"N.erry l@" shall have the meaning set forth in Section 5.1 l(b).
"Notice of Intervening Event Recommendation Change" shall have the meaning set forth in Section
s.3(dxii).
54
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 58 of70
o
#5501 530. I 2
"IRS" shall mean the U.S.Internal Revenue Service.
O 'Notice of Superior 'shall have the meaning set forth in Section
5.3(dxi).
"NYSE" shall mean the New York Stock Exchange.
"OId Plans" shall have the meaning set forth in Section 5.1 1(b).
"OPIJC" shall mean the Public Utility Commission of Oregon.
"Pargn1" shall have the meaning set forth in the Preamble.
"Parent Board" shall mean the board of directors of Parent.
"Parent Disclosure Schedule" shall have the meaning set forth in Article IV.
"P4!gnl-LTIP" shall have the meaning set forth in Section 2.3(b).
"Parent Material Adverse Effect" shall mean any change, circumstance, development, event,
occurrence or effect that, individually or in the aggregate, has had or would reasonably be expected to have
a material and adverse effect on the ability of Parent, US Parent or Merger Sub to consummate, or that
would reasonably be expected to prevent or materially impede, interfere with or delay the consummation
by Parent, US Parent or Merger Sub, of the Transactions.
"Parent Termination Fee" shall have the meaning set forth in Section 7.3(e).
O "EAying_Aggnl" shall have the meaning set forth in Section 2.2(a).
"EEGQ" shall mean the Pension Benefit Guaranty Corporation.
"Perfiormance Award" shall mean a performance award outstanding under the Company Stock
Plans that represents the right to receive a payment in cash or shares of Company Common Stock.
"@" shall have the meaning set forth in Section 2.3(a).
"Permitted Encumbrm 'shall mean (a) zoning, building codes and other state and federal land
use Laws regulating the use or occupancy of such real property or the activities conducted thereon which
are imposed by any Governmental Authority having jurisdiction over such real property and (b) easements,
rights-of-way, encroachments, restrictions, covenants, conditions and other similar Encumbrances that (i)
are not substantial in character, amount or extent in relation to the applicable real property and (ii) do not
materially and adversely impact the Company's current or contemplated use, utility or value of the
applicable real property or otherwise materially and adversely impair the Company's present or
contemplated business operations at such location.
"Pep[i4gd,L|ens" shall mean (a) Liens for Taxes, assessments or other charges by Governmental
Authorities not yet due and payable or the amount or validity of which is being contested in good faith and
for which adequate reserves have been established in accordance with GAAP, (b) mechanics',
materialmen's, carriers', workmen's, warehouseman's, repairmen's, landlord's and similar Liens granted
or which arise in the ordinary course of business, (c) Liens reflected in the Company SEC Documents, (d)
Permitted Encumbrances, (e) Liens permitted under or pursuant to any Contracts relating to Indebtedness
and (f) such other Liens that would not have a Company Material Adverse Effect.
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
o
#ss0l 530. I 2
55
Schedule 3, Page 59 of70
o
o
"P@!" shall mean an individual, corporation, limited liability company, partnership, association,
trust, unincorporated organization, other entity or group (as defined in the Exchange Act or the securities
laws of Canada), including a Governmental Authority.
"fu_Bale" shall mean, as of any determination date, the rate per annum published in the The
Wall Street Journal as the prime lending rate prevailing as of such date.
"Proxy Statement" shall have the meaning set forth in Section 3.4.
"BegulaIqly_4lplqvab" shall have the meaning specified in Section 6.1(b).
"Regulatory Filings" shall mean any filings under applicable state or federal Laws specifically
governing the regulation of public utilities, dam safety or pipeline safety.
"Release" shall mean any spill, emission, discharge, leaking, pumping, injection, pouring, deposit,
disposal, dumping, leaching or migration into or through the environment of any Hazardous Materials.
"RemedjglAgflpn" shall have the meaning set forth in Section 5.4(d).
"Bsrclentaliyg!" shall mean, with respect to any Person, the professional (including financial)
advisors, attomeys, accountants, consultants or other representatives (acting in such capacity) retained by
such Person or any of its controlled Affiliates, together with directors, officers, employees, agents and
representatives ofsuch Person and its Subsidiaries.
"Required Statutory Ap " shall have the meaning set forth in Section 3.4.
"Restraint" shall have the meaning set forth in Section 7.l6Xii).
"Restructuring" shall mean the transactions relating to the restructuring of the ownership of Merger
Sub such that it will become an indirect, wholly owned Subsidiary of US Parent, as further described in
Section 4.5 of the Parent Disclosure Schedule, and, with the wriffen consent of the Company (not to be
unreasonably withheld), such other transactions relating to the restructuring of the ownership of Merger
Sub as Parent may reasonably request in order to facilitate Parent's intemal financing arrangements
associated with the Transactions.
"Rights of Way" shall have the meaning set forth in Section 3.14(b).
"RS(J" shall mean a restricted stock unit outstanding under any Company Stock Plan that represents
the right to receive a payment in cash or shares of Company Common Stock.
"NUASI@I" shall have the meaning set forth in Section 2.3ft).
"Sarbanes-Oxley Act" shall have the meaning set forth in Section 3.5(a).
"SEC" shall mean the U.S. Securities and Exchange Commission.
"blilie!&I" shall have the meaning set forth in Section 3.1(b).
"SMAn 4g!" shall mean the Sherman Antitrust Act of 1890.
56
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 60 of70
o
#5501530 l2
"RCA" shall mean the Regulatory Commission of Alaska.
O
o
".Subsidigry." when used with respect to any party hereto, shall mean any corporation, limited
liability company, partnership, association, trust or other entity of which securities or other ownership
interests representing more than 50% of the equity and more than 50Yo of the ordinary voting power (or, in
the case of a limited parlnership, more than 50% of the general partnership interests) are, as of such date,
owned by such party or one or more Subsidiaries of such parly or by such party and one or more Subsidiaries
of such party. For the avoidance of doubt, the Company Joint Ventures are not Subsidiaries of the
Company.
"S.u@r lropqlA!" shall have the meaning set forth in Section 5.3(g).
"Surviving Corporation" shall have the meaning set forth in Section l.l.
"Takeovel-Proposal" shall have the meaning set forth in Section 5.3(fl.
"Takeover Statute" shall have the meaning set forth in Section 3.13
"Tax Returns" shall have the meaning set forth in Section 3.9ft).
"fpss5" shall have the meaning set forth in Section 3.96).
"Transaction Litigation" shall have the meaning set forth in Section 5.9.
"Tlansaclieng" refers collectively to this Agreement and the transactions contemplated hereby,
including the Merger and the Financing.
"TSX" shall mean the Toronto Stock Exchange.
"uniorl" shall have the meaning set forth in Section 3.16(a).
"SlAIgil" shall have the meaning set forth in the Preamble.
"Washineton Secre " shall have the meaning set forth in Section 1.3.
"UABNr\c!" shall mean the federal Worker Adjustment and Retraining Notification Act of 1988,
and similar state or local laws related to plant closings or mass layoffs.
"WBCA, shall have the meaning set forth in the recitals.
"WUTC" shall mean the Washington Utilities and Transportation Commission.
Section 8.14 Transfer Taxes. All transfer, documentary, sales, use, stamp, registration and
other similar Taxes and fees (including penalties and interest) incurred in connection with the Transactions
shall be paid by Parent, US Parent and Merger Sub when due and shall not be a liability of holders of
Company Common Stock.
Section8.l5 Interpretation.
(a) Time Periods. When calculating the period of time before which, within
which or following which any act is to be done or step taken pursuant to this Agreement, (i) the date that is
the reference date in calculating such period shall be excluded and (ii) ifthe last day ofsuch period is a not
a Business Day, the period in question shall end on the next succeeding Business Day.
57
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 3, Page 61 of70
o
#5501 530. I 2
o
o
(b) Dollars. Unless otherwise specifically indicated, any reference herein to
$ means U.S. dollars.
(c) Gender and Number. Any reference herein to gender shall include all
genders, and words imparting the singular number only shall include the plural and vice versa.
(d) Articles. Sections and Headines. When a reference is made herein to an
Article or a Section, such reference shall be to an Article or a Section of this Agreement unless otherwise
indicated. The table ofcontents and headings contained herein are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
(e) Include. Whenever the words "include", "includes" or "including" are used
herein, they shall be deemed to be followed by the words "without limitation."
(0 Hereof: Defined Terms. The words "hereof," "hereto," "hereby," "herein"
and "hereunder" and words of similar import when used herein shall refer to this Agreement as a whole and
not to any particular provision of this Agreement. All terms defined in this Agreement shall have the
defined meanings when used in any document made or delivered pursuant hereto unless otherwise defined
therein.
(g) Contracts: Laws. Any Contract or Law defined or refered to herein means
such Contract or Law as from time to time amended, modified or supplemented, unless otherwise
specifi cally indicated.
(h) Persons. References to a Person are also to its successors and permitted
assigns.
(i) Exhibits and Disclosure Schedules. Any exhibits to this Agreement and the
Company Disclosure Schedule are hereby incorporated and made a part hereof. The Company may include
in the Company Disclosure Schedule items that are not material in order to avoid any misunderstanding,
and such inclusion, or any references to dollar amounts herein or in the Company Disclosure Schedule,
shall not be deemed to be an acknowledgement or representation that such items are material, to establish
any standard of materiality or to define further the meaning of such terms for purposes of this Agreement
or otherwise. Any capitalized term used in any exhibit or any Company Disclosure Schedule but not
otherwise defined therein shall have the meaning given to such term herein.
0) Construction. Each of the parties hereto have participated jointly in the
negotiation and drafting of this Agreement and, in the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as jointly drafted by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any pafty hereto by virtue of the
authorship of any provision of this Agreement.
(k) Actions of the Surviving Corporation After the Effective Time. For the
purposes of this Agreement, any covenant or agreement by Parent or US Parent to cause the Surviving
Corporation to take any action, refrain from taking any action, or otherwise make any decision or
determination following the Effective Time, shall mean that Parent and US Parent shall have an obligation
to cause the Parent Affiliate that is the sole shareholder of the Surviving Corporation to exercise its rights
as the sole shareholder of the Surviving Corporation, to the extent consistent with the organizational
documents of the Surviving Corporation, to approve or otherwise support the taking of such action, the
refraining from taking such action or the making of such decision or determination, but not to ultimately
58
#5501530.12 Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_
M. Thies, Avista
Schedule 3, Page 62 ot 70
o
t cause the taking of such action, the refraining from taking such action or the making of such decision or
determination.
fS i gnat ur e p ag e fo I I ow s)
o
o
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 63 of70
#5501530 l2
59
o
o
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and
delivered as of lhe date first above written.
AVISTA CORPORATION
5By
OLYMPUS CORP
By:
Name: Scott Morris
Title; Chairman, President and Chief
Executive Officer
HYDROONELIMITED
Name: Mayo Schmidt
Title: President and Chief Executive
Officer
OLYMPUS HOLDING CORP
Name:Mayo Schmidt
Title: President and Chief Executive
Officer
Name: Mayo Schmidt
Title: President and Chief Executive
Officer
By:
By
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 64 of70
o fSignature Page to Merger Agreementf
o
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and
delivered as of the date first above written.
AVISTA CORPORATION
By:
Name: Scott Moris
Title: Chairman, President and Chief
Executive Officer
HYDRO ONE LIMITED
By:
Schmidt
Title: President and Chief Executive
Officer
o OLYMPUS HOLDING CORP
By
Schmidt
Title: President and Chief Executive
Officer
OLYMPUS CORP
By:
Schmidt
: President and Chief Executive
Officer
o
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 65 of 70
lSignature Page to Merger Agreement)
o
o
EXHIBIT A
GOVERNANCE REOUIREMENTS
The articles of incorporation and bylaws of the Surviving Corporation, as may be amended from
time to time, shall provide for the following:
1. the board of directors of the Surviving Corporation (the "Subsidiary Board") shall consist of
nine (9) members, determined as follows: (i) two (2) directors designated by the sole
shareholder of the Surviving Corporation ("Sole Shareholder") who are executives of Parent
or any of its Subsidiaries; (ii) three (3) directors who are not officers, employees or directors
(other than as an independent director of the Surviving Corporation) of Parent or any of its
Affiliates and who are residents of the Pacific Northwest region, to be designated by Sole
Shareholder (collectively, the directors designated in clauses (i) and (ii) hereof, the "!_QIe
Shareholder Desienees"); (iii) three (3) directors who as of immediately prior to the Effective
Time are members of the Board of Directors of the Company, including the Chairman of the
Board of Directors of the Company (if such person is different fi'om the Chief Executive
Officer of the Surviving Corporation); and (iv) the Chief Executive Officer of the Surviving
Corporation (collectively, the directors designated in clauses (iii) and (iv) hereof, the
"eo!0pany-D_gsiggqes"), and (x) the initial Chairman ofthe Board of Directors of the Surviving
Corporation shall be the Chief Executive Officer of the Company as of the time immediately
prior to the Effective Time for a one year term and (y) if any Company Designee resigns, retires
or otherwise ceases to serve as a director of the Surviving Corporation for any reason, the
remaining Company Designees shall have the sole right to nominate a replaeement director to
fill such vacancy, and such person shall thereafter become a Company Designee;
2. Sole Shareholder shall have the unfettered rtght to designate, remove and replace the Sole
Shareholder Designees as directors of the Surviving Corporation with or without cause or
notice at its sole discretion, subject to the requirement that (i) two (2) of such directors are
executives of Parent or any of its Subsidiaries and (ii) three (3) of such directors are not
officers, employees or directors (other than as an independent director of the Surviving
Corporation) of Parent or any of its Affiliates and who are residents of the Pacific Northwest
region, while such requirement is in effect (subject in the case of clause (ii) hereof to Sole
Shareholder determining, in good faith, that it is not able to appoint a non-employee resident
of the Pacific Northwest region in a timely manner, in which case Sole Shareholder may
replace any such director with an employee of Parent or any of its Subsidiaries on an interim
basis, not exceeding six months, after which time Sole Shareholder shall replace such interim
director with a non-employee resident of the Pacific Northwest region);
3. following the initial one year term of the Chairman of the Board of the Surviving Corporation,
Sole Shareholder shall have the right to designate the Chairman of the Board of the Surviving
Corporation, including electing to continue the term of the initial Chairman of the Board of the
Surviving Corporation;
4. at all times, the chief executive officers of the Surviving Corporation and Parent shall be
members of the Subsidiary Board, unless otherwise determined by Sole Shareholder;
Exhiblt No. Q
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
Schedule3, Page66of70
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5. not less than th,ree (3) business days' notice shall be required to call a meeting of the Subsidiary
Board and such notice shall include an agenda of all items of business to be addressed or
subject to decision at such meeting of the Subsidiary Board, unless such notice requirement or
agenda requirement is expressly waived by Sole Shareholder in writing; and
6. a quorum of the Subsidiary Board shall require (i) at least five (5) directors and (ii) that the
number of Sole Shareholder Designees in attendance be equal to or greater than the number of
Company Designees in attendance, and shall include at least one Parent Designee who is an
executive of Parent or any of its Subsidiaries.
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 67 ot70
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EXIIIBIT B
POST-CLOSING MATTERS
Op er at i o n al C o mmit m ent s
1. Maintain (a) the Surviving Corporation's headquarters in Spokane, Washington; (b) the
Surviving Corporation's office locations in each of its other service territories, and (c) no less
of a significant presence in the immediate location of each of such office locations than what
the Company and its subsidiaries maintained immediately prior to the Effective Time;
2. maintain the Surviving Corporation's and its Subsidiaries' brand and establish the plan for the
operation of the business of the Surviving Corporation and its Subsidiaries;
3. maintain at least the Surviving Corporation's and its Subsidiaries' existing levels prior to the
Effective Time of community involvement and support initiatives in the existing service
territories of the Surviving Corporation and its Subsidiaries;
4. maintain a $4,000,000 annual budget for charitable contributions by the Surviving
Corporation, make a $7,000,000 initial contribution to the Surviving Corporation's charitable
foundation at or promptly following the Effective Time and make a $2,000,000 annual
contribution to the Surviving Corporation's charitable foundation;
5. maintain at least the Surviving Corporation's and its Subsidiaries' existing levels of economic
development as of the Effective Time, including the ability of the Surviving Corporation to
spend operations and maintenance funds to support regional economic development and
related strategic opporlunities in a manner consistent with the past practices of the Surviving
Corporation and its Subsidiaries;
6. maintain the Surviving Corporation's and its Subsidiaries' existing levels as of the Effective
Time of capital allocations for capital investrnent in strategic and economic development items,
including property acquisitions in the university district, support of local entrepreneurs and
seed-stage investrnents ;
7. continue development and funding of the Surviving Corporation's and its Subsidiaries'
existing and future innovation activities; and
8. maintain the Surviving Corporation's and its Subsidiaries' safety and reliability standards and
policies and seruice quality measures in a manner that is substantially comparable to, or better
than, those curently maintained as of the Effective Time by the Company and its Subsidiaries.
Exhibit No. 3
Oase Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedule3, Page68of70
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Governance Matters
l. Retain the Surviving Corporation's existing executive management team to manage the
Surviving Corporation's business;
2. cause the board of directors of the Surviving Corporation (the "Subsidiary Board") to consist
of nine (9) members, determined as follows: (i) two (2) directors designated by the sole
shareholder of the Surviving Corporation ("SolgjhAlghqldqI') who are executives of Parent
or any of its Subsidiaries; (ii) three (3) directors who are not officers, employees or directors
(other than as an independent director of the Surviving Corporation) of Parent or any of its
Affiliates and who are residents of the Pacific Northwest region, to be designated by Sole
Shareholder (collectively, the directors designated in clauses (i) and (ii) hereof, the "So!9
Shareholder Designees"); (iii) three (3) directors who as of immediately prior to the Effective
Time are members of the Board of Directors of the Company, including the Chairman of the
Board of Directors of the Company (if such person is different from the Chief Executive
Officer of the Surviving Corporation); and (iv) the Chief Executive Officer of the Surviving
Corporation (collectively, the directors designated in clauses (iii) and (iv) hereof, the
"es4pany_Designees"), and (x) the initial Chairman ofthe Board of Directors of the Surviving
Corporation shall be the Chief Executive Officer of the Company as of the time immediately
prior to the Effective Time for a one year term and (y) if any Company Designee resigns, retires
or otherwise ceases to serve as a director of the Surviving Corporation for any reason, the
remaining Company Designees shall have the sole right to nominate a replacement director to
fill such vacancy, and such person shall thereafter become a Company Designee; and
3. maintain the composition of the Subsidiary Board (including regional representation) and the
appointment of the Chairman of the Subsidiary Board in accordance with parugraph 2
immediately above.
Additional Matters
l. Negotiate, enter into, modiff, amend, terminate or agree to changes in any collective
bargaining agreement or any other Company Material Contract with any labor organizations,
union employees or their representatives;
2. maintain compensation and benefits related practices consistent with the requilements of the
Merger Agreement; and
3. maintain the dues paid by the Surviving Corporation to various industry trade groups and
membership organizations.
The authority of the Subsidiary Board to make decisions with respect to the foregoing matters
includes the authority to amend the foregoing commitments if the Subsidiary Board determines by
special resolution requiring the approval of 2/3 of the directors that an amendment would be in the
best interest of the Surviving Corporation, taking into account relevant regulatory considerations.
Exhibit No. 3
Case Nos. AVU-E-t 7-_ / AVU-G-1 7-_
M. Thies, Avista
Schedule 3, Page 69 of 70
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APPROVAL REOUIREMENTS
Operational Matters
Approval of Sole Shareholder shall be required for any decision to:
1. enter into any agreement with respect to, or otherwise enter into any merger, consolidation,
amalgamation, share purchase or other business combination transaction, or any sale of all or
substantially all of the assets of the Surviving Corporation;
2. take any action that would reasonably be expected to lead to or result in (i) a material change
in the nature of the business of the Surviving Corporation or any of its Subsidiaries or (ii) the
carrying out by the Surviving Corporation or any of its Subsidiaries of any business other than
its current business as of the Effective Time;
3. take any steps to wind up, terminate or dissolve the corporate existence of the Surviving
Corporation or any of its Subsidiaries;
4. declare, pay or withhold any distribution or dividend;
5. make any change to director, officer or employee compensation or any aspects thereof, such
as amount, mix, form, timing etc., that would be inconsistent with current market standards
and practices; and
6. make any commitment or enter into any agreement to do any of the foregoing
Governance and Organizational Matters
l. repeal, replace or amend in any respect the articles of incorporation, bylaws, or other
organizational documents of the Surviving Corporation or any of its Subsidiaries;
2. increase or otherwise amend or change the authorized or issued capital of the Surviving
Corporation or any of its Subsidiaries;
3. make any change to the number of directors that constitute the full board of directors of the
Surviving Corporation;
4. hire, dismiss or replace the Chief Executive Officer of the Surviving Corporation; and
5. make any commitment or enter into any agreement to do any of the foregoing.
Exhibit No. 3
Case Nos. AVU-E-I7-_ / AVU-G-17-_
M. Thies, Avista
Schedule 3, Page 70 ol70
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MASTER LIST OF COMMITMENTS
A. Reservation of Certain Authority to the Avista Board of Directors [See Direct ' 1.-. ,,,
Testimony of Morris/Schmidt/Christie/Pu gliesel
1. Consistent with and subject to the terms of Exhibits A and B to the Merger
Agreement (refened to as "Delegation of Authority") contained in Appendi4_ | of
the Joint Application, decision-making authority over commitments2-15 beloSv is
reserved to the Board of Directors of Avista Corporation ("Avista") and any -change to the policies stated in commitments 2-15 requires a t*o-thirdr'lZtlyiol i'':,
of the Avista Board: = =
Governance ft-l(f
Executive Manasement: Avista will seek to retain all curren!'"r,"Jtir.
management of Avista, subject to voluntary retirements that may .opcur. rlDhis
commitment will not limit Avista's ability to determine its organizational structure
and select and retain personnel best able to meet Avista's needs over time. The
Avista board retains the ability to dismiss executive management of Avista and
other Avista personnel for standard corporate reasons (subject to the approval of
Hydro One Limited ("Hydro One") for any hiring, dismissal or replacement of the
cEo);
Board of Directors: After the closing ofthe Proposed Transaction, Avista's board
will consist of nine (9) members, determined as follows: (i) two (2) directors
designated by Hydro One who are executives of Hydro One or any of its
subsidiaries; (ii) three (3) directors who are not officers, employees or directors
(other than as an independent director of Avista or Olympus Equity LLC) of Hydro
One or any of its afliliates and who are residents of the Pacific Northwest region,
to be designated by Hydro One (collectively, the directors designated in clauses (i)
and (ii) hereof, the "Hydro One Designees"), subject to the provisions of Clause 2
of Exhibit A to the Merger Agreement; (iii) three (3) directors who as of
immediately prior to the closing of the Proposed Transactionl are members of the
Board of Directors of Avista, including the Chairman of Avista's Board of
Directors (if such person is different from the Chief Executive Officer of Avista);
and (iv) Avista's Chief Executive Officer (collectively, the directors designated in
clauses (iii) and (iv) hereof the "Avista Designees"). The initial Chairman of
Avista's post-closing Board of Directors shall be the Chief Executive Officer of
Avista as of the time immediately prior to closing for a one year term. If any
Avista Designee resigns, retires or otherwise ceases to serve as a director of Avista
for any reason, the remaining Avista Designees shall have the sole right to
I "Proposed Transaction" means the transaction proposed in the Joint Application of Avista and Hydro One filed
on September 14,2017.
caseNos AVU-E-17- ,oill-Bl'lurl 'l. fnies, Rvista-
Schequle 4, Page 1 of 13
Appendix 8 to Joint Application Page 1 of 13
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nominate a replacement director to fill such vacancy, and such person shall
thereafter become an Avista Designee.
The term "Pacific Northwest region" means the Pacific Northwest states in which
Avista serves retail electric or natural gas customers, currently Alaska, Idaho,
Montana, Oregon and Washington;
Business Operations
Avista's Brand and Plan for the Oneration of the Business: Avista will
maintain Avista's brand and Avista will establish the plan for the operation of the
business and its Subsidiaries;
Capital Investment for Economic Development: Avista will maintain its
existing levels of capital allocations for capital investment in strategic and
economic development items, including property acquisitions in the university
district, support of local entrepreneurs and seed-stage investments;
Continued Innovation: Avista will continue development and funding of its and
its subsidiaries' innovation activities;
Union Relationshins: Avista will honor its labor contracts and has the authority
to negotiate, enter into, modifu, amend, terminate or agree to changes in any
collective bargaining agreement or any of Avista's other material contracts with
any labor organizations, union employees or their representatives;
Compensation and Benelits: Avista will maintain compensation and benefits
related practices consistent with the requirements of the Merger Agreement;
Local Presence/Community Involvement
Avista's Headquarters: Avista will maintain (a) its headquarters in Spokane,
Washington; (b) Avista's office locations in each of its other service territories,
and (c) no less of a significant presence in the immediate location of each of such
office locations than what Avista and its subsidiaries maintained immediately prior
to completion of the Proposed Transaction;
10.Local Staffrne: Avista will maintain Avista Utilities' staffing and presence in the
communities in which Avista operates at levels sufficient to maintain the provision
of safe and reliable service and cost-effective operations and consistent with pre-
acquisition levels;
ll Communitv Contributions: Avista will maintain a $4,000,000 annual budget for
charitable contributions (funded by both Avista and the Avista Foundation).
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
o
Appendix 8 to Joint Application
Schedule 4, Page 2 of 13Page2ofl3
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Additionally, a $2,000,000 annual contribution willbe made to Avista's charitable
foundation;2
12.Communitv Involvement: Avista will maintain at least Avista's existing levels
of community involvement and support initiatives in its service territories;
13.Economic Development: Avista will maintain at least Avista's existing levels of
economic development, including the ability of Avista to spend operations and
maintenance funds3 to support regional economic development and related
strategic opportunities in a manner consistent with Avista's past practices;
14.Membership Oreanizations: Avista will maintain the dues paid by it to various
industry trade groups and membership organizations; and
l5 Safetv and Reliabilitv Standards and Service Oualitv Measures: Avista will
maintain Avista's safety and reliability standards and policies and service quality
measures in a manner that is substantially comparable to, or better than, those
currently maintained.
B. Rate Commitments [See Direct Testimony of Thies/Ehrbar/Lopezl
16. Treatment of Net Cost Savinss: Any net cost savings that Avista may achieve
as a result of the Proposed Transaction will be reflected in subsequent rate
proceedings, as such savings materialize. To the extent the savings are reflected
in base retail rates they will offset the Rate Credit to customers, up to the
offsetable portion of the Rate Credit.
17 Treatment of Transaction Costs: Avista will not recover the following costs in
rates: (i) legal and financial advisory fees associated with the Proposed
Transaction; (ii) the acquisition premium; (iii) any senior executive compensation
tied to a change of control of Avista; and (iv) any other costs directly related to
the Proposed Transaction.
2 Note that Commitment 53 contains an additional commitment relating to charitable contributions; pursuant to
that commitment Hydro One will cause Avista to make a one-time contribution of $7,000,000 to Avista's
charitable foundation at or promptly following closing of the Proposed Transaction.
3 Operations and maintenance funds dedicated to economic development and non-utility strategic opportunities
will be recorded below-the-line to a nonoperating account.
Exhibit No. 3
case Nos. AVU-E- I 7-_ /.iYr":l iJ;;
ScheEule 4, Page 3 of 13Appendix 8 to Joint Application Page 3 of 13
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18 Rate Credits: Avista and Hydro One are proposing to flow through to Avista's
retail customers in Washington, Idaho and Oregon a Rate Credit of 531.5 million
over a l0-year period, beginning at the time the merger closes.a The Rate Credit
consists of trvo components, and reflects an increased level of savings in years 6-
l0 as illustrated in the table below.
Two-Step Rate Crcdit Proposal
Annual Credit
Years 1-5
Annual Credit
Yean 6-10
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Total Crcdit
Total Credit $2.65 Million $3.65 Million 531.50 Millbn
Offietable Credit $1.70 Million 52.70 Millbn $22.00 Millbn
The Total Rate Credit to customers for the first five years following the closing
would be $2.65 million per year, and the credit would increase to $3.65 million
per year for the last five years of the lO-year period. A portion of the annual total
Rate Credit would be offsetable, as indicated in the table above. During the l0-
year period the financial benefits will be flowed through to customers either
through the separate Rate Credit described above or through a reduction to the
underlying cost of service as these benefits are reflected in the test period numbers
used for ratemaking. At the time of the close, the $2.65 million benefit will be
provided to customers through a separate Rate Credit, as long as the reduction in
costs has not already been reflected in base retail rates for Avista's customers.
To the extent Avista demonstrates in a future rate proceeding that cost savings, or
benefits, directly related to the Proposed Transaction are already being flowed
through to customers through base retail rates, the separate Rate Credit to
customers would be reduced by an amount up to the offsetable Rate Credit amount.
The portion of the total Rate Credit that is not offsetable effectively represents
acceptance by Hydro One of a lower rate of return during the lO-year period.
a The AEL&P operations in the City and Borough ofJuneau, Alaska, operate substantially independent ofAvista
Utilities, and these costs, from which the merger-related cost savings are derived, are currently not being charged
to AEL&P. Therefore, there are no financial cost savings to flow through to AEL&P customers. For Avista's
retail operations in Montana, Avista has approximately 30 retail customers and total retail revenue of
approximately $74,000. Due to the very limited retail operations by Avista in Montana, for administrative
efficiency the past practice by the Montana Public Service Commission has been to review the final rates recently
filed and approved in the State of Idaho, and approve those for Avista's Montana customers, when a request is
made by Avista. The date of the last approved retail rates in Montana for Avista was April27,20l l. Since that
time electric retail rates have increased in the State of Idaho, but Avista has not proposed similar increases for
its Montana customers. Because Avista's current retail rates for its Montana customers are already below its
cost of service, and for the sake of administrative efficiency, Avista and Hydro One are not proposing to flow
through financial benefit to Avista's Montana customers related to the Proposed Transaction. (If a proportionate
benefit to Montana customers were to be calculated based on the level of retail revenue, the total annual Rate
Credit for all customers combined would be approximately $190.)
case Nos. AVU-E-17- ,^?JlB:'l): 'l. mies, RviG
ScheEule 4, Page 4 of 1 3
Appendix 8 to Joint Application Page 4 of 13
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The $31.5 million represents the "floor" of benefits that will be flowed through to
Avista's customers, either through the Rate Credit or through benefits otherwise
included in base retail rates. To the extent the identifiable benefits exceed the
annual offsetable Rate Credit amounts, these additional benefits will be flowed
through to customers in base retail rates in general rate cases as they occur. The
increase in total Rate Credits for years 6- 10 will provide time for Avista and Hydro
One to identifu and capture overtime an increased level ofbenefits, directly related
to the Proposed Transaction, that can be flowed through to customers. Avista and
Hydro One believe additional efficiencies (benefits) will be realized over time
from the sharing of best practices, technology and innovation between the two
companies. It will take time, however, to identifu and capture these benefits. The
level of annual net cost savings (and/or net benefits) will be tracked and reported
on an annual basis, and compared against the offsetable level of savings.
C. Regulatory Commitments [See Direct Testimony of ThieslEhrbarllopezf
19. State Reeulatorv Authoritv and Jurisdiction: Olympus Holding Corp. and its
subsidiaries, including Avista, as appropriate, will comply with all applicable laws,
including those pertaining to transfers of property, affiliated interests, and
securities and the assumption of obligations and liabilities.
Compliance with Existins Commission Orders: Olympus Holding Corp. and
its subsidiaries, including Avista, acknowledge that all existing orders issued by
the Commission with respect to Avista or its predecessor, Washington Water
Power Co., will remain in effect, and are not modified or otherwise affected by the
Proposed Transaction.
22
20.
21. Separate Books and Records: Avista will maintain separate books and records.
Access to and Maintenance of Books and Records: Olympus Holding Corp.
and its subsidiaries, including Avista, will provide reasonable access to Avista's
books and records; access to financial information and filings; audit rights with
respect to the documents supporting any costs that may be allocable to Avista; and
access to Avista's board minutes, audit reports, and information provided to credit
rating agencies pertaining to Avista.
Olympus Holding Corp. and its subsidiaries, including Avista, will maintain the
necessary books and records so as to provide an audit trail for all corporate,
affiliate, or subsidiary transactions with Avista, or that result in costs that may be
allocable to Avista.
The Proposed Transaction will not result in reduced access to the necessary books
and records that relate to transactions with Avista, or that result in costs that may
be allocable to Avista. Avista will provide Commission Staff and other parties to
regulatory proceedings reasonable access to books and records (including those of
Olympus Holding Corp. or any affiliate or subsidiary companies) required to
Exhibit No. 3
Case Nos. AVU-E-1 7-_ / AVU-G-17-_
M. Thies, Avista
o
Appendix 8 to Joint Application Schedule 4, Page 5 of 1 3
Page 5 of l3
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o verify or examine transactions with Avista, or that result in costs that may be
allocable to Avista.
Nothing in the Proposed Transaction will limit or affect the Commission's rights
with respect to inspection of Avista's accounts, books, papers and documents in
compliance with all applicable laws. Nothing in the Proposed Transaction will
limit or affect the Commission's rights with respect to inspection of Olympus
Holding Corp.'s accounts, books, papers and documents pursuant to all applicable
laws; provided, that such right to inspection shall be limited to Olympus Holding
Corp.'s accounts, books, papers and documents that pertain solely to transactions
affecting Avi sta' s regulated utility operations.
Olympus Holding Corp. and its subsidiaries, including Avista, will provide the
Commission with access to written information provided by and to credit rating
agencies that pertains to Avista. Olympus Holding Corp. and each of its
subsidiaries will also provide the Commission with access to written information
provided by and to credit rating agencies that pertains to Olympus Holding Corp.'s
subsidiaries to the extent such information may affect Avista.
23 Cost Allocations Related to Cornorate Structure and Affiliate Interests:
Avista agrees to provide cost allocation methodologies used to allocate to Avista
any costs related to Olympus Holding Corp. or its other subsidiaries, and commits
that there will be no cross-subsidization by Avista customers of unregulated
activities.
The cost-allocation methodology provided pursuant to this commitment will be a
generic methodology that does not require Commission approval prior to it being
proposed for specific application in a general rate case or other proceeding
affecting rates.
Avista will bear the burden of proof in any general rate case that any corporate and
affiliate cost allocation methodology is reasonable for ratemaking purposes.
Neither Avista nor Olympus Holding Corp. or its subsidiaries will contest the
Commission's authority to disallow, for retail ratemaking purposes in a general
rate case, unreasonable, or misallocated costs from or to Avista or Olympus
Holding Corp or its other subsidiaries.
With respect to the ratemaking treatment of affiliate transactions affecting Avista,
Avista and Olympus Holding Corp. and its subsidiaries, as applicable, will comply
with the Commission's then-existing practice; provided, however, that nothing in
this commitment limits Avista from also proposing a different ratemaking
treatment for the Commission's consideration, or limit the positions any other
pafi may take with respect to ratemaking treatment.
Avista will notify the Commission of any change in corporate structure that affects
Avista's corporate and affiliate cost allocation methodologies. Avista will propose
revisions to such cost allocation methodologies to accommodate such changes.
Case Nos. orr-=-', r--, o?.l-Hl):j
M. Thies, Avista
Schelule 4, Page 6 of 13
Appendix 8 to Joint Application Page 6 of 13
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27.
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Appendix 8 to Joint Application
Schedule 4, Page 7 of 1 3
Page 7 of 13
Avista will not take the position that compliance with this provision constitutes
approval by the Commission of a particular methodology for corporate and
affi liate cost allocation.
Ratemakine Cost of Debt and Equitv: Avista will not advocate for a higher cost
of debt or equity capital as compared to what Avista's cost of debt or equity capital
would have been absent Hydro One's ownership.
For future ratemaking purposes:
a. Determination of Avista's debt costs will be no higher than such costs would
have been assuming Avista's credit ratings by at least one industry recognized
rating agency, including, but not limited to, S&P, Moody's, Fitch or
Morningstar, in effect on the day before the Proposed Transaction closes and
applying those credit ratings to then-current debt, unless Avista proves that a
lower credit rating is caused by circumstances or developments not the result
offinancial risks or other characteristics ofthe Proposed Transaction;
b. Avista bears the burden to prove prudent in a future general rate case any pre-
payment premium or increased cost of debt associated with existing Avista
debt retired, repaid, or replaced as a part ofthe Proposed Transaction; and
c. Determination of the allowed retum on equity in future general rate cases will
include selection and use of one or more proxy group(s) of companies engaged
in businesses substantially similar to Avista, without any limitation related to
Avista's ownership structure.
Avista Caoital Structure: At all times following the closing of the Proposed
Transaction, Avista will have a common equity ratio of not less than 44 percent,
(as calculated for ratemaking purposes) except to the extent the Commission
establishes a lower equity ratio for Avista for ratemaking purposes.
FERC Reoortine Requirements: Avista will continue to meet all the applicable
FERC reporting requirements with respect to annual and quarterly reports (e.g.,
FERC Forms 1,2,3q) after closing of the Proposed Transaction.
Particination in National and Resional Forums: Avista will continue to
participate, where appropriate, in national and regional forums regarding
transmission issues, pricing policies, siting requirements, and interconnection and
integration policies, when necessary to protect the interest of its customers.
Treatment of Confidential Information: Nothing in these commitments will be
interpreted as a waiver of Hydro One's, its subsidiaries', or Avista's rights to
request confidential treatment of information that is the subject of any of these
commitments.
Commission Enforcement of Commitments: Hydro One and its subsidiaries,
including Avista, understand that the Commission has authority to enfgce t{eosg
Case Nos. AVU-E- t 7-_ / AVU-G-17-_
M. Thies, Avista
26.
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commitments in accordance with their terms. If there is a violation of the terms of
these commitments, then the offending party may, at the discretion of the
Commission, have a period of thirty (30) calendar days to cure such violation.
The scope ofthis commitment includes the authority ofthe Commission to compel
the attendance of witnesses from Olympus Holding Corp. and its subsidiaries with
pertinent information on matters affecting Avista. Olympus Holding Corp. and its
subsidiaries waive their rights to interpose any legal objection they might
otherwise have to the Commission's jurisdiction to require the appearance of any
such witnesses.
Submittal to State Court Jurisdiction for Enforcement of Commission
Orders: Olympus Holding Co.p., on its own and its subsidiaries' behalf
including Avista's, will file with the Commission prior to closing the Proposed
Transaction an affidavit affirming that it will submit to the jurisdiction of the
relevant state courts for enforcement of the Commission's orders adopting these
commitments and subsequent orders affecting Avista.
Annual Renort on Commitments: By May 1,2019 and each May I thereafter
through May l, 2023, Avista will file a repoft with the Commission regarding the
implementation of the commitments as of December 31 of the preceding year. The
report will, at a minimum, provide a description of the performance of each of the
commitments. If any commitment is not being met, relative to the specific terms
of the commitment, the report must provide proposed corrective measures and
target dates for completion of such measures. Avista will make publicly available
at the Commission non-confidential portions of the report.
Commitments Bindins: Hydro One, Olympus Holding Corp. and its subsidiaries,
including Avista, acknowledge that the commitments being made by them are
binding only upon them and their affiliates where noted, and their successors in
interest. Hydro One and Avista are not requesting in this proceeding a
determination of the prudence, just and reasonable character, rate or ratemaking
treatment, or public interest of the investments, expenditures or actions referenced
in the commitments, and the parties in appropriate proceedings may take such
positions regarding the prudence, just and reasonable character, rate or ratemaking
treatment, or public interest of the investments, expenditures or actions as they
deem appropriate.
D. Financial Integrity Commitments [See Direct Testimony of Thies/Lopez]
Capital Structure Support: Hydro One will provide equity to support Avista's
capital structure that is designed to allow Avista access to debt financing under
reasonable terms and on a sustainable basis.
Utilitv-Level Debt and Preferred Stock: Avista will maintain separate debt
and preferred stock, if any, to support its utility operations.
Exhibit No. 3
Case Nos. AVU-E-17-_ /AVU-G-17-_
M. Thies, Avista
30.
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Appendix 8 to Joint Application
Schedule 4, Page 8 of '13
Page 8 of 13
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35.Continued Credit Ratines: Each of Hydro One and Avista will continue to be
rated by at least one nationally recognized statistical "Rating Agency." Hydro
One and Avista will use reasonable best efforts to obtain and maintain a separate
credit rating for Avista from at least one Rating Agency within the ninety (90)
days following the closing ofthe Proposed Transaction. If Hydro One and Avista
are unable to obtain or maintain the separate rating for Avista, they will make a
filing with the Commission explaining the basis for their failure to obtain or
maintain such separate credit rating for Avista, and parties to this proceeding will
have an opportunity to participate and propose additional commitments.
36. Restrictions on Upward Dividends and Distributions:
a. If either (i) Avista's corporate credit/issuer rating as determined by at least
one industry recognized rating agency, including, but not limited to, S&P,
Moody's, Fitch, or Morningstar is investment grade or (ii) the ratio ofAvista's
EBITDA to Avista's interest expense is greater than or equal to 3.0, then
distributions from Avista to Olympus Equity LLC shall not be limited so long
as Avista's equity ratio is equal to or greater than 44 percent on the date of
such Avista distribution after giving effect to such Avista distribution, except
to the extent the Commission establishes a lower equity ratio for ratemaking
purposes. Both the EBITDA and equity ratio shall be calculated on the same
basis that such calculations would be made for ratemaking purposes for
regulated utility operations.
b. Under any other circumstances, distributions from Avista to Olympus Equity
LLC are allowed only with prior Commission approval.
37.Pension Funding: Avista will maintain its pension funding policy in accordance
with sound actuarial practice.
38 SEC Reporting Requirements: Following the closing of the Proposed
Transaction, Avista will file required reports with the SEC.
Compliance with the Sarbanes-Oxlev Act: Following the closing of the
Proposed Transaction, Avista will comply with applicable requirements of the
Sarbanes-Oxley Act.
E. Ring-Fencing Commitments [See Direct Testimony of Thies/Lopez]
40. Independent Directors: At least one of the nine members of the board of
directors of Avista will be an independent director who is not a member,
stockholder, director (except as an independent director of Avista or Olympus
Equity LLC), officer, or employee of Hydro One or its affrliates. At least one of
the members of the board of directors of Olympus Equity LLC will be an
independent director who is not a member, stockholder, director (except as an
independent director of Olympus Equity LLC or Avista), officer, or employee of
Hydro One or its affiliates. The same individual may serve as an independent
case Nos. our-.-, r--, oilllHi:j
M. Thies, Avista
Appendix g to Joint Application pug" B"["fi'e
4' Pase e or 13
39
o
a
o
director of both Avista and Olympus Equity LLC. The organizational documents
for Avista will not permit Avista, without the consent of a two-thirds majority of
all its directors, including the affirmative vote of the independent director (or if at
that time Avista has more than one independent director, the affirmative vote of at
least one of Avista's independent directors), to consent to the institution of
bankruptcy proceedings or the inclusion of Avista in bankruptcy proceedings.
41. Non-ConsolidationOninion:
a. Within ninety (90) days of the Proposed Transaction closing, Avista and
Olympus Holding Corp. will file a non-consolidation opinion with the
Commission which concludes, subject to customary assumptions and
exceptions, that the ring-fencing provisions are sufficient that a bankruptcy
court would not order the substantive consolidation of the assets and liabilities
of Avista with those of Olympus Holding Corp. or its affiliates or subsidiaries
(other than Avista and its subsidiaries).
b. Olympus Holding Corp. must file an aflidavit with the Commission stating
that neither Olympus Holding Corp. nor any of its subsidiaries, will seek to
include Avista in a bankruptcy without the consent of a two-thirds majority of
Avista's board of directors including the affirmative vote of Avista's
independent director, or, if at that time Avista has more than one independent
director, the affirmative vote of at least one of Avista's independent directors.
c. If the ring-fencing provisions in these commitments are not sufficient to obtain
a non-consolidation opinion, Olympus Holding Corp. and Avista agree to
promptly undertake the following actions:
(i) Notiff the Commission of this inability to obtain a non-consolidation
opinion.
(ii) Propose and implement, upon Commission approval, such additional
ring-fencing provisions around Avista as are sufficient to obtain a non-
consolidation opinion subject to customary assumptions and exceptions.
(iii) Obtain a non-consolidation opinion.
42.Olvmnus Equitv LLC: Olympus Holding Corp. indirect subsidiaries will include
Olympus Equity LLC between Avista and Olympus LLC 2. See the post-
acquisition organizational chart in Appendix I of the Joint Application. Following
closing of the Proposed Transaction, all of the common stock of Avista will be
owned by Olympus Equity LLC, a new Delaware limited liability company, and a
wholly-owned subsidiary of Olympus LLC 2. Olympus Equity LLC will be a
bankruptcy-remote special purpose entity, and will not have debt.
43 Restriction on Pledee of Utilitv Assets: Avista will agree to prohibitions against
loans or pledges of utility assets to Hydro One, Olympus Holding Corp., or any of
their subsidiaries or affiliates, without Commission approval. Exhibit No. 3
Case Nos. AVU-E-17- /AVU-G-17-
M. Thies, Avista
4, Page 10 of 13
J
Schedule
Page l0 of I
o
Appendix 8 to Joint Application
o
o
44.Hold Harmless: Notice to Lenders: Restriction on Acouisitions and
Dispositions:
a. Avista will generally hold Avista customers harmless from any business and
financial risk exposures associated with Olympus Holding Co.p., Hydro One,
and Hydro One's other affiliates.
b. Pursuant to this commitment, Avista and Olympus Holding Corp. will file with
the Commission, prior to closing of the Proposed Transaction, a form of notice
to prospective lenders describing the ring-fencing provisions included in these
commitments stating that these provisions provide no recourse to Avista assets
as collateral or security for debt issued by Hydro One or any of its subsidiaries,
other than Avista.
c. In furtherance of this commitment:
Avista commits that Avista's regulated utility customers will be held
harmless from the liabilities of any unregulated activity of Avista or
Hydro One and its affiliates. In any proceeding before the Commission
involving rates of Avista, the fair rate of return for Avista will be
determined without regard to any adverse consequences that are
demonstrated to be attributable to unregulated activities. Measures
providing for separate financial and accounting treatment will be
established for each unregulated activity.
ii. Olympus Holding Corp. and Avista will noti$ the Commission
subsequent to Olympus Holding Corp.'s board approval and as soon as
practicable following any public announcement of, (1) any acquisition
by Olympus Holding Corp. of a regulated or unregulated business that
is equivalent to five (5) percent or more of the capitalization of Avista;
or (2) the change in effective control or acquisition of any material part
of Avista by any other firm, whether by merger, combination, transfer
of stock or assets. Notice pursuant to this provision is not and will not
be deemed an admission or expansion of the Commission's authority or
jurisdiction over any transaction or in any matter or proceeding
whatsoever.
Within sixty (60) days following the notice required by this subsection
(c)(ii)(2), Avista and Olympus Holding Corp. or its subsidiaries, as
appropriate, will seek Commission approval of any sale or transfer of
any material part of Avista. The term "material part of Avista" means
any sale or transfer of stock representing ten percent (10%) or more of
the equity ownership of Avista.
iii. Neither Avista nor Olympus Holding Corp. will assert in any future
proceedings that, by virtue of the Proposed Transaction and the resulting
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
Schedqle 4, Page 11 of 13
Page ll of13
o
Appendix 8 to Joint Application
o
o
corporate structure, the Commission is without jurisdiction over any
transaction that results in a change of control of Avista.
d. If and when any subsidiary of Avista becomes a subsidiary of Hydro One or
one of its subsidiaries other than Avista, Avista will so advise the Commission
within thirty (30) days and will submit to the Commission a written document
seffing forth Avista's proposed corporate and affiliate cost allocation
methodologies.
45.Olympus LLC 2 and Olvmpus Equitv LLC Sub-entities: Olympus LLC 2will
not operate or own any business and will limit its activities to investing in and
attending to its shareholdings in Olympus Equity LLC, which, in turn, will not
operate or own any business and will limit its activities to investing in and
attending to its shareholdings in Avista.
46.No Amendment of Rins-Fencins Provisions: Olympus Holding Corp. and
Avista commit that no material amendments, revisions or modifications will be
made to the ring-fencing provisions as specified in these regulatory commitments
without prior Commission approval pursuant to a limited re-opener for the sole
purpose of addressing the ring-fencing provisions.
F. Environmental, Renewable Energy, and Energy Efficiency Commitments [See
Direct Testimony of ChristielPugliesel
47. Renewable Portfolio Standard Requirements: Hydro One acknowledges
Avista's obligations under applicable renewable portfolio standards, and Avista
will continue to comply with such obligations.
48.Renewable Energv Resources: Avista will acquire all renewable energy
resources required by law and such other renewable energy resources as may from
time to time be deemed advisable in accordance with Avista's integrated resource
planning process and applicable regulations.
49.Greenhouse Gas and Carbon Initiatives: Hydro One acknowledges Avista's
Greenhouse Gas and Carbon Initiatives contained in its current Integrated
Resource Plan, and Avista will continue to work with interested parties on such
initiatives.
50.Greenhouse Gas Inventorv Report: Avista will report greenhouse gas emissions
as required.
51.Bfficiencv Goals and Obiectives: Hydro One acknowledges Avista's energy
efficiency goals and objectives set fonh in Avista's 2017 lntegrated Resource Plan
and other plans, and Avista will continue its ongoing collaborative efforts to
expand and enhance them.
52.Optional Renewable Power Program: Avista will continue to offer renewable
power programs in consultation with stakeholders.
Exhibit No. 3
Case Nos. AVU-E-17-_ / AVU-G-17-_
M. Thies, Avista
o
Appendix 8 to Joint Application
Schedule 4, Page 12 oI'13
Page 12 of13
o G. Community and Low-Income Assistance Commitments [See Direct Testimony of
Morris/Schmidt/Ch ristie/Pugliesel
53. Communitv Contributions: Hydro One will cause Avista to make a one-time
$7,000,000 contribution to Avista's charitable foundation at or promptly following
closing.5
Low-Income Enerw Efficiencv Fundins: Avista will continue to work with its
advisory groups on the appropriate level of funding for low income energy
efficiency programs.
Addressing Other Low-Income Customer Issues: Avista will continue to work
with low-income agencies to address other issues of low-income customers,
including funding for bill payment assistance.
s Note that Commitment I I contains additional provisions relating to Avista's charitable contributions.
case Nos. AVU-E-,,7- ,^?l:B:i): '-trl. mies, nviG
Schedule 4, Page 13 of 13Appendix 8 to Joint Application Page 13 of 13
54
55
o
o
o
CURRICULUM VITAE
FOR
CHRISTOPHER LOPEZ
o
EMPLOYMENT HISTORY
Employer TransAltaCorporation(Canada)
lndustry Focus Generation and Sale of Electricity.
Located in Alberta Canada, Dual Listed on the TSX /NYSE with a market cap of CAD$3.68 and
Total Enterprise Value of CAD$98.
Role VP Corporate Planning and Mergers & Acquisition Oct l l - 2015
Major Achievements:
. Lead Corporate Planning processes and supported the CEO / CFO annual review of
strategy and subsequent report the Board
. Lead M&A processes delivering bids on over CAD $8B or approx. 85% of the TEV of
TransAlta. Developed strategic relationships with potential targets, partners and feeder
organisations/ systems to ensure continuous pipeline of opportunities.. Optimised M&A process and developed team of l3 to deliver maximum value /
flexibility for investment in activity
Accountabilities:. Lead Corporate Planning activities; TEV -$98 and Revenue "-$38.
. Imagine altemate structures / strategies that will maximise the value of the company,
explore ways to execute and communicate the same to the CEO / CFO
. Lead M&A activities in Canada and the United States and support the same in Australiao Ensure integrity of Corporate Planning and M&A processes and outputs to ensure value
is maximised and protected.
. Effective communicatiorVcompany representation with internal and extemal stakeholders.
Role Director Generation Finance Apr 07 - Oct I I
Major Achievements:
. Lead the management reporting / value integration process for TransAlta.
o Member of and value integration partner to the Operations Leadership Team.. Developed team of 7 Managers (direct reports) and 52 professionals / para professionals
(indirect reports) into an effective, successful financial services leadership team.. Successfully merged Capital Budgeting and. Operations finance into one group and
realigned accountabilities to better service the business / asset teams (streamlined group
from 78 to 52).. Successfully integrated SAP / continuous enhancements into monthly reporting and
developed reporting standards used across the group.
Accountqbilities:o Lead the operations finance management activities for the Generation Business Segment.
Revenues CAD$2.8 Billion: Capital Expenditure $l Billion.. Lead and develop the operations finance leadership team (7 Managers {direct reports} ;
52 professionals {indirect reports} in 8 geographical locations across 4 countries)
. Lead and develop management reporting and analysis to the senior leadership team up to
and including the CEO.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
C.Lopez, Hydro One
o
Schedule 1, Page I of5
I
o
o
Employer
Role
o As part of the Generation Leadership Team, provide financial analysis and advice on how
to maximise asset performance.
. Lead and develop the forecasting, annual planning and budgeting cycleso Ensure integrity of financial accounts (control environment) and stewardship of physical
and financial assetso Ensure all corporate financial policies and controls are adhered to.
o Effective communication/company representation with intemal and extemal stakeholders.
TransAlta Energy Australia Pty Ltd. (Australia)
A subsidiary of TransAlta Corporationv,ith Operating Assets: A$400M Revenue: A$100M.
Major Customers BHP Nickel (formerly WMC Resources) and Newmonl Mining Australia
Country Financial Controller (Aust, New Zealand & Barbados) Jul 02 - Apr 07
Major Achievements:
. Developed team of5 Senior Professionals and 5 Para Professionals into an effective,
successful financial services leadership team. (Administration offices in Australia, New
Zealand and Barbados).
. Requested to act and accepted Directorships for TransAlta Companies in Australia, New
Zealand and Barbados for three years. These Companies were involved in Operations,
Finance and Insurance Activities.
o Exported reporting/analysis methodology from Australian Business to the rest of the
Company.
. Successful in communicating the Australian Growth Strategy to the Shareholder resulting
in the first growth, project for some time and an increasing appetite to invest in the
Australian Business.
. Implemented financial risk management strategy/process in regard to oil price exposure
resulting in costs well below market price over the past three years.
. Successfully managed the implementation of Tax Consolidations resulting in a
substantial benefit to the P&L n2004.
. Successfully managed/defended statutory and commercial claims on TransAlta
Corporation in New Zealand in the amount of S45M.r Refinanced the Australian Business in2004 (cross currency interest rate swap)
o Frequently acted as General Manager - Australia.
Accounlabilities:o Lead the financial management activities in Australia (Operations Company) and New
Zealand (Financing Company), Barbados (Financing and Insurance)
. Lead and develop the financial services leadership team (10 staff,5 Senior Professional)o Lead and develop periodical management reporting and analysis to the Australian
Leadership Team, the Board and the Shareholder (compliant with Australian GAAP and
foreign requirements - Sarbanes Oxley, US GAAP and CAD GAAP).
o As part of the Australian Leadership team, provide financial analysis and advice on how
to maximise asset performance and actively participate in the financial aspects of
acquisition and development projects.
. Lead and develop the forecasting, annual planning and budgeting cycles
. Lead and develop financial risk management and insurance activity (complemented by
Directorship on Global Corporate Captive Insurance Company)
o Ensure integrity of financial accounts (control environment) and stewardship of physical
and furancial assets
o Ensure all corporate financial policies and controls are adhered to
o Lead and develop the Corporate Secretarial Function for Australia
Exhibit No.4
Case Nos. AVU-E-17- and AVU-G-I7-
C Lop.r. Hydro One
o
Schedule 1, Page 2of5
o
o
Role
Role
. Lead and develop tax planning strategies (particularly as related to the shareholder
distributions)o Effective communication/company representation with intemal and extemal stakeholders.
r Member of the Joint. Venture Committee (TransAltaNewmont) for the provision of
power to Newmont Mining
Senior Business Analyst - Corporate Apr 00 - Jul 02
Maior Achievements:
. Reduced operating costs under existing contracts by A$500k per annum.o Created Budget Model - Australia, Turnover A$100M.. Created Long Range Forecast Model - Australia, 5 Years Duration.
. Implemented GST Compliance Program.
. Frequently acted as Financial Controller.
Kqt Accountabilities:
. Forward Planning (13 Companies, I Partnership, I Joint Venture, 7 Plants, 6 Profit
Centres, 100 Cost Centres). Maintaining Long Range Forecast Model (Horizon -5 years)
. Annual Budget(Operating/Capital). Comparison of Forward Plan to the Original Economic Models under which the
assets/business had been purchased.
o Monthly Variance Analysis, Actual Vs Budget/Forecast. (Customers, Australian
Management Group and Parent Management Group, Canada)
. Othero Customer Profitability Analysis and Liaison. Supplier Contract Management and Liaison. Capital Budgeting Process (A$20M per annum)
Senior Financial Accountant - Corporate Apr 99 to Apr 00
Major Achievements:r 5 Months as Acting Financial Controller.
o Created Management Reporting Framework for Australia.
o Team Leader in migration from ACCPAC to SAP.o Significant participation in the transformation from a Management to Operations
Company, i.e. contracts/staff became intemalised.
Accountabilities:o Financial Reporting
. Consolidatedll companies
o Intemal - Aust Management Group and Parent Management Group, Canada.o Extemal - Statutory, ASC, ABS, ATO and other, Auditors.o Preparation of Ad Hoc requests for analysis.
o FinancialManagement.
. AccountsPayable/ReceivableProcess.
. Cash Management Process.
. General Ledger Reconciliation Process.
. Systems
. Conversion of General Ledger and Management Reporting Structures from
ACCPAC to SAP.
r Maintenance/lmprovement - General Ledger
o Prompt verification of transaction input in the Accounting Systems.
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-17-
C Lop.r" Hydro One
o
Schedule 1, Page 3 of5
o
o
Employer
Role
Role
Role
Hamersley Iron Pty. Limited (Pilbra Iron Pty Ltd) (Australia)
Industry Focus -- Mining and Sale of lron Ore.
A subsidiary of the Rio Tinto Corporation, London, England. Rio Tinto is listed as a top 100
company worldwide and is dual listed on the ASX and LSE. Hamersley lron had assets of A$18
and annual revenue ofA $1.28.
Financial Accountant- Corporate Dec 97 - Apr 99
Maior achievements:
. Conversion of General Ledger from Legacy to SAP.
. Simplification of Consolidation Process i.e. completed within the General Ledger.o Simplification of Reporting for 4 foreign Sales Offices, including curency translation.o lmproved valuation model for ore stocks. A$300M.
Kev Accountabilities:c Financial Reporting. Consolidated24Companies, 5 Currencies.
o Intemal - Australian Management Group and Parent Management Group, London.
o External - Statutory, ASC, ABS, ATO and other, Auditors.
r Preparation of Ad Hoc requests for analysis.. Financial Management - General Ledger Reconciliation Process.
o Systems
o Maintenance/lmprovement - General Ledger
o Prompt Verihcation of Transaction input in the Accounting Systems. (Particularly in
the Legacy environment i.e. many systems linked to GL.)
Management Accountant - Mining & Processing Feb 97 - Dec 97
Major qchievements:
o Consolidation of Management Accounting Processes/lnfrastructure. 5 distinct sites into
one value chain.
. Improvement/lmplementation of Activity Based Costing.
o DevelopmenUlmprovement of the non-financial results, i.e. tonnage reconciliation.
(ssMtpa)o Costing budget for consolidated operations, A$500M.
Accountabilities:r Cost Accounting - 5 mine sites, Revenue A$500M pa, customer base: l5 Managers, 40
superintendentso Management Reporting - Financial,/Non Financialo Preparation of Ad Hoc requests for analysis
. General Ledger Reconciliation
o Capital Budgeting Support, Financial Analysis
Graduate Accountant (Site) Feb 96 - Feb 97
Accountabilities:
o Month End Reporting
. Capital Budgeting
. CapitalExpenditurePrioritisationo Post Implementation Reviewso Managerial Finance support for Capital Applications
. General Ledger Reconciliation
o Taxation - Capital for Tax and Fringe Benefits Tax compilation
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17--
C.Lopez, Hydro One
Schedule l, Page 4 of5
o
o
Employer
Role
EDUCATION. 2006o 2002o 2000
a 1997-98
a 1993-96
a 1992- 94
o l99l
Sun-Vale Foods Pty Ltd
A small private company in the food manufacturing industry with sales and distribution in
Australia and South East Asia. Revenue: A$l M.
Accountant Mar 93 - Feb 96
Accountabilities:. Ownership of all internal accounting functions. Debtor/Creditor Process, Costing, Cash
Management and the preparation of the company's Financial Statements.o Forward Planning - Budgeting and Forecasting.o Liaising with an external accountant regarding taxation matters and statutory disclosure.
o Customer profitability analysis
Graduate Diploma - Institute of Company Directors - Company Directors Course
Advanced Financial Modelling - 5 Day residential workshop.
Management and Leadership Development - Banff Centre for Management - Alberta,
Canada. - Two week residential workshop.
Professional Year - Institute of Chartered Accountants in Australia
Accounting I (FinanciaVStatutory)
Accounting II (Management Accounting/Auditing)
Taxation
Advanced Management Accounting
Ethics
Bachelor of Business - Edith Cowan University
Majors: Accounting, Finance and Taxation (Sub)
Course Average:78%o
Associate Diploma of Business - Carine College of TAFE
Major: Accounting
Course AveragezT5Yo
Certificate of Business - Carine College of TAFE
Major: Accounting
Course Average: 81%
National Institute Of Accountants. Award - Best full time student, first year
State Government Insurance Award - Best full time student, first year
Joondalup Development Corporation Award - Highest academic student
o
AWARDS
o 1993o 1993o 1992
PROFESSIONAL MEMBERSHIPS
o Institute of Chartered Accountants in Australia
r Australian Institute of Company Directors
. The Executive Connection (TEC) Key I I I
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-17-
C Lop.r, Hydro One
Schedule l, Page 5 of5
O
o Current Corporate Structure
The diagram below depicts the current relationship of Hydro One Limited and its primarv operating
subsidiaries that are referenced in the Joint Application.
Public Company
(TSX: H)
700%LOO%
Public Debt lssuer
700%100%
Rate Regulated Businesses
(98% of Revenues)
Non-Rate-Regulated Business
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
C.Lopez, Hydro One
100%
o
Hydro One Limited
Hydro One lnc.2485267 Ontario lnc.
Hydro One Networks
lnc.
Hydro One Remote
Communities lnc.
Hydro One Telecom
lnc.
o
Schedule 2,Page I of 2
a
Post-CIosing Corporate Structu re
o
Exhibit No. 4
Case Nos. AVU-E-l 7 -_ and AVU-G-1 7-_
C.Lopez, Hydro One
o
Schedule 2, Page 2 of 2
Hydro One lnc.
Hydro One Limited
(Ontario
Corporation)
Can Sub
(Ontario
Hydro One
Networks lnc.
Hydro One Remote
Communities lnc.
2486267
Ontario lnc.
Hydro One Telecom
lnc.
(Delaware Limited
Liability Company)
(Washington
Corporation)
Avista Corporation
Subsidiaries
o
hvd ro e
D
I
ONE OF NORTH AMERICA'S LARGEST ELECTRIC UTILITIES (TSX: H)
I
P
_f Ty f rf n
Ir?>
,d
I*il
4 \
I/
D A D
\I
2016 ANNUAL REPORT
C.Lopez, Hydro One
Schedule 3, Page 1 of 167
Hydro One limited is Conodo's lorgest pure-ploy electric
tronsmission ond distribution utility with $2S billion in ossets
ond onnuol revenues of over $6.5 billion. It tronsmits ond
distributes electricity sofely ond reliobly ocross the Province
of Ontorio, home to 38 percent of the country's populotion.
Hydro One owns ond operoles o 3O000 circuit km
high-voltoge lronsmission network tuonsmitting
98 percenl of Ontorio's elechic copocity, ond o
123,000 circuit km lower-voltoge distribution network
serving 75 percent of the geogrophy of the prwince
ond more thon 1.3 million residentiol ond business
cuslomers. Hydro One Limited become o public
compony coincident wirh irs initiql public offering in
November 2015, ond ils common shores ore listed
on the Toronto Slock Exchonge [TSX: H).
I HYDRO ONE'S
BUSINESS
YEAR ENDED DECE'ITBER 3I,
ICAD $ millions, except per shore omounts)2016 20r5
Revenues
Purchosed power
Revenues (net of purchosed porr"r)
Operotion, mointenonce ond odminishotion
Depreciolion ond omortizotion
lncome before finoncing chorges ond income tox expense
Finoncing chorges
lncome lox expense
Nel income oilributoble to common shoreholders
Diluted eornings per common shore
Adiusted diluted eornings per common shore '
Net cosh from (used in) operoting octivities
Adiusted net cosh from operoting oclivities2
Copitol investments
s 6,552
3,427
3,125
1,069
778
1278
393
r39
721
t.2t
t.2t
t,656
1,656
1,697
$ 6,s38
3,450
3,088
t, t35
759
1,194
376
105
690
1.39
t.r6
(r,2s3)
1,557
1,663
Tronsmission - overoge monthly Ontorio 60-minute peok demond /MW/20,690 20,344
Distribution - electricity distributed to Hydro One cuslomers /GWh/26,289 28,764
I 2015 Adiusted mrnings per shore IEPS) is colculoted using the number o{ ommon shores atstonding oi December 31, 2016
2 2015 omount excludes the $2,810 million nonrosh impoct of lPoreloted odiustments
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 2 of 167
o
TRANSMISSION DISTRIBUTION
#,flTWH
ond 25"/o of end customers
"?-b
XHtt|ez
98/o ol copocity 75"/o ol geogrophy
HYDRO ONE'S ROIE
IN THE ELECTRIC POWER SYSTEM
MYitil
,1F4 I[
Tronsmission
System
Dishibution
System
Tronsformer
(Decreosed 1o
lower volioge)
lndustriol,
Reridentiol,
Commerciol
Cuslomers
Eleckicify
Generolion
Sources
Percenloge of
Ontorio morkef
Tronshrmer
{lncreosed lo
hioher voltooe)
Tronsformer
(Decreosed to
medium voltoge)
R.EVENUES
(NET OF PURCHASED
POWER COSTS)
REGUTATED EAR,NINGS
BEFORE FINANCING CHARGES
AND INCOME TAXES
o
TOTAT ASSEIS RATE BASE
$rz.e3
BILTION
$25.35
BILLION
O Tronsmission {* Distribution O Other
TOTAT SHAREHOTDER RETURN'
NOVEMBER 5, 2OI5 IPO TO DECEMBER 31, 2OI6
HYDRO ONE
llrtuTED
S&P/TSX
CAPPED UTITITIES
$3,125 $t,3t3
MtLt-toN MILLION
CONTENIS
Letter from the Boord Choir
Letter from the President ond CEO
Tronsmission Operotions
Distribution Operotions
Customers ond Communities
Environmentol Sustoinobility
Corporole Governonce
Why lnvest in Hydro One
Monogement's Discussion ond Anolysls
Consolidoted Finonciol Stolements
Notes to Consolidoted Finonciol Stotements
Boord of Direclors ond Senior Leodership
Corporote ond Shoreholder lnformotion
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE umrED oNE oF NoRTH AMERr(A',sLUtrit r Iffm6 UhgEs
Schedule 3, Page 3 of 167
2%
s&P/TSX
COMPOSITE
INDEX
INDEX
2
3
4
6
8
t0
tt
t2
t4
49
53
98
99
s&P s00
ETECTRIC UTITITIES
INDEX
19.7%
15.%
o
s&P 500
INDEX
*Source: Bloomberg ond S&P
\
/
47.*
382
@
16.3%
9.3%/
"Hydro One hos qchieved much over this
post yeor while moking significont progress
in loying the foundotion ond building
lhe orgonizotionql momentum to deliver
increosing volue for its customers ond
shoreholders in lhe yeors to come."
I
I
I
A MESSAGE FROM
THE CHAIR OF THE BOARD
o
Deor fellow shoreholders,
2Ol6 wos Hydro One's first full yeor os
o public compony, ond its evolution to
o more broodly owned ond cuslomer-
focused orgonizotion is well underwoy.
The compony hos ochieved much over
this post yeol including executing ils
20l6 finonciol ond operoling plons ond
generoting tolol shoreholder return of
19.7% since the November 20'i5 initiol
public offering. lt hos olso mode signiflconl
progress in loying the foundotion to deliver
increosing volue for its customers ond
shoreholders in the yeors to come.
One of President ond Chief Execulive
Officer Moyo Schmidt's key obiectives over
$e post yeor wos to significontly strengthen
the compony's senior leodership leom, ond
in thot regord we now hove new executives
heoding Hydro Ones operotions, customer
service, legol, ond sfrotegy functions. Eoch
of these individuols hos brought signi{icont
experience ond copobilities to Hydro One,
ond the Boord of Direclors is very confident
lhol we now hove in ploce the depth ond
breodth of leodership experlise thot will
furlher occelerole lhe compony's evolution.
ln April 2016, the Province of Ontorio sold
on odditionol l5% of its stoke in Hydro One
to the public in o very successful secondory
offering. This followed the November
2015 initiol public offering of the shores
of Hydro One, ond served to double the
public floot of the compony to 30% of
shores outstonding while ot the some time
meosurobly increosing the troding volume
ond liquidity o[ the shores. This tronsoction
wos not dilutive lo our existing public
shoreholders, ond wos onother step by the
Province towords its stoted gool of reducing
its ownership of Hydro One to 40%.
While the Province of Onlorio remoins
o significont shoreholder of Hydro One,
the outonomy of lhe compony ond
independence of our Boord of Directors
is enshrined in o governonce ogreement
between Hydro One ond the Province.
This governonce ogreement wos execuled
in odvonce of losl yeor's initiol public
offering ond hos operoled os designed
to ensure lhot lhe compony is governed
os on independenl commerciol enlity
with the Province's role limited to thot of
o shoreholder.
I would like to recognize my fellow Boord
members for their service over this busy
period of chonge. Our Boord is comprised
of o diverse ond occomplished group of
proven leoders, eoch of whom is very
commilted to lhe success of Hydro One
ond the highest stondords of corporote
governonce. The Boord hos been highly
engoged with Moyo Schmidt ond his
leodership teom in defining the skotegy
for lhe orgonizolion ond chorting the
poth forword over the course of the nexl
few yeors.
I would olso like to ocknowledge the
hord work ond commitment of the more
thon 5,500 regulor employees of Hydro
One. This teom of dedicoted professionols
works tirelessly - often oround the clock
ond in potentiolly hozordous weolher ond
conditions - to ensure lhot eleckic power is
tronsmitted ond distributed sofely, reliobly
ond cosl-effecfively lo the millions of citizens
of Ontorio ond lhe communities in which
they live ond work.
Thonk you for your investment ond
continued supporl,
DAVTD F. DENISON, o.c
Choir of the Boord
Hydro One Limited
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 4 of 167
o
2 HYDRO ONE LlillrED 2016 ANNUAI- REPORT TSX: H
"We hove ossembled o teom of tolented
ond deeply experienced leqders who
ore dedicoted to lronsforming Hydro
One inlo o more disciplined, cuslomer-
focused ond commerciolly oriented
elecfric lronsmission ond distribution
service provider."
A MESSAGE FROM
THE PRESIDENT AND CEO
o
Deor fellow shoreholders,
This is o new ero ot Hydro One. 2016 wos
o tronsformolive yeor os we emborked on
our iourney from good to greot. ln this first
full yeor os o public compony, we undertook
o compony-wide systemolic review o[ our
business. Through this inlensive process,
we identified o number of initiotives, metrics
ond torgels thot will enoble us lo drive
greoter efficiency ond effectiveness ocross
customer service, operotions, procurement,
network plonning, copitol deployment
ond odministrotion.
Accordingly, we hove ossembled o teom
of tolented ond deeply experienced leoders
who ore dedicoted to tronsforming Hydro
One into o more disciplined, customer-
focused ond commerciolly oriented electric
konsmission ond distribulion service
provider. We ore becoming significontly
more customer ond performonce driven by
focusing on compony-wide occountobility,
productivity, ond efficiency while olso
engoging more prooctively with our
communities ond First Notions ond
M6tis porlners.
Mony Onlorions feel the pressure of
increoses to their elecfricity bills, so we
ore doing our port to keep Hydro One's
portion of the bill os low os possible.
We ore olso providing customers with
meoningful conservolion progroms so they
con toke greoter conkol of their consumption
ond monoge their bills. Port of this move
involves informotion technology inveslmenls
thot enoble the shift from poper-bosed
syslems lo increosingly mobile, online ond
poperless technologies.
Hydro One's employees hove embroced
our lronsformolionol journey to becoming
o commerciol enterprise, one focused
on delivering volue for customers ond
shoreholders. This tronsformotion is centrol
lo our octions ond slrotegies, ond is
enshrined in oll thot we endeovour to
ochieve. As we move the orgonizotion
forword ond modernize Onlorio's electricol
grid, I believe thot we hove multiple
opportunities lo creote increosing volue for
our customers ond shoreholders olike.
While we ore forlunote to hove o skong
foundotion for growth upon which lo
build, we ore olso owore lhot lhere ore
opporlunilies for us to enhonce customer
service ond improve our execulion
copobilities ocross lhe business. We olso
oppreciote the criticolity of occeleroting
the poce o[ upgroding Onlorio's oging
electric power system ond the significont
infroskuclure investment thot is needed to
build ond moinloin o skong, modern ond
relioble grid.
We mode imporlont progress lhis yeor
on the regulotory fronl, where we now
hove o plon with o cleor line of sight
to lhe imminent tronsilion lrom o cosl of
service-bosed regulotory model to o more
dynomic performonce-bosed, customer-
focused regulotory model. We ore fully
engoged ond goining troction on lhis front
in both segments of our reguloled business.
We expecl lo complele the tronsition to o
performonce-bosed regulotory fromework
in our distribution segment in eorly 2018 ond
in our tronsmission segmenl in eorly 2019.
ln oddition to the significont volue we intend
lo creote in improving the performonce of
our substontiol existing operotions, there
is olso volue to be creoted in continuing
to leod the consolidolion of whot is still
o frogmenfed system of eleckic utility
ossels in Ontorio. As such, during 2016
we significontly stepped up the rigour
ord copobilities o,ound how we ocquire
ond integrote other electric utilities. Our
successful integrotion of the Holdimond ond
Woodstock municipol utilities is o good
indicotor of things to come. During the yeoq
we olso completed the ocquisition of Greot
Lokes Power Tronsmission ond onnounced
lhe ocquisition of Orillio Power Distribution,
lwo reguloled electric utilities in Ontorio
which further odd to our leodership position.
AAy thonks go out to the fhousonds of
Hydro One employees ocross Ontorio for
embrocing this tronsformotionol lourney
ond their unwovering commitment to our
customers. I olso extend my oppreciotion
to our Boord of Directors for its support
ond confidence in monogement.
The future is bright ond we will continue
to power forword,
7rt@
,}TAYO SCHftTIDT
President ond Chief Execulive Officer
Hydro One Limited
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
HYDRo oNE LrmrrED oNE oF NoRTH AMERrgsLUp6f Sff&5 5['e'rt
Schedule 3, Page 5 of 167
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rHE SECOND LAR,GEST EIECTRICITY TRANSIAITTER IN ONTARIO. THIS ACQUISITION INCN,EASED
HYDR.O ONE'S TRANSMISSION CAPAC|rY IN ONTARIO IO 98O/", WHITE I'VTPROVING THE
CO,YTPANY,S ABIIITY TO CONNECT GENER,ATORS IN NORTHERN ONIAHO TO ELECTN,ICITY
DE'IIAND IN SOUTHERN ONTAR,IO.
ETECTRIC TRANSMISSION
SEGMENT
The scole of Hydro One's tronsmission
operolions increosed during 2016 to
opproximotely 30,OOO circu il-kilometres
of high-vohoge lines. Hydro One tronsmits
high-voltoge electricity from nucleor,
hydroeleckic, noturol gos, wind ond solor
generotion sources to locol distribution
componies ond to directly connected
induslriol customers ocross Ontorio.
Hydro One's honsmission osrelr con
be divided into three moin cotegories:
Tronsmission slolions
Used for the delivery of power, voltoge
konsformotion ond switching, the slolions
serve os conneclion points for both
customers ond generotors.
Tronsmission lines
Bulk tronsmission lines deliver power from
generoting slolions or connections to
receiving terminol stotions. Areo supply lines
toke power from fhe network ond konsmit
it lo customer supply tronsmission stotions
ot cuslomer lood centres.
Network operolions
The Onlorio Grid Control Cenlre
monoges oll of Hydro One's lronsmission
ond sub-lronsmission operotions.
During 20ld copitol irwestmenB in
Hydro One's lronsmission segmenl lotoled
$988 million, including expenditures
on the following proiects:
TORONTO MIDTOWN TRANSMISSION
REINFORCEMENT PROJECT
ln 2016, Hydro One substontiolly completed
work on the $1,l8 million Toronlo Midtown
Tronsmission Reinforcemenl Proiecl which
refurbished the existing tronsmission
infrostructure fhot serves midtown Toronto
ond oreos to the west. This fiveyeor proiect
reploced ,l4,500 metres of konsmission
cobles ond provides 100 megowotts of
odditionol copocity lo serve the locol
distribution compony ond ils cuslomers.
GUETPH AREA TRANSMISSION
REFURBISHMENT PROJECT
Hydro One subslonfiolly completed the
$87 million Guelph Areo Tronsmission
Refurbishment Proiect thol will help meet
the eleckicity needs of the growing
southwestern Ontorio region. The proiect
included upgroding o five-kilometre section
of existing tronsmission lines, ond inslolling
new tronsformer ond switching equipmenl
ol the tronsformer stotion. More thon 340
construction professionols were involved in
the construction phose of the proiect.
COTTABORATION WTH TONDON HYDRO
Hydro One enlered inlo o colloborolive
investment with London Hydro lo modernize
the equipment in Hydro One's Nelson
Tronsformer Stotion. Hydro One identified
o need to reploce oging equipment ond
London Hydro conkibuted finonciolly for
o voltoge conversion of lhe stotion to be
consistent with the other six locol honsformer
slotions, ollowing the enlire London Hydro
syslem lo be inlerconnecled. The proiect
will olso increose fie reliobility of supply
to on importont stotion thot serves much
of downtown London.
These proiecls together with mony others
underwoy ensure thol Ontorions continue to
receive o sofe, relioble supply of eleclricity
now, ond for yeors lo come.
30,ooo
CIRCUIT KILO'YIETRES
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4 HYDNO ONE L!'ViITED 2016 ANNUAI- REPORT TSX: H
Case Nos. AVU-E-I7-
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3, Page 5 of 167
Exhibit No. 4
AVU-C-17-
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IS THE PROVINCE'S LARGEST tOCAt ETECTRIC POWER DISTR,IBUTION COTAPANY
WITH APPR,OXI'IAATEIY I23,OOO CIR,CUIT KITOMETRES OF POWER LINE5.
ELECTRIC DISTRIBUTION
SEGMENT
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Operoting in rurol, suburbon ond urbon
communities spreod ocross lhe province
of Ontorio, home to 38 percent of the
populotion of Conodo, Hydro One
possesses signiflcont economies of scole
ond brings to beor o strong commitment
to ensuring o modern ond relioble locol
electricity syslem for its I.3 million
customers. This commitmenl olso includes
serving customers in 2l remote communities
spreod ocross lhe for reoches of norlhern
Onlorio thot ore not connected to the
electricily konsmission grid.
CUSTOMER CONSUTTATION
ln mid-2016, Hydro One onnounced
o province-wide consultotion process to
seek input from its customers on the
development of o five-yeor rote plon lhot
will help shope future investments in Hydro
One! electric distribution system. The gool
of lhe consultolion wos to better underslond
how Hydro One's cuslomers' needs ore
being met by lhe current system, ond the
lpes of reliobility ond service improvemenls
cuslomers would volue most. This included
oddressing oging electricity infroskuclure,
system repoirs ond responding lo power
ouloges, power quolity ond costs, os
well os new products, services ond
web-enobled tools lo moke il eosier for
cuslomers to do business wi$ Hydro One.
The feedbock influenced detoiled plons
lhot lhe compony will submil to the
Onlorio Energy Boord, who will ultimotely
determine the investmenls ond rote plons
for Hydro One's locol distribution segment
for the 2Ol8 through 2022 period.
ACQUISITION OF ORITTIA POWER
ln August 2016, Hydro One onnounced
thot it reoched o definitive ogreement
to ocquire Orillio Power Distribution
Corporotion in o tronsoction volued ot over
$41 million. Hydro One will integrote into its
operolions opproximotely .l4,000 cuslomers
locoted in Simcoe County, home lo o
populotion of more thon 30,000 ond port
of the Huronio region of Centrol Ontorio.
Hydro One's currenl service tenitory
includes lhe oreos surrounding the City of
Orillio ond this ocquisition enobles Hydro
One to reolize operotionol synergies over
time. After closing, Hydro One olso intends
to conskucl severol grid control ond
operoting focililies in Orillio. The ocquisition
is conditionol upon the sotisfoction of
customory closing conditions ond opprovol
of the Ontorio Energy Boord.
SERVING MANITOUTIN ISTAND
ln October 2016, Hydro One onnounced
lhol o new distribution stotion will be built
to serve cuslomers on Monitoulin lslond,
locoted in northern Onlorio on loke Huron.
The new dislribution slotion will reploce the
Little Current Distribution Stotion, which wos
originolly built in 1950, ond will help
improve reliobllity ond increose copocity
for the opproximolely 10,000 cuslomers
who live on Monitoulin lslond.
CIRCU!T KITOTYIETRES
OF TOCAL DISTRIBUTION LINES
GEOGRAPHY
OF PROVINCE
SERVED
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ACROSS ONTARIO
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6 HYDTO ONE LI'$[ED 2016 ANNUAI REPORT ]SX: H
Case Nos. AVU-E-17-
3, Page 8 of 167
Hydro One
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Schedule 3, Page l0
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SERVING
CUSTOMERS & COMMUNITIES
CUSTOMER
SERVICE
Throughout 2016, Hydro One's skilled ond
dedicoted employees responded 24 hours o doy,
seven doys o week to quickly ond sofely restore
power for customers through often exkemely
chollenging weother, terroin ond circumstonces.
Hydro One olso continued to provide new ond
enhonced progroms ond services to further define
the compony's commifmenl lo customer service
ond energy conservolion.
PROACTIVE OUTAGE ATERIS
ln eorly 2016, Hydro One wos the first utility in
Conodo to offer customers prooctive ouloge olerb.
Customers who regisler for this service receive
personolized emoil or texl olerts oboul outoges thot
moy offect their homes, cottoges, forms or smoll
businesses, os well os informotion on eslimoled
limes of restorotion. Since lounching lhe progrom,
Hydro One hos sent hundreds of thousonds of
prooclive olerts to customers. This service is on
extension of Hydro One's existing suite of ouloge
communicolion tools, which includes online ouloge
mops ond smortphone opps.
GET tOCAt IN FIRST NATIONS COMMUNITIES
Hydro One begon lo offer o new service model
in First Notions ond M6tis communilies which
focuses on locol, foce-lo{oce inleroclions lo ensure
cuslomers ore informed of ond hove occess fo oll
of the conservotion ond ossistonce progroms the
compony offers. Meeting with Chiefs ond Councils,
representolives from Hydro One's Cuslomer Service
leom visit communities throughout the province ond
conduct informotion-shoring sessions wilh customers.
COMMUNITY INVESTMENT
Throughout 2016, Hydro One committed
millions of dollors in donotions ond sponsorships
to communities it serves ocross Ontorio. The
contributions supported community proiecls such
os the Morkstoy ouldoor ice rink roof-building
proiect for the locol municipolity, benefiting the
community's locol youth. Other community initiotives
include the compony's portnership wifi Right to
Ploy's Promoling Life-Skills in Aboriginol Youth
progrom, o non-profit orgonizotion thot oims to
deliver sofe, fun ond educotionol progromming to
Aboriginol youlh.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
HyDRo oNE LrryurED oNE oF NoRTH AMERrg',sLdFiJrT ffi?6 515grrs
Schedule 3, Page I I of 167
FARM RAPID RESPONSE TEAM
Hydro One onnounced the lounch of its Form Ropid
Response Teom thol ossisls the compony's 13,000
forming customers to identify, ossess ond mitigote
onJorm eleckicol issues. This new opprooch better
serves the needs of Hydro One's forming customers
ond wos developed in porfnership with the Onlorio
Federotion of Agriculture. This streomlined process
olso provides Hydro One's forming customers o
single, speciolized point of contocl to better ossist
with their specific on+orm concerns.
PAPERTESS BIIIING AND HIGH USAGE ATERTS
ln lote 2016, Hydro One lounched poperless
billing nolificotions ond high usoge olerts to provide
customers with more visibility ond control over their
occounls ond energy use. With billing notificotions,
customers sign up lo receive poperless billing
together with personolized insights ond progrom
promolions, which olso provide o new online self-
service chonnel for cuslomers os on olternotive lo
contocting the coll centre. Wifi high usoge olerts,
customers receive emoils or texl messoges if their
usoge during o billing period is trending higher
thon o predefined threshold. Customers olso receive
guidonce on how they con odiust their energy use
before the end of the billing period. Through the
enhonced web portol, customers con olso eoslly
find more informotion obout lheir energy use, os
well os explore o wide ronge of energy tips ond
conservolion progroms provided by Hydro One.
RETIABITITY
SUSTAINABII,ITY
SATETY
DIVERSITY
For futher informotion on
Hydro One's commitments
to customers go to
) HydroOne.com/
Commitments
o
9
FIRST NATIONS
PARTNERSHIPS
TRANSMITTING AND
DETIVERING SOME
OF THE CTEANEST
ETECTRIC POWER
IN NORTH AMERICA
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AS A STEWARD OF THE GRID, HYDRO ONE IS FOCUSED ON TRANSftTITTING AND DETIVERTNG sAFE,
CTEAN AND SUSTAINABIE ENERGY. THIS YEAR THE CO'IIPANY PRODUCED tTS FIR,sT CORPORATE
SOCIAt RESPONSIBITlrY REPORT, ONE WHICH ADHERES TO THE GUIDELINES FOR THE G4 GLOBAL
REPORTING INITIATIVE AND IS PART OF A CONTINUED EFFOR BY THE COMPANY TO ENHANCE THE
TRANSPARENCY, ACCOUNTABITITY AND LINE OF SIGHT TO ITS SUSTAINABTE OPERATIONS.
L ENVIRONMENTAT
SUSTAINAB!LITY
HEBER, DOWN CONSERVATION AREA
Hydro One's Foresky teom portnered with the
Cenfrol Loke Ontorio Conservotion Authority
ond neighbouring utilities to mitigote the
spreod of Phrogmites, on invosive species,
on 3,500 squore metres of o right-of-woy
corridor in the Heber Down Conservolion
Areo. Chollenging ond costly lo remove,
such invosive species threoten lokes, rivers
ond forests. Together with o locol controctor
ond using o voriety of conkol methods
bosed on locotion, density ond surrounding
vegetotion of eoch oreo, the compony
begon work on eliminoting the invosive
species from its right-of-woy. With thousonds
of kilometres of konsmission line corridors
crossing the province, the compony hos
token o leodership role in engoging with
locol stokeholders, toking o prooctive
opprooch to lond monogement ond pooling
community resources to monoge fhe spreod
of invosive species.
VEGETATION MANAGE'IAENT
To ensure the continued sofe operotion of
Hydro One! tronsmission ond distribution
lines, the compony conducts province-wide
vegetotion monogement operotions to
moinloin reliobillty ocross the sptem. As port
of the compony's ongoing commitment to
locol communities, Hydro One hos consulted
with conservolion outhorities ond is worklng
with locol seed distributors to develop ond
test pollinotor-f riendly seed mixes. Pollinotors
include vorious forms of bees, wosps, onls,
flies, moths, beetles, bots ond birds. These
species feed on nector ond pollen from
plonts ond their populotions in Ontorio ore
generolly in decline due to hobitot loss,
diseose, pesticide use ond climote chonge.
To mitigote this, Hydro One is working
to incorporote pollinotor{riendly seed os
port o[ its vegetotion monogement work in
oppropriote oreos os on ohernotive to gross
seed. Locolly, this work supports provinciol
initiotives like the Pollinotor Heolth Action
Plon developed by the Ontorio Ministry of
Agriculture, Food ond Rurol Affoirs.
CORPORAXE KNIGHT'S BEST
50 COR,POR,ATE CITIZENS
Hydro One wos ronked os the top utility
in the l5th onnuol ronking of the 20'15
Corporole Knights Conodo's Best 50
Corporote Citizens. The Best 50 Corporote
Citizens in Conodo ronking ossesses o
brood ronge of Conodion enterprises on
o set of '12 sustoinobility mekics, including
corbon, woter ond woste productivity, percent
of toxes poid, leodership gender diversity,
innovotion, heolth ond sofety performonce,
ond pension fund quolity. Being recognized
os one of Conodo's Best 50 Corporote
Citizens is o testoment to Hydro One's core
volues ond demonskoles thot the compony
continues to develop o skong culture of
sustoinobility ond corporote responsibility.
Customers, investors ond cilizens of Ontorio
should expect thot Hydro One will power
forword in its responsible leodership on
Corporote Citizenship in Conodo.
(o For furlher informotion on Hydro One's
commitments to the environment, go lo
) HydroOne.com/OurCommitment
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 12 of 167
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I0 HYDRO ONE LlmirED 2016 ANNUAI REPORT TSX: H
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BOAR,D OF DIRECTON,S
AND COiTMITTEES
Dovid Denison - Choir
NOiTINAIING,
CORPORATT GOVERNAN€E,
PUBLIC POLTCY AND
REGUTAIORY
HUIAAN
RESOURCTS
HEALTH, SAFETY,
ENVIRONiIENT AND FIRST
NlrtoNs lNo lvlittg
Moyo Schmidt - Presidenl ond CEO
lon Bourne o *
Chor es Brlndomour o a
Morc Colro o o
Christie Clork o o
George Cooke a o
Morionne Horris a *
lomes Hinds a a
Kolhryn Jockson a o
Roberto .lom ieson o o
Fronces Lonkin o o
Philip Orsino *o
.lone Peverell *a
Gole Rubenstein O oo
Hydro One ond its independent Boord of Direclors recognize the
importonce o[ corporote governonce to the effective monogement
of the compony. lndependence, integrity ond occounlobility ore the
foundotion of the compony's opprooch lo corporole governonce.
It is in the long-term best lnterests of shoreholders os well os customers
ond promotes ond strengthens relotionships with employees, the
communilies in which the compony operoles ond other stokeholders
of the compony. The Boord of Direclors is firmly supported in these
commitmenls by o governonce ogreement between Hydro One ond
the Province o[ Ontorio, which wos executed in odvonce of the
November 2015 initiol public offering of the compony ond ossures
thot lhe Province's role is limited to thot of o shoreholder ond not
o monoger o[ the business.
Hydro One's Boord of Direclors is composed of o diverse ond
occomplished group of independent, proven business leoders with
deep corporote governonce experience. The Boord's primory role
is overseeing corporote performonce ond the quolity, depth ond
continuity of monogemenl required to meet the comPony's strotegic
obiectives. Hydro One is committed lo best proctices of corporote
governonce, ond regulorly reviews the compony's governonce
proctices in response to chonging governonce expeclolions ond
regulotions. The Compony's proctices ore fully oligned with the rules
ond regulotions issued by Conodion Securities Administrotors ond
the Toronto Stock Exchonge, including notionol corporote
governonce guidelines ond reloted disclosure requiremenls.
HYDRO ONE'S GOOD GOVERNANCE PRACTICES
FULTY
IN DEPENDENT
BOARD
(EXCLUDTNG CEO)
CODE OF BUSINESS
CONDUCT AND
WHISTTEELOWER
HOTLINE
ANNUAI. REVIEWS
OF BOARD AND
COMMITTEE
PERFORMANCE
COMMITTEE
AUTHORITY TO
RETAIN
INDEPENDENT
ADVISORS
BOARD AND
COMMITTEE
IN.CAMERA
DtscussloNs
DIRECTOR SHARE
OWNERSHIP
GUIDEI.INES
GOVERNANCE
AGREEMENT WITH
PROVINCE
BOARD EDUCATION
sEssroNs
TERM I.IMITS
FOR DIRECTORS
SEPARATE BOARD
CHAIR AND CEO
(9
COMMITMENT TO
DIRECTOR DIVERSITY
MAJORITY VOTING
FOR DIRECTORS
For o complete description of Hydro One's corporote
govemonce structure ond proctices ond individuol
director biogrophicol informotion, go to
) HydroOne.com/lnveslors
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDno oNE r.rnrrED oNE oF NoRTH AMERrq1',sLdF[frT lffl?6 OhErrs il
Schedule 3, Page 13 of 167
o
AUDIT
Business is 99 percent
reguloted ond operotes in
o stoble, tronsporent ond
colloborotive rote-reguloted
environmenl
3
One of the lorgest pure ploy
electric utilities in North
Americo, with significont
scole ond o leodership
position in Conodo's most
populoted province
I
Unique combinotion of
electric tronsmission ond locol
distribution, with no moteriol
exposure to commodity prices
2
Consistent rote bose growth
expected under multi-yeor
copitol investment progrom
to upgrode oging electric
power system infrostructure
4
Strong governonce structure
ond o fully independent Boord
ollow compony to operote
outonomously, tronsform its
culture ond drive shoreholder
volue creotion on multiple fronts
5
Timing of operotionol
tronsformotion coincidenl
with tronsition to Ontorio's
incentive bosed regulotory
fromework expected to
creote volue for both
customers ond shoreholders
6
Proven monogement teom
with demonstroted experience
in tronsforming orgonizotions,
occeleroting performonce
ond creoting significont
shoreholder volue
7
Attroctive dividend yield with
70 - 80 percent torget poyout
rotio ond opportunity for growth
with rote bose exponsion,
efficiency reolizotion ond
continued consolidotion
B
Strong A'-roted investment
grode bolonce sheet with
one of the highesrquolity
credit profiles in the North
Americon utility sector
I
A unique opportunity tro porticipote in the tronsformotion of o premium, lorge-scole utilityI
TEN REASONS TO INVEST
IN HYDRO ONE
12 HYDROONCUilIIED 20I6ANNUALREPORT TSX:H
Case Nos.
Exhibit No. 4
AVU-E-I7-_ and AVU-G-I 7-_
C. Lopez, Hydro One
Schedule 3, Page 14 of 167
o hydro
o
e
2OI 6 FINANCIAL REPORT
iIANAGE'$ENT'S DISCUSSION AND ANAYSIS
Consolidoted Finonciol Highlights ond Stotistics
Overview
Results of Operotions
Common Shore Dividends
Copilol lnvestments
Summory of Sources ond Uses of Cosh
liquidity ond Finoncing Strotegy
Regulotion
Olher Developmenls
NonGAAP Meosures
Reloted Porty Tronsoctions
Risk Monogement ond Risk Foctors
Forwordlooking Slotements ond lnformotion
CONSOTIDATED FINANCIAT STATEMENTS
Monogement's Report
lndependent Auditors' Report
Consolidoted Stotements o[ Operotions ond Comprehensive lncome
Consolidoted Bolonce Sheets
Consolidoted Slolements of Chonges in Equily
Consolidoted Slotements of Cosh Flows
NOTES TO CONSOTIDATED FINANCIAT STATEMENTS
BOARD OF DIRECTORS AND SENIOR TEADER,SHIP
t4
14
l5
17
t8
20
22
23
25
26
28
29
30
44
49
47
48
49
50
5l
52
53
98
99
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
HYDRo oNE LmrrED oNE oF NoRTH AMERrg',qjdUdrrFI'QIrEor#gres r0
Schedule 3, Page l5 of 167
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3
o CORPORATE AND SHAREHOLDER INFOR'YIATION
o hydtoon e
ogement's Discussion ond Anol
ended December 31, 2016 ond 2Ol5
AAo n ys rs
For fhe yeors
The following Monogement's Discussion ond Anolysis (MD&AI of the
finonciol condition ond results of operotions should be reod together
with the consolidoted finonciol slotemenls ond occomponying noles
(the Consolidoted Finonciol Stotementsl of Hydro One Limited (Hydro
One or the Compony) for the yeor ended December 3 1 , 20'l 6. The
Consolidoted Finonciol Stotements ore presented in Conodion dollors
ond hove been prepored in occordonce with United Stotes (US)
Generolly Accepted Accounling Principles (GAAP). All finonciol
informotion in this MD&A is presented in Conodion dollors, unless
otherwise indicoted.
Consolidoted Finonciol Highlights And Stotistics
Yeor ended December 3l
lmillions of dollors, except os othervvise noled)
The Compony hos prepored this MD&A in occordonce with Notionol
lnstrument 5 1 - I 02 - Continuous Disclosure Obligotions of the
Conodion Securities Administrotors. This MD&A provides informotion
for the yeor ended December 3 I , 20,1 6, bosed on informotion
ovoiloble to monogement os of Februory 9, 2017.
The comporotive informotion consists of the resuhs of Hydro One lnc.
up to October 3l , 20,15, ond the consolidoted results of Hydro One
ond Hydro One lnc. from November l, 2015 to December 3'l ,
20,15. See further detoils in section "Other Developments - Chonge
in Hydro One Ownership Slructure".
2016 201 5 Chongeo6,552
3,427
3,125
r,069
778
393
r39
721
6,538
3,450
3,088
1,r35
759
376
r05
690
r,663
1,476
20,344
28,764
0.2%
lo.7%)
1.2%
(s.8%)
2.5%
4.5%
32.4%
4.5%
lJl./ /o
6.O%
201 .O%
I l.l/o
8.7%
\.7/"
18.6%l
Revenues
Purchosed power
Revenues, net ol purchosed power
Operotion, mointenonce ond odministrotion costs
Depreciotion ond omorlizotion
Finoncing chorges
lncome tox expense
Net income ottributoble to common shoreholders of Hydro One
Bosic eornings per common shore {EPSI
Diluted EPS
Bosic pro formo odlusted non€AAP EPS (Adiusted EPS|
Diluted Adiusted EPSr
Nel cosh from (used in) operoting octivities
Adiusted nef cosh from operoting oclivitiesr
Funds from (used in) operotions (FFOIr
Adiusted FFOI
Copilol investmenls
Assels ploced in-service
Tronsmission: Averoge monfily Ontorio 6Gminufe peok demond IMW
Distribution: Electricity distributed to Hydro One cuslomers tGWhL
$ t.zt$ l.2l
$ t.ss$ t.ss
112.e%l
112.e%)
$ l.2l$ r.2r
$ t.to
$ t.t6
4.5%
4.5%
11,248)
1,562
11,479)
r,33r
,656
,656
,494
,494
,697
.605
20,690
26,289
December 3 I 2016 201 5
Debt to copitolizotion rotio2 52.6%50.7%
I See section "NonGAAP Meosures" for description ond reconciliotion of Adiusted EPS, od justed net cosh from operoting octivilies, FFO ond Adiusted FFO.
z Debt to copitolizotion rotio hos been colculoted os totol debt (includes iotol long-term debt ond short-term borrowings, net of cosh ond cosh equivolents)
divided by totol debt plus totol shoreholders' equity, including preferred shores but excluding ony omounh reloted to nonconholling interest.
Exhibit No. 4
CaseNos. AVU-E-I7- and AVU-G-I7-
i.top"r,Hydro one
o
I4 HYDRO ONE tlillTED 2016 ANNUAI REPORT TSX: H
Schedule 3, Page 16 of 167
o
Overview
Hydro One is the lorgest electricity tronsmission ond distribution
compony in Ontorio. Through its wholly owned subsidiory, Hydro
One lnc., Hydro One owns ond operoles substontiolly oll of Onbrio's
electricity tronsmission network, ond on opproximotely ,123,000 circuit
km lowvoltoge distribution network. Hydro One hos three business
segments: (i) fronsmission; (ii) distribution; ond {iii) other business.
Tronsmission Segment
Hydro One's konsmission business owns, operotes ond mointoins
Hydro One's tronsmission system, which occounts {or opproximotely
98% of Ontorio's tronsmission copocity bosed on revenue opproved
by the Ontorio Energy Boord (OEB). The Tronsmission Business
consisls of fie tronsmission system operoted by Hydro One lnc.'s
subsidiories, Hydro One Networks lnc. (Hydro One Networks) ond
Hydro One Soult Ste. Morie LP (formerly Greot Lokes Power
Tronsmission LP (Greot Lokes Power)), os well os o 66% interest in
B2M Limited Portnership {B2M LP), o limited portnership between
Hydro One ond the Sougeen Olibwoy Notion in respect of the
BruceloMilton tronsmission line. The Compony's tronsmission
business is o rolereguloted business thot eorns revenues moinly from
chorging tronsmission roles thot ore opproved by the OEB. The
tronsmission business represented opproximotely 5l% of the
Compony's lotol ossets os ot December 3 I , 20 I 6, ond
opproximotely 51% of its 20 l6 revenues, net of purchosed power.
2016 2015
Z>vz
zo>gt:AEa?
o;I6c)Caaoz
I
Elechicity tronsmitted r /MWhi
Tronsmission lines sponning the province lcicui*ilometres)
Rote bose (millions of dollors)
Copitol investmenrs lmillions of dollorsJ
Assets ploced in-service lmillions of dollors)
136,989,747
30,2s9
10,775
988
937
137,011,780
29,355
10,175
943
696
o
r Elechicity tronsmified represenls totol elechicity tronsmission in Ontorio by oll honsmihers
Distribution Segment
Hydro One's diskibution business is the lorgest in Ontorio ond
consists of the distribution system operoted by Hydro One lnc.'s
subsidiories Hydro One Networks ond Hydro One Remote
Communities lnc. The Compony's distribution business is o rote
reguloted business thot eorns revenues moinly by chorging distribution
rotes fiot ore opproved by the OEB. The diskibution business
represenled opproximotely 37% of the Compony's totol ossets os ot
December 3 I , 20 I 6, ond opproximotely 47% of its 201 6 revenues,
net of purchosed power.
I
O Residenliol
& Generol Senice
I Lorge Users
O Embedded Distribulors
2016 20 r5
Electricity distributed to Hydro One customers /GWhi
Electriciry distributed through Hydro One lines /GWhir
Dishibution lines sponning the province lcircuit*ilometres)
Distribution customers (number of customers)
Rote bose (millions of dollors)
Copitol investmenrs lmillions of dollors)
Assets ploced in-service lmillions of dollors)
26,289
37,394
122,599
r,355,302
7,056
703
662
28,764
40,721
123,425
347,231
6,739
711
775
I Unib distributed through Hydro One lines represent lotol distribution system requirements ond include electricity distributed to consumers who purchosed
power directly from the lndependent Eleclricily System Operotor (IESO).
Other Business Segment
llydro One's ofier business segment consisls of the Compony's
telecommunicotions business ond certoin corporote octivlties. The
telecommunicotions business provides telecommunicotions support for the
Compony's tronsmission ond distribution businesses, ond olso offers
communicotions ond lT solutions to orgonizolions with broodbond
network requirements ulilizing Hydro One Telecom lnc.'s (Hydro One
Telecom) fibre optic network to provide diverse, secure ond highly
relioble broodbond connectivily. Hydro One's other business segment is
nol roteregulobd. This segment represented opproximotely l2% of
l-1ydro One's totol ossets os ot December 3 1 , 201 6, ond opproximotely
2"/" of ns 2016 revenues, net of purchosed power.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE urvilrED oNE oF NoRTH AMERre',qjdterrFl!&lf6gpg,es rs
Schedule 3, Page 17 of 167
o
o
a
MANAGEMENT'S DISCUSSION AND ANALYSIS
Primory Foctors Affecting Results Of Operotions
Tronsmission Revenues
Tronsmission revenues primorily consist of the Compony's konsmission
rotes opproved by the OEB which ore chorged bosed on the monthly
peok electricity demond ocross Hydro One's high-voltoge network.
Tronsmission rotes ore designed lo generote revenues necessory to
conslruct, upgrode, exlend ond support o tronsmission system with
sufficient copocity to occommodote moximum forecosted demond
ond o reguloted return on the Compony's inveslmenl. Peok electricity
demond ls primorily influenced by weother ond economic conditions.
Tronsmission revenues olso include export revenues ossocioted wilh
lronsmitting electriclty to morkets outside of Ontorio. Ancillory
revenues include revenues from providing molntenonce services to
power generotors ond from third-porty lond use.
Distribution Revenues
Distribution revenues include the distribution rotes opproved by the
OEB ond omounts lo recover the cost of purchosed power used by
the customers of the distribution business. Distribution rotes ore
designed to generole revenues necessory to construct ond support the
locol distribution system with sufficient copocity to occommodole
existing ond new customer demond ond o reguloted relurn on the
Compony's investment. According ly, distribution revenues ore
influenced by distribution rotes, the cost of purchosed power, ond the
omount of electricil'y the Compony distributes. Distribulion revenues
olso include oncillory distribution service revenues, such os fees
reloted to the ioint use of Hydro One's distribution poles by the
lelecommunicotions ond coble television induskies, os well os
miscelloneous revenues such os chorges for lote poyments.
Purchosed Power Cosls
Purchosed power cosls ore incuned by the distribution business ond
represent the cost of the electricily purchosed by the Compony for
delivery lo customers within Hydro One's distrlbution service lerritory.
These cosls comprise the wholesole commodiry cost of energy, in
oddition to wholesole morket service ond tronsmission chorges levied
by the IESO. Hydro One posses the cost of eleckicity thot it delivers
to its customers, ond is lherefore not exposed to wholesole electricily
commodity price risk.
Operotion, Mointenonce ond
Administrotion Costs
Operotion, mointenonce ond odministrotion {OM&A) costs ore
incurred to support the operotion ond mointenonce of the tronsmission
ond distribulion systems, ond other costs such os property toxes
reloted to lronsmission ond distribution lines, stotions ond buildings.
Tronsmission OM&A costs ore incurred to sustoin the Compony's
high-voltoge tronsmission stotions, lines ond rightsofr,,roy, ond include
preventive ond conective moinlenonce costs reloted to power
equipment, overheod tronsmission lines, tronsmission stotion sites, ond
Iorestry conkol to mointoin sofe distonce between line spons ond
trees. Diskibution OM&A costs ore required to mointoin the
Compony's low-voltoge distribution system, ond include costs reloted
to distribution line cleoring ond forestry control to reduce power
outoges coused by trees, line mointenonce ond repoir, os well os
lond ossessment ond remedlotion. Hydro One monoges its costs
through ongoing efficiency ond productivity initiotives, while
continuing to complete plonned work progroms ossocioted with lhe
development ond mointenonce of its lronsmisslon ond distribution
networks.
Depreciotion ond Amortizoiion
Depreciotion ond omortizotion costs relote primorily to depreciolion
of the Compony's property, plont ond equipment, ond omortizotion
of cerloin intongible ossets ond regulotory ossets. Depreciotion ond
omortizotion olso includes the costs incurred to remove property, plont
ond equipment where no ossel retirement obligotions hove been
recorded on the bolonce sheet.
Finoncing Chorges
Finoncing chorges relote to the Compony's finoncing octivities, ond
include interest expense on the Compony's long-term debt ond short-
term borrowings, goins ond losses on interest rote swop ogreements,
nel of interest eorned on short-term investments. A portion of finoncing
chorges incurred by the Compony is copitolized to the cost of
property, plont ond equipment ossocioted with the periods during
which such ossets ore under conskuction before being ploced
in-service.
lncome Toxes
Hydro One ond its subsidiories were exempt from regulor Conodion
{ederol ond Onlorio income tox (Federol Tox Regime} ond insteod
poid on equivolent omount referred to os poyments in lieu of
corporote income toxes {PlLs) to the Ontorio Electricity Finonciol
Corporotion {OEFC) under the Electricity Acl (Plls Regime) until
October 20,l5. Since then, Hydro One ond its subsidiories hove
been sublect to the Federol Tox Regime.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page l8 of 167
o
l6 HYDRO ONE tlillTED 2016 ANNUAL REPORT TSX: H
o
Results of Operotions
Net lncome
Net lncome ottributoble to common shoreholders for the yeor ended
December 3 I , 20,l6 wos $721 million, on increose of 4.5%kon
the prior yeor. Eornings were positively offected by lower OAI8,A
ond higher revenues net o{ purchosed power. These posltive effects
were portly of{set by non-recuning items reloted to the Compony's
IPO in 20,l5, nomely on increose in the effective tox rote primorily
driven by lPOreloted tox benefit o{ $ I 9 million recorded in 20,1 5
ond divestiture ol Hydro One Brompton lnc. (Hydro One Brompton)
in 2015. Excluding these lPOreloted effects, net income increosed
by 10.9%.
Revenues
Yeor ended December 3l
(millions of dollars, except os "bgrytre notdl
Bosic EPS ond Adiusted Bosic EPS
Bosic EPS wos $ I .2 ',l in 2016 (201 5 - $ 1 .39). Bosic EPS is
significontly offected by the weighted overoge number of shores in
issue being different from lost yeor due to the effects of the lPO, ond
is the most significont reoson for the lower EPS compored lo lost yeor
Adiusted Bosic EPS, which odiusts for the inconsislent number of
shores in issue, wos $t.2t in 20,l6 {20,l5 - $,].,16}, driven by
increosed net income compored to losl yeor. See section
"NonCAAP Meosures" for description of Adiusted EPS.
2016 2015 Chonge
Z>ozIx>!!3ia=
<no6.)Ca
oz
I
Tronsmisslon
Dislribution
Other
1,584
4,915
53
t,536
4,949
5J
3.1%
lo.7%)
6,552 6,538 V.l /ooTronsmission volumes: Averoge monthly Ontorio 6Ominute peok demond /MW
Distribution volumes: ElectriciV distributed to Hydro One customers /GWh/
20,690
26,289
20,344
28/64
| ./ lo
t8.6%l
Tronsmission Revenues
Tronsmission revenues increosed by 3.,l% in 20,l6 primorily due to
the following:
t prior yeor revenues were oflected by o regulotory driven reduction
of $28 million reloted to differences between octuol ond forecost
provincewide consevolion ond demond monogement sovings
during 20 1 4, which did not recur in 20 I 6;
t higher overoge monthly Ontorio 6Gminute peok demond moinly
due to wormer weolher in lhe second ond third quorters o[ 201 6,
os well os the impoct of severol extremely cold doys thot more
thon o{fset the overoll milder weother in the fourth quorter o[
20 I 6; ond
o increosed OEB<pproved tronsmission rotes lor 20.]6.
Operotion, Mointenonce ond Administrotion Costs
Yeor ended Decenber 3l
lmillions of dollors)
Distribulion Revenues
Disf ibution revenues decreosed by 07% in 201 6 primorily due to
the following:
o the divestiture of Hydro One Brompton in August 201 5, which
olso coused the molority o[ the decreose in distribution volumes;
ond
o lower overoll energy consumption resuhing from milder weofier in
the first ond fourth quorters of 2016; podiolly offset by
. higher power costs from generotors fiol ore possed on to
customers, excluding the impoct of divestiture of Hydro One
Brompton;
I increosed OEBopproved distribution rotes {or 2016; ond
.
:3;;T;*
revenues due lo o rote order reloted lo shored-use
2016 20r5 Chonge
Tronsmission
Distribulion
Other
382
608
79
414
633
88
\7.7%l
13.e%l
110.2%l
1,069 1,135 (s. B%)o
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HyDRo oNE LrMrrED oNE oF NoRTH AMERTe\',qj0B€rrH!tf6€Elgres rz
Schedule 3, Page 19 of 167
o
o
MANAGEMENT'S DISCUSSION AND ANALYSIS
Tronsmission OM&A Costs
Tronsmission OM&A decreosed by 7 .7% in 20.1 6 primorily due to
lower proiect cost ond inventory writedowns coupled with lower
octivity reloted to lronsformer equipmenl refurbishments ond stotions
mointenonce.
Distribution OM&A Costs
Dishibution OAil&.A decreos ed by 3.9% in 20.l 6 primorily due to the
following:
o decreose in bod debt expense including the impoct of revised
estimotes of uncollectible occounts;
o the divesliture of Hydro One Brompton in August 201 5;
o lower support services costs; ond
o lower costs ossocioted with underground distribution coble
locotes; portiolly offset by
. higher volume of vegefotion monogemenl octivilies.
Other OM&A Costs
Other OM&A decreosed W 10.2% in 2016 primorily due to lower
costs reloting to the integrotion ol ocquired locol distributlon
componies ond lower consuhing costs.
Depreciotion ond Amortizotion
The increose of $ l9 million or 2.5% in depreciotion ond
omortizotion costs for 20'16 wos moinly due to the growh in copitol
ossets os the Compony continues to ploce new ossets in-service,
consistent with its ongoing copitol investment progrom.
Finoncing Chorges
The increose of $
,l7 million or 4.5% in finoncing chorges for 20 16
wos moinly due to the following:
. on increose in interest expense on long-term debt moinly due to the
increose in weighted overoge long-lerm debt bolonce outstonding
during the yeor, portiolly offset by o decreose in the weighted
overoge interest role for long-term debt; ond
. on increose in interest expense on short-term noles moinly due to
the increose in weighted overoge short-term notes bolonce
oulstonding during the yeor, os well os on increose in the
weighted overoge interesl rote for short-term notes.
lncome Tox Expense
lncome tox expense in 20'16 increosed by $34 million compored to
201 5, ond the Compony reolized on effective tox rote of
opproximotely 15.7%in 2016, compored to opproximotely 'l 2.8%
reolized in 2015. The increose in the tox expense is primorily due to
the effect of on lPGreloted positive lox odiustmenl of $ l9 million ln
20 1 5, coupled with higher income before toxes in 201 6.
Amount per Shore
Totol Amount
lmillions of dollors)
Common Shore Dividends
ln 20,16, the Compony declored ond poid cosh dividends to common shoreholders os follows:
Dote Declored Record Dote Poyment Dote
Februory .l1, 2016
Moy 5, 2016
August 1 1,2016
November l0,2Ol6
Morch 17, 2O'l 6
June 14,2016
September 14,2016
December 14,2016
Morch 31,2016
June 30, 20.l6
September 30,2016
December 30, 20]6
$0.:a,
$0.21
$0.21
$0.21
202
125
125
125
577
rThiswosthefirstcommonshoredividenddecloredbylheComponyfollowingthecompletionof itsinitiol publicofferinginNovember20l5.The$0.34per
shore dividend included $0. I 3 for the postlPO period from November 5 to December 3 I , 201 5, ond $0.2,l for the quorler ended Morch 3 I , 201 6.
Following the conclusion of the fourth quorter of 2016, the Compony declored o cosh dividend to common shoreholders os follows
Dote Declored Record Dote Poyment Dote Amount per Shore
Totol Amount
(millions of dollors)
Februory 9,2017 Morch I 4, 20 I 6 Morch 3 'l , 201 7 $0.21 t25
o
I8 HYDRO ONE LI'IIITED 20I6 ANNUAI. REPORT TSX: H
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 20 of 167
O
Divestiture of Hydro One Brompton
On August 3 I , 201 5, o dividend wos poid to lhe Province of
Ontorio (Province) by tronsferring to o compony wholly owned by the
Province oll of the issued ond outstondlng shores of Hydro One
Brompton ond intercompony indebtedness owed to Hydro One lnc.
by Hydro One Brompton. Hydro One's 20 I 5 consolidoted results of
operoiions include the resuhs of Hydro One Brompton up to
August 31, 20,l5. The following tobles present quorterly results of
Hydro One Brompton thot were included in consolidoted results ol
Hydro One for the yeor ended December 3 I , 201 5.
Quorter ended
lmillions of dollors)
Mor. 3,l,
201 5
Jun.3O,
20r5
Sept. 30,
201 5
Dec.3l,
20r5
20r5
Totol
Z>oz
za>g3iaa6
I6
Ca
(JZ
I
Revenues
Purchosed power
o/\ &A
Depreciotion ond omortizotion
lncome tox expense
125
107
6
5
129llt
6
4
I
r00
88
4
2
{1)
354
306
l6
1t
Net income 777 21
Copitol investments B9ll 28
Selected Annuol Finonciol Stotistics
Yeor ended December 3 I
(nillions of dollors, except per shore omounts)2016 20r5 2014
o Totol revenue
Net income ottributoble to common shoreholders
Bosic ond diluted EPS
Bosic ond diluted Adlusted EPS
Dividends per common shore declored
Dividends per preferred shore declored
6,552
721
6,538
690
6,548
731
1.21
1.21
0.971
1.12
39
t6
83
03
1.53
1.23
0.56
r.38
rThe$O.gTpershoredividendsdecloredin20l6included$0.l3forthepost-lPOperiodfromNovember5toDecember3l,20l5,ond$0.84fortheyeor
ended December 31, 2016.
December 3l
(millions of dollors)2016 201 5 2014
Totol ossets
Totol noncurrent finonciol liobilities
25,351
10,078
24,294
8,207
22,550
8,373
Quorterly Results of Operotions
Quorter ended Dec. 3l , Sep. 30, Jun. 30. Mor. 3l ,
lmillions of dollors, except EPS) 2016 2016 2016 2016
Dec.3,],
20r5
Sep. 30,
201 5
lun. 30,
20r5
Mor. 3l ,
2015
Revenues
Purchosed power
Revenues, net of purchosed power
Net income to common shoreholders
Bosic EPS
Diluted EPS
Bosic Adiusted EPS
Diluted Adiusted EPS
t ,614
858
756
128
1,706
870
836
233
1,546
803
743
152
1,563
838
725
131
I,BOB
970
838
ttd
$ o.22
$ o.2l
$ 0.22
$ o.2l
$ o.3e
$ 0.3e
$ o.se
$ o.3e
$ 0.26
$ 0.25
$ 0.26
$ o.2s
$ 0.26
$ o.zo
$ o.zt
$ o.zt
$ o.:q
$ o.3e
$ o.sz
$ 0.32
$ o.zz
$ o.zz
$ o.zz
$ o.zz
$ o.tz
$ o.tt
$ o.sa
$ 0.38
1,686
896
790
208
$ 0.35
$ o.3s
$ 0.35
$ 0.3s
1,522
786
736
143
,645
856
789
188
o Voriolions in revenues ond net income over lhe quorters ore primorily due to the impoct of seosonol weother conditions on customer demond ond
morket pricing.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HyDRo oNE LrmrrED oNE or NoRTH AMERtq}',tltftff rFllt[6eHgrrs rc
Schedule 3, Page 2l of167
o
MANAGEMENT'S DISCUSSION AND ANALYSIS
Copitol Investments
The Compony mokes copitol investments to mointoin the sofety,
reliobility ond integrily ol its tronsmission ond distrlbution ossets ond to
provide for the ongoing growth ond modernizotion required lo meel
the exponding ond evolving needs of its customers ond the electricity
morket. This is ochieved through o combinolion of sustoining copitol
The following toble presents Hydro One's 20,16 ond 2015 copitol investments
Yeor ended December 3l
(millions of dollors)
inveslments, which ore required to support the continued operotion of
Hydro One's existing ossels, ond development copitol investments,
which involve both odditions to existing ossets ond lorge scole
projects such os new lronsmission lines ond tronsmission stolions.
2016 20 r5
706
r66
71
750
r56
82
6.2%
16.o%)
I5.5%
Tronsmission
Sustoi ni ng
Development
Other
9BB 943 4.8%
Diskibution
Susloining
Development
Other
384
217
102
398
220
93
(3.s%)
11.4%)
9]%
703 711 (r . r%)
6 9 (33.3%)OtherOTotol copitol investments 1,697 r,663 l.U /o
Tronsmission Copitol lnvestments
Tronsmission copitol investments lncreosed by $45 million or 4.8%in
2016. Principol impocts on the levels of copitol investments included:
o on increosed volume of work on overheod line refurbishmenls ond
insulotor replocements;
o on increosed volume o[ inlegroted stolion component replocemenls
to sustoin certoin oging ossets ol lronsmission stotions;
o continued work on moior locol oreo supply network development
proiects, such os the Hollond Tronsmission Stotion, the Howthorne
Tronsmission Stotion, ond the Toronto Midtown Tronsmission
Reinforcement; ond
o increosed investments reloting to informotion technology
inf rosiructure ond customer progroms, enhoncement proiecls,
including investments to integrote mobile technology wilh the
Compony's exisling work monogemenl tools; poillolly offset by
r decreosed investments in syslem enhoncemenl proiects, primorily
due lo completion o{ certoin proiects ond o difference in timing of
work on olher proiects; ond
. completion of the Guelph Areo Tronsmission Refurbishment proiect.
Distribution Copitol lnveslments
Distribution copitol investments decreosed by $8 million or 'l .l % in
2016. Principol impocts on the levels o[ copitol inveslments included:
. reduced copitol expenditures due lo the divestiture of Hydro One
Brompton in 2015; ond
. o lower volume ol work within stotion refurbishment progroms ond
lower volume of spore tronsformer purchoses; portiolly olfset by
. increosed investmenls reloted to informotion technology
infrostructure ond customer progroms together with upgrode ond
enhoncement projects, including investmenls to integrote mobile
technology with the Compony's existing work monogement tools;
ond
. inveslments in smort grid technology lo mitigote power quolity
impocts of dlstributed generotion ond to improve ouloge response
times.
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-I7-
i.Lop".,Hydro one
o
20 HYDRO ONE LaillIED 2016 ANNUAL REPORT TSX: H
Schedule 3, Page 22 of 167
Chonoe
o
Moior Tronsmission Copitol lnvestment Proiects
The following toble summorizes the stotus o[ significont tronsmission proiects os ot December 31 , 20l6:
Proiect Nome Locotion TyP"
Anticipoted
ln-Service
Dote
Estimoted
Cost
Copitol Cost
TeDote
Development Proiects:
Guelph Areo Tronsmission
Refurbishment
Toronto Midtown Tronsm ission
Reinforcement
Supply to Essex County
Tronsmission Reinforcement
Clorington Tronsmission Stotion
Northwest Bulk Tronsmission Line
Eosl-West Tie Stotion Exponsion
Guelph oreo
Southwestern Ontorio
Toronto
Southweslern Ontorio
Wlndsor-Essex oreo
Soulhweslern Ontorio
Oshowo oreo
Soulhwestern Ontorio
Thunder Boy
Northwestern Ontorio
Tronsmission line
upgrode
New tronsmission
line
New tronsmission
line ond stotion
New tronsmission
stotion
New tronsmission
line
September
2016r
December
20162
$l18 million $ll3 million
20r 8 $73 million $13 million
2018 $262 million $ 192 million
Northern Ontorio Stotion exponsion
To be
determined
2020
To be
determined
$166 million
>7az
za>g-t;E
a=
<;
I6oCaaoz
I
o Sustoinment Projects:
Bruce A Tronsmission Stotion
Richview Tronsmission Stolion
Circuit Breoker Replocement
Lennox Tronsmission Stotion
Circuit Breoker Replocement
Beck #2 Tronsmission Stotion
Circuil Breoker Replocement
Tiverton
Southwestern Ontorio
Toronto
Southwestern Ontorio
Noponee
Southeostern Ontorio
Niogoro oreo
Southwestern Ontorio
Stotion sustoinment 201 9
Stotion sustoinment 20,l 9
Slotion susloinmenr 2O2O
Slolion sustoinmenl 2021
$'109 million $83 million
$102 million $68 million
$95 million $.]5 mtllton
$93 million $28 million
r Moior portions of the project were completed ond ploced in-seryice in September 201 6. Work on certoin minor portions of the proiet conlinues in the first
quorter of 2017.
2 Moior portions of lhe project were completed ond ploced in-service in December 201 6. Work on cerloin minor portions of the proiect continues in the first
qooner ol 2017.
o
Future Copitol lnvestments
Followlng is o summory o[ estimoted copitol investments by Hydro
One over he next five yeors. The Compony's estimoles ore bosed on
monogement's expectolions of the omount of copitol expenditures thot
will be required to provide tronsmission ond distribution services thot
ore efficient, relioble, ond provide volue for cuslomers, consistent with
the OEB's Renewed Regulotory Fromework. These estimotes differ
from the prior yeor disclosures, reflecting onnuol increoses o[
$ I 26 million lor 2017 , $ i I 3 million for 201 8, $239 million for
20l9, ond $360 million for 2020. These future copilol investments
reflect monogement's best eslimotes ond, os opplicoble, proiections
included in rote filings cunently in process. These proiections ond the
timing o{ expenditures ore in lorge port subiect to opprovol by the
OEB, ond will be odiusted going forword os oppropriote to reflecl
role decisions by the OEB.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
HYDRo oNE urvurED oNE oF NoRTH AMERre'',Lr-SbiffrFllQilEeHg,es zt
Schedule 3, Page 23 of 167
$87 million $86 million
o
MANAGEMENT'S DISCUSSION AND ANALYSIS
The lollowing toble summorizes Hydro One's onnuol projected copitol investmentslor 2Ol7 to 2021 , by business segment:
(millions of dollors) 2O)7 2018 2019 2020 2021
Tronsmission
Distribution
Other
t,086
648
12
1,132
647
9
1,217
771
I
1,278
735
6
1,486
749
I
Totol copitol investments 1,746 1,788 1 ,996 2,019 2,243
The following toble summorizes Hydro One's onnuol proiected copitol investmenls tor 2017 to 2021 , by cotegory:
lmillions of dollors) 2017 20I B 2019 2020 2021
Sustoin ing
Development
Otherr
1,107
414
225
I ,165
400
ttJ
1,219
484
293
1,327
487
205
1,546
490
207
Totol copitol investments 1,746 1,788 1,996 2,019 2,243
O
I "Other" copitol expenditures consist o{ speciol proiects, such os those reloting to informolion technology.
Summory Of Sources And Uses Of Cosh
Hydro One's primory sources of cosh flows ore funds generoted from operotions, copitol morket debt issuonces ond bonk credit focilitles thot ore
used lo sotisly Hydro One's copitol resource requirements, including the Compony's copitol expenditures, servicing ond repoyment o[ debt, ond
dividend poyments.
Yeor ended Decenber 3l
lmillions of dollors) 2016 2O1 5
Cosh provided by (used in) operoting oclivities
Cosh provided by finoncing octivities
Cosh used in investing oclivities
1,656
161
(r,86r)
0,248)
2,954
11,712)
Decreose in cosh ond cosh equivqlenq l44l (6)
Primory foctors behind the increose in cosh provided by operoting octivities
The increose in cosh provided by operoting octivities is primorily due to o defened tox recovery of $2.8 billion recorded in 20.)5 thot resulted os
o consequence of leoving the Plls Regime ond entering the Federol Tox Regime.
Primory foctors behind the decreose in cosh
provided by finoncing octivities
Sources of cosh
o The Compony received $2.3 billion proceeds from issuonce of
long-term debt in 2016, compored to $350 million received lost
yeor.
r The Compony received $3,03.l million proceeds from issuonce of
short-term notes in 20'! 6, compored to $2,89,1 million received
losl yeor.
o ln 20 15, the Compony received $2.6 billion proceeds from
common shores issued to the Province prior to the completion of
the initiol public offering {lPO}.
Uses o[ cosh
o Dividends poid in 2016 were $596 million, consisting o[
$577 mllion common shore dividends ond $ I 9 million prefened
shore dividends, compored to $BB8 million poid in 2015. 20l5
dlvidends consisted of $25 mlllion common shore dividends,
$ I 3 million prefened shore dividends, os well os on $800 million
speciol dividend poid to the Province prior to the completion of the
tPo.
r The Compony repoid $4,053 million of short-term notes,
compored to $,1,400 million repoid lost yeor.
e The Compony repoid $502 million of long-term debt in 201 6
compored to $585 million repoid lostyeor.
Exhibit No. 4
CaseNos. AVU-E-I7- and AVU-G-I7-
C. Lop"r, Hydro One
o
22 HYDRO ONE LllllTED 2016 ANNUAL REPORT TSX: H
Schedule 3, Page 24 of 167
o
o
Primory foctors behind the increose in cosh used
in investing octivilies
Uses of cosh
r Copiiol expendilures were $29 million higher in 2016, primorily
due to increosed honsmission copitol investments consistent with the
Compony's ongoi ng copitol invesf ment progrom.
Liquidity ond Finoncing Strotegy
Short-term liquidity is provided through [unds from operotions, Hydro
One lnc.'s commerciol poper progrom, ond the Compony's
consolidoted bonk credit focilitles. Under the commerciol poper
progrom, Hydro One lnc. is outhorized to issue up to $,l.5 billion in
shod-term notes with o term to moturity of up to 365 doys. At
December 3 i, 2016, Hydro One lnc. hod $469 million in
commerciol poper borrowings outstonding, compored to
$ I ,49.l million outstonding ot December 3l , 201 5. ln oddition, the
Compony ond Hydro One Inc. hove revolving bonk credit focilities
totolling $2,550 million moturing in 2021 . The Compony moy use
the credit locilities for working copitol ond generol corporole
purposes. The short-term liquidity under the commerciol poper
progrom, the credit focilities ond onticipoted levels o[ funds from
operotions ore expected to be sufficient to fund the Compony's
normol operoting requiremenls.
At December 3,1, 20.l6, the Compony's longlerm debt in the
principol omounr of $ I 0,671 million included $ t O,SZS million long-
term debt issued under Hydro One lnc.'s Medium Term Note (MTN)
Progrom ond long-term debt in the principol omount o[ $ 148 million
held by Greot Lokes Power. At December 31 , 2O16,lhe moximum
outhorized principol omounl of noles issuoble under the current MTN
Progrom prospectus filed in December 2015 wos $3.5 billion, with
$ I .2 billion remoining ovoiloble for issuonce until Jonuory 20,l 8. The
Roting Agency
o ln 20,l 6, the Compony poid $226 million to ocquire Greot Lokes
Power, compored to o totol of $90 million poid in 2015 to
ocquire Holdimond County Utilities lnc. {Holdimond Hydro) ond
Woodstock Hydro Holdings lnc. (Woodstock Hydro).
o In August 2015, on investmentof $53 million wos mode in Hydro
One Brompton prior to its divestiture to the Province.
long-lerm debt consists of noles ond debentures fiot moture between
2017 ond 2064, ond ot December 3 I , 20 I 6, hod on overoge
term to moturity of opproximotely 15.9 yeors ond o weighted
overoge coupon o[ 4.3%.
On Morch 30, 20.l 6, Hydro One flled o finol universol short form
bose shelf prospectus (Universol Bose Shelf Prospectus) with securilies
regulotory outhorilies in Conodo. The Universol Bose Shelf Prospeclus
ollows Hydro One to offer, from time to time in one or more public
offerings, up to $8.0 billion of debt, equily or other securities, or ony
combinotion thereof, during the 25-month period ending on April 30,
2018. Hydro One Iiled lhe Universol Bose Shelf Prospectus in port to
focilitote the secondory olferings of outstonding shores of the
Compony by the Province, ond to provide the Compony with
increosed linoncing flexibility going forword. In 2016, Hydro One
completed o secondory offering of o portion of its common shores
previously owned by the Province. See sectlon "Other Developments
- Chonge in Hydro One Ownership Structure" for deloils o[ this
tronsoction. Upon closing of the tronsoction, $6,030 mlllion
remoined ovoiloble under the Universol Bose Shelf Prospeclus.
At December 3 I , 20,1 6, the Compony ond Hydro One lnc. were in
complionce with oll finonciol covenonts ond limitotions ossocioted
wilh the oulstondlng borrowings ond credit focilities.
Corporote Credit
Roting
>*az
za>g--9as
U, 16I6ocaaoz
I
Stondord & Poor's Roting Services (S&P)A
Hydro One hos not obtoined o credit roting in respect of ony of its
securities. An lssuer roting from S&P is o loword-looking opinion
obout on obligor's overoll creditworthiness. This opinion focuses on
the obligor's copocity ond willingness to meet its finonciol
commitments os they come due but it does not opply to ony specific
finonciol obligotion. An obligor with o long-term credit roting of 'A'
hos strong copocity lo meet its finonciol commilmenls but is somewhot
more susceptible to the odverse eflects of chonges in circumstonces
ond economic conditions thon obligors in higher-roted cotegories.
The roting obove is not o recommendotion to purchose, sell or hold
ony of Hydro One's securities ond does nol comment on the morket
price or suitobili! of ony of lhe securities for o porliculor inveslor.
There con be no ossuronce thot the roting will remoin in effect for ony
Exhibit No. 4
CaseNos. AVU-E-I7- and AVU-G-I7-
HYDRo oNE LrmrrED oNE oF NoRTH AMERre\',qj0uit rFlltf6€F+lgrrs zo
Schedule 3, Page 25 of 167
o
Credit Rotings
At December 3l , 20,l6, Hydro One's corporote credit rotings were os follows:
O
o
MANAGEMENT'S DISCUSSION AND ANALYSIS
given period of time or thot the roting will not be revised or
withdrown entirely by S&P ot ony time in the future. Hydro One hos
mode, ond onticipotes moking, poyments to S&P pursuont lo
ogreements entered into with S&P in respect of the roting ossigned to
Hydro One ond expects to moke poymenls to S&P in the future lo the
extent il obtoins o roting specific to ony of its securities.
At December 3l , 2016, Hydro One Inc.'s long-term ond short-term debt rotings were os {ollows:
Short-term Debt Long{erm Debt
Roting Agency Roting Roting
DBRS limired R-l (low) A (high)
Moody's lnvestors Service Prime2 43
S&P A.I A
Effect of lnterest Roies
The Compony is exposed to fluctuotions of interest rotes os ils
reguloted return on equiry {ROE) is derlved using o formuloic
opprooch thot tokes inlo occount chonges in benchmork interest rotes
for Government o{ Conodo debt ond the A+oted utility corporote
bond yield spreod. See section "Risk Monogement ond Risk Foctors -
Risks Reloting to Hydro One's Business - Morket, Finonciol lnslrument
ond Credit Risk" for more detoils.
Pension PIon
In 2016, Hydro One contributed opproximotely $ 108 million lo lts
pension plon, compored lo contributions of opproximotely
$ 1 77 million in 20,]5, ond incuned $ I l6 million in net periodic
pension benefit costs, compored to $
,l63 million incuned in 20,l5.
InJune 2016, Hydro One Inc. filed on octuoriol voluotion of its
Pension Plon os ot December 3,l, 20,l5. Bosed on this voluotion ond
20.16 levels of pensionoble eornings, the 2016 onnuol employer
contributions hove decreosed by opproximotely $72 million from
$ I 80 million os estimoted ot December 3 I , 20 15, primorily due to
improvements ln the funded stotus of the plon ond future octuoriol
ossumptions. The decreose olso reflects the impoct o[ chonges
implemented by monogement to improve the bolonce between
employee ond Compony contributions to the Pension Plon. The
updoted octuoriol voluotion resulted in o $25 million decreose in
201 6 revenue with o corresponding decreose in OM&A costs, os
the lower pension contributions will be relurned lo cuslomers through
the pension cost vorionce deferrol occount ln future rote opplicotions.
The Compony estimoles thot totol pension contributions for 2017 ond
20 I 8 will be opproximotely $ 1 05 million ond $ I 02 million,
respectively.
The Compony's pension benefits obligotion is impocted by vorious
ossumptions ond estimotes, such os discount role, rote o[ return on
plon ossets, rote of cost of living increose ond mortolity ossumptions.
A full discussion o[ the significont ossumptions ond estimotes con be
found in the section "Criticol Accounting Estimotes - Employee Future
Benefits".
Other Obligotions
Off-Bolo nce Sheet Arrongements
There ore no off-bolonce sheet orrongements thot hove, or ore
reosonobly likely to hove, o moteriol current or future effect on the
Compony's finonciol condition, chonges in finonciol condition,
revenues or expenses, results of operotions, liquidity, copitol
expenditures or copitol resources.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
C. Lopez, Hydro One
Schedule 3, Page 26 of 167
O
24 HYDRO ONE LlmlrED 2016 ANNUAL REPORT TSX: H
o
Summory of Controctuol Obligotions ond Other Commerciol Commitments
The following toble presents o summory of Hydro One's debt ond other moior conhoctuol obligotions ond commerciol commitments:
December 3l , 201 6 Less thon I -3 3-5
(millions of dollors) Torol I yeor yeors yeors
More thon
5 yeors
Controctuol obligotions ldue by yeor)
Long-term debt - principol repoyments 10,671 602 1 ,484 l,156 7,429
Long-term debt - interest poyments 8,145 456 827 754 6,108
Short-term notes poyoble 469 469
Pension confibutionsr 2O7 105 1O2
Environmentol ond osset relirement obligotions 243 27 51 65 1 00
Outsourcing ogreements 374 165 196 4 9
Operoting leose commitments 42 1l I 6 I 3 2
Long-term softwore/meler ogreement 73 17 33 l8 5
Totol controctuol obligotions 20,224 1,852 2,709 2,010 13,653
Ofher commercio I comm itments lby yeor of expi ryl
Credit focilitiesz
Letters of credit:
Guoronteesa
2,5502,550
174
330
174
330
>=z>oz
za>E"=t;e(r=
cr)
Ia,r)c@
oZ
I
o
Totol other commerciol commitments 3,054 504 2,550
rContributionstotheHydroOnePensionFundoregenerollymodeonemonlhinorreors.The20lTond20lSminimumpensioncontribulionsorebosedon
on octuoriol voluotion os ol December 3 I , 20 I 5 ond projected levels of pensionoble eornings.
2 On August 15,2O16, Hydro One lnc. lerminoted its creditfocilities totolling $2.3 billion moturing inJune 2020ond October 2018, ond entered inb o new
$2.3 billion credit focility moturing in June 2O2l . On November 7 , 2016, the moiurity dote of Hydro One's $250 million credit focility wos extended from
November 2020 to November 2021.
3 Letlers of credit consist of o $ 1 50 million letter of credit reloted to relirement compensolion orrongements, ond leters of credit totolling $24 million provided
os prudentiol support.
{ Guorontees consist of prudenliol support provided to the IESO by Hydro One lnc. on beholf of its subsidiories.
Regulotion
The OEB opproves both the revenue requirements of ond the rotes
chorged by Hydro One's reguloted tronsmission ond distribution
businesses. The rotes ore designed to permit the Compony's
konsmission ond distribution businesses to recover the ollowed costs
The lollowing toble summorizes the stotus of Hydro One's mojor regulotory proceedings:
ond to eorn o formulo-bosed onnuol rote of return on its equity
invested in the reguloted businesses. This is done by opplying o
specified equity risk premium to forecosted interesl rotes on long-term
bonds. In oddition, the OEB opproves rote riders to ollow for the
recovery or disposition of specific regulotory deferrol occounts over
specified time fromes.
Applicotion Yeor(s)Type Stotus
Eleckicity Roles
Hydro One Neiworks
Hydro One Networks
Hydro One Networks
B2M LP
Greot lokes Power
201 5-201 6
2017-2018
2015-2017
2015-2019
2017
Tronsm ission - Cost-of-service
Tronsm ission - Cost-of-service
Distribution - Custom
Tronsm ission - Cost-of-service
Tronsm ission - Cost-of-servlce
OEB decision received
OEB decision pending
OEB decision received
OEB decision received
OEB decision pendino
Mergers Acquisitions Amolgomotions ond Divestitures
Greot Lokes Power
Orillio Power
n/o
n/o
Acquisition
Acquisilion
OEB decision received
OEB decision pending
Leove to Constructoto Essex Tronsmission Reinforcemenl o Seclion 92 OEB decision received
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
HYDRo oNE LrxurED oNE oF NoRTH AMERre',qjobit rFlffiEglgrs zs
Schedule 3, Page 27 of 167
o
MANAGEMENT'S DISCUSSION AND ANALYSIS
Hydro One hos obtoined revenue requirement opprovols {rom the
OEB, subiect to certoin onnuol odiustments, for Hydro One
Networks' tronsmission business through 201 6, for B2M LP through
20'l 9, ond for Hydro One Networks'distribution business to the end
o{ 2017. The following loble summorizes the key elements ond stotus
of Hydro One's electricity rote opplicotions:
Rote Applicotion Stotus
Rote Order
StotusApplicotionYeor
ROE
Allowed (A)
or Forecost (F)Rote Bose
Tronsmission
Hydro One Networks 2016
2017
20r 8
9. r9% (A)
8]8%l )
8.78%lFl
$10,040 million
$ 10,554 million
$t 1,226 million
Approved inJonuory 2015
Filed in Moy 20l6
Filed in Moy 2016
Approved in lonuory 20 1 6
To be filed in 201Z Ql
To be filed in 2Ol7 Q4
B2M LP 2016
2017
201 8
2019
Approved in December 20,l5
Approved in December 2015
Approved in December 2015
Approved in December 2015
Approved inlonuory 2016
Filed in December 20,l6
To be liled tn 2Ol7 Q4
To be filed in 20lB Q4
Greot loles Power 17 9.19%)o lFl i)]B million Filed in December 20l6 Filed in December 2O16
Dishibution
Hydro One Nefworks 2016
2017
e.1e% (A)
8.78%l )
$6,863 million
$7, 190 million
Approved in Morch 20 l5
Approved in Morch 20I 5
Approved in April 20 I 5
Approved in December 20 I 6
o Hydro One Nelworks
On Moy 31, 2016, Hydro One Networks filed o costof-service
opplicotion with the OEB lor 2017 ond 20,1 8 tronsmission rotes. The
opplicotion seeks opprovol of rote bose of $ 10,554 million for
2017 ond $11 ,226 million for 2018. ln October 2016, the OEB
issued updoted cost of copitol porometers for rotes eflective in 2017,
including on updoted 20lZ ollowed ROE of 8.28%. The opplicotion
olso loys oul o plonned tronsmission copitol investment progrom for
the fiveyeor period ending on December 31 ,2021, with investments
in copitol spending primorily to oddress reliobility, sofety ond
customer needs, in o costeffective monner. Monogement expects thol
o decision will be received in the first holf ol 2017 , ond thot new
rotes will be relrooctive to Jonuory 1, 201 7. Future tronsmission role
opplicotions ore onticipoted to be filed under the OEB's incentive-
bosed regulotory fromework.
Hydro One Neharorks plons to submit on opplicotion br 2018-2022
distribution rotes under the OEB's incentivebosed regulotory
fromework in the first quorter of 201 7.
B2M LP
On Jonuory 14, 2O16, the OEB issued its Decision ond Rote Order
opproving the B2M LP revenue requirement recovery through the
20'l 6 Uniform Tronsmission Rotes. On December 'l , 20,] 6, B2M LP
filed o Droft Rote Order with o revised 2017 revenue requirement ol
$34 million, reflecting updoted 2O17 cost of copitol porometers
issued by the OEB in October 2016.
Other Reg ulotory Developments
OEB Pension ond Other Post-Employment
Benefits (OPEB) Generic Heoring
ln 20,)5, the OEB begon o consultotion process to exomine pensions
ond OPEBs in rotereguloted utilities, with the objectives of developing
stondord principles to guide its review of pension ond OPEB reloted
costs in the future, ond to estoblish specific requirements for
opplicotions ond oppropriote ond consistent regulotory mechonisms for
cosl recovery. Hydro One ond other stokeholders filed written
submissions with respect to initiol OEB questions intended to solicit
views on the key issues of interest lo the OEB. Following o stokeholder
forum in July 2016, updoted written submissions were filed wilh the
OEB in September 20,16. lt is onticipoted thot subsequent to the
OEB's review of the updoed written submissions, the OEB will outline
principles to guide its review of pension ond OPEB reloted costs in the
future, ond provide further guidonce on opplicotion requirements ond
regulotory mechonisms for cost recovery.
Other Developments
Chonge in Hydro One Ownership Structure
ln November 2015, Hydro One ond the Province completed on IPO
on fie Toronto Stock Exchonge o[ opproximotely 89.3 million
common shores o[ Hydro One, representing l5% of the Province's
ownership position. Prior to the completion of the IPO, Hydro One
ond its subsldiory, Hydro One lnc., completed o series of
tronsoctions (PrelPO Tronsoctions) thot resulted in, omong other
things, the ocquisition by Hydro One of oll of the issued ond
Exhibit No. 4
CaseNos. AVU-E-17- and AVU-G-17-
C. Lop.r, Hydro One
o
26 HYDRO ONE LlillrED 2016 ANNUAI REPORT TSX; H
Schedule 3, Page 28 of 167
9.19%lA) $516 million
8.78%lAl $509 million
8.78%lF) $502 million
8.78%lF) $496 million
o
o
outslonding shores of Hydro One lnc. from the Province ond the
issuonce of new common shores ond preferred shores o[ Hydro One
to the Province. Both Hydro One ond Hydro One lnc. ore reporting
issuers. In April 20,l6, the Province completed o secondory offering
of 83.3 million common shores of Hydro One on the Toronlo Stock
Exchonge. Hydro One did not receive ony of the proceeds from
either of the soles o[ common shores by the Province. At
December 3 I , 20,l 6, the Province directly holds opproximotely
70.1% ol Hydro One's totol issued ond outstonding common shores.
Closs Action Lowsuit
Hydro One lnc., Hydro One Networks, Hydro One Remote
Communities Inc., ond Norfolk Power Distribution lnc. ore defendonts
in o closs oclion suit in which the representolive plointiff is seeking up
to $ I 25 million in domoges reloted to ollegotions of improper billing
proctices. A certificotion molion in the closs oction is pending. Due to
the preliminory stoge of legol proceedings, on eslimote of o possible
loss reloled to his cloim connot be mode.
Acquisiiions
lntegrotion of Holdimond Hydro ond
Woodstock Hydro
In 20,15, the Compony ocquired Holdimond Hydro ond Woodstock
Hydro, two Ontoriobosed locol distribution componies. ln September
2O I 6, rhe Compony successfully completed the integrotion ol both
entities, including the integrolion of employees, customer ond billing
informotion, business processes, ond operotions.
tronsmission business operoting olong the eostern shore of Loke
Superior, north ond eost of Soult Ste. Morie, Ontorio. The totol
purchose price for Greot Lokes Power wos opproximotely
$326 million, including the ossumption of opproximotely
$ l50 million in outstonding indebtedness. On Jonuory 16, 2017
Greot Lokes Power's nome wos chonged to Hydro One Soult Ste.
Morie LP.
On Dmember 23,2016, Greol Lokes Power flled on opplicotion for
2017 rotes, requesting on increose to the opproved 2016 revenue
requiremenl of 1.9%, resulting in on updoted revenue requirement of
$4 1 million.
Acquisition of Orillio Power
ln August 20.16, the Compony reoched on ogreemenl lo ocquire
Orillio Power Distribution Corporotion (Orillio Power), on electricity
distribution compony locoted in Simcoe County, Ontorio, for
opproximotely $4'l million, including the ossumption of
opproximotely $15 million in outstonding indebtedness ond
regulotory liobilities, subiect to closing odlustments. The ocquisition is
sublect to regulotory opprovol by the OEB.
Hydro One Work Force
l-1ydro One hos o skilled ond flexible work force of opproximotely
5,5@ regulor emplcyees ond over 2,000 non-regulor employees
provincewide, comprlslng o mix of skilled kodes, engineering,
professionol, monogeriol ond execulive personnel. Flydro One's regulor
employees ore supplemented primorily by occessing o lorge externol
lobour {orce ovoiloble through orrongements with the Compony's kode
unions for vorioble workers, sometimes referred to os "hiring holls", ond
olso by occess to controct personnel. The hiring holls offer Hydro One
the obility to flexibly ufilize hight troined ond oppropriotely skilled
workers on o proiect-byproiecl ond seosonol bosis.
Acquisition of Greot Lokes Power
On October 3 1 , 20,1 6, following receipl of regulotory opprovol o[
lhe tronsoctlon by the OEB, Hydro One completed tl^e ocquisition o[
Greot Lokes Power, on Ontorio reguloled electricity
The following toble sets out the number of Hydro One employees os ot December 3,1, 20.16.
Regulor
Employees
Non-Regulor
Employees Totol
>i0z
za>qeia=6I6.}C
oz
I
Power Workers' Union (PWU)
The Society of Energy Professionols (Societ'yl
Conodion Union o[ Skilled Workers {CUSW) ond construction building trode
unions2
3,470
r,365
6981
44
4,168
1,409
1,275 1,275
Totol employees represented by unions
Alonogement ond non-represented employees
4,835
659
2,017
28
6,852
687
o
Totol employees 5,494 2,045 7,539
r lncludes 528 non-regulor "hiring holl" employees covered by the PWU ogreement.
z Employees ore ioindy represented by both unions. The construction building hode unions hove collective ogreemenh with the Eleckicol Power Systems
Conshuction Associotion (EPSCA).
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LrrrilrED oNE oF NoRTH AMERre',qjdudrrf{!flf6:OllgrEs 27
Schedule 3, Page 29 of 167
o
MANAGEMENT'S DISCUSSION AND ANALYSIS
Shore-bosed Com pensotion
During 20 16, the Compony gronted owords under its Longlerm
lncenlive Plon, consisling of Performonce Stock Units (PSUs) ond
Restricted Stock Units (RSUs), oll of which ore equity settled. At
December 31 , 2O1 6, 230,600 PSUs ond 254,1 50 RSUs were
outstonding. No longlerm incentive owords were gronted during
20r5.
poid on prefened shores, ond (iil) distributions to noncontrolling
inleresl. Adiusted FFO is defined os FFO, odiusted for the impoct of
the deferred income tox osset thol resulled os o consequence of
leoving fie PlLs Regime ond entering the Federol Tox Regime.
Monogement believes thot FFO ond Adiusted FFO ore help{ul os
supplementol meosures of the Compony's operoting cosh flows os
they exclude timing-reloted fluctuotions in noncosh operoling working
copitol ond cosh llows not ottributoble to common shoreholders, ond,
in the cose of Adiusted FFO, the impoct of the lPOreloted deferred
income lox osset. As such, these meosures provide consislent
meosures o[ the cosh generoling performonce of lhe Compony's
ossets.
2016 201 5
Non-Goop Meosures
Funds from Operotions (FFO) ond Adiusted FFO
FFO is defined os net cosh from operoting octivities, odlusted for
(i) chonges in noncosh bolonces reloted lo operotions, {ii) dividends
The following loble presents the reconclliotion o[ net cosh from operoting oclivities to FFO ond Adiusted FFO:
Yeor ended Decenber 3 I
lmillions of dollors)
Net cosh from (used in] operoling octivilies
Chonges in noncosh bolonces reloted to operotions
Prelened shore dividends
Distributions to noncontrollino interest
1.656
(r 34)
(t e)
t9l
11,2481
(21 3)
(1 s)
{51
FFOo 1,494 11,4791
Less: Delerred income iox ossetl (2,810)
Adiusted FFO 1,494 t,331
r lmpoct of deferred income tox osset thol resulted os o consequence of leoving the PlLs Regime ond entering the Federol Tox Regime.
Adlusted EPS
The following bosic ond diluted Adlusted EPS hos been prepored by
monogemenl on o supplemenlory bosis which ossumes lhot lhe
totol number of common shores outstonding wos 595,000,000 in
eoch of the yeors ended December 3 l , 201 6 ond 20 1 5. The
supplementory pro formo disclosure is used internolly by monogement
subsequent to the IPO of the Compony's common shores in
November 20.l5 to ossess the Compony's performonce ond is
Yeor ended December 3 I
considered useful becouse it eliminotes the impoct of o different ond
noncomporoble number of shores outstonding ond held by the
Province prior to lhe lPO. Adiusted EPS is considered on importont
meosure ond monogement believes thot presenting it consistently for
oll periods bosed on the number o[ outstonding shores on, ond
subsequent to, lhe IPO provides users with o comporotive bosis lo
evoluote the operotions of the Compony.
2016 20r5
Net income ottributoble to common shoreholders lmillions of dollors)
Pro formo weighted overoge number o[ common shores
Bosic
Effect of dilutive stock-bosed comperyeloldels
721
595,000,000
1,700,823
690
595,000,000
s4,691
Diluted
Adiusted EPS
Bosic
Diluted
596,700,823 595,094,691
$
$
$
$
1.21
1.21
I .16
I.r6
o
28 HYDRO ONE LI'IIITED 20I6 ANNUAI. REPORT TSX: H
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 30 of167
o
Adiusted Net Cosh from Operoting Activities
Adiusted net cosh from operoting octivities is defined os net cosh from
operoting octivities, odlusted for the impoct of the defened income
tox osset thot resulted os o consequence of leoving the PlLs Regime
ond enlering the Federol Tox Regime. Monogemenl believes thot this
meosure is helpful os o supplementol meosure o[ the Compony's net
cosh from operoting octivities os it excludes the impoct of the
lPOreloted deferred income lox osset. As such, odiusted net cosh
from operoting octivities provides o consislent meosure of the
Compony's cosh from operoting octivities compored to prior periods.
201 5
The following toble presents the reconciliolion of net cosh lrom operoting octivities to odiusted net cosh lrom operoting oclivities:
Yeor ended Dxember 3l
lmillions of dollors) 2016
>;0z
ZA>g-ta9aA6
U6oCa
oz
I
Net cosh from {used in) operoting octivities
Less: Deferred income tox ossetl
r,656 \1,2481
1,656
BI
|,562
2
Adiusted net cosh from operoting octivities
I lmpoct of deferred income tox osset lhot resulted os o consequence of leoving the PlLs Regime ond enbring the Federol Tox Regime.
To the extent thot odiusted net income is used in future continuous
disclosure documents of Hydro One, it wlll be defined os nel income,
odiusted for certoin items, including non-recurring items ond other
onetime items thot monogement does not consider to be reflective of
fie operoting performonce o[ the Compony. No such odiustments to
net income ore presented in this MD&.A. Monogement believes thot
this meosure will be helpful in ossessing the Compony's finonciol ond
operoting per{ormonce in the future.
FFO, odiusted FFO, odiusted bosic ond diluted EPS, odjusted net
cosh from operoting octivilies, ond odiusled net income ore not
recognized meosures under US GAAP ond do not hove o
slondordized meoning prescribed by US GAAP. They ore therefore
unlikely to be directly comporoble lo similor meosures presented by
other componies. They should not be considered in isolotion nor os o
substitute for onolysis of the Compony's finonciol informotion reported
under US Gy'vAP.o
Reloted Porty Tronsoctions
The Province is the moiorily shoreholder of Hydro One. The IESO, Ontorio Power Generotion lnc. (OPG), OEFC, OEB, ond Hydro One Brompton
ore reloted porties to Hydro One becouse they ore conholled or significontly influenced by the Province. The following is o summory of the
Compony's reloted porty tronsoctions during the yeor ended December 31, 20,l6:
Yeor ended December 3 I
2016 2015
RelotedPorV Tronsoction lmillions of dollors)
Provincer Dividends poid
Common shores issued2
IPO costs subsequently rq@bursed blthe Prevlnle1
451 888
2,600
7
IESO Power purchosed
Revenues {or tronsm ission services
Distribution revenues reloted to rurol rote protection
Diskibution revenues reloted to the supply of electricity to remote northern communities
2,096
1,549
125
32
63
2,3r8
1,548
127
70Fund ing received reloted to Conservotion ond Demond Monooement proqroms
OPG Power purchosed
Revenues reloted to provision of conslruction ond equipment mointenonce services
Costs expensed reloted to the purchose o{ services
6
5
I
ll
7
I
OEFC Poyments in lieu o[ corporote income toxes4
Power purchosed from power conlrocts odministered by the OEFC
2,933
6
Alndemnificotion fee poid (termi noted effective October 3 I , 20,l 5)
OEB OEB fees I 12
o
Hydro One
Bromptonr
Revenues from monogement, odministrotive ond smort meter network services 3
I On August 3l , 2015, Hydro One lnc. compleled the spinoff of its subsidiory, Hydro One Brompton, to the Province.
2 On November 4, 2O15, Hydro One issued common shores to he Province for proceeds of $2.6 billion.
3ln20l5,HydroOneincurredcerloinlPOrelotedexpensestotolling$Tmillion,whichweresubsequentlyreimbursedtotheComponybytheProvince.
! ln 2015, Hydro One mode Plls trc fie OEFC totolling $2.9 billion, including deporlure tox of $2.6 billion.
Exhibit No. 4
Case Nos. AVU-E-l 7-_ and AVU-G-I7-_
HYDRo oNE ursrrED oNE oF NoRTH AMERre\',qj0udrrFlltf6:emges zc
Schedule 3, Page 3l of 167
o
o
MANAGEMENT'S DISCUSSION AND ANALYSIS
At December 3l , 20,l6, the omounts due from ond due to reloted
porlies os o result of the tronsoctions described obove were
$ I 58 million oad $1 47 million, compored to $ I 91 million ond
$ I 38 million ot December 3 I , 20,1 5, respectively. At
December 3,1, 20,16, included in omounts due to reloted porties
were omounts owing to the IESO ln respect of power purchoses of
$,143 million, compored to $l34 million ot December 3,1, 20,l5.
Risk Monogement ond Risk Foctors
Risks Reloting to Hydro One's Business
Regulotory Risks ond Risks Reloting to Hydro
One's Revenues
Risks Re/ot;ng to Obtoining Rote Orders
The Compony is subject to the risk thot the OEB will not opprove the
Compony's tronsmission ond distrlbution revenue requirements
requesled in ouistonding or future opplicotions for rotes. Rote
opplicotions for revenue requiremenls ore sublect to the OEB's review
process, usuolly involving porticipotion lrom intervenors ond o public
heoring process. There con be no ossuronce thot resulting decisions
or rote orders issued by the OEB will permit Hydro One to recover oll
cosls octuolly incuned, costs of debt ond income toxes, or to eorn o
porticulor ROE. A foilure to obtoin occeptoble rote orders, or
opprovols of oppropriote returns on equity ond costs octuolly
incurred, moy moteriolly odversely offect: Hydro One's konsmission
or dlstribution businesses, the undertoking or timing of copitol
expenditures, rotings ossigned by credit roting ogencies, the cosl ond
issuonce of longlerm debt, ond other motters, ony of which moy in
turn hove o moteriol odverse eflect on the Compony. ln oddition,
there is no ossuronce thot the Compony will receive regulotory
decisions in o timely monner ond, therefore, costs moy be incuned
prior lo hoving on opproved revenue requirement.
Risks Re/oting to Actuol Performonce Agoinsl
Forecosts
The Compony's obility to recover lhe octuol costs of providing service
ond eorn the ollowed ROE depends on lhe Compony ochieving its
forecosts estoblished ond opproved in the rotesetling process. Acluol
costs could exceed the opproved forecosts if, for exomple, the
Compony incurs operolions, mointenonce, odminlstrotion, copitol
ond finoncing costs obove those included in the Compony's
opproved revenue requirement. The inobility lo obloin occeptoble
rote decisions or to recover ony significont diflerence between
forecost ond octuol expenses could moteriolly odversely offect the
Compony's finonciol condition ond results of operotions.
Furlher, the OEB opproves the Compony's tronsmission ond
diskibution rotes bosed on proiected eleclricity lood ond consumption
levels, omong other foctors. lf octuol lood or consumplion moteriolly
folls below proiected levels, lhe Compony's revenue ond net income
for eilher, or both, of these businesses could be moteriolly odversely
offmted. Also, the Compony's current revenue requirements for these
businesses ore bosed on cosl ond other ossumptions thot moy not
moteriolize. There is no ossuronce thot the OEB would ollow rote
increoses sufficienl lo offsel unfovouroble linonciol impocts from
unonticipoted chonges in eleckicily demond or in the Compony's
cosls.
The Compony is subject to risk ol revenue loss from other foctors,
such os economlc trends ond weother conditions thot influence the
demond for eleclricity. The Compony's overoll operoting results moy
fluctuote subslontiolly on o seosonol ond yeor-toyeor bosis bosed on
these trends ond weother conditions. For instonce, o cooler thon
normol summer or wormer thon normol winler moy reduce demond
for electricity below thot lorecost by the Compony, cousing o
decreose in the Compony's revenues from the some period of the
previous yeor. The Compony's lood could olso be negotively
offected by successful Conservotion ond Demond Monogement
progroms whose resulls exceed forecosled expectotions.
Risks Re/oting lo Role-setlin g Models for
T ro ns mi ssi on o nd Di stribution
The OEB opproves ond periodicolly chonges the ROE for
tronsmission ond distribution businesses. The OEB moy in lhe future
decide to reduce the ollowed ROE for elther of these businesses,
modily the formulo or methodology lt uses to determine the ROE, or
reduce lhe weighting of the equity component of the deemed copitol
structure. Any such reduction could reduce the net income o[ the
Compony.
The OEB's recent Cuslom lncentive Rote-setting model requires lhot
lhe term o[ o cuslom role opplicotion be o minimum fivayeor period.
There ore risks ossocioled wilh lorecosting key inputs such os
revenues, operoting expenses ond copltol, over such o long period.
For instonce, if unontlcipoted copitol expenditures orise thot were not
contemploted in the Compony's most recent rote decision, lhe
Compony moy be required to incur cosls thot moy nol be recoveroble
unlil o future period or not recoveroble ot oll in future rotes. This could
hove o moteriol odverse effect on the Compony.
After rotes ore set os port of o port of o Custom Incentive Rote
opplicotion, the OEB expecls there to be no further rote opplicotions
Ior onnuol updotes within the fiveyeor lerm, unless there ore
exceptionol circumstonces, with the exception o[ the cleoronce o[
estoblished deferrol ond vorionce occounts. For exomple, the OEB
does not expect to oddress onnuol rote opplicotions lor updotes lor
cost of copitol (including ROE), working copitol ollowonce or soles
volumes. lf there were on increose in interest rotes over the period ol
o rote decision ond no conesponding chonges were permitted lo the
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 32 of 167
o
30 HYDRO ONE LI'IIITED 20] 6 ANNUAL REPORT TSX: H
o
o
o
Compony's ollowed cost of copilol {including ROE), then the result
could be o decreose in the Compony's finonciol performonce.
To lhe extent thot the OEB opproves on ln-Service Vorionce Accounl
for the tronsmission ond/or distribution businesses, ond should the
Compony foil to meet the threshold levels of in-service copitol, the
OEB moy recloim o corresponding portion of the Compony's
revenues.
Risks Re/otin g to Copitol Expenditures
ln order to be recoveroble, copitol expenditures require the opprovol
of the OEB, either through the opprovol of copitol expenditure plons,
rote bose or revenue requirements for the purposes of setting
tronsmission ond distribution rotes, which include the impoct of copitol
expenditures on rote bose or cost of service. There con be no
ossuronce lhot oll copitol expenditures incurred by Hydro One will be
opproved by the OEB. Copitol cost overruns moy not be recoveroble
in tronsmission or distribution rotes. The Compony could incur
unexpecled copitol expenditures in moinloining or improving its
ossets, porticulorly given thot new technology moy be required to
support renewoble generotion ond unforeseen technicol issues moy
be identified through implementotion o[ proiects. There is risk thot the
OEB moy nol ollow full recovery of such expenditures in the Iuture. To
lhe extent possible, Hydro One oims to mitigote this risk by ensuring
prudent expenditures, seeking from the regulotor cleor poliry direction
on cost responsibility, ond preopprovol of the need for copitol
expenditures.
Any future regulotory decision by the OEB to disollow or limit the
recovery of ony copitol expendilures would leod to o lower thon
expected opproved revenue requirement or rote bose, polentiol osset
impoirment or chorges to the Compony's results o[ operotions, ony of
which could hove o moteriol odverse effect on lhe Compony.
Risks Re/otin g to Deferred Tox Asset
As o result of leoving the PlLs Regime ond entering the Federol Tox
Regime in connection with the IPO of the Compony, Hydro One
recorded o defened lox osset due to the revoluotion of the tox bosis
of Hydro One's fixed ossets ot their foir morket volue ond recognition
of eligible copitol expenditures. Monogement believes this will result
in onnuol net cosh sovings over ot leost the next five yeors due to the
reduction of cosh income toxes poyoble by Hydro One ossocioted
primorily with o higher copitol cost ollowonce. There ls o risk thot, in
currenl or future rote opplicotions, the OEB will reduce the
Compony's revenue requirement by oll or o porlion of those net cosh
sovings. lf the OEB were to reduce the Compony's revenue
requirement in this monner, it could hove o moteriol odverse effect on
the Compony.
Risks Re/oting to Other Applicotions to the OEB
The Compony is olso subimt to the risk thot it will not obtoin required
regulotory opprovols for other motters, such os leove to conshuct
opplicotions, opplicotions for mergers, ocquisitions, omolgomotions ond
diveslifures, ond environmentol opprovols. Decisions to ocquire or divesl
other reguloted businesses licensed by the OEB ore subleo to OEB
opprovol. Accordingly, there is the risk thot such motters moy not be
opproved or thot unfovouroble conditions will be imposed by the OEB.
First Notions ond M6tis Cloims Risk
Some of the Compony's current ond proposed konsmission ond
distribution ossels ore or moy be locoted on reserve (os defined in the
lndion ActlConodo); Reservel Ionds, ond londs over which First
Notions ond M6tis hove Aboriginol, treoty, or other legol cloims.
Some First Notions ond M6tis leoders, communities, ond their
members hove mode ossertions reloted to sovereignty ond iurisdiction
over Reserve londs ond troditionol tenitories ond ore increosingly
willing to ossert their cloims through the courts, tribunols, or by direct
oction. These cloims ond/or settlement of lhese cloims could hove o
moteriol odverse effect on the Compony or otherwise moteriolly
odversely impoct the Compony's operotions, including the
development of current ond future proiects.
The Compony's operotions ond oclivities moy give rise to the
Crown's duty to consult ond potentiolly occommodole First Notions
ond M6tis communities. Procedurol ospects o[ the duty to consult moy
be delegoted to the Compony by the Province or the federol
government. A perceived foilure by the Crown to sufficiently consult o
First Nolions or M6tis community, or o perceived foilure by the
Compony in relotion to delegoted consultotion obligotions, could
result in legol chollenges ogoinst the Crown or the Compony,
including iudiciol review or iniunction proceedings, or could
potentiolly result in direct oction ogoinst the Compony by o
community or its citizens. lf this occurs, it could disrupt or deloy the
Compony's operotions ond octivities, including current ond future
proiects, ond hove o moteriol odverse effect on the Compony.
Risk from Tronsfer of Assets Locoted on Reserves
The tronsfer orders by which the Compony ocquired certoin o[ Ontorio
Hydro's businesses os of April I , 1999 did not tronsfer title to ossets
locoted on Reserves. The tronsfer of title to these ossets did not occur
becouse outhorizotions originolly gronted by the federol government
for the conslruction ond operotion of these ossets on Reserves could
not be tronsferred without required consent. In severol coses, the
outhorizotions hod either expired or hod never been issued.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LriurED oNE oF NoRTH AMERre\',L$UifrrFlltf6gflgrs rr
Schedule 3, Page 33 of 167
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Currenily, the Ontorio Electricity Finonciol Corporotion holds legol title
to these ossets ond it is expected thot the Compony will monoge
them until it hos obtoined permits to complete the title tronsfer. To
occupy Reseves, the Compony musl hove volid permits issued by
Her Moiesty the Queen in the Right of Conodo. For eoch permit, the
Compony must negoliote on ogreement (in the form of o
memorondum of understonding) with the First Notion, the Ontorio
Electricity Finonciol Corporotion ond ony members o[ the First Notion
who hove occuponcy rights. The ogreement includes provisions
whereby the First Notion consents to the federol governmenl (presently
lndigenous Af[oirs ond Northern Development Conodol issuing o
permit. For tronsmission ossets, the Compony musl negotiote terms of
poyment. lt is difflcuh to predict the oggregote omount thot the
Compony moy hove to poy, either on on onnuol or onetime bosis, to
obtoin the required ogreements from First Notions. lf the Compony
connot reoch solisfoctory ogreements with the relevont First Notion to
obtoin federol permits, it moy hove to relocole these ossets lo other
locotions ond restore the londs ot o cosl thot could be substontiol. In
o limited number of coses, it moy be necessory to obondon o line
ond reploce it with diesel generotion focilities. ln either cose, the
costs reloting to these ossels could hove o moteriol odverse effecl on
the Compony if the costs ore not recoveroble in future rote orders.
Complionce with Lows ond Regulotions
Hydro One must comply with numerous lows ond regulotions
offecting its business, including requirements reloting to tronsmission
ond distribution componies, environmentol lows, employment lows
ond heolth ond sofety lows. The foilure of the Compony lo comply
with these lows could hove o moleriol odverse effecl on the
Compony's business. See olso "- Heolth, Sofety ond Environmentol
Risk".
For exomple, Hydro One's licensed tronsmission ond distribution
businesses ore required to comply with the terms of their licences,
with codes ond rules issued by the OEB, ond with other regulotory
requirements, including regulotions of the Notionol Energy Boord. ln
Ontorio, the Morket Rules issued by the IESO require the Compony
to, omong other things, comply with the reliobility slondords
estobhshed by the North Americon Electric Reliobilih/ Corporotion
{NERC} ond Northeost Power Coordinoling Council, lnc. (NPCC).
The incrementol costs ossocioled with complionce with these
reliobility stondords ore expected to be recovered through rotes, but
there con be no ossuronce thot the OEB will opprove the recovery of
oll of such incrementol costs. Foilure to obtoin such opprovols could
hove o moteriol odverse effect on the Compony.
There is the risk thot new legislotion, regulotions, requirements or
policies will be introduced in the future. These moy require Hydro
One to incur odditionol costs, which moy or moy not be recovered in
future tronsmission ond distribution rotes.
Risk of Noturol ond Other Unexpected
Occurrences
The Compony's focilities ore exposed to the effects of severe weother
conditions, noturol disosters, mon-mode events including but not
limited lo cyber ond physicol terrorist type ottocks, events which
originote from third-porty connected syslems, or ony other potentiolly
colostrophic events. The Compony's focilities moy not withstond
occurrences of this type in oll circumslonces. The Compony does not
hove insuronce lor domoge to its tronsmission ond distribution wires,
poles ond towers locoted outside its tronsmission ond distribution
stotions resulting from these or olher evenls. Where lnsuronce is
ovoiloble for other ossets, such insuronce coveroge moy hove
deductibles, limits ond,/or exclusions. Losses from lost revenues ond
repoir costs could be substontiol, especiolly for mony o[ the
Compony's focilities thot ore locoted in remole oreos. The Compony
could olso be subject to cloims for domoges coused by its foilure to
tronsmit or distribute electricity.
Risk Associoted with lnformolion Technology
lnfrostruclure ond Doto Security
The Compony's obility to operote effectively in the Ontorio electrlcity
morket is, in port, dependent upon it developing, mointoining ond
monoging complex inlormotion technology systems which ore
employed to operote ond monitor its lronsmission ond distribution
focilities, finonciol ond billing systems ond other business systems. The
Compony's increosing relionce on informotion syslems ond
exponding doto networks increoses its exposure to informotion
security threols. The Compony's tronsmission business is required to
comply with vorious rules ond stondords for tronsmission reliobility,
including mondotory stondords estoblished by the NERC ond the
NPCC. These include stondords reloting to cyber-security ond
informotion technology, which only opply to certoin of the Compony's
ossets (generolly being those whose foilure could impoct the
functloning ol the bulk eleckicity system]. The Compony moy mointoin
different or lower levels of informotion technology security for its ossets
thot ore not sublect to these mondotory stondords. The Compony must
olso comply with legislotive ond licence requirements reloting to the
collection, use ond disclosure of personol inlormotion ond informotion
rego rdi ng consumers, wholeso lers, generotors ond retoilers.
Cyberottocks or unouthorized occess to corporote ond informotion
technology systems could result in servlce disruptions ond syslem
foilures, which could hove o moteriol odverse effect on the
Compony, including os o resuh ol o foilure to provide electricity to
customers. Due to operoting criticol infroshucture, Hydro One moy be
ot greoler risk of cyber-ottocks from third porties (including stote run or
controlled porties) thoi could impoir or incopocitote its ossets. ln
oddition, in the normol course o{ its operotions, the Compony
collects, uses, processes ond stores informotion, which could be
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 34 of 167
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32 HYDRO ONE tlm[ED 2016 ANNUAL REPORT TSX: H
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exposed in the event of o cyber-security incidenl or other
unoulhorized occess, such os informotion oboul customers, suppliers,
counterporlies ond employees.
Security ond system disosler recovery conkols ore in ploce; however,
there con be no ossuronce thot there will not be system foilures or
security breoches or thot such threots would be detected or mitigoted
on o timely bosis. Upon occurrence ond detection, the focus would
shift from prevention to isolotion, remediotion ond recovery until the
incident hos been fully oddressed. Any such system foilures or securily
breoches could hove o moleriol odverse effect on the Compony.
In oddition, the Compony expects the skilled lobour morket for its
industry to be hlghly compelilive in the fulure. Mony of the
Compony's cunent employees ond mony of the potentiol employees it
would seek in the future possess skills ond experience thot would olso
be highly sought ofter by other orgonizotions inside ond outside the
electricity sector. The foilure to ottroct ond retoin quolilied personnel
for Hydro One's business could hove o moteriol odverse effect on the
Compony.
Lobour Relotions Risk
The substontiol moiority of the Compony's employees ore represented
by either the PWU or lhe Society. Over the post severol yeors,
signilicont effort hos been expended to increose Hydro One's
flexibility to conduct operotions in o more costef{icient monner.
Although the Compony hos ochieved improved flexibility in its
collective ogreements, the Compony moy not be oble to ochieve
further improvements. The Compony reoched on ogreement with the
PWU for o renewol collective ogreemenl wilh o hreeyeor term,
covering the period from April l, 2015 lo Morch 3.l, 2018 ond on
eorly renewol collective ogreement with the Society with o threeyeor
term, covering the period from April l , 201 6 to Morch 3 .1 , 201 9.
The Compony olso reoched o renewol collective ogreement with the
Conodion Unton of Skilled Workers for o threeyeor term, covering
the period {rom Moy 1 , 201 4 to April 30, 201 Z. Addilionolly, the
EPSCA ond o number of construclion unions hove reoched renewol
ogreements, to which Hydro One is bound, for o fiveyeor term,
covering the period from Moy I , 201 5 to April 30, 2020. Future
negotiotions with unions present the risk o[ o lobour disruption ond
the obility to sustoin the continued supply of energy to customers. The
Compony olso foces finonclol risks reloted to its obility lo negotiote
colleclive ogreements consistent with its rote orders. ln oddilion, in the
event of o lobour dispute, the Compony could foce operotionol risk
reloted to conlinued complionce wilh its requirements of providing
service to customers. Any of these could hove o moteriol odverse
effect on the Compony.
Risk Associoted with Arronging Debt Finoncing
The Compony expects to bonow to repoy its existing indebtedness
ond lo fund o portion of copitol expendltures. Hydro One Inc. hos
substontiol debl principol repoyments, including $602 million in
2017, $753 million in 2018, ond $23 I million in 2019. ln
oddition, from tlme to time, the Compony moy drow on its syndicoted
bonk lines ond or issue short-term debt under Hydro One lnc.'s
$ I .5 billion commerciol poper progrom which would moture wifiin
opproximotely one yeor o{ issuonce. The Compony olso plons to
incur continued moteriol copitol expenditures for eoch of 2017 ond
2018. Cosh generoted from operotions, ofter the poyment o[
expected dividends, will not be sufficient to fund the repoyment o[ the
Compony's existing indebtedness ond copitol expenditures. The
Compony's obility to ononge sufficient ond costeffective debt
finoncing could be moteriolly odversely offected by numerous foctors,
including the regulotory environmenl in Ontorio, the Compony's
results of operotions ond finonciol position, morkel conditions, the
rotings ossigned to its debt securities by credit roting ogencies, on
inobiliry of lhe Corporotion to comply with its debt covenonts, ond
generol economic conditions. A downgrode in the Compony's credit
rotings could restrict lhe Compony's obility to occess debt copitol
morkets ond increose the Compony's cost of debt. Any foilure or
lnobiliry on the Compony's pod to borrow the required omounts of
debt on sotlsfoctory terms could impoir its obllity to repoy moturing
debt, fund copitol expenditures ond meet other obligotions ond
requiremenls ond, os o result, could hove o moteriol odverse effect
on the Compony.
Morket, Finonciol lnstrument ond Credit Risk
Morkel risk relers primorily to the risk of loss thot resulls from chonges
in costs, foreign exchonge rotes ond interest rotes. The Compony is
exposed to fluctuotions in interest rotes os its reguloted ROE is derived
using o formuloic opprooch thot tokes into occounl onticipoted
interest roles, but is not currenlly exposed lo moteriol commodity price
risk or moteriol foreign exchonge risk.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
HYDRo oNE LrxilrED oNE oF NoRTH AMERt(}',iloUiff]FllQlf6gr#grrs sr
Schedule 3, Page 35 of 167
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Work Force Demogrophic Risk
By the end ol 2016, opproximotely 22% of the Compony's
employees who ore members of the Compony's defined benefit
pension plon were eligible for relirement under fiot plon, ond by the
end ol 2017, up to opproximotely 23% could be eligible. These
percentoges ore not evenly spreod ocross the Compony's work force,
but tend to be most significont in the mosl senior levels of the
Compony's stoff ond especiolly omong monogement stoff. During
eoch of 20,16 ond 2015, opproximotely 3% of the Compony's work
force elected to retire. Accordingly, the Compony's continued success
will be tied to its obilit/ to conlinue lo ottroci ond retoin sufficient
quolified stoff to reploce the copobility lost through retirements ond to
meet the demonds of the Compony's work progroms.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The OEB-opproved odiustment formulo for colculoting ROE in o
deemed regulotory copitol siructure o[ 60% debt ond 40% equiry
provides for increoses ond decreoses depending on chonges in
benchmork interest rotes for Government of Conodo debt ond the
A-roted utility corporote bond yield spreod. The Compony estimotes
thot o dmreose o[ I O0 bosis points in the combinotion of the
forecosted long-term Government of Conodo bond yield ond the
A-roted utiliry corporote bond yield spreod used in determining ils role
of return would reduce the Compony's tronsmission business' 20'l B
net income by opproximotely $23 million ond its distribution business'
20I B net income by opproximotely $ I 5 million. The Compony
periodicolly utilizes inlerest rote swop ogreements to mitigote
elements o[ inlerest rote risk.
Finonciol ossets creote o risk thot o counlerporly will foil to dischorge
on obligotion, cousing o finonciol loss. Derivotive linonciol
instruments result in exposure to credit risk, since there is o risk of
counterporty defoult. Hydro One monitors ond minimizes credil risk
through vorious techniques, including deoling wilh highly roted
counterporties, limiting totol exposure levels with individuol
counterporties, entering into ogreements which enoble net settlement,
ond by monltoring the linonciol condltion o[ counterporties. The
Compony does not trode in ony energy derivotives. The Compony is
required to procure electricity on beholf of competitive retoilers ond
cerloin locol distribution componies for resole to lheir customers. The
resulting concentrotions of credit risk ore mitigoted through the use of
vorious security orrongements, including letters o[ credit, which ore
incorporoted inlo the Compony's service ogreements with these
retoilers in occordonce with the OEB's Retoil Settlement Code.
The [oilure to properly monoge these risks could hove o moteriol
odverse eflect on the Compony.
Risks Reloting to Asset Condition ond Copitol
Proiects
The Compony continuolly incurs susloinment ond development copitol
expenditures ond monitors the condition of its tronsmission ossels to
monoge the risk of equipment foilures ond to determine the need for
ond timing o[ mojor refurbishments ond replocements of its
tronsmission ond distribution infrostructure. However the lock o[ reol
time monitoring o[ distribution ossets increoses the risk of distribution
equipmenl foilure. The connection of lorge numbers of generotion
focilities to the distribution network hos resulted in greoter thon
expected usoge o[ some of the Compony's equipment. This increoses
mointenonce requirements ond moy occelerole the oging of lhe
Compony's ossets.
Execution o[ the Compony's copitol expenditure progroms,
porticulorly lor development copitol expenditures, is portiolly
dependent on externol foctors, such os environmentol opprovols,
34 HYDRO ONE tlMlTED 2016 ANNUAT REPORT TSX: H
municipol permits, equipment outoge schedules thot occommodote
the IESO, generolors ond tronsmissionconnecled customers, ond
supply choin ovoilobility for equipment suppliers ond consulting
services. There moy olso be o need [or, omong other things,
Environmentol Assessmenl Acl (Ontorio) opprovols, opprovols which
require public meetings, oppropriote engogement with First Notions
ond M6tis communilies, OEB opprovols of expropriotion or eorly
occess lo properly, ond other octivities. Obtoining opprovols ond
corrylng out these processes moy olso be impocted by opposition to
the proposed site of the copitol inveslments. Deloys in obtoining
required opprovols or Ioilure to complete copitol proiects on o timely
bosis could moteriolly odversely offect tronsmission reliobility or
customers' service quolity or increose mointenonce costs which could
hove o moteriol odverse ef{ecl on the Compony. Externol foctors ore
considered in the Compony's plonning process. lf the Compony is
unoble to corry out copitol expenditure plons ln o limely monner,
equipment per{ormonce moy degrode, which moy reduce network
copocity, result in customer interruptions, compromise the reliobility of
the Compony's nelworks or increose the costs of operoting ond
mointoining these ossets. Any o[ these consequences could hove o
moteriol odverse effect on the Compony.
Increosed competition for the development of lorge tronsmission
proiects ond legislotive chonges reloting to the selection o[
tronsmitters could impoct the Compony's obility to expond its existing
tronsmission system, which moy hove on odverse effect on the
Compony. To the extent thot other porties ore selected to construcl,
own ond operote new lronsmission ossets, the Compony's shore of
Ontorio's tronsmission nelwork would be reduced.
Heolth, Sofery ond Environmentol Risk
The Compony is subjecl to provinciol heolth ond sofety legislotion
Findings o[ o foilure to comply with this legislotion could result in
penolties ond reputotionol risk, which could negotively impoct the
Compony.
The Compony is subject to extensive Conodion federol, provinciol ond
municipol environmentol regulotion. Foilure to comply could subject the
Compony to fines or other penolties. ln oddition, fie presence or
releose of hozordous or other hormlul substonces could leod to cloims
by third porties or governmentol orders requiring the Compony to toke
specific oclions such os investigoting, controlling ond remedioting the
effects of these substonces. Contominolion of the Compony's
properties could limit its obility to sell or leose these ossets in the luture.
ln oddition, octuol future environmentol expenditures moy vory
moteriolly from the estimotes used in the colculotion of the
environmentol liobilltles on the Compony's bolonce sheet. The
Compony does not hove insuronce coveroge for these environmenlol
expenditures.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 36 of 167
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There is olso risk ossocioted with obtoining governmentol opprovols,
permits, or renewols of exisling opprovols ond permits reloted to
constructing or operoting focilities. This moy require environmentol
ossessment or result in the imposition of conditions, or both, which
could result in deloys ond cost increoses.
Hydro One emils certoin greenhouse goses, including sulphur
hexofluoride or 'SF6". There ore increosing regulotory requirements
ond costs, olong with ottendont risks, ossocioted with the releose ol
such greenhouse goses, oll of which could impose odditionol
moteriol costs on Hydro One.
Any future regulotory decision to disollow or limir the recovery of such
costs could hove o moteriol odverse effect on the Compony.
Pension Plon Risk
Hydro One hos the Hydro One Defined Benefit Pension Plon in ploce
for the moiorily of ils employees. Contribulions to the pension plon
ore estoblished by octuoriol voluotions which ore required to be filed
with lhe Finonciol Services Commission of Ontorio on o trienniol
bosis. The most recently filed voluotion wos prepored os ot
December 3 i , 20 'l 5, ond wos filed in June 201 6, covering o three
yeor period from 20,16 to 2018. Hydro One's contributions to its
pension plon sotis[7, ond ore expected to sotisfy, minimum [unding
requirements. Conkibutions beyond 20l8 will depend on the funded
posilion of the plon, which is determined by investment returns,
interest rotes ond chonges in benefits ond octuoriol ossumptions ot
thot time. A determinotion by the OEB thot some o[ the Compony's
pension expenditures ore not recoveroble through rotes could hove o
moteriol odverse effecl on the Compony, ond this risk moy be
exocerboted if the omount o[ required pension contributions
increoses.
The OEB hos begun o consuholion process thot will exomine
pensions ond other post€mployment benefits in reguloted ulilitles. See
"- Other Post-Employment ond Post-Retirement Benefits Risks". The
outcome of this consuhotion process is uncertoin ond the Compony is
unoble to ossess the impoct o[ the potentiol chonges stemming from
the review ot this time.
Risk of Recoverobility of Totol Compensotion
Costs
The Compony monoges oll of its totol compensotion costs, including
pension ond other postemployment ond post-retiremenl benefits, subpct
to restrictions ond requirements imposed by the colleclive borgoining
process. Should ony element of totol compensotion costs be disollowed
in whole or port by the OEB ond not be recoveroble from cuslomers in
rotes, the costs could be moteriol ond could decreose net income, which
could hove o moteriol odverse effect on the Compony.
Other Post-Employmenl ond Post-Retirement
Benefits Risks
The Compony provides other postemployment ond post-reiirement
benefits, lncluding workers compensotion benefits ond long-term
disobiliry benefits to quolilying employees. The OEB hos begun o
consultotion process thot will exomine pensions ond other post-
employment benelits in reguloted utilities. The obiectives of the
consultotion ore to develop slondord principles to guide the OEB's
review of pension ond other postemployment ond post-retirement
benefits costs in the future, lo estoblish specific inlormotion
requirements for opplicotion ond to estoblish oppropriote regulotory
mechonisms lor cost recovery which con be opplied consistenlly
ocross the gos ond eleckicity sectors for roteteguloted utililies. The
outcome of lhis consultolion process is uncertoin ond the Compony is
unoble to ossess the impoct of lhe potentiol chonges stemming from
the review ot this time. A determinolion thot some o[ the Compony's
postemployment ond post-retirement benelit costs ore not recoveroble
could hove o moteriol odverse effect on the Compony.
Risk Associoted with Outsourcing Arrongemenls
Consistenl with Hydro One's strotegy of reducing operotlng costs, il
hos enlered into on outsourcing orrongement with o third porty for the
provision of bock office services ond coll cenke services. lf the
outsourcing orrongemenl or stolements o[ work thereunder ore
terminoted for ony reoson or expire before o new supplier is selected
ond fully tronsitioned, the Compony could be required lo incur
significonl expenses to tronsfer to onother service provider or insource,
which could hove o moteriol odverse effed on the Compony's
business, operoting results, finonciol condition or prospects.
Risk from Provinciol Ownership of Tronsmission
Corridors
The Province owns some of the corridor londs underlying the
Compony's tronsmission system. Although the Compony hos the
stotutory right to use these tronsmission corridors, the Compony moy
be limited in its options to expond or operote its systems. Also, other
uses o[ the tronsmission conidors by third porties in conjunction with
the operotion of the Compony's systems moy increose sofety or
environmenlol risks, which could hove o moteriol odverse effed on
the Compony.
Litigotion Risks
ln the normol course of the Compony's operotions, il becomes
involved in, is nomed os o porly to ond is the subiect of, vorious
legol proceedings, including regulotory proceedings, tox
proceedings ond legol octions, reloting to octuol or olleged violotions
of low, common low domoges cloims, personol iniuries, property
domoge, property toxes, lond rights, the environment ond controct
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HyDno oNE LmrED oNE oF NoRTH AMERte\',t!6ffirrf{lcdf6:gfllgtEs 35
Schedule 3, Page 37 of 167
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MANAGEMENT'S DISCUSSION AND ANALYSIS
disputes. The outcome of outstonding, pending or future proceedings
connot be predicted with certointy ond moy be determined odversely
to the Compony, which could hove o moteriol odverse elfect on the
Compony. Even if the Compony prevoils in ony such legol
proceeding, the proceedings could be costly ond limeconsuming
ond would divert the ottention of monogemenl ond key personnel
from the Compony's business operotions, which could odversely
offect the Compony. See olso "Other Developments - Closs Action
Lowsuit".
Tronsmission Assets on Third-Porty Londs Risk
Some of the londs on which the Compony's lronsmission ossets ore
locoted ore owned by third porlies, includlng the Province ond
federol Crown, ond ore or moy become subiect to lond cloims by
First Notions. The Compony requires volid occupotion rights to
occupy such londs (which moy toke the form of lond use permits,
eosements or otherwise). lf the Compony does not hove volid
occupotionol rights on third-porry owned londs or hos occupotionol
rights thot ore subiect to expiry, il moy incur moteriol costs to obtoin
or renew such occupotionol rights, or i[ such occupotionol rights
connot be renewed or obtoined it moy incur moteriol costs lo remove
ond relocote its ossets ond restore the subiect lond. lf the Compony
does not hove volid occupotionol rights ond must incur costs os o
result, this could hove o moteriol odverse effect on the Compony or
otherwise moteriolly odversely impoct the Compony's operolions.
Reputotionol ond Public Opinion Risk
Reputotion risk is the risk of o negotive impoct to the Compony's
business, operolions or finonciol condition thot could result from o
deteriorotion of Hydro One's reputolion. The Compony's reputotion
could be negotively impocted by chonges in public opinion, ottitudes
towords the Compony's privotizotion, loilure to deliver on its customer
promises ond other externol forces. Adverse reputotionol events could
hove negotive impocls on the Compony's business ond prospects
including, but not limited to, deloys or deniols o[ requisite opprovols
ond occommodotions for the Compony's plonned projects, escoloted
costs, legol or regulotory oclion, ond domoge to stokeholder
relotionships.
common shores) o[ ony closs or series if it would own less lhon 40%
o[ the outstonding number o[ voting securities of thot closs or series
ofier the sole ond in certoln clrcumstonces olso requires the Province
to toke steps lo mointoin thot level of ownership. Accordingly, the
Province is expected lo continue lo mointoin o significont ownership
interest in voting securities o[ Hydro One for on indefinite period.
As o resull of its significont ownership of lhe common shores of Hydro
One, the Province hos, ond is expected indefinitely to hove, the
obilily to determine or significontly influence the outcome of
shoreholder votes, subiect to the reskictions in the governonce
ogreement entered into between Hydro One ond the Province doted
November 5, 20,15 (Governonce Agreement; ovoiloble on SEDAR
ot www.sedor.com). Despite the terms of lhe Governonce Agreement
in which lhe Province hos ogreed lo engoge in the business ond
offoirs of the Compony os on investor ond not os o monoger, there is
o risk thot $e Province's engogemenl in the business ond offoirs of
the Compony os on investor will be informed by its policy objectives
ond moy influence the conduct of the business ond ofloirs o[ the
Compony in woys thot moy not be oligned with the interests of other
shoreholders.
The shore ownership reslrictions in lhe Electricily Act (Shore
Ownership Restrictions) ond the Province's significont ownership of
common shores of Hydro One together effectively prohibit one or
more persons octing together from ocquiring control of Hydro One.
They olso moy limit or discouroge tronsoctions involving other
fundomentol chonges to Hydro One ond the obiliry of other
shoreholders to successfully contest the election of the directors
proposed for election pursuont to the Governonce Agreement. The
Shore Ownership Restrictions moy olso discouroge troding in, ond
moy limit the morket [or, lhe common shores ond other votlng
securilies.
Nominotion of Directors ond Confirmotion of
Chief Executive Officer ond Choir
Although director nominees ore required to be independent o[ both
the Compony ond the Province pursuont lo the Governonce
Agreement, there is o risk thot the Province will nominote or confirm
individuols who sotisfy the independence requirements but who it
considers ore disposed to support ond odvonce its policy objectives
ond give disproportionote weight to the Province's interests in
exercising their business iudgment ond boloncing the interests of the
stokeholders of Hydro One. This, combined with the foct certoin
motters require o h^/ethirds vote of the Boord o[ Directors, could
ollow the Province to unduly lnfluence certoin Boord octions such os
confirmotion of the Choir ond confirmotion of the Chief Executive
O[ficer.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 38 of 167
Risks Reloting to the Compony's Relotionship
with the Province
Ownershio ond Continued lnfluence bv the
Province dnd Voting Power; Shore Ownership
Restrictions
The Province currently owns opproximotely 70.1% of the outstonding
common shores of Hydro One. Ihe Electricity Act restricts the
Province from selling voting securities of Hydro One (includingo
36 HYDRO ONE LlillTED 2016 ANNUAT REPORT TSX: H
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Boord Removol Rights
Under the Governonce Agreement, the Province hos the right to
withhold from voting in {ovour of oll director nominees ond hos the
right to seek to remove ond reploce the entire Boord of Directors,
including in eoch cose ils own director nominees but excluding the
Chief Executive Officer ond, ot the Province's discretion, the Choir. ln
exercising these rights in ony porticulor circumstonce, the Province is
entitled to vote in its sole interesl, which moy not be oligned with the
interests of other shoreholders.
More Extensive Regulotion
Although under the Governonce Agreement, the Province hos ogreed
to engoge in the business ond offoirs of Hydro One os on inveslor
ond not os o monoger ond hos stoted thot its intention is to ochieve
its policy obiectives through legislotion ond regulotion os it would
with respect to ony other utilit/ operoting in Ontorio, fiere is o risk
thot the Province will exercise its legislotive ond regulotory power lo
ochieve poliry oblectives in o monner thot hos o moteriol odverse
effect on the Compony.
Prohibitions on Selling the Compony's
Tronsmission or Distribution Business
fhe Electricity AcL prohibits the Compony from selling oll or
substontiolly oll of the business, property or ossels reloted to its
tronsmission system or distribution system thot is reguloted by the
OEB. There is o risk thot these prohibitions moy limit the obilii/ of the
Compony to engoge in sole honsoctions involving o substontiol
portion o[ either syslem, even where such o tronsoclion moy
ofierwise be considered to provide substontiol benefits to the
Compony ond the holders of lhe common shores.
Fulure Soles of Common Shores by the Province
The Province hos indicoted fiot it currently intends to sell further
common shores o{ Hydro One over time, until it holds opproximotely
40% of the common shores, subiect to the selling restrictions ogreed
with the Underwriters. The registrotion rights ogreement between
Hydro One ond the Province doted November 5, 2O15 {ovoiloble
on SEDAR ot www.sedor.com) olso gronts the Province the right to
request thot Hydro One file one or more prospecluses ond loke other
procedurol steps to focilitote secondory olferings by the Province o[
the common shores of Hydro One. Future soles of common shores o[
Hydro One by the Province, or he perceptlon thot such soles could
occur, moy moteriolly odversely offecl morket prices for these
common shores ond impede Hydro One's obility to roir copilol
through the issuonce ol odditionol common shores, including the
number o[ common shores thot Hydro One moy be oble to sell ot o
porticulor time or the totol proceeds thot moy be reolized.
Limitotions on Enforcing the Governonce
Agreement
The Governonce Agreement includes commitments by the Province
reshicting the exerclse o[ its rights os o holder of voting securities,
including wilh respect to lhe moximum number of direclors thot the
Province moy nominote ond on how the Province will vote with
respect to other direclor nominees. Hydro One's obility to obtoin on
effective remedy ogoinst the Province, if the Province were nol to
comply with these commitments, is limited os o result of the
Prx.eedings Agoinst the Crown Act (Ontorio|. This legislotion
provides thot lhe remedies o[ iniunction ond specific performonce ore
not ovoiloble ogoinst the Province, olthough o court moy moke on
order declorotory of the rights o[ the porties, which moy influence the
Province's octions. A remedy of domoges would be ovoiloble to
Hydro One, but domoges moy not be on effective remedy,
depending on the noture of the Province's noncomplionce with lhe
Governonce Agreement.
Criticol Accounting Estimotes ond
Judgments
The preporotion of Hydro One Consolidoted Finonciol Stolements
requires the Compony to moke key estimotes ond criticol iudgments
thot offecr the reported omounts of ossets, liobilities, revenues ond
costs, ond reloted disclosures o[ contingencies. Hydro One boses ils
estimotes ond iudgments on historicol experience, current conditions
ond vorious other ossumptions lhot ore believed to be reosonoble
under the circumstonces, the results of which form the bosis for
moking iudgments obout the corrying volues of ossets ond liobilities,
os well os identifying ond ossessing the Compony's occounting
treotment with respect to commitments ond contingencies. Actuol
resulls moy difler from these estimotes ond judgments. Hydro One hos
identified the lollowing criticol occounting estimotes used in the
preporotion of its Consolidoted Finonciol Stotements:
Revenues
Distribution revenues ottributoble to the delivery of electricify ore
bosed on OEBopproved distribution roles ond ore recognized on on
occruol bosis ond include bllled ond unbilled revenues. Billed
revenues ore bosed on electricity delivered os meosured from
cuslomer meters. At the end of eoch month, electricily delivered to
customers since the dote of the lost billed meter reoding is eslimoted,
ond the corresponding unbilled revenue is recorded. The unbilled
revenue estimote is offected by energy consumplion, weother, ond
chonges in the composition of customer closses.
Exhibit No. 4
Case Nos. AVU-E-I 7-_ and AVU-G-I7-_
HyDRo oNE LrmrrED oNE oF NoRTH AMERre\',Lr.tUiffIgtQp[:grygrEs 37
Schedule 3, Page 39 of167
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Accounts Receivoble ond Allowonce for
Doubtful Accounts
The ollowonce for doubtful occounts re{lects the Compony's best
estimote of losses on billed occounts receivoble bolonces. The
Compony estimotes fie ollowonce for doubtful occounls on cuslomer
receivobles by opplying internolly developed loss rotes to the
outstonding receivoble bolonces by oging cotegory. Loss rotes
opplied to the occounts receivoble bolonces ore bosed on historicol
overdue bolonces, customer poymenls ond writeoffs.
Regulotory Assets ond Liobilities
Hydro One's regulotory ossets represenl certoin omounts receivoble
from {uture electricity customers ond cosls thot hove been deferred for
occounting purposes becouse it is proboble thot they will be
recovered in future rotes. The regulolory ossets moinly include costs
reloted to the pension benefit liobility, defened income tox liobilities,
post-retirement ond postemployment benefit liobility, shorebosed
compensotion costs, ond environmentol liobilities. The Compony's
regulotory liobilities represenl certoin omounts thot ore refundoble to
future electricity customers, ond pertoin primorily to OEB deferrol ond
vorionce occounts. The regulotory ossets ond liobilities con be
recognized lor rotesetting ond finonciol reporting purposes only if the
omounts hove been opproved for inclusion in the electricity rotes by
the OEB, or if such opprovol is iudged to be proboble by
monogemenl. lf monogement iudges thot it is no longer proboble thot
the OEB will ollow the incluslon o[ o regulotory osset or liobility in
future eleckicity rotes, the opplicoble corrying omount of the
regulotory osset or liobility will be re{lected in results of operotions in
the period thot lhe iudgment is mode by monogement.
Environ mentol Liobilities
Hydro One records o liobility for he estimoted future expendilures
ossocioted with the removol ond destruction of PCBcontominoted
insuloting oils ond reloted electricol equipment, ond for the
ossessment ond remediotion of chemicolly contominoted londs. There
ore uncerlointies in estimoting future environmentol costs due to
potentiol externol events such os chonges in legislotion or regulotions
ond odvonces in remediotion technologies. In determining the
omounts lo be recorded os environmentol llobilities, the Compony
estimotes the currenl cost of completing required work ond mokes
ossumplions os to when the future expenditures will octuolly be
incuned, in order lo generote future cosh flow in{ormotion. All foctors
used in estimoling the Compony's environmenlol liobilities represent
monogemenl's best estimotes o[ the present volue of cosls required to
meel exisling legislotion or regulotions. However, it is reosonobly
possible thot numbers or volumes o[ contominoled ossets, cosl
estimotes lo perform work, inflotion ossumptions ond lhe ossumed
pottern of onnuol cosh flows moy differ significontly from the
Compony's current ossumplions. Environmentol liobilities ore
reviewed onnuolly or more frequently if significont chonges in
regulotions or other relevont foctors occur. Estimole chonges ore
occounted for prospectively.
Employee Future Benefits
Hydro One's employee future benefits consist of pension ond post-
reliremenl ond postemployment plons, ond include pension, group
life insuronce, heolth core, ond long-term dlsobilily benefits provided
to the Compony's current ond retired employees. Employee future
benelits costs ore included in Hydro One's lobour costs thot ore either
chorged to resulb o[ operotions or copitolized os port of the cost of
property, plont ond equipment ond intongible ossets. Chonges in
ossumptions offect the benefit obligotion of the employee future
benefits ond fie omounts thot will be chorged to results of operotions
or copitolized in future yeors. The following significont ossumptions
ond estimotes ore used to determine employee future benefit costs
ond obligotions:
Weighted Averoge Discount Rote
The welghted overoge discount rote used to colculote the employee
future benelits obligotion is determined ot eoch yeor end by relening
lo the most recently ovoiloble morket interest roles bosed 66 "AA"-
roted corporote bond yields reflecting the durotion of lhe opplicoble
employee future benefit plon. The discount rote ot December 3,l,
20 'l 6 decreosed to 3.90% ltron 4.O0"/" ot December 3 I , 20 I 5) for
pension benefits ond decreosed to 3.90% (from 4. 10% used ot
December 3 I , 20I 5) for the post-retirement ond postemploymenl
plons. The decreose in the discount rote hos resulled in o
corresponding increose in employee future benefits liobilities for the
pension, posl-relirement ond postemployment plons lor occounting
purposes. The liobilities ore determined by independent ocluories
using the proiected benefit method proroted on service ond bosed on
ossumptions thot reflect monogement's best estimotes.
Expected Rote of Return on Plon Assets
The expected role of return on pension plon ossets is bosed on
expectotions of long-term rotes of relurn ot the beginning of the yeor
ond reflects o pension osset mix consistent with the pension plon's
current investment policy.
Rotes of return on the respective portfolios ore determined with
reference to respective published morket indices. The expected role
of return on pension plon ossets reflects the Compony's long-term
expectotions. The Compony believes thot this ossumption is
reosonoble becouse, with the penslon plon's bolonced investment
opprooch, the higher volotility o[ equii/ inveslment returns is intended
to be offset by the greoter stobility of fixed-income ond short-lerm
investment relurns. The net result, on o longlerm bosis, is o lower
return thon might be expected by investing in equities olone. ln the
short term, the pension plon con experience fluctuotions in ocluol
rotes of return.
Exhibit No. 4
Case Nos. AVU-E-17- and AVU-G-I7-
i.top"r,Hydro one
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38 HYDRO ONE LIMIED 2016 ANNUAL REPORT TSX: H
Schedule 3, Page 40 of 167
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Rote of Cost of Living lncreose
The rote of cost o[ living increose is determined by considering
differences between long-term Government o[ Conodo nominol
bonds ond reol return bonds, which increosed from 1 .50% per
onnum os ot December 31, 2Ol5 to opproximotely 'l .80% per
onnum os ot December 31, 2016. Given the Bonk of Conodo's
commitment to keep long-term inflotion between ,l.00% ond 3.00%,
monogemenl believes thot the cunent role is reosonoble to use os o
long-term ossumption ond os such, hos used o 2.0% per onnum
inflotion rote for employee future benefits liobility voluotion purposes
osolDecember3l,20l6.
Mo*olity Assumptions
The Compony's employee future benefits liobiliry is olso impocted by
chonges in lile expectoncies used in mortolity ossumptions. Increoses
in life expectoncies of plon members result in increoses in the
employee future benefits liobility. The mortolity ossumption used ot
December 3 .l , 201 6 is 95% of 20 l 4 Conodion Pensioners
Mortolity Privote Sector toble proiected generotionolly using
improvement Scole B (compored to ,l00% ol 2014 Conodion
Pensioners Mortoliry Public Sector toble proiected generotionolly
using improvement Scole B used ot December 31, 2Ol5l. The
mortolity toble wos updoted bosed on o review of the historicol
mortolity experience of the pension plon members.
Rote of lncreose in Heolth Core Cost Trends
The cosls of post-retirement ond postemployment benelils ore
determined ot the beginning o[ the yeor ond ore bosed on
ossumptions for expected cloims experience ond luture heolth core
cost inflotion. A l% increose ln the heolth core cost kends would
result in o $23 million increose in 20,16 intereslcost plus service
cost, ond o $289 million increose in the benefit liobility ot
December 3 1, 201 6.
Business Combinotions
Monogement's iudgment is required lo estimote the purchose price,
to identify ond to determine foir volue of oll ossets ond liobilities
ocquired. The determinotion of the foir volue of ossets ond liobilities
ocquired is bosed upon monogement's estimotes ond certoin
ossumptions.
Toxes
Hydro One ossesses the hkelihood thot defened tox ossels will be
recovered from future toxoble income. To the extent monogement
considers it is more likely thon not thot some portion or oll of the
deferred tox ossets will not be reolized, o voluotion ollowonce is
recognized.
Asset lmpoirment
Within Hydro One's reguloted businesses, the corrying costs of most
o[ the long-lived ossets ore included in the rote bose where they eorn
on OEBopproved rote of return. Asset corrying volues ond the reloted
return ore recovered through OEBopproved rotes. As o result, such
ossets ore only tested for impoirment in the event thot the OEB
disollows recovery, in whole or in porl, or if such o disollowonce is
iudged to be proboble. The Compony regulorly monitors the ossets of
ils unreguloted Hydro One Telecom subsidiory for indicotions o[
impoirment. As ot December 31, 20'16, no osset impoirmenl hod
been recorded for ossets within Hydro One's reguloted or
unreguloted businesses.
Goodwill is evoluoted for impoirment on on onnuol bosis, or more
frequently i[ circumstonces require. Hydro One hos concluded thot
goodwill wos nol impoired ot December 3 I , 20 I 6. Goodwill
represents the cost o[ ocquired distribution ond tronsmission
componies thot is in excess o[ the foir volue of the net identifioble
ossets ocquired ot the ocquisition dote.
Disclosure Controls And lnternol Controls
Over Finonciol Reporting
lnternol controls hove been documented ond tested for odequory ond
effectiveness, ond continue to be refined over oll business processes.
ln complionce with the requirements of Notionol Inslrument 52-.109,
the Compony's Certilying Olficers hove reviewed ond certilied the
Consolidoted Finonciol Stotements for the yeor ended December 3l,
2016, together with other finonciol informotion included in the
Compony's securities filings. The Certilying Officers hove olso certified
thot disclosure controls ond procedures (DC&P) hove been designed to
provide reosonoble ossuronce thot moteriol informotion reloting to the
Compony is mode known within the Compony. Further, the Certifying
Officers hove certified thot internol controls over finonciol reporting
(ICFR) hove been designed to provide reosonoble ossuronce
regording the reliobiliv of finonciol reporting ond the preporotion of
the Consolidoted Finonciol Stotements. Bosed on the evoluotion of the
design ond operoling effectiveness of the Compony's DC&P ond ICFR,
the Certifying Olficers concluded thot the Compony's DC&P ond ICFR
were effective os ol December 31, 20]6.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LrMrrED oNE oF NoRTH AMERre\',qjoUiffrFliQlf6€ftgrs rc
Schedule 3, Page 41 of 167
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MANAGEMENT'S DISCUSSION AND ANALYSIS
New Accounting Pronouncements
The following tobles presenl Accounting Stondords Updotes (ASUs) issued by the Finonciol Accounting Stondords Boord thot ore opplicoble to
Hydro One.
Recently Adopted Accounting Guidonce
ASU Dote issued Description Effective dote lmpoct on Hydro One
2O14-16 November
2014
This updote clorifies thot oll relevont terms ond feotures Jonuory I , 201 6
should be considered in evoluoting the noture of o
host conkoct for hybrid finonciol instruments issued in
the form of o shore. The nolure of the host controct
depends upon the economic chorocleristics ond risks
of the entire hybrid finonciol instrument.
No moteriol impoct upon odoption
201 50 I Jonuory 201 5 Extroordinory items ore no longer required lo be
presented seporolely in lhe income slotement.
lonuory 1 , 2016 No moteriol impocl upon odoption
2O15O2 Februory
20r5
Guidonce on onolysis to be performed to delermine
whether certoin types of legol entities should be
consolidoted.
Jonuory '1 , 20 16 No moteriol impocl upon odoption
2015O3 April 2015 Debl issuonce cosls ore required to be presented on
the bolonce sheet os o direct deduction from the
corrying omount of the reloted debt liobility consistent
with debt discounls or premiums.
Reclossificotion of deferred debt
issuonce costs ond net unomortized
debt premiums os on offset to long-term
deb. Applied relrospectively.
lonuory 1, 2016
o
2015O5 April 20'l 5 Cloud computing orrongements thot hove been
ossessed to contoin o softwore llcence should be
occounted for os internol-use softwore.
Jonuory 1 , 20 1 6 No moteriol impoct upon odoption
2015-16 September
201 5
Adiustments to provisionol omounts thol ore identified
during the meosurement period of o business
combinolion in the reporting period in which the
odjustment omount is determined ore required to be
recognized. The omount recorded in cunent period
eornings ore required to be presented seporotely on
the foce of the income stotement or disclosed in the
notes by line item.
Jonuory 1,2016 No moteriol impocl upon odoplion
2015-17 November
20r5
All defened tox ossets ond liobilities ore required to
be clossified os noncurrent on the bolonce sheet.
ionvory 1 ,2017 This ASU wos eorly odopted os o[
April 1, 20l6 ond wos opplied
prospeclively. As o resuh, the currenl
portions o[ the Compony's deferred
Income tox ossets ore reclossified os
noncurrenl ossets on the consolidoted
Bolonce Sheet. Prior periods were not
rekospeclively odiusted.
2016-09 Morch 2016 Severol ospects of the occounting for shorqbosed
poyment tronsoclions were simplilied, including the
income tox consequences, clossilicotion of owords os
either equily or liobilities, ond closslficotion on the
stotement of cosh flows.
This ASU wos eorly odopted os of
October I , 20,1 6 ond wos opplied
retrospectively. As o result, the
Compony occounts for forfeitures os
they occur. There were no olher
moleriol impocts upon odoplion.
)onvory ),2017
o
40 HYDRO ONE Llm[ED 2016 ANNUAL REPORT TSX: H
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 42 of 167
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Recently lssued Accounting Guidonce Not Yet Adopted
ASU Dote issued D"t.tipti*Effective dote Anticipoted impoct on Hydro One
2O14Q9 tv\oy 2014 -
2O15-14 December
2016"08 20r6
20lGt0
201o12
2016-20
ASU 2014O9 wos issued in Moy 2014 ond Jonuory l , 20 1 8
provides guidonce on revenue recognilion reloting to
the tronsfer of promised goods or services lo
customers in on omount thot reflects the considerotion
to which the entiiy expects to be entitled in exchonge
for those goods ond services. ASU 20 I 5- I 4 deferred
the elfective dote of ASU 2Ol4Oq by one yeor.
Additionol ASUs were issued in 2016 thot simplify
konsition ond provide clority on cerloin ospects of the
new stondord.
Hydro One hos completed its initiol
ossessment ond hos identified relevont
revenue streoms. No quontitotive
determinotion hos been mode os o
detoiled ossessment is now underwoy
ond will continue through to the third
quorter o{ 2017, wilh the end result
belng o determinotion of the finonciol
irnpoct of this stondord. The Compony is
on kock for implementotion of this
stondord by the effective dote.
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20l60l Jonuory 2016 This updole requires equily investmenls to be Jonuory 1 , 2018
meosured ot foir volue with chonges in foir volue
recognized in nel income, ond requires enhonced
disclosures ond presentotion of Iinonciol ossets ond
liobilities in the finonciol storemenrs. This ASU olso
simplifies the impoirmenl ossessment of equity
investments without reodily determinoble foir volues by
requiring o quolilotive ossessment fo identify
imPoirmenl.
Under ossessment
o 2016-02 Februory
201,6
Lessees ore required to recognize the rights ond
obligotions resulting from operoting leoses os ossets
(right to use the underlying ossel for the term of the
leosel ond llobilities (obligotion to moke future leose
poyments) on the bolonce sheel.
An initiol ossessment is currently
underwoy encompossing o review o[ oll
existing leoses, which will be followed
by o detoiled review of relevont
controcls. No quontitolive determinotion
hos been mode ot this time. The
Compony is on trock for implemenlotion
of this slondord by the effective dote.
Jonuory 1, 2019
201605 Morch 2016 The omendments clorify thot o chonge in the Jonuory 1 , 2018
counterporty to o derivolive instrumenl thot hos been
designoted os the hedging inslrument under Topic
8'15 does not, in ond of itself, require dedesignotion
of thot hedging relotionship provided thot oll other
hedge occounling criterio continue to be met.
Under ossessment
2016{6 Morch 2016 Contingent coll {put} options thot ore ossessed to
occelerote the poymenl of principol on debt
instruments need to meet the criterio of being "cleorly
ond closely reloted" lo their debt hosts.
Jonuory 1 , 2017 No moleriol impoct
2016o7 Morch 201 6 The requiremenl lo rehooclively odopt the equity Jonvory 1 , 2017 No moteriol impoct
method of occounting if on investment quolifies for use
of the equity method os o result of on increose in the
level of ownership or degree of influence hos been
eliminoled.
2016-l I Moy 20l6 This omendment covers the SEC Stoff's rescinding of Jonuory 1 , 2019
certoin SEC Stoff observer comments thot ore codilied
in Topic 605 ond Topic 932, effective upon the
odoption of Topic 606 ond Topic 8.l5, effective to
coincide with the effeclive dote of Updole 2014-16.
No moteriol impoct
o
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LriltrED oNE oF NoRTH AMERre',qJotrit JFl!fl16@grs rr
Schedule 3, Page 43 of 167
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MANAGEMENT'S DISCUSSION AND ANALYSIS
ASU Dote issued Description Effective dote Anticipoted impoct on Hydro One
20 I 6- I 3 .lune 20 1 6 The omendment provides users with more decision- Jon uory I , 20 I 9 Under ossessment
useful informotion oboul the expected credit losses on
finonciol instruments ond other commitrnents to extend
credit held by o reporting entily ot eoch reporting
dote.
20.16-.15 August2016 Theomendmentsprovideguidonceforeightspecific Jonuoryl,2018 Underossessment
cosh flow issues with the obiective o[ reducing the
existing diversity in proctice.
20,l616 October
2016
The omendment eliminotes the prohibilion o[ ]onuory 1 , 2018
recognizing currenl ond defened income toxes for on
intro€ntity osset tronsfer, other thon inventory, unlil the
osset hos been sold to on outside porty. The
omendment will permit income tox consequences of
:'.1,::'*''
to be recosnized when the konsfer
Under ossessment
20l6lB November
2016
The omendmenl requires thot restricted cosh or Jonuory 1, 2018
restricled cosh equivolents be included with cosh ond
cosh equivolents when reconciling the beginning ond
end-of-period bolonces in the stotement of cosh flows.
2017{1 )onuory 2017 The omendment clorifies the definition of o business Jonuory 1, 2018 Under ossessment
ond provides odditionol guidonce on evoluoting
whelher tronsoctions should be occounted for os
ocquisitions (or dispo
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-I7-
i.l-op"r,Hydro one
Under ossessment
o
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42 HYDRO ONE LlillTED 2016 ANNUAL REPORT TSX: H
Schedule 3, Page 44 of 167
o
Summory of Fourth Quorter Results of Operotions
Three months ended December 3 I
lmillions of dollors, except EPS)2016 20 r5 Chonge
Revenues
Distribution
Tronsmission
Other
1,228
373
l3
1,148
361
l3
7.O%
1 10/
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I
614 1,522 6.O%
Costs
Purchosed power
OM&A
Distribution
Tronsmission
Other
858
r63
98
26
786 9.2%
11.6%
122.2%)
(r0.3%)
146
126
29
Depreciotion ond omorlizotion
287
204
30r
193
14.7%)
1,349 r,280 5.4%
lncome before finoncing chorges ond income toxes
Finoncing chorges
265
t0l
242
94
9.57"
7.47"
a lncome before income toxes
lncome tox expense
164
29
148 r 0.8%
r 00.0%
Net income r35 147 lB.2%)
Net income ottributoble to common shoreholders of Hydro One 128 t43 {r0.5%)
Bosic EPS
Diluted EPS
$ 0.22
$ o.2l
$ o.zo
$ 0.26
11s.4%)
t19.2%)
Copitol investments
Diskibution
Tronsmission
Other
201
274
2
t98
251
2
1.5%
9.2%
477 451 5.8%
Net lncome
Net income ottributoble to common shoreholders for the quorter
ended December 3.l, 20.]6 of $l28 million is o decreose of
$'l 5 million or ,l0.5% from the prior yeor. Excluding the effect of on
lPOreloted positive tox odiustment of $ l9 million in the fourth quorter
of 201 5, net income for the quorter increosed 6y 3.2%.
Revenues
The quorlerly increose of $.12 million or 3.3% in lronsmission
revenues wos primorily due to higher overoge monthly Ontorio
60minute peok demond os severol exkemely cold doys during the
quorter increosed peok tronsmission demond ond OEBcpproved
tronsmission role increoses.
The quorterly increose of $80 million or 7 .O% in dlstribution revenues
wos primorily due to higher power costs from generotors thot ore
possed on to customers ond increosed OEBopproved distribution
rotes {or 20,16, portiolly offset by lower energy consumption resulting
from milder weolher.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
HYDRo oNE LrmrED oNE oF NoRTH AMERre',qj0udrrFI!QIi6glgrrs os
Schedule 3, Page 45 of 167
o
o
o
MANAGEMENT'S DISCUSSION AND ANALYSIS
OM&A Costs
The quorterly decreose of $28 million or 22.2"/" in tronsmission
OM&A costs wos primorily due to lower proiect cost ond inventory
wriledowns ond lower expenditures reloted to forestry control ond
line cleoring on the Compony's tronsmission rightsof-woy.
The quorterly increose of $ I Z million or 1 1 .6"/" in distribution OM&A
costs wos primorlly due to higher volume o[ vegelotion monogemenl
octivilies, portiolly offsel by lower cosls reloled to restoring power
services ond storm response.
Depreciotion ond Amortizotion
The increose of $l I million or 57% in depreciotion ond
omortizotion costs for the fourth quorter o[ 20 ] 6 wos moinly due lo
the growth in copitol ossets os the Compony continues to ploce new
ossels in-servlce, consistent with lls ongoing copitol investment
progrom.
Finoncing Chorges
The quorterly increose of $7 million or 7 .4% in [inoncing chorges
wos primorily due lo on increose in interest expense on longlerm
debt resulting from the increose in weighted overoge long-term debt
outstonding during the quorter.
lncome Tox Expense
lncome tox expense for the lourth quorter ol 2016 increosed by
$28 million compored to 201 5, ond the Compony reolized on
effeclive tox rote o[ opproxim otely 17 .7% in the fourth quorter of
2016 compored to opproximotely 0.7% h 2015. The increose in
tox expense is primorily due to the following:
e the effect of on lPOreloted positive lox odlustment of $ l9 million
in the fourth quorter o[ 2015;
. higher income before toxes in the foudh quorter of 20,l6; ond
r o decreose in deductible temporory differences such os
copitolized pension deducted for tox purposes.
Copitol lnvestmenls
The increose in konsmission copilol investments during the fourth
quorter wos primorily due to
o on increosed volume of work on insulotor replocements;
o on increosed volume ol integroted stotion component replocements
to reploce deterioroted ossets ot tronsmission slotions; ond
. higher volume of demond work ossocioted with equipment foilures
ond spore lronsformer equipment purchoses; portiolly offset by
. reduced work on the Clorington Tronsmission Stotion os the proiect
neors completion.
The increose in distribution copitol investments during the fourth
quorter wos primorily due to
. increosed investments reloted to informotion technology
infrostructure ond cuslomer progroms together with upgrode ond
enhoncement proiects, including investments to integrote mobile
technology with the Compony's existing work monogemenl lools;
. higher volume of focility upgrodes ond construclion of new
operotion centres; ond
. higher volumes of work ossocioted with further enobling cerloin o[
Hydro One's ossets to be lointly used by the telecommunicotions
ond coble lelevision industries, os well os relocotion of poles,
conductors ond other equipment os required by municipol ond
provinciol rood outhorities; portiolly offset by
. higher storm restorolion work in the prior yeor primorily os o result
of two significont wind storms during the fourth quorter of 2015.
Forwo rd-looki ng Stotements And
lnformotion
The Compony's orol ond written public communicotions, including
this document, ohen contoin forword-looking stolements thot ore
bosed on current expectqtions, estimotes, forecosts ond proiections
obout the Compony's business ond lhe industry, regulolory ond
economic environments in which il operotes, ond include beliefs ond
ossumptions mode by the monogement of the Compony. Such
stotements include, but ore not limited to: stotements regording the
Compony's lronsmission ond distribution rotes resulting from rote
opplicotions; slotements regording the Compony's liquidity ond
copitol resources ond operotionol requiremenls; stolements obout the
stondby credit locilities; expectotions regording the Compony's
finoncing octivities; stotemenls regording the Compony's moturing
debt; stotements reloted to credit rotings; stotements regording
ongoing ond plonned proiects ond/or initiotives, including expected
results ond completion dotes; stotements regording expected future
copitol ond development investments, the timing o[ these expendilures
ond the Compony's investment plons, stotements regording
controctuol obligotions ond other commerciol commitments;
stotements reloted to the OEB; stotements regording future pension
contributions, the pension plon ond voluolions; expectotions reloted to
work [orce demogrophics; stotemenls obout collective ogreements,
stolements reloted to dividends; stotemenls reloted to cloims;
expectotions regordlng loxes; stotements reloted to occupotionol
righls; stotements obout nonCAAP meosures; slotements reloted to
criticol occounting estimotes, including expectotions regording
employee future benefits, environmentol liobilities, ond regulotory
ossets ond liobilities; expectotions reloted to the effect of interest
rotes; stotements obout the Compony's reputotion; stolemenls
regording ryber ond doto security; stotements reloted to future soles
of shores o[ Hydro One; stotements reloted to the Compony's
Exhibit No. 4
Case Nos. AVU-E-1 7-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 46 of 167
o
44 HYDRO ONE LIillrED 2016 ANNUAL REPORT TSX: H
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relotionship with the Province; stotements regording recent
occounting-reloted guidonce; expectotions reloted to tox impocts;
slotements reloted to the Universol Bose Shelf Prospectus; ond
stolements reloted to the Compony's ocquisitions, including slotemenls
obout Greol Lokes Power ond Orillio Power. Words such os
"expect", "onticipote", "intend ", "ottempt", " moy", "plon", "will",
"believe', "seek", "estimote", "gool', "oim", "torget", ond voriotions
of such words ond similor expressions ore intended to identify such
lorwordlooking stotements. These stotements ore not guorontees of
future performonce ond involve ossumptions ond risks ond
uncerlointies thot ore difficult to predict. Therefore, octuol outcomes
ond results moy differ moterlolly from whot is expressed, implied or
lorecosted in such forword-looking stotements. Hydro One does not
intend, ond il discloims ony obligotion, to updote ony fon,rord-
looking stotements, except os required by low.
These forword-looking stotements ore bosed on o voriely ol foctors
ond ossumptions including, but not limited to, the following: no
unforeseen chonges in the legislotive ond operoting fromework for
Ontorio's electricity morket; {ovouroble decisions from the OEB ond
other regulotory bodies concerning outstonding ond future rote ond
other opplicotions; no unexpected deloys in obtoining lhe required
opprovols; no unforeseen chonges in rote orders or rote setting
methodologies for the Compony's distrlbution ond tronsmission
businesses; continued use of US GAAP; o stoble regulotory
environment; no unfovouroble chonges in environmentol regulotion;
ond no significont evenl occuning outside the ordinory course of
business. These ossumptions ore bosed on informotion cunently
ovoiloble to the Compony, including informotion obtoined from third-
port/ sources. Actuol results moy differ moteriolly from those predicted
by such forword-looking slotements. While Hydro One does not
know whot impoct ony o[ these differences moy hove, lhe
Compony's business, results of operotions, finonciol condition ond
credit stobility moy be moteriolly odversely offected. Foctors thol
could couse octuol resulb or outcomes to differ moteriolly from the
results expressed or implied by lorwordlooking stolements lnclude,
omong other things:
o risks ossocioted wilh the Province's shore ownership of Hydro One
ond other relotionships with the Province, including potentiol
conflicts of interest thot moy orise between Hydro One, the
Province ond reloted porties;
o regulotory risks ond risks reloting to Hydro One's revenues,
including risks relotlng to rote orders, octuol performonce ogoinst
Iorecosts ond copitol expenditures;
o the risk thot the Compony moy be unoble to comply with
regulotory ond legislotive requirements or thot the Compony moy
incur odditionol costs for complionce thot ore not recoveroble
through rotes;
o the risk of exposure of the Compony's focilities to the effects o[
severe weother conditions, nolurol disosters or olher unexpected
occurrences for which the Compony is uninsured or for which the
Compony could be sublect to cloims for domoge;
. public opposition to ond deloys or deniols of the requisite
opprovols ond occommodotions for the Compony's plonned
proiects;
r the risk thot Hydro One moy incur significont costs ossocioted with
honsfening ossets locoted on Reserves (os defined in the /ndron
Ad {Conodo));
o the risks ossocioted with informotion system security ond
mointoining o complex informolion technology system
infroskucture;
o the risks reloted to the Compony's work force demogrophic ond its
potentiol inobility to ottroct ond retoin quolified personnel;
r the risk of lobour disputes ond inobility to negotiote oppropriote
collective ogreements on occeptoble lerms consistent wih the
Compony's role decisions;
o risk thot the Compony is not oble to orronge sufficient costeffective
finoncing to repoy moturing debt ond to fund copitol expenditures;
o risks ossocioted with fluctuotions in interest rotes ond foilure to
monoge exposure to credit risk;
o the risk thot the Compony moy nol be oble to execule plons for
copitol proiects necessory to mointoin the performonce of the
Compony's ossets or to corry out proiects in o timely monner;
r the risk of noncomplionce wilh environmentol regulotions or foilure
to mitigote significont heolth ond sofety risks ond inobllity to
recover environmentol expenditures in rote opplicotions;
o the risk thot ossumptions thot form the bosis of the Compony's
recorded environmentol liobilities ond reloted regulotory ossets
moy chonge;
o lhe risk of not being oble to recover lhe Compony's pension
expenditures in future rotes ond uncertointy regording fie future
regulotory lreolment of pension, other postemployment benefits
ond post-retirement benefits costs;
o the potentiol thot Hydro One moy incur significont expenses to
reploce functions currently outsourced if ogreements ore terminoted
or expire belore o new service provider is selected;
o the risks ossocioted with economic uncerlointy ond finonciol
morket volotility;
. the inobiliry to prepore finonciol stotements using US GAAP; ond
r the impoct of the ownership by lhe Province of londs underlying
the Compony's tronsmission system.
Hydro One coutions lhe reoder thot the obove list of foctors is not
exhoustive. Some o[ these ond other foctors ore discussed in more
detoil in the section "Risk Monogement ond Risk Foctors" in this
MD&A.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
HYDRo oNE tlrrllrED oNE oF NoRTH AMERTe\'qJbUilrrHSlAf6:gfllgrEs 4s
Schedule 3, Page 47 of 167
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MANAGEMENT'S DISCUSSION AND ANALYSIS
In oddition, Hydro One coutions the reoder thot informotion provided
in this MD&A regording the Compony's outlook on certoin molters,
including potentiol future investmenls, is provided in order to give
context to the nolure ol some of the Compony's luture plons ond moy
not be oppropriote for olher purposes.
Addilionol informotlon obout Hydro One, including the Compony's
Annuol Informotion Form, is ovoiloble on SEDAR ot www.sedor.com
ond the Compony's websile ol www. HydroOne.com/lnvestors.
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-I7-
i.top"r,Hydro One
o
46 HYDRO ONE IllllIED 2016 ANNUAL REPORT TSX: H
Schedule 3, Page 48 of 167
o
O
AAo nogement's Report
The Consolidoted Finonciol Stotements, Monogement's Discussion
ond Anolysis (MD&AI ond reloted finonciol informotion hove been
prepored by the monogement of Hydro One Limited {Hydro One or
the Compony). Monogement is responsible for the integrity,
consistency ond rellobility of oll such informotion presented. The
Consolidoted Finonciol Stotements hove been prepored in
occordonce with United Stotes Generolly Accepted Accounting
Principles ond opplicoble securities legislotion. The MD&A hos been
prepored in occordonce with Nolionol lnstrument 5l-102.
The preporotion ol the Consolidoted Finonciol Stotements ond
lnformotion in the MD&A involves the use of eslimotes ond
ossumptions bosed on monogement's ludgment, porticulorly when
lronsoctions offecting the cunent occounting period connot be
finolized with certointy until future periods. Estimotes ond ossumptions
ore bosed on hisloricol experience, currenl conditions ond vorious
other ossumptions believed lo be reosonoble in the circumstonces,
with criticol onolysis of the significont occounling policies {ollowed by
the Compony os described in Note 2 to the Consolidoted Finonciol
Stotements. The preporotion of the Consolidoted Finonciol Stotements
ond the MD8.A includes informotion regording the estimoted impoct
of future evenls ond honsoctions. The MD&A olso includes lnformotion
regording sources of liquidiry ond copitol resources, operoting trends,
risks ond uncerloinlies. Actuol resulls in the future moy differ moteriolly
from the present ossessmenl of this informotion becouse fulure evenls
ond circumslonces moy not occur os expected. The Consolidoted
Flnonciol Stotemenls ond MD&A hove been properly prepored within
reosonoble limits of moteriolity ond in light o[ informotion up to
Februory 9, 2017 .
Monogement is responsible for estoblishing ond mointoining
odequote internol conkol over finonciol reporting for the Compony. ln
meeting its responsibility for the reliobility of finonciol informotion,
monogement mointoins ond relies on o comprehensive system of
internol control ond internol oudit. The system of internol control
includes o written corporote conduct policy; implementotion of o risk
monogement fromework; effective segregolion of duties ond
delegotion o[ outhorities; ond sound occounting policies thot ore
regulorly reviewed. This structure is designed to provide reosonoble
assuronce thot ossets ore sofeguorded ond thot relioble informotion is
ovoiloble on o timely bosis. In oddition, monogemenl hos ossessed
the design ond operoting effectiveness ol lhe Compony's inlernol
control over finonciol reporting in occordonce with the criterio set
{orth in lnternol Control - lntegroted Fromework {2013), issued by the
Commiltee of Sponsoring Orgonizotions of the Treodwoy
Commission. Bosed on this ossessment, monogement concluded thot
the Compony mointoined effective internol control over finonciol
reporting os of December 3I , 2016. The elfectiveness of these
internol conkols is reported to the Audit Committee of the Hydro One
Boord of Directors, os required.
The Consolidoted Finonciol Stotements hove been oudited by KPMG
LLP, independent externol ouditors oppointed by the shoreholders ol
the Compony. The externol oudltors' responsibility is to express their
opinion on whether the Consolidoted Finonciol Stotements ore foirly
presented in occordonce wlth United Stotes Generolly Accepted
Accountlng Principles. The lndependent Auditors' Report outllnes the
scope of their exominotion ond their opinion.
The Hydro One Boord of Directors, through its Audit Committee, is
responsible for ensuring thot monogement fulfills its responsibilities for
finonciol reporting ond internol controls. The Audit Committee of
Hydro One met periodicolly with monogement, the internol ouditors
ond the externol ouditors to sotisfy itself thot eoch group hod properly
dischorged its respective responsibility ond to review the
Consolidoted Finonciol Stotements before recommending opprovol
by the Boord of Directors. The externol ouditors hod direct ond full
occess to the Audit Committee, with ond without the presence of
monogement, to discuss their oudit findings.
The President ond Chief Executive Officer ond the Chief Finonciol
Officer hove certilied Hydro One's onnuol Consolidoted Finonciol
Stotements ond onnuol MD&A, reloted disclosure controls ond
procedures ond the design ond effectiveness of reloted internol
controls over finonciol reporting.
On beholf of Hydro One's monogement:
rrJ@ .4,4
Moyo Schmidt
President ond Chief
Executive Of[icer
Michoel Vels
Chief Finonciol Officer
o
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
HYDRo oNE urvurED oNE or NoRTH AMERre\',qjoB€2rFllQIlEgpges az
Schedule 3, Page 49 of 167
o
lndependent Auditors' Report
o
To the Shoreholders of Hydro One Limited
We hove oudited the occomponying Consolidoted Finonciol
Stotements of Hydro One Limited, which comprise the
consolidoted bolonce sheets os ol December 3,], 20,l6 ond
December 3.1, 20'l 5, the consolidoted stotements of operotions ond
comprehensive income, chonges in equity ond cosh flows for lhe
yeors then ended, ond noles, comprising o summory o[ significont
occounting policies ond other explonotory informotion.
Mo nogementt Responsib i lity for the Consolidoted
Finonciol Slotemenls
Monogement is responsible for the preporotion ond foir presentotion
of these Consolidoted Finonciol Stotemenls in occordonce with
United Stotes Generolly Accepted Accounting Principles, ond lor such
internol conhol os monogement determines is necessory to enoble the
preporotion of Consolidoted Finonciol Stotements thot ore free from
moleriol misstotement, whether due lo froud or error.
Auditors' Responsibili ty
Our responsibility is to express on opinion on lhese Consolidoted
Finonciol Stolements bosed on our oudits. We conducted our oudits
in occordonce with Conodion generolly occepted ouditing
stondords. Those stondords require thot we comply with ethicol
requirements ond plon ond perform the oudit to obtoin reosonoble
ossuronce obout whether the Consolldoted Finonciol Stotements ore
free from moteriol misslotement.
An oudit involves performlng procedures to obloin oudit evidence
oboul the omounts ond disclosures in the Consolidoted Finonciol
Stotements. The procedures selected depend on our judgment,
including the ossessment of the risks of moteriol misstotement of the
Consolidoted Finonciol Stotements, whether due to froud or error. ln
moking those risk ossessments, we consider internol control relevont to
the entily's preporotion ond folr presentotion o[ the Consolidoted
Finonciol Stotements in order to design oudit procedures thot ore
oppropriote in lhe circumstonces, but not for the purpose o[
expressing on opinion on the effectiveness of the entity's internol
control. An oudit olso includes evoluoting the opproprioleness of
occounting policies used ond the reosonobleness of occounting
estimoles mode by monogement, os well os evoluoting the overoll
presentolion of the Consolldoted Finonciol Stotements.
We believe thot the oudit evidence we hove obtoined in our oudits is
sufficienl ond oppropriote to provide o bosis for our oudit opinion.
Opinion
ln our opinion, the Consolidoted Finonciol Slotements present foirly,
in oll moteriol respects, the consolidoted [inonciol position of Hydro
One Limited os ot December 3.l, 2016 ond December 3,], 20.l5,
ond its consolidoted results of operofions ond lts consolidoted cosh
flows for the yeors then ended in occordonce with United Stotes
Generolly Accepted Accounting Principles.
y'ha zz?
Cho rtered Professionol Accountonts, Licensed Public Accountonts
Toronto, Conodo
Februory 9,2017
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 50 of 167
o
48 HYDNO ONE II'IIITED 20] 6 ANNUAI. REPORT TSX: H
O
Consolidoted Stotements of
ond Comprehensive lncome
Op"rotions
For the yeors ended December 3 I , 201 6 ond 201 5
Dn 2016 201 5
Revenues
Distribution (includes $
.160 reloted porty revenues; 20.l5 - $ 159) lNote 261
Tronsmission (includes $ I ,553 reloted porty revenues; 201 5 - $ I ,5541 lNote 26)
Other
4,915
1,584
53
4,949
r,536
53
6,552 6,538
Costs
Purchosed power (includes $2, ,103 reloted porty costs; 20,l5 - $2,335]r lNote 26)
Operotion, mointenonce ond odminishotion lNote 26)
Depreciotion ond omorlizotion /Nofe 51
3,427
1,069
778
3,450
1, t35
759
5,274 5,344
lncome before finoncing chorges ond income toxes
Finoncing chorges /Nofe 6/
1,278
393
1,194
376olncome before income toxes
lncome toxes lNotes 7, 26)
885
r39
8r8
r05
(aa
>l.1/EA<almXz6;>ma
lz
z.)t
2
Net income 746 713
Other comprehenslve income
Comprehensive income 746 714
Net income ottributoble to:
Noncontrolling lnterest /Note 25i
Prelened shoreholders
Common shoreholders
6
t9
721
t0
IJ
690
746 713
Comprehensive income ottributoble to:
Noncontrolling interest /Nole 25i
Prefened shoreholders
Common shoreholders
6
l9
721
t0
t3
691
746 714
Eornings per common shore /Nole 23i
Bosic
Diluted
$ l.2l
$ l.2l
$ t.:c
$ l.3e
Dividends per common shore declored (Note 22)$ 0.97 $ t.B3
o
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LrrvilrED oNE oF NoRTH AMERt(}',qjouiffrFll&ilEenig'es oc
Schedule 3, Page 5l of 167
See occomponying notes to Consolidoted Finonciol Stotemenls.
o
CONSOLIDATED FI NANCIAL STATEMENTS
Conso idoted Bolonce Sheets
At December 31,2016 ond 2Ol5
December 3l lnillions of Conodion dollors) 2016 2O1 5
Assets
Currenl ossets:
Cosh ond cosh equivolents 50 94
Accounts receivoble /Nore 8/ 838 776
Due from reloted porties lNote 26) I 58 I 9l
Other current ossets /Note 9/ 102 I05
148 166
Property, plont ond equipment (Note l0)
Other long-term ossets:
Regulotory ossets /Note 12/
Delerred income tox ossets /Note Z/
lntongible ossets /Nofe I l/
Goodwill (Note 4)
Olher ossets
19,140 17,968
3,1 45
1,235
349
327
7
3,0r5
r,636
336
i63
l0
5,063 5,r60
o
Totol ossets 25,351 24,294
Liobilities
Current liobilities:
Shortlerm notes poyoble /Note l5l 469 1,491
Long-term debt poyoble within one yeor /Nofe 15/ 602 500
Accounts poyoble ond other current liobilities /Nofe l3i 945 868
Due to reloted porties /Nofe 26l . I47 I 38
2,163 2,997
Long-term liobilities:
Long-term debt {includes $548 meosured ot foir volue; 20 I 5 - $5 I ) lNotes 15, i 6i
Regulotory liobilities (Note l2)
Delerred income tox liobilities lNote 7)
Other long-term liobt!,"r /Mt" lal
10,078
209
60
2,752
8,207
236
207
z,/ zc
r 3,099 | 1 ,373
Totol liobiliries 15,262 14,370
Contingencies ond Commitments lNotes 28, 29)
Subsequent Evenfs /Nole 3ll
Noncontrolling interest subiect to redemption lNole 25)
Equity
Common shores /Nofes 21, 22)
Prelened shores /Notes 21, 22)
Additionol poid-in copitol (Note 24)
Retoined eornings
Accumuloted other comprehensive loss
22
5,623
4t8
34
3,950
(8)
,1
5,623
4t8
t0
3,806
(8)
10,017
50
9,849
52
Totol equity 10,067 9.90r
25,351 24,294
See occompnying notes to Consolidoted Finonciol Sfotements.
On beholf of the Boord of Directors:
>e,."-r \F (>
Philip Orsino
Choir, Audit Committee
Dovid Denison
Choir
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-I7-
i.Lop"r,Hydro One
o
50 HYDRO ONE tlMlrED 2016 ANNUAL REPORT TSX: H
Schedule 3, Page 52 of 167
Hydro One shoreholders' equity
Noncontrolling inlerest /Nofe 25/
o
Consolidoted Stotements of Chonges in Equity
For the yeors ended Decenber 3 I , 20 I 6 ond 201 5
Yeor ended December 31, 2016
Accumuloted Norr
Additionol Other Hydro One controlling
Poid-in Retoined Comprehensive Shoreholders' lnterest TotolCommon Preferred
Shores Shoresof Conodion
Jonuory 1,2016
Net income
Olher comprehensive income
Distributions to nonconholling interest
Dividends on prefened shores
Dividends on common shores
Stock-bosed compensotion (Note 24)
Eornir Loss
5,623 418 'r0 3,806
- 740
(te)
(s771
52
4
(6)
(8)9,849
740
9,90r
744
24
(r el
(s771
24
(6)
(t e)
ls77l
24
December 31, 2016 5,623 418 34 3,950 (8) 1O,Ot7 50 10,067
Accumuloted Non-
Additionol Oher Flydro One controlling
Yeor ended bcenbr 3l , 2015 Common Preferred Poid-in Retoined Comprehensive Shoreholders' lnterest Totol
Imillbns of Conodion dol/ors/ Shores Shores Copltol Eornings Loss Equity /Note 25i Equity
o Jonuory 1, 2015
Net income
Other comprehensive income
Diskibutions to noncontrolling inlerest
Dividends on prefened shores
Dividends on common shores
Hydro One Brompton spinoff /Nob 4i
PrelPO Tronsoctions /Note 2ll
Stock-bosed compensotion (Note 24)
3,3 ,l4 - 4,249
_rot_
7,554
703
1
{t 3)
18751
14s4)
2,923
10
7,603
710
l
t4t
{t 3l
1875]
14s4l
2,923
t0
(e)
I
49
7
t4l
(te6)
2,505 418
l0
(4o>Ui6sa)mtszaa>rI
=z
zt
2
December 3 l, 20] 5 5,623 418 r0 3,806 (8) e,849 52 9,90r
See occomponf ng noles to Consolidoled Finonciol Stobments.
o
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LmrrED oNE oF NoRTH AMERre\',qjduiffrHS&l[6e[Hres sr
Schedule 3, Page 53 of167
(t 3l
l87sl
(2s8)
o
CONSOLIDATED FINANCIAL STATEMENTS
For the yeors ended December 3 I , 201 6 ond 2Ol 5
Yeor ended December 3l (millions of Conodion dollors)
Consolidoted Stotements of Cosh Flows
2016 201 5
Operoting octivities
Nel income
Environmentol expenditures
Adiustments Ior noncosh items:
Depreciotion ond omortizotion (excluding removol cosls)
Regulotory ossets ond liobilities
Defened income toxes (Note 7)
Other
Chonges in noncosh bolonces reloted to operotions lNote 27)
746
l20l
7t3
(te)
668
{3)
12,8441
24
213
688
(16)
It4
t0
134
Net cosh from (used in) operoting octivities 1,656 l,24Bl
o
Finoncing octivities
Long-term debt issued
Long-term debt repoid
Short-term notes issued
Short-term notes repoid
Common shores issued
Dividends poid
Distributions poid to noncontrolling interest
Chonge in bonk indebtedness
Other
2,300
(s02)
3.031
(4,05s)
(5e6)
(el
(10)
350
(s8s)
2,891
{r ,400}
2,600
(888)
(s)
t2)
t7)
Net cosh from finoncing octivities 161 2,954
lnvesting octivities
Copitol expenditores lNote 27)
Property, plont ond equipment
Intongible ossels
Copitol contributions received (Note 27)
Acquisitions lNote 4)
lnvestment in Hydro One Brompton (Note 4)
Other
(r,600)
(61I
21
12241
i,595)
t37l
57
{e0}
(s3)
63
Net cosh used in investing oclivities (1,861l 11 ,712)
Net chonge in cosh ond cosh equivolents
Cosh ond cosh equivolents, beginning of yeor
144l
94
{6)
r00
Cosh ond cosh equivolents, end of yeor 50 94
See occomponl ng notes to Consolidoted F inonciol Slofemenfs.
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-I7-
i.Lop"r,Hydro one
o
s2 HYDRO ONE tlXllTED 20l6 ANNUAL REPORT TSX: H
Schedule 3, Page 54 of 167
o
Notes to Consolidoted Finonclo
For the yeors ended December 31, 2016 ond 2015
I . Description of The Business Bosis of Accounting
These Consolidoted Finonciol Stotements ore prepored ond presented
in occordonce with United Stotes {US) Generolly Accepted
Accounting Principles (GAAP) ond in Conodion dollors.
Use of Monogement Estimotes
The preporotion o{ finonciol slotemenls requires monogement to moke
estimotes ond ossumplions thot offect the reported omounls of ossets
ond liobilities ot the dote of the finonciol stotements ond the reported
omounts of revenues, expenses, goins ond losses during the reporling
periods. Monogement evoluotes these estimotes on on ongoing bosis
bosed upon hisloricol experience, currenl conditions, ond
ossumptions believed to be reosonoble ot the time the ossumptions
ore mode, with ony odiuslments being recognized in results o[
operotions in the period they orise. Significont estimotes relote to
regulotory ossets ond regulotory liobilities, environmentol liobilities,
pension benefits, post-retirement ond postemployment benefits, osset
relirement obligotions, goodwill ond osset impoirments,
contingencies, unbilled revenues, ollowonce for doubtful occounts,
derivotive instruments, ond deferred income tox ossets ond liobilities.
Actuol results moy dilfer significontly from these estimofes.
Rote Setting
The Compony's Tronsmission Business consists of the lronsmission
business of Hydro One lnc., which includes the konsmission business
of Hydro One Networks lnc. (Hydro One Networks), Hydro One
Soult Ste. Morie LP (previously Greot Lokes Power Tronsmission LP
{Greot Lokes Power}1, ond its 66% interest in B2M Limited Portnership
{B2M LPl. The Compony's Distribution Business consists of the
distribution business o[ Hydro One lnc., which includes the
distrlbution businesses of Hydro One Networks, os well os Hydro
One Remote Communities Inc. (Hydro One Remote Communities).
Tronsmission
ln November 2015, the OEB opproved Hydro One Networks'
20 16 tronsmission rotes revenue requiremenl of $ I ,4BO million.
In December 20,l 5, the OEB opproved B2M LP's 201 5-20 I 9 rotes
revenue requirements of $39 million, $36 million, $32 million,
$38 mlllion ond $32 million for the respectlve yeors. On Jonuory 14,
20'l 6, the OEB opproved the B2M LP revenue requirement recovery
through the 20.16 Uniform Tronsmission Rotes, ond the estoblishment
of o deferrol occount to copture costs o[ Tox Rote ond Rule chonges.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
HYDRo oNE LrryurED oNE oF NoRTH AMERre\',qjotrit rFllQll6€ftges ss
Schedule 3, Page 55 of 167
Stotements
o
Hydro One Limited (Hydro One or the Compony) wos incorporoted
on August 31 , 20,l5, under the Business Corprotions Act (Ontorio).
On October 3 I , 20I 5, the Compony ocquired Hydro One lnc., o
compony previously wholly owned by the Province of Ontorio
(Province). The ocquisition of Hydro One lnc. by Hydro One wos
occounled for os o common control tronsoction ond Hydro One is o
continuotion of business operotions of Hydro One lnc. At
December 3l , 20.l6, the Province holds opproximotely 7O.1%
(2015 - B4%) of the common shores of Hydro One. See nole 2l lor
further detoils regording the reorgonizotion of Hydro One.
The principol businesses of Hydro One ore lhe lronsmission ond
distrlbution o[ electricity to customers within Ontorio.
2. Significont Accounting Policies
Bosis of Consolidotion ond Preporotion
These Consolidoted Finonciol Slotements include the occounts of the
Compony ond its subsidiories. Intercompony tronsoctions ond
bolonces hove been eliminoted.
The comporotive informotion to these Consolidoted Finonciol
Slotements hos been presented in o monner similor to the
poolingof-interests method. The comporolive informotion consists of
the results of operotions of Hydro One lnc. prior to October 3'l ,
20.l 5, ond the consolidoted results o[ operotions of Hydro One from
the dote of incorporotion on August 3 1 , 20,l 5 to December 3
.l
,
2015, which include the results of Hydro One lnc. subsequent to its
ocquisition on October 31, 20,I5. The comporotive informotion hos
been combined using historicol omounts. In oddition, Hydro One's
issued ond outstonding common shores prior to October 3l , 2015
hove been retrooclively odiusted for fie purposes o[ presentotion to
reflect the eflects of the ocquisition of Hydro One lnc. using the
exchonge rotio estoblished for the ocquisition. The Consolidoted
Finonciol Stolements ore referred to os "consolidoted" for oll periods
presented.
On August 3,l, 2015, Hydro One lnc. completed the spinoff of its
subsidiory, Hydro One Bromplon Networks Inc. (Hydro One
Brompton) to the Province (see note 4). The comporolive informotion
to these Consolidoted Finonciol Stotements includes the results o[
Hydro One Brompton up to August 3,l, 2015.
o
!zzo>r
6-.EdaO
1,9m<u
=om=z9r>@1mI
3
o
o
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Distribution
ln Morch 20.15, the OEB opproved Hydro One Networks'
distribution revenue requirements of $
,l,326 million lor 201 5,
$ 1,430 million lor 2016 ond $ 1,486 million for 2017.Ihe OEB
hos subsequently opproved updoted revenue requiremenls o[
$ I ,4I0 million for 2016 ond $ I ,41 5 million lor 2017.
On Morch 17, 2016, the OEB opproved on increose ol 2.10% to
Hydro One Remole Communilies' bosic rotes for the distribution ond
generotion of electricity, with on effective dote ol Moy 1 , 20 16.
Regulotory Accounting
The OEB hos fie generol power to include or exclude revenues,
costs, goins or losses in the roles of o speci{ic period, resulting in o
chonge in the timing o[ occounling recognitlon from thot which would
hove Gen opplied in on unreguloted compony. Such chonge in
timing involves the opplicotion ol rotereguloted occounting, giving
rlse to the recognltion of regulotory ossets ond liobilities. The
Compony's regulotory ossels represent certoin omounts receivoble
lrom future cuslomers ond cosls thot hove been de{erred for
occounting purposes becouse it is proboble thot they will be
recovered in future rotes. ln oddition, the Compony hos recorded
regulotory liobilities thot generolly represenl omounls thot ore
refundoble lo future customers. The Compony continuolly ossesses the
likelihood o[ recovery o[ eoch of its regulotory ossets ond continues to
believe thot it is proboble thot the OEB will include its regulotory
ossets ond liobilities in setting of future roles. lf, ot some future dote,
the Compony iudges thot it is no longer proboble thot the OEB will
include o regulotory osset or liobility in setting future roles, the
oppropriote corrying omount would be reflected ln results o[
operotions in the period thot the ossessment is mode.
Cosh ond Cosh Equivolents
Cosh ond cosh equivolents include cosh ond short-term investments
with on originol moturity of lhree months or less.
Revenue Recognition
Tronsmission revenues ore collected through OEBopproved rotes,
which ore bosed on on opproved revenue requirement thot includes
o rote o[ return. Such revenue is recognized os eleclricity is
tronsmitted ond delivered to customers.
Distribution revenues ottributoble lo the delivery ol electricify ore
bosed on OEB-opproved distribulion rotes ond ore recognized on on
occruol bosis ond include billed ond unbilled revenues. Billed
revenues ore bosed on eleckicity delivered os meosured from
customer melers. At the end of eoch month, eleclricily delivered to
customers since the dote of the lost billed meter reoding is estimoted,
ond the corresponding unbilled revenue is recorded. The unbilled
revenue estlmote is offected by energy consumptlon, weother, ond
chonges in lhe composition of customer closses.
Distribution revenue olso includes on omount reloling to role
prolection for rurol, residentiol, ond remole cuslomers, which is
received lrom the lndependent Electricily System Operotor (IESO)
bosed on o stondordized cuslomer rote thot is opproved by the OEB.
Revenues olso include omounts reloted to soles of other services ond
equipment. Such revenue is recognized os services ore rendered or
os equlpment is delivered.
Revenues ore recorded net o[ indirect toxes
Accounts Receivoble ond Allowonce for
Doubtful Accounts
Billed occounts receivoble ore recorded ot the invoiced omount, nel
of ollowonce for doubtful occounts. Unbilled occounts receivoble ore
recorded ot their estlmoted volue. Overdue omounls reloted to
reguloted billings beor interest ol OEBopproved roles. The ollowonce
for doubtful occounts reflects the Compony's best estimote of losses
on billed occounts receivoble bolonces. The Compony estimotes the
ollowonce for doubtful occounts on billed occounts receivoble by
opplying internolly developed loss rotes lo the outstonding receivoble
bolonces by oging cotegory. Loss rotes opplied to the billed occounls
receivoble bolonces ore bosed on historicol overdue bolonces,
customer poyments ond write-offs. Accounts receivoble ore writtenoff
ogoinst the ollowonce when they ore deemed uncollectible. The
ollowonce for doubtful occounts is offected by chonges in volume,
prices ond economic conditions.
Noncontrolling interest
Noncontrolling interest represents the portion of equity ownership in
subsidiories thot is not ottributoble to shoreholders of Hydro One.
Noncontrolling interest is initiolly recorded ot foir volue ond
subsequently the omount is odiusted for the proportionole shore of nel
income ond other comprehensive income ofiributoble lo the
noncontrolling interest ond ony dividends or distributions poid to the
noncontrolling interest.
l[ o tronsoction results in the ocquisition of oll, or port, o[ o
nonconlrolling interest in o subsidiory, the ocquisition o[ the
noncontrolling interest is occounted for os on equity tronsoction. No
goin or loss is recognized in consolidoted net income or
comprehensive income os o resuh of chonges in the nonconlrolling
interest, unless o chonge results in the loss o[ control by the
Compony.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 56 of 167
o
54 HYDRO ONE II'IIITED 20I6 ANNUAL REPORT TSX: H
o
o
lncome Toxes
Prior to the lPO, Hydro One wos exempt from tox under the /ncome
Iox Act (Conodol ond the Toxotion Act, 2007 lOntorio) (Federol Tox
Regime). However, under the Electricity Act, Hydro One wos
required to moke poyments in lieu of tox (PlLs) to the Ontorio
Electricity Finoncing Corporotion (OEFC) (PlLs Regime). The PlLs were,
in generol, bosed on the omounl o[ tox thot Hydro One would
otherwise be lioble to poy under the Federol Tox Regime if it wos not
exempt from toxes under those stotutes. ln connection with the IPO of
Hydro One, Hydro One's exemplion from tox under the Federol Tox
Regime ceosed to opply. Upon exiting the PlLs Regime, Hydro One is
required to moke corporote income tox poyments to the Conodo
Revenue Agency {CRA) under the Federol Tox Regime.
Current ond delerred income toxes ore computed bosed on the tox
rotes ond tox lows enocted os ot the bolonce sheet dote. Tox benefits
ossocioted with income lox positions token, or expected to be token,
in o tox return ore recorded only when the "more-likely-thon-not"
recognition threshold is sotisfied ond ore meosured ot the lorgest
omount of benefit thot hos o greoter thon 50% likelihood of being
reolized upon settlement. Monogement evoluotes eoch position
bosed solely on the technicol merils ond focts ond circumstonces o[
the position, ossuming the position will be exomined by o toxing
outhority hoving full knowledge of oll relevont informolion. Significont
monogement iudgment is required to determine recognition thresholds
ond the reloted omount of tox benelits to be recognized in the
Consolidoted Finonciol Slolements. Monogement reevoluoles lox
positions eoch period using new informotion oboul recognition or
meosurement os it becomes ovoiloble.
Deferred lncome Toxes
Deferred income toxes ore provided for using the liobility method.
Delerred income toxes ore recognized bosed on the estimoted future
tox consequences ottributoble to temporory differences beween the
corrying omount of ossets ond liobilities in the Consolidoted Finonciol
Stotements ond their corresponding tox boses.
Deferred income tox liobilities ore recognized on oll toxoble
temporory differences. Defened tox ossets ore recognized to he
extent lhot it is morelikelython-nol thot these ossets will be reolized
from toxoble income ovoiloble ogoinst which deductible temporory
differences con be utilized.
Defened income toxes ore colculoted ot the tox rotes thot ore
expected to opply in the period when the liobility is setled or the
osset is reolized, bosed on the tox rotes ond tox lows thot hove been
enocted os ot the bolonce sheet dote. Deferred income toxes thot ore
not included in the rotesetling process ore chorged or credited to the
Consolidoted Stolements of Operotions ond Comprehensive Income.
lf monogement determines thot it is morelikelython-nol thot some or
oll of o deferred income tox osset will nol be reolized, o voluotion
ollowonce is recorded ogoinst the deferred income tox osset to report
the net bolonce ol the omount expected to be reolized. Previously
unrecognized deferred income tox ossets ore reossessed ot eoch
bolonce sheet dote ond ore recognized to the extenl thot it hos
become morelikelython-not thot the tox beneflt will be reolized.
The Compony records regulotory ossets ond liobilities ossocioted with
deferred income toxes thot will be included in the rote-setting process.
The Compony uses the flowthrough method to occount for investment
tox credits (lTCs) eorned on eligible scientiftc reseorch ond
experimentol development expenditures, ond opprenticeship iob
creolion. Under this method, only non-refundoble lTCs ore recognized
os o reduclion lo income tox expense.
Moteriols ond Supplies
Moteriols ond supplies represeni consumobles, smoll spore ports ond
construction moteriols held for internol conslruclion ond mointenonce
of property, plont ond equipment. These ossets ore corried ot
overoge cost less ony impoirments recorded.
Property, Plont ond Equipment
Property, plont ond equipment is recorded ot originol cost, net of
customer contributions, ond ony occumuloted impoirment losses. The
cosl of odditions, including betlerments ond replocement osset
components, is included on the Consolidoted Bolonce Sheets os
property, plont ond equipmenl.
The originol cost of property, plont ond equipmenl includes direct
moteriols, direct lobour {including employee benefits), controcted
services, oilributoble copitolized f inoncing costs, osset relirement
costs, ond direct ond indirect overheods thot ore reloted to the copitol
proiect or progrorn. lndirect overheods include o portion o[ corporote
costs such os finonce, treosury, humon resources, informotion
technology ond executive costs. Overheod costs, including corporote
functions ond field services costs, ore copitolized on o fully ollocoted
bosis, consislent with on OEBopproved methodology.
Property, plont ond equipment in service consists of tronsmission,
distribution, communicotion, odministrotion ond service ossets ond
lond eosements. Properly, plont ond equipment olso includes future
use ossels, such os lond, moior componenls ond spore ports, ond
copitolized project development cosls ossocioted with defened
copitol proiects.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
HYDRo oNE r.rilrrED oNE oF NoRTH AMERtg\',qjbtriffrfltcdlUrgifl+gtEs ss
Schedule 3, Page 57 of 167
azz6>izfr6-.EduOl2fra
=om=zar>A-mg
3
o
O
o
NOTES TO CONSOLIDATED FINANCIAT STATEMENTS
Tronsmission
Tronsmission ossets include ossels used for the tronsmission of high-
voltoge electricity, such os tronsmission lines, support structures,
foundotions, insulotors, connecting hordwore ond grounding systems,
ond ossets used to step up the voltoge o[ electricity from generoting
stotions for tronsmission ond to step down voltoges for distribution,
including tronsformers, circuit breokers ond switches.
Distribution
Distrlbution ossets include ossets reloled to the distribution o[
low-voltoge electricily, including lines, poles, switches, tronsformers,
protective devices ond metering systems.
Communicolion
Communicotion ossets include fibre optic ond microwove rodio
systems, opticol ground wire, towers, telephone equipment ond
ossocioted buildings.
Administrotion ond Service
Administrotion ond servlce ossets include odministrotive buildings,
personol computers, lronsport ond work equipmenl, lools ond other
minor ossels.
Eosements
Eosements lnclude stolutory rights o[ use for konsmission conidors ond
obutting londs gronted under the Relioble Energy ond Consumer
Protection Act, 2002, os well os other lond occess rights.
lntongible Assets
lntongible ossets seporotely ocquired or internolly developed ore
meosured on initiol recognition ot cost, which comprises purchosed
sohwore, direct lobour (including employee benefits|, consulting,
engineering, overheods ond ottributoble copitolized finoncing
chorges. Following initiol recognition, intongible ossets ore corried ot
cost, net of ony occumuloted omortizotion ond occumuloted
impoirment losses. The Compony's intongible ossets primorily
represent moior computer opplicotions.
Copitolized Finoncing Costs
Copitolized finoncing costs represent interest costs ottributoble to the
construction of property, plont ond equipment or developmenl of
intongible ossets. The finoncing cosl o[ ottributoble bonowed funds is
copitolized os port of the ocquisition cosl of such ossets. The
copitolized finoncing costs ore o reduction of linoncing chorges
recognlzed in the Consolidoted Stotements of Operotions ond
Comprehensive Income. Copitolized finoncing costs ore colculoled
using the Compony's weighted overoge effeclive cost of debt.
Construction ond Development in Progress
Construction ond development in progress consists of the copitolized
cost of constructed ossets thot ore not yet complete ond which hove
not yet been ploced in service.
Depreciotion ond Amorlizotion
The cost of property, plont ond equipment ond intonglble ossets is
deprecioted or omortized on o stroighlline bosis bosed on the
estimoted remoining service life of eoch osset cotegory, except for
tronsport ond work equipment, which is deprecioted on o declining
bolonce bosis.
The Compony periodicolly initiotes on externol lndependent review of
its properly, plont ond equipment ond intongible osset depreciotion
ond omortizotion rotes, os required by the OEB. Any chonges orising
from OEB opprovol of such o review ore implemented on o
remoining service life bosis, consistent with their inclusion in electricity
rotes. The lost review resulted in chonges to rotes elfectiveJonuory l,
2015. A summory of overoge service lives ond depreciotion ond
omortizotion rotes for the vorious closses o[ ossets is included below:
Averoge
Service Life
Rote
Ronge Averoge
Property, plont ond equipment:
Tro nsm ission
Distribution
Communicotion
Administrotion ond service
lntongible ossets
56 yeors
46 yeors
I 6 yeors
I 8 yeors
1 0 yeors
t%-3%
1%-15%
1%-20%
10%
Z/o
6%
7%
10%o
s6 HYDRO ONE LIMITED 2016 ANNUAL REPORT TSX: H
Schedule 3, Page 58 of 167
Exhibit No. 4
Case Nos. AVU-E-l7- and AVU-G-I7-
i.Lop"r,Hydro one
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ln occordonce with group depreciotion proctices, the originol cost of
property, plont ond equipment, or moior components thereof, ond
intongible ossets thol ore normolly relired, is chorged lo occumuloted
depreciotion, with no goin or loss being reflected in results of
operotions. Where o disposition of property, plont ond equipment
occurs through sole, o goin or loss is colculoted bosed on proceeds
ond such goin or loss is included in depreciolion expense.
Acquisitions ond Goodwill
The Compony occounts for business ocquisilions using the ocquisition
method of occounting ond, occordingly, he ossets ond liobilities of
the ocquired entities ore primorily meosured ot fieir estimoted loir
volue ot the dote o{ ocquisition. Goodwill represents the cost of
ocquired componies thot is in excess of the foir volue of the net
identifioble ossets ocquired ot the ocquisition dote. Goodwill is not
included in rote bose.
Goodwill is evoluoted for lmpoirmenl on on onnuol bosis, or more
lrequently i{ circumstonces require. The Compony performs o
quolilotive ossessmenl to determine whether it is morelikelython-not
thot lhe foir volue of the opplicoble reporting unit is less thon its
corrying omount. lf the Compony determines, os o result of its
quolitotive ossessment, thot it is not morelikely-thon-not thot the foir
volue ol the opplicoble reporting unit is less thon lts corrylng omount,
no further testing is required. lf the Compony determines, os o result
of its quolitotive ossessment, thot it is morelikelython-not thot the foir
volue of the opplicoble reporting unit is less thon its corrying omount,
o goodwill impoirment ossessment is performed using o twostep, foir
voluebosed test. The first step compores the foir volue of the
opplicoble reportlng unit lo its corrying omount, including goodwill. lf
the corrying omount o[ the opplicoble reporting unit exceeds ib foir
volue, o second step is pe#ormed. The second step requires on
ollocotion of foir volue to the individuol ossets ond liobilities using
purchose price ollocotion in order to determine the implied foir volue
of goodwill. lf the tmplied foir volue of goodwill is less thon the
corrylng omount, on impoirment loss is recorded os o reduction to
goodwill ond os o chorge to results of operotions.
For the yeor ended December 31 , 2O16, bosed on the quolitolive
ossessment performed os ot September 30, 2016, the Compony hos
determined thol it is not morelikelython-not thot the Ioir volue of eoch
opplicoble reporting unit ossessed ls less thon ils corrying omounl. As
o resuh, no {urther testing wos performed, ond the Compony hos
concluded thot goodwill wos not impoired ot December 3 I , 201 6.
Long-Lived Asset lmpoirment
When circumstonces indicote the corrying volue of long-lived ossets
moy not be recoveroble, the Compony evoluoles whether the
corrying volue ol such ossets, excluding goodwill, hos been
impoired. For such longJived ossets, the Compony evoluotes whether
impoirment moy exist by estimoting future estimoted undlscounted
cosh flows expected to resull from the use ond eventuol disposition of
the osset. When olternotive courses o[ oction to recover the corrying
omount o[ o long-lived osset ore under considerotion, o probobiliy
weighted opprooch is used to develop estimotes of luture
undiscounted cosh flows. lf the corrylng volue of the long-lived osset
is not recoveroble bosed on the estimoted future undiscounted cosh
flows, on impoirment loss is recorded, meosured os the excess of the
corrying volue ol the osset over its [oir volue. As o result, the osset's
corrying volue is odiusted to its estimoted [oir volue.
Within its reguloted business, the corrying costs of most of Hydro One's
longlived ossets ore included in role bose where they eorn on
OE&opproved rote o[ return. Assel corrying volues ond the reloted return
ore recovered through opproved rotes. As o result, such ossets ore only
tested lor impoirmenl in the event thot the OEB dlsollows recovery, in
vntrole or in porl, or if such o disollowonce is iudged to be proboble.
Hydro One regulorly monitors the ossets o[ its unreguloted Hydro
One Telecom subsidiory for indicotions of impoirmenl. Monogement
ossesses the foir volue of such longlived ossets using commonly
occepted techniques. Techniques used to determine foir volue
include, but ore not limited to, the use of recent third-porty
comporoble soles for reference ond internolly developed discounted
cosh flow onolysis. Significont chonges in morket conditions, chonges
to the condition of on osset, or o chonge in monogement's intent to
utilize the ossel ore generolly viewed by monogemenl os triggering
events lo reossess the cosh flows reloted to these long-lived ossets. As
ot December 3 I , 20 1 6 ond 20 I 5, no osset impoirment hod been
recorded for ossets within either the Compony's reguloted or
unreguloted businesses.
Costs of Arronging Debt Finoncing
For Iinonciol liobilities clossified os other thon held{or-troding, the
Compony defers the exlernol lronsoclion costs reloted to obtoining
debt finoncing ond presents such omounls net of reloted debt on the
Consolidoted Bolonce Sheets. De{erred debt issuonce costs ore
omortized over the controctuol life of lhe reloted debt on on effective
interest bosis ond the omortizotion is included within finoncing
chorges in the Consolidoted Stotements of Operotions ond
Comprehensive Income. Tronsoction costs for items clossilied os
held{or-troding ore expensed immediotely.
Comprehensive lncome
Comprehensive income is comprised of nel lncome ond other
comprehensive income (OCl). Hydro One presenls net income ond
OCI in o single continuous Consolidoled Stotement o[ Operotions
ond Comprehensive lncome.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LrrrrED oNE oF NoRTH AMERTe qJ0triDJf{!uf6rOftgrEs 57
Schedule 3, Page 59 of 167
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NOTES TO CONSOUDATED FINANCIAL STATEMENTS
Finonciol Assets ond Liobilities
All finonciol ossets ond liobilities ore clossified into one o[ the
following five cotegories: heldlomoturity; loons ond receivobles;
held{or-troding; other liobilities; or ovoiloblefor-sole. Finonciol ossets
ond liobililies clossified os held{or-lroding ore meosured ot foir volue.
All other [inonciol ossets ond liobilities ore meosured ot omortized
cosl, except occounts receivoble ond omounts due from reloted
porties, which ore meosured ot the lower of cost or foir volue.
Accounts receivoble ond omounls due lrom reloted porties ore
clossified os loons ond receivobles. The Compony considers the
corrying omounls of occounts receivoble ond omounts due from
reloted porties to be reosonoble estimotes of foir volue becouse of the
short lime to moturily of these instruments. Provisions for impoired
occounts receivoble ore recognized os odiustments to the ollowonce
for doubt{ul occounls ond ore recognized when there is obiective
evidence thot the Compony will nol be oble to collect omounts
occording to lhe originol terms. All {inonciol instrument tronsoctions
ore recorded ol trode dote.
Derivotive inskumenis ore meosured ot foir volue. Goins ond losses
from foir voluotion ore included within [inoncing chorges in the period
in which they orise. The Compony determines lhe clossilicotion o[ its
finonciol ossets ond liobilities ot the dote o[ initiol recognition. The
Compony designotes certoin ol ils finonciol ossets ond liobilities to be
held ot foir volue, when it is consislenl with the Compony's risk
monogement policy disclosed in Note l6 - Foir Volue o[ Finonciol
lnstruments ond Risk Monogement.
Derivotive lnstruments ond Hedge Accounting
The Compony closely monitors the risks ossocioted with chonges in
interesl rotes on its operotions ond, where oppropriole, uses vorious
instrumenls to hedge these risks. Certoin o[ these derivotive instruments
quolify for hedge occounting ond ore designoted os occounting
hedges, while others either do not quolify os hedges or hove not
been designoted os hedges (hereinofter re{ened to os undesignoted
conlrocts) os they ore port of economic hedglng relolionships.
The occounting guidonce for derivotive inslruments requires the
recognition of oll derivotive instruments not identified os meeting the
normol purchose ond sole exemption os either ossels or liobilities
recorded ol foir volue on the Consolidoted Bolonce Sheets. For
derivotive instruments thot quolify for hedge occounting, the Compony
moy elect to designote such derivotive instruments os either cosh flow
hedges or foir volue hedges. The Compony offsets foir volue omounts
recognized on its Consolidoted Bolonce Sheets reloted to derivotive
inslruments executed with the some counterporty under the some
mosler netting ogreement.
For derivotive inskuments thot quolify for hedge occounting ond which
ore designoted os cosh flow hedges, the effective portion of ony goin
or loss, nei ol tox, is reported os o component o[ occumuloted OCI
(AOCI) ond is reclossified to results of operotions in the some period
or periods during which the hedged tronsoction offects results of
operotions. Any goins or losses on the derivotive instrument thol
represenl either hedge ineffectiveness or hedge componenls excluded
from the ossessment of elfectiveness ore recognized in results of
operolions. For foir volue hedges, chonges in foir volue of both the
derivotive instrument ond the underlying hedged exposure ore
recognized in the Consolidoted Stotemenls of Operotions ond
Comprehensive Income in the cunenl period. The goin or loss on the
derivotive instrument is included in the some line item os the offsetting
goin or loss on the hedged item in the Consolidoted Stotements o[
Operotions ond Comprehensive Income. The chonges in foir volue o[
the undesignoted derivotive inslruments ore reflected in results of
operotions.
Embedded derivotive instrumenls ore seporoted from their host
controcts ond ore corried ot foir volue on the Consolldoted Bolonce
Sheets when: (o) the economic chorocteristics ond risks of the
embedded derivotive ore not cleorly ond closely reloted to the
economic chorocteristics ond risks ol the host conlroct; (b) the hybrid
instrument is not meosured ot foir volue, with chonges in foir volue
recognized in results of operotions eoch period; ond (c) the
embedded derivotive itself meets the definition o[ o derivotive. The
Compony does not engoge in derivotive troding or speculotive
octivities ond hod no embedded derivotives ot December 3 I , 20,l 6
or 2015.
Hydro One periodicolly develops hedging strotegies toking into
occount risk monogement obiectives. At the inception of o hedging
relolionship where lhe Compony hos elected to opply hedge
occounting, Hydro One {ormolly documents the relotionship between
the hedged item ond the hedging instrumenl, the reloted risk
monogement obiective, the noture of the specific risk exposure being
hedged, ond the method for ossessing the effectiveness of the
hedging relotionship. The Compony olso ossesses, both ot the
inception of the hedge ond on o quorterly bosis, whether the hedging
instrumenls ore effective in offsetting chonges in foir volues or cosh
flows ol the hedged items.
Employee Future Benefits
Employee future benefits provided by Hydro One include pension,
post-retirement ond postemployment benefits. The costs of the
Compony's pension, post-retirement ond post€mploymenl bene{it
plons ore recorded over the periods during which employees render
servlce.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 60 of 167
o
58 HYDRO ONE tlmlTED 2016 ANNUAL REPORT TSX: H
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The Compony recognizes the funded stotus of its delined benefit
pension, post-retirement ond postemployment plons on its
Consolidoted Bolonce Sheets ond subsequently recognizes the
chonges in funded stotus ot the end of eoch reporting yeor. Defined
benefil pension, post-relirement ond postemploymenl plons ore
considered to be underfunded when the proiecled benefit obligotion
exceeds the foir volue of the plon ossets. Liobilities ore recognized on
the Consolidoted Bolonce Sheets for ony net underfunded proiected
benefit obligotion. The net underfunded projected benefit obligotion
moy be disclosed os o current liobilily, long+erm liobility, or both. The
current portion is the omounl by which the octuoriol present volue of
benefits included ln the benefit obligotion poyoble in the next l2
monlhs exceeds the loir volue ol plon ossets. lf the foir volue of plon
ossets exceeds the proiected benefit obligotion of the plon, on osset
is recognized equol to the net overfunded proiected benefit
obligotion. The post-retirement ond post€mployment benefit plons ore
unfunded becouse there ore no reloled plon ossets.
Hydro One recognizes its contributions to the defined contribution
pension plon os pension expense, with o portion being copitollzed
os port of lobour costs included in copitol expenditures. The
expensed omount is included in operolion, mointenonce ond
odminiskolion costs in the Consolidoted Stotements ol Operotions
ond Comprehensive lncome.
Defined Benefit Pension
Defined benefit pension costs ore recorded on on occruol bosis for
finonciol reporting purposes. Pension cosls ore ocluoriolly determined
using the proiected benelit method proroled on service ond ore
bosed on ossumplions thot reflect monogement's best estimote of the
effect of future events, including future compensotion increoses. Post
service costs lrom plon omendments ond oll octuoriol goins ond
losses ore omortized on o stroight-line bosis over the expected
overoge remoining sevice period of octive employees in the plon,
ond over the estimoted remoining life expectonry of inoctive
employees in the plon. Pension plon ossets, consisting primorily of
listed equily securilies os well os corporote ond government debl
securities, ore foir volued ot the end of eoch yeor. Hydro One
records o regulotory osset equol to the net underfunded proiected
benefit obligotion for ils pension plon.
Post-retirement o nd Postemployment Benef its
Post-retiremenl ond postemployment benefits ore recorded ond
included in rotes on on occruol bosis. Costs ore determined by
lndependent octuories using the proiected benefit method proroted on
service ond bosed on ossumptions thot reflect monogement's best
estimotes. Post service costs from plon omendments ore omorlized to
resulls of operotions bosed on the expecled overoge remoining
service period.
For post-relirement benefits, oll octuoriol goins or losses ore deferred
using the "corridor" opprooch. The omount colculoted obove lhe
"conidor" is omortized lo resuhs of operotions on o stroight-line bosis
over the expected overoge remoining service life of octive employees
in the plon ond over the remoining llfe expectoncy of inoclive
employees in the plon. The post-retirement benelit obligolion is
remeosured to its foir volue ot eoch yeor end bosed on on onnuol
octuoriol report, with on offset to the ossocioted regulotory osset, to
the extent of the remeosurement odjustment.
For postemployment obligotions, the ossocioted regulotory llobllities
representing octuoriol goins on tronsilion to US GAAP ore omortized
to results of operolions bosed on lhe "conidor" opprooch. The
octuoriol goins ond losses on post-employment obligotions thot ore
incurred during the yeor ore recognized immediotely to results of
operotions. The postemployment bene{it obligotion is remeosured lo
its foir volue ot eoch yeor end bosed on on onnuol octuoriol report,
with on offset to the ossocioted regulotory osset, lo the extent of the
remeosurement odiustment.
All post-retirement ond postemployment future benefit costs ore
ottributed to lobour ond ore either chorged to results o[ operotions or
copitolized os port of the cost of property, plont ond equipment ond
intongible ossets.
Stock-Bosed Compensotion
Shore Gront Plons
Hydro One meosures shore gront plons bosed on foir volue of shore
gronts os eslimoled bosed on the gronl dote shore price. The cosls
ore recognized in the finonciol stolemenls using lhe grodedvesting
ottribution method for shore gront plons thot hove both o performonce
condition ond o service condition. The Compony records o
regulotory osset equol to lhe occrued costs o{ shore gront plons
recognized in eoch period. Forfeitures ore recognized os they occur
(see note 3).
Direclors' Deferred Shore Unit (DSU) Plon
The Compony records the liobilities ossocloted with its Direclors' DSU
Plon ot foir volue ot eoch reporting dote until se$lement, recognizing
compensotion expense over the vesting period on o skoight-line
bosis. The foir volue of the DSU liobllity is bosed on the Compony's
common shore closing price ot the end o[ eoch reporting period.
Long-term lncentive Plon (LTIP)
The Compony meosures its LTIP ot foir volue bosed on the gront dote
shore price. The reloted compensotion expense is recognized over
the vesting period on o stroight-line bosis. Forfeitures ore recognized
os they occur.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I 7-_
HYDRo oNE LrmrrED oNE oF NoRTH AMERre\',qjdtriffrFfiQlf6gpgrs se
Schedule 3, Page 61 of 167
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss Contingencies
Hydro One is involved in cerloin legol ond environmenlol moflers thol
orise in the normol course of business. In the preporotion of its
Consolidoted Finonciol Stolemenls, monogemenl mokes judgments
regording the future outcome o[ contingent evenls ond records o loss
for o contingenry bosed on its best estimote when it is delermined
thot such loss is proboble ond the omount of the loss con be
reosonobly eslimoted. Where the loss omount is recoveroble in future
rotes, o regulotory osset is olso recorded. When o ronge estimote for
the proboble loss exists ond no omounlwlthin the ronge is o better
estimote lhon ony other omounl, the Compony records o loss ol the
minimum omount within the ronge.
Monogement regulorly reviews cunenl informotion ovoiloble to
determine whether recorded provisions should be odjusled ond
whether new provisions ore required. Estimoting proboble losses moy
require onolysis of multiple forecosls ond scenorios thot often depend
on iudgments obout potentiol octions by third porties, such os federol,
provinciol ond locol courts or regulotors. Conlingent liobililies ore
ohen resolved over long periods ol time. Amounts recorded in the
Consolidoted Finonclol Stotements moy differ from the octuol outcome
once the contingenry is resolved. Such differences could hove o
moteriol impoct on future results of operotions, finonciol position ond
cosh flows of the Compony.
Provisions ore bosed upon currenl estimotes ond ore subiect to
greoter uncertointy where the proieclion period is lengthy. A
significont upword or downword trend in the number of cloims filed,
the noture of the olleged injuries, ond the overoge cost of resolving
eoch clcrim could chonge the estimoted provision, os could ony
substontiol odverse or fovouroble verdict ot triol. A federol or
provinciol legislotive outcome or slructured sefilemenl could olso
chonge the eslimoted liobilily. legol fees ore expensed os incurred.
Environ mentol Liobi lities
Environmentol liobilities ore recorded in respecl ol post contominotion
when it is determined thot future environmentol remediotion
expenditures ore proboble under exisling stotute or regulotion ond the
omount of the future expenditures con be reosonobly estimoted.
Hydro One records o liobility Ior the estimoted luture expenditures
ossocioted with contominoted lond ossessment ond remediotion ond
Ior the phoseout ond destruction of polychlorinoted biphenyl (PCB)-
contominoled minerol oil removed from electricol equipment, bosed
on the present volue of these estimoted future expenditures. The
Compony determines the present volue with o discount rote equol to
its credit-odjusted risk{ree interest rote on finonciol instruments with
comporoble moturities to the pottern of future environmenlol
expenditures. As the Compony onticipotes lhot the future expenditures
will continue to be recoveroble in future roles, on offsetting regulotory
osset hos been recorded to reflect the future recovery o[ these
environmentol expenditures lrom customers. Hydro One reviews its
estimoles ol fulure environmentol expenditures onnuolly, or more
frequently if there ore indicotions thot circumstonces hove chonged.
Asset Retirement Obligotions
Asset retirement obligotions ore recorded for legol obligotions
ossocioled with the luture removol ond disposol of long-lived ossets.
Such obligolions moy result from the ocquisition, construction,
development ond/or normol use of the osset. Conditionol osset
relirement obligotions ore recorded when there is o legol obligotion
to perform o future osset retirement octivity but where the timing ond,/
or method of settlement ore condltionol on o future event thot moy or
moy not be within the control ol the Compony. In such o cose, the
obligotion to perform lhe ossel retirement octivity is unconditionol
even lhough uncertointy exists obout the timing ond,/or method of
settlement.
When recording on osset retirement obllgotion, the presenl volue of
the estimoted future expenditures required to complete the osset
retiremenl octivity is recorded in lhe period in which the obligotion is
incuned, if o reosonoble estimote con be mode. In generol, the
present volue o[ the estimoted future expenditures is odded to the
corrying omount of the ossocioted osset ond the resulting osset
reliremenl cost is deprecloted over the estimoted useful lile of the
osset. Where on ossel is no longer in service when on ossel
retirement obligotion is recorded, the osset reliremenl cost ls recorded
in results of operotions.
Some of the Compony's tronsmission ond distribution ossets,
porticulorly those locoted on unowned eosements ond rightsofraroy,
moy hove osset retirement obligotions, conditionol or otherwise. The
moiority of the Compony's eosements ond rights-of-woy ore either of
perpetuol durotion or ore outomoticolly renewed onnuolly. Lond rights
with finite terms ore generolly subiect to extension or renewol. As the
Compony expects lo use the moiority of its focilities in perpetuity, no
osset retirement obligotions hove been recorded for these ossets. lf, ol
some future dote, o porticulor focility is shown not lo meet lhe
perpetuity ossumption, it will be reviewed to determine whether on
estimoble ossel retirement obligotion exists. In such o cose, on osset
relirement obligotion would be recorded ot lhot time.
The Compony's osset retirement obligotions recorded to dote relote to
estimoted future expendilures ossocioted wilh the removol ond
disposol of osbestosrontoining moteriols instolled in some of its
focilities ond with the decommissioning of specilic switching stotlons
locoted on unowned sites.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 62 of 167
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60 HYDRO ONE LI'IIITED 2016 ANNUAL REPORT TSX: H
o
3. New Accounting Pronouncements
The following tobles present Accounfing Stondords Updotes (ASUs) issued d the Finonciol Accounting Stondords Boord (FASBI thot ore opplicoble
to Hydro One:
Recently Adopted Accounting Guidonce
ASU Dote issued Description Effective dote lmpoct on Hydro One
2Ol4-16 November
2014
This updote clorifies thot oll relevont terms ond
feotures should be considered in evoluoting the
nolure of o host controct for hybrid finonciol
instruments issued in fie form ol o shore. The
noture of the host controct depends upon the
economic chorocleristics ond risks of the entire
f'ybrid [lnor"ciol ir"s'runent.
Jonuory l, 2016 No moteriol impoct upon odoption
20150,l lonuory 20,l5 Extroordinory items ore no longer required to be Jonuory 1 ,2016 No moteriol impoct upon odoption
presented seporotely in lhe income stotement.
2015A2 Februory
201 5
Guidonce on onolysis to be performed to Jonuory 1 , 2Ol6 No moteriol impoct upon odoption
delermine whether certoin types o[ legol enlities
should be consolidoted.
2015O3 April 2015 Debt issuonce costs ore required to be
presented on the bolonce sheet os o direct
deduction from the corrying omounl of the
reloted debt liobiliry consistent with debt
discounts or premiums.
Jonuory 'l , 201 6 Reclossificotion of de{erred debt issuonce cosls
ond net unomortized debt premiums os on offset
to long-term debt. Applied retrospectively (see
note 15).o
2015O5 April 2015 Cloud computing orrongements thot hove been Jonuory 1 , 2016 No moferiol impoct upon odoption
ossessed to contoin o softwore licence should
be occounted for os internol'use softwore.
20,15-.16 September
201 5
Adiustments to provisionol omounts lhot ore lonuory 1, 20,)6 No moteriol impoct upon odoption
identified during the meosurement period of o
business combinotion in the reporling period in
which the odiustment omounf is determined ore
required lo be recognized. The omount
recorded in cunent period eornings ore required
to be presenled seporotely on the foce of the
income slolement or disclosed in the notes by
line item.
2015-17 November
201 5
All deferred tox ossets ond liobilities ore
required to be clossified os noncurrent on the
bolonce sheet.
Jonuory I , 2017 lhis ASU wos eorly odopted os of April l,
20,l 6 ond wos opplied prospectively. As o
result, the current portions of the Compony's
defened income tox ossets ore reclossified os
noncurrent ossets on the consolidoted Bolonce
Sheet. Prior periods were not retrospectively
od;usted {see note 7).
=zzo>r
6-.
E0aO
1,2m(,
=om=zadIm(,
3
20 I 609 Morch 201 6 Severol ospects of fie occounting for shore
bosed poyment tronsoctions were simpllfied,
including the income tox consequences,
clossi[icotion o[ owords os either equity or
liobilities, ond clossificotion on the stotement of
cosh flows.
Jonuory 1 , 2017 lhis ASU wos eorly odopted os o[ October l,
201 6 ond wos opplied retrospectively. As o
result, the Compony occounts for forfeitures os
they occur. There were no other moleriol
impocts upon odoplion.o
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LU$rrED oNE oF NoRTH AMERre',qldutffJFllflf6glilgrs or
Schedule 3, Page 63 of 167
o
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently lssued Accounting Guidonce Not Yet Adopted
ASU Dote issued Description Effective dote Anticipoted impoct on Hydro One
2014-09
2015-14
20r 6.08
20r6-r0
2016-12
2016-20
Moy 2014 -
December
2016
ASU 201 4O9 wos issued in Moy 201 4 ond
provides guidonce on revenue recognilion
reloting to the lronsfer of promised goods or
services to cuslomers in on omount thot reflects
the considerolion to whlch the entity expects to
be entitled in exchonge for those goods ond
services. ASU 201 5- I 4 defened the effective
dote of ASU 2014{9 by one yeor. Additionol
ASUs were issued tn 201 6 thot simplify
lronsition ond provide clority on certoin ospects
of the new stondord.
Jonuory l, 2018 Hydro One hos completed its initiol ossessmenl
ond hos identified relevonl revenue skeoms. No
quontitotive determinotion hos been mode os o
detoiled ossessment is now underwoy ond will
continue through to the third quorter o{ 2017,
with the end result being o delerminotlon of lhe
finonciol impoct o[ this slondord. The Compony
is on trock for implementolion ol this stondord by
the ef{eciive dole.
20l60l Jonuory
2016
This updote requires equity investments to be
meosured ot foir volue with chonges in foir
volue recognized in net income, ond requires
enhonced disclosures ond presentolion o[
finonciol ossets ond liobilities in the [inonciol
stolements. This ASU olso simplifies the
impoirment ossessment of equity investments
without reodily delerminoble foir volues by
requiring o quolitotive ossessment to identify
impoirment.
Jonuory l, 20,18 Underossessmenl
o 201602 Februory
2016
Lesseesorerequiredlorecognizetherlghtsond Jonuory 1,2019 An initiol ossessmentlscunentlyunderwoy
obligotions resulling from operoting leoses os encompossing o review of oll existing leoses,
ossets (right to use the underlying osset for the which will be followed by o detoiled review of
term of the leose) ond liobilities {obligotion to relevont controcts. No quontitotive determinotion
moke future leose poyments) on the bolonce hos been mode ot this time. The Compony is on
sheet. trock for implementotion of this stondord by the
eflective dote.
20 I 605 Morch 20 I 6 The omendments clorify thot o chonge in the
counterporty to o derivotive instrument thol hos
been designoted os the hedging instrument
under Topic 8,l5 does not, in ond of itself,
require dedesignolion of thot hedging
relotionship provided thot oll other hedge
occounting criterio conlinue to be met.
Jonuory 1, 20,1 8 Under ossessment
201 606 Morch 201 6 Contingent coll (put) options thot ore ossessed lo lonuory | , 2017 No moteriol lmpoct
occelerote the poyment of principol on debt
instruments need to meel the criterio of being
"cleorly ond closely reloted" to their debt hosts.
20\607 Morch 2016 The requirement lo relrooclively odopt the equily Jonuory 1 ,2017 No moteriol impoct
method of occounling if on investment quolilies
for use ol the equity method os o result of on
increose in the level of ownership or degree of
influence hos been eliminoted.
2016'll Moy 2016 This omendment covers the SEC Stoff's Jonuory 1 , 2Ol9 No moteriol impoct
rescinding of certoin SEC Stoff observer
comments thot ore codified in Topic 605 ond
Topic 932, effeclive upon the odoption of Topic
606 ond Topic 815, effective to coincide with
the effecrive dote ol Updote 2Ol4-16.o
62 HYDRO ONE Llil[ED 2016 ANNUAL REPORT TSX: H
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 64 of 167
o
ASU Dote issued Description Effective dote Anticipoted impoct on Hydro One
2016-13 June 20,]6 The omendment provides users with more
decision-useful inlormotion obout the expected
credit losses on finonciol instruments ond other
commitments to exlend credit held by o
reporting entity ot eoch reporting dole.
Jonuory 1, 20l9 Underossessment
20.1 6-l 5 August 201 6 The omendments provide guidonce for eight Jonuory l, 20,l 8 Under ossessment
specific cosh flow issues with the oblective of
reducing the existing diversity in proctice.
201616 October
2016
The omendmenl eliminotes the prohibilion of Jonuory 1, 20 18 Under ossessment
recognizing cunenl ond defened income toxes
for on introentily osset honsfer, other thon
inventory, unlil the osset hos been sold to on
outside porty. The omendment will permit
income tox consequences o{ such tronsfers to be
recognized when the tronsfer occurs.
20l&iB November
2016
The omendment requires thol restricted cosh or Jonuory l, 2018 Under ossessment
restricted cosh equivolents be included with
cosh ond cosh equivolenls when reconciling the
beginning ond endof-period bolonces in the
stotement of cosh flows.o 20l7Q1 Jonuory
2017
The omendment clorifies the definition of o
business ond provides odditionol guidonce on
evoluoting whether tronsoctions should be
occounted for os ocquisitions
(or disposols) of ossets or businesses.
Jonuory 1, 20.1 8 Under ossessment
4. Business Combinotions
Acquisition of Greot Lokes Power
On October 3 I , 201 6, Hydro One ocquired Greot Lokes Power, on
Ontorio reguloled eleckicity lronsmission business operoling olong the
eostern shore of Loke Superior, north ond eost of Soult Ste. Morie,
Ontorio from Brookfield lnfroskucture Holdlngs lnc. The tolol purchose
price for Greot Lokes Power wos opproximotely $376 million,
(nillions of dollors)
lncluding the ossumption of opproximotely $'150 million in
outstonding indebtedness. The following toble summorizes the
determinotion of the finol foir volue of lhe ossets ocquired ond
liobilities ossumed:azzo>r
6ZPoaOi,9fra
=om=zo->@1mg
3
Cosh ond cosh equivolents
Property, plont ond equipment
lnfongible ossets
Regulolory ossets
Goodwill
Working copitol
Long-term debt
Pension ond postemployment benelit liobilities, net
Deferred income toxes
5
221
I
50
r59
t2t
(r 86)
(5)
117l
226
O Goodwill of opproximotely $ ,l59 million orising from the Greot Lokes
Power ocquisition consisls lorgely of lhe synergies ond economies of
scole expected from combining the operolions of Hydro One ond
Greot Lokes Power. Greot Lokes Power conkibuted revenues o[
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
HYDRo oNE LrrrilrED oNE oF NoRTH AMERre\',qjoUifrrFlltf6gllges os
Schedule 3, Page 65 of 167
o
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$6 million ond less thon $l million of net income to lhe Compony's
consolidoted finonciol results for the yeor ended December 3I ,
2016. All costs reloted to the ocquisition hove been expensed
through the Consolidoted Stotements of Operotions ond
Comprehensive Income. Greot Lokes Power's finonciol informotion is
not moteriol to the Compony's consolidoted finonciol results lor the
yeor ended Decem ber 3 I , 20 1 6 ond therefore, hos not been
disclosed on o pro formo bosis. On Jonuory 16, 2017 , the nome o[
Greot Lokes Power wos chonged to Hydro One Soult Ste. Morie LP.
Agreement to Purchose Orillio Power
On August ,15, 20,16, the Compony reoched on ogreement to
ocquire Orillio Power Distribution Corporotion (Orillio Power), on
electricily distribution compony locoted in Simcoe County, Ontorio,
from the City of Orillio for opproximotely $4,1 million, including the
ossumption of opproximotely $ I 5 million in outstonding indebtedness
ond regulotory liobilities, sublect to closing odiustments. The
ocquisition is subiect lo regulotory opprovol by the OEB.
Acquisition of Woodsiock Hydro
On October 3 I , 20,l 5, Hydro One ocquired Woodstock Hydro
Holdings lnc. (Woodstock Hydro), on electricity distribution compony
locoled in southwestern Ontorio. The totol purchose price for
Woodstock Hydro wos opproximotely $32 million. The purchose
(nillions of dollors)
Working copitol 4
Property, plont ond equipment 27
lntongible ossets I
Deferred income tox ossels 2
Goodwill 22
Long-term debt l17l
Derivotive instruments (3)
Post-retirement ond postemployment benefit liobllity (l I
Regulotory liobilities (l l
Other long-term liobilities (21
32
price wos finolized ond the Compony mode the finol purchose price
poymenl of $3 million in 20 16. The following toble summorizes the
determinotion o[ the loir volue of the ossets ocquired ond liobilities
ossumed:
o
Goodwill of opproximotely $22 million orlsing from the Woodstock
Hydro ocquisitlon consists lorgely of the synergies ond economies of
scole expected from combining the operotions of Hydro One ond
Woodstock Hydro. All of the goodwill wos ossigned to Hydro One's
Dislribution Business segment. Woodslock Hydro contri buted
revenues of $ l2 million ond net income of $2 million to the
Compony's consolidoted finonciol results for the yeor ended
December 31 , 20.15. All costs reloted to the ocquisition hove been
expensed through the Consolidoted Stotements of Operolions ond
Comprehensive lncome. Woodstock Hydro's finonciol informotion is
not moleriol to the Compony's consolidoted finonciol results for the
yeor ended December 3 I , 20 I 5 ond therefore, hos not been
disclosed on o pro formo bosis.
Acqulsition of Holdimond Hydro
OnJune 30, 2015, Hydro One ocquired Holdimond County Utilities
lnc. (Holdimond Hydro), on electricity distribution compony locoted in
southweslern Ontorio. The totol purchose price for Holdimond Hydro
lmillions of dollors)
wos opproximotely $73 million. The purchose price wos finolized in
20,16. The following toble summorizes the determinolion ol the foir
volue of the ossets ocquired ond liobilities ossumed:
Cosh ond cosh equivolents
Working copitol
Property, plont ond equipment
Deferred income tox ossets
Goodwill
Longlerm debt
Regulotory liobilities
3
5
52
I
33
(l8l
(3)o
64 HYDRO ONE tlMlTED 2016 ANNUAL REPORT TSX: H
73
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 66 of 167
o
Goodwill o[ opproximotely $33 million orising from the Holdimond
Hydro ocquisition consists lorgely of lhe synergies ond economies of
scole expected from combining fie operotions of Hydro One ond
Holdimond Hydro. All of the goodwill wos ossigned to Hydro One's
Dislribution Business segmenl. Holdimond Hydro contributed revenues
of $32 million ond nel income ol $6 million to the Compony's
consolidoted finonciol results lor the yeor ended December 3l ,
2015. All costs reloted to the ocquisition hove been expensed
through the Consolidoted Stotements o{ Operotions ond
Comprehensive lncome. Holdimond Hydro's finonciol informotion is
not moteriol to the Compony's consolidoted finonciol results for the
yeor ended Dmember 3 I , 20,l 5 ond therefore, hos nol been
disclosed on o pro formo bosis.
Hydro One Brompton Spin-off
On August 31, 2015, Hydro One completed the spinoff of its
subsidiory, Hydro One Brompton. The spinolf wos occounted os o
non-monetory, nonreciprocol tronsfer with fhe Province, bosed on its
corrying volues of August 3'l , 20.15. Tronsoctions thot immediotely
preceded the spin-off os well os the spinolf were os follows:
. Hydro One subscribed for 357 common shores of Hydro One
Brompton for on oggregote subscription price of $53 million; ond
. Hydro One tronsferred to o compony wholly owned by the
Province oll the issued ond outstonding shores of Hydro One
Brompton os o dividend-in-klnd; ond oll of the long-term
intercompony debt in oggregote principol omount of $
.193 million
plus occrued interest o[ $3 million owed by Hydro One Brompton
to Hydro One os o return of stoted copitol of $ 196 million on its
common shores.
o
As o resuh of the spin-o[[, goodwill reloted to Hydro One Brompton of $60 million wos eliminoted from the Consolidoted Bolonce Sheet.
5. Depreciotion And Amortizotion
Yeor ended December 3l
(millions of dollors)2016 201 5
Depreciotion of property, plont ond equipmeni
Asset removol costs
Amortizotion of intongible ossets
Amortizotion o[ regulolory ossets
612
90
56
20
595
9t
54
l9
778 759
6. Finoncing Chorges
Yeor ended December 3l
lmillions of dollors)2016 2015
lnterest on long-term debt
lnterest on short-term notes
Other
Less: lnterest copitolized on construction ond development in progress
lnlerest eorned on inveslments
Goin on inlerest-rote swop oqreements
424
9
l6
(541
l2l
417
2
14
152l
(3t
t2t
=zzo>r
6-.
EdaOt9fr<h
=oMEz9d\mI
3
393 376
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LrMrrED oNE oF NoRTH AMERre\',qjoui#rFllQlf6gHges cs
Schedule 3, Page 67 of167
o
O
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. lncome Toxes
Income toxes ,/ provision for PILs differs from the omount thotwould hove been recorded using the combined Conodion lederol ond Ontorio
stolulory income tox rote. The reconciliotion between the stotutory ond the effective lox rotes is provided os follows:
Yeor ended December 3l
lmillions of dollors) 2016 201 5
Income toxes / provision for PlLs ot stotutory rote
lncreose (decreose) resulting from:
Net temporory dif{erences recoveroble in future rotes chorged to cuslomers:
Copitol cost ollowonce in excess of depreciotion ond omortizolion
Pension contributions in excess o[ penslon expense
Overheods copitolized for occounting but deducted for tox purposes
lnterest copitolized for occounting but deducted for tox purposes
Environmentol expenditures
Other
235 217
(53)
(16)
(16)
(141
(s)
5
137)
t2st
(t5l
(t 3)
l5t
(6)
Net temporory differences
Net tox benefit resulting from tronsition from Plls Regime to Federol Tox Regime
Hydro One Brompton spinoff
Net pernonent differences
(ee)(r 0r)
lte)
7
IJ
Totol income toxes / provision for PlLs 139 105
o The moior components ol income lox expense ore os follows:
Yeor ended December 3l
(millions of dollors)2016 201 5
Current income loxes ,/ provision for Plls
Defened income loxes / provision for (recovery of] Plls
25
114
2,949
12,8441
Totol income loxes ,/ provision for PlLs 139 105
Efleclive income tox rote 15.7%12.8%
o
The provision for current income toxes ,/ PlLs is remitted to the CRA
(Federol Tox Regime) ond the OEFC (PlLs Regime|. At December 3 l,
20,l 6, $ 1 4 million (20I 5 - $ I million) receivoble from the CRA wos
included in other cunent ossets ond $6 million (2015 - $ l2 million)
receivoble from the OEFC wos included in due from reloted porlies
on the Consolidoted Bolonce Sheet.
In conneclion with the IPO in 20,l5, Hydro One's exemption from tox
under the Federol Tox Regime ceosed to opply. Under lhe PlLs
Regime, Hydro One wos deemed to hove disposed of its ossets
immediotely before it lost its tox exempt stotus under the Federol Tox
Regime, resuhing in Hydro One moking poyments in lieu o[ lox
(Deporture Tox) totolling $2.6 billion. To enoble Hydro One to moke
66 HYDRO ONE II'IIITED 20I6 ANNUAI. REPORT TSX: H
the Deporture Tox poyment, the Province subscribed for common
shores of Hydro One for $2.6 billion in 2015 (see note 21). Hydro
One used the proceeds of this shore subscription to poy the
Deporture Tox.
The 20,l5 totol income toxes / provision for PlLs included o current
provision of $2,600 million ond o defened recovery of
$2,8,10 million resulting from the tronsition from the PlLs Regime to the
Federol Tox Regime. The deferred recovery wos not included in the
rolssetting process. Deferred income tox bolonces expected to be
included in the role-setting process ore offset by regulotory ossets ond
liobilities to reflect the onticipoted recovery or disposition o[ these
bolonces within future electricity rotes.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 68 of 167
o
Deferred lncome Tox Assets ond Liobilities
Deferred income tox ossels ond liobilities orise {rom dilferences between the corrying omounts ond tox bosis of the Compony's ossels ond
liobilities. At December 3l , 20.l6 ond 2015, defened income tox ossets ond liobilities consisted of the following:
Decembr 3l
lmillions of dollars) 2016
Deferred income tox ossets
Depreciotion ond omorlizotion in excess of copitol cosl ollowonce
Nondeprecioble copitol property
Poshetirement ond postemployment benefits expense in excess of cosh poyments
Environmenlol expenditures
Non-copitol losses
lnvestmenl in subsidiories
Other
201 5
495
271
607
74
213
75
30
937
271
578
75
62
55
t0
1,765 1,988
Less: voluotion ollowonce
Tolol defened income lox ossets
Less: currenl portion
3
1,413 1,655
t9
413
2016 201 5
December 3l
lmillions of dollors)o Deferred income tox liobilities
Regulotory omounls thot ore nol recognized for tox purposes
Goodwill
Copitol cost ollowonce in excess of depreciotion ond omortizotion
Other
(r53)
(10)
164l
{r r I
(rs3)
(10)
t42l
t2)
Totol defened income tox liobilities
Less: current portion
(238)l2o7l
(238)l2o7l
Net delerred income tox ossets 1,175 1,448
The net deferred income tox ossels ore presented on the Consolidoted Bolonce Sheets os follows
Dxembr 3l
lmillions of dollors)2016 20 r5
Cunent:
Other current ossets
Long-lerm:
Defened income tox ossels
Defened income tox liobilities
1,235
(601
t9
r,636
t207)
=zzo>r
6-.E6oO
1,2mo
=o2Ad\mI
3
Net deferred income tox ossets 175 1,448
o
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
HyDRo oNE r.rxUrED oNE oF NoRTH AMERTe'qjdUi#rf{!til6:eiHgtEs 67
Schedule 3, Page 69 of 167
1,636
O
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The voluotion ollowonce for defened tox ossets os ot December 3'l ,
20.l6 wos $352 mtllion {20.l5 - $333 million). The voluotion
ollowonce primorily relotes to temporory dillerences for
nondeprecioble ossefs ond inveslments in subsidiories. As o[
Yeor of expiry
lmillions of dollors)
December 31, 20,16, the Compony hod noncopitol losses conied
forword ovoiloble lo reduce future yeors' toxoble income, which
expire os follows:
2016 201 5
2034
2035
2036
2
222
s80
232
I
Totol losses 804 234
8. Accounts Receivoble
December 3l
lmillions of dollorsl 2016 201 5
Accounts receivoble - billed 431
442
379
458Accounls receivoble -unbilled
Accounts receivoble, gross
Allowonce for doubtful occounts
873
(35)
837
(61)
Accounts receivoble, net 838 776oThe following toble shows the movements in the ollowonce for doubtful occounts for the yeors ended December 31, 20l6 ond 2015
Yxr ended December 3l
(millions of dollors) 2016
Allowonce for doubtful occounts -lonuory 'l
Write-offs
Additions to ollowonce for doubtful occounts
201 5
(6r )
37
(11)
(66)
132l
Allowonce for doubtful occounts - December 3'l (35)(61 )
9. Other Current Assets
Decenber 3 I
lmillions of dollorsl 2016 201 5
Regulolory ossets /Nob l2l
Moteriols ond supplies
Deferred income tox ossets /Nofes 3, Z/
Prepoid expenses ond other ossets
37
l9
46
36
2l
t9
29
102 r05
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 70 of 167
o
68 HYDRO ONE LIXIITED 2016 ANNUAT REPORT TSX: H
o
lO. Property, Plont And Equipment
December 3l , 2016 Property, Plont Accumuloted Construction
/mil/ions of dol/orsi ond Equipment Depreciotion in Progress Totol
Tronsmission 14,692 4,862 910 lO,74O
Distribution 9,656 3,305 243 6,594
Communicolion 1,233 777 20 476
Adminiskotion ond service 1,632 924 61 769
Eosements 628 67 - 561
27,841 9,93s 1,234 19,140
December 31,2015
lmillions of dollors)
Property, Plont
ond Equipment
Accumuloted
Depreciotion
Construction
in Proqress Totol
Tronsmission
Distribution
Communicolion
Adminishotion ond service
Eosemenls
13,704
9,205
r,165
I,53r
622
4,621
3,177
704
848
64
9,936
6,266
489
719
558
U5J
tJo
td
36
26,227 9,414 r,155 t7,968
o Finoncing chorges copitolized on property, plonl ond equipment under construclion were $52 million in 2O16l2ol5 - $50 million).
ll.lntongibleAssets
December 31, 2016
lmillions of dollors)
lntongible
fuseh
Accumuloted
Amortizotion
Development
in Progress Totol
Computer opplicotions softwore
Other
621
5
326 53 348
I4
626 330 53 349
December 31,2015
(millions o{ dollors)
lntongible
Assets
Accumuloted
Amortizotion
Development
in Progress Totol
Computer oppl icotions softwore
Other
579 270
4
24 333
7 ?
586 274 24
Finoncingchorgescopitolizedtointongibleosselsunderdevelopmentwere$2millionin20l6{20,l5-$l million).Theestimotedonnuol
omortizotion expense for intongible ossets is os follows: 2017 - $54 million; 20.] I - $54 million; 2019 - $45 million; 2O2O - $27 nillion;
ond 2021 - $26 million.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
HYDRo oNE LrryilrED oNE or NoRTH AMERT(l',LLSUiffTFIlQilEeftgrs cc
Schedule 3, Page 71 of 167
336
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Regulotory Assets And Liobilities
Regulotory ossets ond liobihties orise os o result of the rotesetting process. Hydro One hos recorded the following regulotory ossets ond liobilities:
Decembr 3l
lmillions of dollors) 2016 20 I 5
Regulotory ossets:
Deferred income tox regulotory osset
Pension benefit regulolory osset
Post-retiremenl ond postemployment benefits
Environmentol
Reloil settlement vorionce occount
Debt premium
Shorsbosed compensolion
Distribution system code exemplion
2015-2017 role rider
B2M LP stort-up costs
Pension cost vorionce
Other
1,587
900
243
204
145
32
3l
l0
7
5
4
t4
1,445
952
240
207
110
r0
r0
2A
I
J/
12
Totol regulotory ossets
Less: cunent portion
3,182
37
3,05 i
36
3,r45 3,0r5
o Regulotory liobilities:
Green Energy expenditure vorionce
Externol revenue vorionce
CDM deferrol vorionce
Deferred income tox regulotory liobllity
Other
69
64
54
4
t8
76
87
53
23
r6
Totol regulotory liobilities
Less: current portion
209 255
19
209 236
Deferred lncome Tox Regulotory Asset ond
Liobility
Deferred income toxes ore recognized on lemporory differences
between the corrying omount of ossels ond liobilities in the linonciol
stotements ond the corresponding tox boses used in the computotion
of toxoble income. The Compony hos recognized regulotory ossets
ond liobilities thot correspond to deferred income toxes thot flow
through the rolesetting process. ln the obsence of rotereguloted
occounting, the Compony's income tox expense would hove been
recognized using the liobility method ond there would be no
regulotory occounts estoblished for toxes to be recovered lhrough
future rotes. As o result, the 20.l6 income tox expense would hove
been higher by opproximotely $104 million l20l5 - $l0l million).
Pension Benefit Regulotory Asset
ln occordonce wifi OEB rote orders, pension cosls ore recovered on
o cosh bosis os employer contributions ore poid to the pension fund
in occordonce with the Pension Beneflts Act (Ontorio). The Compony
recognizes the net unfunded stotus of pension obligotions on the
Consolidoted Bolonce Sheels with on offset to the ossocioted
regulotory osset. A regulotory osset is recognized becouse
monogement considers it to be proboble thot pension benelit costs
will be recovered in the future through the rotesetting process. The
pension benefit obligotion ls remeosured to its loir volue ot eoch yeor
end bosed on on onnuol ocluoriol report, with on offset to the
ossocioted regulolory osset, lo the extent of the remeosurement
odiustment. ln the obsence of rotereguloted occounting, 20,l6 OCI
would hove been higher by $52 million (2015 - $284 million).
Post-Reti rement o nd Post-E m ployment Benef its
The Compony recognizes the net unfunded stotus of posfretirement
ond postemployment obligotions on the Consolidoted Bolonce
Sheets with on incrementol offset to the ossocioled regulotory ossets.
A regulolory osset is recognized becouse monogement considers it lo
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
C. Lopez, Hydro One
Schedule 3, Page 72 of 167
O
70 HYDRO ONE tlXtlTED 2016 ANNUAI- REPORT TSX: H
O
o
be proboble thot post-retiremenl ond postemployment benefit costs
will be recovered in the future through the rotesetting process. The
post-retirernent ond postemployment benefit obligotion is remeosured
to its foir volue ot eoch yeor end bosed on on onnuol octuoriol
report, with on offset to the ossocioted regulotory osset, to the extent
ol the remeosurement odiuslment. ln the obsence of rotereguloted
occounting, 20,) 6 OCI would hove been lower by $3 million (20 1 5
- higher by $33 million).
Environmentol
Hydro One records o llobilily for the estimoted future expenditures
required to remediote environmentol contominotion. Becouse such
expenditures ore expected to be recoveroble in future roles, the
Compony hos recorded on equivolent omount os o regulotory osset.
In 20,)6, the environmentol regulotory osset decreosed by $1 million
(20,l5 - $24 million) to reflect reloted chonges in the Compony's
PCB liobility, ond increosed by $10 million {2015 - $l million} due
to chonges in the lond ossessment ond remediotion liobiliry. The
environmenlol regulotory osset is omortized to results of operotions
bosed on the pottern of octuol expenditures incuned ond chorged to
environmentol liobilities. The OEB hos the discretion to exomine ond
ossess the prudency ond the timing of recovery of oll of Hydro One's
octuol environmentol expenditures. ln the obsence o[ rotereguloted
occounting, 201 6 operotion, mointenonce ond odministrotlon
expenses would hove been higher by $9 million (20,15 - lower by
$23 milhon). ln oddltion, 20,16 omortizotion expense would hove
been lower by $20 million (2015 - $ l9 million), ond 2016
finoncing chorges would hove been higher by $8 million (2015 -
$'10 million).
Retoil Settlement Vorionce Account (RSVA)
Hydro One hos defened certoin retoil settlement vorionce omounts
under the provisions of Article 490 of the OEB's Accounting
Procedures Hondbook. In Morch 20.l5, the OEB opproved the
disposition of the totol RSVA bolonce occumuloted from Jonuory
2012 to December 201 3, including occrued interest, to be
recovered through the 2O1 5 2017 Rote Rider.
Debt Premium
The volue of debt ossumed in the ocquisition of Greot Lokes Power
hos been recorded ot {oir volue in occordonce with US GAAP -
Business Combinotions. The OEB ollows for recovery of interest ot the
coupon rote of the Senior Secured Bonds ond o regulotory ossel hos
been recorded for the dilference between the foir volue ond foce
volue of this debt. The debt premium is recovered over the remoining
term ol the debt {see note l5}.
Shore-bosed Compensotion
The Compony recognizes cosls ossocioled with shore gront plons in
o regulotory osset os rnonogement considers it proboble thot shore
gront plons costs will be recovered in the future through the rote-
setting process. In the obsence of rotereguloted occounting, 2016
operolion, mointenonce ond odminislrotion expenses would hove
been higher by $9 million (2015 - $5 million).
Distribution System Code (DSC) Exemption
ln June 20 10, Hydro One Networks filed on oppllcotion with the
OEB regording the OEB's new cost responsibility rules contoined in
the OEB's October 2009 Notice of Amendment to the DSC, with
respect to the connection of certoin renewoble generotors thot were
olreody connected or thot hod received o connection impocl
ossessmenl prior to October 21 , 2009. The opplicotion sought
opprovol to record ond defer the unonticipoted costs incuned by
Hydro One Networks thot resulted from the conneclion of cerloin
renewoble generotion focilities. The OEB ruled thot identified specific
expenditures con be recorded in o deferrol occount subiect to the
OEB's review in subsequenl Hydro One Network distribution
opplicotions. In Morch 201 5, the OEB opproved the disposition of
the DSC exemption deferrol occount ot December 3 1 , 20 ,l 3,
including occrued interest, whlch is being recovered through the
2015-2017 Rote Rider. ln oddition, the OEB olso opproved Hydro
One's request lo discontinue this deferrol occounl. There were no
odditions to this regulotory occount in 2015 or 2016.
2015-2012 Rote Rider
ln Morch 2015, os port of its decision on Hydro One Networks'
distribution rote opplicotion for 20I 5-20 I 9, the OEB opproved the
disposition of certoin deferrol ond vorionce occounts, including
RSVAs ond occrued interest. Ihe 2Ol5'2017 Rote Rider occount
includes the bolonces opproved for disposition by the OEB ond is
being disposed in occordonce with the OEB decision over o
32-monlh period ending on December 31 , 2017.
B2M LP Stort-up Costs
ln December 2015, OEB issued its decision on B2M LP's opplicotion
for 20 I 5-20 I 9 ond os port of the decision opproved the recovery of
$8 million o[ stort-up costs reloting to B2M LP. The costs ore being
recovered over o fourleor period which begon in 20 16, in
occordonce with the OEB decision.
Pension Cost Vorionce
A pension cost vorionce occount wos estoblished for Hydro One
Networks' lronsmission ond distribution businesses to trock the
difference between the octuol pension expenses incurred ond
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HyDRo oNE LrA{rED oNE oF NoRTH AMERre\',qJ0Utff]H}t[6gr*ges zr
Schedule 3, Page 73 of 167
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimoted pension costs opproved by the OEB. The bolonce in this
regulotory occount reflects the excess of pension costs poid os
compored to OEBopproved omounls. ln Morch 20 1 5, the OEB
opproved the disposition ol the distribution business portion of the
totol pension cost vorionce occount ol December 3 l, 20,l 3,
including occrued interest, which is being recovered through the
2015-2017 Rote Rider. In he obsence o[ rotereguloted occounting,
20l6 revenue would hove been higher by $25 million (20,15 -
lower by $6 million).
Green Energy Expenditure Vorionce
ln April 2010, the OEB requested the estoblishment o[ delenol
occounts which copture the difference between the revenue recorded
on the bosis ol Green Energy Plon expenditures incurred ond the
octuol recoveries received.
Externol Revenue Vorionce
In Moy 2009, the OEB opproved forecosted omounts reloted to
export service revenue, externol revenue from secondory lond use,
ond exlernol revenue from stotion mointenonce ond englneering ond
consiruclion work. ln November 2012, he OEB ogoin opproved
13. Accounts Poyoble ond Other Current Liobilities
December 3 I
(millions of dollors)
forecosted omounls reloted lo these revenue cotegories ond extended
the scope to encomposs oll olher externol revenues. The externol
revenue vorionce occount bolonce reflects the excess of octuol
externol revenues compored to the OEBopproved forecosted
omounts.
CDM Deferrol Vorionce Accouni
As port of Hydro One Networks' opplicotion for 20 I 3 ond 201 4
tronsmission rotes, Hydro One ogreed to estoblish o new regulotory
deferrol vorionce occount lo kock the impoct of octuol Conservotion
ond Demond Monogement (CDM) ond demond response results on
the lood forecost compored lo the estimoted lood forecost included in
the revenue requlremenl. The bolonce in the CDM deferrol vorionce
occount relotes to the octuol 20 I 3 ond 20,l 4 CDM compored to the
omounls included in 2Ol3 ond2O14 revenue requirements,
respectively. There were no oddilions lo this regulolory occounl in
201 6.
2016 201 5
Accounts poyoble
Accrued liobilities
Accrued interest
Regulotory liobillJies /Nofe l2l
t8t
659
105
155
598
96
t9
945 B6B
.l4. Other Long-Term Liobilities
December 3 I
(millions of dollors)2016 201 5
Post-retiremeni ond post-employment benefit liobiliry fNote / 8/
Pension benefit liobility /Nob l8l
Environmentol liobilities /Nofe I 9i
Assel retirement obligotions (Note 20)
Long-term occounts poyoble ond other liobilities
1,641
900
177
9
25
r,560
952
r85
I
17
2,752 2,723
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 74 of 167
o
72 HYDNO ONE tIil[ED 20'I6 ANNUAL REPORT TSX: H
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.l5. Debt ond Credit Agreements
Short-Term Notes ond Credit Focilities
Hydro One meets its short-term liquidity requirements in port through
the issuonce of commerciol poper under Hydro One lnc.'s
Commerciol Poper Progrom which hos o moximum outhorized
omount of $ L5 billion. These short-term notes ore denominoted in
Conodion dollors with vorying moturities up to 365 doys. The
Commerciol Poper Progrom is supported by Hydro One lnc.'s
committed revolving credit focilities totolling $2.3 billion.
On August | 5, 2016, Hydro One lnc. terminoted its $ I .5 billion
revolving stondby credit focility moturing in June 2020 ond its
$800 million threeyeor senior, revolving term credit focility moturing
in October 2018 {collectively Prior Credit Focilities). On the some
dote, Hydro One lnc. entered inlo o new credit ogreement for o
$2.3 billion revolving credit focility moturing inJune 202,l (New
Credit Focility). The New Credit Focility ronks equolly with ony
existing ond luiure senior debt of Hydro One Inc., ond hos customory
covenonts substontiolly similor lo the covenonts under lhe Prior Credit
Focilities. ln oddition, on November 7 , 2016, the moturity dote of
Hydro One's $250 million credit focility wos extended from
November 2O2O to November 202 I .
At December 31 , 2O16, Hydro One's consolidoted committed, unsecured ond undrown credit focilities totolling $2,550 million consisted of the
following:
(millions of dollors) l&q!ry__ __4I9!!l
Hydro One lnc.
Revolving stondby credit focility June 2021 2,300
Hydro One
Fiveyeor senior, revolving term credil fociliV November 2021 250
o Totol
The Compony moy use lhe credit focilities for working copitol ond
generol corporole purposes. lf used, interest on the credit Iocilities
would opply bosed on Conodion benchmork rotes. The obligotion of
eoch lender to moke ony credit extension under its credit focility is
subiect to vorious conditions including thol no event of defoult hos
occurred or would result from such credit extension.
Long-Term Debt
At December 31 , 2016, $ I 0,523 million long-term debt wos issued
by Hydro One lnc. under Hydro One lnc.'s Medium-Term Note
(MTN) Progrom. The moxlmum outhorized principol omount of notes
issuoble under the cunent MTN Progrom prospectus {iled in
December 20,l5 is $3.5 billion. At December 31, 2016,
$ I .2 billion remoined ovolloble for issuonce untilJonuory 20,1 B. ln
oddition, ot December 3 I , 20I 6, the Compony hod long-term debt
of $ I 84 million ossumed os port of the Greot Lokes Power
ocquisition.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
HYDRo oNE LrryilrED oNE or NoRTH AMERr(}',qjbuiffrfl!Cdf6:O[+grEs 7s
Schedule 3, Page 75 of 167
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a
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The lollowing toble presents outstonding long-term debt ot December 3l , 20.16 ond 2015
December 3 I
(nillions of dollors)201 6 20r5
o
4.64%Series l0 notes due 2016
Flooting-rote Series 27 notes due 20,1 6l
5.1 8% Series l3 notes due 2017
2.78% Seties 28 notes due 201 8
Flooting-rote Series 3l notes due 20l9r
1.48% Series 32 notes due 20]92
4.40% Series 20 notes due 2O2O
1.62% Series 33 notes due 20202
I . 84% Series 34 notes doe 2021
3.20% Series 25 notes dve 2022
2]7%Series 35 notes due2026
2.35% Debentures due 2030
6.93% Series 2 notes due 2032
6.35% Series 4 notes due 2034
5.36% Series 9 notes due 2036
4.89% Series I2 notes due 2037
6.03% Series l7 notes due 2039
5.49% Series lB notes due 2O4O
4.39% Series 23 notes due 2041
6.59% Series 5 notes due 2043
4.59% Series 29 notes doe 2043
4.17% Series 32 notes due 2044
5.00% Series I I notes due 2046
3.91% Series 36 notes doe 2046
3.72% Series 38 notes due 2047
4.00% Series 24 noles due 2051
3.79% Series 26 notes dve 2062
4.29% Series 30 notes dve 2064
600
750
228
500
300
3s0
500
600
s00
400
s00
385
600
400
300
500
300
315
435
350
325
3s0
450
225
310
50
450
50
600
750
ttd
300
350
225
3r0
50
600
400
500
38s
600
400
300
500
300
3t5
435
350
325
Hydro One Inc. long-term debl t0,523 8,723
6.6% Senior Secured Bonds due 2023 {Foce volue - $ I 1 2 million)
4.6% Nore Poyoble due 2023 (Foce volue - $36 mlllionl
144
40
Greot Lokes Power long-term debt l84
10,707 8,723
Add: Net unomortized debt premiums3
Add: Unreolized mork-lomorket loss (goin)2
Less: Deferred debt issuonce costs3
l5
t2t
(40)
17
i
134l
Totol ong-term debt I0,680 8,707
r The interest rotes of the flooting*ole noles ore referenced to the 3oonth Conodion dollor bonkers' occeptonce role, plus o morgin.
2 The unreolized mork-temorket netgoin reloles to $50 million of the Series 33 notes due 2020 ond $500 million Series 37 notes due 2019 (2015 - loss
relotesto$50millionof theSeries33notesdue2020).Theunreolizedmork+amorketnetgoinisoffsetbyo$2million(2015-$l million) unreolized
mork{morket net loss (2015 - goin) on the reloted fixed-toflooting inleresl-rote swop ogreements, which ore occounted for os foir volue hedges. See note
I 6 - Foir Volue of Finonciol lnstruments ond Risk Monogement for detoils of foir volue hedges.
3 Effective Jonuory I , 20 I 6, defened debt issuonce costs ond net unomortized debl premiums were reclossified from other long-term ossets ond other long{erm
liobilities, respectively, os on offsello longierm debt upon odoption ofASU 2015O3 (see note 3). Bolonces os otDecember 31, 2015 were updoted to
reflect the retrospective odoption of ASU 20 I 5-03.
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-17-
i.rop"r,Hydro one
o
74 HYDRO ONE tlMlTED 2016 ANNUAL REPORT TSX: H
Schedule 3, Page 76 of 167
o
The totol longlerm debt ls presented on the consolidoted bolonce sheets os follows:
December 3l
(millions of dollors)2016 20r5
Cunent liobilities:
Long-term debt poyoble within one yeor
Long-term liobilities:
Long-term debt
Totol lono'term debt 10,680 8,707
ln 20 I 6, Hydro One issued $2,300 million (20,l 5 - $350 million; of long-term debt under the MTN Progrom, ond repoid $502 million (201 5 -
$550 millionl of totol long+erm debt.
Principol repoyments ond reloted weighted overoge interesl rotes ore summorlzed by the number of yeors lo moturity in the following toble
602 500
r 0,078 8,207
Yeors to MoturiV
Long+erm Debt
Principol Repoyments
Weighted Averoge
lnteresl Rote
l/ollmillionsofdollors)
o
1 yeor
2 yeors
3 yeors
4 yeors
5 yeors
602
753
731
653
s03
5.2
2.8
1.4
2.9
1.9
6 - 10 yeors
Oer l0 yeors
3,242
1,234
6,r95
2.8
3.3
5.2
10,671 4.3
Interest poyment obligotions reloted to longlerm debt ore summorized by yeor in the following toble:
lnterest Poyments
v-^. tnilli^^< ^{ A^lldrcl
2017 456
20r 8 425
2019 402
2020 384
2021 370
2,O37
t,703
4,405
2022-2026
2027+
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.l6. Foir Volue of Finonciol lnstruments ond Risk
Monogement
Foir volue is considered to be the exchonge price in on orderly
tronsoction between morket porliciponts to sell on osset or tronsfer o
liobllity ot the meosurement dote. The foir volue delinition focuses on
on exit price, which is the price thot would be received in the sole of
on osset or the omount thot would be poid to tronsfer o liobility.
Hydro One clossifies its foir volue meosurements bosed on the
lollowing hierorchy, os prescribed by the occounting guidonce for
foir volue, which prioritizes the inputs to voluotion techniques used to
meosure [oir volue into three levels:
Level 1 inputs ore unodjusted quoted prices in octive morkets for
identicol ossets or liobilities thot Hydro One hos the obiliny to occess.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LrmrED oNE oF NoRrH AMERrg',*oUifrrFlliilEeHg'rs "
Schedule 3, Page 77 of167
o
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NOTES TO CONSOTIDATED FINANCIAL STATEMENTS
An octive morket for the osset or |iobility is one in which honsocfions
for the osset or liobllity occur with sufficient frequency ond volume to
provide ongoing pricing informotion.
Level 2 inputs ore lhose other thon quoted morkel prices thot ore
observoble, either directly or indirectly, for on osset or liobility.
Level 2 inputs include, but ore not llmited to, quoted prices for similor
ossets or liobilities in on octive morket, quoted prices for identicol or
similor ossets or liobilities in morkets thol ore not oclive ond inputs
other thon quoted morket prices thot ore observoble for lhe osset or
liobility, such os interest-rote curves ond yield curves observoble ot
commonly quoted intervols, volotilities, credit risk ond defoult rotes. A
level 2 meosurement connot hove more thon on insignificont portion
o[ the voluotion bosed on unobsevoble inputs.
Level 3 inputs ore ony foir volue meosuremenls thot include
unobservoble inputs for the osset or liobility for more thon on
insignificont portion of lhe voluotion. A Level 3 meosurement moy be
bosed primorily on Level 2 inputs.
Non-Derivotive Finonciol Assets ond Liobilities
At December 3 I , 201 6 ond 20I 5, the Compony's corrying
omounts of cosh ond cosh equivolents, occounts receivoble, due from
reloted porties, shorfterm notes poyoble, occounts poyoble, ond due
to reloted porties ore representotive of foir volue becouse o[ the short-
term nolure o[ these instruments.
20r5
Foir Volue
Foir Volue Meosurements of Long-Term Debt
The foir volues ond corrying volues of the Compony's long-lerm debt ot December 3 I , 20,1 6 ond 20 I 5 ore os follows:
December 31 2016 2016 2015
lmillions of dollorsl Corrying Volue Foir Volue Corrying Volue
Long-term debt
$50 million of MTN Series 33 notes
$500 million of MTN Series 37 notes
Other notes ond debentures
50
498
50
498
11,462
5l 5l
132
r0,680 r 2,010
8,656
8,707
9,942
9,993o
Foir Volue Meosurements of Derivotive
lnstruments
At December 3 I , 201 6, Hydro One Inc. hod interest-role swops in
the omount of $550 million {2015 - $50 million} thot wos used to
convert fixed-rote debt to flootingrote debt. These swops ore
clossified os o foir volue hedges. Hydro One lnc.'s foir volue hedge
exposure wos equol to obout 5% 12015 - 1%l ol its totol long-term
debt. At December 3l , 2O16, Hydro One Inc. hod fie following
interest-rote swops designoted os foir volue hedges:
. o $50 million fixed-toflooting inlerest-rote swop ogreement to
convert $50 million of the $350 million MTN Series 33 notes
moturing April 30, 2O2O inlo threemonth vorioble role debt; ond
. two $125 million ond one $250 million fixed-toflooting interest-
role swop ogreements to convert the $500 million MTN Series 37
notes moluring November 1 8, 20,l 9 into threemonth vorioble rote
debt.
At December 3 1 , 201 6 ond 20 1 5, the Compony hod no interest-
rote swops clossified os undesignoted controcts.
Level 2 Level 3
Foir Volue Hierorchy
The foir volue hierorchy of [inonciol ossets ond liobililies ol December 3l , 20.l6 ond 2Ol5 is os lollows:
December 3l , 2Ol 6 Corrying Foir
(millions of dollorsl Volue Volue Level I
Assels:
Cosh ond cosh equivolents 50 50 50
50 50 50
Liobilities:
Short-lerm notes poyoble
Long-term debt, including current portion
Derivotive instruments
Foir volue hedges - interest-rote swop
469
10,680
2
469
12,010
2
469
2
12,010
o
76 HYDRO ONE tlMlTED 2016 ANNUAL REPORT TSX: H
1 l,t5t 12,481
Schedule 3, Page 78 of 167
471 r 2,010
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-I7-
C. Lop"r, Hydro One
o
December3l,20l5
lnillions of dollors)
Corrying
Volue
Foir
Volue Level l Level 2 Level 3
Assets:
Cosh ond cosh equivolents 94
Derivotive instruments
Foir volue hedge - inlerest-rote swop I
94 94
95 95 95
Liobilities:
Short-term notes poyoble
Long-term debt, including current portion
1,491
8,707
1,491
9,993
1,491
9,993
r 0,1 98 11 ,484 1,491 9,993
o
Cosh ond cosh equivolents include cosh ond shortlerm investmenls.
The corrying volues ore representolive of foir volue becouse of the
short-term noture o[ these instruments.
The foir volue of rhe hedged portion of the long-term debt is primorily
bosed on the present volue of future cosh flows using o swop yield
curve to determine the ossumplion for interest rotes. The foir volue o[
the unhedged portion of the longlerm debt is bosed on unodiusted
periodend morkel prices for the some or similor debt of the some
remoining moturities.
There were no significont tronslers between ony of the foir volue
levels during the yeors ended December 3 l, 2016 ond 2015.
Risk Monogement
Exposure to morket risk, credit risk ond liquidity risk orises in the
normol course of the Compony's business.
Morket Risk
Morket risk refers primorily to the risk of loss thot results from chonges
in cosls, foreign exchonge rotes ond interest rotes. The Compony is
exposed to fluctuotions in interesl rofes os its reguloted return on
equity is derived using o formuloic opprooch thot tokes into occount
onticipoted interest rotes. The Compony is not currently exposed to
moleriol commodiiy price risk or moteriol foreign exchonge risk.
The Compony uses o combinotion o[ fixed ond vorioblerote debt to
monoge the mix of its debt portfolio. The Compony olso uses
derivotive finonciol inslruments to monoge inlerest-role risk. The
Compony utilizes interest-rote swops, which ore lypicolly designoled
os foir volue hedges, os o meons to monoge its interest rote exposure
to ochieve o lower cost of debl. The Compony moy olso utilize
inlerest-rote derivotive inslrumenls to lock in interestrote levels in
onticipotion of luture finoncing.
A hypotheticol '100 bosis points increose in interest rotes ossocioted
with vorioblerote debt would not hove resulted in o signi{icont
decreose in Hydro One's net income Ior the yeors ended
December 3 I , 20 I 6 or 20 I 5.
For derivotive instruments thot ore designoted ond quolify os foir volue
hedges, the goin or loss on the derivotive instrument os well os the
offsetting loss or goin on the hedged item ottributoble to he hedged
risk ore recognized in the Consolidoted Stotements of Operotions
ond Comprehensive lncome. The net unreolized loss (goin) on the
hedged debt ond the reloted interest-rote swops for the yeors ended
December 3 I , 201 6 ond 20,l 5 wos not significont.
Credit Risk
Finonciol ossets creote o risk thot o counterporly will foil to dischorge
on obligotion, cousing o finonciol loss. Al December 31, 20,l6 ond
2015, there were no significont concentrotions of credit risk with
respect to ony closs of finonciol ossets. The Compony's revenue is
eorned from o brood bose of customers. As o result, Hydro One dld
not eorn o significont omount of revenue from ony single customer. At
December 3 I , 201 6 ond 20 1 5, there wos no significont occounts
receivoble bolonce due from ony single customer.
At December 3.l, 2016, the Compony's provision for bod debts wos
$35 mlllion (201 5 - $6,) million). Adlustments ond writeoffs were
determined on the bosis of o review of overdue occounts, toking into
considerotion historicol experience. At December 3,), 20,l6,
opproximotely 6"/" ,2015 - 6%l ol the Compony's net occounls
receivoble were oged more thon 60 doys.
Hydro One monoges its counterporty credit risk through vorious
techniques including: entering into lronsoclions with highly roted
counterporties; limiling totol exposure levels with individuol
counterporties; entering into moster ogreements which enoble net
settlement ond the controctuol right of offset; ond monitoring the
finonciol condition o[ counterporties. The Compony monilors current
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LrmrEo oNE or NoRTH AMERre\',LStrUrrFllQIfSeAH'rs zz
Schedule 3, Page 79 of167
o
azz6>i
6-.EdaOt2fr@
=om=zadIEI
3
o
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
credit exposure to counterporties both on on indlviduol ond on
oggregote bosis. The Compony's credit risk for occounts receivoble is
limited to the corrying omounts on the Consolidoted Bolonce Sheets.
Derivotive finonciol instruments result in exposure to credil risk since
there is o risk of counterporry defoult. The credit exposure o[
derivotive controcts, before colloterol, is represented by the foir volue
of conlrocts ot the reporting dote. At December 3 I , 201 6 ond
20,15, the counterporty credit rlsk exposure on the foir volue of these
interest-rote swop conlrocts wos not significont. At December 31,
201 6, Hydro One's credit exposure for oll derivotive inslrumenls,
ond opplicoble poyobles ond receivobles, hod o credit roling o[
investmenl grode, with lour linonciol insiitutions os the counterporty.
Liquidity Risk
Liquidily rlsk refers to the Compony's obility to meel ils finonciol
obligotions os they come due. Hydro One meets its short-term
liquldity requirements using cosh ond cosh equivolents on hond, funds
Decembr 3l
(millions of dollors)
from operotions, the issuonce ol commerciol poper, ond the revolving
stondby credit {ocilities. The short-term liquidity under the Commerciol
Poper Progrom, revolving stondby credit focilities, ond onticipoted
levels of funds from operotions ore expected to be sufficlent to fund
normol operoting requirenents.
At December 3,1, 2016, occounts poyoble ond occrued liobilities in
the omount of $840 million {2015 - $753 million) were expected to
be settled in cosh ot their corrying omounts within the next l2 months.
12. Copitol Monogement
The Compony's oblectives with respect to its copitol structure ore lo
mointoin elfective occess to copitol on o longlerm bosis ot
reosonoble rotes, ond to deliver oppropriote finonciol returns. ln
order to ensure ongoing occess lo copitol, the Compony torgets to
mointoin strong credit quolity. At December 3 I , 201 6 ond 20I 5,
the Compony's copitol struclure wos os follows:
2016 2015oLong-term debt poyoble within one yeor
Shortlerm notes poyoble
Less: cosh ond cosh equivolents
602 500
1,491
94
469
50
Longterm debt
Prefened shores
Common shores
Retoined eorninos
1,O21
10,078
418
5,623
3,950
1,897
8,207
418
5,623
3,806
Totol copitol 21,O90 19,95 r
Hydro One Inc. ond Greot Lokes Power hove customory covenonts
lpicolly ossocioted with long-term debt. Hydro One lnc.'s long-term
debt ond credit focility covenonts limit permissible debt to 75% ol lts
totol copitolizotion, limit the obility to sell ossets ond impose o
negotive pledge provision, subject to customory exceptions. At
December 3 I , 201 6, Hydro One Inc. ond Greot Lokes Power were
in complionce with oll covenonts ond limitotions.
,l8. Pension ond Post-retirement ond
Post-em ployment Benefits
Hydro One hos o defined benefit pension plon (Pension Plon), o
defined contribution pension plon (DC Plon), o supplementory
pension plon, ond post-retirement ond postemployment benefit plons.
Defined Contribution Pension Plon
Hydro One estoblished o DC Plon effective Jonuory I , 20 1 6. The
DC Plon is mondotory ond covers eliglble monogement employees
hired on or ofterJonuory l,2Ol6, os well os monogement
employees hired before Jonuory 1 , 201 6 who were not eligible or
hod not irrevocobly elected lo ioin the Pension Plon os ol
September 30, 2015. Members of the DC Plon hove on option to
contribute 4%, 5% or 6% of their pensionoble eornings, with motching
contributions by Hydro One.
Hydro One contributions to the DC Plon for the yeor ended
December 3l , 20,l6 were less thon $ I million {2015 - $nil). At
December 31 , 20,l6, Compony contributions poyoble included in
occrued liobilities on the Consolidoted Bolonce Sheets were less thon
$ l million (2015 - $nil).
Exhibit No. 4
Case Nos. AVU-E-l7- and AVU-G-I7-
i.Lop"r,Hydro One
O
78 HYDRO ONE LI'IIITED 20I6 ANNUAI. REPORT TSX: H
Schedule 3, Page 80 of 167
o
o
Defined Benefit Pension Plon, Supplementory
Pension Plon, ond Post-Retirement ond
Post-Employment Plons
The Pension Plon is o defined benefit conlributory plon which covers
oll regulor employees of Hydro One ond its subsidiories. The Pension
Plon provides benefits bosed on highest threeyeor overoge
pensionoble eornings. For Monogement employees who commenced
employmenl on or oflerJonuoty 1, 2004, ond for Society of Energy
Professionols-represented stoff hired ofter November 17 , 2005,
benefits ore bosed on highest fiveyeor overoge pensionoble
eornings. Alter retirement, pensions ore indexed to inflotion.
Membership in the Pension Plon wos closed to Monogement
employees who were not eligible or hod not irrevocobly elected to
join the Pension Plon os of September 30, 20.15. These employees
ore eligible to ioin the DC Plon.
Compony ond employee contributions to the Pension Plon ore bosed
on octuoriol voluotions performed ot leost every three yeors. Annuol
Pension Plon contributions for 2016 of $.l08 million (20.l 5 - $177
million) were bosed on on octuoriol voluotion effective December 3l
2015 (20.l5 - bosed on on octuoriol voluolion effective
December 3.l, 201 3l ond the level o[ pensionoble eornings.
Estimoted onnuol Pension Plon contributions for 201 7 ond 2018 ore
opproximotely $,105 mlllion ond $102 million, respectively, bosed
on the octuoriol voluotion os ot December 3 1 , 20,l 5 ond proiected
levels of pensionoble eornings.
Future minimum contributions beyond 2018 will be bosed on on
octuoriol voluolion effective no loter thon December 31, 20,l8.
Conkibutions ore poyoble one monlh in orreors. All of the
contrlbutions ore expected to be in the form of cosh.
The Hydro One Supplemenlol Pension Plon {Supplementol Plon)
provides members of the Pension Plon with benefits thot would hove
been eorned ond poyoble under the Pension Plon but for limitotions
imposed by the /ncome Iox Acl (Conodo). The Supplemenlol Plon
obligotion is included with other post-retirement ond postemployment
benefit obligotions on the Consolidoted Bolonce Sheets.
Hydro One recognizes the overfunded or underfunded stotus of the
Pension Plon, ond post-retirement ond postemployment benelit plons
{Plons) os on osset or liobilily on its Consolidoted Bolonce Sheets,
with offsetting regulotory ossets ond liobilities os oppropriote. The
underfunded benefit obligotions for the Plons, in the obsence of
regulotory occounting, would be recognlzed in AOCI. The impoct of
chonges ln ossumptions used to meosure pension, post-retirement ond
postemployment benefit obligotions is generolly recognized over the
expected overoge remoining service period of the employees. The
meosuremenl dote {or the Plons ls December 3l .
Posl-Retirement ond
Yeor ended December 3l Pension Benefits Post-Employment Benefits
lmillions of dollors) 201 6 201 5 2016 2Al 5
Chonge in prolected benefit obligotion
Projected benefitobligotion, beginning o[ yeor 7,683 7,535 1,610 1,582
Current service cost 144 146 42 43
Employee contributions 45 40
lnlerest cost 308 302 67 64
Benefits poid (354) (334) (43) 147)
Ner octuoriol loss (goin) (52) (6) 14 127)
Chonge due to Hydro One Brompton spin-off (5)
a7zo>i6-.
E6qO
r.2fra
=or=z9a-mg
3
Proiected benefit obligotion, end o[ yeor 7,774 7,683 r ,690 r ,61 0
Chonge in plon ossets
Foir volue of plon ossets, beginning of yeor
Actuol return on plon ossels
Benefits poid
Employer contributions
Employee contributions
Administrotive expenses
6,731
370
(3541
r08
45
126l
6,299
582
{334)
177
40
(3 3l
147)
47
Bsr
43
o Unfunded stotus 900 952 1,690 1,61 0
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
HYDRo oNE LrmrED oNE oF NoRTH AMERr(}',qjoUU2rFISfrlfEg1Hres zE
Schedule 3, Page 8l of167
Foir volue of plon ossets, end o[ yeor 6,874 6,731
o
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hydro One presents its benefit obligotions ond plon ossets net on its Consolidoted Bolonce Sheets os follows:
December 3l
lmillions o{ dollors)
Pension Benefits
2016
Post-Retirement ond
Post-Employment Bene[its
2016 201520r5
Other ossets
Accrued liobilities
Pension benefit liobility
Post-retirement ond postemployment benefit liobility
lr
900 952
5056
1 ,6412 r,560
Net unfunded stotus 899 952 1,697 I ,610
I Represents the lunded sbtus of Greot Lokes Power's defined benefit pension plon.
2 lncludes $7 million (201 5 - $nil) reloting to Greol Lokes Power's postemployment benefit plons.
The funded or unfunded stotus of the pension, post-relirement ond
postemployment benefit plons refers lo the difference between the [oir
volue of plon ossets ond the proiected benefit obligotions for the
Plons. The funded/unfunded stotus chonges over lime due to severol
foctors, including conkibulion levels, ossumed discount rotes ond
octuol returns on plon ossels.
The {ollowing toble provides the proiected benefit obligoiion (PBO), occumuloted benelit obligotion {ABO) ond foir volue of plon ossets for the
Pension Plon:
December 3l
lmillions of dollors) 2016 201 5
o PBO
ABO
Foir volue o[ plon ossets
7,774
7,094
6,874
7,683
7,020
6,731
On on ABO bosis, the Pension Plon wos funded ol 97% ol
December 3,l, 2016 (2015 - 96%1. On o PBO bosis, the Pension
Plon wos funded ot 88% ot December 3,l, 20l6 (20.l5 - BB%). The
ABO differs from the PBO in thot the ABO includes no ossumption
obout future compensotion levels.
Components of Net Periodic Benefit Costs
The following toble provides the components of the net periodic benefit costs for the yeors ended December 3 .l , 2016 ond 20,15 for the Pension
Plon:
Yeor ended December 3l
lmillions of dollors) 2016 2015
Cunent service cost, nel of employee conkibutions
lnterest cost
Expected return on plon ossets, nel of expenses
Amorlizotion o[ octuoriol losses
Prior service cost omortizolion
144
308
(432]|
96
146
302
(406)
It9
2
Net periodic benefit costs lt6 r63
Chorged to results of operotionsl 48
r The Compony follows the cosh bosis of occounting consistent with the inclusion of pension costs in OEBopproved rotes. During the yeor ended
December3l ,2016, pensloncostsof $l0Smillion l20l5-$\77 million) wereottribuledtolobour,of which$48millionl20l5-$81 million) wos
chorged to operotions, ond $60 million (2015 - $96 million) wos copitolized os port o[ the cosl of property, plont ond equipment ond intongible ossets.
8r
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 82 of 167
o
80 HYDNO ONE LI'VIITED 20]6 ANNUAT REPORT TSX: H
o
The following toble provides the components o[ the net periodic benelil costs for fie yeors ended December 3 ,l , 20l6 ond 20'l5 for the posF
relirement ond postemployment benefit plons:
Yeor ended December 3l
(millions of dollors) 2016 201 5
Cunent service cost, net of employee conhibutions
lnterest cost
Amorlizotion of octuoriol losses
Prior service cost omorlizotion
42
67
l5
43
64
14
Net periodic b"E! r9q,124 121
Choroed lo results of operolions 55 55
Assumptions
The meosurement of the obligotions o[ the Plons ond the costs o[
providing benefits under the Plons involves vorious foctors, including
the development o[ voluotion ossumptions ond occounting policy
elections. When developing the required ossumptions, the Compony
considers historicol informotion os well os future expectolions. The
meosurement o{ benefit obligotions ond costs is impocted by severol
ossumptions including the discount rote opplied to benefit obligotions,
the long-term expected rote of return on plon ossets, Hydro One's
expected level o[ conkibutions to the Plons, lhe incidence of mortolity,
the expected remoinlng service period o[ plon porticiponts, the level
The following weighted overoge ossumptions were used to determine the benefit obligotions ot December 3l , 20'16 ond 20 l5:
Posl-Relirement ond
Pension Benefits Post-Employment Benefits
Yeor ended Decenber 31 2016 2015 2016 2015
Significont ossumptions:
Weighted overoge discount rote
Rote of compensotion scole escolotion (long-term)
Rote of cost o[ living increose
Rote of increose in heolth core cosl trendsl
f 6.25%peronnumin2017,grodingdownto4.36%paronnuminondofler203l (2015-6.38%in2016,grodingdownto4.36%peronnuminond
ofter 2031).
The following weighted overoge ossumptions were used to determine the net periodic benefit costs for the yeors ended December 3 I , 201 6 ond
2015. Assumptions used to determine cunent yeorend benefit obligotions ore the ossumplions used lo estimote the subsequent yeor's net periodic
benefit costs.
Yeor ended December 31 2016 2015
Pension Benefits:
Weighted overoge expected rote of return on plon ossets
Weighted overoge discount rote
Rote of compensotion scole escololion (long-term)
Role of cost of living increose
Averoge remoining service life of employees /yeors/
of compensotion ond rote of compensotion increoses, employee oge,
length of service, ond lhe onticipoted rote of increose of heolth core
costs, omong other foctors. The impoct of chonges in ossumptions
used to meosure the obligotions of the Plons is generolly recognized
over the expected overoge remoining service period ol the plon
porticiponts. In selecting the expected rote of return on plon ossets,
Hydro One considers historicol economic indicotors thot impoct osset
returns, os well os expectotions regording luture long-term copitol
morket performonce, weighted by torget osset closs ollocotions. ln
generol, equily securities, reol estote ond privote equity investments
ore forecosted to hove higher returns thon fixed-income securities.o
3.90%
2.50"/"
2.00y"
4.OO%
2.50%
2.@%
3.90%
2.50%
2.OO%
4.36"/"
4.10%
2.50%
2.OO%
4.36%
6.50%
4.OO%
2.50"/"
2.OO%
t5
6.so%
4.OO%
2.50%
2.OO%
13
=zzo>r
6-.
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=om=zad5mI
3
Posl-Retirement ond Post-Employment Benefits:
Weighted overoge discount rote
Rote of compensolion scole escolotion (longlerm)
Rote of cost of living increose
Averoge remoining service lile of employees lyeors/
Rote of increose in heolth core cost trendsl
4.10y"
2.so%
2.00y"
15.3
4.36%
4.OO%
2.50%
2.OO%
r 3.8
4.36%
r6.38%peronnumin20l6,grodingdownto4.36%psronnuminondoher203l (2015-6.52%in2015,grodingdownto4.36"/"peronnuminondofur
203 r ).
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LmrrED oNE oF NoRTH AMERre\',tldUifr]Fl5&lfEeElges gt
Schedule 3, Page 83 of 167
o
o
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The discount rote used to determine the current yeor pension
obligotion ond the subsequent yeor's net periodic benefit costs is
bosed on o yield curve opprooch. Under the yield curve opprooch,
expected future benefit poyments for eoch plon ore discounled by o
role on o third-porry bond yield cuve corresponding to eoch
durotion. The yield curve is bosed on "AA" longlerm corporote
bonds. A single discounl rote is colculoted lhot would yield the some
presenl volue os the sum of the discounted cosh flows.
The eflect o[ o I % chonge in heolth core cost trends on the proiected benelit obligotion for the post-retirement ond postemployment benef its ot
December 3 l, 20,l6 ond 2015 is os follows:
December 3l
lmillions of dollors) 2016 2015
289
(2211
252
(re6)
The effect of o 1 % chonge in heolth core cost lrends on the service cost ond interest cost for the post-retirement ond posl-employment benefits for
the yeors ended December 31 ,2016 ond 2015 is os follows:
Yeor ended December 3l
(millions of dollors)2016 201 5
Service cost ond interest cost:
Effect of o l% increose in heolth core cost trends
Elfect of o l% decreose in heolth core cost trends
23
117l
22
(16)o The following opproximote life expectoncies were used in the mortolity ossumptions to determine the proiected benefit obligotions for the pension
ond posl-retirement ond post-employment plons ot December 3,1, 2016 ond 2015:
December3l,20l6
Life expectoncy ot 65 for o member currently ot
Ase 65 Age 45
December3l,20l5
Life expectoncy ot 65 for o member currently ot
ASe 65 Age 45
Mole Femole
24
Mole Femole Mole Femole Mole
24
Femole
22 23 24 23 25 26
Estimoted Future Benefit Poyments
At December 3,), 2016, estimoted future beneflt poyments to the porticiponts of the Plons were:
lnillions of dollors)
Post-Retirement ond
Pension Benefits Post-Employment Benefits
2017
20r 8
2019
2020
2021
2022 through to 2026
321
331
340
349
358
1,910
56
57
60
62
64
355
Totol estimoted future benefit poymenls through to 2026 3,609 654
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 84 of 167
o
82 HYDRO ONE tlilltED 2016 ANNUAL REPORT TSX: H
Proiected benef it obligotion:
Effect of o I % increose in heolth core cosl lrends
Effect of o l% decreose in heolth core cost trends
o
Components of Regulotory Assets
A portion of ocboriol goins ond losses ond prior service costs is
recorded within regulotory ossets on Hydro One's Consolidoted
Bolonce Sheets to reflect the expected regulofory inclusion o[ these
Yeor ended December 3l
(millions of dollors)
omounts in future rotes, which would otherwise be recorded in OCl.
The following toble provides the octuoriol goins ond losses ond prior
service costs recorded wilhin regulotory ossets:
2016 2015
Pension Benefits:
Actuoriol loss {goin} for the yeor
Amortizotion of octuoriol losses
Prior service cost omortizotion
35
(n:)
(r8r)
(r rel
t2t
(61)(302)
Post-Retirement o nd Post-Employment Benefits:
Actuoriol loss {goin) for the yeor
Amortizotion o[ octuoriol losses
Prior service cost omortizotion
14
(l 5)
127)
11 4l
(r)
The following toble provides the components of regulolory ossets thot hove not been recognized os components of net periodic benefit costs for
the yeors ended December 3 l, 201 6 ond 2Ol 5:
Yeor ended December 3l
lmillions of dollors)2016
(41 )
o
201 5
Pension Benefits:
Prior service cost
Actuoriol loss 900 952
900 952
Post-Retirement ond Post-Employment Benefits:
Actuoriol loss 243 240
243 240
The following toble provides the components o[ regulotory ossets ol December 3l thot ore expected to be omortized os components of net
periodic benefit costs in the following yeor:
December 3 I
lmillions of dollors)
Pension Beneflts2016 2015
Post-Relirement ond
Post-Employment Bene[its
2016 2015
!zzo>r
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=om=Z9;Im(2
3
86
79 96 86
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LrnrrED oNE oF NoRTH AMERre\',qj0UiffrFlltl6€Elgrrs sr
Schedule 3, Page 85 of 167
o
Prior service cost
Actuoriol loss 79 96
o
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pension Plon Assels
lnvestment Strotegy
On o regulor bosis, Hydro One evoluotes its investment strotegy to
ensure thot Pension Plon ossets will be sufficient lo poy Pension Plon
benefits when due. As port of this ongoing evoluotion, Hydro One
moy moke chonges to its torgeted osset ollocotlon ond inveslmenl
strotegy. The Pension Plon is monoged ot o net osset level. The moin
objective o[ the Pension Plon is to sustoin o certoin level of net ossels
in order to meet the pension obligotions of the Compony. The
Pension Plon fullills its primory obiective by odhering to specilic
investment policies outlined in its Summory of Investment Policies ond
Procedures (SIPP), which is reviewed ond opproved by the Humon
Resource Committee of Hydro One's Boord of Directors. The
Compony monoges net ossets by engoging knowledgeoble externol
investment monogers who ore chorged with the responsibility o[
investing exisling funds ond new funds (cunent yeor's employee ond
employer contributions) in occordonce wilh the opproved SIPP. The
performonce of the monogers is monitored through o governonce
slructure. lncreoses in net ossets ore o direct resuh of inveslment
income generoted by investments held by the Pension Plon ond
contributions to the Pension Plon by eligible employees ond by the
Compony. The moin use of nel ossets is for benefit poyments lo
eligible Pension Plon members.
Pension Plon Asset Mix
At December 3l , 20,16, the Pension Plon torget ossel ollocotions ond weighted overoge osset ollocotions were os follows:
Torget Allocotion (%) Pension Plon Assets (%)
Equity securities
Debt securities
Otherr
55.0
3s.0
r 0.0
58.7
33.6
7.7
100.0 r 00.0
o I Other investments include reol estote ond infrostruclure invesfments.
At December 31, 20,l6, the Pension Plon held $l I million (2015 -
$9 million) Hydro One corporote bonds ond $450 million (201 5 -
$420 million) of debt securities of the Province.
Concentrotions of Credit Rlsk
Hydro One evoluofed its Pension Plon's osset portfolio for the
existence of significont concentrotions o[ credit risk os ot
December 3 I , 20 I 6 ond 20 I 5. Concenkotions thot were evoluoted
include, but ore not limited lo, investmenl concenlrotions in o single
enlity, concentrotions in o lype of industry, ond concentrotions in
individuol funds. At December 3 I , 201 6 ond 20 1 5, there were no
significont concenkolions (defined os greoter thon 10% of plon ossets)
of risk in the Pension Plon's ossets.
The Pension Plon monoges its counterporfy credit risk with respect to
bonds by investing in investment€rode ond government bonds ond
with respect to derivotive instruments by tronsocting only with finonciol
institutions roled ot leost "A+" by Stondord & Poor's Roting Services,
DBRS Limited, ond Fitch Rotings Inc., ond "Al" by Moody's lnvestors
Service, ond olso by utilizing exposure limits to eoch counlerporty
ond ensuring thol exposure is diversified ocross counterporties. The
risk of defoult on tronsoctions in listed securilies is considered
minimol, os the trode will foil if either porly to the tronsoction does not
meet its obligotion.
Foir Volue Meosurements
The following tobles present the Pension Plon ossets meosured ond recorded ot foir volue on o recurring bosis ond their level wlthin the foir volue
hierorchy ot December 3l , 20,)6 ond 2015:
Decembr 31, 2016
/millbns of dol/ors/ Level I Level 2 Level 3 Totol
Pooled funds - 20 425 445
146
9il
2,985_
Cosh ond cosh equivolents
Shorllerm secrrrilies
Corporole shores - Conodion
Coroorole shores - Foreion
Bonls ord debentures - "Conodion
Bonds ond debentures - Foreign
n
lt3
1,943
193
146
127
911
3,098
1,943
r93
o
84 HYDRO ONE LIMITED 2016 ANNUAL REPORT TSX: H
Schedule 3, Page 86 of 167
Totol foir volue of plon ossetsl 4,042 2,396
r At December 3 I , 201 6, the totol foir volue of Pension Plon ossets excludes $27 million of interest ond dividends receivoble, $ l5 million o[ purchosed
inveslmenls poyoble, $9 million of pension odminishotion expenses poyoble, ond $7 million of sold investments receivoble.
425 6,863
Exhibit No. 4
Case Nos. AVU-E-17- and AVU-G-I7-
i.Lop"r,Hydro one
O
December 3l,2Ol5
lmillions of dollors)Level I Level 2 Level 3 Totol
Pooled funds
Cosh ond cosh equivolents
Short-term securities
Corporote shores - Conodion
Corporote shores - Foreign
Bonds ond debentures - Conodion
Bonds ond debentures - Foreign
t9t
807
2,931
23
80
301 324
t9l
an
807
3,047
2,072
201
il6
2,O72
201
Totol Ioir volue of plon ossetsr 3,929 2,492 30r
r At December 3 I , 201 5, the totol foir volue of Pension Plon osseh excludes $27 million of interest ond dividends receivoble, ond $ 'l 8 million reloting to
occruols for pension odminishotion expense ond foreign exchonge conkocts poyoble.
See note l6 - Foir Volue of Finonciol lnstruments ond Risk Monogement for o description of levels within the foir volue hierorchy.
6,722
o
Chonoes in the Foir Volue of Finonciol
lnstruilents Clossified in Level 3
The following loble summorizes the chonges in foir volue of finonciol
instruments clossilied in Level 3 for the yeors ended December 3l ,
20 I 6 ond 20,] 5. The Pension Plon clossifies finonciol instruments os
Yeor ended December 3l
lmillions of dollors)
Level 3 when the foir volue is meosured bosed on ot leost one
significont input thot is not observoble in the morkets or due to lock of
liquidity in certoin morkets. The goins ond losses presented in the
toble below moy include chonges in foir volue bosed on both
observoble ond unobservoble inputs.
2016 2015
Foir volue, beginning of yeor
Reolized ond unreolized goins
Purchoses
Soles ond disbursements
30r
23
t5r
(50)
144
5l
106
Foir volue, end o[ yeor 425 301
There were no significont tronsfers beiween ony o[ the foir volue
levels during the yeors ended December 3 1 , 20 I 6 ond 20,1 5.
The Compony performs sensitivity onolysis for foir volue meosurements
clossified in Level 3, substituting the unobservoble inputs with one or
more reosonobly possible olternotive ossumptions. These sensitivlty
onolyses resuhed in negllgible chonges in the foir volue of [inonciol
lnstruments clossified in this level.
Voluotion Techniques Used to Delermine Foir
Volue
Pooled funds moinly consist o[ privote equity, reol estole ond
in{rostructure investments. Privote equity investments represenl privote
equity funds lhot invest in operoling componies thot ore not publicly
troded on o stock exchonge. Investment strolegies in privote equity
include limlted portnerships in businesses thot ore chorocterized by
high internol growlh ond operolionol efficiencies, venlure copilol,
leveroged buyouts ond speciol siluotions such os diskessed
investments. Reol estote ond infrostructure investments represenl funds
thot invest in reol ossets which ore not publicly troded on o stock
exchonge. Investment strotegies in reol estote include limited
portnerships thot seek to generote o totol relurn through income ond
copitol growth by investing primorily in globol ond Conodion llmited
portnershi ps. lnvestment strolegies in inlrostructure include li mited
portnerships in core infroslructure ossets focusing on ossets lhot
generote stoble, longlerm cosh flows ond deliver incrementol returns
relotive to conventionol fixed-income investments. Privote equity, reol
estote ond infroslructure voluolions ore reported by the fund monoger
ond ore bosed on the voluolion of the underlying investmenls which
includes inputs such os cost, operoting results, discounted future cosh
flows ond morket-bosed comporoble doto. Since these voluotion
inpuls ore not highly observoble, privote equity ond infrostruclure
investmenls hove been cotegorized os Level 3 within pooled funds.
Cosh equlvolents consist of demond cosh deposits held with bonks
ond cosh held by the investment monogers. Cosh equivolents ore
cotegorized os Level i.
Short-term securities ore volued ot cost plus occrued interest, which
opproximotes foir volue due to their short-lerm noture. Short-lerm
securities ore cotegorized os Level 2.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
HYDRo oNE LlIlurED oNE oF NoRTH AMERre',qjdUifrrf{!cd[6rgftgrEs 85
Schedule 3, Page 87 of 167
3
O
70-D46-.
E6aO
r,9fr(u
=oME:ZOaImI
o
NOTES TO CONSOLIDATED FINANCIAT STATEMENTS
Corporote shores ore volued bosed on quoted prices in octive
morkets ond ore cotegorized os Level 'l . lnvestments denominoted in
foreign currencies ore tronsloted into Conodion currency ot yeorend
rotes of exchonge.
Bonds ond debentures ore presentd ot published closing trode
quototions, ond ore cotegorized os Level 2.
.l9. Environmentol Liobilities
The following tobles show the movements in environmentol liobilities for the yeors ended December 3 1 , 201 6 ond 20 l 5
Yeor ended December 31, 2016
(millions of dollors)PCB
Lond
Assessment ond
Remediotion Totol
Environmentol liobilities, lonuory 1
Interest occretion
Expenditures
Revoluotion odiustmenl
148
7
(t I )
(l)
59 207
8
120)
9
1
{e)
lo
Environmentol liobilities, December 3 l
Less: current portion
143
IB
61 204
I 27
125 52 177
O
Yeor ended December 31, 2Ol5
(millions of dollors)PCB
Lond
Assessment ond
Remediotion Totol
Environmentol liobilities, Jonuory 1
Interest occretion
Expenditures
Revoluotion odiustment
172
B
1B)
t24)
67
2
(il)
1
239
10
(1e)
t23)
Environmentol liobilities, December 3 I
Less: current portion
148
\2
59
t0
207
22
136 49 r85
The following tobles show the reconciliotion between the undiscounled bosis of the environmentol liobilities ond the omount recognized on the
Consolidoted Bolonce Sheets olter foctoring in the discount role:
December 31, 2Ol6
(millions of dollors)PCB
Lond
Assessment ond
Remediotion Totol
Undiscounted environmentol liobilities 158 66 224
15 5 20
Discounted environmentol liobilities 143 6l 204
Decenber3l,2Ol5
(millions of dollors)PCB
Lond
Assessment ond
Remediotion Totol
Undiscounted environmentol liobilities
Less: discounti ng occumuloted I iobilities to plg!g!!lro]!q
r68
20
6l 229
222
Discounled environmentol liobilities t48 59 207
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
C. Lopez, Hydro One
Schedule 3, Page 88 ofl67
o
86 HYDRO ONE II'VIITED 20] 6 ANNUAI. REPORT TSX: H
o
At December 3l , 2016, the estimoted luture environmentol expenditures were os lollows
lmillions of dollors)
2017
20r 8
2019
2020
2021
Thereofter
a7
26
25
36
8r
224
o
Hydro One records o liobilily for lhe estimoted future expenditures for
lond ossessment ond remediotion ond for the phoseout ond
deskuction o[ PCB<ontominoted minerol oil removed from electricol
equipment when it is delermined thot future environmenlol remediotion
expenditures ore proboble under existing stotute or regulotion ond the
omount of the future expenditures con be reosonobly estimoted.
There ore uncerlointies in estimoting future environmentol costs due to
potentiol externol events such os chonges in legislotion or regulotions,
ond odvonces in remediotion technologies. In determining the
omounts to be recorded os environmentol liobilities, the Compony
estimotes the current cost of completing required work ond mokes
ossumptions os lo when the future expenditures will octuolly be
incurred, in order to generote future cosh flow in{ormotion. A long-
term inflotion rote ossumption of opproximotely 2% hos been used to
express these current cost estimoles os estimoted future expenditures.
Future expenditures hove been discounted using foclors ronging from
opproximotely 2.O% lo 6.3%, depending on the oppropriole rote for
the period when expenditures ore expected to be incuned. All foctors
used in estimoting the Compony's environmentol liobilities represent
monogement's besl estimotes of lhe present volue of costs required to
meet exisling legislotion or regulotions. However, it is reosonobly
possible thot numbers or volumes o[ contominoted ossets, cosl
estimotes to perform work, inllotion ossumptions ond the ossumed
pottern of onnuol cosh flows moy differ significontly from the
Compony's current ossumptions. ln oddition, with respect to the PCB
environmentol liobility, the ovoilobilily of criticol resources such os
skllled lobour ond replocement ossets ond the obility to toke
molnlenonce outoges in criticol focilities moy influence the timing o[
expendifures.
PCBs
The Environment Conodo regulotions, enocted under rhe Conodion
Environmentol Protection Ac| I 999, govern the monogement,
storoge ond disposol of PCBs bosed on certoin criterio, including
type o[ equipmenl, in-use stotus, ond PC&contominotion thresholds.
Under current regulotions, Hydro One's PCBs hove to be disposed of
by the end ol 2025, with the exception of specificolly exempted
equipment. Contominoted equipment will generolly be reploced, or
will be decontominoted by removing PCBcontominoted lnsuloting oil
ond relro filling with replocement oil thot contoins PCBs in
concentrotions of less thon 2 ppm.
The Compony's best estimote of the totol estimoted future
expenditures to comply with cunent PCB regulotions is $'158 million
(20.l5 - $ 168 million). These expenditures ore expected to be
incurred over the period {ron 2Ol7 to 2025. As o result of its onnuol
review o[ environmentol liobilitles, the Compony recorded o
revoluotion odjustment in 20l6 to reduce the PCB environmentol
lrobiliry by $ I million (2015 - $24 millionl.
[ond Assessment ond Remediotion
The Compony's best estimote of the totol estimoted future
expenditures to complete its lond ossessment ond remediotion
progrom is $66 million (20,15 - $61 million). These expendibres ore
expected to be incurred over the period fron 2017 to 2032. As o
result of its onnuol review of environmentol liobilities, the Compony
recorded o revoluotion odiustment in 20 l6 lo increose the lond
ossessment ond remediotion environmentol liobiliny by $ lO million
(2015 - $l million).
20. Asset Retirement Obligotions
Hydro One records o liobility for the estimoted future expenditures for
the removol ond disposol of osbeslos-contoining moteriols instolled in
some o[ its focilities ond for the decommissioning o[ specific switching
stotions locoted on unowned sites. Asset retirement obligotions, which
represenl legol obligotions ossocioted with lhe retiremenl of certoin
tongible long-lived ossels, ore computed os the present volue o[ lhe
proiected expenditures lor the future retiremenl ol specilic ossets ond
ore recognized in the period in which the liobiliry is incurred, if o
reosonoble estimote of foir volue con be mode. lf the ossel remoins in
seNice ot the recognition dote, the present volue of the liobility is
odded to lhe corrying omount of the ossocioted ossel in the period
the liobiliry is incurred ond this odditionol corrying omount is
deprecioted over the remoining life of the osset. lf on osset relirement
obligotion is recorded in respect of on outo{-service osset, the osset
retirement cost is chorged to results of operotions. Subsequent to lhe
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
HYDRo oNE LmrrED oNE oF NoRTH AMERre',qjoUiffrFllfl[EeHgrs sz
Schedule 3, Page 89 of 167
=zzo.>r
6-.
E66o
,,2fr(,<om=zad\mI
3
O
o
o
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
initiol recognition, the liobility is odiusted for ony revisions to the
estimoted future cosh flows ossocioted with the osset retirement
obligotion, which con occur due to o number of foctors including, but
not limited to, cost escolotion, chonges in technology opplicoble to
lhe ossets to be retired, chonges in legislotion or regulotions, os well
os for occretion of the liobility due to the possoge of time until the
obligotion is settled. Depreciotion expense is odiusted prospectively
for ony increoses or decreoses to the corrying omount of the
ossocioted ossel.
ln determining the omounts to be recorded os ossel retiremenl
obligotions, the Compony estimotes the current foir volue Ior
completing required work ond mokes ossumptions os to when lhe
future expenditures will octuolly be incurred, in order to generote
future cosh flow informolion. A long-term inflotion ossumption of
opproximolely 2% hos been used to express these cunent cost
eslimoles os estimoted future expenditures. Future expenditures hove
been discounted using foctors ronging from opproximotely 3.0% to
5.0%, depending on the oppropriote role for the period when
expenditures ore expected to be incurred. All foctors used in
estimoting the Compony's osset retirement obligotions represenl
monogement's best estimoles of the cost required to meet exisling
legislotion or regulotions. However, it is reosonobly possible thot
numbers or volumes of conlominoted ossels, cost estimotes to perform
work, inflotion ossumptlons ond the ossumed pottern of onnuol cosh
flows moy differ significontly from the Compony's current ossumptions.
Asset reliremenl obligotions ore reviewed onnuolly or more frequently
if significont chonges in regulotions or olher relevonl foctors occur.
Estimole chonges ore occounted for prospectively.
Al December 3 I , 201 6, Hydro One hod recorded osset reliremenl
obligotions of $9 milllon {201 5 - $9 million), primorily consisling of
the eslimoted future expenditures ossocioted with the removol ond
disposol of osbestos'contoining moteriols instolled in some of its
focilities. The omount o[ inlerest recorded is nominol.
2l . Shore Copitol
Common Shores
The Compony is outhorized io issue on unlimited number of common
shores. At December 3 l, 20.l 6 ond 20 I 5, the Compony hod
595 million common shores issued ond outstonding.
The omount ond timing o[ ony dividends poyoble by Hydro One is ot
the discretion of the Hydro One Boord of Directors ond is estoblished
on the bosis of Hydro One's results ol operotions, mointenonce of its
deemed regulotory copitol shucture, finonciol condition, cosh
requiremenls, the sotisfoction of solvency tests imposed by corporote
lows for the declorotion ond poyment of dividends ond other foctors
lhot the Boord of Directors moy consider relevont.
Common Shore Offerings
ln November 20,l5, Hydro One ond the Province completed on
initiol public offering (lPO) on the Toronlo Stock Exchonge of
opproximotely l5% of its 595 million outstonding common shores. ln
April 2016, the Province completed o secondory offering of
opproximotely 83.3 million or l4% common shores o[ Hydro One on
lhe Toronlo Stock Exchonge. Hydro One did not receive ony of the
proceeds from the sole ol the common shores by the Province.
Preferred Shores
The Compony is outhorized to issue on unlimited number of preferred
shores, issuoble in series. At December 3,l, 20,l6, two series of
prefened shores ore outhorized for issuonce: the Series I preferred
shores ond the Series 2 preferred shores. At December 3,1, 2016,
the Compony hod ,l6,220,000 Series 1 prefened shores ond no
Series 2 preferred shores issued ond outstonding.
Hydro One moy from time lo time issue preferred shores in one or
more series. Prior to issuing shores in o series, the Hydro One Boord
of Directors is required to fix the number of shores in the series ond
determine the designotion, rights, privileges, restrictions ond
conditions ottoching to thot series of prefened shores. Holders of
Hydro One's preferred shores ore not entitled to receive notice of, to
ottend or lo vote ot ony meeting of the shoreholders of Hydro One
except thot votes moy be gronted to o series of prefened shores
when dividends hove not been poid on ony one or more series os
determined by the opplicoble series provisions. Eoch series o[
preferred shores ronks on porit/ with every other series of preferred
shores, ond ore entitled to o preference over the common shores ond
ony other shores ronking iunior to the preferred shores, with respect to
dividends ond the distribution o[ ossets ond return of copitol in the
event of the liquidotion, dissolution or winding up of Hydro One.
For the period commencing from the dote of issue o[ the Series I
preferred shores ond ending on ond including November 19,2020,
the holders of Series 1 prefened shores ore entitled to receive lixed
cumulotive pre{erentiol dividends ol $ I .0625 per shore per yeor, if
ond when declored by the Boord of Directors, poyoble quorterly. The
dividend rote will reset on November 20,2O2O ond every five yeors
thereofter ot o role equol to the sum of the then fiveyeor Government
o[ Conodo bond yield ond 3.53%. The Series 1 prefened shores will
not be redeemoble by Hydro One prior to November 20, 2O2O,6ut
will be redeemoble by Hydro One on November 20, 2020 ond on
November 20 o{ every fifth yeor thereofter ol o redemption price
equol to $25.00 for eoch Series 1 prefened shore redeemed, plus
ony occrued or unpoid dividends. The holders of Series 1 prelerred
shores will hove the right, ot their option, on November 20, 2O2O
ond on November 20 o[ every flfth yeor thereofter, lo convert oll or
ony of their Series 1 prefened shores into Series 2 prefened shores
Exhibit No. 4
Case Nos. AVU-E-l7- and AVU-G-I7-
i.Lop"r,Hydro one
o
88 HYDRO ONE LIMITED 2016 ANNUAL REPORT TSX: H
Schedule 3, Page 90 of 167
o
on o oneforone bosis, subiect lo certoin restrictions on conversion. At
December 3l , 2016, no preferred shore dividends were in oneors.
The holders of Series 2 prefened shores will be entitled to receive
quorterly flooting rote cumulotive dividends, if ond when declored by
the Boord of Directors, ot o rote equol to the sum o[ the then three
month Government of Conodo treosury bill rote ond 3.53% os reset
quorterly. The Serles 2 preferred shores will not be redeemoble by
Hydro One prior lo November 20,2020, but will be redeemoble
by Hydro One ot o redemption price equol to $25.00 for eoch
Series 2 preferred shore redeemed, if redeemed on November 20,
2025 or on November 20 of every fifth yeor thereofter, or $25.50
for eoch Series 2 prefened shore redeemed, i[ redeemed on ony
other dote oher November 20,2020, in eoch cose plus ony
Common shores issued - purchose ond concellolion of preferred shores /ci
Acquisition of Hydro One Inc. fd/
Common shores of Hydro One lnc. ocquired by Hydro One
Common shores of Hydro One issued to Province
Prefened shores of Hydro One issued to Province
Common shores issued /e/
occrued or unpoid dividends. The holders of Series 2 prelerred
shores will hove the right, ot their option, on November 20,2025
ond on November 20 of every fihh yeor thereofter, to conveil oll or
ony of their Series 2 preferred shores into Series 1 preferred shores
on o oneforone bosis, subiect to certoin reslrictions on conversion.
Reorgonizoiion
Prior to the completion of the lPO, Hydro One ond Hydro One lnc.
completed o series of tronsoctions (PrelPO Tronsoctions) thot resulted
in, omong other things, on October 3 I , 20,) 5, Hydro One ocquiring
oll of the issued ond outstonding shores of Hydro One Inc. from the
Province ond issuing new common shores ond prefened shores to fie
Province.
323 (323)
13 4411
3,023
418
2,600
The followlng tobles present the chonges to common ond preferred shores os o result of PrelPO Tronsoctions, os well os the movement in the
number of common ond preferred shores during the yeor ended December 3 ,l , 20,)5. There wos no movement in common or pre{ened shores
during the yeor ended December 3 I , 20 I 6.
Preferred Shores
of Common Shores Tem
o
Tolol PrelPO Tronsoctions odluslrnsll 2,505 418 (323)
lnunber of shores)Common Shores
Preferred Shores
Equity Temporory Equity
Number of shores -Jonuory l, 2015 /o/
Common shores issued /b/
PrelPO Tronsoctions:
Common shores issued - purchose ond concellotion of preferred shores ki
Acquisition of Hydro One lnc. /di
Common shores of Hydro One lnc. ocquired by Hydro One
Common shores of Hydro One issued lo Province
Prelerred shores of Hydro One issued to Province
Common shores issued /e/
Common shores consolidotion /f/
r 00,000
r 00,000
2,640
1102,640)
r 2, 192,500,000
2,600,000,000
(r4,202,600,000)
t2,920,000
(1 2,920,000)
16,720,OO0
a7z6> --{
6-.
EdaOi91-fra
=oMEza--r >a1mq
3
Number o[ shores - December 3 1, 201 5 595,000,000 t6,720,o00
(o) At Jonuory I , 201 5, oll common ond prelerred shores represent ]he shores o[ Hydro One lnc.
{b) On August 31, 2015, Hydro One wos incorporoted under the Business Corporotions Acl (Ontorio} ond issued I 00,O00 common shores lo the Province for
proceeds of $100,000.
(c) On October 3t, 2015, Hydro One lnc. purchosed ond concelled 12,920,0O0 preferred shores of Hydro One lnc. previously held by the Province {or
concellotion ol o price equol to the redemplion price of the preferred shores totolling $323 million, which wos sotisfied by lhe issuonce to fie Province of
2,640 common shores of Hydro One lnc.
(d) On October 31, 2015, oll ol the issued ond outslonding common shores of Hydro One lnc. were ocquired by Hydro One from fie Province in relurn lor
12,197,500,000 common shores of Hydro One ond 16,220,000 Series I preferred shores of Hydro One.
(e) On November 4,2O15, Hydro One issued 2.6 billion common shores to the Province for proceeds of $2.6 billion.
(f) On November 4,2O15,lhe common shores of Hydro One were consolidoted by woy of orticles of omendment opproved by the Province os sole
shoreholder so hot, ofter such consolidolion, 595,000,000 common shores of Hydro One were issued ond outstonding.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
HYDRo oNE LmrrED oNE or NoRTH AMERrg',qjdUifrrFllflf6gHg,es gc
Schedule 3, Page 9l of167
o
o
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shore Ownership Restrictions
Ihe Electricity Act lmposes shore ownership restrictions on securities of
Hydro One corrying o voting righl (Votlng Securities). These
restrictions provide thot no person or compony (or combinotion of
persons or componies octing iointly or in concert) moy beneficiolly
own or exercise conlrol or direction over more thon l0% of ony closs
or series of Voting Securities, including common shores of the
Compony (Shore Ownership Restrictions). The Shore Ownership
Restrictions do not opply to Voting Securities held by the Province, nor
to on underwriler who holds Voting Securities solely {or the purpose of
distributing those securitles to purchosers who comply with the Shore
Ownership Reskictions.
22. Dividends
ln 2016, prefened shore dividends in the omount of $19 million
(20,)5 - $13 millionl ond common shore dividends in the omount of
$577 nillion (20.l5 - $875 million) were declored. The 2016
common shore dividends inclvde $77 million for the post-lPO period
Yeor ended December 3l
lrom November 5 to December 31 , 20]5, ond $500 million for the
yeor ended December 3 l, 20,l6.
ln August 2015, Hydro One declored o dividend in-kind on its
common shores poyoble in oll of the issued ond outstonding shores of
Hydro One Brompton (see note 4).
23. Eornings Per Shore
Bosic eornings per common shore (EPS) is colculoted by dividing net
income ottributoble lo common shoreholders of Hydro One by lhe
weighted overoge number of common shores outstonding. Diluted
EPS ls colculoled by dividing net income ottributoble to common
shoreholders of Hydro One by the welghted overoge number of
common shores outstonding odiusted for lhe effects o[ potentiolly
dilutive stock-bosed compensotion plons, including the shore gront
plons ond the Longlerm Incentive Plon, whlch ore colculoted using
the treosury stock method.
2016 20r 5
o
Net income ottributoble to common shoreholders lmillions of dollors)
Weighted overoge number of shores
Bosic
Effect of dilulive stock-bosed compensotion plons /Note 24i
721
595,000,000
1,700,823
690
496,272,733
94,691
Diluted
EPS
Bosic
Diluted
596,700,823 496,367,424
$1.21
$1.21
$1.3e
$r.3e
Pro formo Adiusted non-GAAP Bosic ond
Diluted EPS
The following pro formo odiusted nonGAAP bosic ond dilued EPS
hos been prepored by monogemenl on o supplementory bosis which
ossumes thol the totol number of common shores outstonding wos
595,000,000 in eoch of the yeors ended December 3 I , 20 1 6 ond
20,15. The supplementory pro formo disclosure is used internolly by
monogement subsequent to the IPO of Hydro One to ossess the
Yeor ended December 3l
(unoudited)
Compony's performonce ond is considered useful becouse it
eliminotes the impoct of o different number of shores outstonding ond
held by the Province prior to the lPO. EPS is considered on importonl
meosure ond monogement believes thot presenting it for oll periods
bosed on the number o[ outstonding shores on, ond subsequent to, the
IPO provides users with o comporoble bosis to evoluote the operotlons
o{ lhe Compony.
2016 201 5
Nel income ottributoble lo common shoreholders (millions of dollors)
Pro formo weighted overoge number of common shores
Bosic
Effect of dilulive stock-bosed compensotion plons fNote 24/
721
595,000,000
1,700,823
690
59s,000,000
94,69l'
Diluted
Pro lormo odjusted nonCAAP EPS
Bosic
Diluted
596,700,823 595,O94,691
$1.21
$r.2r
$r r6
$r r6o
90 HYDRO ONE tlillTED 2016 ANNUAL REPORT TSX: H
The obove pro formo odiusted non-GAAP bosic ond diluted EPS does not hove ony stondordized meoning in US GAAP
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 92 of 167
o
o
24. Stock-bosed Compensotion
Shore Gront Plons
Al December 3 I , 201 6, Hydro One hod two shore gront plons
(Shore Gront Plons), one for the benefit of certoin members of the
Power Workers' Union (the PWU Shore Gront Plon) ond one for the
benefit of certoin members of The Society of Energy Professionols {the
Society Shore Gront Plonl.
The PWU Shore Gront Plon provides for the issuonce o[ common
shores o[ Hydro One from treosury to cerloin eligible members of the
Power Workers' Union onnuolly, commencing on April 1 , 2017 ond
continuing until the eorlier of April I , 2028 or the dote on eligible
employee no longer meets lhe eligibility crilerio o[ the PWU Shore
Gront Plon. To be eligible, on employee musl be o member of the
Pension Plon on April 1, 20.15, be employed on the dote onnuol
shore issuonce occurs ond continue to hove under 35 yeors of service.
The requisite service period for the PWU Shore Gront Plon begins on
July 3, 2015, which is the dote the shore gront plon wos rotified by
the PWU. The number of common shores issued onnuolly to eoch
eligible employee will be equol to 2.7% of such eligible employee's
solory os ot April l, 20,)5, divided by $20.50, being rhe price of the
common shores of Hydro One in the lPO. The oggregote number of
common shores issuoble under the PWU Shore Gront Plon sholl not
exceed 3,98 l,763 common shores. ln 2015,3,979,062 common
shores were gronted under the PWU Shore Gront Plon.
The Society Shore Gront Plon provides for the issuonce of common
shores of Hydro One from treosury lo cerloin eligible members o[ The
Society of Energy Professionols onnuolly, commencing on April 1,
Yeor ended December 31, 2016
2O'l 8 ond continuing until fie eorlier of April 1 , 2029 or the dote on
eligible employee no longer meets the eligibilily criterio of the Society
Shore Gront Plon. To be eligible, on employee must be o member of
the Pension Plon on September I , 201 5, be employed on the dote
onnuol shore issuonce occurs ond continue to hove under 35 yeors of
service. Therefore the requisite service period for the Society Shore
Gront Plon begins on September i, 2015. The number of common
shores issued onnuolly to eoch eligible employee will be equol to
2.0% of such ehgible employee's solory os ot September 1 , 201 5,
divided by $20.50, being the price of the common shores of Hydro
One in the lPO. The oggregote number of common shores issuoble
under the Society Shore Gront PIon sholl not exceed 'l ,434,686
common shores. ln 2015, I ,433,292 common shores were gronted
under he Society Shore Gront Plon.
The foir volue o[ the Hydro One Limited 2015 shore gronts of
$l I I million wos estimoted bosed on the grontdote shore price o[
$20.50 ond is recognized using the groded-vesting ofirlbution
method os the shore gronl plons hove both o performonce condition
ond o service condltion. No shores were gronted under the Shore
Gront Plons in 20,16. Totol shore bosed compensotion recognized
during 2016 wos $21 million (2015 - $10 million) ond wos
recorded os o regulotory osset.
A summory of shore gront octivity under the Shore Gront Plons during
yeors ended December 3 I , 20 I 6 ond 201 5 is presented below:
Shore
Gronts
lnumber of common shores)
Weighted-
Averoge
Price
Shore gronts outslonding -Jonuory I , 2016
Gronted lnonvested)
Forfeited
5,412,354
177,9391
$20.50
$20.s0
Shore oronts outstondino - December 3l, 2016 5,334,415 $20.s0
-zzo>r
6-.EdqO
r,2fra
=om=z0r>A1rg
3
Yeor ended December 31, 201 5
Shore
Gronls
(number of common shoresi
Weighted-
Averoge
Price
Shore gronls outstonding -Jonuory I , 2015
Gronted (nonvested)5 ,412,354 $20.50
Shore qronts outstondinq - December 3l , 20,l5 5,412,354 $20.50
o
Directors' DSU Plon
Under the Compony's Directors' DSU Plon, direclors con elect to
receive credit for their onnuol cosh retoiner in o notionol occounl of
DSUs in lieu of cosh. Hydro One's Boord of Directors moy olso
determine from time to time thot speciol circumstonces exist thot would
reosonobly iustify the gront of DSUs to o director os compensotion in
oddition to ony regulor retoiner or lee to which the director is entitled.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
HYDRo oNE LrrnrrED oNE oF NoRTH AMERre',qjouit rfl!cdf6:gfl+gtEs et
Schedule 3, Page 93 of 167
o
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Eoch DSU represents o unit with on underlying volue equivolent to lhe volue of one common shore of the Compony ond is entitled to occrue
common shore dividend equivolents in the form of odditionol DSUs ot the time dividends ore poid, subsequent to declorotion by Hydro One's
Boord of Directors.
Yeor ended December 3l
(nunber of DSUs)2016 20 r5
DSUs outstonding -Jonuory 1
DSUs gronted
20,525
78,558 20,525
DSUs outstondino - December 3l 99,083 20,525
o
For the yeor ended Dmember 3 I , 20,1 6, on expense of $2 million
(2015 - less thon $l milllon) wos recognized in eornings with
respect to the DSU Plon. At December 3l , 2016, o liobility of
$2 million (December 31 , 2015 - less thon $ I million), reloted to
outstonding DSUs hos been recorded ot the closing price of the
Compony's cornmon shores of $23.58 ond is included in occrued
liobilitles on the Consolidoted Bolonce Sheets.
Employee Shore Ownership Plon
Effective December 1 5, 201 5, Hydro One estoblished on Employee
Shore Ownership Plon {ESOP). Under the ESOP, certoin eligible
monogement ond non-represented employees moy contribule
between 1"/" ond 6% of lheir bose solory towords purchosing
common shores of Hydro One. The Compony motches 50% of the
employee's contributions, up to o moximum Compony contribution of
$25,000 per colendor yeor. In 2016, Compony contributions mode
under the ESOP were $2 million (2015 - $nil).
Long-term lncentive Plon
Effective August 3 1 , 201 5, the Boord o[ Directors of Hydro One
odopted on LTIP. Under the LTIP, long-term incentives ore gronted to
certoin executive ond monogement employees of Hydro One ond its
subsidiories, ond oll equity-bosed owords will be settled in newly
issued shores of Hydro One from treosury, consistent with the
provisions o[ the plon. The oggregote number of shores issuoble
under the LTIP sholl not exceed I I ,900,000 shores o[ Hydro One.
The LTIP provides flexibility to oword o ronge of vehicles, including
reskicted shore units (RSUs), performonce shore units (PSUs), stock
options, shore oppreciotion rights, restricted shores, deferred shore
units ond other shorebosed owords. The mix of vehicles is inlended
to vory by role lo recognize the level of executive occountobility {or
overoll business performonce.
During 2O)6, the Compony gronted owords under its LTIP, consisting
of PSUs ond RSUs, oll of which ore equil'y settled, os follows:
Yeor ended December 3l 2016
Number of
PSUs
Number of
RSUs
Units outslonding -Jonuory 1 , 2016
Units gronted
Units forfeited
235,420
14,82Ol
258,970
14,8201
Units outstonding - December 3l , 20.16 230,600 254,150
The gronl dote totol loir volue of the owords wos $ l2 million
(2015 - $nil) The compensotion expense recognized by the
Compony reloling to lhese owords during 2016 wos $3 million
(201 5 - $nil).
25. Noncontrolling lnterest
On December 16,2O14, tronsmission ossets tololling $526 million
were lronsferred from Hydro One Networks to B2M LP. This wos
[inonced by 60% debt l$316 millionl ond 40% equity ($210 million).
On December 17 , 2014, the Sougeen Olibwoy Notion (SONI
ocquired o 34.2% equity interest in B2M LP for considerotion of
$22 million, representing the foir volue o[ the equity interest ocquired
The SON's iniliol investment in B2M LP consists of $50 million of
Closs A units ond $22 million of Closs B units.
The Closs B unlts hove o mondotory put option which requires thot upon
the occunence of on enforcemenl event (i.e. on event o[ defouh such os
o debt defoult by the SON or insolvency event), Hydro One purchose
the Closs B units of B2M LP for net book volue on the redemption dob.
The noncontrolling inleresl reloting lo the Closs B units is clossified on the
Consolidoted Bolonce Sheet os temporory equily becouse lhe
redemption leoture is outside the control o[ the Compony. The bolonce
of the noncontrolling interest is clossified within equity.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 94 of 167
o
92 HYDRO ONE LIXIITED 20,l6 ANNUAL REPORT TSX: H
O
The following tobles show the movements in noncontrolling interesl for the yeors ended December 3,l, 2016 ond 20.15
Yeor ended December 31, 2016
lnillions of dollors)
Temporory
Equity Equity Totol
Noncontrolling interest -Jonuory 1 , 2016
Distibutions to nonconkolling interest
Net income ottributoble to noncontrolling interest
23
(3)
2
52
(61
4
75
(e)
6
Noncontrolling interest- December 31, 2016 22 50 72
Yeor ended December 31, 2015
(millions of dollors)
Temporory
Equily Equily Totol
Noncontrolling interesl -lonuory 'l , 2015
Distributions to noncontrolling interest
Net income ottributoble lo nonconlrol inlerest
2l
(t)
49
t4)
7
70
(5)
r0
23 52 75Noncontrollirg i.t"!u.l - D"."rb"r 3', 2O15
26. Reloied Porty Tronsoctions
The Province is the moiority shoreholder of Hydro One. The IESO, Ontorio Power Generotion lnc. (OPGI, OEFC, OEB, ond Hydro One Brompton
ore reloted porties to Hydro One becouse lhey ore controlled or significontly influenced by the Province.O
Reloted Porty Tronsoction
Yeor ended December 3l
2016 2015
lmillions of dollors)
Provincel Dividends poid
Common shores issued2
IPO costs subsequently reimbursed by the Province3
451 888
2,600
7
IESO 2,096
1,549
125
32
63
2,318
1,548
127
32
70
Power purchosed
Revenues for tronsmission services
Distribulion revenues reloted to rurol role protection
Diskibution revenues reloted to the supply of electricity to remote northern communities
Funding received reloted to Conservotion ond Demond Monoqement proqroms
OPG Power purchosed
Revenues reloled to provision of construction ond equipment mointenonce services
Costs expensed reloted to the purchose of services
I
7
6
5
I
=zzo>r-m6-.
E6aO
1,2fr4,<om=zoa-mI
3
OEFC Poyments in lieu of corporote income toxesa
Power purchosed from power controcts odminislered by the OEFC 1
2,933
6
Ifeeidnoted effective October 3l 201
OEB OEB fees lt 12
Hydro One Bromptonr Revenues from monooemenl, odministrotive ond smort meler ne]work services
lOnAugust3l,20l5,HydroOnelnc.complebdthespinoffof itssubsidiory, l-lydroOneBromptcn,totheProvince.
2 On November 4, 2O15, Hydro One issued common shores to the Province for proceeds of $2.6 billion.
3ln20l5,HydroOneincurredcertoinlPOrelotedqpensestotolling$Tmillion,whichweresubsequentlyreimbursedtotheComponybytheProvince.
I ln 2015, Hydro One mode Plls to the OEFC totolling $2.9 billion, including Deporture Tox of $2.6 billion.
Soles to ond purchoses from reloted porties ore bosed on the requirements of the OEB's Affiliote Relotionships Code. Outstonding bolonces ot
period end ore interest free ond settled in cosh.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDro oNE Lr,trED oNE oF NoRTH AMERTe\',LSUUTIF$tilEepgres es
Schedule 3, Page 95 of167
o
o
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The omounts due to ond from reloted porties os o result o[ the tronsoctions referred to obove ore os follows
December 3l
lmillions of dollors)2016 20) 5
Due from reloted porties
Due lo reloted portiesl
r58
11471
t9l
(r 38)
t lncluded in due to reloted porties ol December 3 I , 201 6 ore omounts owing to lhe IESO in respect of power purchoses of $ I 43 million (201 5 -
$134 million).
27. Consolidoted Stotements of Cosh Flows
The chonges in non-cosh bolonces reloted to operotions consisl of the following
Yeor ended December 3l
lmillions of dollors)2016 201 5
o
Accounls receivoble
Due from reloled porties
Moteriols ond supplies
Prepoid expenses ond olher ossets
Accounts poyoble
Accrued liobiliries
Due to reloted porties
Accrued interest
Long-term occounts poyoble ond other liobilities
Post-retireTent ond postemploymen&engj[lgllly
(60)
2
(15)
t9
53
9
9
6
78
245
JJ
2
4
123l
(t s)
(8eI
t+l
60
134 ,'t 'l
Copitol Expenditures
The following toble reconclles between investments ln properly, plont ond equipment ond the omount presented in the Consolidoted Stotements of
Cosh Flows ofter occounting for copitolized depreciotion ond the net chonge in reloted occruols:
Yeor ended December 3l
lmillions of dollors) 2016 2015
Copitol investments in properry, plont ond equipment
Copitolized depreclotion ond net chonge in occruols included in copltol investments
in property, plont ond equipment
(r,630) | ,623)
30 2B
Copitol expenditures - property, plont ond equipment (r,600) (1 ,5esl
The following toble reconciles between investments in intongible ossels ond the omount presenled in the Consolidoted Stotements o[ Cosh Flows
ofter occounting for the net chonge in reloted occruols:
Yeor ended December 3l
lmillions of dollors) 2016 20 I 5
Copltol investments in intongible ossets
Net chonge in occruols included in copitol investments in intongible ossets
{40)
3
167l
6
Copitol expenditures - intongible ossets (61)l37l
o
94 HYDRO ONE tlitllED 2016 ANNUAL REPORT TSX: H
Exhibit No. 4
Case Nos. AVU-E-l7- and AVU-G-l7-
i.Lop".,Hydro One
Schedule 3, Page 96 of 167
o
Copitol Contributions
Hydro One enters into controcts governed by the OEB Tronsmission
System Code when o tronsmission customer requests o new or
upgroded lronsmission conneclion. The customer is required to moke
o copitol contribution to Hydro One bosed on the shortfoll between
the present volue of the costs o[ the connection focility ond the present
volue of revenues. The presenl volue of revenues is bosed on on
estimote o[ lood forecost for the period of the controct with Hydro
One. Once the connection focility is commissioned, in occordonce
Supplementory I nformotion
Yeor ended December 3l
(millions of dollors)
with the OEB Tronsmission System Code, Hydro One will periodicolly
reossess the estimoted of lood forecost which will leod to o decreose,
or on increose in the copitol contributions from the customer. The
increose or decreose in copitol contributions is recorded directly to
fixed ossets in service. ln 20,l6, copitol contributions from these
reossessments totolled $2,l million (2015 - $52 million), which
represents the difference between the revised lood forecost of
electricity tronsmitted compored to the lood forecost in the originol
conlrocl, sublect to certoin odiustments.
2016 20 r5
Net interest poid
lncome loxes / Plls poid
418
32
416
2,933
o
28. Contingencies
Legol Proceedings
Hydro One is involved in vorious lowsuits, cloims ond regulotory
proceedings in the normol course of business. ln the opinion of
monogement, the outcome of such motters will not hove o moteriol
odverse effect on the Compony's consolidoled linonciol position,
resulb of operotions or cosh flows.
Hydro One lnc., Hydro One Networks, Hydro One Remote
Communities, ond Norfolk Power Distribution lnc. ore defendonls in o
closs oction suit in which the represenlolive plointiff is seeking up to
$ I 25 million in domoges reloted to ollegotions of improper billing
proctices. A certificotion molion in the closs oction is pending. Due to
the preliminory stoge of legol proceedings, on estimole o[ o possible
loss reloted to this cloim connol be mode.
December 31, 2Ol6
lmillions of dollors)2017
Tronsfer of Assets
The tronsfer orders by whlch the Compony ocquired certoin of
Ontorio Hydro's businesses os of April l, .)999 did not tronsfer litle
to some ossets locoted on Reserves (os delined in lhe lndion Act
(Conodo)). Cunently, the OEFC holds these ossels. Under the lerms
of the tronsfer orders, the Compony is required to monoge these
ossets unlil lt hos obtoined oll consents necessory to complete the
tronsfer of title of these ossets to itself. The Compony connot predict
the oggregote omount thot it moy hove to poy, either on on onnuol or
onetime bosis, to obtoin the required consenls. ln 2016, the
Compony poid opproximotely $ 1 million (20,15 - $ I million) in
respecl of consents obtoined. lf fie Compony connot obtoin the
required consents, the OEFC will continue to hold these ossets for on
indefinile period of time. lf the Compony connol reoch o solisfoclory
settlement, it moy hove to relocote these ossets to other locotions ot o
cosl thot could be substontiol or, in o limited number of coses, to
obondon o line ond reploce it with dieselgenerotion focilities. The
costs reloting to these ossets could hove o moteriol odverse effect on
the Compony's results of operotions if the Compony is not oble to
recover them in future rote orders.
2019 2020 2021 Thereofter
29. Commitments
The following toble presents o summory of Hydro One's commitmenls under leoses, outsourcing ond olher ogreemenls due in the next 5 yeors ond
thereofter.
20r I
az
<e
62Poa(\;91Zfr6
=om=zor>a4mv
3
o r65
t7
lt
Outsourcing ogreements
Long-term soltwore/meter ogreement
Operoting leose commitments
102
17
t0
94
t6
6
2
17
r0
9
5
2
2
I
3
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
HYDRo oNE LlrlIED oNE oF NoRTH AMERr(1',sil0uu2rFlltf6g[flg'rs ct
Schedule 3, Page 97 of 167
o
o
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brook{ield Globol lntegroted Solutions (formerly Brookfield Johnson
Controls Conodo tP) (Brookfield) provides services to Hydro One,
including focilities monogemenl ond execution o[ cerloin copitol
proiects os deemed required by the Compony. The ogreement with
Brookfield for these services expires in December 2024.
Long-term softwore/meter ogreemenl
Trilliont Holdings Inc. ond Trilliont Networks (Conodo) lnc.
(collectively Trilliont) provide services to Hydro One for the supply,
moinlenonce ond support services for smorl meters ond reloted
hordwore ond softwore, including odditionol softwore licences, os
well os certoin professionol services. The ogreemenl with Trilliont for
these services expires in December 2025, bul Hydro One hos the
option to renew for on odditionol term of live yeors ot its sole
discretion.
Operoting Leoses
Hydro One is committed os lessee lo inevocoble operoting leose
controcts for buildings used in odminislrotive ond servicereloted
functions ond storing telecommunicotions equipment. These leoses
hove typicol terms of between three ond five yeors, but severol leoses
hove lesser or greoler terms to oddress speciol circumstonces ond/or
opportunities. Renewol options, which ore generolly prevolent in mosl
leoses, hove similor terms of three lo five yeors. All leoses include o
clouse to enoble upword revision of the rentol chorge on on onnuol
bosis or on renewol occording to prevoiling morket conditions or
preestoblished rents. There ore no restrictions ploced upon Hydro
One by entering into these leoses. During the yeor ended
December 3.1, 20,16, the Compony mode leose poyments totolling
$ I I millton (2015 - $7 millionl.
Other Commitments
Prudentiol Support
Purchosers of electricity in Ontorio, through the IESO, ore required to
provide security to mitigote the risk of their de{oult bosed on their
expected octivity in the morket. As ot December 3l , 2016, Hydro
One lnc. provided prudentiol support to the IESO on beholf o{ its
subsidiories using porentol guorontees of $329 million (20i5 -
$329 million), ond on beholl of o distributor using guorontees ol
$l million (2015 - $i millionl. ln oddition, os ot December 31,
201 6, Hydro One Inc. provided letters of credit in the omount of
$24 million (2015 - $15 million), including $17 million (2015 -
$ l5 million) to the IESO. The IESO could drow on these guorontees
ond,/or letters of credit i[ these subsidiories or dislributor foil to moke
o poyment required by o defoult nolice issued by the IESO. The
moximum potentiol poyment is the foce volue of ony letters o[ credil
plus lhe omounl of the porentol guorontees.
Retirement Compensotion Arrongements
Bonk letters of credit hove been issued to provide security for Hydro
One lnc.'s liobility under the terms of o trust fund estoblished pursuont
to the supplementory pension plon for eligible employees of Hydro
One Inc. The supplementory pension plon trustee is required to drow
upon these letters of credit if Hydro One Inc. ls in defoult of its
obligotlons under the terms of this plon. Such obligotions include the
requiremenl to provide the trustee with on onnuol octuoriol report os
well os letters of credit suflicient to secure Hydro One lnc.'s liobility
under the plon, to poy benefits poyoble under the plon ond to poy
the lefler ol credit fee. The moximum potentiol poyment is the foce
volue of the letters of credit. At December 3 I , 201 6, Hydro One
Inc. hod letters of credit of $
.]50 million (20.l5 - $ 139 million)
oulstonding reloting to retirement compensotion orrongements.
The designotion of segments hos been bosed on o combinotion of
regulotory stotus ond the noture ol the services provided. Operoting
segments of the Compony ore determined bosed on informotion used
by lhe chief operoting decision moker in deciding how to ollocote
resources ond evoluole the performonce of eoch of the segments. The
Compony evoluotes segment perlormonce bosed on income before
finoncing chorges ond income toxes from continuing operotions
(excluding certoin ollocoted corporote governonce costs).
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-I7-
i.Lop"r,Hydro one
O
96 HYDTOONELtmtrED 2016ANNUALREPORT TSX:H
Schedule 3, Page 98 of 167
Outsourcin g Agreements
lnergi LP (lnergil, on offiliote of Copgemini Conodo lnc., provides
services to Hydro One, including settlements, source to poy services,
poy operotions services, informotion technology, finonce ond
occounting services. The ogreement with lnergi for these services
expires in December 2019. ln oddition, lnergi provides cuslomer
service operotions outsourcing services to Hydro One. The ogreement
for these services expires in Februory 201 8.
30. Segmented Reporting
Hydro One hos three reportoble segments:
o The Tronsmission Business, which comprises the tronsmission of
high vohoge elechicity ocross lhe province, inlerconnecting more
thon 70 locol distribution componies ond certoin lorge directly
connected induskiol customers throughout the Ontorio
electricity grid;
o The Diskibution Business, which comprlses the delivery o[ eleckicity
to end customers ond certoin other municipol electricity distributors;
ond
o Other Business, which includes certoin corporote octivities ond the
operolions of the Compony's telecommunicolions business.
o
The occounting policies followed by the segments ore the some os lhose described in the summory of significont occounting policies (see note 2).
Yeor ended December 31, 2016
lmillions of dollors)Tronsmission Diskibution Other Consolidoted
Revenues
Purchosed power
Operotion, moinlenonce ond odministrotion
Depreciotion ond omortizotion
1,584
382
390
4,915
3,427
608
379
6,552
3,427
1,069
778
53
79
I
lncome (loss) before finoncing chorges ond income toxes 812 501 (35) 1,278
Copitol investments 988 703 6 1,697
Yeor ended December 31, 2015
(millions of dollors)Tronsm ission Distribution Other Consolidoted
Revenues
Purchosed power
Operotion, mointenonce ond odminislrotion
Depreciotion ond omorlizotion
r,536
414
374
4,949
3,450
OJJ
380
53
88
5
6,538
3,450
r ,135
Income (loss) before linoncing chorges ond income toxes 748 486 {40)1,194
Copitol investments 943 711 I r,663
o Totol Assets by Segment:
December 3 I
(mtllions of dollors)2016 2015
Tronsmission
Distribution
Other
13,007
9,337
3,007
12,045
9,200
3,049
Totol ossets 25,351 24,294
All revenues, costs ond ossets, os the cose moy be, ore eorned, incurred or held in Conodo
31. SubsequentEvents
Dividends
On Februory 9, 2017 , preferred shore dividends in the omount of
$4 million ond common shore dividends in the omount of
$I25 million ($0.2I per common shore) were declored.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
HYDRo oNE umrrED oNE or NoRTH AMERTg',LSUUTTFIlQIfEgHgrs cz
Schedule 3, Page 99 of 167
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BOARD OF DIRECTORS
& SENIOR LEADERSHIP TEAM
o
BOARD OF DIRECTORS
t Dovid Denison, o.c., FcpA, rcA
Choir of the Boord
2 lon Bourne, rcD.D, F.rcD
Boord Choir, Bollord Power Systems
3 Chorles Brindomour
CEO, lntoct Finonciol Corporolion
a Morcello (Morcl Coiro
Vice Choirmon,
Restouronls Bronds lnternotionol
5 Christie Clork, rcr, rcm
Director, Loblow Componies
O CreorgeCooke
Boord Choir,
OMERS Administrotion Corp
Z Moqgoret (Morionne) Horris
Boord Choir, IIROC
8 Jomes Hinds
Former Boord Choir, IESO ond OPA
9 Kothryn J. Jockson, rr.o
Director, Porilond Generol Electric
10 Roberlo Jomieson o.c., c.r',r., r.p.c, [.8, [.D lHoN)
President ond CEO, lndspire
'll Hon. Fronces [. lonkin, o.c., p.c., c.M.
Member of Senote of Conodo
tz Philip S. Orsino, o.c., FcPA, FcA
Director, Bonk of Montreol
13 Jone Peverett, rcMA, rcD.D
Director, Conodion lmperiol
Bonk of Commerce
la Gole Rubenstein
Portner, Goodmons LLP
t5 Moyo fthmidr
President ond CEO, Hydro One Limited
For detoiled biogrophicol informotion
of Hydro One Limited boord nembers
ond senior leodership, go to
) HydroOne.com/lnveslors
SENIOR LEADERSH!P TEAAA
t5 Molo Schmidt
President ond CEO
16 Poul H. Borry
EVP, Strotegy
& Corporote Development
17 Greg Kircly
Chief Operoting Officer
t8 Judy McKellor
EVB Chief Humon
Resources Officer
19 Ferio Pugliese
EVP, Customer Core
& Corporote Affoirs
20 Jomes Uomiel Scorlefi
EVP, Chief Legol Officer
2l Michoel Vels
Chief Finonctol Of f icer
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-I7-
V.Lop"r,Hydro one
(9
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98 HYDXO ONE II'{ITED 2OI6 ANNUAI. REPORT TSX: H
Schedule 3, Page 100 of167
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CORPORATE & SHAREHOTDER
INFORMATION
CORPORATE OFFICES
483 Boy Slreet, South Tower
Toronto, Ontorio, M5G 2P5
r 4r6.345.5000
www.HydroOne.com
CUSTOMER INQUIRIES
Cuslomer Service:
1.888.664.9376 or
[e-mail]
Report on Emergency {24 hours):
r800.434.r23s
SHAREHOLDER SERVICES
l[ you ore o registered shoreholder ond hove
inquiries regording your occounl, wish to chonge
your nome or oddress, or hove questions
oboul dividends, duplicote moilings, lost stock
certificoles, shore tronsfers or eslote settlements,
contocl our tronsfer ogenl ond registror:
Compulershore Trust Compony of Conodo
100 University Avenue, 8lh Floor
Toronlo, ON M5J 2Yl
1.5l4.982 7555 or 1.800.564.6253
[e-mail]
INSTITUTIONAL INVESTORS AND ANALYSTS
lnsiitutionol inveslors, securities onolysts ond
others requiring oddllionol finonciol informotion
con visil HydroOne.com/lnveslors
or contocl us ot:
1.416.345.6867
lnveslor. [e-mail] or
[e-mail]
MEDIA INQUIRIES
l.4l6,345.6868 or 1.877 506.7584
[e-mail]
STOCK EXCHANGE LISTING
Toronlo Stock Exchonge (TSX): H
lcusrP #4488r r208)
EQUITY INDEX INCLUSIONS
DowJones Select Utilities lConodo) lndex
FTSE Al -World lndex Serles
MSCI World {Conodo) lndex
S&PfSX Composile Index
S&P/ISX Utilities lndex
S&P/ISX Composite Dividend lndex
S&P/TSX Composite low Voloti iiy lndex
DEBT SECURITIES
For detoils of the public debt securiiies of
Hydro One ond its subsldiories, pleose refer
to the "Debt lnformotion" section under
HydroOne.com/l nvestors
INDEPENDENT AUDITORS
KPMG I.I,P
ON.LINE INFORMATION
Hydro One is committed to open ond full
finonciol disclosure ond best proclices in
corporote governonce. We invile you lo
visil lhe lnveslor Relolions section ol
HydroOne.com/lnvestorRelotions where you
will tind oddilionol informotion obout our
business, including evenls ond presenlolions,
news releoses, regulolory filings, governonce
proclices, corporote sociol responsibility ond
our conlinuous disclosure moteriols, including
quorterly finonciol releoses, onnuol informotion
forms ond monogement informolion circulors.
You moy olso subscribe to our news by emoil
to outomoticolly receive Hydro One news
releoses electronicolly.
COMMON SHARE DIVIDEND INFORMATION
2017 Expected Dividend Dotes
Record Dote*: Poyment Dote*:
Morch 14,2017
June l3,2Ol7
September 12,2017
December l2,2Ol7
* Subiect to Bard opprovol
Unless indicoted olherwise, oll common shore
dividends poid by Hydro One ore designoted
os "eligible" dividends for lhe purposes o{
the /ncome Iox Act (Conodo) ond ony similor
provincioi legislotion.
DIVIDEND REINVESTMENT PLAN (DRIP)
Hydro One offers o convenient dividend
reinvestmenl progrom for eligible shoreholders
to purchose odditionol Hydro One shores by
relnvesiing their cosh dividends withoul incurring
brokeroge or odminislrolion fees. For plon
informotion ond enrolmenl moleriols or to
eorn more obout lhe Hydro One DRIB visit
HydroOne.com/DRlP or Computershore Trusl
Compony o[ Conodo ol lnvestorCentre.com/
HydroOne
SOCIAL MEDIA
Follow Hydro One on:
Morch 31, 2012
.lune 30, 20lZ
September 29,2017
December 29,2017
E rwrrrrn
!,j uir"...omlHydroOne
E ffi.i,"%neorricior
@ u;m:lnhydroone
il 111.1xps1"
ll[ link"din..omlcompony/hydro-one
(9 Stoy uplo'dote with the lotest
Hydro One investor informotion ot
) HydroOne.com/lnvestors
SUSTAINABILITY
Hydro One is commitled lo continuing lo
grow responsibly ond we focus our sociol
ond environmentol sustoinobility elforts where
we con moke lhe mosl meoningful impocts
on both. To leorn more, visit HydroOne.com/
OurCommilment
CAUTION REGARDING FORWARD.LOOKING INFORIITAIION AND OTHER RISKS
This onnuol report includes forwordlooking stolements oboul lhe finonciol condition, plons ond prospects
of Hydro One thot involve risks ond uncertoinlies ond nonGAAP meosures thot ore detoiled in the 'Risk
Monogement ond Risk Foctors', "Forword-Looking Stotements ond Informotion", ond "Non-GAAP Meosures"
sections of the MD&A contoined herein, which should be rmd in coniunction with oll sections of this document.
&THIS DOCUMENT IS PRIMARITY PUBTISHED IN EI-ECTRONIC FORMAT TO MINIMIZE ITS
ENVIRONMENTAI. IMPACT. PTEASE THINK BEFORE PRINTING.
THE FIBRE USED IN THE MANUFACTURE OF THE STOCK OF THE PRINTED VERSION COMES
FROM WELI-.MANAGED FORESTS, CONTROTTED SOURCES AND RECYCLED WOOD OR FIBRE.
AWARDS
2016
@ 2017 Hydro One limiled
Printed in Conodo
Design by Bould Creotive
bouldcreolive.com
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
HYDxo oNE LmrrED oNE oF NoRTH AMERrg',sLdFiStT lffllt6 UhEEs ee
Schedule 3, Page l0l of 167
IFR
AWARDS
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HYDRO ONE TITIITED IS ONE OF NORTH AMERICA'S LARGEST
ELECTRIC UTILITIES, WITH A REGULATED TRANSMISSION GRID
TRANSMITTING 98 PERCENT OF ONTARIO'S ELECTRIC POWER,
AND A REGULATED LOCAT DISTRIBUTION OPERATION DELIVERING
ELECTRICITY TO MORE THAN 1.3 MILLION RESIDENTIAL AND BUSINESS
CUSTOMERS ACROSS 75 PERCENT OF THE GEOGRAPHY OF THE PROVINCE
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Hy,^lroOne.com
Case Nos. AVU-E-I 7-_ and AVU-G-I7-_
C. Lopez, Hydro One
Schedule 3, Page 102 of 167
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ANNUAL INFORMATION FORM
FOR HYDRO ONE LIMITED
FOR THE YEAR ENDED DECEMBER 31, 2016
Mareh 27,2017
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 103 of 167
o
o TABLE OF CONTENTS
GLOSSARY I
PRESENTATION OF INFORMATION 4
FORWARD-LOOKING INFORMATION.............. .........4
General Overview 7
THE ELECTRICITY INDUSTRY IN ONTARIO ...........7
Regulation of Transmission and Distribution..............
Transmission
7
8
9
9
Distribution
Recent Legislative Amendments Affecting the Electriciry Industry Generally
RATE-REGULATED UTILITIES. ...........I2
Incorporation and Offi ce
Legislative Provisions Specific to Hydro One
Elimination of Certain Legislation With Respect to Hydro One...............
Secondary Common Share Offering
First Nations and Hydro One Limited Shares
Acquisition of Great Lakes Power
Integration of Haldimand Hydro and Woodstock Hydro
Acquisitions Generally
Other Business
First Nations and Mitis Communities
Health, Safety and Environmental Management
t0
l0
t2
l3
o
Corporate Structure and Subsidiaries
GENERAL DEVELOPMENT OF THE BUSINESS.............. .............14
Incorporation and Initial Public Offering ...................t4
Acquisition of Hydro One Inc t4
t4
l5
l5
l5
l5
26
27
28
30
30
Business Segments t7
Transmission Business t7
Reorganizations
RISK FACTORS
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Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I 7-_
C.Lopez, Hydro One
Schedule 3, Page 104 of 167
DESCRIPTION OF CAPITAL STRUCTURE
o General Description of Capital Structure 3l
32
32
Common Shares
Preferred Shares
MARKET FOR SECURITIES...........33
Trading Price and Volume JJ
DIRECTORS AND OFFICERS.. ...............34
Information Regarding Certain Directors and Executive Officers ........38
Corporate Cease Trade Orders and Bankruptcies. ...........38
Indebtedness of Directors and Executive Officers .39
Relevant Education and Experience .40
.41
.42
Pre-Approval Policies and Procedures
Auditors' Fees.....
AGREEMENTS WITH PRINCIPAL SHAREHOLDER
O
Registration Rights Agreement ............48
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS .............48
Relationships with the Province and Other Parties .48
LEGAL PROCEEDINGS AND REGULATORY ACTIONS.................... ...............5I
TRANSFER AGENT AND REGISTRAR..........
ADDITIONAL INFORMATION............
SCHEDULE *A" HYDRO ONE LIMITED AUDIT COMMITTEE MANDATE 51
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 105 of 167
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GLOSSARY
When used in this annual information form, the following terms have the meanings set forth below unless
expressly indicated otherwise:
"$" or "dollar" means Canadian Dollars.
"2015 Underwriting Agreement" has the meaning given to it under "Material Contracts".
"2016 Underwriting Agreement" has the meaning given to it under "Material Contracts".
"Annual MD&A" means management's discussion and analysis for Hydro One Limited for the year
ended December 31, 2016, as filed on SEDAR under Hydro One Limited's profile at www.sedar.com.
"Board" means the Board of Directors of Hydro One Limited.
"CDM" means conservation and demand management.
"common shares" means the common shares in the capital of Hydro One Limited.
"Custom IR Method" has the meaning given to it under "Business of Hydro One - Transmission
Business - Regulation - Transmission Rate Setting.
"DMS" has the meaning given to it under "Business of Hydro One - Distribution Business - Regulation -
Capital Expenditures".
"Electricity Act" means the Electricity Act, 1998 (Ontario).
"Great Lakes Power" means Great Lakes Power Transmission LP.
"Governance Agreement" means the governance agreement dated November 5,2015 between Hydro
One Limited and the Province.
"G'Wh" means gigawaff-hours.
"Haldimand Hydro" means Haldimand County Utilities Inc.
"Hydro One" or the "Company" have the meanings given to such terms set out under "Presentation of
Information".
"Hydro One Limited" has the meaning given to it under "Presentation of Information".
"Hydro One Inc." has the meaning given to it under "Presentation of Information".
"IESO" means the Independent Electricity System Operator.
"kV" means kilovolt.
"kW" means kilowatt.
"management" has the meaning given to it under "Presentation of Information".
"Market Rules" means the rules made under section 32 of the Electricity Act that are administered by the
IESO.
Exhibit No. 4
Case Nos. AVU-E-17- and AVU-G-17-
i.Lop"r,Hydro one
o
Schedule 3, Page 106 of 167
I
a "NERC" has the meaning given to it under "The Electricity Industry in Ontario - Regulation of
Transmission and Distribution - IESO".
"Norfolk Power" means Norfolk Power Inc
"NPCC" has the meaning given to it under "The Electricity Industry in Ontario - Regulation of
Transmission and Distribution - IESO".
"OBCA" means the Business Corporations lcl (Ontario).
"OEB" means the Ontario Energy Board.
"Ontario" or the "province" has the meaning given to it under "Presentation of Information"
"Ontario Energy Board Act" means the Ontario Energt Board Act, 1998 (Ontario).
"Orillia Power" means Orillia Power Distribution Corporation.
"PCB" means polychlorinated biphenyls.
"Province" has the meaning given to it under "Presentation of Information".
"Registration Rights Agreement" means the registration rights agreement dated November 5,2015
between Hydro One Limited and the Province.
"Removal Notice" has the meaning given to it under "Agreements with Principal Shareholder -
Governance Agreement - Governance Matters - Election and Replacement of Directors - Province's
Right to Replace the Board".
"Reserve" means a "reserve" as that term is defined inthe Indian Act (Canada).
"Revenue Cap Index" has the meaning given to it under "Business of Hydro One - Transmission
Business - Regulation - Transmission Rate Setting".
"RRF" has the meaning given to it under "Business of Hydro One - Distribution Business - Regulation -
Distribution Rates".
"Share Ownership Restrictions" has the meaning given to it under "The Electricity Industry in Ontario
- Legislative Provisions Specific to Hydro One - 10o% Ownership Restriction".
"shares" has the meaning given to it under "Agreements with Principal Shareholder - Registration Rights
Agreement - Demand Registration".
"Special Board Resolution" has the meaning given to it under "Agreements with Principal Shareholder -
Governance Agreement - Governance Matters - Board Approvals Requiring a Special Resolution of the
Directors".
"Specified Provincial Entity" has the meaning given to it under "Agreements with Principal Shareholder
- Governance Agreement - Governance Matters - Nomination of Directors - Independence".
"trust assets" has the meaning given to it under "Interests of Management and Others in Material
Transactions - Relationships with the Province and Other Parties - Transfer Orders".
Exhibit No. 4
CaseNos. AVU-E-l7- and AVU-G-I7-
C. Lop"r, Hydro One
o
2
o "TS" means transmission station.
Schedule 3, Page 107 of 167
o
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"TSX" means the Toronto Stock Exchange.
"TWh" means terawatt-hours.
"U.S. GAAP" means United States Generally Accepted Accounting Principles.
"Voting Securities" means a security of Hydro One Limited carrying a voting right either under all
circumstances or under some circumstances that have occurred and are continuing.
"Woodstock Hydro" means Woodstock Hydro Holdings Inc.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 108 of 167
o
3
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PRESENTATION OF INFORMATION
Unless otherwise specified, all information in this annual information form is presented as at December
31,2016.
Capitalized terms used in this annual information form are defined under "Glossary". Words importing
the singular number include the plural, and vice versa, and words importing any gender include all
genders. The Annual MD&A and the audited consolidated financial statements of Hydro One Limited as
at and for the year ended December 31, 2016, are specifically incorporated by reference into and form an
integral part of this annual information form. Copies of these documents have been filed with the
Canadian securities regulatory authorities and are available on SEDAR at www.sedar.com.
Unless otherwise noted or the context otherwise requires, references to "Hydro One" or the "Company"
refer to Hydro One Limited and its subsidiaries taken together as a whole. References to "Hydro One
Inc." refer only to Hydro One Inc. and references to "Hydro One Limited" refer only to Hydro One
Limited.
In addition, "Province" refers to the Province of Ontario as a provincial govemment entity, and
"Ontario" or the "province" in lower case type refers to the Province of Ontario as a geographical area.
References to "management" in this annual information form mean the persons who are identified as
executive officers of Hydro One Limited and its subsidiaries, as applicable, in this annual information
form. Any statements made by or on behalf of management are made in such persons' respective
capacities as executive officers of Hydro One Limited and its subsidiaries, as applicable, and not in their
personal capacities. See "Directors and Officers" for more information.
This annual information form refers to certain terms commonly used in the electricify industry, such as
"rate-regulated", "rate base" and "return on equity". For a description of these terms, see "Rate-
Regulated Utilities". Rate base is an amount that a utility is required to calculate for regulatory purposes,
and refers to the net book value of the utility's assets for regulatory purposes. Return on equity is a
percentage that is set or approved by a utility's regulator and represents the rate ofretum that a regulator
allows the utility to earn on the equity component of the utility's rate base.
In this annual information form, all dollar amounts are expressed in Canadian dollars unless otherwise
indicated. All references to "$" or "dollars" refers to Canadian dollars. Hydro One Limited and Hydro
One Inc. prepare and present their financial statements in accordance with U.S. GAAP.
FORWARD-LOOKING INFORMATION
Certain information in this annual information form contains "forward-looking information" within the
meaning of applicable Canadian securities laws. Forward-looking information in this annual information
form is based on current expectations, estimates, forecasts and projections about Hydro One's business
and the industry in which Hydro One operates and includes beliefs of and assumptions made by
management. Such statements include, but are not limited to, statements related to: the Company's
transmission and distribution rate applications, and resulting rates and impacts; expected impacts of
changes to the electricity industry; the Company's maturing debt and standby credit facilities;
expectations regarding the Company's financing activities; credit ratings; ongoing and planned projects
and/or initiatives, including expected results and timing; expected future capital expenditures, the nature
and timing of these expenditures, including the Company's plans for sustaining and development capital
expenditures for its distribution and transmission systems; expectations regarding allowed return on
equity; expectations regarding the ability of the Company to recover expenditures in future rates; the
OEB; future pension contributions, the pension plan and valuations; expectations regarding the ability to
negotiate collective agreements consistent with rate orders and to maintain stable outsourcing
arrangements; expectations related to work force demographics; expectations regarding taxes;
Exhibit No. 44 Case Nos. AVU-E-I7-- and AVU-G-I7--
C.Lopez, Hydro One
Schedule 3, Page 109 of 167
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occupational rights; expectations regarding load growth; the regional planning process; expectations
related to Hydro One's CDM requirements and targets; the Company's customer focus and related
initiatives; statements related to the Company's relationships with First Nations and M6tis communities;
statements related to environmental matters, and the Company's expected future environmental
expenditures; expectations related to the effect ofinterest rates; the Company's reputation; cyber and data
security; the Company's relationship with the Province; future sales of shares of Hydro One; acquisitions.
including the Company's acquisition of Orillia Power; expectations regarding the Governance Agreement
and other agreements with the Province; expectations regarding the manner in which Hydro One will
operate; expectations regarding Hydro One's dividend policy and the Company's intention to declare and
pay dividends, including the target payout ratio of 70'h to 80% of net income; and legal proceedings in
which Hydro One is currently involved.
Words such as "aim", "could", "would", "expect", "anticipate", "intend", "attempt", "may", "plan",
"will", "believe", "seek", "estimate", "goal", "target", and variations of such words and similar
expressions are intended to identiff such forward-looking information. These statements are not
guarantees of future performance and involve assumptions and risks and uncertainties that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what is expressed, implied or
forecasted in such forward-looking information. Hydro One does not intend, and it disclaims any
obligation to update any forward-looking information, except as required by law.
The forward-looking information in this annual information form is based on a variety of factors and
assumptions including, but not limited to: no unforeseen changes in the legislative and operating
framework for Ontario's electricity market; favourable decisions from the OEB and other regulatory
bodies concerning outstanding and future rate and other applications; no unexpected delays in obtaining
the required approvals; no unforeseen changes in rate orders or rate setting methodologies for Hydro
One's distribution and transmission businesses; no unfavourable changes in environmental regulation;
continued use of U.S. GAAP;a stable regulatory environment; and no significant event occurring outside
the ordinary course of business. These assumptions are based on information currently available to Hydro
One, including information obtained from third-pafty sources. Actual results may differ materially from
those predicted by such forward-looking information. While Hydro One does not know what impact any
of these differences may have, Hydro One's business, results of operations, financial condition and credit
stability may be materially adversely affected if any such differences occur. Factors that could cause
actual results or outcomes to differ materially from the results expressed or implied by forward-looking
information include, among other things:
risks associated with the Province's share ownership of Hydro One and other relationships
with the Province, including potential conflicts of interest that may arise between Hydro
One, the Province and related parties;
regulatory risks and risks relating to Hydro One's revenues, including risks relating to rate
orders, actual performance against forecasts and capital expenditures;
the risk that the Company may be unable to comply with regulatory and legislative
requirements or that the Company may incur additional costs for compliance that are not
recoverable through rates;
the risk of exposure of the Company's facilities to the effects of severe weather conditions,
natural disasters or other unexpected occurences for which the Company is uninsured or
for which the Company could be subject to claims for damage;
public opposition to and delays or denials of the requisite approvals and accommodations
for the Company's planned projects;
the risk that Hydro One may incur significant costs associated with transferring assets
PxhiSit No. +5 Case Nos. AVU-E-I7- and AVU-G-I7-
i.Lop"r,Hydro one
Schedule 3, Page I 10 of 167
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o located on Reserves;
the risks associated with information system security and with maintaining a complex
information technology system infrastructure;
the risks related to the Company's work force demographic and its potential inability to
atlract and retain qualified personnel;
the risk of labour disputes and inability to negotiate appropriate collective agreements on
acceptable terms consistent with the Company's rate decisions;
the risk that the Company is not able to arrange sufficient cost-effective financing to repay
maturing debt and to fund capital expenditures;
risks associated with fluctuations in interest rates and failure to manage exposure to credit
risk;
the risk that the Company may not be able to execute plans for capital projects necessary
to maintain the performance of the Company's assets or to carry out projects in a timely
manner;
the risk of non-compliance with environmental regulations or failure to mitigate
significant health and safety risks and inability to recover environmental expenditures in
rate applications;
the risk that assumptions that form the basis of the Company's recorded environmental
liabilities and related regulatory assets may change;
the risk of not being able to recover the Company's pension expenditures in future rates
and uncertainty regarding the future regulatory treatment of pension, other post-
employment benefits and post-retirement benefits costs;
the potential that Hydro One may incur significant expenses to replace functions currently
outsourced if agreements are terminated or expire before a new service provider is
selected;
the risks associated with economic uncertainty and financial market volatility;
the inability to prepare financial statements using U.S. GAAP; and
the impact of the ownership by the Province of lands underlying the Company's
transmission system.
Hydro One cautions the reader that the above list of factors is not exhaustive. Some of these and other
factors are discussed in more detail under the heading "Risk Management and Risk Factors" in the
Annual MD&A. You should review such section in detail, including the matters referenced therein.
In addition, Hydro One cautions the reader that information provided in this annual information form
regarding Hydro One's outlook on certain matters, including potential future expenditures, is provided in
order to give context to the nature of some of Hydro One's future plans and may not be appropriate for
other purposes.
Exhibit No. 4
CaseNos. AVU-E-I7- and AVU-G-I7-
i.Lop"r,Hydro one
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Schedule3, Page 111 of167
o ELECTRICITY INDUSTRY OVERVIEW
General Overview
The electricity industry is made up of businesses that generate, transmit, distribute and sell electricity.
While traditionally a mature and stable industry, innovation and technological change are expected to
have a significant impact on the industry in the foreseeable future. Hydro One's business is focused on the
transmission and distribution of electricity.
Transmission refers to the delivery of electricity over high voltage lines, typically over long
distances, from generating stations to local areas and large industrial customers.
Distribution refers to the delivery of electricity over low voltage power lines to end users such as
homes, businesses and institutions.
Overview of an Electricity System
The basic configuration of a typical electricity system showing electricity generation, transmission and
distribution is illustrated in the following diagram:
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Transmission and distribution networks are sometimes referred to as the "electricity grid" or simply "the
grid". For simplicity, the diagram above does not show customers directly connected to the transmission
system or distributed generation sources or other distributors that may be connected to the distribution
system.
THE ELECTRICITY INDUSTRY IN ONTARIO
Regulation of Transmission and Distribution
General
The Electricity Act and the Ontario Energy Board Act establish the general legislative framework for
Ontario's electricity market. The activities of transmitters and distributors in Ontario are overseen by
three main regulatory authorities: (i) the OEB, (ii) the IESO, and (iii) the National Energy Board.
Ontario Energt Board
The OEB is an independent and impartial public regulatory agency. The Ontario Energy Board Act
provides the OEB with the authority to regulate Ontario's electricity market, including the activities of
transmitters and distributors.
The OEB has the following objectives in relation to the electricity industry:
to protect the interests of consumers with respect to prices and the adequacy, reliability and
quality of electricity service, Exhibit No. 47 Case Nos. AVU-E-I7-- and AVU-G-I7--
C. Lopez, Hydro One
Schedule 3, Page ll2 of 167
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distribution, sale and demand management of electricity and to facilitate the maintenance of a
financially viable electricity industry,
to promote electricity conservation and demand management in a manner consistent with the
policies of the Province, including having regard to the consumer's economic circumstances,
to facilitate the implementation of a smart grid in Ontario, and
to promote the use and generation of electricity from renewable energy sources in a manner
consistent with the policies of the Province, including the timely expansion or reinforcement of
transmission systems and distribution systems to accommodate the connection of renewable
energy generati on faci I ities.
The OEB is responsible for, among other things, approving transmission and distribution rates in Ontario.
It also approves the construction, expansion, or reinforcement of transmission lines greater than two
kilometres in length, as well as mergers, acquisitions, amalgamations and divestitures involving
distributors, transmitters and other entities which it licenses. The activities of transmitters and distributors
are subject to the conditions of their licenses and a number of industry codes issued by the OEB. These
codes and other requirements prescribe minimum standards of conduct and service for licensed
participants in the electricity market.
IESO
The IESO manages the operation and reliability of Ontario's bulk power system and administers the
wholesale electricity market. It is govemed by a board whose chair and directors are appointed by the
Province. The IESO also coordinates province-wide conservation efforts.
Transmitters and other wholesale market participants must comply with the Market Rules issued by the
IESO. The Market Rules require transmitters to comply with mandatory North American reliability
standards for transmission issued by the Nonh American Electric Reliability Corporation ('NERC") and
the Northeast Power Coordinating Council, Inc. ("NPCC"). The IESO enforces these reliability standards
and coordinates with system operators and reliability agencies in other jurisdictions to ensure energy
adequacy and security across the interconnected bulk electricity system in North America.
National Energt Board
The National Energy Board is an independent federal regulatory agency, governed by the National
Energt Board Act (Canada) and has jurisdiction over the construction and operation of international
power lines, as well as interprovincial lines that are designated as being under federal jurisdiction (of
which there are currently none). As Hydro One owns and operates I I active international power lines
connecting Ontario's transmission system with transmission systems in Michigan, Minnesota and New
York, Hydro One is required to hold several certificates and permits issued by the National Energy Board
and is subject to its mandatory electricity reliability standards and reporting requirements.
Transmission
Transmission companies own and operate transmission systems that deliver electricity over high voltage
lines. Hydro One's transmission system accounts for approximately 98o/o of Ontario's electricity
transmission capacity based on the revenues approved by the OEB. The Company's transmission system
is interconnected to systems in Manitoba, Michigan, Minnesota, New York and Quebec and is part of the
North American electricity grid's Eastern Interconnection. The Eastern Interconnection is a contiguous
electricity transmission system that extends from Manitoba to Florida and from east of the Rocky
Mountains to the North American east coast. Being part of the Eastern Interconnection provides benefits
Exhibit No. 48 Case Nos. AVU-E-I7-- and AVU-G-I7--
C. Lopez, Hydro One
Schedule 3, Page I 13 of 167
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a to Ontario, such as greater security and stability for Ontario's transmission system, emergency support
when there are generation constraints or shortages in Ontario, and the ability to exchange electricif with
other jurisdictions.
Distribution
Distributors own and operate distribution systems that deliver electricity over power lines at voltages of
50kV or less to end users. In Ontario, as at December 31, 2015,71local distribution companies provided
electricity to approximately five million customers. During 2016, Hydro One completed integration of
two local distribution companies. The distribution industry in Ontario is fragmented, with the l5 largest
local distribution companies accounting for approximately 78% of the province's customers.
Through its wholly-owned subsidiary Hydro One Inc., Hydro One owns the largest local distribution
company in Ontario, which serves over 1.3 million, predominantly rural customers, or approximately
26Yo of the total number of customers in Ontario.
A local distribution company is responsible for distributing electricity to customers in its OEB-licensed
service territory, and in some cases to other distributors. A service territory may cover large portions or
all of a particular municipality, or an otherwise-defined geographic area. Distribution customers include
homes, commercial and industrial businesses and institutions such as governments, schools and hospitals.
Legislative Provisions Specific to Hydro One
In addition to legislation in Ontario that impacts all transmitters and distributors, there is legislation that is
specific to Hydro One. Specifically, the Electricity Act requires Hydro One's head office and principal
grid control centre to be maintained in Ontario, restricts the disposition of substantially all of its OEB-
regulated transmission or distribution business, prohibits any change to its jurisdiction of incorporation,
requires the Company to have an ombudsman, contains a l0o/o ownership restriction with respect to
Voting Securities and restricts the Province from selling Voting Securities if it would own less than40o/o
of the Voting Securities of any class or series as a result of the sale.
Ombudsman
The Electricity Act requires the Company to have an ombudsman to act as a liaison with customers and to
establish procedures for the ombudsman to inquire into and report to the Board on matters raised with the
ombudsman by or on behalf of customers. See "General Development of the Business - Customer Focus
- Ombudsman" for more information.
1 0% Ownership Restriction
The Electricity Act imposes share ownership restrictions on the Voting Securities. These restrictions
provide that no person or company (or combination of persons or companies acting jointly or in concert)
may beneficially own or exercise control or direction over more than looh of any class or series of Voting
Securities, including common shares of the Company (the "Share Ownership Restrictions"). The Share
Ownership Restrictions do not apply to Voting Securities held by the Province, nor to an underwriter who
holds Voting Securities solely for the purpose of distributing those securities to purchasers who comply
with the Share Ownership Restrictions. The articles of Hydro One Limited provide for comprehensive
enforcement mechanisms that are applicable in the event of a contravention of the Share Ownership
Restrictions.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page ll4 of 167
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Maintenance of 40% Ownership
As of December 31, 2016,lhe Province owned approximately 70.1% of Hydro One Limited's common
shares. The Province has indicated that it intends to sell further common shares over time, until it holds
approximately 40% of Hydro One Limited. See the Annual MD&A under the heading "Risk Management
and Risk Factors" for more information.
The Electricity Act restricts the Province from selling Voting Securities (including common shares of
Hydro One Limited) if it would own less than 40o/o of the outstanding number of Voting Securities of that
class or series after the sale. If as a result of the issuance of additional Voting Securities by Hydro One
Limited, the Province owns less than 40Yo of the outstanding number of Voting Securities of any class or
series, the Province must, subject to the approval of the Lieutenant Govemor in Council and the necessary
appropriations from the Legislature, take steps to acquire as many Voting Securities of that class or series
as are necessary to increase the Province's ownership to not less than40Yo of the outstanding number of
Voting Securities of that class or series. The manner in which, and the time by which, the Province must
acquire these additional Voting Securities will be determined by the Lieutenant Governor in Council.
The Province has been granted pre-emptive rights by Hydro One Limited to assist it in meeting its
ownership requirements under the Electricity Act as described under "Agreements with Principal
Shareholder - Governance Agreement - Other Matters - Pre-emptive Rights".
Elimination of Certain Legislation With Respect to Hydro One
In 2015, priorto completion of the initial public offering of Hydro One Limited, Hydro One Inc. and its
subsidiaries ceased to be subject to a number of Ontario statutes that apply to entities owned by the
Province. Hydro One Limited is similarly not subject to those statutes. In making the transition, the
Auditor General of Ontario, the Financial Accountability Officer, the Information and Privacy
Commissioner and the Provincial Ombudsman continued to exercise certain of their powers with respect
to the Company in certain limited circumstances until December 4,2015. The Information and Privacy
Commissioner could also continue to issue certain orders with respect to the Company until June 4,2016.
The Company is required under the Financial Administration Act (Ontario) and the Auditor General Act
(Ontario) to provide financial information to the Province for the Province's public reporting purposes.
Recent Legislative Amendments Affecting the Electricity Industry Generally
Tax Incentives
Tax incentives were included in the 2015 Ontario Budget to promote consolidation in the electricity
distribution sector. The 2015 Ontario Budget announced a reduction in the tax rate for transfers of
electricity assets from 33o/o to 22%o and to NIL for distributors with fewer than 30,000 customers. In
addition, the budget also introduced a capital gains exemption where capital gains arise as a result from
exiting the payments in lieu of corporate taxes regime. These changes apply for the period beginning
January 1, 2016,and ending December 3 l, 201 8.
Ontario Rebatefor Electricity Consumers Act, 2016
The Ontario Rebate for Electricity Consumers program commenced on January 1,2017. This program
provides financial assistance to residential, farm, small business and other eligible consumers in respect of
electricity costs equal to a rebate of eight percent (8%) of the base invoice amount for each billing period.
This rebate appears as a line item on eligible consumers' electricity bills.
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-I7-
C.Lop"r,Hydro One
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Schedule 3, Page I 15 of 167
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Energt Statute Law Amendment Act, 2016
Tlte Energt Statute Law Amendment Act, 2016 came into force on January 1,2017. This Act affects the
transmission and distribution sector of the electricity industry in Ontario, amending various sections of
the Ontario Energy Board Act, the Electricity Act and the Green Energt Act, 2009 (Ontario). The Energt
Statute Low Amendment Act, 2016 amended the Electricity Act to require the Minister of Energy to
produce long-term energy plans that may require the OEB and the IESO to issue implementation plans to
achieve the objectives of those plans and the OEB would be guided by such plans' objectives in
exercising its powers and performing its duties. The plans may require the IESO to enter into contracts to
procure or develop, among other things, transmission systems or any part of such systems. Once the IESO
has commenced the procurement process, the OEB is prohibited from granting leave to construct except
where the applicant is the party with whom the IESO has entered into a contract for the development or
construction of the transmission project. The Energt Statute Low Amendment Act, 2016 also prohibits
new feed-in tariffprograms, but grandfathers existing ones.
Climate Change Mitigation and Low-carbon Economy Act,2016
Pursuant to the Climate Change Mitigation and Low-carbon Economy Act, 2016, the Province introduced
a cap and trade program in Ontario beginning January 1,2017. The program caps the amount of
greenhouse gas emissions that Ontario homes and businesses are allowed to emit, and lowers that limit
over time. Hydro One Networks Inc., an indirect wholly-owned subsidiary of Hydro One Limited, is
deemed a mandatory participant in the cap and trade program based on its annual carbon dioxide
equivalent emissions. As required, Hydro One Networks Inc. registered under the program in November
2016, and will comply with its requirements.
Bill 27 - Burden Reduction Act,2016
Bill27 was introduced into the Legislative Assembly of Ontario in September 2016 and received Royal
Assent on March 22,2017. This is an omnibus bill amending various statutes, including the Ontario
Energy Board Act and the Electricity Act. Bill 27, among other things, amends the Ontario Energy Board
Act in a number of ways related to deferral and variance account review and oversight and review of
transactions befween transmitters and distributors and electricity generators.
Bill 95 - An Act to amend the Ontario Energt Board Act, 1998
Bill 95 was introduced into the Legislative Assembly of Ontario and received Royal Assent on February
22,2017. Bill 95 impacts a distributor's ability to disconnect customers by broadening the power of the
OEB to prescribe, as a condition of a distributor's licence, periods during which disconnections of low-
volume consumers may not take place. At the end of February 2017, the OEB issued a decision and order
amending the licenses of all Ontario electricity distributors prohibiting the disconnection of residential
customers by reason of non-payment for the balance of the 2017 winter period. See "General
Development of the Business - Customer Focus - Winter Moratorium and Winter Relief Program" for
more information.
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-I7-
i.Lop"r,Hydro one
o
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Schedule 3, Page 116 of 167
o Rate Applications in 0ntario
Framework
The term "rate-regulated" is used to refer to an electricity business whose rates for transmission,
distribution or other services are subject to approval by a regulator. The rate base of a rate-regulated
utility refers to the net book value of the utility's assets for regulatory purposes. Rate base differs from a
utility's total assets for accounting purposes, primarily because it includes the regulated assets of a utility.
The OEB is the regulator that approves electricity transmission and distribution rates in Ontario.
Transmission rates have historically been determined based on a cost-of-service model, while distribution
rates are generally determined using a performance-based model. These models are reviewed and
modified by the OEB from time to time.
In February 2016, the OEB updated the filing requirements for electriciry transmission applications and
introduced new revenue requirement setting options. The requirements changed the framework for setting
a transmitter's revenue requirement from a cost-of-service approach to a performance-based approach
similar to that outlined in the RRF for electricify distributors. To facilitate the transition to the new
framework, existing transmitters may still apply for revenue requirement approval based on a one or two
year cost-of-service application for their first application following the issuance of the new filing
requirements.
In a cost-of-service model, a utility charges rates for its services that allow it to recover the costs of
providing its services and earn an allowed return on equity. A utility's return on equity or "ROE" is the
rate of return that a regulator allows the utility to earn on the equity portion of the utility's rate base. The
costs of providing its services must be prudently incurred. Cost savings are typically passed on to
customers in the form of lower rates reflected in future rate decisions. In a cost-of-service model, the
utility has the potential to retain cost savings that are achieved in the intervening years between rate
decisions.
Cost of Service ($) + Return on Equity ($)Revenue Requirement ($)
In a performance-based model, a utility also charges rates for its services that allow it to recover the costs
of providing its services and earn an allowed return on equity. However, the rates charged by the utility in
a performance-based model assume that the utility becomes increasingly efficient over time, resulting in
lower costs to provide the same service. If a utility achieves cost savings in excess of those established by
the regulator, the utility may retain some or all of the benefits of those cost savings, which may permit the
utility to eam more than its allowed return on equity.
CORPORATE STRUCTURE
Incorporation and Office
Hydro One Limited was incorporated on August 31,2015, under the OBCA. Its registered office and head
office is located at 483 Bay Street, Sth Floor, South Tower, Toronto, Ontario M5G 2P5.
On October 30, 2015, the articles of Hydro One Limited were amended to authorize the creation of an
unlimited number of Series I preferred shares and an unlimited number of Series 2 preferred shares, with
the Series I preferred shares to be issued to the Province.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page ll7 of 167
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RATE-REGULATED UTILITIES
On October 31,2015, all of the issued and outstanding shares of Hydro One Inc. were acquired by Hydro
One Limited from the Province in exchange for the issuance to the Province of common shares and Series
1 preferred shares of Hydro One Limited.
On November 4,2015, the articles of Hydro One Limited were amended to authorize the consolidation of
its outstanding common shares such that 595,000,000 common shares of Hydro One Limited were issued
and outstanding.
Corporate Structure and Subsidiaries
The following is a simplified chart showing the organizational structure of Hydro One and the name and
jurisdiction of incorporation of certain of its subsidiaries. This chart does not include all legal entities
within Hydro One's organizational structure. Hydro One Limited owns, directly or indirectly, 100%, of
the voting securities of all of the subsidiaries listed below.
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common shares and 100% ofthe outstanding Series I preferred shares.
Indirectly held through a wholly-owned subsidiary of Hydro One Limited that acts as a holding company for Hydro
One's non-rate-regulated businesses.
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Certain of Hydro One's subsidiaries are described below
Hydro One Inc. - acts as a holding company for Hydro One's rate-regulated businesses. Its
publicly-issued debt continues to be outstanding.
13 caseNos. AVU_E_r7_ *o o..)l_oo:i;:.0
C. Lop.r, Hydro Oi,e
Schedule 3, Page I l8 of 167
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regul ated transm ission and distributi on businesses.
Hydro One Remote Communities Inc. - generates and supplies electricity to remote
communities in northem Ontario.
Hydro One Telecom Inc. - carries on Hydro One's non-rate-regulated telecommunications
business.
GENERAL DEVELOPMENT OF THE BUSINESS
The following key events occurred in2015,2016 and early 2017 in respect of Hydro One
Incorporation and Initial Public Offering
On August 31,2015, Hydro One Limited was incorporated by the Province as its sole shareholder.
On November 5,2015, Hydro One Limited completed its initial public offering on the TSX by way of a
secondary offering of 81,100,000 common shares by the Province at a price of $20.50 per share for
aggregate gross proceeds to the Province of $1,662,550,000. On November 12,2015, the underwriters in
the initial public offering exercised their option to purchase an additional 8,150,000 common shares from
the Province at a price of 520.50 per share for additional aggregate gross proceeds to the Province of
$ 167,075,000. Hydro One Limited did not receive any proceeds from the initial public offering.
Acquisition of Hydro One Inc.
Prior to the closing of the initial public offering, all of the issued and outstanding common shares of
Hydro One Inc. were acquired by Hydro One Limited. Under applicable Canadian securities laws, the
acquisition of all of the issued and outstanding shares of Hydro One Inc. was considered a "significant
acquisition". Hydro One Limited filed a business acquisition report in respect of the acquisition on
January 14,2016. See "Business of Hydro One - Reorganizations" for more information.
Hydro One Brampton Networks Inc.
On August 31,2015, all of the issued and outstanding shares of Hydro One Brampton Nefworks Inc. were
transferred to the Province. Hydro One was not a participant in nor did it receive any proceeds from the
transfer of Hydro One Brampton Networks Inc. to the Province.
Following the transfer to the Province, Hydro One provided certain management, administrative and
smart meter network services to Hydro One Brampton Networks Inc. pursuant to service level
agreements. These agreements terminated as of February 28,2017.
Secondary Common Share Offering
On April 14,2016, the Province completed a secondary offering of 72,434,800 common shares of Hydro
One Limited at a price of $23.65 per share for aggregate gross proceeds to the Province of
S1,713,083,020. On April29,20l6, the underwriters in the secondary offering exercised their option to
purchase an additional 10,865,200 common shares from the Province at a price of $23.65 per share for
additional aggregate gross proceeds to the Province of $256,961,980. Following the completion of the
transaction, the Province held approximately 70.1% of total issued and outstanding common shares.
Hydro One Limited did not receive any proceeds from the sale of the common shares by the Province.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page ll9 of 167
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First Nations and Hydro One Limited Shares
In July 2016, the Province and First Nations in Ontario, as represented by the Chiefs-in-Assembly,
announced an agreement-in-principle for the Province to sell to First Nations up to approximately l5
million shares of Hydro One Limited, depending on the level of First Nation participation. All First
Nations have been invited to participate. A minimum threshold of 80% First Nation participation by the
end of 20 I 7 is required for this transaction to close. Hydro One Limited is not a parry to this transaction.
Agreement to Acquire Orillia Power
In August 2016,the Company reached an agreement to acquire Orillia Power, an electricity distribution
company located in Simcoe County, Ontario, for approximately $41 million, including the assumption of
approximately $15 million in outstanding indebtedness and regulatory liabilities, subject to closing
adjustments. The acquisition is subject to regulatory approval by the OEB.
Acquisition of Great Lakes Power
On October 31,2016, following receipt of regulatory approval of the transaction by the OEB, Hydro One
completed the acquisition of Great Lakes Power, an Ontario regulated electricity transmission business
operating along the eastem shore of Lake Superior, north and east of Sault Ste. Marie, Ontario. The total
purchase price for Great Lakes Power was approximately $376 million, including the assumption of
approximately $150 million in outstanding indebtedness. On January 16,2017, Great Lakes Power's
name was changed to Hydro One Sault Ste. Marie LP.
Integration of Haldimand Hydro and Woodstock Hydro
In 2015, the Company acquired Haldimand Hydro and Woodstock Hydro, two Ontario-based local
distribution companies. In September 2016, the Company successfully completed the integration of both
entities, including the integration of employees, customer and billing information, business processes, and
operations.
Acquisitions Generally
The Company intends to continue to evaluate local distribution company consolidation opportunities in
Ontario and intends to pursue those acquisitions which deliver value to the Company and its shareholders.
Over time, the Company may also consider larger-scale acquisition oppornrnities or other strategic
initiatives outside of Ontario to diversiff its asset base and leverage its strong operational expertise. These
acquisition opportunities may include other providers of electrical transmission, distribution and other
similar services in Canada and in the United States.
Customer Focus
Hydro One is transitioning into a corporation which is more commercially oriented; that is, one that has a
greater focus on customers, greater corporate accountability for performance outcomes, and company-
wide increase in productivity and efficiency.
Customer Service
Hydro One is committed to delivering significant value to customers by becoming easier to do business
with, being available when customers need assistance, and always staying connected. This includes
specific, measurable commitments to customers that encompass all areas of service. Hydro One's billing
system is stable and outperforming its previous system in terms of timeliness, accuracy and reliability. In
2017, the Company intends to launch a new corporate website, improve its self-service portal, and
introduce a newly designed customer bill. Additionally, the Company is committed to increasing the
Exhibit No. 4l5 Case Nos. AVU-E-I7-- and AVU-G-I7--
C.Lopez, Hydro One
Schedule 3, Page 120 of 167
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Review of Operations
Hydro One has been focused on the identification of opportunities for improved corporate performance
and the development of strategies to drive more efficient, cost-effective operations. Hydro One conducts
regular reviews of key corporate activities and programs, covering areas such as construction services and
project management practices, asset deployment and controls, information technology and cybersecurity,
vegetation management practices, fleet services and utilization, supply chain management and business
continuity planning. Operational improvements in capital planning and execution have already been
observed, and improvements have been made to work execution process. The OEB's rate decisions also
contain directions to Hydro One to become more cost efficient and improve value to customers.
ll/inter Moratorium and *l/inter Relief Program
Hydro One has an existing policy (the winter disconnection moratorium) that from December I to March
3l it will not disconnect residential customers whose accounts are in arrears. ln 2016, Hydro One
instituted its winter disconnection moratorium as of November 25.
Hydro One announced its new Winter Relief Program in December 2016,as an extension of its existing
winter disconnection moratorium. This new initiative is intended to help residential customers facing
extreme hardship and who have had their electricity service disconnected by reaching out to these
customers directly to help re-connect their electricity service for the remainder of the winter. As part of
the program, Hydro One will waive reconnection fees and also work with customers to determine
payment options to bring their accounts up-to-date and to evaluate various support programs in which
certain customers may be eligible to participate.
Ontario Re bate for E lectr icily Consu mers Program
See "The Electricity Industry in Ontario - Recent Legislative Amendments Affecting the Electricity
Industry Generally - Ontario Rebate for Electricity Consumers Act, 2016" for information on the Ontario
Rebate for Electricity Consumers program.
Ombudsman
The Electricity Act requires that the Company have an ombudsman to act as a liaison with customers and
to establish procedures for the ombudsman to inquire into and report to the Board on matters raised with
the ombudsman by or on behalf of customers. These procedures are set out in a written mandate and
terms of reference.
The role of the ombudsman is to facilitate resolution of complaints by customers of the Company that
remain unresolved after having been processed through the Company's complaints handling process. The
ombudsman is an impartial and independent investigator, who makes recommendations to facilitate the
resolution of both individual and systemic issues with a view to achieving a resolution that is fair to both
the customer and the Company. The main purposes of the ombudsman are to address procedural and
substantive unfaimess, handle unresolved complaints, conduct systemic reviews that will lead to
improvements in programs and systems, support the Company in holding its employees accountable for
carrying out the Company's directives and their responsibilities, and support the Board in its mandate to
govern in a just, fair, and equitable manner. The ombudsman also works with the OEB to maintain
integrated procedures for liaising with the Company and inquiring into matters raised by customers with
the ombudsman. The ombudsman is an office of last resort within the Company.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 121 of 167
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o BUSINESS OF HYDRO ONE
Business Segments
Through its wholly-owned subsidiary Hydro One Inc., Hydro One is Ontario's largest electricity
transmission and distribution utility with approximately $25.3 billion in assets and2016 revenues of over
$6.5 billion. Hydro One owns and operates substantially all of Ontario's electricity transmission network
and is the largest electricity distributor in Ontario by number of customers. The Company's regulated
transmission and distribution operations are owned by Hydro One Inc., a wholly-owned subsidiary of
Hydro One Limited. Hydro One delivers electricity safely and reliably to over 1.3 million customers
across the province of Ontario, and to large industrial customers and municipal utilities. Hydro One Inc.
owns and operates over 30,000 circuit kilometres of high-voltage transmission lines and approximately
123,000 circuit kilometres of primary low-voltage distribution lines.
Hydro One has three business segments: (i) transmission; (ii) distribution; and (iii) other business. Each
of the three segments is described below.
Hydro One's transmission and distribution businesses are both operated primarily through Hydro One
Networks Inc. This allows both businesses to utilize common operating platforms, technology, work
processes, equipment and field staff and thereby take advantage of operating efficiencies and synergies.
For regulatory purposes, Hydro One Networks Inc. files separate rate applications with the OEB for each
of its licensed transmission and distribution businesses.
Transmission Business
Overyiew
Hydro One's transmission business consists of owning, operating and maintaining Hydro One's
transmission system, which accounts for approximately 98% of Ontario's transmission capacity based on
revenue approved by the OEB. All of the Company's transmission business is carried out by its wholly-
owned subsidiary Hydro One Inc., through its wholly-owned subsidiary Hydro One Networks Inc. and
through other wholly-owned subsidiaries of Hydro One Inc. that own and control Great Lakes Power
(now Hydro One Sault Ste. Marie LP), as well as through the Company's 66%o interest in B2M Limited
Partnership. B2M Limited Partnership is a limited partnership between Hydro One and the Saugeen
Ojibway Nation, which owns the transmission line assets relating to two circuits between Bruce TS and
Milton TS. Hydro One's transmission business represented approximately 51o/o of its total assets as at
December 31, 2016, and accounted for approximately 51oh of its total revenue in 2076, net of purchased
power and 50Yo of its total revenue in 201 5, net of purchased power.
The Company's transmission business is one of the largest in North America and is a rate-regulated
business that eams revenues mainly from charging transmission rates that are subject to approval by the
OEB. In February 2016,the OEB updated the filing requirements for electricity transmission applications
and introduced new revenue requirement setting options. During the transition period from the cost-of-
service model to the performance-based model, the Company's transmission rates are determined based
on a cost-of-service model. Transmission rates are collected by the IESO and are remitted by the IESO to
Hydro One on a monthly basis, which means that Hydro One's transmission business has no direct
exposure to end-customer counterparty risk.
Transmission rates are based on monthly peak electricity demand across Hydro One's transmission
network. This gives rise to seasonal variations in Hydro One's transmission revenues, which are generally
higher in the summer and winter due to increased demand, and lower during other periods of reduced
demand. Hydro One's transmission revenues also include revenues associated with exporting energy to
markets outside of Ontario. Ancillary revenue includes revenues from providing maintenance services to
generators and from third parry land use.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 122 of167
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Business
The Company's transmission system serves substantially all of Ontario, with the exception of the James
Bay and Fort Erie areas, and transported approximately 137 TWh of energy throughout the province in
2016. Hydro One's transmission customers consist of 44 local distribution companies (including Hydro
One's own distribution business) and 87 large industrial customers connected directly to the transmission
network, including automotive, manufacturing, chemical and natural resources businesses. Electricity
delivered over the Company's transmission network is supplied by 126 generators in Ontario and
electricity imported into the province through interties. Interties are transmission interconnections
between neighbouring electric systems that allow power to be imported and exported.
The high voltage power lines in Hydro One's transmission nefwork are categorized as either lines which
form part of the "bulk electricity system" or "area supply lines". Power lines which form part of the bulk
electricity system typically connect major generation facilities with transmission stations and often cover
long distances, while area supply lines serve a local region. Ontario's transmission system is connected to
the transmission systems of Manitoba, Michigan, Minnesota, New York and Quebec through the use of
interties, allowing for the import and export of electricity to and from Ontario.
Hydro One's transmission assets were approximately $13 billion as at December 31, 2016 and include
transmission stations, transmission lines, a control centre and telecommunications facilities. Hydro One
has approximately 306 in-service transmission stations and over 30,000 circuit kilometres of high voltage
lines whose major components include cables, conductors and wood or steel suppoft structures. All of
these lines are overhead power lines except for approximately 277 circuit kilometres of underground
cables located in certain urban areas.
B2M Limited Partnership is Hydro One's partnership with the Saugeen Ojibway Nation with respect to
the Bruce-to-Milton transmission line. B2M Limited Partnership owns the transmission line assets
relating to two circuits between Bruce TS and Milton TS, while Hydro One owns the transmission
stations where the lines terminate. Hydro One maintains and operates the Bruce-to-Milton line. Hydro
One has a 66%o economic interest in the partnership.
Hydro One's transmission network is managed from a central location. This centre monitors and controls
the Company's entire transmission network, and has the capability to remotely monitor and operate
transmission equipment, respond to alarms and contingencies and restore and reroute interrupted power.
There is also a backup facility which would be staffed in the event of an evacuation of the centre.
Hydro One uses telecommunications systems for the protection and operation of its transmission and
distribution networks. These systems are subject to very stringent reliability and security requirements,
which help the Company meet its reliability obligations and facilitate the restoration of power following
service interruptions.
On October 31,2016, following receipt of regulatory approvalof the transaction by the OEB, Hydro One
completed the acquisition of Great Lakes Power, an Ontario regulated electricity transmission business
operating along the eastem shore of Lake Superior, north and east of Sault Ste. Marie, Ontario. The total
purchase price for Great Lakes Power was approximately $376 million, including the assumption of
approximately $150 million in outstanding indebtedness. On January 16,2017,Great Lakes Power's
name was changed to Hydro One Sault Ste. Marie LP.
See "General Development of the Business - Acquisitions Generally" for more information.
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-I7-
C. Lop.r, Hydro One
o
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Schedule 3, Page 123 of 167
O Regulation
Transmission Rate Setting
As discussed under "Rate-Regulated Utilities", transmission rate setting in Ontario has changed. The
OEB has created two new revenue plan options: the Custom Incentive Rate Setting Plan (the "Custom IR
Method") and the Incentive Index Rate Setting Plan (the "Revenue Cap Index"). Transmitters may still
apply for revenue requirement approval based on a one or two year cost-of-service application for their
first application following the issuance of the filing requirements, as the OEB has recognized that a
transition period may be needed.
Under the Custom IR Method, the revenue requirement is adjusted though the rate term to reflect
forecasts, the OEB's inflation analysis, and intemal and extemal benchmarking evidence.
Under the Revenue Cap Index the first year's revenue requirement reflects the transmitter's cost of
service, and annually thereafter, this amount is subject to a formulaic increase reflecting productivity and
stretch commitments proposed by the transmitter. Revenue Cap Index applicants can request incremental
capital funding.
The OEB sets transmission rates based on a two-step process. First, all transmitters apply to the OEB for
the approval of their revenue requirements. Second, the OEB aggregates the total revenue requirements of
all transmitters in Ontario and applies a formula to arrive at a single set of rates that are charged to
ratepayers for the three types of transmission services applicable in Ontario, namely: network services,
line connection services and transformation connection services. The three separate rates charged for
these services are the same for all transmitters and are referred to as "uniform transmission rates".
Uniform transmission rates for all transmitters are set by the OEB on an annual basis, using the revenue
requirements set out in the most recent rate decision issued for each transmitter.
The updated filing requirements for transmitters mandate that steps be made towards the integration of
core RRF concepts into revenue requirement applications. Transmitters applying for revenue
requirements under the Custom IR Method or Revenue Cap Index must include (i) evidence of the
continuous improvement and efficiency gains anticipated to be achieved over the rate term; (ii) a
mechanism to protect ratepayers in the event of eamings significantly in excess of the regulatory net
income supported by the return on equity established in the approved revenue requirement; and (iii)
proposed performance metrics applicable to their individual circumstances. A key component of rate-
setting under the RRF is benchmarking evidence to support cost forecasts and system planning proposals.
A transmitter must apply for the approval of its revenue requirement for an initial base year covered by
the rate decision. The revenue requirement for subsequent years is determined based on a formula that
accounts for inflation and certain productivity factors set by the regulator. The revenue requirement in
these subsequent years is set on the assumption that the transmitter is lowering its cost of service over the
period covered by the rate decision due to efficiency or productivity improvements. A transmitter is
permitted to retain all or a porlion of the cost savings achieved in excess of the estimate established by the
regulator during the period covered by the rate decision.
Recent Transmission Rate Applications
Hydro One Networks Inc., B2M Limited Partnership and Great Lakes Power (now Hydro One Sault Ste.
Marie LP) file separate applications for the approval of their revenue requirements for transmission
services.
In January 2015, the OEB approved Hydro One Networks Inc.'s 2015 transmission rate order for
transmission services, which provided for a revenue requirement of 51,477 million for 2015 and
$l,5l6million for 2016 (excluding B2M Limited Partnership). These revenue requirements reflect an
Exhibit No. 419 Case Nos. AVU-E-I7-- and AVU-G-I7--
C.Lopez, Hydro One
Schedule 3, Page 124 of 167
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o approved rate base of 59,651 million, retum on equity of 9.30Y" and deemed capital structure of 60% debt
and40o/o equity. In January 20l,6,lhe OEB issued its decision and order on 2016 transmission revenue
requirement for Hydro One Networks Inc. approving a revenue requirement of approximately $1,480
million based on an approved rate base of $10,040 million and a return on equity of 9.19Yr.
In May 2016, Hydro One Networks Inc. filed a transmission rate application with the OEB for its 2017-
2018 revenue requirements on a cost of service basis, electing to take advantage of the transition period
available to transmifters before the OEB requires transmitters to choose between the two incentive-based
revenue plan options. In its application, Hydro One Networks Inc. requested the OEB's approval of rates
revenue requirements of $1,505 million for 2017 and S1,586 million for 2018. These rates revenue
requirements reflect the requested rate base of $10,554 million for 2017 and $11,226 million for 2018,
and reflect an allowed ROE of 9.l97o for each year.
In December 2016, pursuant to the OEB's publication of its cost of capital parameters for2017 rateyear,
Hydro One Networks Inc. updated its transmission rate application to reflect the change. The revised rates
revenue requirement for 2017 is $1,487 million and $1,558 million for 2018. Furthermore, the cost of
capital update reflects ROE, short-term and long-term debt cost updates. As a result, the ROE in the
application has been updated to 8.78%o for 2017 and the same rate is being a placeholder for 201 8.
In preparing its application, Hydro One Networks Inc. carried out customer engagement and incorporated
the feedback into its application. As part of the transmission rate application, Hydro One Networks Inc.
also filed its proposed five-year transmission system capital plan.
In March 2015,82M Limited Partnership filed an application for revenue requirements covering the 2015
to 2019 period. B2M Limited Partnership requested revenue requirements of $39million for 2015,
$36million for 2016, $3Tmillion for 2017, $3Smillion for 2018 and $3Tmillion for 2019.In January
20l6,the B2M Limited Partnership revenue requirement was approved. In December 2016, B2M Limited
Partnership filed a draft rate order with a revised 2017 revenue requirement of $34 million. See also the
Annual MD&A under the subheading "Regulation - B2M LP".
In December2016, Great Lakes Power filed an application with the OEB for 2017 rates, requesting an
increase to the approved 2016 revenue requirement of 1.9%o, resulting in an updated revenue requirement
of $41 million.
Reliabil ity Standards for Transmission
The Company's transmission business is required to comply with various rules and standards for
transmission reliability, including mandatory standards established by the NERC and the NPCC, both of
which are industry organizations involved in promoting and improving the reliability of transmission
networks in North America. These reliability standards are enforced by both the IESO and the National
Energy Board.
Among its standards, the NERC has also established and continues to issue revised requirements to
ensure that utilities and other users, owners and operators of the bulk electricity system in North America
have appropriate procedures in place to protect critical infrastructure from cyber-attacks. Hydro One's
physical, electronic and information security processes have been and are being upgraded to meet these
revised requirements. Hydro One expects to continue to perform additional work and incur further costs
to comply with the NERC's updated and revised standards. Hydro One anticipates that these costs will be
incurred annually over a number of years and will be recovered in rates. See the Annual MD&A under the
subheadings "Risk Management and Risk Factors - Compliance with Laws and Regulations; - Risk
Associated with Information Technology Infrastructure and Data Security; - Risks Relating to Asset
Condition and Capital Projects" for more information.
Exhibit No. 4
Case Nos. AVU-E-17- and AVU-G-I7-
i.Lop"r,Hydro one
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Schedule 3, Page 125 of 167
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Resional Planning
The OEB oversees regional planning processes to ensure that transmission and distribution investments
are coordinated at a regional level. The OEB has indicated it will rely on regional planning studies and
reports to support rate applications submitted by transmitters and distributors and "leave to construct"
applications submifted by transmitters. In Ontario, the regional planning process is led by the transmitter
responsible for a particular geographic region. For this purpose, the province is divided into 2l regions.
As the largest transmitter in Ontario, Hydro One plays a key role in the regional planning process and is
responsible for leading the regional planning process in 20 of the 2l designated regions. The first cycle of
the regional planning process for all of the 2l regions is expected to be completed in 2017. Once a
transmission and distribution infrastructure plan is finalized, the transmitter responsible for each region
will take steps to implement the recommended transmission investments and distributors in the region
will implement the recommended distribution investments in their respective service territories.
In conducting regional planning, Hydro One works closely with the IESO and all distributors in the
region to jointly identify needs and develop transmission and distribution investment options. Hydro One
also coordinates with the IESO on its Integrated Regional Resource Planning process.
Copital Expenditures
The Company anticipates that it will spend approximately S1,086 million to $1,486 million per year, over
the next five years, on capital expenditures relating to its transmission business. The Company's capital
expenditure plans are included in Hydro One's applications to the OEB for transmission rates. See
"Capital Investments - Future Capital Investments" in the Annual MD&A for more information on future
capital expenditures.
The Company incurs both sustaining capital expenditures and development capital expenditures.
Sustaining capital expenditures are those investments required to replace or refurbish lines or station
components to ensure that transmission assets continue to function as originally designed. Hydro One's
plans to maintain, refurbish or replace existing assets are based upon risk assessments, asset condition
assessments and end-of-service life criteria specific to each type of asset. Priorities are assigned to each
type of investment based upon the extent of the risks that it mitigates.
Investments to sustain Hydro One's transmission assets are critical to maintain the safety, reliability and
integrity of its existing transmission network. Hydro One's sustainment capital plan is designed to
maintain Hydro One's transmission reliability performance, as determined by measures such as the
average length (in minutes) of unplanned interruptions per delivery point. The Company expects that
significant investments will be required in its existing infrastructure over the long term.
The Company's development capital expenditure plan is designed to address Ontario's changing
generation profile, accommodate load growth in areas throughout Ontario and support the expected
change in generation mix. Development capital expenditures include those investments required to
develop and build new large-scale projects such as new transmission lines and stations and smaller
projects such as transmission line or station reinforcements, extensions or additions.
The Company engages with various stakeholders, including its customers, as it develops its capital plans.
It also engages affected communities and parties who may be impacted by individual projects. The
Company also consults with First Nations and Mdtis communities whose rights may be affected by its
projects.
Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-I7-
i.Lop".,Hydro one
o
2l
Schedule 3, Page 126 of 167
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Co mp etitiv e Co ndil io ns
The Company's operations are currently limited to Ontario, where the Company operates and maintains
substantially all of Ontario's transmission system. Competition for transmission services in Ontario is
currently limited. The adoption by the OEB of uniform transmission rates that apply to all transmitters
also reduces the financial incentive for customers to seek altemative transmission providers, since each
transmitter in Ontario charges the same uniform rate for transmission services. Hydro One competes with
other transmitters for the opportunity to build new large-scale transmission facilities in Ontario.
Management believes that Hydro One is well-positioned to pursue the development of such facilities.
However, the competitive process was amended by the proclamation of the Energt Statute Low
Amendment Act, 2016 to allow for the selection of a transmitter outside the existing competitive process.
See "The Electricity Industry in Ontario - Recent Legislative Amendments Affecting the Electricity
Industry Generally- Energt Statute Law Amendment Act, 2016" for more information.
Hydro One does not compete with other transmitters with respect to investments which are made to
sustain or develop its existing transmission infrastructure.
Distribution Business
Ovemiew
Hydro One's distribution business consists of owning, operating and maintaining Hydro One's
distribution system, which Hydro One, through Hydro One Inc., owns primarily through its wholly-
owned subsidiary, Hydro One Networks Inc., the largest local distribution company in Ontario. The
Company's distribution system is also the largest in Ontario. The Company's distribution business is a
rate-regulated business that earns revenues mainly by charging distribution rates that are subject to
approval by the OEB. The Company's distribution rates are generally determined using a performance-
based model, except for the distribution rates of Hydro One Remote Communities Inc., which are set on a
cost-recovery basis and do not include a return on equity.
Hydro One's distribution business represented approximately 37% of its total assets as at December3l,
2016, and accounted for approxim ately 47o/o of its total revenue in 2016, net of purchased power and 48o/o
of its total revenue in 2015, net of purchased power. Hydro One's distribution business also includes the
business of its wholly-owned subsidiary, Hydro One Remote Communities Inc., which supplies electricity
to customers in remote communities in northem Ontario. Distribution revenues include distribution rates
approved by the OEB and amounts to reimburse Hydro One for the cost of purchasing electricity
delivered to its distribution customers. Distribution revenues also include minor ancillary service
revenues, such as fees related to the joint use of the Company's distribution poles by participants in the
telecommunications and cable television industries, as well as miscellaneous charges such as charges for
late payments.
As at December 31,2016, Hydro One's distribution assets were $9,337 million.
Business
Hydro One delivers electricity through its distribution network to over L3 million residential and business
customers, most of whom are located in rural areas, as well as 53 local distribution companies (including
Hydro One's own distribution business).
Hydro One's distribution system includes approximately 123,000 circuit kilometres of primary low-
voltage distribution lines and approximately 1,000 distribution and regulating stations. Other distribution
assets include poles, transformers, service centres and equipment.
Hydro One's distribution system services a predominantly rural territory. As a result of the lower
Exhibit No. 422 Case Nos. AVU-E-I7-- and AVU-G-I7--
C.Lopel Hydro One
Schedule 3, Page 127 of167
O
o population density in the Company's service territory, the Company's costs to provide distribution
services may be higher than those of distributors who service urban areas. Furthermore, unlike the
distribution systems found in urban areas, most of Hydro One's distribution system was not designed with
redundancy, to be interconnected in loops with other distribution lines, with the result that intemrptions
experienced at any point along a distribution line in Hydro One's network can cause all customers
downstream of the intemrption point to lose power. Accordingly, the reliability of Hydro One's
distribution system is lower than that of local distribution companies which service urban teritories that
typically have redundancy built into their systems. The Company engages in vegetation management
activities to maintain the reliability of Hydro One's distribution system on a preventive basis and to
protect public health and safety. This consists of the trimming or removal of trees to lower the risk of
contact with distribution lines, thereby reducing the risk of power outages, and preventing potential injury
to the public or employees. The Company's monitoring systems assist with determining areas of priority
and with system restoration. The Company relies on its local line crews for these restoration activities.
Hydro One's distribution business is involved in the connection of new sources of electricity generation,
including renewable energy. Hydro One invests in upgrades and modifications to its distribution system
to accommodate these new sources of generation and ensure the continued reliability of is distribution
network. As at December 31, 2016, there were approximately 15,000 small, mid-size and large embedded
generators connected to Hydro One's distribution network, including approximately 14,000 generators
with capacities of up to l0 kW. As at December 31,2016, Hydro One also had approximately
1,500 generators pending connection.
Hydro One has played a significant role in the installation of smart meters and the migration of
distribution customers to time of use pricing in Ontario. Smart meters are regarded as an integral means of
promoting a culture of conservation, and they allow customers to change their electricity consumption
patterns and reduce their costs. Hydro One has completed all material activities associated with the
implementation of smart meters, and has transitioned the vast majority of its customers to time of use
pricing.
Acquisitions
Agreement to Acquire Orillia Power
In August 2016, the Company reached an agreement to acquire Orillia Power, an electricity distribution
company located in Simcoe County, Ontario, for approximately $41 million, including the assumption of
approximately $ l5 million in outstanding indebtedness and regulatory liabilities, subject to closing
adjustments. The acquisition is subject to regulatory approval by the OEB.
Integration of Haldimand Hydro and Woodstock Hydro
ln 2015, the Company acquired Haldimand Hydro and Woodstock Hydro, two Ontario-based local
distribution companies. In September 2016, the Company successfully completed the integration of both
entities, including the integration of employees, customer and billing information, business processes, and
operations.
See "General Development of the Business - Acquisitions Generally" for more information.
Regulation
Distribution Rates
Distribution rates in Ontario are determined using a performance-based model set out in the OEB's
Renewed Regulatory Frameworkfor Electricity Distributors: A Performance-Based Approach, which is
Exhibit No. 423 CaseNos. AVU-E-I7--and AVU-G-17--
C.Lopez, Hydro One
Schedule 3, Page 128 of 167
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o sometimes referred to as the "RRF". Under the RRF, distributors in Ontario may choose one of three rate-
setting methods, depending on their capital requirements: 4ft Generation Incentive Rate-Setting (now
known as Price Cap IR), Custom Incentive Rate-Setting, or Annual Incentive Rate-Setting Index.
The RRF contemplates that a distributor will apply for the approval of its revenue requirement for an
initial base year covered by the rate decision. The revenue requirement for subsequent years is determined
based on a formula that accounts for inflation and certain productivity factors set by the regulator. The
revenue requirement in these subsequent years is set on the assumption that the distributor is lowering its
cost of service over the period covered by the rate decision due to efficiency or productivity
improvements. The RRF allows the distributor to retain all or a portion of the cost savings achieved in
excess of the estimate established by the regulator during the period covered by the rate decision. This
allows the distributor an ability to earn more than its allowed retum on equity. The RRF provides
incentives for distributors to achieve certain performance outcomes, namely: customer focus, operational
effectiveness, public policy responsiveness and financial performance. The OEB has indicated that
customer focused outcomes and continuous performance improvements by distributors are central to the
RRF framework objectives. The OEB has further indicated that distributors should develop plans that
respond to customer service needs.
A distributor must submit proposed performance measures as part of its application for distribution rates
under the RRF. Distributors may also propose their own performance measures for approval by the OEB.
In its most recent distribution application, Hydro One submitted eight additional quantitative measures
relating to areas that will be the subject ofincreased spending levels over the next few years, such as pole
replacements, distribution station refurbishments and vegetation management. Distributors are required to
report to the OEB on their performance against the performance measures approved as part of their most
recent rate decision.
The OEB's review process under the RRF follows a process similar to that of a transmission rate
application for the review ofthe anticipated cost of service for providing distribution services, other than
as noted above. Once the revenue requirement for distribution services is determined, it is allocated across
the distributor's customer rate classes using a methodology approved by the OEB resulting in the setting
of individual rates for distribution services based on each customer rate class. Hydro One currently has l3
customer rate classes.
Distribution rates in Ontario are not the same for all distributors and reflect the particular circumstances
of each distributor, including its own costs of providing electricity service to its own particular customers.
The OEB policy, A New Distribution Rate Design for Residential Electricity Customers, changes the
current distribution rate design for residential customers (a combination of a fixed monthly rate and a
variable charge) to a fixed monthly charge only. In December 2015, the OEB increased the transition
period for certain customer classes of Hydro One Networks Inc. to eight years to mitigate bill impacts.
Implementation will occur over the next three to seven years for Hydro One Networks Inc.'s residential
customers.
The OEB has also initiated a working group to consider possible changes to the design of rates for
commercial industrial customers. Changes to rate design will not impact the rates revenue requirement to
be collected for each customer class.
Distribution Rate Appl ications
The Company's distribution rates, other than the distribution rates of Hydro One Remote Communities
Inc., are determined using a performance-based model.
In March 2015,the OEB issued a decision regarding Hydro One Networks Inc.'s distribution rates for the
three-year period from 2015 to 2017, providing for a revenue requirement of $1,326 million for 2015,
$1,430 million for 2016 and $1,486 million for 2017. The 2015 revenue requirement reflects an approved
Exhibit No. 424 Case Nos. AVU-E-I7-- and AVU-G-I7--
C. Lopez, Hydro One
Schedule 3, Page 129 of 167
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rate base of $6,552 million, retum on equity of 9.30% and a deemed capital structure of 60% debt and
40%o eqtity. The rates are effective as of January I in each year. On January 14,2016, the OEB issued its
final decision and order approving Hydro One Networks Inc.'s draft rate order for 2016 rates.
In December 2016, the OEB issued its decision and order approving Hydro One Networks Inc.'s
distribution rates effective January 1,2017. The overall impact of this decision is a reduction of the
proposed 2017 revenue requirement to approximately $1,415 million from $1,486 million. The 2017
revenue requirement reflects an approved rate base of $7, 190 million, return on equity of 8.78Yo and a
deemed capital structure of 600/, debt and 40o/oequity. The overall impact of the new rates is a reduction
in distribution delivery charges for most residential customers.
In December 2016, the OEB approved increases to the rates charged in the service areas for the former
Haldimand Hydro, Woodstock Hydro and Norfolk Hydro, effective Jantary 2017.
Hydro One Networks Inc. expects to file a distribution rate application for 2018 to 2022 in the first
quarter of2017.
Hydro One Remote Communities Inc.'s business is exempt from a number of sections of the Electricity
Act which relate to the competitive market. For example, Hydro One Remote Communities Inc. continues
to apply bundled rates to customers in remote communities. Hydro One Remote Communities Inc.'s
business is operated on a break-even basis, without a retum on equity included in rates. As a result, any
net income or loss in the year related to the regulated operations of Hydro One Remote Communities Inc.
is recorded in a regulatory variance account for inclusion in the calculation of future customer rates.
For more information, see the Annual MD&A under the heading "Regulation".
Conservation and Demand Management
CDM requirements in Ontario require distributors to achieve specific energy savings targets by
encouraging their customers to reduce their energy usage. Distributors seek to achieve these targets
through a number of different initiatives, including by offering customers energy saving devices for use at
home, cash rebates for the purchase of energy efficient light bulbs and other products. Incentive programs
are also offered to small, medium, and large businesses, as well as industrial customers. Distributors are
responsible for developing and submitting CDM plans and reporting on their progress towards achieving
specific energy-savings targets. The IESO oversees compliance with CDM requirements in Ontario and
also reimburses distributors for the costs of complying with CDM requirements. Hydro One expects that
its costs of complying with CDM requirements will be fully reimbursed by the IESO. As a result, CDM-
related costs that are reimbursed by the IESO are not included in Hydro One's rate applications to the
OEB.
Distributors in Ontario are collectively required to achieve a total of 7 TWh of electricity savings by
December 31, 2020, with each local distribution company being allocated individual energy-savings
targets and budgets.
Targets and budgets for CDM were allocated to distributors in October 2014. Hydro One Networks Inc.'s
2015-2020 CDM energy savings target is 1,159 GWh and its CDM plan was approved by the IESO on
July 8, 2015. In December 2016, Hydro One Networks Inc.'s 2015-2020 CDM energy savings target was
revised to 1,221GWh to reflect the integration of the CDM targets of Norfolk Power, Haldimand Hydro
and Woodstock Hydro. In December 2016, Hydro One Networks Inc. also submitted a joint CDM plan
with another local distribution company to the IESO for approval. The joint target for Hydro One
Networks Inc. increased by 35 GWh to 1,256 GWh by 2020.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 130 of 167
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Capital Expenditures
Hydro One's asset sustainment activities are based on an assessment of asset condition. Distribution asset
renewals are undertaken when assessments indicate there is a high risk of failure and where further
maintenance activities are not appropriate. Capital expenditures for the Company's distribution business
in the near term are anticipated to focus on new load connections, storm damage, wood pole replacement,
and system capability reinforcement. In addition, the Company expects to continue to construct new
distribution lines and stations in the future in response to system growth forecasts, continued suburban
community development, high load relief requirements and requirements to connect new sources of
generation. The Company expects that it will spend approximately $647 million to $771 million per year
over the next five years on capital expenditures relating to its distribution business.
Hydro One is continuing to modernize its distribution system through the deployment of smart devices
(including remotely controllable switches and breakers as well as faulted circuit indicators) as power
system assets are renewed. Hydro One is also implementing a new Distribution Management System
("DMS") at its Ontario Grid Control Centre. The DMS will enable distribution components to be
monitored and controlled, perform real-time analysis and determine, with greater precision, the location
of equipment failures. Additional functionality is planned, in future, to allow field staff to view system
conditions remotely in real-time. Smaft metering data will also be used to deliver operational and asset
management benefits such as better notification of outages and their scope, asset loading information and
other data.
For more information on future capital expenditures, see the Annual MD&A under the subheading
"Capital Investments - Future Capital Investments".
C o mp et it iv e C o n d it io n s
Hydro One's distribution service area is set out in its licence issued by the OEB. Only one distributor is
permitted to provide distribution services in a service territory, and distributors have exclusive rights to
provide service to new customers located within their service territory. As a result, there is very little
direct competition for distribution services in Ontario, except near the borders of adjoining service
territories, where a distributor may apply to the OEB to claim the right to serve new customers who are
not currently connected to its distribution grid.
In March 2016,the OEB directed all local distribution companies to eliminate load transfer arrangements
by June 21 ,2017. Load transfer arrangements arise when a customer is within one distributor's service
area but is served by a second distributor. The Company has load transfer arrangements with over 50 local
distribution companies. Hydro One Networks Inc. has developed an implementation plan to eliminate
load transfer arrangements. As a result, some of the Company's customers will be transferred to the
adjacent local distribution companies and other customers will be added to the Company's customer base.
To create more efficiency in the distribution sector, the Premier's Advisory Council on Govemment
Assets endorsed the need for faster consolidation among local distribution companies in Ontario, which
may result in competition for acquisition or merger opportunities. Potential acquirers may include
strategic and financial buyers, in addition to other local distribution companies.
Other Business
Hydro One's other business segment consists of principally its telecommunications business, which
provides telecommunications support for the Company's transmission and distribution businesses as well
as certain corporate activities including a deferred tax asset. The telecommunication business is carried
out by its wholly-owned subsidiary Hydro One Telecom Inc. It also offers communications and
information technology solutions to organizations with broadband network requirements utilizing Hydro
One Telecom Inc.'s fibre optic network to provide diverse, secure and highly reliable connectivity.
Exhibit No. 426 Case Nos. AVU-E-17-- and AVU-G-I7--
C.Lopez, Hydro One
Schedule 3, Page l3l of 167
o
o Hydro One Telecom Inc. is not regulated by the OEB. However, Hydro One Telecom Inc. is registered
with the Canadian Radio-television and Telecommunications Commission as a non-dominant, facilities-
based carrier, providing broadband telecommunications services in Ontario with connections to Montreal,
Quebec, Buffalo, New York and Detroit, Michigan.
The other business segment represented approximately l2o/o of Hydro One's total assets as at
December 31,2016, and accounted for approximately 2o/o of its total revenue, net of purchased power in
each of 2016 and 2015. The deferred tax asset arose on the transition from the provincial payments in lieu
of tax regime to the federal tax regime in connection with the Company's initial public offering and
reflects the revaluation of the tax basis of Hydro One's assets to fair market value.
First Nations and M6tis Communities
Hydro One believes that building and maintaining respectful, positive and mutually beneficial
relationships with First Nations and Mdtis communities across the province is important to achieving the
Company's corporate objectives. Hydro One is committed to working with First Nations and M6tis
communities in a spirit of cooperation, partnership and shared responsibility. Hydro One's equify
partnership with the Saugeen Ojibway Nation in respect of the Bruce-to-Milton transmission line
demonstrates the Company's commitment to these principles. In keeping with the Company's First
Nations and Mdtis Relations Policy, Hydro One's First Nations and M6tis Relations team provides
guidance and advice to support the Company in developing and advancing positive relationships. Hydro
One also has several programs related to First Nations and Mdtis communities and their citizens. These
include educational and training opportunities which provide opportunities for work terms, First Nations
and M6tis procurement partnership agreements along with community investments, customer support and
outreach. Together, Hydro One Networks Inc. and Hydro One Remote Communities Inc. serve
approximately 90 First Nation communities.
The Company's Health, Safety, Environment and First Nations & Mdtis Committee of the Board is
responsible for assisting the Board in discharging the Board's oversight of responsibilities relating to
effective occupational health and safety and environmental policies and practices at Hydro One, and its
relationship with First Nations and Mdtis communities.
To gain efficiencies and cost reductions, Hydro One has outsourced certain non-core functions, including
facilities management services with respect to its stations and other facilities, and certain back-office
services such as information technology, payroll, supply chain, call centre and accounting services. The
Company's back-office services and call centre services are provided by a third parfy service provider
under an agreement that expires on December3l,2019 for back-office services, and on February 28,
2018 for call centre services. The Company has an option to renew the agreement for two additional terms
of approximately one year each. The Company's facilities management services are provided by a third
party service provider under an agreement that expires on December3l,2024 with an option for the
Company to renew the agreement for an additional term of three years.
Employees
As at December 31, 2016, Hydro One had approximately 5,500 regular employees and over 2,000 non-
regular employees province-wide comprised of a mix of skilled trades, engineering, professional,
managerial and executive personnel. Hydro One's regular employees are supplemented primarily by
accessing alarge external labour force available through arrangements with the Company's trade unions
for variable workers, sometimes referred to as "hiring halls", and also by access to contract personnel.
The hiring halls offer Hydro One the ability to access highly trained and appropriately skilled workers on
a project-by-project basis. This provides the Company with more flexibility to address seasonal needs and
unanticipated changes to its budgeted work programs. The Company also offers apprenticeship and
Exhibit No. 427 case Nos. Avu_E_I7__ "llrffii;;
Schedule 3, Page 132 of 167
o
o
Outsourced Services
o
o
technical training programs to ensure that future staffing needs will continue to be met.
For more information on employees, see the Annual MD&A under the heading "Hydro One Work
Force".
Health, Safety and Environmental Management
Hydro One has an integrated Health, Safety and Environment Management System that includes key
elements for the successful minimization of risk and continued performance improvements. Health, safety
and environmenlalhazards and risks are identified and assessed and controls are implemented to mitigate
significant risks. The Company has policies in place regarding Health and Safety, Environment,
Workplace Violence and Harassment and Public Safety.
Hydro One Networks Inc. is a designated "Sustainable Electricity Company" by the Canadian Electricity
Association. The brand demonstrates Hydro One's commitment to responsible environmental, social and
economic practices, and to the principles of sustainable development.
Given the nature of the work undertaken by Hydro One employees, health and safety remains one of the
Company's top priorities. The Company is committed to creating and maintaining a safe workplace which
is one of Hydro One's stated core values, and maintaining safety through a concentrated focus on the
elimination of serious incidents or "near-misses" which have the potential to cause serious injuries. The
Company has developed and is continuing to develop a number of programs and initiatives for accident
prevention and to minimize the risk of injury to the public associated with its facilities and operations.
Measures are in place to monitor, on a regular basis, health, safety and environment performance using
proactive and reactive measures and/or qualitative and quantitative measures. Since 2004, the evolution of
Hydro One's recordable rate, its key health and safety perforTnance measure, has seen a reduction of
approximately 85% in the number of recordable rate incidents. All measures are monitored by
management and by the Health, Safety, Environment and First Nations & Mdtis Committee. Management
compensation has been tied, in part, to success in achieving annual health and safety performance targets.
A program allowing for an effective early and safe return to work has allowed the Company to ensure
that, when injuries occur, employees recover and retum to the workplace as soon as possible.
ln 2016, Hydro One continued with its "Journey to Zero" safety initiative that began in 2009. This
initiative compares Hydro One to other companies to identifu performance gaps. Safety perception
assessments were completed in 2009,2013 and 2015. The assessment identified opportunities for
improvement and forms the development of new health and safety initiatives using cross-functional teams
from across the province.
Environmental Regulation
Hydro One is subject to extensive federal, provincial and municipal regulation relating to the protection of
the environment that governs, among other things, environmental assessments, discharges to water and
land and the generation, storage, transportation, disposal and release of various hazardous substances.
Estimated environmental liabilities are reviewed annually or more frequently if significant changes in
regulation or other relevant factors occur. Estimated changes are accounted for prospectively.
Permits and Approvals
The Company is required to obtain and maintain specified permits and approvals from federal, provincial
and municipal authorities relating to the design, construction and operation of new and upgraded
transmission and distribution facilities. Examples include environmental assessment approvals, permits
for facilities to be located in parks or other regulated areas, water crossing permits, and approvals to
discharge to air and water. Some projects may require environmental approvals from the federal
Exhibit No. 428 Case Nos. AVU-E-I7-- and AVU-G-I7--
C.Lopez, Hydro One
Schedule 3, Page 133 of 167
o
o govemment. Interconnections with neighbouring utilities in other provinces and states also require federal
approval and will be subject to federal regulatory review.
In general, larger projects are subject to an individual environmental assessment process, pursuant to the
Environmental Assessment Act (Ontario). The majority of approvals fall under a class environmental
assessment process which provides for more streamlined approvals. The scope, timing and cost of
environmental assessments are dependent on the scale and type of project, the location (urban versus
rural), the environmental sensitivity of affected lands and the significance of potential environmental
effects.
Regulation of Releases
Federal, provincial and municipal environmental legislation regulates the release of specific substances
into the environment through the prohibition of discharges that will or may have an adverse effect on the
environment, which can include liquids, gasses and noise. Releases occur in the course of the Company's
normal operations. Accordingly, Hydro One has spill, leak prevention and leak mitigation programs
involving the testing, replacement, repair and installation of containment systems including re-gasketting
of transformers and sulphur-hexafluoride-filled equipment. In addition, the Company has an emergency
response capability which the Company believes is sufficient to minimize the environmental impact of
spills and to comply with its legal obligations.
Pursuant tothe Climate Change Mitigation and Low-carbon Economy Act, 2016, the Province introduced
a cap and trade program in Ontario beginning January 1, 2017 . For more information, see "The Electricity
Industry in Ontario - Recent Legislative Amendments Affecting the Electricity Industry Generally -
Climate Change Mitigation and Low-carbon Economy Act, 20lA'.
Hazardous Substances
Hydro One manages a number of hazardous substances, such as PCBs, herbicides, and wood
preservatives. In addition, some facilities have substances present which are designated for special
treatment under occupational health and safety legislation, such as asbestos, lead and mercury. The
Company has environmental management programs in place to deal with PCBs, herbicides, asbestos, and
other hazardous substances.
Land Assessment and Remediation
Hydro One has a pro-active land assessment and remediation program in place to identiff and, where
necessary, remediate historical contamination that has resulted from past operational practices and uses of
certain long-lasting chemicals at the Company's facilities. These programs involve the systematic
identification of contamination at or from these facilities and, where necessary, the development of
remediation plans for the Company's properties and affected adjacent private properties. As at December
31,2016, future consolidated expenditures related to Hydro One's land assessment and remediation
program were estimated at approximately $61 million, and undiscounted liabilities were estimated at
approximately $66 million. These consolidated expenditures are expected to be spent over the period
ending 2032. Addirional acquisitions could add to land assessment and remediation expenditures. The
consolidated expenditures on this program for 2016 were approximately $9 million. These costs are
expected to be recovered in the Company's transmission and distribution rates.
Insurance
Hydro One maintains insurance coverage, including liability, all risk property, boiler and machinery and
directors' and officers' insurance. The Company also maintains other insurance coverage that is required
by law, covering risks such as automobile liability, pesticide liability and aircraft liability. The Company
does not have insurance for damage to its transmission and distribution wires, poles or towers located
Exhibit No. 429 CaseNos. AVU-E-l7--and AVU-G-I7--
C. Lopez, Hydro One
Schedule 3, Page 134 of 167
o
o
o outside transmission and distribution stations, including damage caused by severe weather, other natural
disasters or catastrophic events or for environmental remediation costs. The OEB has generally permitted
the recovery of costs associated with extreme weather events, such as the ice storm that occurred in 1998.
Reorganizations
In 2015, prior to the closing of the initial public offering of Hydro One Limited, Hydro One completed a
series of transactions resulting in, among other things, the acquisition by Hydro One Limited of all of the
issued and outstanding shares of Hydro One Inc. and the issuance of new common shares and preferred
shares of Hydro One Limited to the Province. The Province then sold a portion of its common shares of
Hydro One Limited pursuant to the initial public offering. A series of pre-closing steps occurred,
including:
On October 31,2015, Hydro One Inc. repurchased its existing preferred shares held by the
Province for cancellation at a price equal to the redemption price of the preferred shares (being
equalto approximately $323 million) satisfied by the issuance to the Province of common shares
of Hydro One Inc. having an aggregate fair market value equal to the price to be paid for the
preferred shares.
a
o
All of the issued and outstanding common shares of Hydro One Inc. were acquired by Hydro One
Limited in retum for the issuance to the Province of 12,197,500,000 common shares and
16,720,000 Series I preferred shares of Hydro One Limited.
The outstanding common shares of Hydro One Limited were consolidated such that 595,000,000
common shares were issued and outstanding immediately prior to the closing of the initial public
offering.
Under applicable Canadian securities laws, the acquisition of all of the issued and outstanding shares of
Hydro One Inc. was considered a "significant acquisition". Hydro One Limited filed a business
acquisition report in respect of the acquisition on January 14,2016. See also "General Development of the
Business" for more information.
RISK FACTORS
A discussion of Hydro One Limited's risk factors can be found under the heading "Risk Management and
Risk Factors" in the Annual MD&A.
DIVIDENDS
The Company did not declare or pay cash dividends in 2015. In 2016, the Company declared and paid
cash dividends to common shareholders as follows:
I This was the first common share dividend declared by the Company following the completion of its initial public ot'fbring in
November 2015. The $0.34 per share dividend included $0.13 for the postJPO period from November 5 to December 31, 2015,
and $0.21 for the quarter ended March 31, 2016.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 135 of 167
a
a
Date Declared Record Date Payment Date Amount Der Common Share
February ll,2016 March 17.2016 March 31,2016 $0.34'
May 5,2016 June 14,2016 June 30,2016 $0.2r
August 11,2016 September 14.2016 September 30. 2016 s0.21
November 10,2016 December 14,2016 December 30,2016 s0.21
O
30
Hydro One Inc. and certain of its subsidiaries were required to pay a $2.6 billion "departure tax"
to the Ontario Electricity Financial Corporation as a consequence of the initial public offering.
o
o
On February 9,2017, the Board declared a dividend of $0.21 per share on each of its outstanding
common shares to be paid on March 31,2017 to shareholders of record on March 14,2017 . The dividend
represents payment for the first quarter ending March 31,2017 .
ln 2016, the Company declared and paid cash dividends to the Province, the sole holder of the Series I
preferred shares as follows:
On February 9,2017, the Board declared a dividend of 50.265625 per share on each of its Series I
preferred shares and it was paid on February 21,2017.
Dividend Policv
The Board has established a dividend policy pursuant to which Hydro One Limited expects to pay an
annualised dividend amount on its common shares, based on atarget payout ratio of 70ohto 80% of net
income. The amount and timing of any dividends payable by Hydro One Limited will be at the discretion
of the Board and will be established on the basis of Hydro One's results of operations, maintenance of its
deemed regulatory capital structure, financial condition, cash requirements, the satisfaction of solvency
tests imposed by corporate laws for the declaration and payment of dividends and other factors that the
Board may consider relevant.
The preferred shares of Hydro One Limited are entitled to a preference over the common shares with
respect to the payment of dividends. Other than the foregoing, there is currently no restriction that would
prevent the Company from paying dividends at current levels.
For more information on dividends, see the notes to the audited consolidated financial statements of
Hydro One Limited as at and for the years ended December 31,2016 and 2015 under the headings
"Dividends" and "Subsequent Events".
Dividend Reinvestment Plan
On February 11,2016, the Board approved the creation of a Dividend Reinvestment Plan which is
currently in place. The Dividend Reinvestment Plan enables eligible shareholders to have their regular
quarterly cash dividends automatically reinvested in additional Hydro One common shares acquired on
the open market.
DESCRIPTION OF CAPITAL STRUCTURE
General Description of Capital Structure
The following description may not be complete and is subject to, and qualified in its entirety by reference
to, the terms and provisions of Hydro One Limited's articles, as they may be amended from time to time.
Hydro One Limited's authorized share capital consists of an unlimited number of common shares and an
unlimited number of preferred shares, issuable in series. As at December 31,2016, there were
595,000,000 common shares, 16,720,000 Series I preferred shares and no Series 2 preferred shares issued
and outstanding.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 136 of 167
Date Declared Record Date Pavment Date Amount per Preferred Share
February 11,2016 N/A February 22,2016 $0.32602739
May 5,2016 N/A May 20,2016 $0.265625
August ll,2016 N/A August 22,2016 s0.265625
November 10,2016 N/A November 21,2016 $0.265625
o
31
o Common Shares
Holders of common shares are entitled to receive notice of and to attend all meetings of shareholders,
except meetings at which only the holders of another class or series of shares are entitled to vote
separately as a class or series, and holders of common shares are entitled to one vote per share at all such
meetings of shareholders. Hydro One Limited's common shares are not redeemable or retractable. Subject
to the rights, privileges, restrictions and conditions attaching to any other class or series of shares,
including the Series I preferred shares and Series 2 prefered shares, holders of common shares are
entitled to receive dividends if, as, and when declared by the Board. Subject to the rights, privileges,
restrictions and conditions attaching to any other class or series ofshares, including the Series I preferred
shares and Series 2 preferred shares, holders of common shares are also entitled to receive the remaining
assets of Hydro One Limited upon its liquidation, dissolution or winding-up or other distribution of
Hydro One Limited's assets for the purposes of winding-up its affairs. See "Dividends - Dividend
Policy" for a description of Hydro One Limited's dividend policy.
The Voting Securities of Hydro One Limited, which include the common shares, are subject to share
ownership restrictions under the Electricity Act and certain other provisions contained in the articles of
Hydro One Limited related to the enforcement of those share ownership restrictions. The share ownership
restrictions provide that no person or company (or combination of persons or companies acting jointly or
in concert), other than the Province or an underwriter who holds Voting Securities solely for the purposes
of distributing them to purchasers who comply with the share ownership restrictions, may beneficially
own or exercise control or direction over more lhan l0%o of any class or series of Voting Securities of
Hydro One Limited.
Preferred Shares
Hydro One Limited may from time to time issue preferred shares in one or more series. Prior to issuing
shares in a series, the Board is required to fix the number of shares in the series and determine the
designation, rights, privileges, restrictions and conditions attaching to that series ofpreferred shares.
Subject to the OBCA, holders of Hydro One Limited's preferred shares or a series thereof are not entitled
to receive notice of, to attend or to vote at any meeting of the shareholders of Hydro One Limited except
that votes may be granted to a series ofpreferred shares when dividends have not been paid on any one or
more series as determined by the applicable series provisions. Each series of preferred shares ranks on
parity with every other series of preferred shares with respect to dividends and the distribution of assets
and return of capital in the event of the liquidation, dissolution or winding up of Hydro One Limited. The
preferred shares are entitled to a preference over the common shares and any other shares ranking junior
to the preferred shares with respect to payment of dividends and the distribution of assets and retum of
capital in the event of the liquidation, dissolution or winding up of Hydro One Limited.
Series I Preferred Shares and Series 2 Prefened Shares
For the period commencing from October 31,2015, and ending on and including November 19,2020,the
holders of Series I preferred shares will be entitled to receive fixed cumulative preferential dividends of
$1.0625 per share per year, if and when declared by the Board, payable quarterly on the 20s day of
November, February, May and August in each year. The dividend rate will reset on November 20,2020
and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada
bondyield and3.53o/o. TheSeries I preferredshareswill notberedeemablebyHydroOneLimitedprior
to November 20, 2020, but will be redeemable by Hydro One Limited on November 20, 2020 and on
November 20 every fifth year thereafter at a redemption price equal to $25.00 for each Series I preferred
share redeemed, plus any accrued or unpaid dividends. The holders of Series I preferred shares will have
the right, at their option, on November 20, 2020 and on November 20 every fifth year thereafter, to
convert all or any oftheir Series I preferred shares into Series 2 preferred shares on a one-for-one basis,
subject to certain restrictions on conversion.
Exhibit No. 432 Case Nos. AVU-E-I7-- and AVU-G-I7--
C. Lopez, Hydro One
Schedule 3, Page 137 of 167
o
o
o The holders of Series 2 prefered shares will be entitled to receive quarterly floating rate cumulative
dividends, if and when declared by the Board, at a rate equal to the sum of the then three-month
Government of Canada treasury bill rate and3.53Yo as reset quarterly. The Series 2 preferred shares will
be redeemable by Hydro One Limited at a redemption price equal to $25.00 for each Series 2 preferred
share redeemed if redeemed on November 20,2025, or on November 20 every fifth year thereafter or
525.50 for each Series 2 preferred share redeemed if redeemed on any other date after November 20,
2020, in each case plus any accrued or unpaid dividends. The holders of Series 2 preferred shares will
have the right, at their option, on November 20,2025, and on November 20 every fifth year thereafter, to
convert all or any of their Series 2 preferred shares into Series I preferred shares on a one-for-one basis,
subject to certain restrictions on conversion.
In the event of the liquidation, dissolution or winding-up of Hydro One Limited, or any other distribution
of assets of Hydro One Limited for the purpose of winding-up its affairs, the holders of Series I preferred
shares and Series 2 preferred shares will be entitled to receive $25.00 for each Series I preferred share
and each Series 2 preferred share held by them, plus any unpaid dividends, before any amounts are paid
or any assets of Hydro One Limited are distributed to holders of common shares and any shares ranking
junior to the Series I preferred shares and Series 2 preferred shares. After payment of those amounts, the
holders of Series 1 preferred shares and Series 2 preferred shares will not be entitled to share in any
further distribution of the property or assets of Hydro One Limited.
Except as required by the OBCA, neither the holders of Series 1 preferred shares nor the holders of
Series 2 preferred shares shall be entitled to receive notice of, or to attend meetings of shareholders of
Hydro One Limited and shall not be entitled to vote at any such meeting, unless Hydro One Limited fails
for eight quarters, whether or not consecutive, to pay in full the dividends payable on the Series I
preferred shares or Series 2 preferred shares, as applicable, whereupon the holders of Series I preferred
shares and Series 2 preferred shares, as applicable, shall become entitled to receive notice of and attend
all meetings of shareholders, except class meetings of any other class of shares, and shall have one vote
for each Series I preferred share or Series 2 preferred share held at such meetings, as applicable.
CREDIT RATINGS
For a description of Hydro One Limited's credit ratings, see the Annual MD&A under the heading
"Liquidity and Financing Strategy".
MARKET FOR SECURITIES
Trading Price and Volume
The common shares are listed on the TSX under the symbol "H". The following table sets fonh the high
and low reported trading prices and the trading volume of the common shares on the TSX for each month
commencing January 2016:
Period Hieh ($) Low ($) Volume
January 2016
o
o
February 2016
March 2016
April20l6
May 2016...
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 138 of 167
22.60
23.31
24.50
24.50
24.84
25.98
21.85
21.90
23.15
23.50
23.56
24.14
3,929,776
4,489,699
7,835,876
21,727,653
23,222,353
30,645,553June 2016.
33
O
o
26.80
26.48
26.54
26.02
24.58
23.65
24.49
24.17
24.08
Period
July 2016...
August 2016.........
September 2016.
October 2016.........
November 2016
December 2016.
January 2017.........
February 2017.........
March I to March 242017......
Hieh ($) Low ($) Volume
Position/Title Independent
25.51
25.10
25.36
24.02
22.06
22.59
23.49
23.22
23.04
Principal Occupation
8,548,768
7,138,631
7 ,031,417
6,765,511
11,932,522
9,719,103
8,368,1 l6
g,4oo,ooo
8,400,000
Committees
The Series I preferred shares and Series 2 preferred shares of Hydro One Limited are not listed or quoted
on any marketplace.
DIRECTORS AND OFFICERS
Directors and Executive Officers
The following table sets forth information regarding the directors and executive officers of Hydro One as
of December 31, 2016. Each of the directors was first appointed on August 31,2015. Each director is
elected annually to serve for one year or until his or her successor is elected or appointed.
Name, Province or State
and Country of
Residence Age
Mayo Schmidt
Ontario, Canada
Paul Barry
North Carolina. United
States
Gregory Kiraly
Ontario. Canada
Judy McKellar
Ontario. Canada
Ferio Pugliese
Ontario, Canada
James Scarlett
Ontario, Canada
Michael Vels
Ontario. Canada
59 President and Chief
Executive Officer and
Director
59 Executive Vice
President, Strategy and
Corporate Development
52 Chief Operating Officer
60 Executive Vice
President, Chief Human
Resources Officer
48 Executive Vice
President, Customer
Care and Corporate
Affairs
63 Executive Vice
President, ChiefLegal
Officer
No President and Chief Executive
Officer
Executive Vice President.
Strategy and Corporate
Development
Chief Operating Officer
Executive Vice President. Chief -Human Resources C)ffi cer
Executive Vice President,
Customer Care and Corporate
Affairs
Executive Vice President, Chief -Legal Officer
Chief Financial Officer
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 139 of 167
o 55 Chief Financial Officcr
34
o Name, Province or State
and Country of
Residence CommitteesPosition/Title Independent Principal 0ccupationAge
64
o
David F. Denison
Ontario, Canada
Ian Boume(r)
Alberta, Canada
Charles Brindamour
Ontario. Canada
Marcello (Marc) Caira(r;
Ontario, Canada
Christie Clark
Ontario, Canada
George Cooke(r)
Ontario, Canada
Margaret (Marianne)
Harris
Ontario, Canada
James Hinds
Ontario, Canada
Kathryn Jackson(r)
Pennsylvania. United
States
Roberta Jamieson
Ontario. Canada
Frances Lankin
Ontario, Canada
Philip S. Orsino
Ontario, Canada
Director and Chair of the Yes
Board
69 Director Yes
46 Director Yes
62 Director Yes
63 Director Yes
63 Director Yes
59 Director Yes
59 Director Yes
59 Director Yes
64 Director Yes
62 Director Yes
62 Director Yes
Board Chair, Hydro One
Limited and Hydro One Inc.
Chair, Ballard Power Systems
Inc.
Chief Executive Officer, Intact
Financial Corporation
Vice-Chairman, Restaurant
Brands Intemational Inc.
Corporate Director
President, Martello Associates
Consulting / Chair, OMERS
Administration Corporation
Corporate Director
Corporate Director
Corporate Director
President and Chief Executive
Officer, Indspire
Human Resources
Committee (Chair);
Nominating, Corporate
Govemance. Public Policy
& Regulatory Committee
Audit Committee; Human
Resources Committee
Human Resources
Committee; Nominating.
Corporate Governance,
Public Policy & Regulatory
Committee
Human Resources
Committee; Nominating,
Corporate Governance,
Public Policy & Regulatory
Committee
Audit Committee; Health,
Safety, Environment and
First Nations & Mdtis
Committee
Human Resources
Committee; Health, Safety,
Environment and First
Nations & Mdtis
Committee (Chair)
Audit Committee; Health,
Safety, Environment and
First Nations & Mdtis
Committee
Nominating, Corporate
Governance. Public Policy
& Regulatory Committee;
Health, Safety,
Environment and First
Nations & Mdtis
Committee
Audit Committee; Health.
Saf'ery, Environment and
First Nations & Mdtis
Committee
Corporate Director Audit Committee;
Nominating, Corporate
Governance. Public Policy
& Regulatory Committee
Corporate Director Audit Committee (Chair);
Nominating, Corporate
Govemance, Public Policy
& Regulatory Committee
Corporate Director Human Resources
Exhibit No. 4
CaseNos. AVU-E-17- and AVU-G-17-
C. Lop"r, Hydro One
Schedule 3, Page 140 of 167
o
Jane Peverett(r)58 Director Yes
35
a Name, Province or State
and Country of
Residence Position/Title Independent Principal OccupationAge Committees
British Columbi4 Canada
Gale Rubensteintr)
Ontario. Canada
63 Director Yes
Committee; Nominating.
Corporate Govemance,
Public Policy & Regulatory
Committee (Chair)
Human Resources
Committee; Health, Safety,
Environment and First
Nations & Mdtis
Committee
o
Parlner, Goodrnans LLP
Notes:
( I ) These directors have been designated as the Province's nominees to the board of directors of Hydro One lbr the purpose of
the Govemance Agreement.
The following includes a brief profile of each of the executive officers of Hydro One, which include a
description oftheir present occupation and their principal occupations for the past five years. For profiles
of each of the directors of Hydro One, see Hydro One Limited's Management Information Circular under
the subheading "About the Nominated Directors - Director Profiles".
Mayo Schmidt is the President and Chief Executive Officer of Hydro One. Prior to joining Hydro One,
Mr. Schmidt served as President and Chief Executive Officer at Viterra Inc., a global food ingredients
company operating in l4 countries. Early in his career, Mr. Schmidt held a number of key management
positions of increasing responsibility at General Mills, Inc. until he joined ConAgra as President of their
Canadian operations and spearheaded ConAgra's expansion into Canada.ln2007, he led a $2.0 billion
acquisition of Agricore United, then a $2.2 billion acquisition of ABB, Australia's leading agriculture
corporation, growing Viterra Inc. from a $200 million market capitalization to finally a sale in 2012 for
over $7.5 billion. Mr. Schmidt currently sits on the Board of Directors of Agrium Inc. as Chairman of the
Governance Committee and Chairman of the Special Committee for the Merger of Equals of Agrium and
Potash Corp. forming a $38 billion global fertilizer giant. He is a member of Harvard University Private
and Public, Scientific, Academic and Consumer Food Policy Group, and is on Washburn University's
Foundation Board of Trustees. Mr. Schmidt received his Honorary Doctorate of Commerce from
Washburn in2016 and his B.B.A. from Washburn in 1980.
Effective September l, 2016, Paul Barry was appointed to the role of Executive Vice President, Strategy
and Corporate Development of Hydro One Networks Inc. Mr. Barry has significant strategy, business
development and financial expertise in the electric power, natural gas, and water utility sectors. Mr. Barry
was recently Chief Executive Officer and founding partner of Public Infrastructure Partners LLC, a power
and utility strategic advisor to leading private equify, infrastructure, and pension funds in the U.S.,
Canada, and Europe. Mr. Barry's prior executive leadership roles include Senior Vice President and Chief
Development Officer, Head of Mergers & Acquisitions, and President of the commercial and
international business for Duke Energy Corporation. At Duke Energy, Mr. Barry was responsible for
executing over $50 billion of strategic transactions that transformed the company into the largest electric
utility in North America. He served as CFO for Pepco Holdings, a Fortune 500 mid-Atlantic utility based
in Washington, D.C., and was Vice President, Business Development, Energy Financial Services, for
General Electric Company. Mr. Barry also served as Senior Advisor, Cify of Los Angeles, Department of
Water and Power (LADWP), the largest municipal electric and water utility in the U.S., and as Executive
Vice-President and Chief Financial Officer of Kinross Gold Corporation. Mr. Barry earned an MBA
from Harvard Business School, where he also attended the Executive Program, and a Bachelor of Science,
magna cum laude, in Finance from Northeastern University.
Effective September 12, 2016, Gregory Kiraly was appointed to the role of Chief Operating Officer
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 141 of 167
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a (COO) of Hydro One. As COO, Mr. Kiraly oversees the transmission and distribution value chain
including Planning, Engineering, Construction, Operations, Maintenance, and Forestry; Shared Services
functions including Facilities, Real Estate, Fleet, and Procurement; and the Telecom and Remote
Communities subsidiaries. Mr. Kiraly is a power and utilities executive with 30 years of experience. He
has an extensive background in energy transmission and distribution, in both electricity and gas, having
served in various executive leadership roles across three of the largest investor-owned utilities in the U.S.;
Pacific Gas and Electric (PG&E), Commonwealth Edison (ComEd), and Public Service Electric & Gas
Company (PSE&G). Mr. Kiraly most recently held the role of Senior Vice President, Electric
Transmission and Distribution for PG&E in San Francisco, and also served in several other key executive
assignments over the past eight years. Prior to joining PG&E, Mr. Kiraly held executive-level positions at
Capital Commonwealth Edison (Exelon) in Chicago from 2000-2008 in the areas of Distribution System
Operations, Construction and Maintenance, and Energy Delivery. Prior to ComEd, Mr. Kiraly started his
career at PSE&G in New Jersey, having served in various leadership roles over 15 years, where his
accountabilities focused on Health and Safety, Electric and Gas Distribution.
Judy McKellar is the Executive Vice President, Chief Human Resources Officer of Hydro One Inc. She
was appointed to this position onNovember 11,2016. Ms. McKellar has held various roles of increasing
responsibility at Hydro One Networks Inc., an indirect subsidiary of Hydro One Limited, in the Human
Resources department over her 30+ year career and was appointed VP of Human Resources in 2010. In
2014, she assumed the additional responsibility of Senior Vice President of People and Culture/Health,
Safety and Environment and serves as the accountable executive for the Human Resources Committee of
the Board of Directors. Ms. McKellar earned a Bachelor of Arts degree from Victoria College, University
of Toronto and was recently named as one of 2015's 100 Most Powerful Women in Canada by
PricewaterhouseCoopers in the "Public Sector" category.
Effective September 9, 2016, Ferio Pugliese was appointed to the role of Executive Vice President,
Customer Care and Corporate Affairs of Hydro One Networks Inc. Prior to his appointment, Mr. Pugliese
held progressively senior leadership roles in hospitality, pulp and paper and airline industries with
responsibility for human resources, operations and customer service. Since 2007, Mr. Pugliese was a
member of the Executive Leadership team at Wesdet Airlines serving as WestJet's Executive Vice
President People, Culture and Inflight Services and in 2013 led the launch and successful operation of the
company's regional airline as President of WestJet Encore. WestJet Encore was recognized for having the
continent's top on-time performance for regional airlines in 2015. Mr. Pugliese is highly recognized as a
market leader in customer service and brings expertise in building and leading a winning culture focused
on serving customers and communities. Mr. Pugliese was recognizedby Caldwell Partners as one of
Canada's Top 40 under 40 in 2007. He holds a Master of Arts degree in Adult Education from Central
Michigan University, an Honours Bachelor of Arts degree in Social Science and an Honours Bachelor of
Commerce degree from the Universiry of Windsor.
Effective September 1,2016, James Scarlett was appointed as Executive Vice President and Chief Legal
Officer of Hydro One. Prior to joining Hydro One, Mr. Scarlett was a Senior Partner at Torys LLP. He
joined Torys in March 2000 and held a number of leadership roles at the firm, including head of Torys'
Capital Markets Group, Mining Group and International Business Development Strategy. Mr. Scarlett
was also a member of the firm's Executive Committee from 2009-2015. Prior to joining Torys, Mr.
Scarlett was a partner at another major Canadian law firm. While at that firm Mr. Scarleff held leadership
roles as head of its Corporate Group, Securities Group and as a member of its Board. Mr. Scarlett was
also seconded to the Ontario Securities Commission in 1987 and was appointed as the first Director of
Capital Markets in 1988, a position he held until his return to private law practice in 1990. Mr. Scarlett is
currently a director of Camp Oochigeas, a charity for kids with cancer. Mr. Scarlett earned his law degree
(J.D.) from the University of Toronto in l98l and his Bachelor of Commerce Degree from the University
of McGill in 1975. He is highly recognized in his profession having been consistently and repeatedly
named to numerous prestigious lists and rankings. ln 2015, Mr. Scarlett earned his ICD.D (lnstitute of
Corporate Directors) desi gnation.
Exhibit No. 4
CaseNos. AVU-E-I7- and AVU-G-I7-
C. Lop"r, Hydro One
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Schedule 3, Page 142 of 167
O Michael Vels is the Chief Financial Officer of Hydro One. Before joining Hydro One, Mr. Vels was the
Chief Financial Officer for Maple Leaf Foods Inc. Mr. Vels had over 20 years of experience with Maple
Leaf Foods Inc. where he was responsible for leading organizational change, multiple capital market
transactions, business acquisitions and divestitures, information technology transformations and
restructurings. He also served on the board of directors of Maple Leaf Foods Inc.'s public traded
subsidiary, Canada Bread Company, Limited. Mr. Vels led complex multi-divisional finance teams,
information solutions and communications and investor relations functions and has considerable
experience with mergers, acquisitions and divestitures. He currently serves on the Board of Directors of
Canada's National Ballet School. Mr. Vels earned a Bachelor of Accountancy from the University of
Witwatersrand, in Johannesburg, South Africa. He is a Chartered Accountant (South African Institute of
Chartered Accountants) and he has eamed his ICD.D (lnstitute of Corporate Directors) designation.
Information Regarding Certain Directors and Executive Officers
As at December 31, 2016,the directors and executive officers of Hydro One Limited beneficially owned,
controlled or directed, directly or indirectly, as a group, 128,608 common shares, which represented
approximately 2o/o of the outstanding common shares.
Corporate Cease Trade Orders and Bankruptcies
Except as described below:
none of the directors or executive officers of Hydro One Limited is, or within the last l0 years
has served as, a director or executive officer of any company that, during such service or within a
year after the end of such service, became bankrupt, made a proposal under any legislation
relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement
or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its
ASSCTS;
none of the directors or executive officers of Hydro One Limited is, or within the last l0 years
has served as, a director, chief executive officer or chief financial officer of any company that,
during such service or as a result ofan event that occurred during such service, was subject to an
order (including a cease trade order, or similar order or an order that denied access to any
exemption under securities legislation), for a period of more than 30 consecutive days; or
a
o
a
o
none of the directors or executive officers of Hydro One Limited nor any shareholder holding
shares sufficientto materially affect control of Hydro One Limited, within the last l0 years has
become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or
become subject to or instituted any proceedings, arrangement or compromise with creditors, or
had a receiver, receiver manager or trustee appointed to hold the assets ofthe director.
In May 2004, Saskatchewan Wheat Pool Inc., a predecessor to Viterra Inc., initiated a disposition of its
hog operations, which had been carried on through certain of its subsidiaries, through a court supervised
process under the Companies' Creditors Arrangement Act (Canada). On April 12, 2005, the
Saskatchewan Financial Services Commission issued a cease trade order against four of these subsidiaries
for failing to file the required annual continuous disclosure documents. The cease trade order was revoked
on October 18, 2010 pursuant to Viterra Inc.'s application to effect a re-organization of the entities in
question. Mr. Schmidt served as an officer and/or director of these entities at the time.
Mr. Orsino was a director of CFM Corporation from July 2007 until his resignation in March 2008. In
April 2008, CFM filed for protection under the Companies' Creditors Arrangement Act (Canada).
Exhibit No. 4
Case Nos. AVU-E-17- and AVU-G-17-
C. Lop.r, Hydro One
38
Schedule 3, Page 143 of 167
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Ms. Peverett was a director of Postmedia Network Canada Corp. between April 2013 and January 2016.
On October 5,2016, within one year of Ms. Peverett's resignation from the board of directors, Postmedia
completed a recapitalization transaction (the recapitalization transactlan) pursuant to a court approved
plan of arrangement under the Canada Business Corporations Acl. As part of the recapitalization
transaction, approximately US $268.6 million of debt was exchanged for shares that represented
approximately 98% of the outstanding shares at that time. Additionally, Postmedia repaid, extended and
amended the terms of its outstanding debt obligations pursuant to the recapitalization transaction.
Penalties or Sanctions
None of the directors or executive officers of Hydro One Limited, nor any shareholder holding shares
sufficient to materially affect control of Hydro One Limited, has been subject to any penalties or
sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has
entered into a settlement agreement with a securities regulatory authority or been subject to any other
penalties or sanctions imposed by a court or regulatory body that would likely be considered important to
a reasonable investor making an investment decision.
Conflicts of Interest
To the best of the Company's knowledge, there are no existing potential conflicts of interest among the
Company and the directors or executive officers of the Company as a result of their outside business
interests as at the date of this annual information form. Certain of the directors and executive officers
serve as directors and executive officers of other public companies. Accordingly, conflicts of interest may
arise which could influence these persons in evaluating possible acquisitions or in generally acting on
behalf of the Company.
Indebtedness of Directors and Executive Officers
No director, executive officer, employee, former director, former executive officer or former employee or
associate of any director or executive officer of Hydro One Limited or any of its subsidiaries had any
outstanding indebtedness to Hydro One Limited or any of its subsidiaries except routine indebtedness or
had any indebtedness that was the subject of a guarantee, support agreement, letter of credit or other
similar arrangement or understanding provided by Hydro One Limited or any of its subsidiaries.
AUDIT COMMITTEE
The Audit Committee must consist of at least three directors, all of whom are persons determined by
Hydro One to be both "independent" (within the meaning of all Canadian securities laws and stock
exchange requirements and the Governance Agreement) and "financially literate" (within the meaning of
other applicable requirements or guidelines for audit committee service under securities laws or the rules
of any applicable stock exchange, including National Instrument 52-ll0 - Audil Committees). At least
one member of the Audit Committee will qualiff as an "audit committee financial expert" as defined by
the applicable rules of the United States Securities and Exchange Commission. The Audit Committee
comprises Philip S. Orsino (Chair), Charles Brindamour, George Cooke, James Hinds, Roberta Jamieson
and Frances Lankin. Each of the audit committee members has an understanding of the accounting
principles used to prepare Hydro One's financial statements and varied experience as to the general
application of such accounting principles, as well as an understanding of the internal controls and
procedures necessary for financial reporting.
The Board has adopted a written charter for the Audit Committee, in the form set out under Schedule "A"
hereto, which sets out the Audit Committee's responsibilities.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 144 of 167
o
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a Relevant Education and Experience
Charles Brindamour
Mr. Charles Brindamour is the Chief Executive Officer of Intact Financial Corporation, Canada's largest
property and casualty insurance provider. Mr. Brindamour began his career with Intact in 1992 as an
actuary and held over the years a number of progressive management positions. Under Mr. Brindamour's
leadership, the company became an independent and widely-held Canadian company in 2009 and two
years later engineered the acquisition of AXA Canada; the largest acquisition in the history of Canada's
property and casualty insurance industry. Mr. Brindamour is a board member of Intact Financial
Corporation, the C.D. Howe Institute, the Geneva Association, the Business Council of Canada and
Branksome Hall. He is also a member of the Advisory Committee of the University of Waterloo's
Climate Change Adaptation Project, serves on the advisory board of Gibraltar Growth Corporation and is
co-chair of Laval University's "Grande Campagne". Mr. Brindamour is a graduate of Laval University in
Actuarial Sciences and an associate of the Casualty Actuarial Society.
George L. Cooke
Mr. George Cooke is a corporate director and the Chair of the board of directors of the OMERS
Administration Corporation, CANATICS (Canadian National Insurance Crime Services) and the Ontario
Lottery and Gaming Corporation. OMERS is one of Canada's largest pension funds and OMERS
Administration Corporation is responsible for pension services and administration, investments, and plan
valuation. Mr. Cooke is the former President and CEO of The Dominion of Canada General Insurance
Company (The Dominion), formerly a properfy and casualty insurance company, a position he held from
1992to August 2012.ln August 2012,Mr. Cooke retired from his role as President of The Dominion and
continued to hold the position of Chief Executive Officer of the company until December 31, 2012. Mr.
Cooke obtained a Bachelor of Arts degree (Hons.) in Political Studies and a Masters of Business
Administration degree from Queen's University. He also holds an Honorary Doctor of Laws degree from
Assumption University in Windsor. Mr. Cooke was a member of the Board of Directors of The Dominion
(1992-2013} the Insurance Bureau of Canada (1992-2013), E-L Financial Corporation (1992-2012),
Empire Life (1992-2002) and Atomic Energy of Canada Limited (1995-1999), and he was also Executive
Vice-President with E-L Financial Corporation Limited (1992-2013).
James Hinds
Mr. James Hinds is a corporate director. He is also a director of Allbanc Split Corp., a mutual fund
company. He is a retired investment banker, having previously served as Managing Director of TD
Securities Inc., prior to which he held positions at CIBC Wood Gundy Inc. and Newcrest Capital Inc. Mr.
Hinds was the past chair of the Independent Electricity System Operator flESO), a Crown corporation
responsible for operating the electricity market, and was also chair of the former Ontario Power Authoriry
Board of Directors (2010-2014) until its merger with the IESO effective January 1,2015. Mr. Hinds was a
member of the Audit Committee of the Board of Directors of both the IESO and Ontario Power
Authority. Mr. Hinds received a Bachelor of Arts degree from Victoria College at the University of
Toronto, a Master of Business Administration from the Wharton School of Business and a law degree
from the University of Toronto Law School.
Roberta L. Jamieson
Ms. Roberta Jamieson is a Mohawk woman from the Six Nations of the Grand River Territory in Ontario,
where she still resides. She is also President and Chief Executive Officer of Indspire, Canada's premiere
Indigenous-led charity, and Executive Producer of the Indspire Awards, a nationally broadcast gala
honoring Indigenous achievement. Ms. Jamieson was the first First Nations woman to eam a law degree
in Canada; the first non-parliamentarian appointed an ex-officio member of a House of Commons
Committee; the first woman Ombudsman of Ontario (1989-1999); and in December 2011, she was the
Exhibit No. 440 Case Nos. AVU-E-I7-- and AVU-G-I7--
C.Lopez, Hydro One
Schedule 3, Page 145 of 167
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t first woman elected Chief of the Six Nations of the Grand River Territory. She was also a Director of the
Ontario Power Generation Inc. Board of Directors (2012-2015) and served on its Risk Oversight
Committee. Ms. Jamieson was appointed a Member of the Order of Canada in 1994 and promoted to an
Officer in2016. Ms. Jamieson holds a Bachelor of Laws from the University of Western Ontario.
Hon. Frances L. Lankin, P.C., C.M.
Hon. Frances Lankin is a corporate director. She was the former President and CEO of the United Way
Toronto (2001-2010), a Toronto-based charity. [n2009, Ms. Lankin was appointed to the Queen's Privy
Council for Canada and served for five years as a member of the Security Intelligence Review
Committee. Ln2014, Ms. Lankin was appointed to the Premier's Advisory Council on Government Assets
whose mandate was to review and identifr opportunities to modernize government business enterprises,
and in 201I and 2012, she co-led a review of Ontario's social assistance system as part of the province's
poverfy reduction strategy. During her first term as an elected Member of Provincial Parliament, Ms.
Lankin served in a variefy of Cabinet roles including Chair of Management Board, Minister of Health and
Long-Term Care, and Minister of Economic Development and Trade. Ms. Lankin is a Director of the
Ontario Lottery and Gaming Corporation and Chair of the Social Responsibility Committee of the Board.
She is the former Chair of the National NewsMedia Council, and a former Director of the Institute of
Corporate Directors, where she sat on the Audit Committee. Additionally, she sat on the Ontario Hospital
Association's Audit Committee from 2012-2013. Ms. Lankin was appointed a Member of the Order of
Canada in 2012. In April of 2016, Ms. Lankin was appointed to the Senate of Canada where she sits as an
Independent Senator from Ontario. Ms. Lankin seryes on the Senate Committee on Intemal Economy,
Budgets and Administration.
Philip S. Orsino, O.C., FCPA, FCA
Mr. Philip S. Orsino is a corporate director. He was the President and Chief Executive Officer of Jeld-
Wen Inc., a global integrated manufacturer of building products from 201 I until he retired in 2014.
Formerly until October 2005, Mr. Orsino was the President and Chief Executive Officer of Masonite
Intemational Corporation for 22 years. Mr. Orsino is a director of The Bank of Montreal and Chair of its
Audit and Conduct Review Committee and a director of The Minto Group, a private real estate developer,
and chair of the Audit Committee. He was the recipient of the 2003 Canada's Outstanding CEO of the
Year Award and received the University of Toronto's Distinguished Business Alumni Award for 2002.He
is a Fellow of the Institute of Chartered Accountants and holds a degree from Victoria College at the
University of Toronto. Mr. Orsino was appointed an Officer of the Order of Canada in2004.
Pre-Approval Policies and Procedures
The Audit Committee Charter requires that all non-audit services to be provided to Hydro One Limited or
any of its subsidiaries by the external auditors or any of its affiliates are subject to pre-approval by the
Audit Committee.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 146 of 167
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Auditors' Fees
The aggregate fees billed by KPMG to Hydro One and its subsidiaries in 2016 and 2015 for professional
services are presented below:
Audit
Audit-Related Fees(a)
Tax Fees:
SR&ED(5) Tax Credit Claim
General Tax Advice
Other Fees(6)
Total
Year ended
December 31,2016
$ 1,524,81
$488,854
$90,000
$57,500
s413,643
Year ended
December 31,2015
$ 1,376,
$ 412,200
$90,000
N/A
N/A
$2,574,81I $1,878,700
Notes:(r) The nature of the services rendered was: audit of annual financial statements of the Company and is subsidiaries, and
statutory and regulatory filings.(2) Additional services in 2016 included: IFRS reporting to the Province, audit of annual financial statements of acquired
companies and audit offinancial system enhancements and complex accounting.(3) $475,000 of these fees related to the company's initial public offering completed on November 5, 2015, which are
recoverable from the Province.
(4) The nature of the services rendered was: translations and audit of the Hydro One Pension Plan and related services
reasonably related to the performance of the audit or review of the Company's financial statements that are not reported
under Audit Fees.(5) Scientific Research and Experimental Development.(6) The nature ofthe services rendered was: due diligence activities.
PROMOTERS
Hydro One Inc. has taken the initiative in founding and organizing Hydro One Limited and may therefore
be considered a promoter of Hydro One Limited for the purposes of applicable securities legislation. In
connection with a series of pre-closing transactions completed in connection with the initial public
offering of Hydro One Limited, on October 31,2015, Hydro One Limited acquired all of the issued and
outstanding common shares of Hydro One Inc. from the Province in exchange for the issuance to the
Province of 16,720,000 Series I preferred shares and 12,197,500,000 common shares. See "Corporate
Structure - Corporate Structure and Subsidiaries", "General Development of the Business" and "Business
of Hydro One - Reorganizations".
Although the Province was identified as a promoter of Hydro One for purposes of the initial public
offering, as a result of the entering into of the Govemance Agreement and completion of the initial public
offering, Hydro One no longer believes the Province is a promoter of Hydro One.
AGREEMENTS WITH PRINCIPAL SHAREHOLDER
In connection with the November 2015 completion of the initial public offering of Hydro One Limited, on
November 5,2015, Hydro One and the Province entered into:
the Governance Agreement to address the Province's role in the governance of Hydro One
Limited; and
the Registration Rights Agreement to provide the Province with the right to require Hydro One
Limited to facilitate future secondary offerings of common shares or preferred shares owned or
controlled by the Province.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 147 of 167
o
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I The material terms of the Governance Agreement and the Registration Rights Agreement are summarized
below. A copy of each of the Governance Agreement and the Registration Rights Agreement has been
filed on SEDAR and is available under Hydro One Limited's profile at www.sedar.com. The discussion
in this annual information form concerning the Governance Agreement and the Registration Rights
Agreement is not complete, and is qualified in its entirety to the text of the Governance Agreement and
the Registration Rights Agreement, each of which should be refemed to. Not all of the terms of the
Governance Agreement and the Registration Rights Agreement are described in this annual information
form.
Governance Agreement
Governance Matters
The Govemance Agreement specifically addresses the following governance matters:
The govemance principles under which Hydro One Limited and its subsidiaries will be managed
and operated.
The nomination of directors, which includes: (i) the requirement for a fully independent board of
directors (other than the Chief Executive Officer), and (ii) the maximum number of directors that
may be nominated by the Province.
The election and replacement of directors.
Approvals requiring a special resolution of the directors.a
a
a
a
a
a
a
o Governance Principles
The Governance Agreement provides that the business and affairs of Hydro One Limited will be managed
and operated in accordance with certain governance principles.
The governance principles provide that:
Hydro One Limited will maintain corporate governance policies, procedures and practices
consistent with the best practices of leading Canadian publicly listed companies, having regard to
Hydro One Limited's ownership structure and the Governance Agreement.
The board of directors of Hydro One Limited is responsible for the management of the business
and affairs of Hydro One Limited.
With respect to its ownership interest in Hydro One Limited, the Province will engage in the
business and affairs of Hydro One Limited as an investor and not a manager, and the Province
intends to achieve its policy objectives through legislation and regulation, as it would with respect
to any other utility operating in Ontario.
Nomination of Directors
The Governance Agreement establishes qualification standards for director nominees, provides for the
number of directors that may be nominated and establishes a process for confirming nominees. The
Govemance Agreement recognizes that the Board is to be a fully independent board (independent of both
Hydro One and the Province), except the Chief Executive Officer, as described under the subheading " -
Independence" below.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page -l48 of 167
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o Dir e ct or Qual ifi c ati on St andards
Under the Govemance Agreement, the Province and the Nominating, Corporate Governance, Public
Policy & Regulatory Committee have agreed to nominate as directors, qualified individuals of high
quality and integrity who have the experience, expertise and leadership appropriate to manage a business
of the complexity, size and scale of the business of Hydro One Limited, on a basis consistent with the
highest standards for directors of Canada's leading public companies.
In addition, a majority of the directors must be resident Canadians (as defined in the OBCA).
Independence
Each director nominee must, among other things:
be independent of Hydro One Limited (other than the Chief Executive Officer) within the
meaning of Ontario securities laws governing the disclosure of corporate govemance practices;
be independent of the Province (other than the Chief Executive Officer). A director will be
independent of the Province if he or she would be independent of Hydro One Limited within the
meaning of Ontario securities laws goveming the disclosure of corporate governance practices if
the Province and each Specified Provincial Entity were treated as Hydro One Limited's parent
under that definition, but excluding, in the case only for the current directors, any prior
relationship that ended before August 31,2015.In addition, he or she may not be an employee or
official of the Province or any Specified Provincial Entity, either: (i) currently or, (ii) within the
last three years (excluding in the case of (ii), the curent directors whose prior relationship ended
before August 31,2015); ando
a
a
a
a meet the requirements of applicable securities and other laws and any exchange on which the
voting securities are listed.
A "Specified Provincial Entity" means (l)(a) the Ontario Financing Authority, (b) the IESO, (c) Ontario
Power Generation Inc., (d) the Electrical Safety Authority, (e) Ontario Electricity Financial Corporation,
(f) Infrastructure Ontario, or (g) a subsidiary of, or a person controlled by, any organization listed in (a) to
(f); and (2) the OEB.
Number of Directors
Under the articles of Hydro One Limited and pursuant to the terms of the Governance Agreement, the
Board will consist of no fewer than l0 and no more than l5 directors, with the initial Board consisting of
l5 directors until the first annual meeting of shareholders following the completion of the initial public
offering of Hydro One Limited.
Board Nominees
The nominees to be proposed for election to the Board by Hydro One Limited at annual meetings of
shareholders will be determined as follows:
a The Chief Executive Officer will be nominated.
The Province will be entitled to nominate that number of nominees equal to 40%o of the number
of directors to be elected (rounded to the nearest whole number), subject to certain exceptions.
The Nominating, Corporate Governance, Public Policy & Regulatory Committee will nominate
the remaining directors.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 149 of 167
a a
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Board Nomination Process
Under the Governance Agreement, the Province and representatives of the Nominating, Corporate
Govemance, Public Policy & Regulatory Committee are to meet after each annual meeting of
shareholders to discuss expected upcoming departures from the Board (whether due to resignation,
retirement or otherwise) and the impact such departures will have on the Board, having regard to
continued compliance with the Governance Agreement and the ability of the Board to satisff the Board's
skills matrix, diversity policy and other governance standards. Under the Govemance Agreement, at this
meeting the Nominating, Corporate Governance, Public Policy & Regulatory Committee is to make
recommendations to the Province respecting potential candidates for director, including potential
candidates for nomination by the Province. The Province has no obligation to nominate any of the
individuals recommended as one of its director nominees.
Not later than 60 days prior to the date by which proxy solicitation materials must be mailed for Hydro
One's annual meeting of shareholders, each of the Province and the Nominating, Corporate Governance,
Public Policy & Regulatory Committee will notifi the other of its proposed director nominees. If a
proposed nominee is not already a director of Hydro One or is then a director but whose circumstances
have materially changed in a way that would affect whether she or he would continue to meet the director
qualification standards under the Governance Agreement, then the Province or the committee, as the case
may be, will have l0 business days to confirm that nominee or reject that nominee on the basis that the
nominee does not meet those director qualification standards.
If a director nominee of the Province or the Nominating, Corporate Govemance, Public Policy &
Regulatory Committee is rejected, then the Province or the committee will be entitled to nominate
additional candidates until a nominee is confirmed by the other. If no replacement nominee is confirmed
for a director who was expected to depart from the board and that director does not resign, that director
shall be re-nominated. The Province and the committee will use commercially reasonable efforts to
confirm director nominees prior to the date by which proxy solicitation materials must be mailed for the
annual meeting of shareholders.
Election and Replacement of Directors
The Governance Agreement provides for how:
the Province will vote with respect to director nominees, including its nominees and those of the
Nominating, Corporate Govemance, Public Policy & Regulatory Committee,
the Province may vote at contested elections,
the Province may seek to replace the Board by withholding votes or voting for removal, and
a
a
a
a Board vacancies will be filled.
Voting on Director Elections
At any meeting of shareholders to elect directors, the Province is required to vote in favour of the
nominees selected by the Province and the Nominating, Corporate Governance, Public Policy &
Regulatory Committee in accordance with the board nomination process set out in the Governance
Agreement, except in the case of contested director elections or where the Province seeks to replace the
Board in accordance with the Govemance Agreement.
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 150 of 167
O
45
o Contested Elections
At any meeting of shareholders to elect directors of Hydro One Limited at which there are more nominees
for directors than there are directors to be elected, the Province may vote its Voting Securities in its sole
discretion (including to vote in favour of other candidates instead of the Province's nominees), except that
the Province willvote in favour of the election of the Chief Executive Officer as a director.
Right to Withhold Votes
The Province is required under the Governance Agreement to vote in favour of all director nominees of
Hydro One Limited, subject to the Province's overriding right to withhold from voting in favour of all
director nominees and its right to seek to remove and replace the entire Board, including in each case its
own director nominees but excluding the Chief Executive Officer and, at the Province's discretion, the
Chair. Depending on the number of withheld votes a director nominee receives at a meeting of
shareholders at which directors are to be elected, that director nominee may be required to tender his or
her resignation to the Board in accordance with Hydro One Limited's majority voting policy.
Province's Right to Replace the Board
The Province may at any time notify Hydro One Limited that it intends to request that Hydro One
Limited hold a meeting of shareholders for the purposes removing all of the directors in office, including
those nominated by the Province, with the exception of the Chief Executive Officer and, at the sole
discretion of the Province, the Chair (a "Removal Notice"). If the Province gives Hydro One a Removal
Notice, then the Chair shall coordinate the establishment of an ad hoc nominating committee comprising
one representative of each of the five largest beneficial owners of Voting Securities known to the
Company (or if at least three such owners are not willing to provide a representative, then the individuals
the Province proposes to nominate as replacement directors). The Province and the ad hoc nominating
committee will identiff and confirm replacement directors to be nominated at the shareholders' meeting
pursuant in accordance with the process set out in the Governance Agreement. Each replacement director
nominee must meet the same qualification and independence standards under the Govemance Agreement
as for any director nominee. Hydro One Limited will call the shareholders' meeting once the replacement
director nominees are confirmed pursuant to this process, and will hold the shareholders' meeting within
60 days of this confirmation. At the shareholders' meeting, the Province will vote in favour of removing
the current directors with the exception of the Chief Executive Officer and, at the Province's discretion,
the Chair, and will vote in favour of the new independent director nominees.
Board Approvals Requiring a Special Resolution of the Directors
The Governance Agreement provides that certain actions require approval by a resolution of the Board
passed by at least two-thirds of the votes cast at a meeting of the directors, or consented to in writing by
all of the directors (a "Special Board Resolution"). Matters requiring approval by a Special Board
Resolution include:
the appointment and annual confirmation of the Chair,
a
a
the appointment and annual confirmation of the Chief Executive Officer, and
changes to certain specified governance standards specified in the Govemance Agreement to be
"Hydro One's govemance standards".
The govemance standards subject to this special approval requirement include the Board's skills matrix,
the Ombudsman's Mandate, the Diversity Policy and the Majority Voting Policy, the Corporate
Governance Guidelines, the mandates of the Board and its committees, position descriptions for the Chief
Executive Officer, the Chair, the directors and committee chairs, and the Stakeholder Engagement Policy.
Exhibit No. 446 Case Nos. AVU-E-I7-- and AVU-G-I7--
C.Lopez, Hydro One
Schedule 3, Page l5l of 167
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Other Matters
In addition to the govemance matters noted above, the Govemance Agreement also addresses the
following matters:
a
a
Restrictions on the right of the Province to initiate fundamental changes.
Pre-emptive rights provided to the Province with respect to future issuances of Voting Securities
by Hydro One Limited.
Acquisition limits with respect to the Province's acquisition of outstanding Voting Securities.a
o
Restrictions on Province's Right to Initiate Fundamental Changes
The Province has agreed not to initiate a fundamental change to Hydro One Limited (as defined in Part
XIV of the OBCA), including not to initiate any arrangement or amalgamation involving Hydro One
Limited or any amendment to the articles of Hydro One Limited. The Province may, however, vote its
Voting Securities as it sees fit in the event any fundamental change is initiated by Hydro One Limited or
another shareholder of Hydro One Limited.
Pre-emptive Riehts
Hydro One Limited has granted to the Province a pre-emptive right to acquire additional Voting
Securities as part of future offerings by Hydro One Limited of Voting Securities. If Hydro One Limited
proposes to issue Voting Securities in the future, whether pursuant to a public offering or a private
placement, Hydro One Limited must notifi the Province of the proposal and provide information in
accordance with the provisions of the Governance Agreement at least 30 days in advance and must offer
the Province the right to purchase tp to 45oh of the Voting Securities being offered. Any Voting
Securities not purchased by the Province pursuant to the offer may be purchased by any other person
pursuant to the proposed offering.
The pre-emptive right also applies with respect to any proposed issuance by Hydro One Limited of
securities convertible into or exchangeable for Voting Securities except securities convertible into or
exchangeable for Voting Securities: (i) pursuant to certain employee or director compensation plans; (ii)
pursuant to any dividend re-investment arrangement of the Company that is consistent with dividend
reinvestment arrangements of other publicly traded utilities in Canada (including as to discount rates) and
that does not include a cash purchase option; (iii) pursuant to a rights offering that is open to all
shareholders of Hydro One Limited; or (iv) pursuant to any business combination, take-over bid,
arrangement, asset purchase transaction or other acquisition ofassets or securities ofa third party.
45% Acquisition Limit
The Province has agreed in the Govemance Agreement, subject to certain exceptions, not to acquire
previously issued Voting Securities if after that acquisition, the Province would own more than 45o/o of
any class or series of Voting Securities. This restriction does not limit the Province from acquiring Voting
Securities on an issuance by Hydro One Limited, including pursuant to the exercise by the Province of its
pre-emptive right. See "Agreements with Principal Shareholder - Governance Agreement - Other Matters
- Pre-emptive Rights" above.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 152 of 167
47
o Registration Rights Agreement
Demand Registration
Pursuant to the Registration Rights Agreement, Hydro One Limited has granted the Province certain
demand registration rights providing that, from time to time while the Province is a "control person" of
Hydro One Limited within the meaning of applicable Canadian securities laws, the Province can require
Hydro One Limited to file, at the expense of the Province (except for internal expenses of Hydro One
Limited or other expenses that Hydro One Limited would have incurred in the absence of such a request),
and subject to certain exceptions, one or more prospectuses and take other procedural steps as may be
reasonably necessary to facilitate a secondary offering in Canada of all or any portion of the common
shares or preferred shares ("shares") held by the Province.
" Piggt-Back" Registration
If Hydro One Limited proposes to undertake a Canadian public offering by prospectus, the Province is
entitled, while it is a "control person" of Hydro One Limited within the meaning of applicable Canadian
securities laws, to include shares owned by it as part of that offering, provided that the underwriters may
reduce the number ofshares proposed to be sold ifin their reasonablejudgment all ofthe shares proposed
to be offered by Hydro One Limited and the Province may not be sold in an orderly manner within a price
range reasonably acceptable to Hydro One Limited. In that case, the shares to be sold will be allocated pro
rata between Hydro One Limited and the Province based on their relative proportionate number of shares
requested to be included in the offering. Hydro One Limited and the Province will share the expenses of
the offering (except for intemal expenses of Hydro One Limited) in proportion to the gross proceeds they
each receive from the offering.
Private Placements
Hydro One Limited has also agreed to use commercially reasonable efforts to assist, at the Province's
expense, the Province in any sale by it of shares of Hydro One Limited pursuant to an exemption from the
prospectus requirements, in the preparation of an offering memorandum and other documentation and by
facilitating due diligence by the prospective buyer.
Customary Agreements
Hydro One Limited and the Province have also agreed to enter into customary agreements, including
"lock-up" agreements, on customary market terms in connection with such transactions. Hydro One
Limited also agreed to certain indemnification and contribution covenants in favour of the Province and
any underwriters involved in such transactions.
INTEREST OF MANAGEMENT AND OTHERS IN MATERJAL TRANSACTIONS
Other than as noted below and elsewhere in this annual information form, there are no material interests,
direct or indirect, of any director or executive officer of the Company, any shareholder that beneficially
owns, or controls or directs (directly or indirectly), more than 10%o of any class or series of Hydro One
Limited's outstanding voting securities, or any associate or affiliate of any of the foregoing persons, in
any transaction within the three years before the date hereof that has materially affected or is reasonably
expected to materially affect the Company.
Relationships with the Province and Other Parties
Ovemiew
The Province is Hydro One Limited's principal shareholder. The OEB is the principal regulator of
Exhibit No. 448 CaseNos. AVU-E-I7--and AVU-G-I7--
C.Lopez, Hydro One
Schedule 3, Page 153 of 167
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O
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Ontario's electricity industry. The Province appoints the board members of the OEB and fills any
vacancies on the OEB. The OEB is obligated to implement approved directives of the Province
concerning general policy and objectives to be pursued by the OEB and other directives aimed at
addressing existing or potential abuses of market power by industry participants. The IESO, among other
matters, directs the operation of the Ontario power system by balancing supply and demand of electricity
and directing electricity flow and assumed the responsibility for forecasting supply and demand of
electricity over the medium and long term to meet the needs of the province. The board of directors of the
IESO, other than its Chief Executive Officer, is appointed by the Province in accordance with the
regulations in effect from time to time under the Electricity Act.
In connection with the initial public offering of Hydro One Limited, the Company entered into the
Govemance Agreement and the Registration Rights Agreement with the Province. See "Agreements with
Principal Shareholder".
Transfer Orders
The transfer orders pursuant to which Hydro One Inc. acquired Ontario Hydro's electricity transmission,
distribution and energy services businesses as of April l, 1999, did not transfer certain assets, rights,
liabilities or obligations where the transfer would constitute a breach of the terms of any such asset, right,
liability or obligation or a breach of any law or order (the "trust assets"). The transfer orders also did not
transfer title to assets located on Reserves, which assets are held by the Ontario Energy Financial
Corporation. For more information, see the Annual MD&A under the subheading "Risk Management and
Risk Factors - Risk from Transfer of Assets Located on Reserves".
Hydro One is obligated under the transfer orders to manage both the trust assets (until it has obtained all
consents necessary to complete the transfer of title to these assets to Hydro One) and the assets otherwise
retained by the Ontario Electricity Financial Corporation that relate to Hydro One's businesses. Hydro
One has entered into an agreement with the Ontario Electricity Financial Corporation under which it is
obligated, in managing these assets, to take instructions from the Ontario Electricity Financial
Corporation if Hydro One's actions could have a material adverse effect on the Ontario Electricity
Financial Corporation. The Ontario Electricity Financial Corporation has retained the right to take control
of and manage the assets, although it must notify and consult with Hydro One before doing so and must
exercise its powers relating to the assets in a manner that will facilitate the operation of Hydro One's
businesses. The consent of the Ontario Electricity Financial Corporation is also required prior to any
disposition of these assets.
The Province also transferred officers, employees, assets, liabilities, rights and obligations of Ontario
Hydro in a similar manner to its other successor transferees. These transfer orders include a dispute
resolution mechanism to resolve any disagreement among the various transferees with respect to the
transfer ofspecific assets, liabilities, rights or obligations.
The transfer orders do not contain any representations or warranties from the Province or the Ontario
Electricity Financial Corporation with respect to the transferred officers, employees, assets, liabilities,
rights and obligations. Furthermore, under the Electricity Act, the Ontario Electricity Financial
Corporation was released from liability in respect of all assets and liabilities transferred by the transfer
orders, except for liability under Hydro One's indemnity from the Ontario Electricity Financial
Corporation. The parties, with the consent of the Minister of Finance, agreed to terminate such indemnity
effective October 31,2015. By the terms of the transfer orders, each transferee indemnifies the Ontario
Electricity Financial Corporation with respect to any assets and liabilities related to that transferee's
business not effectively transferred, and is obligated to take all reasonable measures to complete the
transfers where the transfers were not effective.
Hydro One has indemnified the Ontario Electricity Financial Corporation in respect of the damages,
losses, obligations, liabilities, claims, encumbrances, penalties, interest, taxes, deficiencies, costs and
Exhibit No. 449 CaseNos. AVU-E-I7--and AVU-G-17--
C.Lopez, Hydro One
Schedule 3, Page 154 of 167
o
o expenses arising from matters relating to the Company's business and any failure by Hydro One to
comply with its obligations to the Ontario Electricity Financial Corporation under agreements dated as of
April 1, 1999. These obligations include obligations to employ the employees transferred to Hydro One
under the transfer orders, make and remit employee source deductions (including tax withholding
amounts, and employer contributions), manage the real and personal properties which the Ontario
Electricity Financial Corporation continues to hold in trust or otherwise and take any necessary action to
transfer all of these properties to the Company, to pay realty taxes and other costs, provide access to
books and records and to assume other responsibilities in respect of the assets held by the Ontario
Electricity Financial Corporation in trust for the Company.
Departure Taxes
By virtue of being wholly owned by the Province, Hydro One was exempt from tax under the Income Tax
Act (Canada) and the Tqxation Act, 2007 (Ontario). However, under the Electricity Act, Hydro One was
required to make payments in lieu of tax to the Ontario Electricity Financial Corporation. The payments
in lieu of tax were, in general, based on the amount of tax that Hydro One would otherwise be liable to
pay under the Income Tax Act (Canada) and the Taxation Act, 2007 (Ontario) if it was not exempt from
taxes under those statutes.
In connection with the initial public offering of Hydro One Limited, Hydro One's exemption from tax
under the Income Tax Act (Canada) and the Taxation Act, 2007 (Ontario) ceased to apply. Under the
Income Tax Act (Canada) and the Tuation Act, 2007 (Ontario), Hydro One was deemed to have disposed
of its assets immediately before it lost its tax exempt status resulting in Hydro One making payments in
lieu of tax under the Electricity Act totalling $2.6 billion in respect thereof, calculated by reference to the
Income Tax Act (Canada) ("departure tax").
Hydro One Inc. also paid the Ontario Electricity Financial Corporation approximately $0.2 billion in
additional payments in lieu of tax in connection with the initial public offering and approximately $0.1
billion in other payments in lieu of tax instalments.
For a discussion of the departure tax and the related financial implications on the Company, see the
Annual MD&A under the heading "Related Parfy Transactions".
MATERIAL CONTRACTS
The following are the only material contracts, other than those contracts entered into in the ordinary
course of business, which Hydro One Limited has entered into since the beginning of the last financial
year, or entered into prior to such date but which contract is still in effect:
(a) the underwriting agreement (the "20l6 Underwriting Agreement") dated April7,20l6, between
Hydro One Limited, the Province and a syndicate of underwriters pursuant to which the
underwriters agreed to purchase, and the Province agreed to sell 72,434,800 common shares (such
number of shares subsequently increased to an aggregate of 83,300,000 common shares) of
Hydro One Limited at a price of $23.65 per share. The2016 Underwriting Agreement provides
that Hydro One Limited will indemniff the underwriters and each of their respective affiliates,
and their directors, officers, partners, employees, agents and controlling persons against certain
liabilities, including I iabilities under Canadian securities legislation;
(b) the underwriting agreement (the "2015 Underwriting Agreement") dated October 29,2015,
between Hydro One Limited, Hydro One Inc., the Province and a syndicate of underwriters
pursuant to which the underwriters agreed to purchase, and the Province agreed to sell 81,100,000
common shares (such number of shares subsequently increased to an aggregate of 89,250,000
common shares) of Hydro One Limited at a price of $20.50 per share. The 2015 Underwriting
Agreement provides that Hydro One Limited and Hydro One Inc. will jointly aqd-sevqrallyso case Nos. AVU-E-r; "r. f;l'-Tl): u
i.Lop".,Hydro one
o
o
Schedule 3, Page 155 of 167
o indemnifi the underwriters and each of their respective affiliates, and their directors, officers,
partners, employees, agents and controlling persons against certain liabilities, including liabilities
under Canadian securities legislation;
(c) the Govemance Agreement, described under "Agreements with Principal Shareholder"; and
(d) the Registration Rights Agreement, described under "Agreements with Principal Shareholder"
Copies of the foregoing material agreements have been filed with the Canadian securities regulatory
authorities and are available on SEDAR at www.sedar.com.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
The Company is from time to time involved in legal proceedings of a nature considered normal to its
business. Except as disclosed below, Hydro One believes that none of the litigation in which it is
currently involved, or has been involved since the beginning of the most recently completed financial
year, individually or in the aggregate, is material to its consolidated financial condition or results of
operations. The Company is not subject to any material regulatory actions.
Hydro One Inc., Hydro One Networks, Hydro One Remote Communities Inc., and Norfolk Power
Distribution Inc. are defendants in a class action suit in which the representative plaintiff is seeking up to
$125 million in damages related to allegations of improper billing practices. A certification motion in the
class action is pending. Due to the preliminary stage of legal proceedings, an estimate of a possible loss
related to this claim cannot be made.
In connection with the reorganization of Ontario Hydro, Hydro One Inc. succeeded Ontario Hydro as a
parly to various pending legal proceedings relating to the businesses, assets, real estate and employees
transferred to it. Hydro One Inc. also assumed responsibility for future claims relating to the businesses,
assets, real estate and employees acquired by Hydro One Inc. and arising out ofevents occurring prior to,
as well as after, April l, 1999. In addition to claims assumed by the Company, it is, from time to time,
named as a defendant in legal actions arising in the normal course of business. There are currently no
actions that are outstanding which are expected to have a material adverse effect on the Company.
INTEREST OF EXPERTS
KPMG LLP, Chartered Professional Accountants, located at 333 Bay Street, Suite 4600, Bay Adelaide
Centre, Toronto, Ontario M5H 2S5, is the auditor of Hydro One Limited. and has audited the
consolidated financial statements of Hydro One Limited as at and for the years ended December 31 ,2016
and December 31,2015. KPMG LLP has confirmed that it is independent of Hydro One Limited and
Hydro One Inc. within the meaning of the relevant rules and related interpretations prescribed by the
relevant professional bodies in Canada and any applicable legislation or regulation.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Hydro One Limited's common shares is Computershare Trust
Company of Canada at its principal office in Toronto, Ontario.
5l Exhibit No. 4
Case Nos. AVU-E-I7- and AVU-G-17-
i.Lop"r,Hydro One
Schedule 3, Page 156 of 167
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ADDITIONAL INFORMATION
Additional information relating to Hydro One Limited may be found on SEDAR at www.sedar.com.
Additional information, including with respect to directors' and officers' remuneration and indebtedness,
principal holders of Hydro One Limited's securities and shares authorized for issuance under equity
compensation plans, is contained in the Company's management information circular for its most recent
annual meeting of shareholders that involves the election of directors.
Additional financial information is provided in the Annual MD&A and in the consolidated financial
statements and notes to the consolidated financial statements of Hydro One Limited for 2016.
Exhibit No. 4
Case Nos. AVU-E-17- and AVU-G-17-
i.Lop"r,Hydro one
o
52
Schedule 3, Page 157 of 167
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SCHEDULE "A'
HYDRO ONE LIMITED
AUDIT COMMITTEE MANDATE
Purpose
The Audit Committee (the "Committee") is a committee appointed by the board of directors (the
"Board") of Hydro One Limited (including its subsidiaries, the "Company"). The Committee is
established to fulfill applicable public company obligations and to assist the Board in fulfilling its
oversight responsibilities with respect to financial reporting including responsibility to oversee:
(a) the independence, qualification and appointment of extemal auditors;
(b) the integrity of the Company's financial statements and financialreporting process, including the
audit process and the Company's internal control over financial reporting, disclosure controls and
procedures and compliance with other related legal and regulatory requirements;
(c) the performance of the Company's financial finance function, internal auditors and external
auditors; and
(d) the auditing, accounting and financial reporting process.
The function of the Committee is oversight. It is not the duty or responsibility of the Committee or its
members: (a) to plan or conduct audits; (b) to determine that the Company's financial statements are
complete and accurate and are in accordance with generally accepted accounting principles; or (c) to
conduct other types of auditing or accounting reviews or similar procedures or investigations. The
Committee, its Chair and its members with accounting or finance expertise are members of the Board,
appointed to the Committee to provide broad oversight of the financial, risk and control related activities
of the Company, and are specifically not accountable or responsible for the day to day operation or
performance of such activities.
Procedures
l. Number of Members - The members of the Committee shall be appointed by the Board. The
Committee will be composed of not less than three (3) Board members.
2. Independence - The Committee shall be constituted at all times of directors who are
"independent" (a) within the meaning of all Canadian securities laws and stock exchange
requirements, each as in effect and applicable to Hydro One Limited from time to time; and (b) of
the Province of Ontario within the meaning of the Govemance Agreement between the Company
and the Province of Ontario (as amended, revised or replaced from time to time, the
"Governance Agreement").
3. Financial Literacy - Each member shall be "financially literate" within the meaning of other
applicable requirements or guidelines for audit committee service under securities laws or the
rules of any applicable stock exchange, including NI 52-l10. At least one member will otherwise
qualifu as an "audit committee financial expert" as defined by applicable rules of the Securities
and Exchange Commission.
4. Cross-Appointment - No member may serve on the audit committee of more than two other
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C. Lopez, Hydro One
Schedule 3, Page 158 of 167
o
53
o
o public companies, unless the Board determined that this simultaneous service would not impair
the ability of the member to serve effectively on the Committee.
5. Appointment and Replacement of Committee Members - Any member of the Committee may
be removed or replaced at any time by the Board and shall automatically cease to be a member of
the Committee upon ceasing to be a director. The Board shall fill any vacancy if the membership
of the Commiffee is less than three directors. Whenever there is a vacancy on the Committee, the
remaining members may exercise all its power as long as a quorum remains in office. Subject to
the foregoing, the members of the Committee shall be appointed by the Board annually and each
member of the Committee shall remain on the Committee until his or her successor shall be duly
appointed and qualified or his or her earlier resignation or removal.
6. Committee Chair - Unless a Committee Chair is designated by the full Board, the members of
the Committee may designate a Chair by majority vote of the full Committee. The Committee
Chair shall be responsible for leadership of the Committee and reporting to the Board. If the
Committee Chair is not present at any meeting of the Committee, one of the other members of the
Committee who is present shall be chosen by the Committee to preside at the meeting. The
Committee Chair shall also appoint a secretary who need not be a director.
7. Conflicts of Interest - If a Committee member faces a potential or actual conflict of interest
relating to a matter before the Committee, other than matters relating to the compensation of
directors, that member shall be responsible for alerting the Committee Chair. If the Committee
Chair faces a potential or actual conflict of interest, the Committee Chair shall advise the Board
Chair. If the Committee Chair, orthe Board Chair, as the case may be, concurs that a potential or
actual conflict of interest exists, the member faced with such conflict shall disclose to the
Committee the member's interest and shall not be present for or participate in any discussion or
other consideration of the matter and shall not vote on the matter.
8. Meetings - The Committee shall meet regularly and as often as it deems necessary to perform the
duties and discharge its responsibilities as described herein in a timely manner, but not less than
four (4) times a year. The Committee shall maintain written minutes of its meetings, which will
be filed within the Company's corporate minute books. The Board Chair may attend and speak at
all meetings of the Committee, whether or not the Board Chair is a member of the Committee.
9. Separate Private Meetings - The Committee shall meet regularly, but no less than quarterly,
with the Chief Financial Officer, the head of the intemal audit function (if other than the Chief
Financial Officer) and the external auditors in separate private sessions to discuss any matters that
the Committee or any of these groups believes should be discussed privately and such persons
shall have access to the Committee to bring forward matters requiring its attention. The
Committee shall also meet at each meeting of the Committee without management or non-
independent directors present, unless otherwise determined by the Committee Chair.
10. Professional Assistance - The Committee may require the extemal auditors to perform such
supplemental reviews or audits as the Committee may deem desirable and may retain such special
legal, accounting, financial or other consultants as the Committee may determine to be necessary
to carry out the Committee's duties, in each case at the Company's expense and inform the Chair
of the Nominating and Corporate Govemance Committee of any such retainer. The Company's
external auditors will have direct access to the Committee at their own initiative.
I l. Reliance - Absent actual knowledge to the contrary (which shall be promptly reported to the
Board), each member of the Committee shall be entitled to rely on: (a) the integrity of those
persons or organizations within and outside the Company from which it receives information;
(b) the accuracy of the financial and other information provided to the Committee by such
s4 CaseNos. AVU-E-17- ",, ft}i,Tl;: '
C. Lop.r, Hydro One
Schedule 3, Page 159 of 167
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2.
persons or organizations; and (c) representations made by management and the external auditors
as to any information technology, internal audit and other permissible non-audit services provided
by the extemal auditors to the Company and its subsidiaries.
12. Reporting to the Board - The Committee will report through the Committee Chair to the Board
following meetings of the Committee on matters considered by the Committee, its activities and
compliance with this Mandate.
Responsibilities
The principal responsibilities of the Committee are:
Selection and Oversight of the External Auditors
l. approve the terms of engagement and, if the shareholders authorize the Board to do so, the
compensation to be paid by the Company to the extemal auditors with respect to the conduct of
the annual audit. The external auditors are ultimately accountable to the Committee and the Board
as the representatives of the shareholders of the Company and shall report directly to the
Committee and the Committee shall so instruct the external auditors.
evaluate the quality of service, independence, objectivity, professional skepticism and
performance of the extemal auditors and make recommendations to the Board on the
reappointment or appointment of the external auditors of the Company to be proposed for
shareholder approval and shall have authority to terminate the external auditors. If a change in
external auditors is proposed by the Committee or management of the Company, the Committee
shall review the reasons for the change and any other significant issues related to the change,
including the response of the incumbent external auditors, and enquire on the qualifications of the
proposed external auditors before making its recommendation to the Board.
review and approve policies and procedures for the pre-approval ofservices to be rendered by the
external auditors. All permissible non-audit services to be provided to the Company or any of its
affiliates by the external auditors or any of their affiliates that are not covered by pre-approval
policies and procedures approved by the Committee shall be subject to pre-approval by the
Committee. The Commiftee shall have the sole discretion regarding the prohibition of the external
auditor providing certain non-audit services to the Company and its affiliates. The Committee
shall also review and approve disclosures with respect to permissible non-audit services.
review the independence and professional skepticism of the extemal auditors and make
recommendations to the Board on appropriate actions to be taken which the Committee deems
necessary to protect and enhance the independence of the external auditors. In connection with
such review, the Committee shall:
actively engage in a dialogue with the external auditors about all relationships or services
that may impact the objectivity and independence of the extemal auditors, including
whether there are any disputes, restrictions or limitations placed on their work;
(b)obtain from external auditors at least annually, a formal written statement delineating all
relationships between the Company and the extemal auditors and their affiliates;
(c)ensure the rotation of the lead (and concurring) audit partner having primary
responsibility for the audit and the audit partner responsible for reviewing the audit as
required by applicable law or professional practice; and
consider the auditor independence standards promulgated by applicable auditing
Exhibit No. 455 Case Nos. AVU-E-l7- and AVU-G-17-
C.Lopez, Hydro One
Schedule 3, Page 160 of 167
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(a)
o (d)
o regulatory and professional bodies
6.
5 review and approve policies for the hiring by the Company of employees or former employees of
the extemal auditors.
require the external auditors to provide to the Committee, and review and discuss with the
external auditors, all notices and reports which the external auditors are required to provide to the
Committee or the Board under rules, policies or practices of professional or regulatory bodies
applicable to the external auditors, and any other reports which the Committee may require. Such
reports shall include:
(a)a description of the extemal auditors' intemal quality-control procedures, any material issues
respecting the external auditors raised by the most recent internal quality-control review, peer
review or review body with auditing oversight responsibility over the external auditors, or by any
inquiry or investigation by govemmental or professional authorities, within the preceding five
years, respecting one or more independent audits carried out by the extemal auditors, and any
steps taken to deal with any such issues; and
(b)a report describing: (i) the proposed audit plan and approach, (ii) all critical accounting policies
and practices to be used by the Company; (iii) all alternative treatments of financial information
within generally accepted accounting principles related to material items that have been discussed
with management, ramifications of the use of such alternative disclosures and treatments, and the
treatment preferred by the external auditors; and (iv) other material written communication
between the extemal auditors and management, such as any management letter or schedule of
unadj usted differences.O 7 meet periodically with the external auditors to discuss their audit plan for the year, progress of
their activities, any significant findings stemming from the external audit, any changes required in
the planned scope of their audit plan, whether there are any disputes or any restrictions or
limitations on the external auditors.
8.review the experience and qualifications of the audit team and review the performance of the
external auditors, including assessing their effectiveness and quality of service, annually and,
every five (5) years, perform a comprehensive review of the performance of the external auditors
over multiple years to provide further insight on the audit firm, its independence and application
of professional standards.
Appointment and Oversight of Internal Auditors9. review and approve the appointment, terms of engagement, compensation, replacement or
dismissal of the internal auditors. When the internal audit function is performed by employees of
the Company, the Committee may delegate responsibility for approving the employment, terms of
employment, compensation and termination of employees engaged in such function other than the
head of the Company's internal audit function.
l0 meet periodically with the internal auditors to review and approve their audit plan for the year,
and discuss progress of their activities, any significant findings stemming from internal audits,
any changes required in the planned scope oftheir audit plan and whether there are any disputes,
restrictions or limitations on internal audit.
ll review summaries of the significant reports to management prepared by the intemal auditors, or
the actual reports if requested by the Committee, and management's responses to such reports.
communicate with, as it deems necessary, the internal auditors with respect to their reports and
s6 caseNos.AVU-E-I7- -o ott;1,-oJ-i;:
o
C. t-op"r, Hydro One
Schedule 3, Page 16l of 167
o 12.
o
o
recommendations, the extent to which prior recommendations have been implemented and any
other matters that the internal auditor brings to the attention of the Committee. The head of the
internal audit function shall have unrestricted access to the Committee.
13. evaluate, annually or more frequently as it deems necessary, the internal audit function, including
its activities, organizational structure, independence and the qualifications, effectiveness and
adequacy of the function.
Oversight and Review of Accounting Principles and Practices14. review and discuss with management, the extemal auditors and the intemal auditors (together and
separately as it deems necessary), among other items and matters:
(a) the quality, appropriateness and acceptability of the Company's accounting principles,
practices and policies used in its financial reporting, its consistency from period to
period, changes in the Company's accounting principles or practices and the application
of particular accounting principles and disclosure practices by management to new
transactions or events;
(b) all significant financial reporting issues and judgments made in connection with the
preparation of the financial statements, including the effects of alternative methods within
generally accepted accounting principles on the financial statements and any "second
opinions" sought by management from an external auditor with respect to the accounting
treatment of a particular item;
(c) any material change to the Company's auditing and accounting principles and practices
as recommended by management, the extemal auditors or the internal auditors or which
may result from proposed changes to applicable generally accepted accounting principles;
(d) the extent to which any changes or improvements in accounting or financial practices, as
approved by the Committee, have been implemented;
(e) any reserves, accruals, provisions or estimates that may have a material effect upon the
financial statements of the Company;
(f) the use of any "pro forma" or "adjusted" information which is not in accordance with
generally accepted accounting principles;
(g) the effect of regulatory and accounting initiatives on the Company's financial statements
and other financial disclosures; and
(h) legal matters, claims and contingencies that could have a significant impact on the
Company's financial statements.
15. review and resolve disagreements between management and the external auditors regarding
financial reporting or the application ofany accounting principles or practices.
Oversight and Monitoring of Internal Controls16. exercise oversight of, review and discuss with management, the external auditors and the internal
auditors (together and separately), as it deems necessary:
(a) the adequacy and effectiveness of the Company's internal control over financial reporting
and disclosure controls and procedures designed to ensure compliance with applicable
laws and regulations;
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 162 of 167
o
57
o
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(b)any significant deficiencies or material weaknesses in intemal control over financial
reporting or disclosure controls and procedures, and the status of any plans for their
remediation;
(c)the adequacy of the Company's internal controls and any related significant findings and
recommendations of the external auditors and internal auditors together with
management's responses thereto; and
(d)management's compliance with the Company's processes, procedures and intemal
controls.
Oversight and Monitoring of the Company's Financial Reporting and Disclosures17. review with the external auditors and management and recommend to the Board for approval the
audited annual financial statements and unaudited interim financial statements, and the notes and
Management's Discussion and Analysis accompanying all such financial statements, the
Company's annual report and any other disclosure documents or regulatory filings containing or
accompanying financial information of the Company, prior to the release of any summary of the
financial results or the filing of such reports with applicable regulators.
t8 discuss earnings press releases prior to their distribution, as well as financial information and
earnings guidance prior to public disclosure, it being understood that such discussions may, in the
discretion of the Committee, be done generally (i.e., by discussing the rypes of information to be
disclosed and the type of presentation to be made) and that the Committee need not discuss in
advance each earnings release or each instance in which the Company gives earning guidance.
19 review with management the Company's disclosure controls and procedures and material changes
to the design of the Company's disclosure controls and procedures.
receive and review the financial statements and other financial information of material
subsidiaries of the Company and any auditor recommendations concerning such subsidiaries.
21.meet with management to review the adequacy of the process and systems in place for ensuring
the reliability of public disclosure documents that contain audited and unaudited financial
information.
Oversight of Finance Matters
22. periodically review matters pertaining to the Company's material policies and practices
respecting cash management and material financing strategies or policies or proposed financing
arrangements and objectives of the Company.
periodically review the Company's major financial risk exposures (including foreign exchange
and interest rate) and management's initiatives to control such exposures, including the use of
financial derivatives and hedging activities.
review and discuss with management all material off-balance sheet transactions, arrangements,
obligations (including contingent obligations), leases and other relationships of the Company with
unconsolidated entities or other persons, that may have a material current or future effect on
financial condition, changes in financial condition, results of operations, liquidity, capital
resources, capital reserves, or significant components ofrevenues or expenses.
review and discuss with management any equity investments, acquisitions and divestitures that
may have a material current or future effect on financial condition, changes in financial condition,
results of operations, liquidity, capital resources, capital reserves, or significant components of
58 CaseNos. Avu-E-I7- "ro ott)|,-oo:):
o
C. Lop.r, Hydro One
Schedule 3, Page 163 of 167
20.
23.
24.
o 25
o
26.
27.
28.
revenues or expenses.
review and discuss with management the Company's effective tax rate, adequacy of tax reserves,
tax payments and reporting of any pending tax audits or assessments, and material tax policies
and tax planning initiatives.
review the organizational structure of the finance function and satisfi itself as to the
qualifi cations, effectiveness and adequacy of the functi on.
review the work plan and progress on implementation of major information technology system
changes and satisfr itselfas to the adequacy ofthe information system infrastructure.
Regulatory Matters29. review the financial impact to the Company of electrical regulatory initiatives
30. review the financial implications of Company initiatives which may have a material impact on
transmission and distribution rate filing applications.
Code of Business Conduct and Whistleblower Policy
31. review and recommend to the Board for approval any changes to the Code of Business Conduct
for employees, officers and directors of the Company.
32.review and approve changes to the whistleblower policy or other procedures for: (a) the receipt,
retention, and treatment of complaints received by the Company regarding accounting, intemal
accounting controls, or auditing matters; and (b) the confidential, anonymous submission by
employees of the Company of concerns regarding questionable accounting or auditing matters.
oversee management's monitoring of, compliance with the Company's Code of Business Conduct
and the Whistleblower Policy.
Enterprise Risk Management34. review the Enterprise Risk Management framework for the Company and assess the adequacy
and completeness of the process for identifring and assessing the key risks facing the Company.
meet with the head of the Enterprise Risk Management function at least semi-annually.
ensure that primary oversight responsibility for each of the key risks identified in the Enterprise
Risk Management framework is assigned to the Board or one of its Committees.
Additional Responsibilities37. review the Company's privacy and data security risk exposures and measures taken to protect the
security and integrity of its management information systems and Company and customer data.
review and approve in advance any proposed related-party transactions and required disclosures
of such in accordance with applicable securities laws and regulations and consistent with the
Company's related party transaction policy, and report to the Board on any approved transactions.
39 review on an annual basis reports on the expense accounts ofthe ChiefExecutive Officer and his
or her direct reports.
undertake on behalf of the Board such other initiatives as may be necessary or desirable to assist
the Board in fulfilling its oversight responsibilities with respect to financial reporting and perform
such other functions as required by law, stock exchange rules or the Company's constating
ss case Nos. AVU-E-I7- "ro ot;1,-oJ-l;:'
o
C. Lop.r, Hydro One
Schedule 3, Page 164 of 167
o
33
35.
36.
38
o 40
o
41
documents.
review annually the adequacy of this Mandate and ensure that it is disclosed in compliance with
applicable securities laws and stock exchange rules and posted on the Company's website.
Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 165 of 167
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60
o
hydro e
o
Exhibit No. 4
Case Nos. AVU-E-I7-_ and AVU-G-I7-_
C.Lopez, Hydro One
Schedule 3, Page 166 of167
o
61
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Exhibit No. 4
Case Nos. AVU-E-17-_ and AVU-G-17-_
C.Lopez, Hydro One
Schedule 3, Page 167 of 167
o
o Avista Utilities
Utility Allocator for CD AA (7)
Four Factor Allocation for Electric & All Gas
For the Twelve Months Ended December 31, 2016
Direct Non-Labor
O&M (Accts 500-894)
A&G - ED & GD (Accts 901-935)
A&G - CD (Accts 901-935)
Adjustments
Adjustments
Total
Percentage
Direct Labor
O&M (Accts 500-894)
A&G - ED & GD (Accts 901-935)
A&G - CD (Accts 901-935)
Total
Percentage
Year End Customers at 12131116
Washington
ldaho
Oregon
Total
Four Factor
Total
$72,715,941
43,334,872
4,567,936
$61,020,528
29,783,317
3,141,860
as North
$7,373,s19
9,075,029
1,426,076
$4,321,894
4,476,526
(1,2)
(2)
(2)
$120,618,749
100.000%
$74,847,276
5,876,743
11,494,963
$93,945,705
77.887%
$55,802,150
3,640,911
7,690,233
$17,874,624
14.819%
$13,705,913
291,467
3,804,730
$8,798,420
7.294%
$5,339,213
1,944,365
o
$92,218,982
100.000%
406,454
210,653
100,472
$67,133,294
72.798%
247,777
129,508
$17,802,110
19.304o/o
158,677
81,145
$7,283,578
7.898%
100,472
Percentage
717,579
100.000%
Net Direct Plant (Ending Balance al1213'1116)Amount $3,243,965,315
Percentage 100.000%
377,285
52.577%
$2,531,901,896
78.O50%
239,822
(5,562.00)
33.421%
$461,825,314
14.2360/o
100,472
14.002o/o
$250,238,105
7.714%
400.000%281.3',t2%81.780o/o 36.908%
Notes
(1 ) Excludes Resource Costs: Electric - 501 , 547, 555, 557, 565 & Gas 804, 805, 808, 81 1
(2) Excludes Labor
Exhibit No. 7
Case Nos. AVU-E-17-_ and AVU-G-17--
P.Ehrbar, Avista
Schedule 1, Page 1 of 3
o
Total Electric
o
o
Avista Utilities
Factor No. 4 - Allocation for Electric
For the Twelve Months Ended December 31, 2016
Direct Non-Labor
O&M (Accts 500-894)
A&G - ED & GD (Accts 901-935)
A&G - CD (Accts 901-935)
Net
Direct Labor
O&M (Accts 500-894)
A&G - ED & GD (Accts 901-935)
A&G - CD (Accts 901-935)
Net
Washington ldaho NotesTotal
Electric
$19,878,625
25,456,934
1,706,431
$13,041,456
18,532,681
1,240,806
$6,837,169
6,924,253
465,625
(1,2)
(2)
(2)
Percentage
$47,041,990
100.000%
$1 s,1 00, 1 58
674,582
5,657,439
Percentage
$19,432,179
100.000%
Year End Customers at 12131116
Amount 377,285
100.000%Percentage
Net Direct Plant (Ending Balance a112131116)Amount $1,072,965,542
Total $1,072,96s,542
100.000%Percentage
Four Factor
Total 400.000%
$712,213,744 $360,751,798
$32,814,943
69.757%
$8,869,997
436,117
4,543,331
$14,227,047
30.243o/o
$4,230,161
238,465
1,114,108
$13,849,445
71.271%
247,777
65.674o/o
$5,582,734
28.729%
129,508
34.3260/o
$712,213,744
66.378%
$360,751,798
33.6220/o
273.O8Oo/o 126.920%
(1) Excludes Resource Costs: Accounts 501, 547,555 & 557
(2) Excludes Labor
Exhibit No. 7
Case Nos. AVU-E-'! 7-_ and AVU-G-17--
P.Ehrbar, Avista
Schedule 1, Page 2 of 3
o
o
o
Avista Utilities
Factor No. 4 - Allocation for Gas North
For the Twelve Months Ended December 31, 2016
Direct Non-Labor
O&M (Accts 500-894)
A&G - ED & GD (Accts 901-935)
A&G - CD (Accts 901-935)
Net
Percentage
Direct Labor
O&M (Accts 500-894)
A&G - ED & GD (Accts 901-935)
A&G - CD (Accts 901-935)
Net
Washington ldaho
$3,454,659
7,310,016
624,408
Total
Gas North
Notes
$5,323,361
8,599,184
817,261
$1,868,702
1 ,289,1 68
192,853
(1,2)
(2)
(2)
$14,739,806
100.000%
$9,086,688
225,934
3,013,024
$11,389,083
77.2680/o
$6,100,791
183,994
2,445,792
$3,3s0,723
22.732%
$2,985,897
41,940
567,232
Percentage
Year End Customers a|12131116
Percentage
Net Direct Plant (Ending Balance at12131116
Net Direct Plant After Adjustments
Percentage
Four Factor
Total
$12,325,646
100.000%
239,822
100.000%
$428,218,603
$8,730,577 $3,595,069
70.833% 29.1670/o
158,677 81,145
66.1640/o 33.836%
$286,411,181 $141,807,422
$428,218,603
100.000%
$286,41 1,181
66.884o/o
$141,807,422
33.116%
400.000%281.149%118.851o/o
(1) Excludes Resource Costs: Accounts 804, 805, 808, 81 1
(2) Excludes Labor
o Exhibit No. 7
Case Nos. AVU-E-17-_ and AVU-G-17--
P.Ehrbar, Avista
Schedule 1, Page 3 of 3
o Derivation of Rate Credit Applicable to Services and Jurisdictions
Rate Credit $2,650,000
WA, OR, ID Operations
1. Spread based on Factor 7 - Allocation of Common Costs for all Services and Jurisdictions
Factor 7
Electric Operations
Natural Gas Operations (WA & ID)
Natural Gas Operations (Oregon)
Total
Electric Operations (Electric Factor 4)
Washington Electric
Idaho Electric
Total
$1,863,692
$541,793
s244,515
s2,650,000
$1,272,343
$591,349
$1,863,692
$380,810
$160,983
$541,793
Exhibit No.7
Case Nos. AVU-E-17-_ and AVU-G-17-_
P.Ehrbar, Avista
Schedule 2, Page L of 2
70.328%
20.445%
9.227%
100.000%
68.270%
31.730%
100.000%
Natural Gas Operations (WA & ID) (Gas Factor 4)
Washington Natural Gas 70.287%
Idaho Natural Gas 29.713%
Total 100.000%a
WA Electric
ID Electric
WA Natural Gas
ID Natural Gas
OR Natural Gas
Total
$1,272,343
$591,349
$380,810
s160,983
$244,515
$2,650,000
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Date: September 7,2017
To:
From:
All Employees
Kelly Norwood
o
Subject: Protocol for Direct Assignment of Costs Associated with Hydro One's Acquisition of
Avista Corp.
Accountine for Costs Related to Hvdro One Prior to Closins
Prior to the date of closing of the Hydro One's acquisition of Avista Corp, presently anticipated
to be in the second half of 2018, all costs associated with due diligence and other activities will
continue to be recorded below the line to a non-utility account (FERC Account No. 426500).
The following table summarizes the accounting for such expenses:
Pmject
tr'ERC Acct Sewicc Jurisdicition ff,RC Acct Description Number Pmject Dcscription Debit
426500 ZZ ZZ Miscellaneous Income Deduction 77105316 Hydro One Avista Acquisition XXXX
Direct Assignment of Costs to Hvdro One Post-Closinq
Following the date of closing, to the extent Avista employees dedicate time and incur costs
supporting the operation of Hydro One, those costs would be separately tracked and directly
assigned to Hydro One.|l2
In the future, if opportunities arise for the consolidation of certain Avista and Hydro One utility
functions, where the utilities have an opportunity to benefit from specialized expertise or to
achieve effrciencies, the following situations may arise whereby Administrative Services may be
provided between and among the Company and its Utilities, a) the Companies may directly
assign or allocate any corporate or administrative costs, common costs, or costs incurred for the
benefit of the Utility or Utilities, to a Utility or the Utilities, b) the Companies may procure any
I Time and costs incurred include, but are not limited to activities for the following: a) services by the Board of Directors, and
executive, management, professional, technical and clerical employees; b) financial and accounting services, corporate
governance and compliance services, legal services, audit services, information and technolory services, treasury services,
investor relations services, governmental and regulatory services, human resources services, communications services, payroll
processing services,
employee benefits participation, procurement and fleet management, tax and related services, contract negotiation and
administration services, insurance and risk management services, environmental services and engineering and technical services;
c) the use of office facilities, including but not limited to office space, furniture, equipment, machinery, supplies, computers and
computer software, communications equipment, insurance policies and other personal property; d) the use of automobiles,
airplanes, other vehicles and equipment;
2 Likewise, if tlydro One employees were to provide support for Avista's utility operations, such costs would be directly
assigned to Avista. The Company expects such assignment of costs, both to Hydro One and from Hydro One, to be relatively
small since Avista will continue to operate as a standalone utility. Exhibit No. 7
Case Nos. AVU-E-I7-_ & AVU-G-I7-_
P.Ehrbar, Avista
Schedule 3, Page I of2
o
llPage
o
o
corporate or administrative services from a Utility or the Utilities for the Company's benefit, or
c) the Companies may procure any corporate or administrative services from each other or agree
to directly assign or allocate common costs to each other.3
With regard to the accounting process for assigning and billing corporate or administrative costs,
these employee costs would be charged to suspense accounts (Detbned Debit Account No. 186),
loaded for benefits, and would then be established as a receivable (FERC Account No. 146) when
billed to Hydro One. If other resources are expended during the course of this work, such as
travel or consulting services, these costs are also charged to suspense accounts and billed to
Hydro One. All corporate services provided, and costs incurred, would be direct billed to Hydro
One at cost and no margin or profit shall be included and no assets allocated, provided that any
amount billed to Hydro One shall be adjusted to the extent necessary to comply with any U.S.
federal or Canadian transfer pricing or similar tax law. Avista will use the same methodology for
direct assignment of costs to the proposed Hydro One subsidiary operations, as we currently do
for existing subsidiary operations.
A summary of the accounting for post-closing costs directly assigned to Hydro One is provided
below.
Hvdro One Transactions
To record transaction when employee charges time or incurs costs related to Hvdro One:
FERC
Acat Senice .lurisdicition l'iiR(AcctDcrcrip(iort
Prcjcct
l{umhcr Pmiecl l}qic{ilaioa Dehit Creditr86xxx 72 ZZ Miscellmcous Defered Debits 777XXXX Sub Billing - Hydro One xxxx
To record transaction to establish a receivable from Hvdro One:
FERC Prcject
Acct Scnicc .Iurisdicition FI:RC Accl Dc$riplion Number Prticcl Dcscriptioo Dcbit ('n'dil
t46XXX
I 86XXX
ZZ7'/
ZZ
Accouts Receivable Assoc Compmy - Hydro Onc
Miscellaneous Defened Debils
777Xn<X Sub Billing - Hydro One
777>iX.XX Sub Billing - Hydro One
xxxx
xxxx
To record transaction of a payment made to Avista Corp from Hvdfg One:
FERC
Ac{l Strvice Jurisdicition FIRC Ar{ D$criplion
Project
Number PmietDescriolion Ihbil (rdil
l3l)o(x
l46XXX
xxxx
For questions regarding direct assignment of costs associated with Hydro One or any other
subsidiary costs, please contact Jeanne Pluth, Manager of Regulatory Accounting 495-2204, or
Jennifer Smith, Senior State and Federal Regulatory Analyst at 495-2098.
3 The Company would file proposals with the Commission as required. Exhibit No. 7
Case Nos. AVU-E-17-_ & AVU-G-17-
ZlPage P.Ehrbar,Avista
Schedule 3, Page2 of2
7-7.
ZZ
7.7.
;/;L
Cmh
Accous Rccaivsblc Assoc Comprny - l{ydro Oac 777XXXX Sub Billing - Hydro Onc xxxx
o
o
o
l.P.U.C. No.28
lssued by
By
Sheet 73
Kelly O. Norwood, Vice-President, State & Federal Regulation
Exhibit No. 7
Case Nos. AVU-E-17-_ & AVU-G-17-_
P.Ehrbar, Avista
Schedule 4,Page 1 ot2
AVISTA CORPORATION
d/b/a Avista Utilities
SCHEDULE 73
MERGER RATE CREDIT - IDAHO
APPLICABLE:
To Customers in the State of ldaho where the Company has electric service available.
This Merger Rate Credit shall be applicable to all retail customers for charges for electric
energy sold and to the flat rate charges for Company-owned or Customer-owned Street
Lighting and Area Lighting Service.
This rate credit is designed to reflect benefits attributable to the merger between Hydro
One and Avista.
MONTHLY RATE:
The energy charges of the individual rate schedules are to be decreased by the
following amounts:
Schedules 1
Schedules 11 & 12
Schedules 21 &22
Schedules 25
Schedules 25P
Schedules 31 &32
Schedules 41 - 48
0.0220, per kWh
0.024i, per kWh
0.0190 per kWh
0.0120, per kWh
0.0110 per kWh
0.0220, per kWh
0.089d per kWh
TERM:
The Merger Rate Credit will be in effect for a ten-year period as provided for in the
Joint Application filed in Case No. AVU-E- 17-_, but is subject to change upon
Commission approval.
SPECIAL TERMS AND CONDITIONS:
Service under this schedule is subject to the Rules and Regulations contained in this
tariff.
The above Rate is subject to increases as set forth in Tax Adjustment Schedule 58
Effective (UponCommissionApproval)lssued TBD
o Avista
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l.P.U.C. No.27
lssued by
By
inal Sheet 173
,Vice-President, State & Federal Regulation
Exhibit No. 7
Case Nos. AVU-E-17-_ & AVU-G-17-_
P.Ehrbar, Avista
Schedule 4,Page2ol2
o
AVISTA CORPORATION
d/b/a Avista Utilities
SCHEDULE 173
MERGER RATE CREDIT - IDAHO
APPLICABLE:
To Customers in the State of ldaho where the Company has natural
gas service available. This Merger Rate Credit shall be applicable to all retail
customers taking service under Schedules 101 , 1 11, 112, 131, 132, and 146.
This rate credit is designed to reflect benefits attributable to the merger between
Hydro One and Avista.
MONTHLY RATE:
The energy charges of the individual rate schedules are to be decreased by the
following amounts:
Schedule 101 & 102
Schedule 111 & 112
Schedule 131 & 132
Schedule 146
$0.00225 per Therm
$0.00116 per Therm
$0.00116 per Therm
$0.00054 per Therm
TERM:
The Merger Rate Credit will be in effect for a ten-year period as provided for in
the Joint Application filed in Case No. AVU-G-17--, but is subject to change
upon Commission approval.
SPECIAL TERMS AND CONDITIONS:
Service under this schedule is subject to the Rules and Regulations
contained in this tariff.
The above Rate is subject to increases as set forth in Tax Adjustment Schedule
158.
Effective (Upon CommissionApproval)lssued TBD
Avista Utilities
Kelly O. Norwood
vrsTAlttf,atrt
DATE:
TO:
FROM:
SUBJECT:
August 2,20L8
AllEmployees
Ryan Krasselt, VP & Controller
Accounting Policy for Direct Assignment of Costs Associated with the Merger of Avista
Corporation and Hydro One
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Avista is required to record costs associated with the Merger in accordance with the Merger Commitments
made in the various states and in the FERC order approving the merger as well as regulatory accounting
requirements. The following policy defines the merger cost categories and how each category should be
recorded. For questions regarding this accounting policy, please contact:
Adam Munson, Director of Accountingert.247L, or
Jennifer Smith, Senior State and Federal Regulatory Analyst at ext. 2098.
l. Accountine for Costs Incurred to Facilitate the Transaction (Transaction Costsl - Proiect 77705315
All costs associated with activities incurred to facilitate the closing of the transaction are required to
be recorded below the line to a non-utility account (FERC account No. 426500).
The following Project and Task will be used for such expenses:
Project #Project Description Task
777053L6 Hydro One Avista Acquisition 426500
ll. Accountine for Transition Costs (lncluding Costs lncurred to ldentifv and Develop Strateeic
Benefits with Hvdro One) - Proiect 77705331
All costs directly incurred to identify and develop strategic benefits with Hydro One and any other
transition costs are required to be recorded below the line to a non-utility account (FERC account
No. 426500). Broadly, transition costs refer to all costs necessary post-transaction, to meld or find
synergies in corporate cultures and processes.
Examples of transition costs include, but are not limited to:
. consolidation of technology,. optimization of purchasing,. broad deployment of resources and technologies, and. activities to make the aggregated corporation more efficient and effective.
The following Project and Task will be used for such expenses:
Avista Corporation
Page 1
Exhibit No. 7
7-09/AVU-G-17-05
P. Ehrbar, Avista
Schedule 5, Page 1 of3
Revised 8l2nl18
Project #Project Description Task
7770533L Hydro One Transition Costs 426500
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Revised November 28, 2018
This project and task will be used for activities which are general in nature and are not identifiable to
a specific potential strategic benefit. Once a potential strategic benefit is identified and defined, a
specific project and/or task shall be established for the purpose of recording cost to achieve, and
approved by the Strategic Benefits Core Team.
All transition costs will remain below the line unless approved for recovery by the appropriate
regulatory authority. General transition costs will be considered for allocation to specific Strategic
Benefits tasks as approved for recovery by the appropriate regulatory authority.
lll. Sharing of Best Practices
lf time and/or expenses are related to general sharing of best practices, costs are required to be
charged "below the line". Please direct any questions regarding accounting for best practices to the
contacts listed above.
The following Project and Task will be used for such expenses:
Project #Project Description Task
77705337 Hydro One Transition Costs 426500
lV. Direct Assisnment of Costs to Hydro One Post-Closins
Following the date of closing, to the extent Avista employees dedicate time and incur costs supporting
the operation of Hydro One, those costs will be directly assigned to Hydro One.l/2
ln the future, if opportunities arise for the consolidation of certain Avista and Hydro One utility
functions, where the utilities have an opportunity to benefit from specialized expertise or to achieve
efficiencies, a) the Companies may directly assign or allocate any corporate or administrative costs,
common costs, or costs incurred for the benefit of the Utility or Utilities, to a Utility or the Utilities, b)
the Companies may procure any corporate or administrative services from a Utility or the Utilities for
the Company's benefit, or c) the Companies may procure any corporate or administrative services
from each other or agree to directly assign or allocate common costs to each other (Avista would file
proposals with the Commission as required).
All corporate services provided, and costs incurred, will be direct billed to Hydro One at cost and no
margin or profit shall be included and no assets allocated, provided that any amount billed to Hydro
lTime and costs incurred include. but are not limited to activities for the following: a) services by the Board of Directors, and executive,
management, professional, technical and clerical employees; b) financial and accounting services, corporate governance and compliance services,
legal services, audit services, information and technology services, treasury services, investor relations services, governmental and regulatory
services, human resources services, communications services, payroll processing services, employee benefits participatlon, procurement and
fleet management, tax and related services, contract negotiation and administration services, insurance and risk management services,
environmental services and engineering and technical services; c) the use of office facilities, including but not limited to office space, furniture,
equipment, machinery supplies, computers and computer software, communications equipment, insurance policies and other personal property;
d) the use of automobiles, airplanes, other vehicles and equipment;
2 Likewise, if Hydro One employees were to provide support for Avista's utility operations, such costs would be directly assigned to Avista. The
Company expects such assignment of costs, both to Hydro One and from Hydro One, to be relatively small since Avista will continue to operate
as a standalone utility. Exhibit No. 7
Case Nos. AVU-E-1 749/AVU-G-1 7-05
Avista Corporation P. Ehrbar, Avista
Page 2 Schedule 5, Page 2 of3
Revised 8lZ2O18
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Revised November 28, 2018
One shall be adjusted to the extent necessary to comply with any U.S. federal or Canadian transfer
pricing or similar tax law. Avista will use the same methodology for direct assignment of costs to the
proposed Hydro One subsidiary operations, as we currently do for existing subsidiary operations.
The following Project and Task will be used for the accounting of such expenses:
Project #Project Description Task
777xxxxx Sub Billing - Hydro One 186200
o
Avista Corporation
Page 3
Exhibit No. 7
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
P. Ehrbar, Avista
Schedule 5, Page 3 of3
Revised 81212018
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ON BETIATE OE AVISTA CORPORATION
DAVID J. MEYER
VICE PRESIDENT AND CH]EF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS
P.O. BOX 3127
7417 EAST M]SSION AVENUE
SPoKANE, VIASH]NGTON 99220-3121
TELEPHoNE: [phone]L6
FACSIMILE: [phone]
DAVI D. MEYERGAVISTACORP . COM
ON BEHAI,E OF HYDRO O![E I,IMITED
ELIZABETH THOMAS, PARTNER
KAR] VANDER STOEP, PARTNER
K&L GATES LLP
925 FOURTH AVENUE, SUrrE 2900
SEATTLE, WA 981014-1158
TELEPHONE: [phone]
EACSIMILE: [phone]
LTZ . THOMASGKLGATES . COM
KAR] . VANDERSTOEP GKLGATES . COM
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
]N THE MATTER OF THE JOINT
APPLICAT]ON OF HYDRO ONE LIMITED
(ACTING THROUGH ]TS ]NDIRECT
SUBSIDIARY, OLYMPUS EQU]TY LLC)
AND
AVISTA CORPORATION
FOR AN ORDER AUTHORIZING PROPOSED
TRANSACT]ON
CASE NO. AVU-E_17-05
CASE NO. AVU_G-11_09
EXH]BIT NO. B
PAUL M. DOBSON
FOR HYDRO ONE LIMITED
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Paul Dobson
Chief Financial Officer
Paul Dobson is the Chief Financial Officer (CFO) at Hydro One. As CFO, Mr. Dobson is
responsible for finance, treasury, controller, internal audit, technology and regulation. Prior to
joining Hydro One in 2018, Mr. Dobson served as CFO for Direct Energy Ltd. (Direct Energy),
Houston, Texas, where he was responsible for overall financial leadership of a SfS billion
revenue business with three million customers in Canada and the United States. Since 2003,
Mr. Dobson has held senior leadership positions in finance, operations, information technology
and customer service across the Centrica Group, the parent company of Direct Energy. Prior to
Direct Energy, Mr. Dobson worked at CIBC for 10 years in finance, strategy and business
development roles in both Canada and the United States. Mr. Dobson also brings considerable
experience in mergers and acquisitions and integrating acquired companies across North
America and in the United Kingdom. Mr. Dobson is a dual Canadian-U.S. citizen who holds an
honours bachelor's degree from the University of Waterloo as well as an MBA from the
University of Western Ontario and is a CPA, CMA.
Exhibit No. 8
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
P. Dobson, Hydro One
Schedule '1, Page 'l of '1
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4iilrrrsra
September 19,2018
Hydro One Limited
483 Bay Street
South Tower, 81h Floor
Totonto, Ontario MsG 2P5
Attention: James Scarlett, EVP and Chief Legal Officer
RE: Extensjon of EgdDate
Dear Jamie:
This is with reference to that certain Agreernent and Plan of Merger, dated as of July 19. 2017 (the
"Mg$g5.$gleelnel11"), by and among Hydro One Limited, a corporation organized under the laws of
the Province of Ontario ("Earent"), Olympus Holding Corp., a Delaware corporation ('US Parent"),
Olympus Co.p., a Washington corporation ('Meref_Sub"), and Avista Corporation, a Washington
corporation (the "egnpgqy"). Capitalized tenns used but not defined herein shall have the rneanings
ascribed to them in the Merger Agreement.
Pursuant to Section 7.1(b) of the Merger Agreement. the Company hereby notifies each of Parent, US
Parent and Merger Sub that the Company has elected to extend the End Date to March 29,2019.
Exeept as expressly modified by the imrnediately preceding sentence, the Merger Agreement shall
remain unchanged and in full force and effect in accordance with its terms.
Sincerely,
AVISTA CORPORATION (
o
,Sfit-4
CC: John G. Klauberg
Frederick J. Lark
Elcna V. Rubinov
(Bracewell LLP)
By
Name: Scott L. Morris
Title: Chairman and CEO
Avista Corp,, 1411 E. Mlssion Ave., Spokane. WA 99202, Telephone (509) 495,+140 Exhibit No. 8
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
P. Dobson, Hydro One
Schedule 2, Page 1 of 1
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ON BEIIAI.E OE AVISTA CORPORATTON
DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AEFAIRS
P.O. BOX 3121
14T7 EAST MISSION AVENUE
SPOKANE, WASHfNGTON 99220-3121
TELEPHONE: [phone]
FACSIMILE: [phone]
DAVI D. MEYERGAV]STACORP . COM
ON BETIAIF OF HYDRO ONE LIMITED
ELIZABETH THOMAS, PARTNER
KAR] VANDER STOEP, PARTNER
K&L GATES LLP
925 FOURTH AVENUE, SUITE 29OO
SEATTLE, WA 981014-1158
TELEPHoNE: [phone]
FACSIMILE: [phone]
L]Z . THOMASGKLGATES. COM
KART . VANDERSTOEPGKLGATES . COM
BEEORE THE IDAHO PT'BLIC UTILITIES COMMISSION
IN THE MATTER OF THE JOINT
APPLICATION OF HYDRO ONE L]M]TED
(ACTING THROUGH ITS ]ND]RECT
SUBS]DIARY, OLYMPUS EQUITY LLC)
AND
AVISTA CORPORATION
FOR AN ORDER AUTHORIZING PROPOSED
TRANSACT]ON
CASE NO.
CASE NO.
AVU-E-17-05
AVU-G-11 -09
EXHIBIT NO. 9
THOMAS D. VIOODS
FOR HYDRO ONE LIMITED
)
o
TOM WOODS
tomwoods I I [e-mail]
M - 416 -726 -7032
H-416-482-315s
128 hnperial St.
Toronto, Ontario
MsP I C6
o
(-lq1rynt lloards - Alberta lnvestment Maragement Corporation (AIMCo)- Bank of Arnerica Corporation- Providence St Joseph's St Michael's Health Care (Board Chair)- University of Toronto - Mechanical & tndustrial Engirreering
Advisory Board
Career Canadian Imperial Bank of Commerce, Toronto (1977-2014)- Vice-Chairman - 2013-20I4(r)- SEVP & Group Chief Risk Officer - 2008-201 3G)- EVP/SEVP & Group Chief Financial Officer -2000-2008G)- SVP & Group Controller - 1999-2000
CIBC World Markets, Toronto and Montreal- Chief Financial Offrcer- 1998-1999- Head, Canadian Corporate Banking - 1996-1997- lnvestrnent Banking Dept. - 1977-1996{4)
Etlucation University of Toronto, BASc Industrial Engineering * 1975
Harvard Business School, MBA - 1977
Prcvious Boartls see attached
Familv - Wife - Ruth (COO, Osler Hoskin law firm)- Children - Shannon (Architeot - B+FI - Singapore), Derck (Financial
Analyst - tHS Markit - London)
reported to the CEO- responsibilityfor coverage of client CEOso
Exhibit No. 9
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
T. Wood, Hydro One
Schedule 'l, Page 1 of 3
(:AR.iIGM
'fiIIE-? I
T
o - Asset/Liability Committee; Global Risk Committee- Business Sffategy Group (strategic planning / luI&A)
... continued
(2) SEVP & Group Chief Risk OIficer, CIBC - 2008-201 3 (Jul:l
- reported to the CEO; 650 employees- togetherwith the CEO and the senior manqgement team, focus was
de-risking the bank; managed successfully in a challenging
environment- named the " strongest Bank in North America" (3'o in wortd) by
Bloombergfor each of 2012 and 2013- CRO position had ultimate quthority (delegated by CEO) for
approval of all loans, finoncial modelingfor risk assessment of
capital markets / other businesses- Chqir of Asset/Liability Committee and Global Risk Committee;
quarterly investor w eb cast presentations
(3) EVP & Group Chiqf Financial Ofrcer, CIBC * 2000-2003
SEVP & Group Chief Financial O_frtcer, CIBC - 2003-2008- reported to the CEO (2003-2008); 700 employees
- financial statement preparation, financial planning, internal control
systems, investor / rating agency / regulatory relations, purchasing,
tqx- Chair of CIBC Pension Fund Board- first Cqnadian company and thefirst Not'th American bank to receive
Sarb qnes Oxley certification- quarterly investor webcast presentations und BNN television
int erv i ew s ; annua I share h o I d er m e et in g pr e s ent at i on s
- nofinancial restatements during this time
(a) Wood Gundlt - 1977-1989 (when acquired ht CIBC.)
CAR_llGM:40m87.1
Exhibit No. 9
Case Nos. AVU-E- 1 7-09/AVU-G-17-05
T. Wood, Hydro One
Schedule 1, Page 2 of 3
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7/5/2018 1:2i:14 PM
Tom Woods - Boards
Date of
Commencement
Date
Stepped Down
o Alberta Investrnent
Management
Corporation (AIMCo)
Oct 2015 C{rrcrrt
Director
Chair - Audit Cttee.
Investment Cttee
Bank of America
Corporation Apr2076 Cwrcfi
Director
Entelprise Risk Cttee.
Govemance Cttee.
Canadian Council on
Children & Youth Jan 1989 Mar 7992 Director
Chair - Finance Cttee.
Canadian Opera
Company Apr 2006 Oct2012 Director
Chair - Finance Cttee.
Covenant House
Intemational (N.Y.)Mar2007 May 2014 Director
Chair - Finance Cttee.
Covenant llouse
Toronto Nov 2001 Nov 2012 Board Chair
Chair - Finance Cttee.
De La Salle College,
Toronto Sep 2003 Sep 2007 Director
Chair, Finance Cttee.
DBRS Limited and
DBRS,Inc.Aug 2015 Nov 2016 Dircctor
First Caribbean
Intemational B ank(tx2)Dec 2006 Sep 2010
Director
Chair - Finance Cttee.
Chair - Risk Cttee.o Hummingbird (Sony)
Centre for the
Performing Arts
Apr 2000 Apr2006 Director
Chair - Finance Cttee.
Intria Items Inc.(4(r)Dec 2001 Nov 2005 Director
Invest in Kids Dec 1996 Dec 2007 Director
Chair - Finance Cttee.
Jarislowsky Fraser Ltd.Jar, 2017 May 2018F)Director
Chair - HR Cttee.
Metrowerks fnc.(l)Jan 1996 Mar 19990 Director
Providence St Joseph's St
Michael's Health Care Aug2017 C{rrcnt Board Chair
St. Joseph's Health
Centre, Etobicoke, Ont.Jul 2013 Aug 2017
Director
Chair, Finance & Audit Cttec.
Pension Cttee.
Royal Ontario Museum
Foundation Mar 1997 Aug 2000 Director
TMX Group(t)(z)
(Toronto/Montreal
Stock Exchange)
lul 2012 Dec20140)Director
Derivatives Cttee.o University of Toronto
Mechanical & Industrial
Engineeri4g
Csffcnt Director (Advisory B oard)
0, P,tblicb lmded conponl 12) ABCAppoilee Q) ABCjoinl wnbm willFisen Inc. (\ Con?anJ sold $\ SlepPcd fuva on Dcc 11, 2Ol4 rloa ntinnenlJnm CIBC
Exhibit No. 9 T. Wood, Hydro One
Case Nos. AVU-E-'l 7-09/AVU-G-17-05 Schedule 1 , Page 3 of 3
Feb 2011
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ON BETIAI.E OE AVISTA CORPORATION
DAVID J. MEYER
V]CE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AEEATRS
P.O. BOX 3727
747I EAST MISSION AVENUE
SPOKANE, WASHTNGTON 99220-3127
TELEPHONE: [phone]
EACSIMILE: [phone]
DAVI D . MEYERGAVI STACORP . COM
ON BETIAI,E OF HYDRO ONE LIMITED
EL]ZABETH THOMAS, PARTNER
KAR] VANDER STOEP, PARTNER
K&L GATES LLP
925 EOURTH AVENUE, SUrrE 2900
SEATTLE, WA 981014-1158
TELEPHONE: [phone]
FACSIMILE: [phone]
L]Z . THOMASGKLGATES. COM
KAR] . VANDERSTOE P G KLGATES . COM
BEEORE THE IDAHO PT'BI.IC UIILITIES COMMISSION
IN THE MATTER OF THE JO]NT
APPLICAT]ON OE HYDRO ONE LIMITED
(ACTING THROUGH ITS INDIRECT
SUBSIDIARY, OLYMPUS EQUITY LLC)
AND
AVISTA CORPORAT]ON
FOR AN ORDER AUTHORIZING PROPOSED
TRANSACTION
CASE NO.
CASE NO.
AVU-E-17-05
AVU-G-11 -09
EXHIBIT NO. 1O
JAMES D. SCARLETT
FOR HYDRO ONE LIMITED
o
o Hydro One lnc.
483 Boy Slreet
8th Floor Soulh Tower
Toronlo, Ontorio MsG 2P5
www.HydroOne.com
hydroon,
o
Dovid F. Denison
Choir of the Boord
July 1 1 ,2018
Her Majesty The Queen in Right of Ontario
as represented by the Ministry of Energy, Northern Development and Mines
900 Bay Street
4th Floor, Hearst Block
Toronto, ON M7A 2E1
Attention: The Honourable Greq Rickford. Minister
Dear Sirs/Mesdames:
Re: Hydro One Limited Governance Arrangements and Related Matters
This letter agreement (the "Agreement") sets out the agreement between Hydro One Limited
("Hydro One") and the Province (as defined below) with respect to the process to facilitate the
orderly replacement of the entire Board of Directors of Hydro One, the retirement of Hydro
One's Chief Executive Officer, and related governance and compensation matters. This
Agreement is effective as of the date hereof and shall be a legal and binding agreement
enforceable against each of the parties hereto in accordance with the terms hereof.
Remova! and Replacement of the Board of Directors
The Hydro One Board of Directors (the "Board"), led by the Chair of the Board and with the
cooperation of the Province, will facilitate the orderly resignation of all of the fourteen (14)
existing directors on the Board (the "Directors") and their replacement on a future effective
date to be mutually agreed upon by the Province and Hydro One as soon as reasonably
practicable and, in any event, by no later than August 15, 2018, through an expedited
process as follows:
a. Promptly following your acceptance of this Agreement, and in any event within five
(5) Business Days hereof, the Chair of the Board shall coordinate the establishment
of an Ad Hoc Nominating Committee consistent with the process set out in the
Governance Agreement comprised of one representative of each of the five largest
beneficial owners of Voting Securities of Hydro One, excluding the Province, or if one
of such five beneficial owners of Voting Securities is not willing to provide a
representative to serve on the committee, then the four representatives from the four
of the five largest beneficial owners of Voting Securities shall form the committee, or
if two of such five beneficial owners of Voting Securities are not willing to provide a
representative to serve on the committee, then the three representatives from the
three of the five largest beneficial owners of Voting Securities shall form the
committee, or if three or more of such five beneficial owners of Voting Securities are
Exhibit No. 10
Case Nos. AVU-E-'l 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 1, Page 1 of8
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not willing to provide representatives to serve on the committee, then one
representative of each of the three largest beneficial owners of Voting Securities who
is willing to provide a representative to serve on the committee.
b. Following the establishment of the Ad Hoc Nominating Committee, the Province and
the Ad Hoc Nominating Committee, acting reasonably, shall identify, nominate and
confirm a slate of ten (10) replacement Director nominees to be appointed to the
Board (the "Replacement Directors"). Following their appointment to the Board, the
Replacement Directors shall increase the size of the Board to eleven (11) members
upon the appointment of a Replacement CEO, which Replacement CEO shall be
appointed to the new Board pursuant to section 13 of this Agreement and consistent
with the Governance Agreement. ln accordance with the Governance Agreement,
the Province shall be entitled to nominate the number of nominees that is equalto
40% of the Replacement Directors to be elected (being four nominees) and the Ad
Hoc Nominating Committee shall be entitled to nominate the remaining 60% of the
Replacement Directors to be elected (being six nominees). The Province and the Ad
Hoc Nominating Committee willwork expeditiously to identifo, nominate, confirm and
appoint all of the Replacement Directors as soon as reasonably practicable and, in
any event, by August 15,2018. The Replacement Directors (and each of them, as
applicable) must meet the requirements set out in section 4.2 of the Governance
Agreement, as applicable.
c. Following the identification and nomination of all of the Replacement Directors and,
in any event, by August 15, 2018, the existing Chair of the Board shall call a meeting
of the Board at which the existing Board shall accept the resignations of each of the
existing Directors and fillthe vacancies created by such resignations with the
Replacement Directors in a sequential manner as contemplated by section 4.6.2(a)
of the Governance Agreement. For greater certainty, the requirements to provide a
Removal Notice or call and hold a Removal Meeting under the Governance
Agreement are waived in connection with the replacement of the existing Directors
with the Replacement Directors in the manner contemplated under this section 1.
d. Prior to the appointment of the Replacement Directors, the Province may designate
one or more of its nominees for Replacement Directors to act as a liaison with Hydro
One, the current Chair and the Ad Hoc Nominating Committee with respect to the
identification, nomination, confirmation and appointment process for the
Replacement Directors outlined in this Agreement
e. Once all of the Replacement Directors have been appointed to fill all of the vacancies
created on the Board in accordance with section 1.c of this Agreement, the newly
appointed Board shall then appoint a new Chair of the Board in accordance with
section 3.2 of the Governance Agreement and in consultation with the Province.
2. Each of the Replacement Directors nominated and appointed to the Board pursuant to
section 1 of this Agreement shall serve on the Board until the earlier of the 2019 annual
meeting of shareholders of Hydro One or until his or resignation or his or her successor is
elected or appointed in accordance with the Governance Agreement and the OBCA.
3. Each of the existing Directors shall be entitled to receive all remuneration, benefits, awards
and other entitlements previously granted, awarded or earned on or prior to June 30, 2018,
including all payments relating to director deferred share units acquired in lieu of cash board
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 1, Page 2 of8
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o fees on or prior to June 30, 2018 (plus dividend equivalents), without modification,
amendment or derogation, and shall not be required to forfeit, return or have clawed back
any previously granted, earned or awarded remuneration, benefits, awards or other
entitlements. For greater certainty, the existing Directors' rights to indemnity under
applicable law, the by-laws or other constating documents of any Hydro One Entity or any
agreement between an existing Director and any Hydro One Entity and to coverage under
and to contribution and indemnification pursuant to any directors' and officers' insurance
policies of any Hydro One Entity shall continue following their resignation and retirement in
accordance with their respective terms. Hydro One and the Province acknowledge and
agree that, with immediate effect as of the date of this Agreement, the Board has voluntarily
agreed to reduce the compensation of the existing Directors to the levels that existed as of
December 31,2017 pursuant to the then-existing director compensation policies, and the
Board shall pass a resolution fixing such rate of compensation for the Directors with effect
from and after the date hereof. lt is further acknowledged and agreed that each of the
existing Directors has voluntarily agreed to forego any further remuneration, benefits,
awards or other compensation for his or her service as a Director following June 30, 2018
through to the effective date of resignation and retirement from the Board. For greater
certainty, nothing under this section 3 shall prevent the replacement Board of Hydro One
appointed under sections I and 2 of this Agreement from, following their appointment to the
Board, determining the remuneration of the directors of Hydro One going forward in
accordance with section 2.3(c) of the Governance Agreement.
4. The director deferred share units (plus dividend equivalents) referred to in section 3 above
may be cash-settled based on the June 29, 2018 closing price of the Hydro One common
shares on the Toronto Stock Exchange (the "TSX"), provided that the closing price of such
common shares on another date as soon as practicable after June 29,2018 may be used to
the extent required or deemed advisable by Hydro One in its discretion. Director deferred
share units will continue to accrue dividends until their date of settlement pursuant to the
terms of the applicable plan.
5. The existing Directors shall not be required to meet or maintain any share ownership
requirements of Hydro One from and after their resignation and retirement from the Board
6. Each of the existing Directors, the Province, and Hydro One (on behalf of itself and its
affiliates) shall execute mutual releases, including non-disparagement provisions, in form
satisfactory to each of them, with effect upon each Director's resignation from the Board and
subject to the payment of amounts owed to them in accordance with this Agreement in their
capacity as Directors. For greater certainty,(i) the Province's non-disparagement
commitments shall apply to all official government publications, communications or
statements (written or oral and in any medium whatsoever) and (ii) such release shall not
release any rights of the Directors to the compensation, indemnification and insurance
contemplated under section 3 hereof.
Retirement of Hydro One Chief Executive Officer
7. Mayo Schmidt ("Mr. Schmidt"), the current President and Chief Executive Officer of Hydro
One, shall retire pursuant to his employment agreement with Hydro One dated August 20,
2015, as amended (the "Employment Agreement") and Hydro One's existing Long Term
lncentive Plan first adopted on August 31,2015, as amended to-date (the "Plan")) as an
employee and officer of Hydro One and each other applicable Hydro One Entity and resign
as a director of Hydro One and each other applicable Hydro One Entity, effective as of 5:00
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 1, Page 3 of8
o
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p.m. (Toronto time) on July 11, 2018 (the "Retirement Date"). Mr. Schmidt's Retirement as
President and Chief Executive Officer of Hydro One shall be approved by the Board in
accordance with section 11 of the Employment Agreement and subsection 12.2(c) of the
Plan.
8. ln connection with such Retirement, Mr. Schmidt shall be entitled to receive all
remuneration, benefits, awards and other entitlements previously granted, awarded or
earned through to the Retirement Date as more particularly set out below in accordance with
the terms of his Employment Agreement, the Plan and all other applicable compensation
plans and policies of Hydro One in effect as of the date hereof. The Province acknowledges
and agrees that a statement of all such remuneration, benefits, awards and other
entitlements payable to Mr. Schmidt in connection with his Retirement on or after the
Retirement Date based on achievement of target performance and a specified price per unit
for the Awards, together with the presentation thereof that would be expected to appear in
Hydro One's 2019 management information circular, has been separately provided to you
(the "Retirement Gompensation"). Hydro One represents and warrants that the
information contained in the Retirement Compensation is accurate and complete in all
material respects and reflects all compensation payable to Mr. Schmidt in connection with
his Retirement. The parties further acknowledge and agree with respect to the Retirement
Compensation that:
a. Mr. Schmidt shall receive the following amounts from Hydro One, as set out in the
Retirement Compensation :
i. base salary prorated to the Retirement Date;
ii. the target short-term incentive plan ("ST!P") bonus for the 2018 fiscal year
prorated to the Retirement Date;
iii. the release of his benefit allowance prorated to the Retirement Date;
iv. the release of his accrued pension benefits, deferred share units ("DSUs")
(plus dividend equivalents), and employee share ownership plan ("ESOP")
common shares of Hydro One as of the Retirement Date, in accordance with
the existing terms of the applicable STIP, DSU and ESOP policies and plans
of Hydro One; and
v. a one-time lump sum cash payment of $400,000 in lieu of all post-retirement
benefits and allowances as provided in his contract or otherwise.
b. The Awards (as such term is defined in the Plan) previously granted to Mr. Schmidt
pursuant to the Plan, consisting of Restricted Share Units and Performance Share
Units (as such terms are defined under the Plan), as well as the DSUs, may be cash-
settled at target levels at a specified price per unit. The DSUs will continue to accrue
dividend equivalents until their date of settlement pursuant to the terms of the Plan;
the RSUs and PSUs shall cease to accrue dividend equivalents after the Retirement
Date. All Options will be cancelled on the Retirement Date for no consideration.
Exhibit No. 10
Case Nos. AVU-E-'l 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 1, Page 4 of 8
o
o c. Payments made to Mr. Schmidt shall be subject to applicable withholding tax, shall
be paid without interest and, in the event of Mr. Schmidt's death, shall be made to his
successors and assigns including the estate, heirs, executors, trustees,
administrators and/or personal legal representatives of Mr. Schmidt, as applicable.
d. ln no case shall the amounts paid pursuant to this section 8 exceed the aggregate
amount of the remuneration, benefits, awards and other entitlements set out in the
Retirement Compensation. For greater certainty, other than the payment referred to
in section 8.a.v above, allsuch remuneration, benefits, awards and other
entitlements represent recognized obligations of Hydro One as at the Retirement
Date.
e. For greater certainty, Mr. Schmidt's existing rights to indemnity under applicable law,
the by-laws or other constating documents of any Hydro One Entity or any
agreement between Mr. Schmidt and any Hydro One Entity and to coverage under
and to contribution and indemnification pursuant to any directors' and officers'
insurance policies of any Hydro One Entity shall continue following his Retirement
and resignation, as applicable, as an employee, officer and director of Hydro One
and each other applicable Hydro One Entity, in accordance with their respective
terms.
9. Mr. Schmidt shall not be required to meet or maintain any share ownership requirements of
Hydro One from and after the Retirement Date.
10. The Province shall take no action or fail to take any action whatsoever, the result of which
would or could reasonably be expected to, directly or indirectly, result in any modification,
amendment, derogation from or supplement to any of Mr. Schmidt's existing arrangements
relating to his Retirement Compensation as specified under this Agreement.
11. Mr. Schmidt shall not be entitled to receive the Separation Package (as such term is defined
in the Employment Agreement) or any other severance payment, retiring allowance, change
of control payment or any other compensation in connection with his Retirement on the
Retirement Date except as set out in the Retirement Compensation, and any amounts paid
in excess of the aggregate Retirement Compensation shall be repayable by Mr. Schmidt (or
his successors and assigns, as applicable) to Hydro One.
12. Mr. Schmidt, the Province, and Hydro One (on behalf of itself and its affiliates) shall execute
a mutual release, including non-disparagement provisions, in form satisfactory to each of
them with effect upon Mr. Schmidt's Retirement and resignation as an employee, officer and
director of Hydro One and each other applicable Hydro One Entity. The Province's non-
disparagement commitments shall apply to all official government publications,
communications or statements (written or oral and in any medium whatsoever).
13. The Replacement Directors appointed to the Board in accordance with sections 1 and 2 of
this Agreement shall, following their appointment, identify, select and appoint a replacement
President and Chief Executive Officer of Hydro One (the "Replacement CEO") in
accordance with section 3.3 of the Governance Agreement, which CEO shall also serve as
one of the Replacement Directors. The existing Board shall appoint an acting President and
Chief Executive Officer, in consultation with the Province, for the interim period from Mr.
Schmidt's Retirement Date until the appointment and election of the Replacement CEO by
the Replacement Directors.
Exhibit No. 10
Case Nos. AVU-E-'1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule '1, Page 5 of I
o
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o Hydro One Executive Management Team
14. The Province acknowledges and agrees that, for greater certainty, the terms and conditions
of employment of Hydro One's executive leadership team other than Mr. Schmidt (the
"Executives") under their respective employment agreements, the Plan, all related Award
Agreements under the Plan, and the other compensation plans and policies of Hydro One
remain in full force and effect from and after the date hereof. The Province further agrees
that the Executives shall remain entitled to receive, and the Province shalltake no action
that would require or result in the forfeiture, return or claw back (other than in accordance
with Hydro One's policies) of, any remuneration, benefits, awards or other entitlements
(whether vested or unvested) granted, earned or awarded prior to the date of cessation of
employment of such Executives with Hydro One. For greater certainty, the foregoing does
not address any severance entitlements of such Executives, under contract or otherwise.
15. The parties acknowledge and agree that the replacement Board of Hydro One appointed
under sections I and 2 of this Agreement shall be responsible for determining the
compensation of executives of Hydro One in accordance with the Governance Agreement
and the other compensation plans and policies of Hydro One in effect from time to time, and
nothing in this Agreement shall limit the actions that the Replacement Directors may take in
carrying out their duties and responsibilities in this regard, provided that it is the intention of
the parties that the Province, as the single largest shareholder of Hydro One, shall be
consulted in a manner to be discussed and agreed upon between the Province and the
replacement Board appointed under sections 1 and 2 of this Agreement on future matters
relating to Hydro One's executive compensation arrangements.
General Provisions
16. Reaffirmation: By entering into this Agreement, the Province ratifies and reaffirms its
obligations under the Governance Agreement and agrees that, except as specifically set out
in this Agreement with respect to the subject matter hereof, (i) the execution, delivery and
effectiveness of this Agreement or any other documents delivered in connection herewith
shall not amend, modify or operate as a waiver or forbearance of any right, power,
obligation, remedy or provision under the Governance Agreement, and (ii) such agreement
shall continue in fullforce and effect. Until each existing Director resigns as contemplated in
this Agreement, such existing Director shall remain a director of Hydro One (unless such
Director otherwise resigns, dies or is replaced) and shall be entitled to take such actions as
a director as it determines to be appropriate, consistent with his or her fiduciary duties and
the principles set out in section 4.7.4 of the Governance Agreement, provided such actions
are not inconsistent with the terms of this Agreement.
17. Defined Terms: Unless otherwise defined, capitalized terms used in this Agreement shall
have the respective meanings ascribed to such terms in the Governance Agreement dated
as of November 5, 2015 between Hydro One and Her Majesty The Queen in Right of
Ontario (the "Province", "you" or "you/'), as represented by the Minister of Energy (the
"Governance Agreement").
18. Non-Disparaoement: The Province shall not, directly or indirectly, on its own behalf or on
behalf of any other person, take, engage in or authorize any action or make any statement
(written or oral and in any medium whatsoever) in any official government publication,
communication or statement that (i) defames, criticizes, ridicules, disparages or is
derogatory or otherwise would reasonably be expected to be deleterious or damaging to any
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 1, Page 6 of 8
o
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of the directors, officers, employees, agents and/or representatives of Hydro One or any
other Hydro One Entity or encourages the making of such statements or the taking of such
actions by someone else, or (ii) is inconsistent with the provisions of this Agreement. Hydro
One agrees not to, directly or indirectly, on its or any other Hydro One Entity's own behalf or
on behalf of any other person, take, engage in or authorize any action or make any
statement (written or oral and in any medium whatsoever) that defames, criticizes, ridicules,
disparages or is derogatory or otherwise would reasonably be expected to be deleterious or
damaging to the Province in connection with the actions or matters contemplated by this
Agreement, or encourages the making of such statements or the taking of such actions by
someone else. Nothing in this section 18 shall prevent or restrict (i) any statement made in
the Legislative Assembly of Ontario or communications in any form by elected officials who
are not members of the government, or (ii) any party from making statements that are
truthful if and to the extent required by applicable law or legal process.
19. Public Announcement: Each of Hydro One and the Province shall publicly announce the
entering into of this Agreement promptly following the execution hereof, provided that the
parties shall consult with each other with respect to the timing and content of any press
releases, announcements or public statements relating to this Agreement or the subject
matter hereof, having regard to the Province's governmental responsibilities and policy
objectives as contemplated in sections 2.2.1(d) and 2.2.2 of the Governance Agreement, on
the one hand, and the obligations of Hydro One as a reporting issuer subject to applicable
securities laws and the rules of the TSX, on the other hand. For clarity, nothing in this
Agreement shall restrict Hydro One from repeating in its public disclosure documents filed
with securities regulatory authorities any statements or disclosure (in substance) previously
made in accordance with this section 19 and this section 19 is subject to each party's
overriding obligation to make disclosure or filings required from time to time under applicable
laws or stock exchange rules, as applicable.
20. Governinq Law: This Agreement shall be interpreted and enforced in accordance with, and
the respective rights and obligations of the parties shall be governed by, the laws of the
Province of Ontario and the federal laws of Canada applicable therein.
21. Enurement: Assiqnment: This Agreement shall enure to the benefit of and be binding upon
the parties and their respective successors and permitted assigns. This Agreement may not
be assigned by either party except with the prior written consent of the other party.
22. Entire Aqreement: Amendments: This Agreement, together with the Governance
Agreement, constitute the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements, understandings, negotiations and
discussions, whether written or oral. There are no conditions, covenants, agreements,
representations, warranties or other provisions, express or implied, collateral, statutory or
otherwise, relating to the subject matter hereof except as provided herein. This Agreement
may be amended only by an instrument in writing executed by each of the parties hereto.
23. Counteroarts: This Agreement may be executed and delivered in any number of
counterparts, with the same effect as if all parties had signed and delivered the same
document, and all counterparts shall be construed together to be an original and will
constitute one and the same agreement.
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 1, Page 7 ofB
o
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Yours very truly,
The foregoing is acknowledged, accepted and agreed to this 1 1th day of July, 2018.
HYDRO ONE LIMITED
By:"David Denison"
Name: David F. Denison
Title: Chair of the Board of Directors
HER MAJESW THE QUEEN IN RTGHT
OF ONTARIO AS REPRESENTED BY
THE MINISTER OF ENERGY,
NORTHERN DEVELOPMENT AND
MINES, AND MINISTER OF
INDIGENOUS AFFAIRS
By:"Greg Rickford"
The Honourable Greg Rickford
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 1, Page 8 of8
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2
SCHEDULE 1
HYDRO ONE ACCOUNTABILITY ACT,2OI8
INte.npRererroN
Definitions
1 In this Act,
"Chief Executive Officer" means the person holding the position of President and Chief Executive Oflicer of Hydro One
Limited; ("chef de la direction")
"compensation" means anything paid or provided, directly or indirectly, to or for the benefit of a person who performs duties
and functions that entitle the person to be paid, and includes salary, benefits, perquisites and all forms of non-discretionary
and discretionary payments; ("r6mun6ration")
"executive" means any person who holds the office ofexecutive vice-president, vice-president, chiefadministrative officer,
chief operating officer, chief financial officer, chief information officer, chief legal officer, chief human resources officer
or chiefcorporate development officer, or holds any other executive position or office, regardless ofthe title ofthe position
or office; ("cadre supdrieur")
"Minister" means the Minister of Energy, Northern Development and Mines or such other member of the Executive Council
as may be assigned the administration of this Act under the Executive Council Act; ("ministre")
"subsidiary" has the same meaning as in the Business Corporations Act,but does not include a subsidiary incorporated in a
jurisdiction outside Canada. ("fi liale")
Expculve AND DIRECToR CoMPENSATION
Compensation framework
2 (l) The board of directors of Hydro One Limited shall, within six months of the day this subsection comes into force,
establish a new compensation framework for the board, the Chief Executive Officer and other executives in consultation with
the Govemment of Ontario and the other five largest shareholders of Hydro One Limited.
Severance entitlements
(2) For greater certainty, the compensation framework must include policies governing the severance and other entitlements
of the Chief Executive Officer and other executives in connection with any termination of their employment with Hydro One
Limited.
Management Board approval
(3) The compensation framework established by Hydro One Limited under subsection (1), and any amendments to the
framework, are not effective until they are approved by the Management Board of Cabinet.
Directives
3 (l) The Management Board of Cabinet may issue directives,
(a) governing the compensation of the directors and the Chief Executive Officer and other executives of Hydro One
Limited, including, without being limited to, directives restricting the total annual compensation payable to such
persons; and
(b) governing the development, form, manner and timing of the compensation framework provided for in subsection 2 (1)
and any amendments to that framework.
Compliance
(2) Hydro One Limited and its board of directors shall comply with every directive made under subsection (l).
Publication
(3) Every directive made under subsection (1),
(a) shall be made available to the public on request; and
(b) shall be publicly posted on at least one Government of Ontario website.
Status
(4) Part III (Regulations) ofthe Legislation Act, 2006 does not apply with respect to directives made under subsection (l).
Same, subsidiaries
4 Sections 2 and 3 apply, with necessary modifications, to each of Hydro One Limited's subsidiaries.
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G- 1 7-05
J. Scarlett, Hydro One
Schedule 2, Page 1 of 3
o
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o Expiry
5 Sections 2,3 and 4 cease to have effect on January 1,2023.
TERvrNerroN oF RTGHTS AND CRowN luvuNlry
No cause of action
6 ( I ) No cause of action arises against the Crown or any current or former member of the Executive Council or any current
or former employee or agent of or adviser to the Crown, or against Hydro One Limited or any of its subsidiaries, or any of
their current or former officers, directors, employees or agents, as a direct or indirect result of,
(a) the enactment, operation, administration or repeal of any provision of this Act;
(b) anything done or not done under this Act;
(c) anything related in any way to the involvement of the Government of Ontario in compensation matters, or other
aspects of the corporate governance, of Hydro One Limited or any of its subsidiaries;
(d) any alleged misrepresentation within the meaning of applicable securities laws in any prospectus, document or other
public statement related in any way to the involvement of the Government of Ontario in compensation matters at
Hydro One Limited or any of its subsidiaries; or
(e) any adverse market consequences or diminishment in the value of any securities in Hydro One Limited, or any of its
subsidiaries, or any other investment, resulting from the enactment ofthis Act, anything done or not done in order to
comply with this Act or the involvement of the Government of Ontario in the corporate governance of Hydro One
Limited or any of its subsidiaries.
Proceedings barred
(2) No proceeding, including but not limited to any proceeding for a remedy in contract, restitution, tort, misfeasance, bad
faith, trust or fiduciary obligation, and any remedy under applicable securities laws or any other statute, that is directly or
indirectly based on or related to anything referred to in subsection (l) may be brought or maintained against the Crown or
any current or former member of the Executive Council or any current or former employee or agent of or adviser to the
Crown, or against Hydro One Limited or any of its subsidiaries, or any of their current or former officers, directors,
employees or agents.
Application
(3) Subsection (2) applies to any action or other proceeding claiming any remedy or relief, including specific performance,
injunction, declaratory relief, any form ofcompensation or damages, or any other remedy or relief, and includes a proceeding
to enforce ajudgment or order made by a court outside ofCanada.
Retrospective effect
(4) Subsections (2) and (3) apply regardless of whether the cause of action on which the proceeding is purportedly based
arose before, on or after the day this subsection comes into force.
Proceedings set aside
(5) Any proceeding referred to in subsection (2) or (3) commenced before the day this subsection comes into force shall be
deemed to have been dismissed, without costs, on the day this subsection comes into force.
GENsnel
Salary disclosure
7 (l) Despite any other Act or agreement, not later than March 31 of each year, Hydro One Limited shall publish on its
public website a record of the total annual compensation paid in the previous year by Hydro One Limited to or in respect of
executives provided for in the regulations made under subsection (3).
Publication of proposed compensation changes
(2) The board of directors of Hydro One Limited shall publish on its website any proposed changes to its compensation
frameworks for the board, the Chief Executive Officer or other executives at least 30 days prior to the date on which it seeks
approval from the Management Board of Cabinet under subsection 2 (3).
Regulations
(3) The Lieutenant Governor in Council may make regulations governing the application of this section, including, without
being limited to,
(a) providing for executives or categories ofexecutives whose compensation must be published under subsection (1);
(b) requiring and specifing additional information to be published;
(c) providing for the contents ofthe notice required under subsection (2);
case Nos. AVU-E-17-oe/Xl!b-tl? l3
.i;iT!"jlJ.lti?i8
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4
(d) requiring and governing the application of this section, with necessary modification, to executives of subsidiaries of
Hydro One Limited.
Information and reports
8(l) TheMinistermayrequestHydroOneLimitedandsuchotherpersonsandentitiesastheMinisterconsidersappropriate
to give the Minister information the Minister considers necessary for the purpose of administering the provisions of this Act,
including information that,
(a) discloses the financial or other details of any employment agreement or other contract with any director, Chief
Executive Officer or other executive in respect of their employment by Hydro One Limited or any of its subsidiaries;
or
(b) discloses anything related to the compensation paid, payable or available to a director, Chief Executive Officer or
other executive of Hydro One Limited or any of its subsidiaries.
Compliance
(2) A person or entity who receives a request from the Minister for information or a report shall comply with the request.
Authorization
(3) The Minister may directly or indirectly collect personal information that the Minister is authorized to collect under this
Act, and use it for the purpose of administering the provisions of this Act.
No notice to individual required
(4) Subsection 39 (2) of the Freedom of lnformation and Protection of Privacy Act does not apply with respect to any
personal information collected under this section.
Regulations
9 (l) The Lieutenant Governor in Council may make any regulations that the Lieutenant Covernor in Council considers
necessary or desirable for carrying out the purposes, provisions and intent ofthis Act.
Same
(2) Without limiting the generality of subsection ( 1), the Lieutenant Governor in Council may make regulations defining or
clarifring the meaning of any word or expression used in this Act but not otherwise defined.
Onlario Energt Board Act, 1998
l0 Section 78 of the Ontario Energt Board Act, 1998 is amended by adding the following subsection:
Same, Hydro One executive compensation
(5.0.2) InapprovingorfixingjustandreasonableratesforHydroOneLimitedoranyofitssubsidiaries,theBoardshallnot
include any amount in respect of compensation paid to the Chief Executive Officer and executives, within the meaning of the
Hydro One Accountability Ac4 2018, of Hydro One Limited.
RErEAL, CoMMENCEMENT AND SuoRr Trrln,
Repeal
11 (l) Subject to subsection (2), this Act is repealed on a day to be named by proclamation of the Lieutenant
Governor.
(2) A proclamation may provide for the repeal of different provisions of this Act on different dates.
Commencement
12 (1) Subject to subsection (2), the Act set out in this Schedule comes into force on the day the Urgent Priorities Act,
2018 receives Royal Assent.
(2) Sections I to l0 come into force on a day to be named by proclamation of the Lieutenant Governor.
Short title
l3 The short title of the Act set out in this Schedule is the Hydro One Accountability Act,20l8.
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 2, Page 3 of3
o
EXECUTION VERSION
o
HYDRO ONE LIMITED
o
GOVERNANCE AGREEMENT
Dated as of November 5, 2015
o
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-c-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page I of54
TABLE OF CONTENTS
ARTICLE 1 INTERPRETATION.
t.l Definitions.
2.1 Governance Principles2.2 Interpretation of Governance Principles
2.3 Role of the Board.........
2.4 Governance Standards
2.5 Restriction on Province Initiating a Fundamental Change
ARTICLE 3 GOVERNANCE STRUCTURE
3.1 Number of Directors....
3.2 Appointment of Chair3.3 Appointment of CEO.3.4 Advance Notice for Special Board Resolution...
3.5 NominatingandGovernanceCommittee............
ARTICLE 4 ELECTION AND APPOINTMENT OF DIRECTORS
Page
....2
1.2 Schedules
ARTICLE 2 GOVERNANCE PRINCIPLES AND GOVERNANCE STANDARDS ................ 8
2
6
6
............. 8
9
.............9
.'......,,. l0
........... I I
2.6 Restriction on Province Acting Jointly or in Concert 1l
2.7 Acquisition by the Province of Additional Voting Securities .......... I I
2.8 TSX Listing ...........12
2.9 Obligations of Hydro One............ ................12
2.10 Governance of Subsidiaries 12
2.11 By-Laws.................... l3
................ l3
l3
14
................14
................14
15
................. l5
4.1 Nomination of Directors t5
Qualification of Director Nominees ............ 16
IdentificationandConfirmationofDirectorNominees.. ..................18
Replacement Board Nominees in case of Vacancies................. .......20
Province's Voting Rights at Contested Shareholders Meetings................ ..........20
Province's Right to Withhold Votes for Directors ................ ...........21
4.2
4.3
4.4
4.5
4.64.7 Province's Right to Replace Directors............4.8 Province Below 40o/o of Yoting Securities .....
ARTICLE 5 CONFIDENTIALITY OF INFORMATION PROVIDED
5.1 ConfidentialityAgreement..............
ARTICLE 6 PRE-EMPTIVE RIGHT
6.1 Offer to Subscribe for Common Shares.....6.2 Delivery of the Offer..........
6.3 Offer Price and Number of Securities if Public Offering
6.4 Province's Response
2t
23
24
24
24
24
24
25
25
Exhibit No. 10
Case Nos. AVU-E- 1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 2 of54
-l-
o TABLE OF CONTENTS
(continued)
Page
6.5 Oflered Securities Not Subscribed For.....6.6 Purchase of Offered Securities...
6.7 SubsequentOfferings...6.8 No Obligation to Subscribe
ARTICLE 7 DISPUTE RESOLUTION
7.1 Arbitration.7.2 Location of Arbitration
7.3 Laws of Ontario ..........7.4 Arbitration Act, l99l ..
ARTICLE 8 GENERAL PROVISIONS
25
25
25
26
26
26
26
26
26
Financial Obligations of the Province....
Effective Date.....
Amendments to this Agreement.
Term
Termination Not to Affect Rights or Obligations...............
No Third Party Rights
Representations and Warranties of Hydro One .....
Representations and Warranties of the Province...
Notices, Designations and Other Communications
Invalidity of Provisions.................
Waiver.......
Goveming Law
Further Assurances
Enurement; Assignment.....................
Counterparts
26
26
27
27
27
27
27
28
28
29
30
30
3l
3r
31
3l
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Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 3 of 54
o -ll-
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
8.r0
8.11
8.12
8.13
8.14
8.15
o GOVERNANCE AGREEMENT
THIS AGREEMENT is made as of the 5th day of November,2015
BETWEBN:
HYDRO ONE LIMITED a corporation incorporated under the
Province of Ontario
("Hydro One")
-and-
HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO
(the "Province"), as represented by the Minister of Energy
RECITALS:
D
laws of the
A.The Province has determined that in order to strengthen the long-term performance of
Hydro One and generate value for Ontarians it is desirable to broaden the ownership of
Hydro One pursuant to the Offering.
The Province and Hydro One wish to establish the governance structure for Hydro One
given the Province's position as a significant and responsible shareholder of Hydro One.
In the Prospectus, the Province has stated that it intends to sell additional common shares
of Hydro One over time. Pursuant to the Electricity Act, 1998 (Ontario), the Minister of
Energy on behalf of the Province has the authority to dispose of its interest in Hydro One
and enter into any agreement the Minister considers necessary or incidental to the
disposition of any such interest. However, under the Electricity Act, 1998 (Ontario)
(i) the Province is not permitted to sell Voting Securities if as a result the Province would
own less than40%o of any class or series of Voting Securities and (ii) if as a result of the
issuance of additional Voting Securities by Hydro One, the Province owns less than 40
per cent of the outstanding number of Voting Securities of any class or series, the
Province is required to take steps to increase its ownership (subject to the Lieutenant
Governor in Council determining the manner by which, and the time by or within which,
the Voting Securities shall be acquired) to not less than 40 per cent of the outstanding
number of Voting Securities of that class or series, in accordance with the provisions of
that statute.
Given the Province's stated intention about future sales by it of common shares of Hydro
One, the Province is prepared to commit not to acquire previously issued Voting
Securities in the future if the Province would, after that acquisition, own more than 45%o
of any class or series of Voting Securities.
Given the Province's ownership obligations with respect to Voting Securities in
accordance with the Electricity Act, 1998 (Ontario), Hydro One is prepared to provide the
Exhibit No. 10
Case Nos. AVU-E- 1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page4 of54
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Province with a pre-emptive right to acquire up to 45%o of certain new issuances of
Voting Securities by Hydro One.
Hydro One and the Province wish to enter into this Agreement to give effect to the
matters set out in the Recitals and to govern the Province's relationship with Hydro One
in its capacity as a holder of Voting Securities.
In consideration of the mutual covenants and agreements contained in this Agreement and other
good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged
by each of the Parties), the Parties agree as follows.
ARTICLE T
INTERPRETATION
1.1 Definitions
In this Agreement:
l.l.l
Section 4.7.2;
"Ad Hoc Nominating Committee" has the meaning given to that term in
1.1.2 "Agreement" means this Governance Agreement and all Schedules
attached to this agreement, in each case as they may be amended, supplemented or
replaced from time to time in accordance with this Agreement;
1.1.3 "Annual Confirmation Meeting" means the first meeting of Directors
after each annual meeting of Shareholders;
1.1.4 "Arbitration Rules" has the meaning given to that term in Section 7.1;
1.1.5 "Articles" means the articles of incorporation of Hydro One, as amended
from time to time;
1.1.6 "Board" means the board of directors of Hydro One;
1.1.7 "Board Diversity Policy" means the policy on board diversity approved
by the Board and in effect on the date of this Agreement, as it may be amended from time
to time in accordance with Section 2.4.2;
1.1.8 "Business Day" means any working day, Monday to Friday inclusive, but
excluding statutory and other holidays, namely: New Year's Day; Family Day; Good
Friday; Easter Monday; Victoria Day; Canada Day; Civic Holiday; Labour Day;
Thanksgiving Day; Remembrance Day; Christmas Day; Boxing Day and any other day
identified as a "holiday" under Section 88 of the Legislation Act,2006 (Ontario);
1.r.9 "Chair" means the chair of the Board;
"CEO" means the Chief Executive Officer of Hydro One;
Exhibit No. 10
Case Nos. AVU-E-1 7-0g/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 5 of54
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"Circular Deadline" has the meaning given to that term in Section 4.3.3;
1.1.12 "Constating Documents" means Hydro One's articles of incorporation,
certificate of incorporation, by-laws, or similar organizational documents, as the same
may be amended from time to time;
I .l .13 "Contested Meeting" means a meeting of Shareholders for the purposes
of electing Directors where the number of candidates for election as a Director validly
nominated exceeds the number of Directors to be elected at that meeting;
1.1.14 "Director" means a director of Hydro One;
1.1.15 "DRIP" means any dividend re-investment arrangement established by
Hydro One from time to time that is on terms (including as to discount rate) consistent
with dividend re-investment arrangements of other publiclytraded utilities in Canada and
that does not include a cash purchase option.
LI.16 "EA" meansthe Electricity Act, 1998 (Ontario);
l.l.l7 "Effective Date" means the date the Offering is completed;
1.1.18 "Excluded Issuance" means the issuance of Voting Securities: (i)
pursuant to employee or director compensation plans existing on the date hereof or plans
adopted after the date hereof that comply with the rules of the TSX and, if required, have
been approved by the TSX; (ii) pursuant to a DRIP; (iii) pursuant to a rights offering that
is open to all Shareholders; or (iv) pursuant to any business combination, take-over bid,
arrangement, asset purchase transaction or other acquisition of assets or securities of a
third party;
1.1.19 "Expected Departing Directors" has the meaning given to that term in
Section 4.3.1;
1.1.20 "FAA" means the Financial Administration Act (Ontario);
o'Governance Principles" has the meaning given to that term in1.1.21
Section 2.1;
1.1.22 "Governmental AuthoriQr" means any federal, national, supranational,
state, provincial or local government, any court, tribunal, arbitrator, authority, agency,
commission, official, any Canadian or Provincial minister or the Crown or foreign
equivalent or any non-governmental self-regulatory agency or other instrumentality of
any government that, in each case, has jurisdiction over the matter in question;
1.1.23 "Hydro One" means Hydro One Limited;
1.1.24 "Hydro One Entity" means any Person controlled directly or indirectly
by Hydro One where "control" has the meaning given to that term in the take-over bid
rules under Ontario securities Laws;
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 6 of 54
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1.1.25 "Hydro One Ombudsman" means the ombudsman for Hydro One
appointed by the Board pursuant to Section 48.3 of the EA;
1.1.26 "Hydro One's Governance Standards" has the meaning given to that
term in Section 2.4.2;
1.1.27 "Law" means all laws, statutes, rules, regulations, ordinances, judgments,
orders, writs, directives, decisions, rulings, decrees, awards and other pronouncements
having the effect of law in Canada or in Ontario, or, as applicable, any foreign country or
any other domestic or any foreign province, state, county, city or other political
subdivision or of any Governmental Authority;
1.1.28 "Majority Voting Policy" means the majority voting policy of Hydro One
approved by the Board and in effect on the date of this Agreement, as it may be amended
from time to time in accordance with Sections 2.4.1 and2.4.2;
1.1.29 "material information" means a "material fact" or a "material change"
(as each of those terms is defined under applicable securities Laws);
1.1.30 "Nominating and Governance Committee" has the meaning given to
that term in Section 3.5;
l.l.3l "Nomination Deadline" has the meaning given to that term in
Section 4.3.3;
1.1.32 "Nomination Notice" has the meaning given to that term in Section 4.3.3;
1.1.33 "OBCA" means the Business Corporations Act (Ontario);
1.1.34 "OEB" means the Ontario Energy Board continued as a non-share capital
corporation under the OEB Act;
1.1.35 "OEB Act" means the Ontario Energt Board Act, 1998 (Ontario);
I .l .36 "Offer" has the meaning given to that term in Section 6.1 ;
1.1.37 "Offered Securities" has the meaning given to that term in Section 6.1;
1.1.38 "Offering" means the initial public offering of common shares of Hydro
One described in the Prospectus;
1.1.39 "Offering Outside Date" has the meaning given to that term in Section
6.2;
1.1.40 "Official or Employee of the Province" has the meaning given to that
term in Schedule "A" to this Agreement;
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 7 of54
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1.1.41 "Ordinary Board Resolution" means a resolution of the Board passed by
at least a majority of the votes cast at a meeting of the Directors, or consented to in
writing by all of the Directors;
1.1.42 "Parfi/" means a party to this Agreement and "Parties" means all of the
parties to this Agreement;
1.1.43 "Person" means any individual, partnership, limited partnership, joint
venture, syndicate, sole proprietorship, company or corporation with or without share
capital, unincorporated association, Governmental Authority, trust, trustee, executor,
administrator, or other legal personal representative;
l.l .44 "Proposed Offering" has the meaning given to that term in Section 6.1 ;
1.1.45 "Prospectus" means the prospectus of Hydro One dated October 29,
2015;
1.1.46 'oProvince" has the meaning given to that term in the Recitals;
1.1.47 "Provincial Nominee" means any Director nominated by the Province to
serve as a Director pursuant to the terms of this Agreement who has been duly elected or
appointed to the Board;
1.1.48 "Provincial Representative" means the Minister of Energy or any other
Person(s) designated from time to time in accordance with Section 8.9 by the Minister of
Energy as representing the Province for the particular matter or matters under this
Agreement stated in the relevant designation, provided that the Minister of Energy may
designate no more than one Person for a particular matter;
1.1.49 "Public Accounts" has the same meaning as that term has when used in
the FAA;
1.1.50 "Public Entity" has the meaning given to the term "public entity" in the
FAA;
I .1 .51 "Recitals" means the recitals to this Agreement;
1.1.52 "Registration Rights Agreement" means the registration rights
agreement dated the date of this Agreement between the Province and Hydro One;
1.1 .53 "Removal Meeting" has the meaning given to that term in Section 4.7 .1;
1.l.54 "Removal Notice" has the meaning given to that term in Section 4.7.l;
1 .1 .55 "Response" has the meaning given to that term in Section 6.2;
I .l .56 "Shareholder" means a holder of Voting Securities;
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 8 of54
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1.1.57 "Skills Matrix" means the matrix of expertise, skills, experience and
perspectives applied in recruiting and retaining Directors with a balance of expertise,
skills, experience and perspectives, taking into consideration Hydro One's mandate, risk
profile, operations and ownership structure, approved by the Board and in effect on the
date of this Agreement, as it may be amended from time to time in accordance with
Section 2.4.2:
1.1.58 "Specified Provincial Entities" means each organization referred to in
Sections 6 and7 of Schedule "A" to this Agreement.
I .1 .59 "Special Board Resolution" means a resolution of the Board passed by at
least two-thirds of the votes cast at a meeting of the Directors, or consented to in writing
by all of the Directors;
1.1.60 "TSX" means Toronto Stock Exchange;
1.1.61 "Voting Securit5r" means a voting security of Hydro One where "voting
security" has the meaning given to the term "voting security" in the EA; and
1.1.62 "Voting Security Threshold" has the meaning given to that term in
Section 4.8.1.
o 1.2 Schedules
The following schedules are attached to this Agreement:
Schedule "A"
Schedule "B"
Schedule "C"
Schedule "D"
Oflicial or Employee of the Province
Form of Confidentiality Agreement
Hydro One's Governance Standards
Rules of Procedure for Arbitration
1.3 Interpretation
Unless otherwise expressly provided in this Agreement or the context requires a different
interpretation, the following rules of interpretation shallapply:
1.3.1 The table of contents and headings and references to them set forth in this
Agreement are for convenience of reference purposes only, do not constitute a part of this
Agreement and do not affect and are not intended to affect in any way the meaning or
interpretation of this Agreement or any term or provision hereof.
1.3.2 All references in this Agreement to Sections, Articles, or Schedules, shall
be deemed to refer to Sections, Articles or Schedules of this Agreement, as applicable.
1.3.3 All references in this Agreement to specific Sections, Articles, Schedules,
and other divisions of this Agreement followed by a number are references to the whole
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page I of54
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of the Section, Article, Schedule or other division of this Agreement, as applicable,
bearing that number, including all subsidiary provisions containing that same number as a
prefix.
1.3.4 The Schedules to this Agreement are an integral part of this Agreement
and a reference to this Agreement includes a reference to the Schedules.
1.3.5 Any reference in this Agreement to each of the masculine, feminine and
neuter genders shall be deemed to include all other genders.
1.3.6 Any reference to the singular in this Agreement shall also include the
plural and vice versa, as the context may require.
1.3.7 References in this Agreement to any Party or other Person (other than a
Provincial Representative) shall include references to its respective successors resulting
from any amalgamation, merger, alTangement or other reorganization of such Party or
other Person.
1.3.8
culTency
All amounts in this Agreement are stated and are to be paid in Canadian
o
1.3.9 Unless specified otherwise, reference in this Agreement to a statute or
statutory provision refers to that statute or statutory provision as it may be amended,
replaced or re-enacted from time to time, or to any restated or successor statute or
statutory provision of comparable effect. A reference in this Agreement to a statute
includes a reference to all rules, regulations, by-laws and other instruments made under
that statute.
1.3.10 Any reference to a number of days shall refer to calendar days unless
Business Days are specified.
1.3.11 In construing this Agreement, the rule known as the ejusdem generis rule
shall not apply nor shall any similar rule or approach apply to the construction of this
Agreement and, accordingly, general words introduced or followed by the word "other"
or "including" or "in particular" shall not be given a restrictive meaning because they are
followed or preceded (as the case may be) by particular examples intended to fall within
the meaning of the general words.
1.3.12 Where this Agreement states that an obligation shall be performed "no
later than" or "within" or "by" a prescribed number of days before a stipulated date or
event or "by" a date which is a prescribed number of days before a stipulated date or
event, the latest time for performance shall be 5:00 p.m. on the last day for performance
of the obligation concerned, or if that day is not a Business Day, 5:00 p.m. on the next
Business Day.
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 10 of 54
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1.3.13 Where this Agreement states that an obligation shall be performed'oon" a
stipulated date, the latest time for performance shall be 5:00 p.m. on that day, or, if that
day is not a Business Day, 5:00 p.m. on the next Business Day.
1.3.14 Any reference to time of day or date means the local time or date in
Toronto, Ontario unless otherwise specified.
1 .3.15 References containing terms such as:
"hereof', "herein", "hereto", "hereinafter", "hereunder" and other terms of like
import are not limited in applicability to the specific provision within which such
references are set forth but instead refer to this Agreement taken as a whole;
(b)"include", "includes" and "including", whether or not used with the words
"without limitation" or "but not limited to", shall not be deemed limited by the
specific enumeration of items but shall, in all cases, be deemed to be without
limitation and construed and interpreted to mean "include without limitation",
"includes without limitation" and "including without limitation"; and
(c) "in its sole discretion" shall be deemed to be "in its sole and absolute discretion"
1.3.16 Where an amount is to be determined under this Agreement by rounding
to the nearest whole number, any half shall be rounded up to the next whole number.
1.3.17 Unless otherwise provided in this Agreement, any action to be taken by
the Province, including the performance of any obligation or the exercise of any right,
shall be undertaken by a Provincial Representative. Any action taken by a Provincial
Representative shall bind the Province under this Agreement with respect to the matter or
matters for which the Minister of Energy has designated that Provincial Representative at
the relevant time and Hydro One shall be entitled to rely on any action taken by a
Provincial Representative without any further enquiry into the Provincial
Representative's authority to take the particular action.
ARTICLE 2
GOVERNANCE PRINCIPLES AND GOVERNANCE STANDARDS
2.1 Governance Principles
The business and affairs of Hydro One shall be managed and operated in accordance with the
following principles (collectively, the "Governance Principles"):
2.1.1 Hydro One shall maintain, and act in accordance with, corporate
governance policies, procedures and practices that are consistent with the best practices
of leading Canadian publicly listed companies, having regard to Hydro One's ownership
structure and this Agreement.
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 11 of54
(a)
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2.1.2 The Board shall be responsible for the management of or supervising the
management of the business and affairs of Hydro One, including for those matters
described in Section 2.3.
2.1.3 The Province shall, with respect to its ownership interest in Hydro One,
engage in the business and affairs of Hydro One and the Hydro One Entities as an
investor and not as a manager.
2.2 Interpretation of Governance Principles
2.2.1 For clarity, the Governance Principles:
(a)
(b)
(c)
(d)
are fundamental to Hydro One and the Province entering into this Agreement, and
compliance with the Governance Principles is essential to the management and
operation of Hydro One;
are obligations of Hydro One and the Province;
are subject to applicable Laws and the other provisions of this Agreement; and
do not restrict the Province in any way (i) in relation to the regulation of Hydro
One or any Hydro One Entity, including by the OEB or other body appointed by
or responsible to the Province, or (ii) in relation to system planning by the
Independent Electricity System Operator, or (iii) in relation to the enforcement of
Ontario Laws applicable to Hydro One or any Hydro One Entity or the enactment,
promulgation or amendment of such Laws or (iv) in respect of any
communication regarding Hydro One or any Hydro One Entity by an individual in
his or her capacity as a member of the Legislative Assembly of Ontario, if made
in the Legislative Assembly of Ontario or in another public forum in relation to
the enforcement, promulgation or enactment of Ontario Laws or in relation to
Ontario regulatory policy; and, for further clarity, communications by a member
of the Legislative Assembly of Ontario who is not a member of the governing
party at the relevant time are not communications by the Province.
2.2.2 With respect to its ownership interest in Hydro One, the Province intends
to achieve its policy objectives through legislation and regulation as it would with respect
to any other utility operating in Ontario. For clarity, neither the Governance Principles
nor that intention restrict the exercise by the Province of its rights as a Shareholder,
including its right to vote any Voting Securities in the sole interest and sole discretion of
the Province, except as expressly provided for in this Agreement.
2.3 Role of the Board
Subject to applicable Law, including the OBCA, those matters for which the Board is responsible
and in respect of which it has full authority (whether directly, by delegation or by supervision)
include specifically:
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page '12 ol 54
o (a) corporate governance;
o
2.4
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Financial Officer and other senior officers of Hydro One;
(c)
(d)
(e)
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(e)
(h)
(i)
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remuneration of directors;
strategic planning and direction;
risk management;
capital structure;
dividend and distribution policy;
fi nancial management and reporting;
approval ofthe annual business plan and budget ofHydro One;
disclosure under applicable securities and other Laws and other public
communication; and
(k) any other matter that from time to time ordinarily is supervised by the board of
directors of a corporation with publicly traded securities.
Governance Standards
2.4.1 Hydro One shall maintain in effect at all times a majority voting policy in
respect of the election of Directors that requires a Director nominee who receives a
greater number of votes "withheld" than votes "for" at a meeting of Shareholders to elect
Directors to tender his or her resignation to the Board promptly following the conclusion
of that meeting. The parties acknowledge that the Majority Voting Policy in effect on the
date of this Agreement satisfies this requirement. Hydro One may amend the Majority
Voting Policy only in accordance with Section 2.4.2 and to the extent consistent with the
requirements of majority voting policies required by the TSX or other applicable Laws,
even where Hydro One is exempt from those requirements by reason of the Province's
ownership interest and provided that the amended Majority Voting Policy complies with
the first sentence of this Section 2.4.1 or will have substantially the same effect.
2.4.2 Hydro One has established the governance policies, procedures and
practices listed in Schedule "C" attached to this Agreement (collectively, "Hydro One's
Governance Standards"), which include the mandate for the Hydro One Ombudsman,
the Skills Matrix, the Board Diversity Policy and the Majority Voting Policy. No
amendment, supplement or addition to Hydro One's Governance Standards shall be
effective unless approved by a Special Board Resolution, except to the extent required by
any applicable Laws.
Exhibit No. '10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 1 3 of 54
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Restriction on Province Initiating a Fundamental Change
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The Province shall not requisition a meeting of Shareholders to consider a fundamental change
(as described in Part XIV of the OBCA) in respect of Hydro One. The Province may, however, at
any meeting of Shareholders vote its Voting Securities in its sole interest and sole discretion on
any proposal or resolution relating to such a proposed fundamental change.
2.6 Restriction on Province Acting Jointly or in Concert
The Province shall not act jointly or in concert with any Person in connection with the exercise
by that other Person of that Person's rights as a Shareholder or take any steps, directly or
indirectly, to solicit any other Person to exercise that Person's rights as a Shareholder in a
manner if the Province would be prohibited under this Agreement from directly exercising its
own rights as a Shareholder in that manner. For clarity, a Person's rights as a Shareholder
include for this purpose the right to requisition a meeting of Shareholders, to nominate someone
for election as a Director and to vote any Voting Securities, but nothing in this Section 2.6 shall
restrict the Province from soliciting proxies to vote another Person's shares in a particular
manner, if the Province would have been entitled to vote its own Voting Securities in that
manner under this Agreement. For greater certainty, any pension plan or related pension fund
which the Province or any Public Entity establishes, sponsors, administers or contributes to,
whether in whole or in part and whether before or after the Effective Date, shall not be treated as
a joint actor of the Province for purposes of this Section 2.6, except to the extent that the
Province solicits the administering entity or goveming body of the pension plan or related
pension fund to take a particular action or step.
2.7 Acquisition by the Province of Additional Voting Securities
2.7.1 The Province shall not, directly or indirectly, acquire beneficial ownership
or control or direction over previously issued Voting Securities if after the acquisition the
Province would have beneficial ownership or exercise control or direction over greater
than 45oh of any class or series of Voting Securities. For clarity, the foregoing restriction
does not require the Province to sell or otherwise dispose of any Voting Securities it
owns on the Effective Date or that it acquires after that date in accordance with this
Agreement nor does it restrict the Province from acquiring Voting Securities on an
issuance by Hydro One pursuant to Article 6 or otherwise.
2.7.2 For purposes of Section 2.7.1, beneficial ownership of or control or
direction over the following Voting Securities shall not be taken into account:
(a) Voting Securities acquired by the Province as a result of the enforcement by the
Province of any security interest securing payment of debt obligations owing by
third parties to the Province;
(b) Voting Securities acquired by Ontario Power Generation Inc. for the purposes of
fulfilling obligations it may have under employee compensation arrangements to
deliver Voting Securities to its employees; or
Exhibit No. '10
Case Nos. AVU-E-1 7-09IAVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 14 oI 54
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Voting Securities acquired pursuant to the Ontario Nuclear Funds Agreement; and
(d) Voting Securities acquired by, on behalf of, or by the trustee for, the Ontario
Retirement Pension Plan contemplated by the Ontario Retirement Pension Plan
Act,20l5.
2.7.3 For clarity, for purposes of Section 2.7.1, the Province does not have
beneficial ownership of or exercise control or direction over Voting Securities that are
investments on behalf of the Province or a Public Entity:
(a) made by a third party investment manager with discretionary authority (subject to
any retained discretion in order for the Province or the Public Entity to fulfil its
fiduciary duties);
(b) made by an investment fund or other pooled investment vehicle in which the
Province or a Public Entity has directly or indirectly invested and which is
managed by a third party investment manager; or
(c) made as a passive investment,
and in each case made under a bona fide investment program and independently of, and
not coordinated with, the Province's policy objectives relating to its ownership of Voting
Securities pursuant to the EA.
2.8 TSX Listing
Hydro One shall maintain a listing of its common shares on the TSX, subject to continuing to
meet the listing requirements of the TSX.
2.9 Obligations of Hydro One
Any obligations of the Board, the Nominating and Governance Committee, the Chair or any
other representative of Hydro One provided for in this Agreement are deemed to be obligations
of Hydro One and Hydro One shall ensure those obligations are complied with.
2.10 Governance of Subsidiaries
2.10.1 Subject to applicable Laws, the board of directors of each of Hydro One
Inc. and Hydro One Networks Inc. shall be constituted to have the same members as the
Board unless the Board determines otherwise.
2.10.2 Hydro One shall cause each of its wholly-owned Hydro One Entities, and
shall use all commercially reasonable efforts to cause each of its other Hydro One
Entities, to manage and operate its business and affairs on a basis that permits Hydro One
to comply with its obligations under Sections 2.1.1 and2.l.2.
2.10.3 Hydro One shall use its best efforts to cause each of its wholly-owned
Hydro One Entities, and shall use all commercially reasonable efforts to cause each of its
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 15 of 54
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3.1
(a)
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other Hydro One Entities, to manage its business and affairs on a basis that facilitates and
is consistent with the Province complying with its obligations under Section 2.1.3.
2.10.4 Hydro One shall cause each of its wholly-owned Hydro One Entities to,
and shall use all commercially reasonable efforts to cause each of its other Hydro One
Entities to, comply with their respective obligations under the EA and the OEB Act.
By-Laws
2.11.1 If Hydro One cannot perform its obligations under or comply with this
Agreement without being in breach of the by-laws of Hydro One, then Hydro One shall,
as soon as reasonably practical after determining that is the case and to the extent
permitted by applicable Law:
amend the by-laws to permit Hydro One to perform its obligations under and
comply with the terms of this Agreement without breaching the by-laws; and
(b)submit the amendment to the Shareholders for approval at the next meeting of
Shareholders.
2.11.2 To the extent that the requirements of this Agreement are in addition to or
more onerous than the requirements of the by-laws of Hydro One, but do not otherwise
require Hydro One to amend its by-laws in accordance with Section 2.11.1, Hydro One
shall comply with the terms of this Agreement as well as the by-laws.
ARTICLE 3
GOVERNANCE STRUCTUR-E,
Number of Directors
3.1.1 The number of Directors shall be a minimum of 10 and a maximum of 15.
Hydro One's Articles shall at all times provide for this minimum and maximum number
of Directors.
3.1.2 Until the first annual meeting of Shareholders after the date of this
Agreement, the number of Directors of Hydro One shall be 15.
3.1.3 The number of Directors to be elected at the first and each subsequent
annual meeting of Shareholders after the date of this Agreement shall be the number of
Directors determined from time to time by the Board, subject to Section 3.1.1, the
Articles and the OBCA.
3.1.4 If the Board increases the number of Directors between annual meetings
ofthe Shareholders, any vacancies created by the increase shall be filled in accordance
with Section 4.4.
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 16 of 54
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3.2
3.2.1 The appointment of a new Chair at any time must be approved by a
Special Board Resolution.
3.2.2 The Chair shall be nominated and confirmed annually by a Special Board
Resolution at the Annual Confirmation Meeting. If the Board does not confirm the Chair
at the Annual Confirmation Meeting by a Special Board Resolution, the Board shall
remove the Chair as soon as practicable and appoint a replacement Chair in accordance
with this Section 3.2.
3.2.3 The Chair must be a Director.
3.2.4 The CEO shall not be the Chair
3.2.5 The Parties acknowledge and confirm that the current Chair, as set forth in
the Prospectus, has been nominated and confirmed as required by this Section 3.2 until
the next Annual Confirmation Meeting.
3.2.6 Nothing in this Section 3.2 limits the ability of the Board, by Ordinary
Board Resolution, to remove the Chair between Annual Confirmation Meetings.
3.3 Appointment of CEO
3.3.1 The appointment of a new CEO at any time must be approved by a Special
Board Resolution.
3.3.2 The CEO must be confirmed annually by a Special Board Resolution at
the Annual Confirmation Meeting. If the Board does not confirm the CEO at the Annual
Confirmation Meeting by a Special Board Resolution, the Board shall remove the CEO as
soon as practicable and appoint a replacement CEO in accordance with this Section 3.3.
3.3.3 Hydro One shall ensure that it is a term of the CEO's employment
arrangements that she or he shall resign as a Director at such time that she or he ceases to
be CEO.
3.3.4 The Parties acknowledge and confirm that the current CEO, as set fonh in
the Prospectus, has been appointed and confirmed as required by this Section 3.3 until the
next Annual Confirmation Meeting.
3.3.5 Nothing in this Section 3.3 limits the ability of the Board, by Ordinary
Board Resolution, to remove the CEO between Annual Confirmation Meetings.
3.4 Advance Notice for Special Board Resolution
Notwithstanding anything to the contrary in the by-laws of Hydro One, Hydro One shall notify
the Directors not less than 10 days in advance of a meeting at which a resolution is to be
considered that must be approved by Special Board Resolution, provided that (i) the foregoing
o
Exhibit No. 10
Case Nos. AVU-E- 1 7-09/AVU-G-'1 7-05
J. Scarlett, Hydro One' Schedule 3, Page '17 ol *
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The Board shall maintain a committee (the "Nominating and Governance Committee") that
has the responsibilities and obligations contemplated by this Agreement to be responsibilities and
obligations of the Nominating and Governance Committee. All references in this Agreement to
the Nominating and Governance Committee shall mean whichever committee has those
responsibilities and obligations at the relevant time, regardless of what other responsibilities and
obligations that committee may have and regardless of the name or designation of that committee
in the Hydro One Governance Standards. For clarity, initially the Nominating and Governance
Committee is designated in Hydro One's Governance Standards as the "Nominating, Corporate
Governance, Public Policy & Regulatory Committee".
ARTICLE 4
ELECTION AND APPOINTMENT OF DIRECTORS
4.1 Nomination of Directors
4.1.1 Subject to Section 4.7, at any meeting of Shareholders at which Directors
are to be elected, Hydro One shall propose nominees for election as Directors as follows:
(a) The CEO shall be nominated.
(b) Subject to Section 4.8, the Province shall be entitled to nominate the number of
nominees that is equal to 40Yoof the number of Directors to be elected (rounded
to the nearest whole number). Each nominee of the Province must meet the
qualifications set out in Section 4.2 and any Director nominee of the Province
must be confirmed in accordance with Section 4.3,as applicable.
(c)The Directors not nominated pursuant to Section a.1.1(a) or 4.1.1(b) shall be
nominated by the Nominating and Governance Committee. Each nominee of the
Nominating and Governance Committee must meet the qualifications set out in
Section 4.2 and any Director nominee of the Nominating and Governance
Committee must be confirmed in accordance with Section 4.3, as applicable.
4.1.2 In respect of any meeting of Shareholders at which Directors are to be
elected, Hydro One shall take all actions necessary and advisable to ensure that (i)
proxies are solicited by or on behalf of Hydro One in favour of the election of the
Director nominees nominated in accordance with Section4.l.l and (ii) every such
nominee is endorsed and recommended in the applicable management information
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 1 8 of 54
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notice requirement does not apply to confirmation of the Chair and CEO at the Annual
Confirmation Meeting, and (ii) a Director may in any manner waive notice, provided that his or
her attendance at a meeting shall be treated as a waiver of any notice of that meeting required by
this Section 3.4 except where such Director attends the meeting for the express purpose of
objecting to the transaction of any business on the grounds that the meeting was not lawfully
called. Hydro One shall include in the notice a copy of the proposed resolution and details
regarding the matter to be considered for approval.
3.5 Nominating and Governance Committee
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4.2
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circular and other proxy solicitation materials provided by or on behalf of Hydro One to
Shareholders. Hydro One shall take all other commercially reasonable actions necessary
to permit the election or appointment to the Board of such nominees.
4.1.3 Subject to Sections 4.5, 4.6.1 and 4.7.6, in respect of any meeting of
Shareholders at which Directors are to be elected, the Province shall vote in favour of the
Director nominees nominated in accordance with Section 4.1.1 .
Qualification of Director Nominees
4.2.1 Each Director nominee must be an individual of high quality and integrity
who has:
(a) significant experience and expertise in business or that is applicable to business,
(b) served in a senior executive or leadership position,
(c) broad exposure to and understanding of the Canadian or international business
community,
(d) skills for directing the management of a company, and
(e) motivation and availability,
in each case to the extent requisite for a business of the complexity, size and scale of the
business of Hydro One and on a basis consistent with the highest standards for directors
of leading Canadian publicly listed companies.
4.2.2 Other than the CEO, each Director nominee shall be independent of Hydro
One within the meaning of Ontario securities Laws governing the disclosure of corporate
governance practices.
4.2.3 Other than the CEO, each Director nominee (including, for clarity, a
nominee of the Province), shall be independent of the Province. For these purposes, a
Director nominee shall be independent of the Province if:
(a) he or she is independent of Hydro One within the meaning of Ontario securities
Laws governing the disclosure of corporate governance practices, where the
Province and each Specified Provincial Entity is deemed to be a "parent" of
Hydro One under that definition but excluding, in the case only of the Directors
named in the Prospectus, any prior relationship referred to in those Ontario
securities Laws where the relationship ended before August 31,2015;
o
(b)
(c)
he or she is not a current Official or Employee of the Province; and
he or she has not been an Official or Employee of the Province for at least three
years prior to the date of his or her nomination to the Board but excluding, in the
Exhibit No. 10
Case Nos. AVU-E-1 7-09IAVU-G-1 7-05
J. Scarleft, Hydro One
Schedule 3, Page 19 of 54
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case only of the Directors named in the Prospectus, where the relationship ended
before August 31,2015.
4.2.4 Each Director nominee shall meet the requirements of applicable
securities and other Laws and any exchange on which Voting Securities are listed.
4.2.5 No Director nominee may be proposed by the Province or the Nominating
and Governance Committee to replace an incumbent Director if, taking into account the
selection criteria identified pursuant to Section 4.3.1 and any other proposed Director
nominees to replace incumbent Directors who have already been confirmed pursuant to
Section 4.3, the Board would not collectively satisfy the Skills Matrix, Board Diversity
Policy or any other policy relating to the composition of the Board forming part of Hydro
One's Governance Standards. For clarity, notwithstanding the previous sentence, the
Parties acknowledge that the Skills Matrix, Board Diversity Policy and other policies
referred to in the previous sentence may include goals that the Board expressly intends to
strive to meet over time (referred to here as "aspirational goals"). Nothing in this Section
4.2.5 shall prevent a Director nominee from being proposed who does not meet
aspirational goals, provided his or her nomination would not prevent the Board from
collectively satisfying any requirement of those policies that is then applicable or be
reasonably likely to prevent the Board from satisfying any aspirational goal over the
period of time if any, contemplated for that aspirational goal by the relevant policy.
4.2.6 The majority of the Board must at all times be resident Canadians (as
defined in the OBCA). Neither the Province nor the Nominating and Governance
Committee will nominate any Person for election or appointment as a Director if as a
result of that nominee being elected or appointed as a Director, this requirement would
not be met.
4.2.7 Notwithstanding this Section 4.2, each Director named in the Prospectus is
qualified to be a director of Hydro One on the Effective Date whether or not he or she
satisfies the qualifications set out in this Section 4.2 on that date. The Provincial
Nominees on the Effective Date are those who have been identified as such in the
Prospectus.
4.2.8 If the Province or the Nominating and Governance Committee nominates
any individual who is an incumbent Director for election as a Director at an annual
meeting of Shareholders held afterthe Effective Date, that individual shallnot be subject
to confirmation pursuant to Section 4.3.4 as satisfying the qualifications set out in this
Section 4.2, except to the extent there has been a material change in that individual's
circumstances since the Effective Date or his or her most recent confirmation pursuant to
Section 4.3.4, as applicable, that would affect whether he or she satisfies the
qualifications set out in this Section 4.2. For clarity, in determining whether there has
been a material change in an individual's circumstances for this purpose, changes in the
duration of an individual's term as a Director and in an individual's age shall be taken
into account. The Province or the Nominating and Governance Committee, as applicable,
shall promptly notify the other upon becoming aware of any such material change in
circumstances regarding any incumbent Director.
Exhibit No. 10
Case Nos. AVU-E- 1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 20 ot 5,4
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Identification and Confirmation of Director Nominees
4.3.1 Each year following the annual meeting of Shareholders, the Province and
representatives of the Nominating and Governance Committee shall meet to discuss
which Directors each does not expect to re-nominate in the next one to five years
(whether due to resignation or retirement or otherwise), with an emphasis on those
Directors, if any, that each previously nominated that each does not expect to nominate
for election at the next annual meeting of Shareholders ("Expected Departing
Directors"). In this discussion the Province and representatives of the Nominating and
Governance Committee shall consider the impact on the Board of not re-nominating the
Expected Departing Directors and identify the selection criteria for nominees to replace
those Expected Departing Directors, to ensure that the Board will collectively comply
with this Agreement and collectively satisfy the Skills Matrix, Board Diversity Policy
and any other policy relating to the composition of the Board forming part of Hydro
One's Govemance Standards. The representatives of the Nominating and Governance
Committee shall also at this meeting recommend to the Province individuals whom the
Nominating and Governance Committee has previously identified as potential candidates
for nomination to the Board, provided that the Province shall have no obligation to
nominate any of the recommended individuals as one of its Director nominees. This
initial meeting between the Province and representatives of the Nominating and
Govemance Committee would be expected to occur within 60 days following each
annual meeting of Shareholders.
4.3.2 Following the initial meeting between the Province and representatives of
the Nominating and Governance Committee contemplated in Section 4.3.7, each of the
Province and the Nominating and Governance Committee shall separately consider their
respective Expected Departing Directors and their proposed Director nominees to replace
those Directors. The Province and representatives of the Nominating and Governance
Committee shall meet to discuss further their Expected Departing Directors and proposed
replacement nominees under consideration. These subsequent meetings between the
Province and representatives of the Nominating and Governance Committee would be
expected to occur within 120 days following each annual meeting of Shareholders.
4.3.3 As soon as practicable following the discussions between the Province and
representatives of the Nominating and Governance Committee referenced in
Sections 4.3.1 and 4.3.2, each of the Province and the Nominating and Governance
Committee shall provide one or more notices (each being a "Nomination Notice")
setting out its proposed Director nominees, along with (i) sufficient background
information about any nominee who is not an incumbent Director or (ii) in the case of an
incumbent Director whose circumstances have materially changed as described in Section
4.2.8, sufficient information about the material change, so as in either case to allow the
other to assess whether that nominee satisfies the qualifications set out in Section 4.2.
Each of the Province and the Nominating and Governance Committee shall, in any event,
deliver its Nomination Notice to the other at least 60 days (the "Nomination Deadline")
prior to the date by which proxy solicitation materials must be mailed for purposes of the
next annual meeting of Shareholders (the "Circular Deadline"). Hydro One shall notify
Exhibit No. 10
Case Nos. AVU-E-I 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 21 ot il
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the Province of the Nomination Deadline at least 20 days prior to the Nomination
Deadline.
4.3.4 If the Province or the Nominating and Governance Committee has
received a Nomination Notice from the other of a Director nominee (i) who is not an
incumbent Director or (ii) who is an incumbent Director whose circumstances have
materially changed as described in Section 4.2.8, in either case prior to the Nomination
Deadline, the Province or the Nominating and Governance Committee, as the case may
be, shall have ten Business Days to confirm or reject that Director nominee, acting
reasonably, but may reject that nominee only on the grounds that the nominee does not
satisfu the qualifications for Directors set out in Section 4.2 or, in the case of a nominee
whose circumstances have materially changed as contemplated in Section 4.2.8, the
nominee as a consequence of the change no longer satisfies such qualifications. Any
Director nominee who is not rejected by the Nominating and Governance Committee or
the Province, as the case may be, within ten Business Days of receiving a Nomination
Notice of such nominee's nomination shall be proposed by Hydro One for election as a
Director in accordance with Section 4.1 .l .
4.3.5 If any Director nominee of the Province or the Nominating and
Governance Committee is rejected pursuant to Section 4.3.4, the Province or the
Nominating and Governance Committee, as the case may be, shall be entitled to deliver
one or more Nomination Notices nominating a replacement Director nominee until a
nominee is confirmed by the other in accordance with Section 4.3.4.
4.3.6 If notwithstanding the expectations of the Province and the Nominating
and Governance Committee regarding Expected Departing Directors, there is any
Expected Departing Director: (i) for whom no replacement nominee has been confirmed
in accordance with Section 4.3.4 prior to the Circular Deadline and (ii) who has not
resigned, that Director shall be re-nominated in accordance with Section 4.1.1.
4.3.7 The Province and the Nominating and Governance Committee shall use
commercially reasonable efforts to cause Director nominees to be confirmed prior to the
Circular Deadline. If insufficient Director nominees of either the Province or the
Nominating and Governance Committee are confirmed by the Circular Deadline and
Section 4.3.6 does not apply, the Province and the Nominating and Governance
Committee shall, acting reasonably, consider and implement alternatives to ensure that
applicable Law and the provisions of Section4.l.l with respect to the number of
Directors each is entitled to nominate are complied with in respect of the applicable
annual meeting of Shareholders. These alternatives may include reducing the number of
directors to be elected at that annual meeting of Shareholders or delaying the date of that
annual meeting of Shareholders until Section 4.1.1 may be complied with.
4.3.8 The parties, acting reasonably, shall apply a process that is as substantially
equivalent to the process provided for in this Section 4.3 as is practicable in the
circumstances, with respect to any meeting of Shareholders to elect Directors other than
an annual meeting of Shareholders.
Exhibit No. 10
Case Nos. AVU-E- 1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 22ot 14
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4.3.9 If there is any dispute with respect to the process for nominating Directors
provided for in this Section 4.3, either the Province or the Nominating and Governance
Committee may request that ADR Chambers Canada appoint a single arbitrator with
expertise in corporate governance matters to adjudicate the dispute. The arbitration
proceedings will be conducted in accordance with Article 7.
Replacement Board Nominees in case of Vacancies
4.4.1 If one or more vacancies occurs on the Board:
(a)if the vacancy is caused by (i) a Provincial Nominee ceasing to serve as a Director
or (ii) an increase in the number of Directors such that, pursuant to
Section4.l.l(b), the Province would be entitled to nominate an additional
Director at the next meeting of Shareholders at which Directors are to be elected,
then the Province shall nominate an individual to fill the vacancy, provided that
the nominee shall be subject to confirmation by the Nominating and Governance
Committee in accordance with a process that is as substantially equivalent to the
process provided for in Section 4.3 as is practicable in the circumstances, as
applied by the Parties, acting reasonably, and so that the vacancy can be filled
within 90 days of the vacancy occurring;
(b)if the vacancy is created by the CEO ceasing to serve in that office, the vacancy
shall be filled by the replacement CEO appointed in accordance with Section 3.3;
and
(c)otherwise, the Nominating and Governance Committee shall nominate an
individual to fill the vacancy, provided that the nominee shall be subject to
confirmation by the Province in accordance with a process that is as substantially
equivalent to the process provided for in Section 4.3 as is practicable in the
circumstances, as applied by the Parties acting reasonably and so that the vacancy
can be filled within 90 days of the vacancy occurring.
4.4.2 If:
(a)the replacement nominee to fill a vacancy as described in Section 4.4.1(a) or
Section a.a.1@) has been confirmed as provided for in that Section; or
(b) upon the approval of the CEO's replacement pursuant to Section 3.3,
then in either such case, the Board shall appoint that replacement as a Director to fill the
applicable vacancy.
4.5 Province's Voting Rights at Contested Shareholders Meetings
Notwithstanding Section 4.1.3, the Province may vote its Voting Securities or withhold from
voting its Voting Securities in favour of any Director nominee (including for clarity the
Provincial Nominees) at any Contested Meeting, at its sole discretion, except that the Province
shall vote its Voting Securities in favour of the election of the CEO as a Director. The Province
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 23 ot 54
4.4
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shall not, however, nominate for election at any Contested Meeting or Removal Meeting any
directors except in accordance with Section 4.1 or Section 4.7.3,as the case may be. For clarity,
subsequent to any Contested Meeting, the provisions of this Agreement will continue to apply
with respect to all future Director nominations.
4.6 Province's Right to Withhold Votes for Directors
4.6.1 Notwithstanding Section 4.1.3 but subject to Section 4.7.6, at any meeting
of Shareholders at which Directors are to be elected, the Province may choose to
withhold from voting in favour of any Director nominee with the exception of the CEO
and, atthe sole discretion of the Province, the Chair, provided thatthe Province shall do
so only if it withholds from voting in favour of all Director nominees with the exception
of the CEO and, at the sole discretion of the Province, the Chair. In the case of any
annual meeting of Shareholders, the Province shall notifu Hydro One in advance of the
Circular Deadline of its intent to withhold from voting in favour of all Director nominees
with the exception of the CEO and, at the sole discretion of the Province, the Chair.
4.6.2 If after a Shareholders meeting to elect Directors where the Province
withholds from voting in favour of Director nominees in accordance with Section 4.6.1,
one or more Directors elected at the Shareholders meeting tender their resignations as
Directors pursuant to the Majority Voting Policy, the Board shall take whatever actions it
determines are appropriate in the circumstances in accordance with the Majority Voting
Policy, including:
(a) accepting Director resignations in a sequential manner and only after a
replacement Director for the resigning Director has been identified and confirmed
pursuant to Section 4.4;
(b) accepting some but not all Director resignations until sufficient replacement
Directors for the resigning Directors have been identified and confirmed pursuant
to Section 4.4;
(c) calling a Shareholders meeting for the election of Directors and accepting
Director resignations only upon the election of replacement Directors at the
Shareholders meeting;
(d) not accepting the Director resignations until Director nominees are elected at the
next annual meeting of Shareholders; or
(e) rejecting the Director resignations.
4.7 Province's Right to Replace Directors
4.7.1 Notwithstanding any other provision of this Agreement, the Province may
at any time provide Hydro One with a notice (a "Removal Notice") setting out its
intention to request Hydro One to hold a Shareholders meeting for the purposes of
removing all of the Directors then in office, including the Provincial Nominees, with the
Exhibit No. 10
Case Nos. AVU-E- 1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 24 ot 54
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exception of the CEO and, at the Province's sole discretion, the Chair (a "Removal
Meeting").
4.7.2 Upon the Province delivering a Removal Notice to Hydro One, the Chair
(whether or not the Province proposes to remove him or her) shall coordinate the
establishment of a committee comprising:
(a) one representative of each of the five largest beneficial owners of Voting
Securities known to Hydro One, excluding the Province, willing to provide
representatives to serve on the committee or if fewer than five such beneficial
owners of Voting Securities are willing to provide representatives to serve on the
committee, then one representative of each of the beneficial owners of Voting
Securities, but a minimum of three, willing to do so, or
(b)if at least three such beneficial owners of Voting Securities are not willing to
provide representatives to serve on the committee within 30 days of the Province
delivering a Removal Notice, then the individuals that the Province proposes to
nominate as replacement Directors pursuant to Section 4.1 .l
(in either case, the "Ad Hoc Nominating Committee"). In addition to supporting the
establishment of the Ad Hoc Nominating Committee, the Chair shall assist the Ad Hoc
Nominating Committee in carrying out its duties in an impartial manner.
4.7.3 The Province and the Ad Hoc Nominating Committee, acting reasonably,
shall identify and confirm the replacement Director nominees to be nominated at the
Removal Meeting to replace the incumbent Directors in accordance with Section 4.1.1
and a process that is as substantially equivalent to the process provided for in Section 4.3
as is practicable in the circumstances, as applied by the Province, Hydro One and the Ad
Hoc Nominating Committee, acting reasonably, with the Ad Hoc Nominating Committee
taking the place of the Nominating and Governance Committee, provided that none of the
Director nominees determined pursuant to this Section 4.7 may be Directors other than
the Chair if the Province elects pursuant to Section 4.7.1 not to vote for the removal of
the Chair.
4.7.4 Hydro One shall call the Removal Meeting forthwith upon all the Director
nominees being confirmed pursuant to Section 4.7.3, and shall hold the Removal Meeting
within 60 days after all the Director nominees being confirmed pursuant to Section 4.7.3.
From the time the Province delivers a Removal Notice until the Removal Meeting, the
Directors then in office shall, in exercising their fiduciary duty with a view the best
interests of Hydro One, take into account the Province's intention to cause a new Board
to be constituted at the Removal Meeting and the desirability that the actions of the
current Board not interfere with ability of any new Board to exercise its responsibility to
oversee the business and affairs of Hydro One after the Removal Meeting in accordance
with the Governance Principles, including with respect to each of the matters referred to
in Section 2.3.
Exhibit No. '10
Case Nos. AVU-E- 1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 25 ot 54
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4.7.5 Hydro One shall cause the proxy solicitation materials, including the
meeting circular, for the Removal Meeting, to contain information customary for Director
nominees about the replacement Director nominees identified and confirmed pursuant to
Section 4.7.3. Hydro One shall take all other commercially reasonable actions necessary
to conduct the Removal Meeting and to permit the election or appointment to the Board
of the replacement Director nominees, if a resolution is passed at the meeting to remove
some or all of the Directors.
4.7.6 At the Removal Meeting, the Province shall vote in favour of removing
the current Directors with the exception of the CEO and, if the Province elects pursuant
to Section 4.7 not to vote for removal of the Chair, the Chair and shall vote in favour of
replacement Director nominees determined pursuant to this Section 4.7.
4.7.7 For clarity, subsequent to any Removal Meeting, the provisions of this
Agreement, including Section 4.3, will continue to apply with respect to all future
Director nominations.
4.8 Province Below 40o/" of Yoting Securities
If the Province:
4.8.1 ceases to own Voting Securities to which are attached 40Yo of the votes
that may be cast on the election of Directors at a meeting of Shareholders (the "Voting
Secu rity Threshold"); and
4.8.2 the Province does not subsequently acquire Voting Securities so that it
meets the Voting Security Threshold prior to the next Nomination Deadline following the
second anniversary of the first date on which the Province ceased to own Voting
Securities sufficient to meet the Voting Security Threshold;
then commencing on that next Nomination Deadline until the Province again owns Voting
Securities sufficient to meet the Voting Security Threshold, the number of Directors that the
Province shall be entitled to nominate pursuant to Section4.1.l(b) and pursuant to any other
provision of this Agreement that refers to that Section to determine how many Directors the
Province may nominate, shall be proportionate to the number of votes that the Province may cast
on the election of Directors at a meeting of Shareholders out of the total number of votes that
may be cast. The number of Directors that the Province is entitled to nominate pursuant to this
calculation shall be rounded to the nearest whole number and based on the Province's ownership
of Voting Securities as of (i) in the case of a nomination for an upcoming annual meeting of
Shareholders, the Nomination Deadline for that meeting and (ii) in all other cases, the
Nomination Deadline prior to the most recent annual meeting of Shareholders.
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 26 ot 54
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ARTICLE 5
CONFIDENTIALITY OF INFORMATION PROVIDED
5.1 Confidentiality Agreement
The Parties shall enter into and comply with a confidentiality agreement in the form attached as
Schedule "B" to this Agreement.
ARTICLE 6
PRE-EMPTIVE RIGHT
6.1 Offer to Subscribe for Common Shares
If Hydro One proposes to issue any Voting Securities or any securities that are convertible into
or exchangeable for Voting Securities (the "Offered Securities"), whether pursuant to a public
offering or a private placement or otherwise but excluding an Excluded Issuance (a "Proposed
Offering"), Hydro One shall offer (the "Offer") to the Province the right to subscribe for and
purchase up to 45o/o of the number or principal amount, as applicable, of the Offered Securities,
in accordance with this Article 6 and subject to applicable Laws and to the rules of any stock
exchange on which Hydro One's securities are listed. If applicable Laws or rules of a stock
exchange require Hydro One to obtain shareholder or other approvals to issue Offered Securities
in accordance with this Article 6, Hydro One shall use all commercially reasonable efforts to
obtain those approvals.o 6.2 Delivery of the Offer
Hydro One shall notify the Province as soon as reasonably practicable that it is contemplating a
Proposed Offering and shall deliver an Offer in any event not later than 30 days prior to the date
that Hydro One enters into an agreement to issue Offered Securities (including a bid letter in
connection with a "bought deal" offering). The Offer shall be in writing and, subject to
Section 6.3, shall contain the terms and conditions of the Offered Securities, including the price
at which the Offered Securities are to be issued, the number of Offered Securities which the
Province is entitled to purchase pursuant to this Article 6, the proposed outside date (the
"Offering Outside Date") for completing the Proposed Offering, which date shall not be more
than 60 days after the date of the Offer, and any other details of the Proposed Offering. The Offer
must also state that (i) if the Province wishes to purchase Offered Securities pursuant to this
Article 6, it shall do so by giving written notice (the "Response") of the exercise of that right to
Hydro One, and (ii) if Province wishes to subscribe for a number of Offered Securities less than
the number to which it is entitled pursuant to this Article 6, it may do so. For clarity, the Offer
may be contingent upon Hydro One determining to proceed with the Proposed Offering in its
sole discretion. Notwithstanding that an Offer may be contingent, the Province acknowledges
that the fact that Hydro One is contemplating the Proposed Offering may constitute material
information regarding Hydro One, and that the requirements of securities Laws, as well as of the
Confidentiality Agreement and internal controls referred to therein, may restrict disclosure of the
information and trading in securities of Hydro One by those with knowledge of that information.
Exhibit No. '10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 27 ot 54
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Offer Price and Number of Securities if Public Offering
o
If the Offer is being delivered in connection with a proposed best-efforts or fully underwritten
public offering (including an offering proposed on a "bought deal" basis) through an agent or
underwriteq the Offer may include a range for the size of the Proposed Offering (expressed in
number of Offered Securities or aggregate dollar value of the Proposed Offering), rather than a
fixed number of Offered Securities and may state that the actual price per Offered Security shall
be the offering price to be agreed upon by Hydro One in the agency agreement, bid letter or
underwriting agreement, as the case may be, relating to the issuance.
6.4 Province's Response
The Offer shall specify a deadline by which the Province must deliver the Response to Hydro
One, which deadline shall be no earlier than ten Business Days after the Province receives the
Offer. The Province shall be deemed to have declined the Offer if it does not deliver a Response
by that deadline. In the Response, the Province must specify the number of Offered Securities
that it wishes to purchase. If the Offer was delivered in connection with a proposed best-efforts
or fully underwriffen public offering (including an offering proposed on a "bought deal" basis)
through an agent or underwriter, the Response may specify the maximum price or a range of
prices per Offered Security at which the Province will exercise its right to subscribe for or
purchase Offered Securities under the Offer (provided that the Response may specify more than
one maximum price per Offered Security together with the corresponding maximum number of
Offered Securities to be subscribed for or purchased at each maximum price). Any Response
delivered by the Province to Hydro One will be irrevocable and will be a legally binding
obligation of the Province to subscribe for and purchase the Offered Securities specified therein,
provided that if the Proposed Offering is not completed by the Offering Outside Date, the Offer
will be deemed to be automatically revoked.
6.5 Offered Securities Not Subscribed For
Any Offered Securities not subscribed for and purchased by the Province pursuant to a Proposed
Offering may be issued to any other person pursuant to the Proposed Offering.
6.6 Purchase of Offered Securities
The completion of any purchase of Offered Securities by the Province pursuant to a Proposed
Offering shall be on the same terms and on the same date as the completion of that Proposed
Offering, unless otherwise agreed by the Province.
6.7 Subsequent Offerings
If Hydro One proposes to issue Voting Securities or securities convertible into or exchangeable
for Voting Securities otherwise than pursuant to the Proposed Offering and not later than the
Offering Outside Date for the Proposed Offering, Hydro One shall again comply with this
Article 6. If Hydro One is continuing in good faith to contemplate a Proposed Offering after the
Offering Outside Date for that Proposed Offering, Hydro One may deliver further Offers that
have the effect of extending the Offering Outside Date for that Proposed Offering, provided that
Exhibit No. l0
Case Nos. AVU-E-1 7-09IAVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 28 ot 54
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(i) the extended Offering Outside Date for that Proposed Offering occurs no later than four
months after the original Offering Outside Date for that Proposed Offering, and (ii) after the
Offering Outside Date for any particular Proposed Offering (including all permitted extensions,
if any were effected, of that Offering Outside Date), Hydro One shall not deliver any Offer for
any further Proposed Offering for a minimum of 90 days after that Offering Outside Date.
6.8 No Obligation to Subscribe
The Province shall have no obligation to subscribe for any Offered Securities, except for the
Offered Securities specified in any Response delivered by the Province to Hydro One.
ARTICLE 7
DISPUTE RESOLUTION
7.1 Arbitration
Each Party acknowledges and agrees that any dispute arising out of or in connection with this
Agreement shall be resolved solely by arbitration in accordance with the arbitration rules set out
in Schedule "D" (the "Arbitration Rules"). For greater certainty, the Province may not seek, nor
is the Province entitled to obtain, status as a "complainant" for the purpose of commencing an
oppression remedy proceeding or derivative claim proceeding in court, as described in Section
8.6.2(a) or 8.6.2(b), but the Province is otherwise entitled to assert such claims by way of
arbitration in respect of any dispute arising out of or in connection with this Agreement.
7.2 Location of Arbitration
The place of arbitration shall be at Toronto, Ontario unless the Parties otherwise agree.
7.3 Laws of Ontario
The law to be applied in connection with the arbitration shall be the law of Ontario, including its
conflict of law rules.
7.4 Arbitration Act, 1991
The provisions of the Arbitration Act, 1991 (Ontario) shall apply to the extent that they are not
inconsistent with this Article or with the Arbitration Rules.
ARTICLE 8
GENERAL PROVISIONS
8.1 Financial Obligations of the Province
Pursuant to the FAA, any payment required to be made by the Province pursuant to this
Agreement is subject to there being sufficient appropriation by the Legislative Assembly of
Ontario for the fiscal year in which the payment is to be made or the payment having been
charged to an appropriation for a previous year.
Exhibit No. '10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 29 ol il
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8.2 Effective Date
1-his Agreement shall become effective on the Effective Date.
Amendments to this Agreement
This Agreement may be amended only by an instrument in writing executed by each of the
Parties. If there are changes in circumstances in the future that impact the original purpose and
intention of the parties in entering into this Agreement, the Parties shall cooperate in good faith
to amend this Agreement to reflect those changes in circumstances.
Term
T'his Agreement may be terminated only with the mutual agreement of both Parties.
8.5
8.6
Termination Not to Affect Rights or Obligations
A termination of this Agreement shall not affect or prejudice any rights or obligations that have
accrued or arisen under this Agreement prior to the termination, which rights and obligations
shall survive the termination.
No Third Party Rights
Notwithstanding any possible inferences to the contrary
8.3
8.4
o 8.6.1
(a)the Parties intend that the provisions of this Agreement shall not create any right
or cause of action in or on behalf of any Person who is not a Party to this
Agreement (including without limitation, any Shareholder, creditor, Director or
officer of Hydro One); and
(b) no Person other than the Parties shall be entitled to enforce the provisions of this
Agreement in any legal proceeding in any forum.
8.6.2 For clarity, Section 8.6.1 does not preclude, and is not intended to
preclude, any Shareholder or other stakeholder of Hydro One from obtaining status as a
complainant:
(a) for the purpose of applying to court for leave under the procedure known as the
"derivative action", that is provided for under section 246 of the OBCA to bring
an action in the name and on behalf of Hydro One to enforce the rights of Hydro
One under this Agreement; or
(b) for the purpose of pursuing the proceeding known as an "oppression proceeding"
in relation to this Agreement under Section 248 of the OBCA.
Hydro One irrevocably agrees not to raise any objection on the basis of
Section 8.6.1 it might now or hereafter have to any Shareholder or other stakeholder of Hydro
One obtaining status as a complainant forthe purpose described in Sections 8.6.2(a) or 8.6.2(b).
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule3, Page30of54
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Flowever, for clarity, Hydro One reserves absolutely its right otherwise to contest (on any
grounds whatsoever that it considers to be appropriate) any application to the court by any
Shareholder for leave to bring a derivative action or to pursue an oppression proceeding.
8.7 Representations and Warranties of Hydro One
Hydro One represents and warrants that this Agreement and the performance by Hydro One of
its obligations under this Agreement: (i) has been duly authorized, executed and delivered by it,
and is a valid and binding obligation of Hydro One, enforceable against Hydro One in
accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar Laws affecting the enforcement of creditors' rights
generally and by general equitable principles (regardless of whether the enforceability is
considered in a proceeding in equity or at Law); and (ii) does not and will not violate any Law,
the Constating Documents or any provision of any agreement or other instrument to which
Hydro One or any of its properties or assets is bound, or result in a breach of or constitute (with
due notice or lapse of time or both) a default under any such agreement or other instrument, or
conflict with any such agreement or other instrument so as to prevent Hydro One from either
performing its obligations under, or complying with, both this Agreement and any such
agreement or other instrument.
Representations and Warranties of the Province
8.8.1 The Province represents and warrants that this Agreement and the
performance by the Province of its obligations under this Agreement:
(a) has been duly authorized, executed and delivered by the Province, and is a valid
and binding obligation of the Province, enforceable against the Province in
accordance with its terms, subject to:
limitations with respect to the enforcement of remedies by bankruptcy,
insolvency, reorganization, moratorium, winding-up, arrangement,
fraudulent preference and conveyance and other similar Laws affecting the
enforcement of creditors' rights generally and by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at Law);
(ii) general equitable principles and the fact that the availability of equitable
remedies such as specific performance and injunction are not available
against the Province and that a court may stay proceedings or the
execution ofjudgments;
(iii) statutory limitations of general application respecting the enforceability of
claims against the Province or its property;
Exhibit No.'10
Case Nos. AVU-E-1 7-09/AVU-G- 1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 31 of 54
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(iv) section I 1.3 of the FAA;
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to the Province under this Agreement or otherwise, by way of deduction or
set off out of any money owing by the Province to Hydro One under this
Agreement, pursuant to section 43 of the FAA; and
(b)does not and will not violate any Laws of any province of Canada orthe Laws of
Canada or any provision of any agreement or other instrument to which the
Province or any of its properties or assets is bound, or conflict with or constitute
(with due notice or lapse of time or both) a default under any such agreement or
other instrument.
8.9 Notices, Designations and Other Communications
Any notice, designation or other communication required or permitted to be given under this
Agreement shall be in writing and shall be given by prepaid first class mail, by facsimile or other
means of electronic communication or by delivery by hand as hereafter provided. Any such
notice, designation or other communication, if mailed by prepaid first class mail at any time
other than during a general discontinuance of postal service due to strike, lockout or otherwise,
shall be deemed to have been received on the fourth Business Day after the post marked date
thereof, or if sent by facsimile or other means of electronic communication, shall be deemed to
have been received on the Business Day following the sending, or if delivered by hand shall be
deemed to have been received on the Business Day it is delivered to the applicable address noted
below either to the individual designated below or to an individual at such address having
apparent authority to accept deliveries on behalf of the addressee. Notice of change of address
shall also be governed by this Section. Any designation of a Provincial Representative shall be
signed by the Minister of Energy and shall state the name, address and fax number of the
Provincial Representative and the particular matter or matters under this Agreement to which the
designation relates. Any such designation shall remain in full force and effect with respect to
such Provincial Representative and in respect of such matter or matters until subsequently
amended or revoked by the Minister of Energy. In the event of a general discontinuance of postal
service due to strike, lock out or otherwise, notices, designations or other communications shall
be delivered by hand or sent by facsimile or other means of electronic communication and shall
be deemed to have been received in accordance with this Section. Notices, designations and
other communications shall be addressed as follows:
(a) if to Hydro One:
Hydro One Limited
483 Bay Street
South Tower, Suite 800
Toronto, Ontario M5G 2P5
Attention: General Counsel
Fax: [phone]
Exhibit No. '10
Case Nos. AVU-E- 1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 32 ol 54
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With a copy (which shall not constitute notice) to:
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Osler, Hoskin & Harcourt LLP
100 King Street West
1 First Canadian Place
suite 6200, P.o. Box 50
Toronto, ON M5X 188
Affention: Steve Smith / Michael lnnes
Fax: [phone]
(b) if to the Province:
5th Floor
56 Wellesley Street West
Toronto, ON M7A 2E7
Attention: Legal Director, Legal Services Branch serving the Minister of EnergyFax: 416-325-1781
With a copy (which shall not constitute notice) to:
Torys LLP
79 Wellington Street West, Suite 3000
Box270, TD South Tower
Toronto, ON M5K lN2
Attention: Sharon Geraghty
Fax: [phone]
with a copy to the applicable Provincial Representative (to the extent one has
been designated by the Minister of Energy under this Section 8.9 but only in
respect of the matter or matters in respect of which such Provincial Representative
has been so designated).
8.10 Invalidity of Provisions
Each of the provisions contained in this Agreement is distinct and severable and a declaration of
invalidity or unenforceability of any such provision or part thereof by a court of competent
jurisdiction shall not affect the validity or enforceability of any other provision. The Parties shall
engage in good faith negotiations to replace any provision which is declared invalid or
unenforceable with a valid and enforceable provision, the economic and substantive effect of
which comes as close as possible to that of the invalid or unenforceable provision which it
replaces.
8.11 Waiver
Except as expressly provided in this Agreement, no waiver of any provision or of any breach of
any provision of this Agreement shall be effective or binding unless made in writing and signed
by' the party purporting to give such waiver and, unless otherwise provided in such written
Exhibit No. 10
Case Nos. AVU-E- I 7-09/AVU-G-'1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 33 ofil
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waiver, shall be limited to the specific provision or breach waived. No waiver by any Party
hereto of any provisions or of any breach of any term, covenant, representation or warranty
contained in this Agreement, in one or more instances, shall be deemed to be or construed as a
further or continuing waiver of that or any other provision (whether or not similar) or of any
breach of that or any other term, covenant, representation or warranty contained in this
Agreement.
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8.12 Governing Law
T'his Agreement shall be governed by and construed in accordance with the Laws of the Province
of Ontario and the Laws of Canada applicable therein.
8.13 Further Assurances
Each of the Parties shall, with reasonable diligence, provide such further documents and
instruments to the other Party and do all such things and provide all such reasonable assurances
as may be required or as are reasonably desirable to effect the purpose of this Agreement and
carry out its provisions.
8.14 Enurement; Assignment
This Agreement shall enure to the benefit of and be binding upon the Parties and their respective
successors and legal personal representatives. This Agreement may not be assigned by either
Party except with the prior written consent of the other Party.
8.15 Counterparts
This Agreement may be signed in counterparts and each such counterpart shall constitute an
original document and such counterparts, taken together, shall constitute one and the same
instrument.
[S i gnat ur e page fol I ow sJ
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-17-05
J. Scarlett, Hydro One
Schedule 3, Page 34of 54
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IN WITNESS WHEREOF the Parties have executed this Agreement.
HYDRO ONE LIMITED
By: "Mayo Schmidt"
Name: Mayo Schmidt
Title: President and Chief
Executive Officer
[Signature page to Governance Agreement]
Exhibit No. 10
Case Nos. AVU-E-'1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 35 of il
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By: "Bob Chiarelli"
Bob Chiarelli
[Signature page to Governance AgreementJ
HER MAJESTY THE QUEEN IN
RIGHT OF ONTARIO AS
REPRESENTED BY THE MINISTER
OF ENERGY
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G- 1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 36 of 54
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SCHEDULE 6(A''
Official Or Employee Of The Province
Each of the following individuals is an "Official or Employee of the Province":
l. A public servant as defined by the Public Service of Ontario Act, 2006 ("PSOA") who is
employed under Part III of the PSOA in a ministry of the Government of Ontario.
2. The Secretary of the Cabinet.
3. A deputy minister of the Government of Ontario.
4. A member of the Executive Council or an employee of a minister's office.
5. A member of the Legislative Assembly of Ontario or an employee of a member's office.
6. A director or an officer or employee, of the following organizations:
(a) The Ontario Financing Authority;
(b) The Independent Electricity System Operator;
(c) Ontario Power Generation Inc.;
(d) Electrical Safety Authority;
(e) OntarioElectricityFinancialCorporation;
(0 Infrastructure Ontario; or
(g) A Subsidiary of, or a Person controlled by, any organization listed in sub-
paragraphs (a) to (0.
7. A member, officer or employee of the Ontario Energy Board.
8. A person who was previously a Director or a director of any Hydro One Entity or Person
controlled by Hydro One, other than a person who is a Director on the date of this
Agreement.
9. An officer or employee of Hydro One, or any Hydro One Entity or Person controlled by
Hydro One, other than the chief executive officer of Hydro One.
Exhibit No.'10
Case Nos. AVU-E- 1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 37 ol 54
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SCHEDULE *B'
Form of Confidentiality Agreement
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 38 of il
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CONFIDENTIALITY AGREEMENT
THIS AGREEMENT is made as of the 5th day of November,2015
BETWEEN:
HYDRO ONE LIMITED, a corporation incorporated under the laws of the
Province of Ontario
-and-
HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO
(the "Province"), as represented by the Minister of Energy.
Hydro One Limited and its subsidiaries (the "Company") expect to provide the Province,
pursuant to the governance agreement dated as of the date hereof between the Province and Hydro
One Limited (the "Governance Agreement") and the registration rights agreement dated as of the
date hereof between the Province and Hydro One Limited (the "Registration Rights
Agreement"), with Company Confidential Information (as defined in Section 2 below) from time
to time. The Governance Agreement requires the parties to enter into this confidentiality agreement
(this "Agreement") goveming the use and disclosure by the Province of the Company Confidential
Information and by the Company ofthe Province Confidential Information (as defined in Section 14
below).
Confidentialitv Oblisations in favour of the Companv:
In consideration of the Company providing, or causing to be provided, the Company Confidential
Information to the Province and/or its Representatives (as defined below in Section l) from time to
time as required by the Governance Agreement and the Registration Rights Agreement and other
good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged
by each of the parties), the parties agree to the following:
In this Agreement, "Representatives" of the Province means, collectively, any persons
appointed pursuant to the Executive Council Act (Ontario) and the Province's directors,
officers, officials, employees, public servants as defined by the Public Service of Ontario
Act, 2006 (Ontario), managers, agents, representatives, lawyers, accountants, consultants
and financial and other advisors, provided that such persons or entities shall only be
considered Representatives if such persons or entities have received Company
Confi dential Information.
In this Agreement, "Company Confidential Information" means all information and
material of, or relating to, the Company and its Representatives (as defined below in
Section l3), whether in oral, written, graphic, electronic or any other form or medium,
including without limitation information and material concerning the Company's past,
Exhibit No. '10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 39 of 54
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present or future customers, suppliers, technology, business, policy decisions, affairs,
financial conditions, assets, liabilities, operations, plans, potential financings or
transactions or other activities that is fumished to the Province or its Representatives
pursuant to the Governance Agreement and/or the Registration Rights Agreement on or
after the date of this Agreement. For the purposes of this definition, "Company
Confidential Information" includes the portion of any plans, proposals, reports,
analyses, notes, compilations, studies, forecasts or other documents prepared by the
Province or its Representatives that are based on, contain, incorporate or otherwise reflect
Company Confi dential Information.
Notwithstanding Section2, the following will not constitute "Company Confidential
Information" under this Agreement:
(a) for the avoidance of doubt (i) information that the Province or its
Representatives receive or obtain solely pursuant to any Applicable Law (as
defined in Section 8 below) and (ii) information that the Province or its
Representatives receive or obtain other than pursuant to the Governance
Agreement and/or the Registration Rights Agreement.
(b) information that the Province or its Representatives receive or obtain from a
third person who is not known by the Province to be prohibited from
transmitting the information to the Province or its Representatives by a
contractual, legal or fiduciary obligation not to disclose such information;
(c)information that has been publicly disclosed by the Company (including, for
greater certainty, information publicly disclosed through regulatory filings or
processes), or that is or becomes publicly available through no fault of the
Province or its Representatives in breach of this Agreement or other
contractual, legal or fiduciary obligation not to disclose such information;
(d)information that was independently developed by the Province or its
Representatives without any reference to the Company Confidential
Information; and
(e)information that the Company agrees in writing is not Company Confidential
Information for the purposes of this Agreement.
The Province and its Representatives shall only use Company Confidential Information
in connection with the Province's exercise or enforcement of its rights under the
Governance Agreement and the Registration Rights Agreement and in connection with
evaluating, overseeing and determining how to manage its investment in Hydro One
Limited, including whether to dispose of, return or acquire additional interests in Hydro
One Limited and exercising its rights as a shareholder (including board representation
rights), in each case in accordance with the Governance Agreement, the Registration
Rights Agreement and Applicable Law (the "Purpose").
The Province and the Company acknowledge that the Province and certain of its
Representatives are subject to the Freedom of Information and Protection of Privacy Act
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 40 of 54
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(Ontario), as amended or supplemented from time to time ("FIPPA',), and that FIPPA
applies to and governs all records (as such term is defined in FIPPA) in the custody or
control of the Province and those Representatives, including Company Confidential
Information described in this Agreement. Subject to the obligations of the Province under
Section 11 of this Agreement, the Province's obligations pursuant to this Agreement to
maintain such information in confidence are subject to any requirement the Province and
its Representatives have under Applicable Law to disclose information, including records
that must be disclosed by the Province and its Representatives under FIPPA. The
provisions of this Section 5 shall survive termination of this Agreement and shall prevail
over any other provisions of this Agreement to the contrary.
The Province acknowledges and agrees that the Company may not be able to furnish or
disclose any information about an identifiable individual or other information that is
subject to Applicable Law relating to the collection, use, storage and/or disclosure of
information about an identifiable individual, including the Personal Information
Protection and Electronic Documents Act (Canada) and Personal Heolth Information
Protection Act, 2004 (Ontario), whether or not such information is confidential,
(collectively, "Personal Information") to the Province or any of its Representatives
unless consents to the disclosure of such Personal Information have been obtained from
the relevant individual(s) as required, or the Company is otherwise authorized by
Applicable Law to disclose such information. If any Personal Information is disclosed to
the Province and/or its Representatives, the Province and its Representatives shall, subject
to their obligations under Applicable Law, (i) use the Personal Information only in
connection with the Purpose, (ii) limit disclosure of the Personal Information to what is
authorized by the Company or required by Applicable Law, (iii) promptly refer any
persons looking for access to their Personal Information to the Company, (iv) use
appropriate security measures to protect the Personal Information, and (v) comply with
Applicable Law relating to the privacy of the Personal Information.
The Province acknowledges and agrees that pursuant to the provisions of the Company's
Electricity Distribution Licenses issued by the Ontario Energy Board, the Company may
not be able to furnish or disclose any information regarding a consumer, retailer,
wholesaler or generator, whether or not such information is confidential, (collectively,
"Customer Information") to the Province or any of its Representatives unless consent to
the disclosure of such Customer Information has been obtained, or the Company is
otherwise authorized by its Electricity Distribution License or Applicable Law to disclose
such information. If any Customer Information is disclosed to the Province and/or its
Representatives, the Province and its Representatives shall, subject to their obligations
under Applicable Law, (i) limit the use of the Customer Information to the Purpose,
(ii) limit disclosure of the Customer Information to what is authorized by the Company or
required by Applicable Law, (iii) promptly refer any persons looking for access to their
Customer Information to the Company, (iv) use appropriate security measures to protect
the Customer Information, and (v) comply with Applicable Law relating to the protection
of the Customer Information.
The Province agrees that all Company Confidential Information shall be held and treated
by the Province and its Representatives in confidence and shall not be disclosed by the
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 41 ot 54
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Province or its Representatives in any manner whatsoever, in whole or in paft, except as
expressly provided in this Agreement, as required by FIPPA or by any law, statute, rule,
regulation, ordinance, judgment, code, guideline, order, writ, directive, decision, ruling,
decree, award or other pronouncement or instrumentality of any federal, provincial or
municipal government, parliament or legislature, or of any regulatory authority, agency,
commission, tribunal, board or department of any such government, parliament or
legislature, or of any court or other law, regulation or rule-making entity, having
jurisdiction in the relevant circumstances (collectively, "Applicable Law"), or with the
Company's prior written consent.
The Province also agrees (i) to use the same means to protect the confidentiality of the
Company Confidential Information that the Province would use to protect its own
confidential and proprietary information (but in any event, no less than reasonable
means), (ii) to disclose Company Confidential Information only to its Representatives
who need to know the Company Confidential Information for the Purpose, who are
informed by the Province of the confidential nature of the Company Confidential
Information and who agree to be bound by the terms of this Agreement, (iii) to take all
necessary steps to require that its Representatives comply with and are bound by the
terms and conditions of this Agreement, and (iv) to be responsible for any breach by its
Representatives of any terms of this Agreement applicable to the Province's
Representatives (as if the Province's Representatives were pafties to and bound by those
provisions of this Agreement). The provisions of clause (iv) of this Section 9 shall
survive termination of this Agreement.
The Province acknowledges that certain of the Company Confidential Information that it
receives or obtains may be information, including records prepared by or for counsel for
use in giving legal advice or in contemplation of or for use in litigation, to which
solicitor-client privilege and/or litigation privilege attaches (collectively, "Privileged
Information"). The Province acknowledges and agrees that access to the Privileged
Information is not intended and should not be interpreted as a waiver of any privilege in
respect of Privileged Information orof any right to assert orclaim privilege in respect of
Privileged Information. To the extent there is any waiver of privilege, it is intended to be
a limited waiver in favour of the Province, solely for the purposes and on the terms set out
in this Agreement.
In the event that the Province or any of its Representatives are required by Applicable
Law, by oral questions, interrogatories, requests for information or documents, subpoena,
criminal or civil investigative demand, legislative committee or officer, or similar process
to disclose any Company Confidential Information, the Province or such Representative,
as the case may be, shall, to the extent permitted by Applicable Law, provide the
Company with prompt written notice of such requirement so that the Company may seek
a protective order or other appropriate remedy, if available, or waive compliance with the
provisions of this Agreement. The Province shall thereafter cooperate with the Company
to prevent such disclosure (including cooperating in obtaining a protective order or other
appropriate remedy). Where a request is made to the Province or its Representatives for
access to information subject to this Agreement under FIPPA, the Province or its
Representatives shall provide the Company with notice of the request, and the
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 42 of 54
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opportunity to make submissions to the Province or its Representatives about disclosure
of the records, in accordance with section 28 of FIPPA. In the event that the Company is
unable to obtain a protective order or other remedy, the Province or such Representative, as
the case may be, may disclose only that portion of the Company Confidential Information
which the Province or such Representative is advised by counsel (intemal or external) as
being required to disclose under FIPPA or by other Applicable Law. The Province or
such Representative, as the case may be, shall use reasonable efforts to obtain reliable
assurance that confidential treatment will be afforded to any Company Confidential
Information so disclosed. The parties acknowledge, however, that Province cannot
require any person who receives information under FIPPA to maintain such information
in confidence. The provisions of this Section I I shall survive termination of this
Agreement.
12 The Company Confidential Information provided by the Company to the Province and/or
its Representatives shall at all times remain the property of the Company or its
Representatives (as defined below in Section l3), as applicable, and by making Company
Confidential Information available to the Province, neither the Company nor its
Representatives shall be deemed to be granting any license or other right under or with
respect to any trade secret, patent, copyright, trademark, or other proprietary or
intellectual property right. The provisions of this Section l2 shall survive termination of
this Agreement.
Confidentialitv Oblisations in favour of the Province:
In consideration of the Province providing, or causing to be provided, the Province
Confidential Information (as defined below) to the Company and its Representatives (as defined
below) from time to time in connection with the Purpose for good and valuable consideration
(the receipt and sufliciency of which are hereby acknowledged by each of the parties), the parties
agree to the following:
13. In this Agreement, "Representatives" of the Company means, collectively, the
Company's directors, officers, employees, managers, agents, representatives, lawyers,
accountants, consultants, and financial and other advisors, provided that such persons or
entities shall only be considered Representatives if such persons or entities have received
Province Confi dential Information.
14.In this Agreement, "Province Confidential Information" means all information and
material of, or relating to, the Province and its Representatives, whether in oral, written,
graphic, electronic or any other form or medium, including without limitation
information and material concerning the Province's past, present or future policy
decisions, business, affairs, financial conditions, operations, plans, potential transactions
or potential purchases or sales of shares of Hydro One Limited or other activities that is
furnished to the Company or its Representatives pursuant to the Governance Agreement
and/or the Registration Rights Agreement on or after the date of this Agreement in
connection with the Purpose. For the purposes of this definition, "Province Confidential
Information" includes the portion of any plans, proposals, reports, analyses, notes,
compilations, studies, forecasts or other documents prepared by the Company or its
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 43 of54
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15.
16.
17
Representatives that are based on, contain, incorporate or otherwise reflect Province
Confi dential Information.
Notwithstanding Section 14, the following will not constitute "Province Confidential
Information" under this Agreement:
(a) for the avoidance of doubt (i) information that the Company or its
Representatives receive or obtain solely pursuant to any Applicable Law and
(ii) information that the Company or its Representatives receive or obtain other
than pursuant to the Governance Agreement and/or the Registration Rights
Agreement.
(b)information that the Company or its Representatives receive or obtain from a
third person who is not known by the Company to be prohibited from
transmiffing the information to the Company or its Representatives by a
contractual, legal or fiduciary obligation not to disclose such information;
(c)information that has been publicly disclosed by the Province (including, for
greater certainty, information publicly disclosed through regulatory filings or
processes), or that is or becomes publicly available through no fault of the
Company or its Representatives in breach of this Agreement or other
contractual, legal or fiduciary obligation not to disclose such information;
(d)information that was independently developed by the Company or its
Representatives without reference to the Province Confidential Information;
and
(e)information that the Province agrees in writing is not Province Confidential
Information for the purposes of this Agreement.
The Company acknowledges and agrees that the Province may not be able to furnish or
disclose Personal Information to the Company or any of its Representatives unless
consents to the disclosure of such Personal Information have been obtained from the
relevant individual(s) as required, or the Province is otherwise authorized by Applicable
Law to disclose such information. If any Personal Information is disclosed to the
Company and/or its Representatives, the Company and its Representatives shall, subject to
their obligations under Applicable Law, (i) use the Personal Information only in
connection with the Purpose, (ii) limit disclosure of the Personal Information to what is
authorized by the Province or required by Applicable Law, (iii) promptly refer any
persons looking for access to their Personal Information to the Province, (iv) use
appropriate security measures to protect the Personal Information, and (v) comply with
Applicable Law relating to the privacy of the Personal Information.
The Company agrees that all Province Confidential Information shall be held and treated
by the Company and its Representatives in confidence and shall not be disclosed by the
Company or its Representatives in any manner whatsoever, in whole or in part, except as
expressly provided in this Agreement, as required by Applicable Law or by the
Exhibit No. '10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 214 of 54
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o requirements of any stock exchange on which securities of the Company are listed or
with the Province's prior written consent.
The Company also agrees (i) to use the same means to protect the confidentiality of the
Province Confidential Information that the Company would use to protect its own
confidential and proprietary information (but in any event, no less than reasonable
means), (ii) to disclose Province Confidential Information only to its Representatives who
need to know the Province Confidential Information in connection with the Purpose, who
are informed by the Company of the confidential nature of the Province Confidential
Information and who agree to be bound by the terms of this Agreement, (iii) to take all
necessary steps to require that its Representatives comply with and are bound by the
terms and conditions of this Agreement, and (iv) to be responsible for any breach by its
Representatives of any terrns of this Agreement applicable to the Company's
Representatives (as if the Company's Representatives were parties to and bound by those
provisions of this Agreement). The provisions of clause (iv) of this Section l8 shall
survive termination of this Agreement.
The Company acknowledges that certain of the Province Confidential Information that it
receives or obtains may be Privileged Information. The Company acknowledges and
agrees that access to the Privileged Information is not intended and should not be
interpreted as a waiver of any privilege in respect of Privileged Information or of any
right to assert or claim privilege in respect of Privileged Information. To the extent there
is any waiver of privilege, it is intended to be a limited waiver in favour of the Company,
solely for the purposes and on the terms set out in this Agreement.
In the event that the Company or any of its Representatives are required by the
requirements of any stock exchange on which securities of the Company are listed, by
Applicable Law, by oral questions, interrogatories, requests for information or
documents, subpoena, criminal or civil investigative demand, legislative committee or
officer, or similar process to disclose any Province Confidential Information, the
Company or such Representative, as the case may be, shall, to the extent permitted by
Applicable Law, provide the Province with prompt written notice of such requirement so
that the Province may seek a protective order or other appropriate remedy, if available, or
waive compliance with the provisions of this Agreement. The Company shall thereafter
cooperate with the Province to prevent such disclosure (including cooperating in
obtaining a protective order or other appropriate remedy). The parties acknowledge that
the Company is subject to applicable securities law and the requirements of the Toronto
Stock Exchange and New York Stock Exchange which mandate immediate disclosure of
material information concerning the Company such that it may not always be practicable to
provide prompt written notice of the requirement to disclose Province Confidential
Information, to the extent Province Confidential Information would constitute material
information concerning the Company. In the event the Province is unable to obtain a
protective order or other remedy, the Company or such Representative, as the case may be,
may disclose only that portion of the Province Confidential Information which the
Company or such Representative is advised by counsel as being required to disclose by
Applicable Law or the requirements of any stock exchange on which securities of the
Company are listed. The Company or such Representative, as the case may be, shall use
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 45 of54
l8
19.
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reasonable efforts to obtain reliable assurance that confidential treatment will be afforded
to any Province Confidential Information so disclosed. The parties acknowledge,
however, that the Company cannot require any securities regulator or stock exchange
who receives information to maintain such information in confidence. The provisions of
this Section 20 shall survive termination of this Agreement.
The Province Confidential Information provided by the Province to the Company and/or
its Representatives shall at all times remain the property of the Province or its
Representatives, as applicable, and by making Province Confidential Information
available to the Company, neither the Province nor its Representatives shall be deemed to
be granting any license or other right under or with respect to any trade secret, patent,
copyright, trademark, or other proprietary or intellectual property right. The provisions of
this Section 2l shall survive termination of this Agreement.
General Provisions:
Each party acknowledges that it is aware (and that it will advise its respective
Representatives) that applicable securities laws in Canada or elsewhere prohibit any
person with material non-public information about an issuer (which would include both
Hydro One Limited and Hydro One Inc.) from purchasing or selling securities of such
issuer, or subject to certain limited exceptions, from communicating such information to
any other person. The Province has instituted reasonable intemal controls to restrict
(a) the disclosure of material non-public information about the Company and (b) trading
in the securities of the Company by the Province and its Representatives. The Province
has provided a copy of such internal controls to Hydro One Limited and Hydro One Inc.
on or prior to the date of this Agreement.
The parties acknowledge that any information that the Province receives pursuant to
section 1.0.25 of the Financial Administration Act (Ontario) (the "FAA") shall be dealt
with in accordance with the provisions of the FAA.
The Company agrees to notifu the Province of any information requests made by the
Auditor General of Ontario pursuant to its rights under the Auditor General Act (Ontario)
in relation to the audit of the Public Accounts (prepared pursuant to the FAA) and to
advise the Assistant Deputy Minister and Provincial Controller, Treasury Board
Secretariat (or any successor office thereto) as soon as reasonably practicable of the
anticipated timing and planned approach to meet such requests.
25 Except as otherwise specified in this Agreement, this Agreement shall terminate on the
second anniversary of the last to occur of the following: (i) the Governance Agreement
no longer being in effect; and (ii) the Registration Rights Agreement no longer being in
effect. The obligations of the Company and the Province under this Agreement shall
survive termination of this Agreement with respect to that Province Confidential
Information and Company Confidential Information, as the case may be, that pertains to
those matters identified by the Province or the Company, as the case may be, to the other
in writing at the time of termination of this Agreement.
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 46 of 54
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24.
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26.
27
28.
This Agreement may not be amended except with the written consent of all parties
hereto. There are no understandings, representations, warranties, terms, conditions,
undertakings or collateral or other agreements, express, implied or statutory, among the
parties with respect to the subject matter of this Agreement other than as expressly set
forth in this Agreement, the Governance Agreement and the Registration Rights
Agreement. lf any provision of this Agreement is held to be invalid or unenforceable in
whole or in part, such invalidity or unenforceability shall not affect any other provision
hereof and all other provisions hereof shall continue in full force and effect.
It is understood and agreed that no failure or delay in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise thereofpreclude any other or further exercise thereofor the exercise ofany other
right, power or privilege hereunder. Nothing shall be construed or have the effect of a
waiver except an instrument in writing signed by a duly authorized representative of the
party which expressly waives any such right, power or privilege.
This Agreement will be governed by and construed in accordance with the laws of the
Province of Ontario and the laws of Canada applicable therein.
This Agreement may be executed in counterparts, each of which will be deemed to be an
original and both of which taken together will be deemed to constitute one and the same
instrument. Delivery of an executed signature page to this Agreement by any party by
electronic transmission will be as effective as delivery of a manually executed copy of the
agreement by such party.
[Remainder of page intentionally left blankJ
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 47 ot 54
29
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IN WITNESS WHEREOF the parties have executed this Agreement as of the date set forth
above.
HYDRO ONE LIMITED
By:
Name: Mayo Schmidt
Title: President and Chief
Executive Officer
Exhibit No. 10
[Signature page to Confidentiality Agreement'ase Nos. AVU-E-17-09/AVU-G-17-05
J. Scarlett, Hydro One
Schedule 3, Page 48 of 54
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HER MAJESTY THE QUEEN IN
RIGHT OF ONTARIO, AS
REPRESENTED BY THE MINISTER
OF ENERGY
By
Name: Bob Chiarelli
Title: Minister of Energy
Exhibit No. 10
[Signature page to Confidentiality Agreemen{ase Nos. AVU-E-'|7-09/AVU-G-17-os
J. Scarlett, Hydro One
Schedule 3, Page 49 o'f il
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1.
2.
J.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
SCHEDULE 6(C"
Hydro One Governance Standards
Skills Matrix
Board Diversity Policy
Majority Voting Policy
Stakeholder engagement policy
Corporate disclosure policy
Corporate governance guidelines
Mandate for the Hydro One Ombudsman
Mandates of the Board and its committees
Position descriptions for the CEO, the Chair, the Directors and the committee chairs
Code of business conduct
Whistleblower policy
Executive share ownership guidelines & anti-hedging policy
Compensation recoupment policy
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 50 ofil
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SCHEDULE "D'
Rules of Procedure for Arbitration
The following rules and procedures shall apply with respect to any matter to be arbitrated
by the Parties under the terms of the Agreement.
I. INITIATION OF ARBITRATION PROCEDURES
(a)If a Party to this Agreement wishes to have any matter under this Agreement
arbitrated, it shall give notice to the other Party specifying particulars of the
matter or matters in dispute and request that ADR Chambers Canada appoint a
single arbitrator who need not be a member of ADR Chambers Canada and who
satisfies the requirements of Section 1(b) of this Schedule "D" (the
"Arbitrator").
(b)The individual selected as Arbitrator shall be reasonably qualified by education
and/or experience to decide the matter in dispute.
2. SUBMISSION OF WRITTEN STATEMENTS
(a)Within l5 Business Days of the appointment of the Arbitrator, the Party initiating
the arbitration (the "Claimant") shall send the other Party (the "Respondent") a
Notice of Arbitration setting out in sufficient detail the facts and any contentions
of law on which it relies, and the relief that it claims.
Within 15 Business Days of the receipt of the Notice of Arbitration, the
Respondent shall send the Claimant an Answer to the Notice of Arbitration stating
in sufficient detail which of the facts and contentions of law in the Notice of
Arbitration it admits or denies, on what grounds, and on what other facts and
contentions oflaw he relies.
(b)
(d) Each Notice of Arbitration, Answer and Reply shall be accompanied by copies
(or, if they are especially voluminous, lists) of all essential documents on which
the Party concerned relies and which have not previously been submitted by any
Party.
(e)After submission of all the pleadings, the Arbitrator will give directions for the
further conduct of the arbitration.
3. MEETINGS AND HEARINGS
(a) The arbitration shall be heard in Toronto. Ontario or in such other place as the
Claimant and the Respondent shall agree upon in writing. The arbitration shall be
conducted in English unless otherwise agreed by the Parties and the Arbitrator.
Exhibit No. '10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 51 of 54
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(c) Within 15 Business Days of receipt of the Answer, the Claimant may send the
Respondent a Reply.
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Subject to any adjournments which the Arbitrator allows, the final hearing will be
continued on successive working days until it is concluded.
(b) All meetings and hearings will be in private and shall be confidential unless the
Parties otherwise agree.
(c)
(d)
Any Party may be represented at any meetings or hearings by legal counsel
4. THE DECISION
(a) The Arbitrator will make a decision in writing and, unless the Parties otherwise
agreq will set out reasons for decision in the decision.
(b)The Arbitrator will deliver the decision to the Parties as soon as practicable after
the conclusion of the final hearing, but in any event no later than 60 days
thereafter, unless that time period is extended for a fixed period by the Arbitrator
on written notice to each Party because of illness or other cause beyond the
Arbitrator's control.
(c)The provisions of this Agreement and the Arbitration Rules requiring the
determination of certain disputes of arbitration shall not operate to prevent
recourse to the court by any Party as permitted by the Arbitration Act, 7991
(Ontario) with respect to injunctions, receiving orders and orders regarding the
detention, preservation and inspection of property, or whenever enforcement of an
award by the sole arbitrator reasonably requires access to any remedy which an
arbitrator has no power to award or enforce, provided that any such recourse to
the court and any remedy of the arbitrator shall, in the case of remedies against
the Province, be subject to the Proceeding Against the Crown Act (Ontario). In all
other respects an award by the Arbitrator shall be final and binding upon the
Parties and there shall be no appeal from that award on any questions of fact,
mixed law and fact, or law provided that the Arbitrator has followed the
Arbitration Rules in good faith and has proceeded in accordance with the
principles of natural justice.
5. JURISDICTION AND POWERS OF THE ARBITRATOR
(a) By submitting to arbitration under these Arbitration Rules, the Parties shall be
taken to have conferred on the Arbitrator the following jurisdiction and powers, to
be exercised at the Arbitrator's discretion subject only to these Arbitration Rules
and the relevant law with the object of ensuring the just, expeditious, economical
and final determination of the dispute referred to arbitration.
Without limiting the jurisdiction of the Arbitrator at law, the Parties agree that the
Arbitrator shall have jurisdiction to:
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-17-05
J. Scarlett, Hydro One
Schedule 3, Page 52 oI 54
Each Party may examine, cross-examine and re-examine, as appropriate, all
witnesses at the arbitration.
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(b)
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(i)
(i i)
(i ii)
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determine any question of law arising in the arbitration;
determine any question as to the Arbitrator's jurisdiction;
determine any question of good faith, dishonesty or fraud arising in the
dispute;
make one or more interim awards;
hold meetings and hearings, and make a decision (including a final
decision) in Ontario (or elsewhere with the concurrence of the Parties
thereto);
(iv) order any Party to provide further details of that Pafty's case, in fact or in
law;
(v) proceed with the arbitration notwithstanding the failure or refusal of any
Party to comply with these Arbitration Rules or with the Arbitrator's
orders or directions, or to attend any meeting or hearing, but only after
giving that party notice that the Arbitrator intends to do so;
(vi) receive and take into account such written or oral evidence tendered by the
Parties as the Arbitrator determines is relevant, whether or not strictly
admissible in law;
(vii)
(viii)
(ix) order the Parties to produce to the Arbitrator, and to each other for
inspection, and to supply copies of, any documents, except privileged
documents, or classes of documents in their possession or power which the
Arbitrator determines to be relevant;
(x) order the preservation, storage, sale or other disposal of any property or
thing under the control of any of the Parties;
(xi) make interim orders to secure all or part of any amount in dispute in the
arbitration;
(xii) make any order as to the payment of costs of the arbitration, including
legal fees on a solicitor and client basis;
(xiii) include, as part of any award, the payment of interest at the rate
determined by the Arbitrator from an appropriate date as determined by
the Arbitrator; and
(xiv) make any other order that the Arbitrator determines is just and reasonable
in determining the matters in dispute.
Exhibit No. l0
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page 53 of 54
o
a -4-('. ARBITRATION ACT, I 99I
The rules and procedures of the Arbitration Act, 1991 (Ontario) shall apply to any
arbitration conducted hereunder except to the extent that they are modified by the express
provisions of these Arbitration Rules.
Exhibit No. 10
Case Nos. AVU-E-1 7-09/AVU-G-1 7-05
J. Scarlett, Hydro One
Schedule 3, Page il of il
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