20170914Application.pdf

Avista Gorp.
1411 East Mission P.O. Box 3727
Spokane, Washington 99220-0500
Telephone [phone]
Toll Free 800-727-9170
September 14,2017
Diane Hanian
Commission Secretary
Idaho Public Utilities Commission
472W. Washington St.
Boise, lD 83702
*vtsrfr
Corp.
AVU-g- l-7-ol
Anu - G'tl -os-
ifi
i*)
i ll-:
fi1
RE: Joint Application of Hvdro One Limited and Avista Corporation for Order Authorizine
Proposed Transaction Dct o 1'
noctet Nos. avu-e- tz-6>{ anO RvU-C- tz-6X
On July 19,2017, Avista Corporation announced that it had entered into a Merger Agreement with
Hydro One Limited. Enclosed for filing with the Commission are an original and seven copies of
the Joint Application of Avista Corporation and Hydro One Limited for an Order Authorizing the
Proposed Transaction (the "Joint Application"). In support of the Joint Application, the applicants
also included seven copies of pre-filed direct testimony and exhibits of:
o Scott L. Morris, Chairman of the Board, President and Chief Executive Officer of Avista;
o Mark Thies, Senior Vice President, Chief Financial Officer and Treasurer of Avista;
o Kevin Christie, Vice President of Customer Solutions of Avista;
o Patrick Ehrbar, Director of Rates of Avista;
o Mayo Schmidt, President and Chief Executive Office of Hydro One;
o Christopher Lopez, Senior Vice President, Finance of Hydro One; and
o Ferio Pugliese, Executive Vice President, Customer Care and Corporate Affairs of Hydro
One.
Applicants will be providing Protective Agreements to interested parties who intervene in order to
facilitate discovery.
As set foth in the Joint Application and supporting testimony, the applicants respectfully request
that the Commission complete its review and issue an order approving the Proposed Transaction by
August 14,2018, in order to consummate the Proposed Transaction by no later than September 30,
2018, as contemplated by the Merger Agreement.
Page I of4
Avista Corp.
1411 East Mission P.O. Box 3727
Spokane, Washington 99220-0500
Telephone [phone]
TollFree 800-727-9170
Persons authorized on behalf of Avista to receive notices and communications with respect to this
Joint Application are:
{rusrfr
Corp.
Persons authorized on behalf of Hydro One to receive notices and communications with respect to
this Joint Application are:
David J. Meyer, Esq.
Vice President and Chief Counsel for
Regulatory & Governmental Affairs
Avista Corp.
P. O. Box3727
l4l1 E. Mission Avenue, MSC 27
Spokane, Wash ington 99220-37 27
Telephone: [phone]
Facsimile: [phone]
E-mai I : [e-mail]
Elizabeth Thomas, Partner
Kari Vander Stoep, Partner
K&L Gates LLP
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-l158
Telephone: [phone]
Facsimile: [phone]
E-mail : [e-mail]
E-mail : kari.vanderstoep@kl gates.com
Patrick Ehrbar
Director of Rates
State and Federal Regulation
Avista Corp.
P. O. Box3727
l4l I E. Mission Avenue, MSC 27
Spokane, Washington 99220 -37 27
Telephone: [phone]
Facsimile: [phone]
E-mail: [e-mail]
James Scarlett
Executive Vice President &
Chief LegalOfficer
Hydro One
483 Bay Street, 8th Floor, South Tower
Toronto, Ontario, M5G 2P5
Telephone: [phone]
Facsimile : (41 6) 345 -697 2
E-mail : i [e-mail]
Patrick Ehrbar
Director of Rates
State and Federal Regulation
Avista Corp.
P. O. Box3727
l4l I E. Mission Avenue, MSC 27
Spokane, Washington 99220 -37 27
Telephone: [phone]
Facsimile: [phone]
E-mail : [e-mail]
Data requests to the Joint Applicants should be addressed to the following
For Avista:
David J. Meyer, Esq.
Vice President and Chief Counsel for
Regulatory & Governmental Affairs
Avista Corp.
P. O.Box3727
l4l I E. Mission Avenue, MSC 27
Spokane, Washington 99220 -37 27
Telephone: [phone]
Facsimile: [phone]
E-mai I : [e-mail]
Page 2 of 4
Avista Corp.14ll East Mission P.O.Box3727
Spokane, Washington 99220-0500
Telephone [phone]
Toll Free 800-727-9170
frtnstt
James Scarlett
Executive Vice President &
Chief Legal Officer
Hydro One
483 Bay Street, 8th Floor, South Tower
Toronto, Ontario, M5G 2P5
Telephone: [phone]
Facsimile : (41 6) 3 45 -697 2
E-mail : i [e-mail]
S. Kyle Mersky, Senior Advisor
Office of the President and CEO
Hydro One Inc.
483 Bay Street, 8th Floor, South Tower
Toronto, Ontario, M5G 2P5
Telephone: [phone]
E-mail: [e-mail]
Gory.
For Hvdro One:
Elizabeth Thomas, Partner
Kari Vander Stoep, Partner
K&L Gates LLP
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-l158
Telephone: [phone]
Facsimile: [phone]
E-mail : liz.thomas@kl gates.com
E-mail: [e-mail]
Dirk Middents, Paralegal
K&L Gates LLP
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-l158
Telephone: [phone]
E-mail: [e-mail]
Hydro One and Avista have created an Electronic Document Room containing the documents listed
in the Index provided as Appendix 3 to the Joint Application. These documents provide significant
foundational information pertaining to both Avista and Hydro One. The Document Room contains
documents such as the annual reports of both Avista and Hydro One for 2016, documents relating to
debt and equity issuances, and financial reports.
Provisions for access to the electronic Document Room can be arranged by contacting the following
representatives of Hydro One: Ben Mayer, Associate, K&L Gates, [e-mail],206-
370-8074; or Dirk Middents, K&L Gates, [e-mail], 206-370-5705.
Computer-readable copies of the Joint Application, testimony, and exhibits, required under Rule
231.05, are included on the enclosed compact disc.
Attached to the Application is the form of Customer Notice and form of Press Release to be issued
by the Applicants.
If you have any questions, please do not hesitate to contact David Meyer on behalf of Avista
Corporation at 509-495-4316 or [e-mail] or Elizabeth Thomas on behalf of
Hydro One Limite d, at 206-370-7631 or [e-mail] or Kari Vander Stoep on behalf of
Hydro One Lim ite d, at 206-370-7 804 or kari.vanderstoep@kl gates. com.
Page 3 of4
Avlcta Gorp.
141{ East illrslon ?.O. Box3727
Spokane, Wrshlngton 99220-0500
Telephone [phone]
Toll Free 800-727-9170
AhnsrfiW
RESPECTFULLY SUBMITTED this 'l,Ath day of Septembe\ 2017.
K&L GATES, LLP AVISTA CORPORATION
-
Hill, Partner,No.6l75 ISB No. 8317
Elizabeth Thomas, Partner (pro hac vice
application pending)
Kari Vander Stoep, Partner (pro hac vice
application pending)
K&L Gates LLP
On Behalf of Hydro One Limited
Olympus Equity LLC
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-1158
[e-mail]
[e-mail]
Kari. vanderstoep@kl eates.com
Chief Counsel for Regulatory and
Governmental Affairs
Avista Corporation
l41l E. Mission Ave., MSC-27
Spokane, WA 99220-3727
[e-mail]
cc: All parties to Avista's pending General Rate Case (AVU-E-17-01 and AVU-G-17-01)
Page 4 of4
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that I have this 14fr day of September,2017, served the foregoing
application, and Avista's Direct Testimony and Exhibits in Docket No. AVU-E-I7-0X
and AVU-G-17-0X, upon the following parties, by mailing a copy thereof, properly
addressed with postage prepaid to:
Diane Hanian, Secretary
ldaho Public Utilities Commission
472 W. Washington Street
Boise, lD 83720-5983
diane. hanian@puc. idaho.oov
Karl Klein
Brandon Karpen
Deputy Attomeys General
ldaho Public Utilities Commission
472W. Washington
Boise,,D 83720-AA74
karl.klein@ouc. idaho.gov
brandon. karpen@puc. idaho.qov
Marv Lewallen
28530 SW Canyon Creek Rd. - South
Wilsonville, OR 97070
[e-mail]
Larry Crowley
The Energy Strategies lnstitute, lnc.
5549 S. Cliffsedge Ave
Boise, lD 83716
[e-mail]
Travis Ritchie
Staff Attorney
Sierra Club
2101 Webster St., Suite 1300
Oakland, CA94612
Travis. ritch ie@sierraclub. oro
Dean J. Miller, Lawyer
3620 E. Warm Springs
Boise, lD 83716
deanimiller@cableone. net
Brad M. Purdy
Attorney at Law
2019 N 17th Street
Boise, lD 83702
[e-mail]
Peter J. Richardson
Greg M. Adams
Richardson Adams PLLC
515 N. 27th Street
Boise, lD 83702
peter@richardsonadams, com
g,req @ richa rdsonsda ms. com
Ronald L. Williams
Williams Bradbury, P.C.
P. O. Box 388
Boise, lD 83701
ron @wi I I ia m sbrad bu ry. com
Dr. Don Reading
6070 Hill Road
Boise, lD 83703
dreadinq@m i ndsorino.com
ro?
!/)t jl
-_1
:3.
O
itt,-J
irl
rn
Paul Kimball
Sr. Regulatory Analyst
Mafthew A. Nykiel/Ben Otto
ldaho Conservation League
P. O. Box 2308
102E. Euclid #207
Sandpoint, lD 83864
mnvkiel@idahoconservation. orq
David J. Meyer
Chief Counsel for Regulatory and
Governmental Affairs
Avista Corporation
l4l I E. Mission Ave., MSC-27
Spokane, WA 99220-3727
David.meyer@avi stacom. com
Teresa Hill, Partner
Elizabeth Thomas, Partner
Kari Vander Stoep, Partner
K&L Gates LLP
On Behalf of Hydro One Limited
Olympus Equity LLC
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-1158
Theresa.h i I l@kl gates.com
[e-mail] :
[e-mail] ,
t-J
BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
In the Matter of the Joint Application of
HYDRO ONE LIMITED (acting through
its indirect subsidiary Olympus Equity
LLC)
and
JOINT APPLICATION FOR AN
ORDER AUTHORIZING
PROPOSED TRANSACTION
AVISTA CORPORATION
For an Order Authorizing Proposed
Transaction
I. INTRODUCTION
Hydro One Limited ("Hydro One"), acting through Olympus Equity LLC an indirect,
wholly-owned subsidiary, and Avista Corporation ("Avista") (sometimes hereafterjointly referred
to as "Joint Applicants" or the "companies") request an order of the Idaho Public Utilities
Commission (the "Commission") authorizing the Proposed Transaction whereby Olympus Equity
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - I
Avt - Elr-o3
CASE No. AUll - 6- lt - og
I
2
LLC would acquire all of the outstanding common stock of Avista, and Avista would thereafter
become a direct, wholly-owned subsidiary of Olympus Equity LLC and an indirect, wholly-owned
subsidiary of Hydro Onel (the combination of these transactions is hereafter "Proposed
Transaction"). Appendix 1 depicts (i) a simplified chart of the current relationship of Hydro One
and its primary operating subsidiaries (direct and indirect) that are referenced in this Joint
Application, and (ii) the corporate structure that adds to the first chart the additional subsidiaries
that will result from the consummation of the Proposed Transaction (post-closing).
Hydro One, operating through its principal subsidiary, Hydro One Inc., is an investor-
owned electric transmission and distribution utility headquartered in Toronto, Ontario, Canada.
Hydro One provides electric distribution service to more than 1.3 million retail end-use customers,
as well as electric transmission service to many local distribution companies and large industrial
customers. Avista is an investor-owned utility providing electric generation, transmission, and
distribution services to approximately 378,000 retail customers in Washington, Idaho and
Montana, and the distribution of natural gas to approximately 342,000 retail customers in
Washington, Idaho and Oregon. Alaska Electric Light and Power ("AEL&P"), a wholly-owned
indirect subsidiary of Avista, also provides electric generation, transmission and distribution
services to approximately 17,000 retail customers in the City and Borough of Juneau, Alaska.
A table of contents for this Application is as follows:
On July 19,2017, Avista, a Washington corporation, Hydro One, a Province of Ontario corporation, Olympus
Holding Corp. (also referred to hereafter as "US Parent"), a Delaware corporation, and Olympus Corp. ("Merger
Sub"), a Washington corporation and an indirect, wholly-owned subsidiary of US Parent, entered into an
Agreement and Plan of Merger. Following all approvals, at the effective time on the closing date, Merger Sub will
be merged with and into Avista, and the separate existence of Merger Sub shall thereupon cease, and Avista will
be the surviving corporation and will become a direct, wholly-owned subsidiary of Olympus Equity LLC and an
indirect, wholly-owned subsidiary of Hydro One. (See Appendix l)
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 2
3
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
x.
x.
xt.
XII.
XIII.
xv.
XVI.
XVII.
INTRODUCTION
JURISDICTION / LEGAL STANDARD...................
REQUESTED APPROVAL DATE....
JOINT APPLICANTS' INFORMATION
DESCRIPTION OF THE PROPOSED TRANSACTION
AVISTA'S REASONS FOR THE PROPOSED TRANSACTION ........
HYDRO ONE'S REASONS FOR THE PROPOSED TRANSACTION
.5
.8
10
t4
t6OVERVIEW OF HYDRO ONE
OVERVIEW OF AVISTA....23
POST-CLOSING CORPORATE STRUCTURE............. .,,,,,.....26
POST-CLOSTNG AVISTA GOVERNANCE, MANAGEMENT AND OPERATIONS. 28
BENEFITS TO CUSTOMERS FROM THE PROPOSED TRANSACTION .......,,........,29
PROTOCOL FOR DIRECT ASSIGNMENT OF COSTS BETWEEN AVISTA AND
32
oTHER REQUIRED APPROVALS ................35
JOINT APPLICANTS' WITNESSES SPONSORING TESTIMONY............................. 35
JOINT APPLICANTS' REQUEST 37
APPENDICES
XIV. SATISFACTION OF THE PUBLIC TNTEREST AND COMMITMENTS BY JOINT
I
4
5
APPENDIX 1
APPENDIX 2
APPENDIX 3
APPENDIX 4
APPENDIX 5
CORPORATE STRUCTURE _ PRE- AND POST-CLOSING
MERGER AGREEMENT
ELECTRONIC DOCUMENT ROOM - DOCUMENT LIST
BAR CHART SHOWING RELATIVE SIZE OF INVESTOR OWNED
UTILITIES
DELEGATION OF AUTHORITY TO AVISTA BOARD OF DIRECTORS
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 3
APPENDIX 6
APPENDIX 7
APPENDIX 8
APPENDIX 9
AVISTA'S FINANCIAL STATEMENTS (FORMS 1OK/lOQ) AND
HYDRO ONE'S FINANCIAL STATEMENTS (2016 ANNUAL
REPORT AND 2016 ANNUAL INFORMATION FORM)
PROTOCOL FOR DIRECT ASSIGNMENT OF COSTS BETWEEN
AVISTA AND HYDRO ONE
MASTER LIST OF COMMITMENTS
IDENTIFICATION OF HYDRO ONE AND AVISTA OFFICERS AND
EXECUTIVES
4
II. JURISDICTION / LEGAL STANDARD
This Application is filed pursuant to Idaho Code $ 6l-328, which requires authorization by
order of the Commission before an electric public utility owning, controlling or operating any
property located in ldaho used in the generation, transmission, distribution or supply of electric
power or energy to the public may merge, sell, lease, assign or transfer, directly or indirectly, such
property, or the operation, management or control thereof.
Accordingly, the Commission has jurisdiction over this transaction pursuant to Idaho Code
$ 6l-328. This section prohibits Hydro One from acquiring Avista without the written
authorization of the Commission. Before authorizing such a transaction, the Commission must
find that: (1) the transaction is consistent with the public interest; (2)the transaction will not cause
the cost of or rates for supplying electrical service to increase; and (3) that Hydro One has the bona
fide intent and financial ability to operate and maintain Avista's operations in ldaho. Idaho Code
$ 6l-328.
As explained below, Avista and Hydro One have proposed immediate financial net benefits
for Avista's customers, as well as presenting the opportunity for longer-term benefits for customers
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 4
J
6
7
from efficiencies gained through best practices, technology and innovation. It is consistent with
the public interest and the transaction will not cause the cost of or rate for supplying service to
increase.
III. REOUESTED APPROVAL DATE
The Joint Applicants respectfully request approval of the Proposed Transaction on or
before August 14,2018, and have made the same request in other state jurisdictions, in order to
complete the Proposed Transaction on or before September 30,2018. The Agreement and Plan of
Merger (the "Merger Agreement") among Hydro One, US Parent, Merger Sub and Avista permits
Hydro One or Avista to terminate the Agreement if the merger has not been consummated by
September 30, 2018, subject to extension if certain conditions to closing remain unfulfilled. A
copy of the Merger Agreement is included as Appendix 2 to this Application. (See Section 7.1(b))
The Proposed Transaction is important for the customers, communities, employees, and
shareholders of both companies. In order to mitigate both the duration and the effects of
uncertainties during the approval process, the Joint Applicants respectfully request that the
Commission schedule its review of the Application in a manner that will facilitate issuance of an
order on or before August 14,2018.
IV. JOINT APPLICANTS' INFORMATION
The exact name and address of Hydro One's principal business office is as follows:
Hydro One Limited
483 Bay Street
8th Floor Reception, South Tower
Toronto, Ontario M5G 2P5
The exact name and address of Avista's principal business office is as follows:
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 5
8
9
10
Avista Corporation
l41l East Mission Avenue
P.O.Box3727
Spokane, Washington 99220-3727
Persons authorized on behalf of Avista to receive notices and communications with respect
to this Joint Application are:
il
12
13
David J. Meyer, Esq
Vice President and Chief Counsel for
Regulatory & Governmental Affairs
Avista Corp.
P. O.Box3727
1411 E. Mission Avenue, MSC 27
Spokane, Wash in gton 99220-37 27
Telephone: [phone]
Facsimile: [phone]
E-mail : david.meyer@av istacorp.com
Persons authorized on behalf
respect to this Joint Application are:
Elizabeth Thomas, Partner
Kari Vander Stoep, Partner
K&L Gates LLP
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-l158
Telephone: [phone]
Facsimile: [phone]
E-mail : I [e-mail]
E-mail : [e-mail]
For Avista:
David J. Meyer, Esq.
Vice President and Chief Counsel for
Regulatory & Govemmental Affairs
Avista Corp.
P. O.Box3727
l4l I E. Mission Avenue, MSC 27
Spokane, Washington 99220-37 27
Telephone: [phone]
Facsimile: [phone]
E-mail : [e-mail]
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 6
Patrick D. Ehrbar
Director of Rates
Avista Corp.
P. O. Box3727
l4l I E. Mission Avenue, MSC 27
Spokane, Washington 99220 -37 27
Telephone: [phone]
Facsimile: [phone]
E-maiI: [e-mail]
ofH One to receive notices and communications with
Data requests to the Joint Applicants should be addressed to the following:
James Scarlett
Executive Vice President &
Chief LegalOfficer
Hydro One
483 Bay Street, 8th Floor, South Tower
Toronto, Ontario, M5G 2P5
Telephone: [phone]
Facsimile: (41 6) 345 -6972
E-mai I : i [e-mail]
Patrick D. Ehrbar
Director of Rates
Avista Corp.
P. O.Box3727
l4l I E. Mission Avenue, MSC 27
Spokane, Washin gton 99220 -37 27
Telephone: [phone]
Facsimile: [phone]
E-mail: [e-mail]
For Hydro One:
Elizabeth Thomas, Partner
Kari Vander Stoep, Partner
K&L Gates LLP
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-l158
Telephone: [phone]
Facsimile: [phone]
E-mail : [e-mail]
E-mail : [e-mail]
Dirk Middents, Paralegal
K&L Gates LLP
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-1158
Telephone: [phone]
E-mail : [e-mail]
James Scarlett
Executive Vice President &
Chief Legal Officer
Hydro One
483 Bay Street, 8th Floor, South Tower
Toronto, Ontario, M5G 2P5
Telephone: [phone]
Facsimile : (41 6) 345 -697 2
E-mail : i [e-mail]
l4
t5
Electronic Document Room
Hydro One and Avista have created an electronic Document Room containing the
documents listed in the Index provided as Appendix 3 to this Joint Application. These documents
provide significant foundational information pertaining to both Avista and Hydro One. The
Document Room contains documents such as the annual reports of both Avista and Hydro One for
2016 and documents relating to debt and equity issuances.
Provisions for access to the electronic Document Room can be arranged by contacting the
following representatives of Hydro One: Ben Mayer, Associate, K&L Gates,
[e-mail], 206-370-8074; or Dirk Middents, K&L Gates,
dirk.m iddents@.klgatelsam, 206-37 0 -57 0 5 .
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION . 7
S. Kyle Mersky, Senior Advisor
Office of the President and CEO
Hydro One Inc.
483 Bay Street, 8th Floor, South Tower
Toronto, Ontario, M5G 2P5
Telephone: [phone]
E-mail : [e-mail]
16
l7
18
V. DESCRIPTION OF THE PROPOSED TRANSACTION
On July 19, 2017, Hydro One, US Parent and Merger Sub entered into the Merger
Agreement with Avista which provides for, among other things, the acquisition of Avista by Hydro
One through the merger of Merger Sub with and into Avista, with Avista as the surviving
corporation in the merger. The Proposed Transaction was unanimously approved by the Boards
of Directors of both companies.
Following the receipt of all approvals and the closing of the Proposed Transaction, Avista
will become a wholly-owned indirect subsidiary of Hydro One. At the close, Avista's common
stock will be delisted from the New York Stock Exchange ("NYSE"), and Avista will have one
shareholder (i.e., Hydro One).
Under the terms of the all-cash transaction, Avista shareholders will receive $53 per
common share, representing a twenty-four percent (24%) premium to Avista's last sale price on
July I 8, 2017 of $42.74 per share. The aggregate purchase price is approximately S5.3 billion,
comprised of an equity purchase price of $3.4 billion and the indirect assumption of approximately
$1.9 billion of debt. Hydro One's financing plan is designed to maintain a strong investment grade
balance sheet following completion of the acquisition. Hydro One's regulated utility profile will
remain intact with approximately ninety-eight percent (98%) of its earnings generated from rate-
regulated activities. Hydro One will finance the Proposed Transaction through a combination of
medium and long-term borrowings and the net proceeds from its previously completed issue of
CS1.54 billion of convertible unsecured subordinated debentures, which will form the permanent
equity component of the financing plan upon conversion at closing of the Proposed Transaction.
Hydro One's common shares are listed on the Toronto Stock Exchange (TSX: H).
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 8
19
20
Following closing of the Proposed Transaction, Avista's customers and the communities
Avista serves will see little or no change in Avista's operations. Avista will maintain its existing
corporate headquarters in Spokane, Washington, and will continue to operate as a standalone utility
in Washington, Oregon, Idaho, and Montana. Avista's subsidiary, AEL&P, will continue to
operate as a standalone utility in Alaska. Avista will maintain office locations throughout its
service areas, continue to operate under the same Avista name and seek to retain its existing
employees and management team. All of these features together with other provisions embedded
within the Merger Agreement are designed to ensure that Avista's customers will continue to
receive the service they have come to expect from a company that has been a Pacific Northwest
presence for more than 100 years. Avista will continue to have a local Board of Directors
consisting primarily of either board members chosen by Avista, and/or members that reside in the
Pacific Northwest. Moreover, the communities Avista serves will see increased charitable
contributions and a continuation of the strong support Avista provides in economic development
and innovation.
Through this unique arrangement with Hydro One, Avista's customers can receive the
benefits of scale that come with joining a larger organization while also avoiding the risk of a
potential subsequent acquisition by another party that may not share Avista's culture and values.
Avista and Hydro One believe this preservation of Avista's name and brand, its headquarters, its
employees, its culture and its way of doing business is important to Avista's customers, in that
customers can continue to expect and experience reliable service and a high level of customer
satisfaction.
Customers will see immediate financialbenefits in the form of proposed retail rate credits
beginning upon the closing of the Proposed Transaction. ln addition, overtime the mergerwill
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 9
21
22
23
provide increased opportunities for innovation, research and development, and efficiencies by
extending the use oftechnology, best practices, and business processes over a broader customer
base and a broader set of infrastructure between the two companies. These immediate and longer-
term benefits to Avista's customers are benefits that will otherwise not occur absent the Proposed
Transaction.
The Proposed Transaction is subject to receipt of Avista shareholder approval and certain
regulatory and governmental approvals, including the expiration or termination of any applicable
waiting period under the HSR Act, clearance of the Proposed Transaction by CFIUS, the approval
by each of the WUTC, IPUC, OPUC, MPSC, RCA, FERC, and the FCC; and the satisfaction of
other customary closing conditions.2 No additional approvals are required from Canadian
authorities.3 The closing of the Proposed Transaction is currently expected to occur in the second
half of 2018.
VI. AVISTA'S REASONS FOR THE PROPOSED TRANSACTION
Avista's decision to enter into the Proposed Transaction with Hydro One was driven by the
unique partnership that is possible with Hydro One. The merger with Hydro One will allow Avista
and its customers to benefit from being part of a larger organization (the benefits of scale), while
at the same time preserving local control of Avista, its commitment to community involvement,
2 HSR Act (Hart-Scott-Rodino Antitrust Improvements Act of 1976), CFIUS (Committee on Foreign Investment in
the United States), WUTC (Washington Utilities and Transportation Commission), IPUC (Idaho Public Utilities
Commission), OPUC (Public Utility Commission of Oregon), MPSC (Public Service Commission of the State of
Montana), RCA (Regulatory Commission of Alaska), FERC (Federal Energy Regulatory Commission), and FCC
(Federal Communications Commission).3 The Ontario Energy Board (OEB) regulates the rates and practices of certain affiliates of Hydro One. Its approval
is not required in order to effectuate this transaction.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 1O
25
and the retention of Avista's employees and management team, as well as its culture and its way
of doing business.
With regard to scale, the number of investor-owned electric and/or natural gas utilities in
North America has decreased significantly over the years through consolidation. When comparing
the size of investor-owned utilities from largest to smallest, Avista is one of the smallest investor-
owned utilities remaining in North America.a A bar chart indicative of the investor-owned utilities
in North America, from largest to smallest, is provided in Appendix 4. The merger of Avista and
Hydro One will place the combined companies toward the middle of the range of investor-owned
utilities, in terms of size. Through consolidation, larger utilities have the opportunity to spread
costs, especially the costs ofnew technology, over a broader customer base and a broader set of
infrastructure, which inures to the benefit of customers.
Hydro One has more than 1.3 million electric distribution customers, and Avista has
378,000 electric customers and 342,000 natural gas customers. This combination will provide
opportunities for efficiencies in the long-term through the sharing of best practices, technology
and innovation. The merger will provide benefits to Avista's customers that otherwise would not
occur.
These benefits of scale will not occur in the near term following the closing of the merger,
but are expected to occur over the long-term. After all approvals are received and the companies
merge, both companies will work together to identifu, evaluate and execute on opportunities to
reduce costs for both companies through, among other things, the sharing of technology, best
practices, and business processes. The benefits from these cost savings will be flowed through to
customers in future general rate cases.
a As measured by equity value.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - I I
26
27
28
Avista chose to merge with Hydro One, under the specific provisions in the Merger
Agreement, in paft, to preserve its culture and the way it does business for the long-term. This will
enable Avista to continue to focus on providing reliable service to customers and high customer
satisfaction at a reasonable cost. In addition, provisions in the Merger Agreement are designed to
increase the level of support provided by Avista to the local communities it serves, including,
among other things, charitable giving and continued support of economic development. The
combination with Hydro One accomplishes all of these important goals for the indefinite future.
Details of the agreements between Hydro One and Avista designed to protect and benefit
Avista's customers were memorialized in Exhibits A ("Governance Requirements") and B ("Post-
Closing Matters" and "Approval Requirements") to the Merger Agreement, hereafter collectively
referred to as the "Delegation of Authority" (see Appendix 5 to this Application). Under the
Delegation of Authority, Avista's Board of Directors retains its authority to review, authorize and
approve certain specified matters related to Avista, without any obligation to obtain separate
authorization or approval from the Hydro One Board. Among the matters retained by the Avista
Board pursuant to the Merger Agreement are decisions to do the following:
l. Keeping Avista's headquarters in Spokane;
2. Keeping Avista's brand the same;
3. Keeping Avista's office locations in each of its service areas, with no less of a
significant presence in each location than that in place prior to the merger;
4. Preventing workforce reductions resulting from the Proposed Transaction;
5. Retaining Avista's existing management team;
6. Maintaining existing compensation and benefit practices;
7. Negotiating and entering into agreements with bargaining unit employees;
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - I2
Maintaining Avista's safety and reliability standards and policies and service quality
measures in a manner that is substantially comparable to, or better than, those prior to
the merger;
Maintaining Avista's community involvement and support initiatives at levels equalto
or greater than those prior to the merger;
10. Maintaining a $4.0 million annual budget for charitable contributions (funded by both
Avista and the Avista Foundation) as compared to an approximate $2.5 million level
prior to the merger;
ll. Making a $2.0 million annual contribution to the Avista Foundation (following an
initial contribution to the Foundation of $7.0 million at the time the merger closes);
12. Maintaining at least the level of economic development that existed prior to the merger,
including the expenditure of funds to support regional economic development and
related strategic opportunities consistent with past practices;
13. Maintaining existing levels of capital allocations for capital investment in strategic and
economic development, including property acquisitions in the university district,
support of local entrepreneurs and seed-stage investments;
14. Continued development and funding of Avista's existing and future innovation
activities; and
preserve reliable service and a high level of customer satisfaction for the benefit of Avista's
customers. Changes to these provisions in the Merger Agreement require a two-thirds majority
vote of the Avista board.
In addition to the authority to effect these decisions and other commitments, the makeup
of the Avista Board of Directors will further reinforce and preserve the way Avista currently does
business, for the benefit of its customers. The Avista board will be a local board primarily
consisting of either board members who are, or who are chosen by, Avista designees, and/or
members who reside in the Pacific Northwest. Specifically, after closing, Avista will be governed
by a nine member Board of Directors, with Avista's CEO Scott Morris serving as the Chairman of
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - I3
8
9
29
30
15. Maintaining dues paid by Avista to various industry trade groups and membership
organizations.
The Delegation of Authority is designed to ensure that local knowledge and control will
3t
32
the Board. Three additional board members will be chosen by Avista, and these three board
members together with the CEO will be referred to as Avista designees. There will always be a
total of four Avista designees, and these Avista Board members, as a group, will choose their
successors. Of the five board members chosen by Hydro One, three of the five will reside in the
Pacific Northwest. The remaining two board members will be executives of Hydro One or one of
its subsidiaries.
The Delegation of Authority included in the Merger Agreement and the makeup of the
Avista Board of Directors is intended to ensure that Avista's culture and its way of doing business
will continue for the long-term, inuring to the benefit of customers. The Proposed Transaction is
not designed to target the elimination ofjobs, or cost cutting that may lead to a deterioration of
customer service, customer satisfaction, safety, reliability, or a deterioration of charitable giving,
economic development or innovation in the communities Avista serves. 5
vII.HYDRO ONE'S REASONS FOR THE PROPOSED TRANSACTION
For more than 100 years and untiljust two years ago, Hydro One, and its predecessor
Ontario Hydro, was owned solely by the Province of Ontario. In 2015, Hydro One became a
commercially operated investor owned utility. Over the years, Hydro One had acquired a number
of local distribution companies in Ontario to increase its distribution footprint. Hydro One
5 On July 19,2017, S&P affirmed its ratings, including the 'BBB' issuer credit rating, on Avista and revised the
outlook to positive from stable. The positive outlook reflects S&P's view of the potential for higher ratings on
Avista if the merger is completed as proposed based on its view that Avista will be an important member of the
Hydro One group, highly unlikely to be sold and integral to the overall group strategy and operations. In addition,
on July 19,2017, Moody's affirmed the ratings of Avista's (i) issuer rating (Baal); (ii) multiple seniority medium-
term note program ((P)A2); (iii) senior secured medium-term notes (A2); (iv) senior secured first mortgage bonds
(A2); (v) senior secured medium-term note program ((P)A2); and (vi) senior unsecured medium-term note program
((P)Baal) and kept the outlook at stable. Moody's indicated that the stable rating outlook on Avista reflects its
view that the merger will not materially affect the credit quality of Avista.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - I4
33
54
35
36
continues to pursue growth and the benefits that will accrue to its customers, communities and
shareholders from that growth.
Hydro One is a pure play transmission and distribution utility located solely within Ontario.
It seeks diversification both in terms ofjurisdictions and service areas. The Proposed Transaction
with Avista achieves both goals by expanding Hydro One into the U.S. Pacific Northwest and
expanding its operations to natural gas distribution and electric generation. The Proposed
Transaction with Avista will deliver the increased scale and benefits that come from being a larger
player in the utility industry.
The utility industry is changing dramatically, with the deployment of distributed generation
and storage resources, and the ever increasing reliance on renewable generation. Avista and Hydro
One acting separately will be challenged to participate in these innovations on a scale similar to
the larger utilities due to the size of their balance sheets and customer bases. Combined, however,
Avista and Hydro One will become more competitive by creating scale and cost efficiencies over
time. Hydro One and Avista intend to continue investing in innovation. Together, with nearly two
million customers, they can spread these costs over a larger base.
Finally, Hydro One and Avista believe that the Proposed Transaction will deliver cost
savings over the next five to ten years. While Hydro One and Avista cannot quantify those savings
at this time, the companies should achieve savings through scale and collaboration in supply chain
activity, IT development and implementation, innovation, and potentially other areas.
Both Hydro One and Avista have similar cultures and values, including a strong
commitment to their respective communities, which will enable a seamless integration. Both
companies make customer service, high customer satisfaction, reliability, safety, respect for the
environment, and reasonable retail rates a high priority. Because oftheir shared culture and values,
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - I5
37
38
both companies have high expectations that Avista's and Hydro One's reasons for the Proposed
Transaction will be achieved.
V[I. OVERVIEW OF HYDRO ONE
Hydro One is an investor-owned electric transmission and distribution utility
headquartered in Toronto, Ontario, Canada.6 Through its subsidiaries, Hydro One provides
electric distribution service to more than 1.3 million retail end-use customers, as well as electric
transmission service to many local distribution companies and large industrial customers.
The operations of Hydro One originated in 1906 as the Ontario-owned Hydro-Electric
Power Commission of Ontario . In 1999, Ontario Hydro was restructured into five separate entities,
including Hydro One Inc. as the successor to its transmission and distribution business, and
Ontario Power Generation Inc., as the successor to its generation business. Hydro One Inc., Hydro
One's wholly-owned subsidiary, was incorporated on December l, 1998 under the Business
Corporations Act (Ontario) as a separate corporation providing transmission and distribution
services, with the Province of Ontario as its sole shareholder. Hydro One was incorporated by the
Province of Ontario on August 31, 2015 under the Business Corporations Act (Ontario). On
October 30,2015 Hydro One's articles of incorporation 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 1 preferred shares to be issued to the Province. On October 31,2015,atl
of the issued and outstanding shares of Hydro One Inc. were acquired by Hydro One from the
Province in exchange for the issuance to the Province of commons shares and Series 1 preferred
6 Please see Appendix 9 for identification ofthe officers, Executive Leadership Team and SVP ofFinance (acting
in the capacity of CFO) of Hydro One.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION . I6
39
10
shares of Hydro One. On November 4,2015, the articles of Hydro One were amended to authorize
the consolidation of its outstanding common shares such that 595,000,000 common shares of
Hydro One were issued and outstanding.
On November 5,2015, Hydro One completed its initial public offering on the Toronto
Stock Exchange by way of a secondary offering of common shares by the Province of Ontario,
with the goal of 60Yo of the company being held by private investors. The Province of Ontario is
a shareholder and pursuant to its governance agreement with Hydro One it does not hold or
exercise any managerial oversight over Hydro One. As of July 31,2017, the Province owned
49.9% of Hydro One's shares with the remainder of shares held by private investors. Based on
facts known today and assuming the Proposed Transaction is completed, the Province's level of
ownership of Hydro One willdecline to below 45Yo. ln addition, the Ontario Electricity Act, 1998,
restricts the Province from selling voting securities (including common shares of Hydro One) if it
would own less than 40%6 ofthe outstanding number of voting securities of that class or series after
the sale. If as a result of the issuance of additional voting securities of any class or series by Hydro
One, the Province would own less than 40 percent of the outstanding number of voting securities
of that class or series, then the Province shall, subject to certain requirements, take steps to acquire
as many voting securities of that class or series of voting securities as are necessary to increase the
Province's ownership to not less than 40 percent of the outstanding number of voting securities of
that class or series.
In order to assist the Province in meeting its ownership obligations under the Electricity
Act, l99S,underthegovernanceagreementwiththeProvince,HydroOnehasgrantedtheProvince
a pre-emptive right to subscribe for and purchase up to 45oh of any proposed issuance by Hydro
One of voting securities or securities that are convertible or exchangeable into voting securities
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 17
4l
42
13
(other than certain specified excluded issuances). Any offered securities not subscribed for and
purchased by the Province pursuant to its pre-emptive right may be issued to any other person
pursuant to the proposed offering. Accordingly, the requirement of the Province to maintain a
407o ownership interest in Hydro One does not constrain Hydro One's ability to issue more
equity. Hydro One is permitted to issue voting securities or securities that are convertible into or
exchangeable for voting securities at any time, provided that it must first give the Province the
opportunity to subscribe for the number of securities to which it is entitled pursuant to its pre-
emptive right before offering them to others.
Of Hydro One's 15 directors, all are independent of the Province within the meaning of
Canadian securities laws, and, with the exception of the President and Chief Executive Officer, all
of Hydro One's directors are independent of Hydro One.
Hydro One connects generating facilities operated by Ontario Power Generation ("OPG"),
Bruce Power Limited Partnership ("Bruce Power") and a number of other privately-owned
companies to its transmission and distribution systems. OPG is a Crown corporation wholly-owned
by the Province. OPG is responsible for approximately half of the electricity generation in the
Province of Ontario, Canada. Sources of electricity include nuclear, hydroelectric, wind, gas and
biomass.
Hydro One purchases power from these generating sources and delivers the power to its
retail customers. The costs of these power purchases are a "pass-through" to Hydro One's retail
customers, i.e., these customers pay a commodity power cost equal to that paid by Hydro One.
Hydro One's wholesale customers and its large-use customers that are market participants
purchase commodity directly and do not rely on Hydro One to purchase commodity for them.
Therefore, Hydro One has no material exposure to variations in the commodity cost of power.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - I8
45
46
47
Since 1998, Hydro One has successfully consolidated and integrated approximately 90
separate local distribution electric utilities with sensitivity and respect for the customers and
communities it serves and the numerous employees which have joined Hydro One through these
acquisitions. These customers are part of Hydro One's more than 1.3 million retail end-use
customers.
Hydro One is committed to the communities it serves, and has been rated as the top utility
in Canada for its corporate citizenship, sustainability, and diversity initiatives. It is one of only
four utility companies in Canada to achieve the Sustainable Energy Company designation from
the Canadian Electrical Association.
Hydro One has approximately 5,400 fulltime employees and 3,300 casual and temporary
employees (not including extemal contractors) with total assets of C$25 billion, annual revenues
over C$6.5 billion, and with a market capitalization of C$14 billion. Based on pro forma financial
information at March 31,2017, following the merger, Hydro One's total assets will increase from
approximately C$25.4 billion to approximately C$34.9 billion.
Hydro One is the largest electricity transmission and distribution company in Ontario.
Through its wholly-owned subsidiary, Hydro One Inc., Hydro One owns and operates substantially
all of Ontario's electricity transmission network with over 30,000 circuit kilometers (km)
(approximately 19,000 miles) of high-voltage transmission lines, and approximately 123,000
circuit km (approximately 77,000 miles) of low-voltage distribution network. The pricing and
terms and conditions of Hydro One's transmission and distribution operations (approximately 98%o
of Hydro One's revenues) are regulated by the OEB.
Hydro One has three business segments: (i) transmission; (ii) distribution; and (iii) other
business. The following corporate organization chart depicts the current relationship of Hydro One
JOINT APPLICATION FOR AN ORDER
AUTHORIZINC PROPOSED TRANSACTION - 19
18
and its primary operating subsidiaries (direct and indirect) that are referenced in this Joint
Application. Hydro One Networks Inc. owns and operates the transmission and distribution
systems. Hydro One Remote Communities Inc. and Hydro One Telecom Inc. will be briefly
explained later.
Illustration No. 1:
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%700%
Public Debt lssuer
700%700%
Rate Regulated Businesses
(98% of Revenues)
Non-Rate-Regulated Business
Hydro One's transmission business consists of owning, operating and maintaining its
transmission system, which accounts for approximately 98o/o of Ontario's transmission capacity.
Hydro One's transmission business is a rate-regulated business that receives revenues from
charging transmission rates approved by the OEB. Hydro One's transmission business accounted
for approximately 5l%o of Hydro One's total assets on December 31, 2016, and approximately
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION . 20
700%
49
Hydro One Limited
Hydro One lnc.2486267 Ontario lnc.
Hydro One Networks
I nc.
Hydro One Remote
Communities lnc.
Hydro One Telecom
I nc.
50
5lo/o of its total revenues, net of purchased power, in 2016. The following map depicts the
transmission network:
Illustration No.2:
Electric Transmission Svstem Map
Hydro One's distribution business consists of owning, operating and maintaining its
distribution system. Hydro One's distribution system is the largest in Ontario, and principally
serves rural communities. Hydro One's distribution business is a rate-regulated business that
receives revenues by charging distribution rates that are approved by the OEB. Hydro One's
distribution business accounted for approxim ately 37Yo of its total assets on Decemb er 31 , 2016,
and approximately 47%o of its total revenues, net of purchased power, in 2016. The following
map depicts the distribution footprint of Hydro One:
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 2I
hydrofi"
TmkrlmUrs
!{iglrYofogImnirdmlim
ll5tv
-
230 tv
-
500tv
truiricr
ft*rrtoorfioo
l) Exirtirg
4
A
r
t
trtr
xtI{IIO8 ONTARIO
,/
qrhrc
7
rflNffi
77I-17
r{&ltr{
71
M
51
52
Illustration No.3:
Electric Distribution Svstem Map
Through Hydro One Remote Communities Inc., Hydro One also operates and maintains
the generation and distribution assets used to supply electricity to 2l communities across northern
Ontario that are not connected to the Province's electricity grid, l5 of which are First Nations
reserves.T
Hydro One's other business segment consists principally of Hydro One's
telecommunications business (Hydro One Telecom Inc.), as well as certain other corporate
activities.s The telecommunications business provides telecommunications support for Hydro
7 The First Nations are the predominant Indigenous group of Canada south of the Arctic. There are currently 634
recognized First Nations govemments or bands spread across Canada, roughly half of which are in the provinces
of Ontario and British Columbia.8 Hydro One Telecom Inc. is not regulated by the OEB. lt is registered with the Canadian Radio-television and
Telecommunications Commission (CRTC) as a non-dominant, facilities-based telecommunications carrier.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 22
hydrofi*
os*
610.000 knzsice leriiory
o H*,
0isrihutbn
.5BftU
IrElv Yo*(
rcil
lt$tHtscra
r$CH|GAN
Tfllo{l&rH
d
oufuc
I
m
NTAR
\**
*l
v-
to
t
#-'o
fiffi
:fl ,.
X%ffi fiM ttrcl
d
!o
fiA} TOEJT
53
54
One's transmission and distribution businesses. The telecommunications business also offers
communications and information technology solutions to organizations with broadband network
requirements.
On July 19,2017, Standard and Poors ("S&P") affirmed an'A'long-term corporate credit
rating on both Hydro One and Hydro One Inc. On July 19,2017, Moody's affirmed the ratings of
Hydro One Inc.'s: (i) senior unsecured regular bonds (A3); (ii) senior unsecured medium-note
program ((P)A3); and (iii) senior unsecured commercial paper (P-2). On July 19,2017, the rating
agency DBRS (originally known as Dominion Bond Rating) expressed its view that, should the
merger be financed as contemplated in the announcement, it will have no impact on Hydro One
Inc.'s credit profile. The recent financial statements of Hydro One are included in Appendix 6,
including a copy of Hydro One's 2016 Annual Report and the 2016 Annual Information Form
filed with Canadian Securities regulators.
Avista Utilities, headquartered in Spokane, Washington, and an operating division of
Avista (not a subsidiary), provides electric and natural gas service within a 30,000 square mile
area of eastern Washington and northern ldaho.e Of Avista's approximate 378,000 electric and
342,000 natural gas customers (as of June30,2017),130,000 and 82,000, respectively, were ldaho
customers. Avista also serves approximately 30 retail electric customers in western Montana,
many of whom are Avista employees who operate Avista's Noxon Rapids generating facility.
Avista also provides natural gas distribution service in southwestern and northeastern Oregon. In
e Please see Appendix 9 for identification ofthe corporate officers ofAvista.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 23
IX. OVERVIEW OF AVISTA
55
56
57
2014, Avista acquired AEL&P, which serves electric power to approximately I 7,000 customers in
the City and Borough of Juneau, Alaska.
Avista operates a vertically-integrated electric system in Washington, Idaho, and western
Montana. Avista's owned generating resource portfolio includes a mix of hydroelectric generation
projects, base-load coal and base-load natural gas-fired thermal generation facilities, waste wood-
fired generation, and natural gas-fired peaking generation. Avista-owned generation facilities have
a total capacity of 1,925 MW, which includes 56Yo hydroelectric and 44oh thermal resources.
Avista has approximately 18,300 miles of primary and secondary electric distribution lines, and
has an electric transmission system of 685 miles of 230 kV lines and 1,534 miles of 115 kV lines.
Avista owns and maintains a total of 7,650 miles of natural gas distribution lines, and is
served off of the Williams Northwest and Gas Transmission Northwest (GTN) pipelines. Avista
is also one of the three original developers of the underground storage facility at Jackson Prairie,
which is located near Chehalis, Washington.
A map showing Avista's electric and natural gas service area in Washington, Idahoo
Montana and Oregon is provided below in Illustration No.4.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 24
58
Illustration No. 4:
On December 31,2016, Avista Utilities had total assets (electric and natural gas) of
approximately $5.0 billion (on a system basis), with electric retail revenues of $760 million
(system) and natural gas retail revenues of $294 million (system). In December 2016, the Utility
had 1,742 employees.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 25
! EloctricsenicrArca
ffifl trratcrscniccAror
I Ehctric.ld il.llnl G.s S!ruicrAr.t
IDAHO
?-tl riltLr
-1./
D
I
.t
I
OREGON
Ja
I
t]
aI
,
a
59
60
6l
Avista's credit ratings, assigned by S&P and Moody's are as follows
S&P Moody's
Corporate Credit Rating BBB Baal
Senior Secured Debt A-A2
Outlook Positive Stable
The recent financial statements of Avista are included in Appendix 6, including a copy of Avista's
Form 10-K filed with the Securities and Exchange Commission ("SEC") for the fiscal year ending
December 31,2016, and a copy of Avista's Form l0-Q filed with the SEC for the quarterly period
ending June30,2017.
X. POST-CLOSINGCORPORATESTRUCTURE
After the closing, Avista will be owned by Hydro One, through a series of wholly-owned
subsidiaries, as depicted in Illustration No. 5 below:
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 26
Illustration No. 5:
62 Avista will continue to issue debt financing, as needed. Hydro One will provide equity to
support Avista's capital structure that is designed to allow Avista access to debt financing under
reasonable terms on a sustainable basis.
Olympus Equity LLC is a debt-free, bankruptcy-remote entity. Following closing of the
Proposed Transaction, all ofthe common stock of Avista will be owned by Olympus Equity LLC,
a new Delaware limited liability company, and a wholly-owned indirect subsidiary of Hydro One.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 27
63
Hydro One lnc.
Hydro One Limited
(Ontario
Corporation)
(Ontario
Hydro One
Networks lnc,
Hydro One Remote
Communities lnc.
Olympus Holding
Corp. (Delaware
Corporation)
2486267
Ontario lnc.
Hydro One Telecom
lnc.
Olympus 1 LLC
(Delaware Limited
Liability Company)
Olympus 2 LLC
(Delaware Limited
Liability Company)
Olympus Equity LLC
(Delaware Limited
Liability Company)
Avista Corporation
(Washington
Corporation)
Avista Corporation
Subsidiaries
64
65
66
As noted, Olympus Equity LLC will be established as a bankruptcy-remote special purpose entity,
and will not have debt.lo
XI. POST-CLOSING AVISTA GOVERNANCE. MANAGEMENT AND
OPERATIONS
As explained earlier, as a result of the merger, Avista's customers and the communities
Avista serves will see little or no change in the operations of Avista, as compared to Avista's
operations prior to the Proposed Transaction. Hydro One and Avista believe that the partnership
they have forged will benefit customers in the years to come.
Avista customers will see immediate financial benefits in the form of proposed retail rate
credits (the "Rate Credits") beginning at the close of the Proposed Transaction, as well as
opportunities for additional longer-term benefits from efficiencies gained through the sharing of
best practices, technology and innovation. The communities Avista serves will see increased
charitable contributions and a continuation of the strong support Avista provides in economic
development and innovation.
The Merger Agreement provides for the retention of Avista's existing employees and
management team. Following the closing of the Proposed Transaction, Avista will be governed
by a nine member Board of Directors, with Scott Morris as the Chairman of the Board. Three
additional board members will be chosen by Avista. There will be a total of four Board members
r0 The structure has been set up to provide segregation between the US rate regulated business and the Ontario rate
regulated business, which is held through Hydro One Inc. Upon the closing of the Proposed Transaction, Avista
will be a wholly owned subsidiary of Olympus Equity LLC, which will be a bankruptcy-remote entity with no
debt. Together with the ring-fencing provisions described in Mr. Christopher Lopez's and Mr. Mark Thies's
testimony, this structure insulates Avista and its customers from any potential financial weakness at Olympus
Equity LLC or other entities up the chain from Olympus Equity LLC. Hydro One has created three intermediate
subsidiaries between Avista / Olympus Equity LLC and the Can Sub. The entities are created for Canadian tax
planning purposes and to manage intercorporate funds flows. This corporate structure will not result in any
additional costs to be recovered from Avista customers.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 28
67
68
referred to as Avista designees, and these Avista Board members (Avista designees) will choose
their successors. Of the five board members chosen by Hydro One, three of the five will reside in
the Pacific Northwest. The remaining two board members will be executives of Hydro One or one
of its subsidiaries. Therefore, the Avista Board will be a local board primarily consisting of either
board members chosen by Avista, and/or members who reside in the Pacific Nofthwest. Retaining
Avista's employees and management enables the combined company to satisfy its promises to
Avista's customers by assuring continuity in its business and operations after the close of the
Proposed Transaction.
State regulators and other stakeholders will see a continued focus by Avista on providing
safe and reliable service to customers, high customer satisfaction, and energy service at a
reasonable cost. The various provisions of the Merger Agreement are designed to enable Avista
to do so for the indefinite future.
XII. BENEFITS TO CUSTOMERS FROM THE PROPOSED TRANSACTION
There will be cost savings immediately following the close, such as reduced expenses
associated with the fact that Avista will no longer have publicly traded common stock. Some
savings will materialize with respect to filings with the SEC, including legal and accounting costs.
In addition, the post-close Avista Board of Directors will have fewer non-employee members,
which will result in lower costs. These cost savings are discussed in the testimony of Avista
witness, Mr. Thies. The total estimated annual cost savings to customers, on a system basis, for
Avista is approximately $1.7 million.
Avista and Hydro One are proposing to flow through to Avista's retail customers in
Washington, Idaho and Oregon a Rate Credit of $31 .5 million over a 1O-year period, beginning at
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 29
69
the time the merger closes.ll The Rate Credit consists of two components, and reflects an
increased level of savings in years 6-10 as illustrated in the table below.
Two-Step Rate Credit Prcposal
Annual Crcdit
Yean 1-5
Annual Crcdit
Yean 6-10
70
71
Total Crcdit
TotalCredit $2.65 Millbn $3.65 Millbn $31.50 Million
Oftetable Credit $1.70 Millbn $2.70 Millbn 522.00 Million
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 1O-year period. During the 1O-year period, the financial benefits of the Rate Credit
will flow through to customers either through a separate tariff schedule or through a reduction to
the underlying cost of service as these benefits are reflected in the test period numbers used for
ratemaking as described more fully below. At the time of the closing, the $2.65 million benefit
will be provided to customers through a separate Rate Credit, as long as the reduction in costs is
not already reflected in base retail rates for Avista's customers.
A portion of the annual total Rate Credit would be offsetable, as indicated in the table
above. To the extent Avista demonstrates in a future rate proceeding that cost savings, or benefits,
rr The AEL&P operations in the City and Borough of Juneau, Alaska, operate substantially independent of Avista
Utilities, and the 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 April 27 ,2011 . 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 a financial benefit to
Avista's Montana customers related to the Proposed Transaction. (lf 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.)
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 30
72
73
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 ofthe total Rate Credit that is not offsetable effectively
represents acceptance by Hydro One of a lower rate of return during the lO-year period.
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 reflected 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 foryears 6-10 will provide time forAvista and Hydro One to
identify and capture over time an increased level of benefits, directly related to the Proposed
Transaction, that can be flowed through to customers. As explained earlier, 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. Areas Hydro One and Avista
expect to prioritize in evaluating opportunities for cost savings include:
o Investing in innovation that could help both Hydro One and Avista to better meet their
customers' growing expectations for choice of energy supply and tools to manage
energy consumption and costs. Leveraging the innovation, research and development
investments of both companies could accelerate their ability to bring the benefits of
new ideas and technologies to their customers.
o Exercising their purchasing power at greater scale for equipment and materials.
. Providing mutual assistance during and after storm and emergency events.
. Employment of common technology platforms for outage management, distribution
management and other operations.
It will take time to identify 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.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 3I
71
75
76
Avista and Hydro One are not aware of any net increase in costs to Avista's customers
related to the Proposed Transaction.l2 Therefore, the annual Rate Credits proposed by the
companies represent an immediate net benefit to customers. Mr. Ehrbar explains in his testimony
the manner in which the Rate Credit is proposed to be flowed through to Avista's electric and
natural gas customers.
In addition to providing net benefits to customers through rate credits, the merger also
ensures there will be little to no change in the operations of Avista as a result of the Proposed
Transaction, as compared to Avista's operations prior to the Proposed Transaction. As explained
in previous sections, the Proposed Transaction does not target the elimination of jobs, or cost-
cutting that could potentially lead to a deterioration of customer service, customer satisfaction,
safety, or reliability.
XIII. PROTOCOL FOR DIRECT ASSIGNMENT OF COSTS BETWEEN AVISTA
AND HYDRO ONE
Following closing of the Proposed Transaction, to the extent Avista employees dedicate
time and incur costs related to the operations of Hydro One, those costs would be directly assigned
and billed to Hydro One, and would not be borne by Avista's customers. Likewise, should Hydro
One employees dedicate time and incur costs associated with Avista's operations, such costs would
be directly assigned and billed to Avista. If a Hydro One employee's time and costs are related to
Avista's regulated utility operations, the costs would be subject to review and approval by the
Commission prior to being recovered in retail rates.
r2 None of the costs associated with the Proposed Transaction will be flowed through to the customers of Avista or
Hydro One.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 32
77
78
79
80
The protocol for the direct assignment of costs between the two companies, and the
accounting treatment for the costs is included in the memorandum attached as Appendix 7.
xIv SATISFACTION OF THE PUBLIC INTEREST AND COMMITMENTS BY
JOINT APPLICANTS
Avista's choice to merge with Hydro One will allow Avista and its customers to benefit
from being a part of a larger organization (the benefits of scale), while at the same time preserving
local control of Avista, its culture and its way of doing business.
As explained earlier, following closing of the Proposed Transaction, Avista will continue
to have a local Board of Directors consisting primarily of either board members chosen by Avista,
and/or members that reside in the Pacific Northwest. The Avista Board will have the authority to
maintain Avista's headquarters in Spokane, Washington, to maintain its other office locations
throughout its service areas, to continue to operate under the same Avista name, to retain its
existing employees and management team (although CEO selection is subject to Hydro One
approval), and to ensure that Avista's culture and its way of doing business will continue for the
long-term.
Following the close of the Proposed Transaction, Avista's customers and the communities
it serves will see little or no change in the operations of Avista, as compared to Avista's operations
prior to the Proposed Transaction. Customers, however, will see immediate financial benefits in
the form of proposed retail Rate Credits beginning at the close of the Proposed Transaction, as
well as opportunities for additional longer-term benefits from efficiencies gained through the
sharing of best practices, technology and innovation. These immediate and longer-term benefits
will not otherwise occur absent the Proposed Transaction.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 33
8t
82
8-i
Following closing of the Proposed Transaction, the communities Avista serves will see
increased charitable contributions and a continuation of the strong support Avista provides in
economic development and innovation. Furthermore, Avista and Hydro One employees will see
increased opportunities as the two companies pursue efficiencies and innovation through the use
oftechnology, best practices and business processes.
The Delegation of Authority (Appendix 5) and the make-up of the post-closing Avista
Board of Directors ensure that Avista's culture and its way of doing business can continue for the
indefinite future. Under the Delegation of Authority, Hydro One's Board of Directors
acknowledges that Avista's Board will have the authority to review, authorize and approve certain
specific matters related to Avista, without any obligation to obtain separate authorization or
approval from the Hydro One Board. These operational matters are summarized in Section VI
above and are also set fonh in Exhibit B to the Merger Agreement (Appendix 2 to this Application).
Changes to these features of the Proposed Transaction require a two-thirds majority vote of the
Avista Board.
As part of this Joint Application for approval of the Proposed Transaction, Hydro One and
Avista offer other commitments in addition to the Delegation of Authority (summarized in Section
VI above). The commitments included in the Joint Application total 55 commitments offered by
Hydro One and Avista related to approval of the Proposed Transaction. The 55 commitments are
grouped together into the categories identified below. The master list of all 55 commitments is
attached as Appendix 8.
A. Reservation of Certain Authority to the Avista Board of Directors
1. Governance2. Business Operations
3. Local Presence/Community Involvement
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 34
81
85
B. Rate Commitments
C. Regulatory Commitments
D. Financial Integrity Commitments
E. Ring-fencing Commitments
F. Environmental, Renewable Energy, and Energy Efficiency Commitments
G. Community and Low-lncome Assistance Commitments
XV. OTHER REOUIRED APPROVALS
The Proposed Transaction was unanimously approved by the Boards of Directors of both
companies and is expected to close in the second half 2018. The Proposed Transaction must be
approved by Avista's shareholders. A proxy statement will be filed by Avista with the SEC in
September 2017, in preparation for a vote of Avista's shareholders related to approval of the
Proposed Transaction. Approvals are required by the WUTC, the IPUC, the OPUC, the MPSC,
the RCA, and FERC. All ofthese filings requesting approval are expected to be made on or around
the same date.
A filing for approval from the FCC will be made related to Avista's radio licenses. In
addition, clearance is required by the CFIUS, and compliance with applicable requirements under
the HSR Act, as amended, and the satisfaction of customary closing conditions.
XVI. JOINT APPLICANTS' WITNESSES SPONSORING TESTIMONY
For Avista:
Scott L. Morris, Chairman of the Board, President and Chief Executive Officer of Avista, will,
among other things, summarize the Proposed Transaction, the reasons why Avista chose to partner
with Hydro One, and will describe why the Proposed Transaction is in the best interests of Avista's
customers, communities, employees, and shareholders.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 35
86
87
88
89
91
92
90
Mark Thies, Senior Vice President, Chief Financial Officer and Treasurer of Avista, will describe
Avista from a financial perspective and will testify about the financial details of the Proposed
Transaction. Mr. Thies will also describe the corporate and financial structure commitments that
will be in place after completion of the Proposed Transaction, and how the Proposed Transaction
provides protection for customers by "Ring-Fencing" Avista and its customers from Hydro One
and its affiliates.
Kevin Christie, Vice President of Customer Solutions, will provide testimony describing how the
Proposed Transaction will be beneficial to Avista's customers. He will also explain Hydro One's
commitment to increase funding for Avista's philanthropic initiatives and maintain the support of
economic development initiatives, as well as a $2 million annual contribution to the Avista
Foundation.
Patrick Ehrbar, Director of Rates of Avista, will describe some of the regulatory commitments
being offered by the Joint Applicants, including testimony regarding proposed Rate Credits that
would be provided to customers if the Proposed Transaction is approved. He will also discuss the
assignment of any costs between Avista and Hydro One before and after the Proposed Transaction,
to prevent cross-subsidization. Finally, he will provide testimony related to the interaction of this
application and the Proposed Transaction with the pending general rate case currently before the
Commission.
For Hydro One:
Mayo Schmidt, President and Chief Executive Office of Hydro One, willdescribe Hydro One and
its business platforms, with a specific focus on its utility business. He will describe the Proposed
Transaction, explain the reasons for Hydro One's proposed purchase of Avista, and describe the
corporate structure of Hydro One and Avista after closing. Mr. Schmidt will also explain why the
Proposed Transaction is consistent with the public interest and provides a net benefit to Avista's
customers, and will explain that Avista's operations, once the Proposed Transaction closes, will
essentially be no different than Avista's current operations.
ChristopherLopez, Senior Vice President, Finance of Hydro One, will provide details regarding
Hydro One's corporate structure, Avista's place within that structure, Hydro One's capital
structure, the financial and accounting aspects of the Proposed Transaction, how Avista will
become a ring-fenced business under Hydro One, including the structural and financial
commitments to be provided by Hydro One, to ensure that the Proposed Transaction will not
expose Avista's customers to any risk of harm.
Ferio Pugliese, Executive Vice President, Customer Care and Corporate Affairs will provide an
overview of Hydro One from a customer care perspective, describing, among other things, the
various customer initiatives Hydro One has put into place to provide and enhance service to its
customers.
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 36
93
XVIL JOINTAPPLICANTS'REOUEST
WHEREFORE, Applicants respectfully request that the Commission issue an order
pursuant to Idaho Code $ 6l-328 authorizing Hydro One (through Olympus Equity LLC) to
acquire all of the outstanding common stock of Avista.
DATED: September /Y ,2017.
K&L GATES, LLP AVTSTA CORPORATION
BY BY
Partner,ISB t75 Meyer, ISB No. 8317
Elizabeth Thomas, Partner (pro hac vice
application pending)
Kari Vander Stoep, Partner (pro hac vice
application pending)
K&L Gates LLP
On Behalf of Hydro One Limited
Olympus Equity LLC
925 Fourth Avenue, Suite 2900
seattle, wA 98104-1158
Teresa. hi I [e-mail]
[e-mail]
kari.vanderstoep@kl gateg.Sm
Chief Counsel for Regulatory and
Govemmental Affairs
Avista Corporation
1411 E. Mission Ave., MSC-27
Spokane, WA 99220-3727
Dav id. meyer@av i stacorp.com
JOINT APPLICATION FOR AN ORDER
AUTHORIZING PROPOSED TRANSACTION - 37
D
DRAFT
Hydro One and Avista File for Regulatory Approval of Merger
On Sept. 14, 2017, Hydro One Limited and Avista Corporation filed a Joint Application with the ldaho Public
Utilities Commission (Commission) requesting regulatory approval of the proposed merger of the two companies
that was announced on July 19, 2017 . The Joint Application requested approval of the merger on or before Aug.
14,2019.
If approved by the Commission, following closing of the merger, Avista's customers and the communities Avista
serves will see little or no change in Avista's operations. Avista will maintain its existing corporate headquarters
in Spokane, Washinglon, and will continue to operate as a standalone utility in ldaho, Washington, Oregon, and
Montana. Avista will maintain office locations throughout its service areas, continue to operate under the same
Avista name and seek to retain its existing employees and management team. All of these features together with
other provisions embedded within the Merger Agreement are designed to ensure that Avista's customers will
continue to receive the service they have come to expect from Avista.
Please visit www.myavista.com for more information about the proposed merger and this filing.
The Joint Application is a proposal, subject to public review and a Commission decision. A copy of the Joint
Application is available for public review at the offices of both the Commission and Avist4 and on the
Commission's website (www.puc.idaho.gov). Customers may file with the Commission written comments relatedto the Company's filing. Customers may also subscribe to the Commission's RSS feed
(http://www.puc.idaho.gov/rssfeeds/rss.htm) to receive periodic updates via e-mail about the case. Copies of the
filing are also available on our website, www.myavista.com/rates.
The Commission will begin a comprehensive review of the Joint Application and will seek public input.
If you would like to submit comments on the filing, you can do so by going to the Commission website or mailing
comments to:
Idaho Public Utilities Commission
P. O. Box 83720
Boise, lD 83720-0074
AVA278i
APPENDIX 1
.-_l.:) *=;a
rT1
=l:3 -:
.t)
C,:i
CORPORATE STRUCTURE -
PRE. AND POST.CLOSE
Current Corporate Structure
The diagram below depicts the current relationship of Hydro One Limited and its primarv operatins
subsidiaries that are referenced in the Joint Application.
Public Company
(TSX: H)
700%700%
Public Debt lssuer
700%700%
Rate Regulated Businesses
(98% of Revenues)
100%
Non-Rate-Regulated Business
2486267 Ontario lnc.
Hydro One Networks
I nc.
Hydro One Remote
Communities lnc.
Hydro One Telecom
I nc.
Appendix 1 to Joint Application Page I of2
Hydro One Limited
Hydro One lnc.
Post-Closing Corporate Structu re
Appendix I to Joint Application Page2 of2
Hydro One lnc.
Hydro One Limited
(Ontario
Corporation)
Can
Hydro One
Networks lnc.
Hydro One Remote
Communities lnc.
(Ontario
Olympus Holding
Corp. (Delaware
Corporation)
Olympus 1 LLC
(Delaware Limited
Liability Company)
Olympus 2 LLC
(Delaware Limited
Liability Company)
Olympus Equity LLC
(Delaware Limited
Liability Company)
Corporation)
Avista Corporation
Subsidiaries
2486267
Ontario lnc.
Hydro One Telecom
lnc.
APPENDIX2
MERGERAGREEMENT
EXECUTION VERSION
AGREEMENT AND PLAN OF MERGER
Dated as of July 19,2017,
by and among
HYDRO ONE LIMITED,
OLYMPUS HOLDING CORP..
OLYMPUS CORP.
and
AVISTA CORPORATION
#5501530 r2
Appendix 2 to Joint Application Page I of70
Article I
TABLE OF CONTENTS
Page
The Merger
Closing
Effective Time.....
Effects of the Merger
Articles of Incorporation and Bylaws of the Surviving Corporation
Directors and Officers of the Surviving Corporation
Post-Merger Operations ...................
Effect on Capital Stock..................
Exchange of Certifi cates ................
Treatment of Performance Awards
Adjustments ................
Withholding Taxes......
.2
,2
,2
.2
.2
.2
.2
.J
.3
.4
.6
.8
.8
Section 1 .l
Section 1.2
Section 1.3
Section 1.4
Section 1.5
Section 1.6
Section 1.7
Article II Effect of the Merger on Capital Stock......... ..............3
Article III Representations and Warranties of the Company.. .....................8
Section 2.1
Section 2.2
Section 2.3
Section 2.4
Section 2.5
Section 3.1
Section 3.2
Section 3.3
Section 3.4
Section 3.5
Section 3.6
Section 3.7
Section 3.8
Section 3.9
Section 3.1 0
Section 3.1I
Section 3.12
Section 3.13
Section 3.14
Section 3.15
Section 3.16
Section 3.17
Section 3.1 8
Section 3.19
Organization, Standing and Corporate Power .........
Capitalization ..............
Authority; Non-contravention......
Governmental Approvals ................
Company SEC Documents; Undisclosed Liabilities
Absence of Certain Changes....
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...
..9
.,9
l0ll
lt
l2
.... I 3
....1 3
l3
.................1 4
................. I 5
................. I 6
.................1 6
................. I 6
............,,...17
t7
............... I 8
............... I 8
Article IV Representations and Warranties of Parent, US Parent and Merger
Section 4.1 Organization, Standing and Corporate Power
#5501 530. I 2
Company Shareholder Approval... .......................18
8
l8
Appendix 2 to Joint Application Page 2 of 70
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........
Non-Reliance on Company Estimates, Projections, Forecasts,
Forward-Looking Statements and Business Plans
Covenants
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
.... I 9
.... I 9
.... I 9
....20
....20
....20
....20
Article V
....20
......................21
......................21
...'..,.....,...,,....24
,,......,,,,,......,..26
)s
34
,'',,,'........34
...................36
...,.............,,37
Section 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
#5501 530. I 2
Conduct of Business
Preparation of the Proxy Statement; Shareholders Meeting
No Solicitation; Change in Recommendation..
Reasonable Best Efforts
Public Announcements ...........
Access to Information; Confi dentiality.....
Takeover Laws..........
Indemnification and Insurance...
Transaction Litigation ......
Section I 6...............
Employee Matters
Merger Sub and Surviving Corporation
No Control of Other Party's Business ..
Termination
Effect of Termination........
Termination Fees ..............
No Survival of Representations and Warranties
Fees and Expenses
Amendment or Supplement .............
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
5.1 I
5.12
5.13
5.t4
5.15
3l
32
32
32
Advice of Changes .........37
Financing Cooperation ......................37
Article VI Conditions Precedent.18
Conditions to Each Party's Obligation to Effect the Merger.....................38
Conditions to Obligations of Parent, US Parent and Merger Sub..............39
Conditions to Obligations of the Company .........40
Frustration of Closing Conditions............40
Article VII ..40
,40
.42
.42
Article VIII Miscellaneous..............44
.44
.44
.44
Page 3 of70Appendix 2 to Joint Application
ll
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
8.4
8.5
8.6
8.7
8.8
8.9
8.10
8.1 I
8.12
8.13
8.14
8.15
TABLE OF CONTENTS (CONT'D)
Page
Specific Enforcement .46
WAIVER OF JURY TRIAL.,..... ,,,...46Notices ........47
Severability ....................48
Definitions.....48
Transfer Taxes ...............57
Interpretation . . ..57
E,XHIBITS
EXHIBIT A - Governance Requirements
EXHIBIT B - Post-Closing Matters
#5s01 530. I 2
Appendix 2 to Joint Application
ill
Page 4 of70
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of July 19,2017 (this "Aglqem,enl"), is
entered into by and among Hydro One Limited, a corporation organized under the laws of the Province of
Ontario ("Parent"), Olympus Holding Corp., a Delaware corporation ("US Parent"), Olympus Corp., a
Washington corporation and a wholly owned Subsidiary of US Parent ("Merger Sub"), and Avista
Corporation, a Washington corporation (the "eernpgny"). Defined terms used herein have the respective
meanings set forth in Section 8.13.
WITNESSE TH
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 "Merger") on the terms and subject to the
conditions set forth in this Agreement;
WHEREAS, the board of directors of the Company (the "@pA!y__Boald") 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 ofeach ofParent and US Parent and their respective stockholders for each ofParent 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 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) 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
#ss01530.12
Appendix 2 to Joint Application Page 5 of70
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 l.l The Merger. Upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the WBCA, 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 "Surviving Corporation") and shall become, as a result
of the Merger, an indirect, wholly owned subsidiary of Parent.
Section 1.2 Closing. The consummation of the Merger (the "Closing") 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 "el-q!.i-ng_D.ate."
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 Secretary
of State") articles of merger (the "A4!s.l_98_qf_14_9lggl") executed in accordance with, and containing such
information as is required by, Section 238.11.050(l) 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 "Etle.gji.v.9_fim-9"). This Agreement
together with the articles of incorporation of the Surviving Corporation shall be deemed the "plan of
merger" under Chapter I I of the WBCA and shall be filed with the Articles of Merger pursuant to Section
238.11.050(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 Survivins 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 affached 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 Surviving Cornoration.
(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
#ss0l 530. I 2
Appendix 2 to Joint Application
2
Page 6 of70
respective successors are duly elected or appointed and qualified (including in accordance with Section l 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; provided, 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 aftached 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-Merser 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 Capital Stock. At the Effective Time, by virtue of the Merger and
without any action on the part of the Company, Parent, US Parent or Merger Sub or any holder of any shares
of common stock, no par value, of the Company ("Company Common Stock") or any shares of capital
stock of Merger Sub:
(a) Capital Stock of Merger Sub: Issuance of Common Stock by Surviving
Corporation. Each issued and outstanding share of capital stock of Merger 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 otherwise 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 "lVlgfggl
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 ("Book-EnIry.
Shares") and the holders of certificates that immediately prior to the Effective Time represented any such
#5501 530. r 2
Appendix 2 to Joint Application
3
PageT of70
shares of Company Common Stock (each, a "Certificate") 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(aXiii).
(d) Dissenters' Riehts. Notwithstanding 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 "Dissenting
Shareholder Shares", and each shareholder holding Dissenting Shareholder Shares, a "Dissenli-lg
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 238.13 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 238.13 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) Paying Aeent: Investment by Paying 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 "Payilg_4gen!") 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 deposit, 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) short-term obligations for which the full faith and credit of the United States
4
#5501 530 I 2
Appendix 2 to Joint Application Page 8 of70
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 purposes of paying the
Merger Consideration. No investment or investment 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 speciff that
delivery shall be effected, and risk of loss and title to the Certificates shall pass, orly 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 of payment 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 of this 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
that 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
#5501530 l2
Appendix 2 to Joint Application Page 9 of70
as otherwise provided for herein or by applicable Law. If at any time after the Effective Time, Cerlificates
are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as
provided in this Article IL
(d) Lost. Stolen or Destroyed 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, if required by the Surviving Corporation, the posting by such Person of a
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 the 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 property of any Governmental 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.
(f) No Liabilitv. Notwithstanding 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 official 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 settled)
shall be cancelled and the holder thereof shallthen 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
bewithheldinaccordancewithSection2'5.ForpurposesofthisAgreement,..@aId
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 ( I ) 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 thereof) 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
#5501 s30. I 2
Appendix 2 to Joint Application Page l0 of70
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 (l) 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,
treatment 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"), and each such Converted RSU shall not be accelerated except as provided in the original
related RSU agreement issued by the Company (the "RSU Agreement"). At the Effective Time, Parent
shall assume all obligations of the 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 shallcontinue 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 "EarcnL!-IIP"). 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
#5501530 12
Appendix 2 to Joint Application Page I 1 of70
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; provided. however, that nothing in this Section 2.4 shall be deemed to permit
or authorize any party 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, notiff 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 COMPANY
Except (a) as set forth in the disclosure schedule delivered by the Company to Parent
simultaneously with the execution of this Agreement (the "Companv Disclosu ") (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 forth 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 priorto 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:
#5501 530 I 2
Appendix 2 to Joint Application
8
Page 12 of70
Section 3.1 Organization. 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 orthe 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.
(b) Section 3.1(bXi) 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
3-]1iD0D 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 "S-qg.utid-g!_A-91") 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.
(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 Canitalization.
(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 Stock"). At the
close of business on July I 8, 201 7, (a) 64,411,244 shares of Company Common Stock were issued and
outstanding, (b) no shares of Company Preferred Stock were issued and outstanding, (c) I 09,089 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 tar get levels.
9
#5501 530. l 2
Appendix 2 to Joint Application Page l3 of70
(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 of the
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 the 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
of the 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, "Equitv 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 ofthe 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 par:ty to any voting
agreement with respect to the voting of any capital stock or voting securities of, or other equiry 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 authorize the execution and
delivery of, 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 "Bankruptcy and Equ ").
l0
#5501 530. I 2
Appendix 2 to Joint Application Page 14 of70
(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 referred
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 3.3(bXiii) 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 "Plqxy_Slalgrn_gnI"), and other filings required under, and
compliance with other applicable requirements of, the Securities Exchange Act of 1934 (the "Exchange
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 Statutorv Approvals"), no consents
or approvals of, or filings, declarations or registrations with, any Governmental 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 Comnanv 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 fumish 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 "Company SEC Documeffi"). 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 (the "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
#s501 s30. I 2
Appendix 2 to Joint Application
ll
Page 15 of70
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 I 0-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 permitted 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 l3a- l5 under the Exchange Act) as required by Rule I 3a- l5 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, summarized and 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 internal 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 I 3a- I 5 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 "&Lance_S,bee!!ate")
(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 1,2015 have been filed or furnished with the applicable Governmental
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 Chanses. 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
12
#ssol 530. I 2
Appendix 2 to Joint Application Page I 6 of70
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 Governmental Authority, that would
reasonably be expected to have a Company Material Adverse Effect.
Section 3.8 Compliance 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, "Laws") 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 Returns 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 couft 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 ofthe 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 party 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 not yet expired (excluding extensions of time to file Tax Returns obtained
in the ordinary course); (vi) neither the Company nor any Subsidiary of the Company had any liabilities for
unpaid Taxes as ofthe 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 arrangement, except for such an agreement or arrangement 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 qualify 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
13
#5501530.r2
Appendix 2 to Joint Application Page 17 of70
defined in Treasury Regulations Section I .601 I -4 in any Tax year for which the statute of limitations has
not expired; (xi) there are no Liens for Taxes on any of the assets of the Company or any or Subsidiary of
the Company (except for any Liens described in clause (a) ofthe definition of Permitted 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 Governmental 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 Return 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 property, personal property, capital stock, social
securify, unemployment, payroll, employee or other withholding, or other tax, including any interest,
penalties or additions to tax imposed by any Governmental Authority in connection with any of the
foregoing and (ii) ".IaX_B9IuIn!" 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 Emplovee Benefits Matters.
(a) Section 3. l0(a) of the 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 cuffent 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 401(a) of the Code (each, a "Company Pension Ph") 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 4971 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
t4
#s501530.12
Appendix 2 to Joint Application Page l8 of70
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 incurred 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
three 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.
(f) This Section 3.10 and Section 3.16 (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 Governmental Authority unilaterally
seeking to modifu, 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 of the 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
#s50t 530 l 2
Appendix 2 to Joint Application Page l9 of70
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 1 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 Propertv. 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 Properfy 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 ofthe 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 ".I4ke.qvels.latule.") or any similar provision in the Company
Charter Documents.
Section 3.14 Real Pronerty.
(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.
(b) Each of the Company and its Subsidiaries has such consents, easements, rights of
way, permits, licenses and other similar real property interests (collectively, "Rishts of Wav") 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
Appendix 2 to Joint Application Page 20 of70
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 Contract" 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 601(bXl0) 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 paffy 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 MaterialAdverse 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 labor union 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,aparry to,boundby,ornegotiatinganycollectivebargainingagreementorotherContract
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 3.16ft) 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 of the 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 1,2015, neither the Company nor any of its Subsidiaries has
engaged in any action that required notifications under the WARN Act.
t7
#5501 530 r 2
Appendix 2 to Joint Application Page2l of70
(d) Section 3.8 and Section 3.10 (in each case, to the extent related to labor and
employment matters) and this Section 3.16 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 ("BpIA_X4gqiL!_!yngh") 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.
Section3.l8 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 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 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 Corporate 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 carry 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.
#5501 530 r 2
Appendix 2 to Joint Application
18
Page 22 of 70
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 Equiry 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 Anprovals. 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 Washinglon 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.
l9
#5501530.12
Appendix 2 to Joint Application Page23 of70
Section 4.5 Ownership and Operations of Merser 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 willcollectively 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 oftheir 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 Ownership. None of Parent, US Parent orMerger Sub is, individually or
together with their respective "affiliates" and "associates" (as such terms are defined in Rule 12b-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 Lesal 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 Comnanv 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 of the adequacy and accuracy of all estimates, projections, forecasts and other forward-
looking information, as well as such business plans and forward-looking cost-related plans, furnished 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
#5501 530 l 2
Appendix 2 to Joint Application Page 24 of 70
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, waffanty, 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 Affiliateswith
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 of their 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 Governmental Authorities, employees, customers
and suppliers, and (y) the Company shall not, and shall not permit any of its Subsidiaries to:
#5501 s30. I 2
Appendix 2 to Joint Application Page25 of70
(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 of its capital stock, except (A) for the issuance of any 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;
21
(ii) redeem, purchase or otherwise acquire any of its outstanding shares of
capital stock, or any rights, warrants or options to acquire any shares of its capital stock, except (A)
pursuant to Company Material Contracts set fofth in Section 5.1(aXii) 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 satisfu Tax obligations with respect to RSUs and Performance Awards, or
acquisitions in connection with the forfeiture of RSUs and Performance Awards;
(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 equalto 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 by (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 reclassif, any shares of its
capital stock;
(iv) incur any Indebtedness in an outstanding principal amount in excess of
5250,000,000 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 ofthe 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(a)(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.I (aXvi);
(viii) (l) increase the compensation or benefits of any of its directors, executive
officers or Company Employees (gqytdgd 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-
22
#5501 530. l 2
Appendix 2 to Joint Application Page 26 of 70
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
Governmental 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, modify 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
#5501 530. I 2
Appendix 2 to Joint Application
23
Page27 of70
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, tornado, 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 pafi, 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; plovi_dgd, 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 Govemmental 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 Govemmental 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 Preparation of the Proxy 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
24
#5501 530 l 2
Appendix 2 to Joint Application Page 28 of 70
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 concerning 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 Statementwill 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. Ii 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. lf, 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 notifu 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 Sharehol@"); provided. however, that the Company shall
be permitted to delay or postpone convening the Company Shareholders Meeting (i) with the consent of
Parent, (ii) forthe absence of a quorum, (iii) to allow reasonable additional time for any supplemental or
25
#5501530 12
Appendix 2 to Joint Application Page 29 of70
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: Chanse 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 notifu 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 thereot) 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 ifthe 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) notifr 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 allmaterial respects (and in any event within the later of twenty-fow (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 thereo{). The Company shall not
terminate, amend, modifu, 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
#5501 530. l 2
Appendix 2 to Joint Application Page 30 of70
(c) Except as otherwise provided in this Agreement, neither the Company Board nor
any committee thereof shall (i)(A) withdraw, change, quali$r, withhold or modifu in a manner adverse to
Parent, or publicly propose to withdraw, change, qualifr, withhold or modift 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 l4D 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 (revided 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 "golpp4ny
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
be expected to lead to a Takeover Proposal (a "Company Acquisition Agreement").
(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) (l ) the Company provides Parent prior wriften notice
of its intent to make a Company Adverse Recommendation Change and terminate this Agreement
pursuant to Section 7. I (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(dXii), which notice shall specifr 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 (BXl), (2) and (3)
of this Section 5.3(d)(i) shall apply mutatis mutandis except that, in the case of such a new notice,
all references to four (4) Business Days in this Section 5.3(dXi) 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
#5501 530 r 2
Appendix 2 to Joint Application Page 31 of70
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 commiffee thereof) 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 Intervening Event Recommendation Change") (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 l4e-2(a) under the Exchange Act or making a statement
contemplated by Item l0l2(a) of Regulation M-A or Rule l4d-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, "Jakeever llqpel4l" 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 l5%o 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) l5% 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
#ss0l 530 I 2
Appendix 2 to Joint Application Page 32 of70
(g) As used in this Agreement, "Superior Proposal" 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 of the definition of Superior Proposal, the references to "150lo" 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
Governmental 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 Governmental 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 party 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) furnish
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
#5501 530. I 2
Appendix 2 to Joint Application Page 33 of70
(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 Govemmental Authority regarding the filings and
submissions described in Section 5.4(a), (ii) keep the others reasonably infomed of any developments,
meetings or discussions with any Governmental Authority in respect of any filings, investigations, or
inquiries concerning the Transactions and (iii) not independently participate in any meeting or discussions
with a Governmental Authority in respect of any filings, investigations or inquiries conceming the
Transactions without giving the other parfy or parties hereto prior notice of such meeting or discussions
and, unless prohibited by such Govemmental 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 S-gclipnlj, 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 Governmental 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 "Remedial Action");
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, inthe eventthatany litigation orotheradministrative orjudicial action
or proceeding is commenced, threatened or is reasonably foreseeable challenging any of the 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 priorto 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 permanent, 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.
(f) 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
#5501530 l2
Appendix 2 to Joint Application Page 34 of70
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
Governmental 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 Governmental 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 notify 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.
#5501 530. I 2
Appendix 2 to Joint Application
3l
Page 35 of70
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 7.1, 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 furnish 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); Eovided 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; plov.i-dg( fufther,
(i) 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 parfy, jeopardize the protection of the attorney-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 "ConfidentialiY Agreement"), 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 "lndemnitee" and, collectively, the "lndemnitees") 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
#s501 530. I 2
Appendix 2 to Joint Application Page 36 of70
have occurred before or at the Effective Time (including any Claim relating in whole or in parl 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 of directors' 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;
provided, however, that, after the Effective Time, none of Parent, US Parent or the Surviving Corporation
shallbe required to pay annual premiums in excess of 300% of the annualpremium 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; plovj_ded, 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 ofthis Section 5.8 are (i) intendedto be forthe 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 oi 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
JJ
#5501 530. I 2
Appendix 2 to Joint Application Page37 of70
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 of such 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 notifi the other
promptly of the commencement of any shareholder litigation relating to this Agreement or the Transactions
of which it has received notice ("Transaction Litigation"), 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 reporling 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 l6b-3 promulgated under the Exchange Act.
Section 5.1I Emplovee Matters.
(a) For a period of three (3) years following the Effective Time (the "fuli.nua1qjon,
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 of performance 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, Paront 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
#5501 s30. I 2
Appendix 2 to Joint Application Page 38 of70
Effective Time, to the same extent as such Company Employee was entitled, before the Effective Time, to
credit for such service under any Company Plan 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 Health Plan") 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). "Eli€liblgnglilgg!"
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 "Old Plans"), and (2) for purposes of each New Plan providing medical, dental,
pharmaceuti cal andlor 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 satisfring 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.ll(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 affangements and agreements in
accordance with their terms as in effect immediately before the Effective Time (including the Executive
35
#5501 530. l 2
Appendix 2 to Joint Application Page 39 of70
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 2018 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 201 8 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 5.1l, 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
implement 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.I I
are solely for the benefit of the parties to this Agreement, and no provision of this Section 5.1 I 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 Survivine 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 of the Restructuring; provided that any obligation
to cooperate shall be limited to the same extent provided under Section 5.15(b); provided, further, that in
no event shall the failure to comply with this Section 5.I 2(b) give rise to a failure of the condition in Section
6.2(b\ to be satisfied.
#ss0l s30. I 2
Appendix 2 to Joint Application
36
Page 40 of70
(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. I 2(b), and (ii) indemnifu 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 other than in the case offraud
(d) At or prior to the Effective Time, Parent shall adopt the instrument set forth in
Section 5.12 of the Parent Disclosure Schedule, with regard to the matters set forth in Exhibit A and Exhibit
B.
Section 5.13 No Control of Other Party'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 Chanees. 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 notiff 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 FinancinsCooperation.
(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 "Eilgrci!€t"), 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) fumishing Parent and its Affiliates such other information concerning the
JI
#5501 530.1 2
Appendix 2 to Joint Application Page 4l of70
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 preparc pro
forma financial statements or proforma adjustments reflecting the Financing or the Transactions (plgyrdgd
that the Company shall otherwise cooperate with the preparation of such pro forma financial statements
andproforma 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 (l) 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 of doubt, the foregoing clause (2) shall not be relied upon to prevent the Company or any of its
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 forty-five (45) days,
or sixty (60) days in the case ofan annual period, prior to the date ofsuch 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)indemnifu
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 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 Party'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
#5501 530 I 2
Appendix 2 to Joint Application Page 42 of70
(a) Company Shareholder Approval. The Company Shareholder Approval shall have
been obtained
(b) Regulatory 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 "Bggul-alqry_Applqvab"), 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 Mereer 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 3.6(b) 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 3.6(b) 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 ofsuch 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 certirying 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.
#5501 530 I2
Appendix 2 to Joint Application
39
Page 43 of70
Section 6.3 Conditions to Oblisations of the Companv. 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 ofsuch 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 Mereer 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"); plqvjd_gd 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"); plov_ldgd,
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 (l) the failure
to satisfr 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
#ss0l 530 1 2
Appendix 2 to Joint Application
40
Page 44 of 70
(ii) ifany Law having the effect set forth in Section 6.1(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 "Restraint"), shall have become final and non-appealable;
provided. however, that the right to terminate this Agreement under this Section 7.1(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; provided 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 6.3(b), 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 thirry
(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(dXi) 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 7.1(d)(ii) 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
#5501 530. I 2
Appendix 2 to Joint Application Page 45 of70
(plgyrdgd 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_Sec!iod_6(b)). 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 concurrently with the termination of this Agreement.
(b) In the event that this Agreement is terminated by Parent pursuant to Section
7.1(cXii), 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 7.1 (bXi) or Section 7. l(bXiii) or (B) by Parent pursuant to Section 7.1(c)(i) (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(bXi) or Section 7.1(c)(i), prior to the date of such termination, or (y) in
the case of termination pursuant to Section 7.I(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 (provided that for purposes
of clause (iii) of this Section 7.3(c), the references to "15oZ" in the definition of Takeover Proposal shall be
deemed to be references to "50o%"), 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) For purposes of this Agreement, "Company Termination Fee" shall mean an
amount equal to S I 03,000,000.
42
#5501 530 l2
Appendix 2 to Joint Application Page 46 of70
(e) Parent shall pay or cause to be paid to the Company a fee of $ 103,000,000 in cash
(the "Parent Termination Fee") if:
(i) this Agreement is terminated by Parent or the Company:
(A) pursuant to Section 7.1(bXi) and, at the time of such termination,
any ofthe 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.I(bXii) (if, and only if, the applicable
Restraint giving rise to such termination arises in connection with the Regulatory
Approvals); or
(ii) this Agreement is terminated by the Company pursuant to Section 7.1(dXi)
because of a failure by Parent, US Parent or Merger Sub to comply with their obligations under
Section 5.4;
plgyjdgd that, at the time of any such termination described in clause (i) or (ii) ofthis Section 7.3(e),
the conditions to the Closing set forth in Section 6.1(a) and Section 6.2 (otherthan 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, officers, 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 7.3(h) 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 7.3(h), 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
#5501 530. r 2
Appendix 2 to Joint Application Page 47 of70
(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 party 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 7.3ft) 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 attorneys' 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 rale 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 Renresentations 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 Confidentialiry
Agreement shall (a) survive termination of this Agreement in accordance with its terms (as modified in
Section 5.6(b)) or (b) terminate as of the Effective Time.
Section 8.2 Fees and Exoenses. 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 party hereto incurring or required
to incur such fees or expenses.
Section 8.3 Amendment or Supplement. 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 parties hereto and delivered by duly
44
#5501 530 r 2
Appendix 2 to Joint Application Page 48 of70
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 parfy 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 party 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 of, and be enforceable by, the parties hereto and their
respective successors and permitted assigns. Any purported assignment not permitted under this Section
8.5 shall be null and void.
Section 8.6 Counterparts. 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 Agreement: 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
other than 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 Governine 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
#5501 530 I 2
Appendix 2 to Joint Application Page 49 of70
jurisdiction other than the State of Delaware, except that matters related to the fiduciary obligations of the
Company Board and matters that are specifically required by the WBCA in connection with the
Transactions shall be governed by the laws of the State of Washinglon.
(b) Each of the parties hereto (i) irrevocably submits itself to the personaljurisdiction
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 (pleytdgd 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 courl 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 couft, (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
couft, and (v) waives any defense of inconvenient forum to the maintenance of any suit, action or
proceeding so brought.
(c) Each party 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, return receipt
requested, to its address as specified in or pursuant to this Article VIII. However, the foregoing shall not
limit the right of aparty hereto to effect service of process on any other party hereto by any other legally
available method.
Section 8.9 Snecific 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 ofthe provisions ofthis 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 equiry.
If any parfy 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 PERIT{ITTED BY APPLICABLE LAW, ANY RIGHT IT MAY
HAVE TO A TRIAL BY JURY IN RESPECT OF ANIY 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
#5501 530. l 2
Appendix 2 to Joint Application
46
Page 50 of70
AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVER AND
CERTIFICATIONS IN THIS SECTION 8.I0.
Section 8.11 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 (provided, that the same is sent by overnight 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, 8th Floor
Toronto, Ontario M5G 2P5
Attention: James Scarlett, Executive Vice President and Chief Legal Officer
Facsimile: [phone]
Emai I : [e-mail]
with a copy (which shall not constitute notice) to:
BracewellLLP
l25l 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.l ark@brac ewe I l. c o m
el ena. rubinov@bracewel l.com
If to the Company, to:
Avista Corporation
l4l I East Mission Avenue
Spokane, Washington 99220
Attention: Marian Durkin, Senior Vice President, General Counsel, Corporate Secretary
and Chief Compliance Officer
Facsimile: [phone]
Email: [e-mail]
47
#5501 530.1 2
Appendix 2 to Joint Application Page 5l of70
with a copy (which shall not constitute notice) to
Kirkland & Ellis LLP
655 Fifteenth Street, N.W.
Washington, D.C.20005
Attention: George P. Stamas
Alexander D. Fine
Brendan J. Reed
Facsimile: [phone]
Emails: [e-mail]
al exander. fi ne@kirkl and. com
brendan.reed@ki rkland. com
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 modifr 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:
"Acceptable Confidentialitv Agreement" shall mean a confidentiality agreement (which need not
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 Dividends" 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.
"Afi]iglq" 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.
"Aglgeru-qn1" 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.
48
#5501 530. l 2
Appendix 2 to Joint Application Page 52 of70
"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.
"B_alancejhset Date" shall have the meaning set forth in Section 3.5(d).
"Bankruptcy and Equity Exception" shall have the meaning set forth in Section 3.3(a).
"BofA MerrillLynch" shallhave the meaning set forth in Section 3.17.
"b,k-Enlry Shares" shallhave the meaning set forth in Section 2.1(c).
"Burdensome Condi " 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 hypotheticalcompany 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 provided, further,
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.
"Business 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" shall have 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.
"eg4jlg3[g" shall have the meaning set forth in Section 2.1(c).
"gIfUS" means the Committee on Foreign Investment in the United States and each member
agency thereofacting in such capacity.
"CFIUS Approval" shall mean any ofthe 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 SectionT2l orthere are no unresolved national
security concerns; (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 "Plegi_den1"), 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.
#5501 530 l 2
Appendix 2 to Joint Application
49
Page 53 of70
"Claim" shall have the meaning set forth in Section 5.8(a).
"Clayton Act" shall mean the Clayton Act of 1914, as amended.
"elpqi!.gi" shall have the meaning set forth in Section 1.2.
"Closing Date" shall have the meaning set forth in Section 1.2.
"Code" mean the U.S. Internal Revenue Code of 1986, as amended.
(reglqpry" shall have the meaning set forth in the Preamble
"Company Acquisition Agreement" shall have the meaning set forth in Section 5.3(c).
"Companv Adverse Recommendation Change" shall have the meaning set forth in Section 5.3(c).
"Company Board" shall have the meaning set forth in the recitals.
"Company Board Reco " shall have the meaning set forth in Section 3.3(a).
"Company Charter Documents" 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 Schedule" shall have the meaning set forth in the Article III.
"Comoany Employee" shall have the meaning set forth in Section 5.1 I (a).
"Company Intervenin " shall mean any circumstance, development, change, event,
occurrence or effect that (l) 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; plqvidgd, however, that neither a Takeover Proposal nor any consequence
thereof shall constitute a Company Intervening Event.
"Company Joint Venture" shall mean any Person that is not a Subsidiary of the Company, in which
the Company owns directly or indirectly an equity interest.
"Comoany 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; @jidgd 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
#5501 530. l 2
Appendix 2 to Joint Application Page 54 of70
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 of the 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 eamings
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 ofits
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 electriciry,
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 of each of clauses (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 Contract" 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).
"Company 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 parry 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 parry 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
#5501530.12
Appendix 2 to Joint Application Page 55 of70
"Company Preferred Stock" shall have the meaning set forth in Section 3.2(a).
'Company netirea gmp " shall have the meaning set forth in Section 5.1 l(b).
' Company netiree Hea " shall have the meaning set forth in Section 5.1 I (b).
"Company SEC Documents" shall have the meaning set forth in Section 3.5(a).
"Company Shareholder Approval" shall have the meaning set forth in Section 3.19.
"@" shallhave the meaning set forth in Section 5.2(b),
"e-e[pgly_Slqgk_PlAnl" 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 Agreement" shall have the meaning set forth in Section 5.6(a).
"e-enltnuatj_qn J_gliod" shall have the meaning set forth in Section 5.1l(a).
((Contract" 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).
"Dissenting Shareholder" shall have the meaning set forth in Section 2.1(d).
"Dissenting Shareh " shall have the meaning set forth in Section 2.1(d).
"Effectivg Jj-me" shall have the meaning set forth in Section 1.3.
"Eligible Retirees" shall have the meaning set forth in Section 5.1l(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 Properfy shall not constitute an Encumbrance.
s'End Date" shall have the meaning set forth in Section 7.1(bXi).
"Environmental Laws" shall mean all Laws relating to workplace safety or health, safety in respect
of the transportation, storage and delivery of natural gas, pollution or protection of the 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.
"Equitv Secudli-Qg" shall have the meaning set forth in Section 3.2(b).
#5501 s30. l 2
Appendix 2 to Joint Application
52
Page 56 of70
"ERISA" shall mean the Employee Retirement Income Security Act of 1974.
"ERISA Affiliate" shall mean each corporation or trade or business that is treated as a single
employer with the Company pursuant to Section 4001(bXl) of ERISA or Section 414(b), (c), (m) or (o) of
the Code.
"Exchange Act" shall have the meaning set forth in Section 3.4.
"Exchanse Ratio" 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 of Control Agreements" 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.l3(EC) of the Company Disclosure Schedule.
"Eee" shall mean the Federal Communications Commission.
"FCC Aporoval" 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.
"Federal Trade Commission Act" shall mean the Federal Trade Commission Act of 1914, as
amended.
"FERC" shall mean the Federal Energy Regulatory Commission
"E\1Qlpryl" shall mean FERC authorization of the Merger pursuant to Section 203 of the
Federal Power Act of 1935, as amended.
"Final Order" 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.
(!EjIA@" shall have the meaning set forth in Section 5.15(a).
"GAAP" shall mean generally accepted accounting principles in the United States.
"Govemmental Authori8" shall mean any U.S. or foreign federal, state or local, provincial or local
governmental authority, court, government or self-regulatory organization, 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
nongovemmental 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
#5501 530 I 2
Appendix 2 to Joint Application Page57 of70
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
"Indebtedness" 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 counterparfy
thereto, (d) all capitalized lease obligations of such Person and (e) all guarantees or other assumptions of
liability for any of the foregoing.
"@jlee(!)" shall have the meaning set forth in Section 5.8(a).
"lntellectual Propefi" 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, internet domain
names, and any applications forregistration of any of the foregoing, togetherwith 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.
"lPIJC" shallmean the Idaho Public Utilities Commission.
"lR$" shall mean the U.S. Internal Revenue Service.
"Jgdg4g4" shall mean a judgment, injunction, order, decree, ruling, writ, assessment or arbitration
award of a Governmental Authority of competent jurisdiction.
"Knowledge" 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 8.13(b) of the Parent Disclosure
Schedule.
6'La\ils" shall have the meaning set forth in Section 3.8.
!'LjEn!" shall mean any pledges, liens, charges, Encumbrances, options to purchase or lease or
otherwise acquire any interest, and security interests ofany kind or nature whatsoever.
"MgIgpI" shall have the meaning set forth in the recitals.
"Merger Consideration" shall have the meaning set forlh in Section 2.1(c).
"Merger Sub" 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 00l(a)(3) of ERISA
subject to Title IV of ERISA to which Company or its ERISA Affiliates makes contributions.
"W!lgn!" shall have the meaning set forth in Section 5.11(b).
"Notice of Interven " shall have the meaning set forth in Section
s.3(dxii).
54
#5501 530. I 2
Appendix 2 to Joint Application Page 58 of70
"Notice of Superio " shall have the meaning set forth in Section
s.3(d)(i).
"NYSE" shall mean the New York Stock Exchange.
r'Old Plans" shall have the meaning set forth in Section 5.1 I (b).
"OPfJC" shall mean the Public Utility Commission of Oregon.
"Parent" shall have the meaning set forth in the Preamble.
"EArenlBoArd" shall mean the board of directors of Parent.
"Parent Disclosur " shall have the meaning set forlh in Article IV.
"@n!I-TIB" 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).
"Payinq Asent" shall have the meaning set forth in Section 2.2(a).
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Performance 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.
"Performance Award Amount" shall have the meaning set forth in Section 2.3(a).
"Permitted Encumbrances" 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 properry 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.
"Permitted Liens" 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.
#5501 530. I 2
Appendix 2 to Joint Application
55
Page 59 of70
'rPerson" shall mean an individual, corporation, limited liability company, paftnership, association,
trust, unincorporated organization, other entity or group (as defined in the Exchange Act or the securities
laws of Canada), including a Governmental Authority.
"Prim-g_Ba1g" 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.
"RCA', shall mean the Regulatory Commission of Alaska.
'BegUlAIgIy Apggygls" 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.
"Bemedigl44i-qn" shall have the meaning set forth in Section 5.4(d).
"Representatives" shall mean, with respect to any Person, the professional (including financial)
advisors, attorneys, 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 Approvals" shall have the meaning set forth in Section 3.4.
"Restraint" shall have the meaning set forth in Section 7.I (bXii).
'BCSltUgtq[g" 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 written consent of the Company (not to be
unreasonably withheld), such othertransactions relating to the restructuring of the ownership of Merger
Sub as Parent may reasonably request in order to facilitate Parent's internal financing arrangements
associated with the Transactions.
"Rights of Way" shallhave the meaning set forth in Section 3.14(.b).
"BSU" 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.
"RSU,_AgIeemen!" shall have the meaning set forth in Section 2.30).
"Sarbanes-Oxley Act" shall have the meaning set forth in Section 3.5(a).
"SEC" shall mean the U.S. Securities and Exchange Commission
"Securities Act" shall have the meaning set forth in Section 3.1(b).
"Sherman Act" shall mean the Sherman Antitrust Act of 1890
56
#5501 530. I 2
Appendix 2 to Joint Application Page 60 of70
"Slblidj4ry." 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 50% of the ordinary voting power (or, in
the case of a limited partnership, more than 50Yo of the general partnership interests) are, as of such date,
owned by such party or one or more Subsidiaries of such party 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.
"Sufgliel_P1glpSal" shall have the meaning set forth in Section 5.3(g).
'Sg1yly14glglpel4!g!" shall have the meaning set forth in Section l L
"Takeover 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_BeIUre" shall have the meaning set forth in Section 3.9(b).
"Taxes" shall have the meaning set forth in Section 3.9(b).
"Tl4n9egl!-qn_Ljli&U_qn" shall have the meaning set forth in Section 5.9.
"Transactions" refers collectively to this Agreement and the transactions contemplated hereby,
including the Merger and the Financing.
"TSX" shall mean the Toronto Stock Exchange.
"Un!on" shall have the meaning set forth in Section 3.16(a).
"IJS Parent" shall have the meaning set forth in the Preamble.
"Washington Secretary of State" shall have the meaning set forth in Section l 3.
"WARN Act" 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.
"\ irBCA" shall have the meaning set forth in the recitals.
"Ue" 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.
Section 8.15 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
#ss01 530 I 2
Appendix 2 to Joint Application Page 61 of70
(b) Dollars. Unless otherwise specifically indicated, any reference herein to
S 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 Headings. 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 of contents 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."
(f) 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.
(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 furlher 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.
O 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 par} 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
#5501530.t2
Appendix 2 to Joint Application
58
Page 62 of 70
(g) Contracts: Laws. Any Contract or Law defined or referred 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.
cause the taking of such action, the refraining from taking such action or the making of such decision or
determination.
fSi gnat ur e p age fo I low sl
#5s01 530. I 2
Appendix 2 to Joint Application
59
Page 63 of70
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:t}+
Name: Scott Morris
Title: Chairman, President and Chief
Executive Officer
HYDRO ONE LIMITED
By:
OLYMPI"]S CORP
By:
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:
Appendix 2 to Joint Application
lSignature Page to Merger Agreementj
Page 64 of 70
IN WTNESS 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
OLYMPUS HOLDING CORP.
By:
Schmidt
Title: President and Chief Executive
Officer
OLYMPUS CORP.
Schmidt
President and Chief Executive
Officer
Appendix 2 to Joint Application
lSignature Page to Merger Agreementl
Page 65 of70
By:
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 "Sole
Shareholder Desiqnees"); (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
"Company Designees"), and (x) the initial Chairman of the 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;
2. Sole Shareholder shall have the unfettered right to designate, rcmove 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;
#55093 14.6Appendix 2 to Joint Application Page 66 of70
5. not less than three (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.
#s5093 14.6Appendix 2 to Joint Application
a-L-
Page67 of70
EXHIBIT B
POST-CLOSING MATTERS
Operational C ommitments
l. 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
teruitories 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
Tirne 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 irurovation activities; and
8. maintain the Surviving Corporation's and its Subsidiaries' safety and reliability standards and
policies and service 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.
#55093 13.6Appendix 2 to Joint Application Page 68 of70
Governance Matters
1. 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 "Eubddiagf Eoafd") to consist
of nine (9) members, determined as follows: (i) two (2) directors designated by the sole
shareholder of the Surviving Corporation ("Sqlg ShAlghqldgl') 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!e
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 Director's 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 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 paragraph 2
immediately above.
Additional Matters
Negotiate, enter into, modiff, atnend, 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 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 2/3 of the directors that an amendment would be in the
best interest of the Surviving Corporation, taking into account relevant regulatory considerations.
app.ndfiol'l8ulo int Appl ication
-2-
Page 69 of70
APPROVAL REOUIREMENTS
Operational Mqtters
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 curent 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 Organizat ional Mqtter 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, 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.
#s5093 I3.6Appendix 2 to Joint Application Page 70 of70
ra
'.ji i-l
;7
l_\a
Lj
i.::
i':
.*-
(..":)
{fI
ELECTRONIC DOCUMENT ROOM -
APPENDIX 3
DOCUMENT LIST
1.0
2.0
Appendix 3
Hydro One Limited
Electronic Data Room lndex
Corporate Records
1.a Articles of lncorporation
1.a.1 Hydro One Limited - Articles of Amendment - November 4,2015
1.a.2 Hydro One Limited - Articles of Amendment - October 30, 2015
1.a.3 Hydro One Limited - Articles of lncorporation - August 31, 2015
1.b Bylaws
1.b.1 Hydro One Limited - By-Law No. 1 - August 31,2015
1.c OrganizationCharts
1.c.1 Hydro One Limited and Hydro One lnc. - Executive Team Org Chart -
August 24,2017
1.c.2 Appendix 1 - Hydro One Limited Corporate Structure (Pre- and Post-
Closing)
1.d Merger Agreement
1.d.1 Hydro One Limited and Avista - Agreement and Plan of Merger - July 19,
2017
1.e Annual Report to Stockholders
1.e.1 Hydro One Limited - Annual Report -2016
1.e.2 Hydro One Limited - Annual Report -2015
1.e.3 Hydro One Limited - Cover Letter_Filing of Amended Annual Report -
March 10,2016
Financial Documents
2.a lndentures
2.a.1 Hydro One Limited - Trust lndenture - August 9,2017
2.b Other Financial Documents
2.b.1 Hydro One Limited - lnstalment Receipt and Pledge Agreement - August
9,2017
2.b.2 Hydro One Limited - UNDERWRITING AGREEMENT for Convertible
Debentures - July 25,2017
2.b.3 Hydro One Limited - UNDERWRITING AGREEMENT for Secondary
Offering of Common Shares by Shareholder - May 10,2017
2.b.4 Hydro One Limited - UNDERWRITING AGREEMENT for Secondary
Offering of Common Shares by Shareholder - April 7,2016
2.b.5 Hydro One Limited and Hydro One lnc. - Underwriting Agreement -
October 29,2015
2.b.6 Hydro One Limited - Secondary Offering Short Form Prospectus - August
1,2017
2.b.7 Hydro One Limited - Preliminary Short Form Prospectus - July 25,2017
2.b.8 Hydro One Limited - PROSPECTUS SUPPLEMENT to Short Form Base
Shelf Prospectus dated March 30 2016 - May 10,2017
2.b.9 Hydro One Limited - Final Short Form Base Shelf Prospectus - March 30,
2016
Appendix 3 to Joint Application Page 1 of 10
2.b.10
2.b.11
2.b.12
2.b.13
2.b.14
2.b.15
2.b.16
2.b.17
2.b.18
2.b.19
2.b.20
2.b.21
2.b.22
2.b.23
2.b.24
2.b.25
2.b.26
2.b.27
2.b.28
2.b.29
2.b.30
2.b.31
2.b.32
2.b.33
Appendix 3
Hydro One Limited
Electronic Data Room lndex
Hydro One Limited - Preliminary Short Form Prospectus - March 23,2016
Hydro One Limited - Secondary Offering Supplemented Prep Prospectus
- October 29,2015
Hydro One Limited - Secondary Offering IPO Prospectus - October 29,
2015
Hydro One Limited - BASE PREP PROSPECTUS - October 28,2015
Hydro One Limited - AMENDED AND RESTATED PRELIMINARY BASE
PREP PROSPECTUS - October 9, 2015
Hydro One Limited - PRELIMINARY BASE PREP PROSPECTUS -
September 17 ,2015
Hydro One Limited - Debentures Term Sheet - July 19, 2017
Hydro One Limited - Secondary Offering of Common Shares Term Sheet
- May 8,2017
Hydro One Limited - Management Report and Audited Financial
Statements ending December 31 2016 and 2015
Hydro One Limited - Management Report and Audited Financial
Statements ending December 31,2015 and2014
Hydro One Limited - MD&A ending June 30 2017 and2016
Hydro One Limited - MD&A ending March 312017and2016
Hydro One Limited - MD&A ending December 31 2016 and 2015
Hydro One Limited - MD&A ending September 30 2016 and 2015
Hydro One Limited - MD&A ending June 30 2016 and2015
Hydro One Limited - MD&A ending March 30 2016 and 2015
Hydro One Limited - MD&A ending December 312015 and2014
Hydro One Limited - CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
ending June 30 2017 and2016
Hydro One Limited - CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
ending March 312017 and 2016
Hydro One Limited - CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
ending September 30 2016 and 2015
Hydro One Limited - CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
ending June 30 2016 and 2015
Hydro One Limited - Balance Sheets Unaudited September 30 2015 and
August 31 2015
Hydro One Limited - CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
ending March 31 2016 and 2015
Hydro One Limited - Business Acquisition Report - January 14,2016
Appendix 3 to Joint Application Page 2 oI 10
3.0
4.0
Appendix 3
Hydro One Limited
Electronic Data Room lndex
Regulatory Documents
3.a Distribution and Transmission Maps
3.a.1 Hydro One Distribution Map
3.a.2 Hydro One Transmission Map
3.b Ontario Energy Board Licenses
3.b. 1 OEB_ED-2003-0043_Hydro One Networks I nc._Electricity Distribution
License - Amended August 3,2017
3.b.2 OEB_EB-2003-0035_Hydro One Networks I nc._Electricity Transmission
License Amended - November 26,2015
Others
4.a Securities Filings
4.a.1 Hydro One Limited - ANNUAL MEETING OF SHAREHOLDERS
REPORT OF VOTING RESULTS - ltlay 4,2017
4.a.2 Hydro One Limited - ANNUAL MEETING OF SHAREHOLDERS
REPORT OF VOTING RESULTS - May 31,2016
4.a.3 Hydro One Limited - CERTIFICATE OF ELIGIBILITY UNDER NATIONAL
INSTRUMENT 44-101 - July 25,2017
4.a.4 Hydro One Limited - CERTIFICATE OF ELIGIBILITY UNDER NATIONAL
INSTRUMENT 44-101 AND 44-102 - March 23,2016
4.a.5 Hydro One Limited - CFO Cert CLASS 1 REPORTING ISSUERS AND
CLASS 38 REPORTING ISSUERS Participation Fee - February 10,2017
4.a.6 Hydro One Limited - CFO Cert CLASS 1 REPORTING ISSUERS AND
CLASS 38 REPORTING ISSUERS Participation Fee - February 12,2016
4.a.7 Hydro One Limited - Undertaking re Final Short Form Prospectus of the
lssuer - August 1,2017
4.a.8 Hydro One Limited - Undertaking re Final Base PREP Prospectus -
March 30, 2016
4.a.9 Hydro One Limited - Undertaking re Final Base PREPR Prospectus -
October 28,2015
4.a.10 Hydro One Limited - CFO Certification Form 52-109F'l - March 27,2017
4.a.11 Hydro One Limited - CFO Certification Form 52-109F1 - March 22,2016
4.a.12 Hydro One Limited - CFO Certification Form 52-109F2 - August 8,2017
4.a.13 Hydro One Limited - CFO Certification Form 52-109F2 - May 6, 2016
4.a.14 Hydro One Limited - CFO Certification Form 52-109F2 - May 4,2017
4.a.15 Hydro One Limited - CFO Certification Form 52-109F2 - November 11,
2016
4.a.16 Hydro One Limited - CFO Certification Form 52-109F2 - August 12,2016
4.a.17 Hydro One Limited - CFO Certification Form 52-109F2 - March22,2016
4.a.18 Hydro One Limited - President and CEO Certification Form 52-109F2 -
August 8,2017
4.a.19 Hydro One Limited - President and CEO Certification Form 52-109F2 -
May 4,2017
Appendix 3 to Joint Application Page 3 of 10
Appendix 3
Hydro One Limited
Electronic Data Room lndex
4.a.20 Hydro One Limited - President and CEO Certification Form 52-109F1 -
March 27,2017
4.a.21 Hydro One Limited - President and CEO Certification Form 52-109F2 -
November 11,2016
4.a.22 Hydro One Limited - President and CEO Certification Form 52-109F2 -
August 12,2016
4.a.23 Hydro One Limited - President and CEO Certification Form 52-109F2 -
May 6, 2016
4.a.24 Hydro One Limited - Form 51-102F3 - Material Change ReportAvista
Acquisition and Debentures - July 19,2017
4.a.25 Hydro One Limited - Form 13-501F6 Subsidiary Exemption Notice for
Hydro One lnc. to Alberta Securities Commission - February 10,2017
4.a.26 Hydro One Limited - Form 13-502F6 Subsidiary Exemption Notice for
Hydro One lnc. to Ontario Securities Commission - February 10,2017
4.a.27 Hydro One Limited - Form 13-502F6 Subsidiary Exemption Notice for
Hydro One lnc. to Ontario Securities Commission - February 12,2016
4.a.28 Hydro One Limited - Form 62-103F1 - Required Disclosure under the
Early Warning Requirements - May 17,2017
4.a.29 Hydro One Limited - Notice of 2016 Annual General Meeting - February
17,2017
4.a.30 Hydro One Limited - NOTICE DECLARING INTENTION TO BE
QUALIFIED Nl 44-101 - March 9,2016
4.a.31 Hydro One Limited - Schedule 14A Hydro One Limited and Avista Slide
Deck on Acquisition
4.a.32 Hydro One Limited - Schedule 14A Press Release Hydro One Limited to
Acquire Avista
4.a.33 Hydro One Limited - Schedule 14A Hydro One Limited and Avista Joint
Conference Call on Acquisition
Annual lnformation Forms
4.b.1 Hydro One Limited - 2016 Annual lnformation Form
4.b.2 Hydro One Limited - 2015 Annual lnformation Form
Representative Consents
4.c.1 Hydro One Limited - Counsel Consent Long Form Prospectus - October
28,2017
4.c.2 Hydro One Limited - Auditors Consent Short Form Prospectus
Debentures - August 1,2017
4.c.3 Hydro One Limited - Auditors Consent Short Form Prospectus
Debentures re Avista - August 1,2017
4.c.4 Hydro One Limited - Counsel Consent Short Form Prospectus
Debentures - August 1,2017
4.c.5 Hydro One Limited - Underuvriters Legal Counsel Consent Short Form
Prospectus Debentures - August 1,2017
4.b
4.c
Appendix 3 to Joint Application Page 4 of 10
Appendix 3
Hydro One Limited
Electronic Data Room lndex
4.c.6 Hydro One Limited - Counsel Consent Short Form Prospectus
Supplement - May 10, 2017
4.c.7 Hydro One Limited - Underwriters LegalCounselConsent ShortForm
Prospectus Supplement - May 10,2017
4.c.8 Hydro One Limited - Auditors Consent Short Form Prospectus - May 10,
2017
4.c.9 Hydro One Limited - Counsel Consent Prospectus Supplement - April 7,
2016
4.c.10 Hydro One Limited - Underwriters Counsel Consent Prospectus
Supplement - April 7,2016
4.c.11 Hydro One Limited - Underuvriters Counsel Consent Final Long Form
Prospectus - October 28,2015
4.c.12 Hydro One Limited - Auditors Consent Long Form Prospectus - October
28,2015
News Releases
4.d.1 News Release - Hydro One Limited Announces Closing of $1.54 Billion
Bought Deal Offering of Convertible Debentures - August 9,2017
4.d.2 News Release - Hydro One Limited Reports Second Quarter Results -
August 8,2017
4.d.3 News Release - Hydro One to Acquire Avista to Create Growing North
American Utility Leader with C$31.2 Billion in Enterprise Value - July
2017
4.d.4 News Release - Hydro One Limited Announces $1.4 Billion Bought Deal
Offering of Convertible Debentures - July 19,2017
4.d.5 News Release - Province of Ontario Reports Hydro One Limited Share
Ownership Pursuant to Section 5.2 - May 17,2017
4.d.6 News Release - HYDRO ONE LIMITED ANNOUNCES CLOSING OF
SECONDARY OFFERING - May 17,2017
4.d.7 News Release - HYDRO ONE LIMITED ANNOUNCES SECONDARY
OFFERING OF COMMON SHARES BY THE PROVINCE OF ONTARIO -
May 8,2017
4.d.8 News Release - Hydro One Limited Announces Voting Results from
Annual Meeting of Shareholders - May 4,2017
4.d.9 News Release - Hydro One Limited Reports First Quarter Results and
lncreases Shareholder Dividend - May 4,2017
4.d.10 News Release - Hydro One Limited CFO Accepts New Role - April 26,
2017
4.d.11 News Release - Hydro One Limited Chief Financial Officer accepts new
role - April 26,2017
4.d.12 News Release - Hydro One Networks Files Five Year Distribution Rate
Application - March 31,2017
4.d
Appendix 3 to Joint Application Page 5 of 10
Appendix 3
Hydro One Limited
Electronic Data Room lndex
4.d.13 News Release - Hydro One Limited Reports Positive Fourth Quarter
Revenue and Operating Cost Trends - February 10,2017
4.d.14 News Release - Hydro One Limited Reports Growing Third Quarter
Revenue and Earnings - November 11,2016
4.d.15 News Release - Hydro One Limited Concludes RegulatoryApproval
Process for Great Lakes Power Acquisition - October 13,2016
4.d.16 News Release - Hydro One Limited Executive Appointments - August 22,
2016
4.d.17 News Release - Hydro One Limited Reports Second Quarter with
Revenue, Efficiencies and Earnings allTrending Positively - August 12,
2016
4.d.18 News Release - Hydro One Limited First Quarter, Building Momentum
and an Operating Metrics Focus - May 6,2016
4.d.19 News Release - Hydro One Limited ANNOUNCES CLOSING OF
CLOSING OF OVER-ALLOTMENT OPTION - April 29,2016
4.d.20 News Release - Hydro One Limited ANNOUNCES CLOSING OF
SECONDARY OFFERING OF COMMON SHARES BY PROVINCE -
April 14, 2016
4.d.21 News Release - Province of Ontario Reports Hydro One Limited Share
Ownership Pursuant to OSC Rule 62-504 - April 14,2016
4.d.22 News Release - Hydro One Limited ANNOUNCES SECONDARY
OFFERING OF COMMON SHARES BY PROVINCE - AprilS,2016
4.d.23 News Release - HYDRO ONE LIMITED REPORTS FOURTH QUARTER
2015 RESULTS - February 12,2016
4.d.24 News Release - Executive Departure S Struthers - February 3,2016
4.d.25 News Release - Hydro One Limited Announces Closing of IPO Over-
Allotment Option - November 12,2015
4.d.26 News Release - Closing of Hydro One Limited IPO - November 5,2015
4.d.27 News Release - Province of Ontario Reports Hydro One Limited Share
Ownership - November 5,2015
4.d.28 News Release - Hydro One Limited Announces Pricing of Secondary
Offering of Common Shares - October 29,2015
4.d.29 News Release - Hydro One Limited Files AmRe Preliminary Prospectus
in Canada for Secondary Offering of Common Shares - October 9,2015
Miscellaneous
4.e.1 Hydro One Code of Conduct
4.e.2 Hydro One Limited - Management lnformation Circular for May 4,2017
Annual Meeting of Shareholders
4.e.3 Hydro One Limited - Form of Proxy - May 4,2017 Annual Meeting of
Shareholders
4.e.4 Hydro One Limited - Notice of 2017 Annual Meeting of Shareholders -
March 23,2017
4.e
Appendix 3 to Joint Application Page 6 of 10
4.e.5
4.e.6
4.e.7
4.e.8
4.e.9
4.e.10
4.e.11
4.e.12
4.e.13
4.e.14
4.e.15
4.e.16
4.e.17
4.e.18
4.e.19
4.e.20
4.e.21
4.e.22
4.e.23
4.e.24
Appendix 3 to Joint Application
Appendix 3
Hydro One Limited
Electronic Data Room lndex
Hydro One Limited - Management lnformation Circular for May 31, 2016
Annual Meeting of Shareholders
Hydro One Limited - Form of Proxy - May 31, 2016 Annual Meeting of
Shareholders
Hydro One Limited - Notice of 2016 Annual Meeting of Shareholders -
April 15, 2016
Hydro One - Marketing Materials for Avista Acquisition - July 19,2017
Hydro One Limited - Marketing Materials for Secondary Offering of
Common Shares Term Sheet - April 5,2016
Hydro One Limited - Marketing Materials for IPO of Common Shares by
way of Secondary Offering Term Sheet - October 29,2015
Hydro One Limited - Marketing Materials for IPO of Common Shares by
way of Secondary Offering Term Sheet - October 9,2015
Hydro One Limited - Marketing Materials IPO Slide Deck - October 9,
2015
Hydro One Limited - NON-ISSUER FORM OF SUBMISSION TO
JURISDICTION AND APPOINTMENT OF AGENT - August 1,2017
Hydro One Limited - NON-ISSUER FORM OF SUBMISSION TO
JURISDICTION AND APPOINTMENT OF AGENT - lt/arch 30, 2016
Hydro One Limited - NON-ISSUER FORM OF SUBMISSION TO
JURISDICTION AND APPOINTMENT OF AGENT - September 28,2015
Hydro One Limited - Ontario Securities Commission Receipt for
Prospectus Debentures - August 1,2017
Hydro One Limited - Ontario Securities Commission Receipt for
Preliminary Prospectus for Debentures - July 25,2017
Hydro One Limited - Ontario Securities Commission Receipt for
Prospectus - March 31,2016
Hydro One Limited - Ontario Securities Commission Receipt for
Preliminary Prospectus - March 23,2016
Hydro One Limited - Ontario Securities Commission Receipt for
Prospectus - October 29,2015
Hydro One Limited - Ontario Securities Commission Receipt for
Preliminary Prospectus - October 9, 2015
Hydro One Limited - Ontario Securities Commission Receipt for
Preliminary Prospectus - September 18,2015
Hydro One Limited - Governance Agreement - November 5, 2015
Hydro One Limited - Registration Rights Agreement - November 5,2015
Page 7 of 10
1.0
Appendix 3
Corporate Records
1.a Articles of lncorporation
1 .a.1 Avista Corporation - Articles of lncorporation - June 6, 2012
1.b Bylaws
1.b.1 Avista Corporation - By-Law - August 17,2016
1.c OrganizationCharts
1.c.1 Avista Corporation Current Corporate Structure
1.d GovernanceGuidelines
1 .d.1 Avista Corporation Governance Guidelines - May 2015
1.e Annual Report to Stockholders
1.e.1 Avista Corporation - Annual Report -2016
Financial Documents
2.a Credit Agreements
2.a.1 Avista Corporation - Credit Agreement - February 11,2017
2.a.2 Avista Corporation - First Amendment to Credit Agreement andWaiver
Thereunder - December 14,2011
2.a.3 Avista Corporation - Union Bank Margin Change - February 5,2014
2.a.4 Avista Corporation - Second Amendment to Credit Agreement - April 18,
2014
2.a.5 Avista Corporation - Extension of Expiration Date of Credit Facility,
MUFG Union Bank - May 16, 2016
2.b Security and Exchange Commission Filings
2.b.1 Avista Corporation - 10-K's
2.b.1.4 Annual Report - December 31 ,2016
2.b.2 Avista Corporation - 1O-Q's
2.b.2.A Quarterly Report - June 30,2017
2.b.2.8 Quarterly Report - March 31,2017
2.b.2.C Quarterly Report - September 30,2016
2.b.2.D Quarterly Report - June 30, 2016
2.b.3 Avista Corporation - 8-K's
2.b.3.A 8-t(A Amendment to August 14,2017 8-K - Augusl28,2017
2.b.3.8 Form B-K Current Report - August 14,2017
2.b.3.C Form 8-K Current Report - August 2,2017
2.b.3.D Form 8-K Current Report - July 19,2017
2.b.3.E Form 8-K Current Report - June 9,2017
2.b.3.F Form 8-K Current Report - May 31,2017
2.b.3.G Form 8-K Current Report - May 26,2017
2.0
Appendix 3 to Joint Application Page 8 of 10
Avista Corporation
Electronic Data Room lndex
Appendix 3
Avista Corporation
Electronic Data Room lndex
2.b.4
2.b.3.H Form 8-K Current Report - May 19,2017
2.b.3.1 Form 8-K Current Report - May 11,2017
2.b.3.J Form 8-K Current Report - May 3,2017
2.b.3.K Form 8-K Current Report - March 22,2017
2.b.3.L Form 8-K Current Report - February 27,2017
2.b.3.M Form 8-K Current Report - February 22,2017
2.b.3.N Form 8-K Current Report - December 23,2016
2.b.3.O Form 8-K Current Report - December 16,2016
2.b.3.P Form 8-K Current Report - December 15,2016
2.b.3.Q Form 8-K Current Report - December 12,201
2.b.3.R Form 8-K Current Report - November 1,2016
2.b.3.S Form 8-K Current Report - October 24,2016
2.b.3.T Form 8-K Current Report - August 17,2016
2.b.3.U Form 8-K Current Report - August 10, 2016
2.b.3.V Form 8-K Current Report - August 3,2016
Other Securities Filings
2.b.4.4 Form S-8/A - Post-Effective Amendment No. 1 to Registration
Statement for The lnvestment and Employee Stock Ownership
Plan of Avista Corporation - February 26,2015
2.b.4.8 Form 10/A - Post-Effective Amendment No. 1 to Form 10-
General Form for Registration of Securities - February 26,2015
2.b.4.C Form S-3 - Prospectus of Avista Corporation Common Stock -
February 25,2016
2.b.4.D 42485 - Prospectus Supplement to February 25,2016
Prospectus of Avista Corporation Common Stock -March 2,
2016
Other Regulatory Filings
3.a lntegrated Resource Plan (lRP)
3.a.1 Electric lntegrated Resource Plan (lRP) and Appendices -20173.a.2 Natural Gas lntegrated Resource Plan (lRP) and Appendices -20163.a.3 Natural Gas lntegrated Resource Plan (lRP) Work Plan - 2018
3.b Avista Corporation - State Filings
3.b.1 Washington
3.b.1.A Affiliated lnterests Annual Report - April 28,2017
3.b.1.8 Annual and Biennial Conservation Reports - June 2016
3.b.1.C Service Quality Measures Annual Report -2016
3.b.1.D Low-lncome Rate Assistance Program (LIRAP) Annual Report -
December 28,2016 - WA and OR
3.b.1.E Annual Conservation Plan - November2016
3.b.1.F Renewable Target Compliance - |-937/RPS Report - June 1,
2017
3.0
Appendix 3 to Joint Application Page 9 of 10
4.0
Appendix 3
Avista Corporation
Electronic Data Room lndex
3.b.1.F.i Revised Renewable Target Compliance-l-937/RPS
Report - July 11,2017
3.b.2 ldaho
3.b.2.A 2017 Demand Side Management (DSM) Business Plan
3.b.3 Oregon
3.b.3.A Affiliated lnterests Annual Report - May 25,2017
Federal Energy Regulatory Commission
3.c.1 FERC Form 1 -2016
3.c.1.A Washington ElectricAnnualReport - 2016
3.c.1.B ldaho ElectricAnnual Report -2016
3.c.1.C Montana Electric Utility Annual Report - 2016
3.c.2 FERC Form2 -2016
3.c.2.A Washington Natural Gas AnnualReport -2016
3.c.2.8 ldaho Natural Gas Annual Report - 2016
3.c.2.C Oregon State Supplemental Form 695 - 2016
Hart-Scott-Rodino Act Filing - To Be Provided
Federal Communications Commission (FCC) Filing - To Be Provided
Avista Corporation Securities Filings
4.a.1 Avista Corporation - Proxy - To Be Provided
4.a.2 Avista Corporation - Proxy Statement and Notice of May 11,2017
Annual Meeting of Shareholders - To Be Provided
4.a.3 Avista Corporation - Minutes of Annual Meeting of Shareholders- May
11,2017 - To Be Provided
3.c
3.d
3.e
Others
4.a
Appendix 3 to Joint Application Page 10 of 10
i;L
-,-)
: /-:
---7
fJ
:)
C-)
;,;
rJl
7
t-:-'l(f
APPENDIX 4
BAR CHART SHOWING RELATIVE SIZE OF
INVESTOR OWNED UTILITIES
G+rUI
olHI*rltalqrl
EI
EI(al
trn (Fulto o
ll;
trerN
^F',vv
SrnN
WNd
]H
t'rv
HTS
uod
NDV
vot
)A
now
190
srv
vwl
'rg/v\Anv
IN
t9n
l.NI
gf,S
/nNd
H
dNf,
swf,
VAV+H
llv
urrrr/dx9
ll
UI:l
u9v
su
lro
sl
J:I'N
9ld
'EX
o3
xtl
'tdd
lus
drv
9)d
f,xl
os
o
rno
llN
e
-(!Pti'=
+oCoo
E'
-
OJ
o
Fl
a
-\S
o
ttiE€sN:3Eri\ q>x.Spo'uS
o;e
E:Bi; ,il reii,iEs
.9
oEo-
o
$
.xE
oo-o-
oooclho
oooo
ooc6
0
ooo-o
ooo6
+
oooo
0
ooo.66
ooo-o+o
E
Ev!
,N
G(,
o(,i-]L
-'trE..L8g
tJl
.g.=
f
EoC
=o
o
tJlo
C
C(o(J
t-o
E
oz
o
o
(o
od.
of
(1J
.=f5
IJ.J
o
.NVI
1Ao
.=PIo
CLIttL-oo-
PoV
-So
.9
-lt
=o.
olF{l
ulqrld\.ttrl\fl
nlt
i;.1
:::)
ua
frrn
ra
fl1
APPENDIX 5
DELEGATION OF AUTHORITY TO AVISTA
BOARD OF DIRECTORS
EXHIBIT A
GOVERNANCE REOUIREMENTS
The articles of incorporation and bylaws of the Surviving Corporation, as may be amended frorn
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 "Sole
Shareholder Desisnees"); (iii) three (3) directors who as of irnmediately 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
"eqgpg&y_Dggiguggg"), 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;
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 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;
fl ss09314.6Appendix 5 to Joint Application Page 1 of5
5. not less than three (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.
#5s093 14.5Appendix 5 to Joint Application Page 2 of 5
EXIIIBIT B
POST-CLOSING MATTERS
Operational Commitments
l. Maintain (a) the Sulviving 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 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
Tirne 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 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.
#55093 13.6Appendix 5 to Joint Application Page 3 of5
Governance Matters
1. 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 ("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 "Sq!s
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 from the Chief Executive
Officer of the Surviving Corporation); and (iv) the Chief Executive Offrcer of the Surviving
Corporation (collectively, the directors designated in clauses (iii) and (iv) hereof, the
"Company 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 Conh'act 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 2/3 of the directors that an amendment would be in the
best interest of the Surviving Corporation, taking into account relevant regulatory considerations.
app"rdiiYtluro int A pp I ication
-2-
Page 4 of5
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 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 cument 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 Or ganizational Matter s
1. 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,
#5s093 13.6Appendix 5 to Joint Application Page 5 of5
APPENDIX 6 '-ifi
C)
:rl.1" :
1,*)
i-;l;
ttr'(f,
U
c,-1
AVISTA' S FINANCIAL STATEMENTS
(FORMS 10K/10Q)
AND
HYDRO ONE LIMITED'S
FINANCIAL STATEMENTS
(2016 Annual Report & 2016 Annual Information Form)
UNITED STATES
SE C URIT"' q1.P,T":,T}IT9P C OMMIS S ION
Form 10-K
(Mark One)
E ANNUAL REPORTPT]RSUANTTOSECTION13 ORIs(d)OFTHE SECI]RITIESEXCHANGEACT OFT934
FoR rHE FISCAL YEAR ENDED DsgElL20!.6 oR
tr TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECIJ'RJTIES EXCTIANGE ACT OF 1934
FORTHETRANSITIONPERIODFROM TO
Commission Iile number l-3701
AVISTA CORPORATION
@xact name of Registrant as specified in its charter)
Washington
(State or other jurisdiction of
incorporation or organization)
914462470
(I.RS. Employer
Identification No.)
l4l l East Mission Avenue, Spokane, Washington 99202-2600
(Address ofprincipal executive oflices) (Zip Code)
Registrant's telephone number, including area code: 509-489{500
Web site: http://rrrmu.avistacorp.com
Securities registered pursuant to Section I 2(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
Common Stock, no parvalue New York Stock Exchange
Securities registered pursuant to Section I 2(g) ofthe Act:
Title of Class
Preferred Stock, Cumulative, Without Par Value
Indicate by check mark if the registrant is a well-known seasoned issuet as defined in Rule 405 of the Securities Act. Yes E No tr
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 ( I ) has fi led all reports required to be filed by Section I 3 or I 5(d) of the Securities Ex change Act of I 934
during thc preceding I 2 months (or for such shortcr period that thc Registrant was rcquired to file such rcports), and (2) has bccn subjcct to such filing
requirementsforthepast90days: Yes E No E
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, ifany, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 ofRegulation S-T ($232.405 ofthis chapter) during the preceding I 2 months (or for such shorter period that
the registrant was required to submit and post such files). Yes E No E
Indicate by check mark ifdisclosure ofdelinquent filers pursuant to Item 405 ofRegulation S-K ($ 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 amcndment to this Form 10-K. tr
Indicate 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 repo(ing company" in Rule I 2b-2 ofthe Exchange Act. (Check one):
Large accclcrated filer E
Non-accelerated filer E (Do not check ifa smallerreporting company)
Accclcrated filcr
Smaller reporting company
Appendix 6 to Joint Application Page 1 of 414
IndicatebycheckmarkwhethcrtheRcgistrantisashcll company(asdcfincdinRulc l2b-2oftheExchangcAct): 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 ,64,311 ,891 shares of Registrant's Common Stock, no par value (the only class of common stock), were outstanding.
Documents Incorporated Bv Reference
Partof Form 10-Kinto Which
proxy Statemen, ro r. o,"affiI",ion with the annual meeting
ofshareholders to be held on May 11,2017.
Prior to such filing, the Proxy Statement filed in connection with the
annual meeting ofshareholders held on May 12,2016.
Document is Incorporated
Part III, Items 10, I I,
I 2, l3 and l4
Appendix 6 to Joint Application Page 2 of 414
Table of Contents
AVISTA CORPORATION
Item
No.
INDEX
Acronvms and Terms
Forward-Lookin q Statements
Available Information
Part I
I Business
Comoanv Overview
Avista Utilities
General
Electric Ooerations
Electric Requirements
Electric Resources
Hvdroelectric Licenses
Future Resource Needs
Natural Gas Ooerations
Regulatory Issues
Federal Laws Relatcd to W}olcsalc Comoetition
Reqional Transmission Organizations
Regional Transmission Planning
Reeional Enersy Markets
Reliability Standards
Avista t Jtilities Oneratins Statistics
Alaska Electric Lisht and Power Comoanv
Alaska Electric Light and Power Companl, Operatins Statistics
Other Businesses
lA. Risk Factors
lB. UnrcsolvedStaffComments
2 Prooerties
Avista Utilities
Alaska Electric Li8ht and Powcr Comoany
3 Leqal Proceedinqs
4 Mine Safew Disclosures
Part II
5 Market for Registrant's Common Equity. Related Stockholder Matten and lssuer Purchases of Equity Securities
6 SelectedFinancialData
7 Manaqement's Dscussion and Anal),sis ofFinancial Condition and Results of Operations
Business Segments
Executive Level Summar,v
Regglatory Matters
Results ofOperations - Overall
Results of Operations - Avista Utilities
Results of Ooerations - Alaska Electric Light and Power Companv
Results ofOocrations - Ecova - Discontinucd Operations
Results ofOperations - Other Businesses
Accounting Standards to Be Adooted in 201 7
Critical Accountine Policies and Estimates
Liouidity and Capital Resources
Overall Liouidity
Review ofConsolidated Cash Flow Statement
Caoital Resources
Capital Exoenditures
Off-Balance Sh eet Arran gements
Appendix 6 to Joint Application
Page
No.
iii
L
4.
4.
4.
4_
!_
4.
5
5
E
E
2
.LL
l2
l2
It
l3
-LL
t4
t7
l8
D.
20
26
27u
)q
22
29
,o
31
7,)
32
2.
33
40
43
55
55
55
56
55
t2
59
60
62
@_
65
Page 3 of 414
Pension Plan
Credit Ratings
Dividends
Contractual Oblisations
6t
65
66
66
Appendix 6 to Joint Application Page 4 of 414
Table of Contents
AVISTA CORPORATION
74.
Competition
Economic Conditions and Utility Load Growth
Environmental Issues and Other Contingencies
Enterprise Risk Manaeement
Ouantitative and Oualitative Disclosures about Mar*et Risk
Financial Statements and Supplementarv Data
Reoort oflndependent Registered Public Accounting Firm
Financial Statemcnts
Consolidated Statements of Income
Consolidated Statements ofComprehensive Income
Consolidated Balance Sheets
Consolidated Statcmcnts ofCash Flows
Consolidated Statements of Eouitv and Redeemable Noncontrolling Interests
Notes to Consolidated Financial Statements
Note l. Summary ofSiqnificant Accountins Policies
Note 2. New Accounting Standards
Note 3. Variable lnterest Entities
Note 4. Business Acouisitions
Note 5. Discontinued Onerations
Note 6, Derivatives and Risk Manasement
Notc 7. Jointly Owncd Elcctric Facilities
Note 8. Prooerty. Plant and Eouioment
Note 9. Asset Retirement Obliqations
Note 1 0. Pension Plans and Other Postretirement Benefit Plans
Notc I I . Accounting for Incomc Taxcs
Note I 2. Enerqv Purchase Contracts
Note t3. Committed Lines of Credit
Note I 4. Lons-Term Debt and Canital Leases
Note 15. Lonr-Term Debt to Afllliated Trusts
Note 16. FairValue
Note 17. Common Stock
Note I 8. Eaminqs oer Common Share Attributable to Avista Comoration Shareholden
Note 19. Commitments and Continqencies
Notc 20. Rcaulatorv Mattcrs
Note 2l . Information by Business Segments
Note 22. Selected Ouarterly Financial Data (Unaudited)
Changes in and Disaereernents with Accountants on Accounting and Financial Disclosure
Controls and Proccdurcs
Other Information
Part III
Directors- Executive Officers and Coroorate Govemance
Executive Compensation
Security Ownership of Certain BeneficiaI Owners and Management and Related Stockholder Matters
Certain Relationshios and Related Transactions. and Directorlndeoendence
Princioal Accountins Fees and Services
parr ry
Exhibits. FinanciaI Staternent Schedules
Signaturcs
Exhibit Index
67
68
69
30
80
E.L
82
82
84
85
EZ
89
9l
91
t00
t02
102
104
105
109
lt0
110
111
tt7
118
I l9
t2t
123
124
128
t29
130
132
136
137
t39
139
t4t
t4l
142
142
t43
t4f
144
145
14',7
8.
10.
I l.
12.
13.
14.
9.
94.
98.
l5
Appendix 6 to Joint Application
* : not an applicable item in the 20 I 6 calendar year for Avista Corp.
Page 5 of 414
ii
Table of Contents
AVISTA CORPORATION
Acronvm/Term
aMW
AEL&P
AERC
AFTJDC
AM&D
ASC
ASU
Avista Capital
Avista Corp.
Avista Energy
Avista Utilities
BPA
Capacity
Cabinet Gorge
CIAC
Colstrip
Coyotc Springs 2
CT
Deadband or ERM deadband
Dekatherm
Ecology
Ecova
EIM
Encrgy
EPA
ERM
FASB
FCA
FERC
GAAP
GHG
GS
ACRO}[Y']V{S AND TERMS
(The following acronyms and terms are found in multiple locations within the document)
Memin s
_ Average Megawatt - a measure ofthe average rate at which a particular generating source produces energy over a period
of time
- 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 METALII
- AccountingStandardsCodification
- AccountingStandardsUpdate
- 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 ratc at which a particular gencrating sourcc is capablc ofproducing energy, measured in KW or MW
- The Cabinet Gorge Hydroelectric Generating Project, located on the Cla* Fork River in Idaho
- Contribution in aid ofconstruction
- The coal-fired Colstrip Generating Plant in southeastem Montana
- Thc natural gas-fired combincd-cycle Coyotc Springs 2 Gcncrating Plant locatcd ncarBoardman, Orcgon
- 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 ofWashington's Department of Ecology
Ecova, Inc., a provider offacility information and cost managemcnt scrvices for multi-site customers and cncrgy
- efficiency program management for commercial enterprises and utilities throughout North America, subsidiary of Avista
Capital. Ecova was sold on June 30,2014.
- Encrgy Imbalance Market
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 clcctric and natural gas decoupling mechanism in Idaho.
- Federal Energy Regulatory Commission
- Generally Accepted Accounting Principles
- Creenhouse gas
- Generating station
lll
Appendix 6 to Joint Application Page 6 of 414
Table of Contents
AVISTA CORPORATION
IPUC
IRP
Jackson Prairie
Juneau
KV
KW,KWh
Lancaster Plant
LNG
MPSC
MW,MWh
NERC
Noxon Rapids
OPUC
PCA
Idaho Public Utilities Commission
Integmted 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 (1 000 volts): a measure ofcapacity on transmission lines
Kilowatt ( I 000 watts): a measure ofgenerating output or capability. Kilowatt-hour (l 000 watt hours): a measure of
cnergy produccd
A natural gas-fired combined cycle combustion turbine plant located in Idaho
Liquefied Natural Gas
Public Service Commission of the State of Montana
Megawatt: I 000 KW. Megawatt-hour: I 000 KWh
North American Electricity Reliability Corporation
The Noxon Rapids Hydroelectric Generating Project, located on the Cla* Fork 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 Agreernent
Public Utility District
The Public Utility Regulatory Policies Act ofl 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 owncd by Avista Corp.
Unit ofmeasurement for natural gas; a therm is equal to approximately one hundred cubic feet (volume) or I 00,000
BTUs (energy)
Washin gton Util ities 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
iv
PGA
PPA
PUD
PURPA
RCA
REC
Salix
Spokane Energy
Thcrm
IJTC
Watt
Appendix 6 to Joint Application PageT of4l4
Table 0f Contents
AVISTA CORPORATION
Forward-Looking Statements
From time-to-timc, wc make forwardJooking statcments such as statemcnts regarding projcctcd or futurc:
' 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 ofwhich are based, in tum, upon furtherassumptions). Such statements are made both in our
reports filed under the Securities Exchange Act of I 934, as amcnded (including this Annual Report on Form 1 0-K), and elscwhcre. 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 Report on Form I 0-K) are subject to a variety ofrisks and uncertainties and other factors.
Most ofthese factors 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 diflermaterially from those anticipated in our statements. Such risks, uncertainties and other factors include, among
others:
Financial Risk
weather conditions (temperatures, prccipitation lcvels and wind pattcms), including thosc from Iong-term climate changc, which affcct 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 thc issuancc ofdcbt and/or cquity sccuritics, which can be affcctcd 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, our ability to eflectively 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 custorlers;
changes in actuarial assumptions, interest rates and the actual retum on plan assets for our pension and other postretirernent 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 contingenciesl
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;
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 over authorized retum on investment;
possibility that our integrated resource plans for electric and natural gas will not be acknowledged by the state commissions;
the eflect on any or all ofthe foregoing, resulting from changes in general economic or political factors;
Appendix 6 to Joint Application Page 8 of414
Table of Contents
AVISTA CORPORATION
Energy Commodity Risk
. volatility and iltiquidity in wholesale energy markets, including the availability ofwilling buyers and sellers, changes in wholesale energy prices
that can affect operating income, cash requircmcnts to purclrase elcctricity and natural gas, value reccived forwholesalc salcs, collatcral requircd 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;
. potcntial cnvironmental rcgulations affecting our ability to utilizc or rcsulting in the obsolcscence ofour powcr supply rcsources;
Operational Risk
. severe weather 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 suppon services;
. explosions, fires, accidents, mechanical breakdowns or other incidents that may impair assets and may disrupt operations ofany ofour generation
facilitics, transmission, and electric and natural gas distribution systcms or othcr operations and may rcquire us to purchasc rcplacemcnt powcr;
. wildfires, including those caused by our transmission or electric 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, cyber attacks or other malicious acts that may disrupt or cause damage to our utility assets or to the national or regional economy in
general, including any effects ofterrorisrn, cyber attacks or vandalism that darnage or disrupt information technology systerns;
. 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 restnctive coverage terms and our ability 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 ouremployees and retirees;
. third party construction of buildings, billboand signs, towers or other structures within our rights of way, or placement of fuel receptacles within
close proximity to our transformers or other equipment, including overtuild atop natural gas distribution lines;
. thc loss ofkcy suppliers for matcrials or serviccs or disruptions to thc supply chain;
. advcrse impacts to our Alaska opcrations that could result from an cxtcnded outagc ofits hydroelectric generating resourccs 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 opcrations 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 vendors or other potential lapses that result in unauthorized di sclosure ofprivate information, wh ich could result in
liabilities against us, costs to investigate, remediate and defend, and damage to ourreputation;
z
Appendix 6 to Joint Application Page 9 of 414
Table of Contcnts
AVISTA CORPORATION
. disruption to or breakdowns ofinformation systems, automated controls and other technologies that we rely on for our operations, communications
and customer scrvicc;
. changcs in costs tlrat impcde ourability to effectively implcment new information technology systcms orto operatc and maintain ourcurcnt
production technology;
. changes in technologies, possibly making some ofthe current technology we utilize obsolete or the introduction ofnew technology that may create
new cyber security risk;
. insufficicnt technology skills, which could lead to thc inability to develop, modifu or maintain our information systems;
Strategic Risk
. growth or decline ofour customer base and the extent to which new uses for our services may maleialize 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 opemtions and in realizing expected opportunities, diversions ofmanagement resources, loss ofkey
employees, challcnges with respcct to operating ncw busincsses and othcr 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
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 cxisting busincsscs and the cxtcnt ofour busincss dcvclopment cfforts whcrc potential futurc business is unccrtain;
. non-rcgulated activitics may incrcasc camings 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 of legislation or administrative rulemaking at the federal, state or local levels, including possible effects on our generating
rcsourccs ofrestrictions on greenhousc gas cmissions to mitigate conccms ovcr global climatc 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 turtines or hydroelectric facilities;
. wholcsale and rctail compctition including altemative cnergy sourccs, growth in customcr-owned powcrrcsourcc tcchnologics that displacc utility-
supplied energy or that may be sold back to the utility, and altemative energy suppliers and delivery arrangements;
. failure to identifo 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
. thc risk ofmunicipalization in any ofour scwice territorics.
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 thirrd parties. However, there can be no assurance that our expectations, beliefs or
projections will be achieved or accomplished. Furthermore, any forward-looking statement speaks only as ofthe date on which such statement is made. We
undertake no obligation to update any forwardJooking statement or statements to reflect events or circumstances that occur after the date on which such
statement is made or to reflect the occurrence oiunanticipated events. New risks, unce(ainties and other factors emerge liom 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 that any such factor or combination of
factors may cause actual results to differmaterially from those contained in any forwardJooking statement.
3
Appendix 6 to Joint Application Page l0of4l4
Table of Contents
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 with 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, 20 I 6, we employed 1,742 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 Inland Northwest region (eastem Washington and northem 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 ofDecember 3 I , 20 I 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 parts of Oregon. We also supply electricity to a small number of customers in Montana,
most ofwhonr are our employees who operate our Noxon Rapids generating facility. Avista Utilities also engages in wholesale purchases and sales
ofelectricity and natural gas as an integral part ofenergy resource management and our load-serving obligation.
. AEL&P - a utility providing electric services in Juneau, Alaska that is a wholly-ou,rned subsidiary and the primary operating subsidiary of AERC.
We acquired AERC on July I , 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.
Wc lravc other busincsscs, including shcct mctal fabrication, vcnture fund investments, rcal cstatc invcstmcnts, a company that cxplorcs markcts that could
be served with LNG, as well as certain other investments ofAvista Capital, which is a drrect, wholly owned subsidiary ofAvista Co4r. These activities do not
represent a reportable business segrnent and are conducted by various direct and indirect subsidiaries ofAvista Corp., including AM&D, doing business as
METALI}.
Total Avista Corp. shareholders' equity was $ 1,648.7 million as of December 3 l, 2016, of which $60.7 million represented our investment in Avista Capital
and $ l0l .1 million represented our investment in AERC.
See "Item 6. Selected Financial Data" and "Note 2 I ofthe Notes to Consolidated Financial Statements" for information with respect to the operating
performance ofeach business segment (and other subsidiaries).
A\TSTA UTILITIES
General
At the end of20l 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 I .6 million. See "Item 2. Properties" for further information on our
utility assets. See "Item 7. Management's Discussion and Analysis ofFinancial Condition and Results ofOperations - Economic Conditions and Utility
Load Growth" for information on economic conditions in our service territory.
Electric Operafions
Q34g[ Avista Utilitics generatcs, transmits and distributes clcctricity, scrving electric customers in castcm Washington, northcm Idaho and a small numbcr
of customers in Montana.
Avrsta Utilities generates electricity llom 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 with our
resource optimization activities as described below.
4
Appendix 6 to Joint Application Page11of414
Tabk of Contents
AVISTA CORPORATION
As part ofAvista Utilities'resource procurement and management operatrons in the electric business, we engage in an ongoing process ofresource
optimization, which involves the economic selection ofenergy resources fforr 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 transpofiation. Such transactions are part ofthe process of
matching available rcsourccs with load obligations and hcdging the relatcd financial risks. Thcsc transactions rangc from tcrms ofintra-hour up to multiplc
years. We make continuing projections ot
. electric loads at various points in time (ranging from intra-hourto multiple years) based on, among otherthings, estimates ofcustomer
usage and weather, historical data and contract terms, and
. rcsource availability at thesc points in timc bascd on, among other things, fuel choiccs and fucl markcts, estimatcs ofstreamflows,
availability ofgenerating units, historic and forward market 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 involvcs scheduling and dispatching availablc rcsourccs as wcll as the followrng:
' 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
dcrivativc instrumcnts.
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 short-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 20 I 6 was I ,65 5 MW, which occurred on December 17 ,2016.In 20 I 5, our peak electric native load
was 1,638 MW, which occurred during the summer, and in20l4, it was 1,715 MW, which occurred during the winter.
Electric Resources
Avista Utilities has a diverse electric resource mix ofCompany-owned and contracted hydroelectric, thermal and wind generation facilities, and other
contracts for powcr purchascs and cxchangcs.
At the end of 201 6, our Company-owned facilities had a total net capability of I ,862 MW, of which 5 5 percent was hydroelectric and 45 percent was thermal.
See "Item 2. hoperties" for detailed information on generating facilities.
Hydroelectric Resources Avista Utilities owns and opcratcs six hydroclectric projects on tlre Spokanc River and two hydroelectric projects on thc Clark
Fork River. Hydroelectric generation is typically our lowest cost source per MWh 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. Ourestimate ofnormal annual hydroelectric generation for2OlT (including
rcsourccs purchascd undcrlong-tcrm hydroclcctric contracts with certain PLIDs) is 538 aMW (or4.7 rnillion MWhs).
5
Appendix 6 to Joint Application Page 12 of 414
Table of Contcnts
AVISTA CORPORATION
{.1le
5.:-5f,r
-r.5(,x)
j.7i0
i.o(x)
1 aifl
1.50n
75tl
Hydroelectric Generation
1.777
:0lo lI l:
S tIl{r
r
0
:il lJ
f Noson Rapids
f Cabinet Corge
I Spokane Rir,er Pro;ects
Lun{-tcrnr hldrot'lectrrc
colltracts \uth Pt I Ds
Nonrtal hvrlroeleclrrc
gelreratldn I I I
The following shows Avista Utilities'thousands o the ended December 3 I
(l ) Normal hydroelectric generation is determined by applying an upstrcam dam regulation calculation to median natural water flow information. 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 nearBoardman, 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 boilcr generating facility known as thc Kettle Falls Generating Station (Kettle Falls GS) in northeastcm 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 resewes under coal supply and transportation agreements in effect
through 20 I 9. During 20 I 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 arc searching for a replacement operator for units 3 & 4. In addition, see "Item 7. Management's Discussion and Analysis, Environmental
Issues and Contingencies" for further discussion regarding environmental issues surrounding Colstrip.
6
Appendix 6 to Joint Application Page l3of4l4
Table of Contents
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 belowprevailing wholesale electric prices. These generating facilities have access to natural gas supplies that
are adequate to meet their respective operating needs.
See "Item 2. Prope(ies - Avista Utilities - Generation Properties" forthe 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 through 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 3 I :
Thernral Generation
6.0m
s.?J0
4.500
3,750
3.0m
3.350
|.500
?50
0
:-508
{.{.17 I (b1ote Springs !
=
a
: Colsrrip
I Kcttlc liulls ( iS
Nrrrtheixt CT.
Rathdruu ('T. Bouldcr
Par[ GS rnd Kettle
Falls CT
l.:rlrc:rsl*r Pl;rnt PI'..\
:(! l(,:ttl::il ll
Wind Resources We have exclusive rights to all the capacity of Palouse Wind, a wind generation project developed, owned and managed by an unrelated
third-party and locatcd in Whitman County, Washington. Wc have a PPA that expircs in 2042 and allows us to acquire all of thc power and rcncwable
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 and335,291 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 2O-year term ofthe agreement. Under the terms ofthe PPA, we do not have any input into the day-today
operation ofthe projcct, including maintenancs dccisions. All such rights arc hcld by thc owner.
Other Purchases. Exchanges and Sales In addition to the resources described above, we purchase and sell power under various long-term 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'lying facilities. This
includes, among other resources, hydroelectric projects, cogeneration projects and wind generation projects at rates approved by the UTC and the IPUC.
7
Appendix 6 to Joint Application Page 14 of4l4
t.()j j
tr
Table of Conteots
AVISTA CORPORATION
See "Avista Utilities Electric Operating Statistics - Electric Operations" for annual quantities ofpurchased power, wholesale power sales and power from
exchanges in 2016,2015 and 20 I 4. See "Electric Operations" above for additional information with respect to the use ofwholesale purchases 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 under the Federal Power Act (FPA) as administered by the FERC, which includes regulatron 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
paymcnt oftlre lesscr of"net invcstmcnt" or "fair value" ofthe project, in either case, plus scverance damages. In thc unlikely cvent that a take-over occurs, it
could lead to either the decommissioning ofthe hydroelectric project or offering the project to another party (likely through sale and transfer ofthe license).
Cabinet Gorge and Noxon Rapids are under one 45-year FERC license issued in March 200 1 . See "Cabinet Gorge Total Dissolved 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 watcr quality standards downstream ofCabinct Gorge during periods when we must divert cxccss river flows ovcr thc 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 requirerrents and our available resources for 2017 through 2020:
Forecasted Electric Energy Requirements and Resources
I.O00 Rc.tuarrnrnlI
I Slsrcm lord
I Conractfuporrrr sales tlt
Rotl)urrtr
r,558 t.5ll
1.5(x)II
/.1.0(X)
500
('onrFalt {rr trcd ild conroal
hr dro gcrcralron l!t
{ onrJurl +rr ncd ud contrst
thr'md gsot'ratiur t -tI
(}hcr contrxts for poncr
prrchlxs
r\ddrtmt rr rrLrblt r'nr.rgrr{l
8
Appendix 6 to Joint Application Pagel5of4l4
r.5:e l..ure
l-10 r^r:s t.t06
:
I
I
^$\^t^P'^$
Table of Contents
AVISTA CORPORATION
(l )The contracts for power sales decrease due to certain contncts expiring in each ofthese years. We are evaluating the future plan for the additional
resources made available due to the expiration ofthese contracts.
The forecast assumes near normal hydroelectric generation.
lncludes 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 our base load requirements.
The combined maximum capacity of Boulder Park GS, Kettle Falls CT, Northeast CT and Rathdrum CT is 278 MW, witlt estimated available energy
production as indicated ior each year.
(2)
(3)
(4)
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 UTC and IPUC do not approve or disapprove ofthe content in the IRPs; rather they acknowledge that the IRPs were prepared in accordance
with applicable standards ifthat is the case. Thc IRP dctails projcctcd groMh in demand for cnergy and the new resources needcd to scrve customcrs ovcr thc
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 I 5 IRP include the following expectations and projections:
. We will have adequate resources between ourowned and contractually controlled generation, combined with conservation and market
purclrases, 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 2O-year IRP time
frame with a combination of qualifting hydroelectric upgrades, the 30-year PPA with Palouse Wind, the Kettle Falls GS and selective REC
purchases.
. Load gro*h will be approx imately 0.6 percent, a decline from the growth of 1 .0 percent forecasted in 2 0l 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 programs (using less
energy to perform activities) employed by our customem over the next 20 years and the load impacts ofincreased prices. See "ltem 7.
Managcmcnt Discussion and Analysis - Economic Conditions and Utility Load Growth" for furthcr discussion rcgarding utility customcr
growth, load growth, and the general economic conditions in our service territory. The estimates of future load growth in the IRP and at
"ltern 7. Management Discussion and Analysis - Economic Conditions and Utility Load Growth' differ slightly due to the timing ofwhen
the tv/o 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 filture customer needs.
. Energy efficiency will offset more than half of projected load growth through the 20-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 of20l 7. Our resource strategy may change from
the 20 I 5 IRP based on market, lcgislative and rcgulatory dcvclopments.
We are subject to the Washington state Energy Independence Act, which 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 Discussion and Analysis ofFinancial Condition - Environmental Issues and Contrngencies" for information related to existing
laws, as well as potcntial legislation that could influcncc our future clcctric rcsource mix.
Natural Gas Operations
General Avista Utilities provides natural gas distribution services to retail customers in parts ofeastem Washington, northem ldaho, and northeastem and
southwestem Oregon.
Market prices for natural gas, like otlrer comrnodities, can be volatile. Our natural gas procurement strategy is to provide a reliable supply to our customers
with some level of price certainty. We procure natural gas from various supply basins and overvarying time periods. The resulting portfolio is a diversified
mix offorward fixed price purchases, index and spot market purchases, utilizrng physical and financial derivative instruments. We also use natural gas
storagc to support high demand pcriods and to procure natuml gas whcn priccs may bc lower. Sccuring prices throughout thc ycar and even into subsequcnt
years provides a level ofprice certainty and can mitigate price volatility to customers between years.
9
Appendix 6 to Joint Application Page l6of414
Table of Contents
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 customers'projected natural gas requirements through forward market
transactions and derivative instruments. These transactions may extend formultiple years into the future. We also leave a portion of ournatural gas supply
requircmcnts unhcdged for purchase in thc short-term spot markets.
Our purchase of natural gas supply is govcmcd by our procuremcnt plan and is rcvicwcd and approvcd annually by thc Risk Managcmcnt Committee (RMC),
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 managelnent groups.
The plan's progress is also presented to the UTC and IPUC staffin semi-annual meetings, and updates are given to the OPUC staffquartedy. Other
stakcholdcrs, such as the Public Counsel Unit of tlrc Officc of the Attomey Gencral or the Citizcn Utility Board, arc invitcd to participate. Thc 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 tlre wholesale purchase 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
third-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 are 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 Supply 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 diverse portfolio ofnatural gas resources
allows us to make natural gas procurement decisions that benefit our natural gas customers. These interstate pipeline transportation rights provide the
capacity to serve approximately 25 percent ofpeak natural gas customer demands fiom 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
owncr, our sharc is onc-third ofthe pcak day dcliverability and total working capacity. Wc also contract for additional storage capacity and dclivcry 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
identify opportunities to purchase lower cost natural gas in the immediate term 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 resource, and to protect fiom extreme daily price volatility during cold weather or other events affecting the market.
Future Resource Needs In August 201 6, we filed our 201 6 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
l0
Appendix 6 to Joint Application Page l7 of414
Table of Contcnts
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.
. Futurc custome r groMh in our scrvicc tcrritory \rrill increasc slightly comparcd to thc 2014 IRP. Thcre will bc increasing intercst 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 fiom 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 of natural 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/ortransportation, constrain cxisting pipclinc nctworks, stimulate dcvclopment ofnewpipclinc resourccs, and changc 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 fiom 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 the jurisdiction 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
clcctric transmission scrviccs and wholesale salcs.
Since Avista Corp. is a "holding company" (in addition to being itselfan operating utility), we are also subject to the jurisdiction ofthe FERC under the
Public Utility Holding Company Act of 2005, which imposes cerlain repo(ing and other requirements. We, and all of our subsidiaries (whether or not
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 ofanyjurisdictional 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 of any affiliated company.
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 detennined 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.ln general,requests fornewretail ratesaremade 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
diffcr among thc various jurisdictions, designed to rcflcct thc cxpcctcd rcvenucs, operating cxpcnscs and nct invcstmcnt during thc pcriod ncw rctail ratcs
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
l1
Appendix 6 to Joint Application Page l8 of414
Table of Contcnts
AVISTA CORPORATION
of recovery, or timely recovery, of certain expenses or investment and the limitation by the comrrission of the authorized retum on investment.
Our rates for wholesale electric and natural gas transmission services are based on either "cost ofservice" principles or tnarket-based rates as set forth by the
FERC. See "Notes 'l and 20 ofthe Notes to Con sol i dated Financial Statements" for additional informati on 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 "Item
7. Management's Discussion and Analysis - Regulatory Matters - General Rate Cases" for infomation on general rate case aclivity.
Power Cost Deferrals Avista Utilities defers the recognition in the income statement ofcertain power supply costs that vary liorr the level currently
recovered from our retail customers as authorized by the UTC and the IPUC. See "Item 7. Management's Discussion and Analysis - Regulatory Matters -
PowerCost Deferrals and Recovery Mechanisms" and "Note 20 ofthe Notes to Consolidated Financial Statements" for information on powercost deferrals
and rccovcry mcchanisms in Washington and Idaho.
Purchased Gas Adjustment (PGA) Under established regulatory pnrctices 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 rccovcry mechanisms in Washington, Idaho and Oregon.
Decouplins and Earninss Sharing Mechanisms Decoupling is a mechanism designed to sever the link between a utility's revenues and consumers' energy
usage. In eaclr 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 orrebated to customers beginning in the following year. In conjunction with
the dccoupling mcchanisms, Washington includes an after-thc-fact camings test. At thc end ofeach calcndar ycar, camings calculations are madc for thc prior
calendaryearand a portion ofany eamings above a certain threshold are deferred and laterretumed to customers. Oregon also has an annual eamings review,
not directly associated with the decoupling mechanisrn, where eamings above a certain threshold are deferred and later retumed to customers. See "ltem 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
Fedcral law promotcs practiccs that foster competition in thc clcctric wholesalc energy markct. The FERC rcquires clcctric utilities to transmit powcr and
energy to or for wholesale purchasers and sellen, and requires electric utilities to enhance or construct transmission lacilities to create additional transmission
capacity for the purpose ofproviding these services. Public utilities (through subsidiaries or affiliates) and otlter 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 nondiscriminatory 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 wilh standards ofconduct designed to ensure that all wholesale users, including
the public utility's power merchant operations, have equal access to the public utility's transmission 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 "Itcm 7. Managcmcnt's Discussion and Analysis - Compctition" for furthcr information.
Regional Transmission Organizations
Beginning with FERC Order No. 888 and continuing with subsequent rulemakings and policies, the FERC has encouraged better coordination and
opcrational consistcncy aimcd to capturc efficiencies that might othcrwise bc gained through the formation ofa Regional Transmission Organization or an
independent system operator (ISO).
t2
Appendix 6 to Joint Application Pagel9of4l4
Tible of Cont€rts
AVISTA CORPORATION
Regional Transmission Planning
Avista Utilities meets its FERC requirements to coordinate transmission planning activities r /ith 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 lormation. ColumbiaGrid is
not an ISO, but performs those functions that its members rcquest from time to time. Currently, ColumbiaGrid filts thc role of facilitating our regional
transmission planning as required in FERC Order No. I 000 and other clarifting FERC Orders. ColumbiaGrid and its members also work with other westem
organizations to address transmission planning, including WestConnect and the Northem Tier Transmission Group (NTTG). In 201 I , 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 particrpants in the CAISO EIM or plan to integrate into the market in the near future, which could reduce bilateral market liquidity and
opportunitics for wholcsalc transactions in thc Pacific Northwest. Avista Utilitics will continuc to monitor the CAISO EIM cxpansion and the associatcd
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 effective in 2007. We are required to self-certi! our compliance with these standards on an annual basis and undergo regularly scheduled periodic
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 S 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
Infi'astructure 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
Appendix 6 to Joint Application Page 20 of 414
Table of Contents
AVISTA CORPORATION
AI'ISTA UTILITIES ELECTRIC OPERATING STATISTICS
2016
Years Ended December 3 I
201 5 2014
ELECTRJC OPERATIONS
OPERATING REVENIJES (Dollars in Thousands):
Residential
Commercial
Industrial
Public street and highway lighting
Total retail
Wholesale
Sales of fuel
Other
Decoupling
Provision for eamings sharing
Total electric operating revenues
ENERGY SALES (Thousands of MWhs):
Residential
Commercial
Industrial
Public street and highway lighting
Total retail
Wholesale
Total electric energy sales
ENERGY RESOURCES (Thousands of MWhs):
Hydro generation (from Company facilities)
Thermal generation (from Company facilities)
Purchased power
Powcr cxchangcs
Total power resources
Energy losses and Company use
Total energy resources (net oflosses)
NUMBER OF RETAIL CUSTOMERS (Average for Period):
Residcntial
Commercial
lndustrial
Public street and highway lighting
Total electric retail customers
RESIDENTIAL SERVICE AVERAGES :
Annual use per customer (KWh) (1)
Revenue per KWh (in cents)
Annual revenue per customer
AVERAGE HOURLY LOAD (aMW)
$339,210 $
305,613
t07,296
7.662
335,552 $
308,210
l t l,770
7,277
338,697
300,1 09
I10,7'15
7,549
7 59,7 8t
't 12,071
78,334
28,492
t7,349
932
762,809
127,253
82,853
25,839
4,740
(s,62t)
7 57 ,130
138,162
83,732
27,467
(7,s03)
$ 996,959 $ 997,873 S 998,988
3,528
3,1 83
1,7 63
z3
3.57 1
1 tq7
1,812
23
3,694
3,1 89
i,868
25
8497
2,998
8,603
3.t45
8,77 6
3,686
I I ,495 1t,748 12,462
3,836
3.626
4.597
(6)
3,434
3,9 83
4,899
(2)
4,143
1r{,
5,6t5
(2s)
12,053
(5s8)
12,314
(566)
12,985
(s23)
12,462I 1,495 I1,7 48
330,699
4l ,785
I,342
558
327,057
41,296
1,353
529
324,1 88
40,9 8 8
1,385
531
374,384 370,235 367,092
S
10,667
9.62
I ,025.74 $
1,033
10,827
9.40
1,017 .2t $
1,047
I 1,394
9.17
I ,044.7 6
1,062
Appendix 6 to Joint Application
14
Page 2l of 414
Table of Contents
AVISTA CORPORATION
AVISTA UTILITIES ELECTRIC OPERATING STATISTICS
Years Dcccmber
2016 2015 20t4
Winter 1,655 |,529 1,715
COOLINGDEGREE DAYS:
Actual 474 805 631
ok of average 1290h 241%| 600/o
WA
Historical 6,482 6A9t 6,820
(l ) There has been a trending decline in use per customer during the three-year period primarily due to weather fluctuations but also due in part to
energy efficiency measures adopted by customers.(2) Cooling degree days are the measure ofthe warmness ofweatherexperienced, based on the extent to which the average ofhigh and lowtemperatures
for a day excecds 65 dcgrces Fahrenhcit (annual degree days above historic indicatc warmcr than avcrage tempcrdtures). In 20 1 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.(3) Heating degree days are the measure ofthe coldness ofweather experienced, based on the extent to which the average ofhigh and low temperatures
for a day falls below 65 degrees Fahrenheit (annual degree days below historic indicate warmer than average temperatures). In 20 1 5, we switched to a
rolling 2O-year average for calculating heating degree days, whereas in prior years we used a 3O-year rolling average.
l5
Appendix 6 to Joint Application Page 22 of 414
Table of Contents
AVISTA CORPORATION
AVISTA I,ITILITIES NATI,]RAL GAS OPERATING STATISTICS
2016
Years Ended December 3 l.
20t5 2014
NATURAL GAS OPERATIONS
OPERATING REVENUES (Dollars in Thousands):
Residential
Commercial
Intemrptible
Industrial
Total retail
Wholesale
Transportation
Other
Decoupling
Provision for earnings sharing
Total narural gas operaring revenues
THERMS DELN'ERED (Thousands of Therms):
Residential
Commercial
lntemrptible
Industrial
Total retail
Wirolesale
Transportation
Interdepartmental and Company use
Total therms delivered
NUMBER OF RETAIL CUSTOMERS (Average forPeriod):
Residential
Commcrcial
lntemrptible
Industrial
Total natural gas retail customers
RESIDENTIAL SERVICE AVERAGES:
Annual use per customer (therms)
Revenue per therm (in dollars)
Annual revenue per customer
HEATING DEGREE DAYS: (I )
Spokane, WA
(t )
(2\
$193,825
96,7 5t
2,782
3,792
$203,373
r 03,1 79
2,792
4,1 58
297,t50
204,289
7,988
5,5 78
6,004
(221)
$ 470,894 i_____l?1492_$ 556,664
195.2'7 5
92,978
2,179
3,348
s
293,780
153,446
8,339
5,'787
t2,309
(2,767 )
3 13,502
228,187
7,735
7,461
I 86,565
112,686
5,700
5,234
176.6t3
107,894
4,708
5,070
t90,t7 t
| 16,7 48
5,033
5,648
310,185
684,317
178,377
378
294,285
809,1 32
164,679
335
317,600
545,620
162,311
411
1,173,257 1,268,43t t,025,942
300,883
34,868
37
255
296,005
34,229
35
261
291,928
34,047
37
264
336,043 330.530 326.276
$
$
620
l 05
649.01
593
l l0
65 0.8 3
651
1.07
696.66
s
$
$
$
Actual 5,790 5,614 6,215
Historical average (2) 6,482 6,491 6,820
Voofaverage 89% 86% 9l%
Medford, OR
Actual 3,637 3,534 3,382
Historical average (2) 4,129 4,150 4,539
%o ofaverage 88o/o 85% 75%
Heating degree days are the measure ofthe coldness ofweather experienced, based on the extent to which the average ofhigh and low temperatures
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 rn pnor years we used a 30-year rolling average.
Appendix 6 to Joint Application
l6
Page 23 of 414
Table of Contetrts
AVISTA CORPORATION
ALASKA ELECTRIC LIGHT AI\D POWER COMPAIYY
AEL&P is the primary opcrating subsidiary of AERC. AEL&P is the solc utility providing clcctrical encrgy in Juneau, Alaska. Juncau 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 operatcs clcctric gcncration, transmission and distribution facilitics locatcd in Juncau. AEL&P opcratcs five hydroclcctric generation
facilities with I 02.7 MW of hydroelectric generation capacity as of December 3 1 ,2016. AEL&P owns four of these generation facilities (totaling 24.5 MW of
capacity) and has a PPA f,or the output ofthe Snettisham hydroelectric project (totaling 78.2 MW ofcapacity).
The Snettisham hydroelectric project is owned by the Alaska Industrial Development and Export Authority (AIDEA), a public corporation ofthe State of
Alaska. AEL&P has a PPA and operating and maintenance agreement with the AIDEA to operate and maintain the facility. This PPA is a take-or-pay
obligation expiring in December2038, to purchase all ofthe output ofthe project.
For accounting purposes, this PPA is treated as a capital lease and as ofDecember 3 1, 20 1 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 time for a price equal to the principal
amount ofthe bonds outstanding at that time. See "Note I 4 ofthe Notes to Consolidated Financial Staternents" for further discussion ofthe Snettisham
capital lease obligation.
As of December 31,2016, AEL&P also had 107.5 MW of diesel generating capacity from four facilities to provide back-up sewice to firm customers when
necessary.
The following graph shows AEL&P's hydroelectric generation (in thousands of MWhs) during the time periods indicated below:
Hydroelectric Generation
c
€
C
450
400
350
300
150
:00
t50
t00
50
0
I Snettisham
I LakeDororhy
I Salnron Crcek
I Annex Creek
t cold creek
- Norrnalhvdroelectrrc+
Beilerstion ( I I
lOl(r :ol 5 :(llJ Secorxl hrlf ol'l(ll{
(l) Normal hydroelectric generation is defined as the energy output ofthe plant during a yearwith average inflows to the reservoir.
Only thc hydroelectric gencration for thc sccond half of 201 4 in the graph abovc was included in Avista Corp.'s ovcral I rrsults for 201 4. Th c full I 2 months
of20 I 4 in the graph above is presented for information purposes only.
As of December 3 l, 2016, AEL&P sewed approximately I 7,000 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
17
Appendix 6 to Joint Application Page 24 of 414
Table of Contents
AVISTA CORPORATION
served on a firm basis while certain ofits customers, including its largest customer, are served on an interruptible 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 other matters, but not
\ rith 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 electric general rate case during 2016. See "ltern 7. Management's Discussion and Analysis - Regulatory Matters" for further discussion of this general rate
case filing, including the proposed capital structure.
AEL&P is also subject to the jurisdiction ofthe FERC conceming the permits and licenses necessary 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 Sncttisham hydroclcctric project is subjcct to regulation by thc Statc ofAlaska with rcspcct to dam safety and ccrtain aspects ofits opcrations. In
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 Dcccmbcr 3 I
2016 201 5
Second half of
20t4
ELECTRIC OPERATIONS
OPERATING REVENUES (Dollars in Thousands):
Residential
CommerciaI and govemrnent
Public street and highway lighting
Total retail
Other
Total electric operating revenues
ENERGY SALES (Thousands of MWhs):
Residcntial
Commercial and govemment
Public street and highway lighting
Total electric energy sales
NUMBER OF RETAIL CUSTOMERS (Average forPeriod):
Residential
Commercial and govemment
Public street and highway lighting
Total electric retail customers
RESIDENTIAL SERMCE AVERAGES:
Annual use pcr customer (KWh)
Revenue per KWh (in cents)
Annual revenue per customer
}IEATING DEGREE DAYS: (I )
Juneau, AK
Actual
Historical average
%o ofaverage
(l)
$18,207
)1 '1))
266
I 8,01 7
26^049
215
8,283
12,948
150
$s
45,795
481
44,281
497
21,381
263
$ 46,276 $44.778 $ 21,644
139
253
I
139
258
I
63
125
I
393 398 189
14,448
2,181
2tt
14,285
2,179
210
14,121
2,148
213
r 6.840 16,67 4 t6,482
$
9,621
t 3.10
1 ,260.17
9,7 30
12.96
1,261 .25
4,461
r 3.15
586.57ss
7,301
8,351
87%
7,395
8,35 l
89%
3,381
3,771
9t%
Heating degree days are the measure ofthe coldness ofweather experienced, based on the extent to which 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 tempemtures).
Appendix 6 to Joint Application
l8
Page 25 of 4l4
Tabl€ of Contetrts
AVISTA CORPORATION
OTHERBUSINESSES
The following table shows ourassets related to ourotherbusinesses, excluding intracompany amounts as ofDecember3 1,2016 and 201 5 (dollars in
thousands):
Entiry and Asset Type 20\6 201 5
Avista Capital
Salix - wholly owned subsidiary
Equity investments
Other assets
Avista Development
Equity investments
Real estate
Notes rcceivablc and othcr assets
METAL& - wholly owned subsidiary
Alaska companies (AERC and AJT Mining)
Total
I 1,530
I I.359
5,444
I 1,568
8,390
5,107
6.718
951
12.779
8,084
$3,842 $
3.000
123
2,500
3,039
28
ss,256 $39,206
Avista Capital
. Salix is a wholly-owned subsidiary of Avista Capital that explores markets that could be serrred with LNG.
. Equity investments arc primarily in an emerging technology venture capital fund.
Avista Development
Equity investmcnts arc primarily in cmcrging technology vcnturc capital funds and companics, including an invcstmcnt in a tcchnology company
that delivers scalable smart grid solutions to global partners 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 spuning economic development
throughout Washin gton State.
AM&D doing business as METALfi 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 ofDecember3l,20l6 and $1.0 million as ofDecember3l,20l5.
Alaska companies
. lncludes AERC and AJT Mining, which is a wholly-owned subsidiary ofAERC and is an inactive mining company holding certain properties.
Ovcr timc as opportunities arise, we dispose ofinvestments and phase out operations that do not fit with our overall corporate strategy. Howevcr, 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 opponunities 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 ourwork on this project forthe foreseeable future. Ifconditions change favorably in the
future, wc may proceed with thc regulatory process to rcquest authority to build and opcrate a gas utility in Juneau.
19
$
Appendix 6 to Joint Application Page 26 of 414
Table of Contents
AVISTA CORPORATION
Salix LNG Project
In early 20 I 6, Salix was selected as the prcferred respondent to a request for proposal (RFP) issued by AIDEA that sought a qualified candidate to develop a
ncw LNG thcility to servc tlrc Fairbanks, Alaska area as part of the Intcrior Energy hoject (IEP). Commcrcial discussions in latc 2016 lcd Salix and AIDEA to
enter into an agreement that concluded Salix's involvement in the IEP.
ITEM TA. RISK FACTORS
RISK FACTORS
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
opcrations, financial condition or cash flows and could cause actual rcsults to diffcr matcrially from thosc anticipatcd in such statcments.
Finsncial Risk Factors
Weather (temperatures, precipitation levels, wind patterns and storms) has a significant effect on our results ofoperations, linancial condition and cash
flows.
Weather impacts are described in the following subtopics:
. certain retail electricity and natural gas sales,
' the cost ofnatural gas supply, and
' the cost ofpower supply.
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 thc surnmer (third quartcr) in the Pacific Northwcst. In gencral, warmer weatlrer in thc heating scason and cooler weathcr in thc 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 ofnaturat gas supply tends to increase with higher demand during periods ofcold weather. Increased 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
regulatory 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 demanddriven price volatility in otherregions ofNorth America to affect
prices in our region, even though there may be less extreme weather conditions in our area.
The cost of power supply can be significantly affccted by wcathcr. Prccipitation (consisting ofsnowpack, its vr'atcr contcnt and mclting pattcm plus
rainfall) and other streamflow conditions (such as regional water storage operations) significantly affect hydroelectric generation capability. Variations in
hydroelectric generation inversely affect our reliance 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 from surplus hydroelectric wholesale sales is
reduced. Wholesale prices also vary based on wind patterns as wind generation capacity is material in ourregion but its contribution to supply is
inconsistent.
The price ofpower in the wholesale energy markets tends to be higher during periods ofhigh regional demand, 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 currently in retail rates, the difference is partially absorbed
by the Company in current expense and it is partially defened or shared with customers through regulatory mechanisms.
20
Appendix 6 to Joint Application Page27 of414
Table 0f Contents
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 exaceltated when intermittent resources suclr 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 ne 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 econorries
impacts our financial condition. We could experience increased borrowing costs or limited access to capital on reasonable terms.
We access long-tcrm capital markcts to financc capital cxpcnditures, repay maturing long+crm dcbt and obtain additional working capital from timc-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 rnay 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 arrangements. We would also likely be prohibited llom payrng
divtdends on ourcommon stock.
Performance ofthe financial markets could also result in significant declines in the market values ofassets held by our pension plan and/or a significant
incrcase in thc pcnsion liability (which impacts the fundcd status ofthe plan) and could increasc futurc funding obligations and pension expcnsc.
We rely on credit from Iinancial institutions for short-term borrowings. We need adequate levels of credit with financial institutions for short-
term liquidity. We have a $400.0 million committed line of credit that expires in April 2021. Our subsidiary AEL&P has a $25.0 million committed 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
agrccments contain customary covcnants and default provisions.
Any default on thc lines ofcredit or othcr financing an-angcmcnts ofAvista Corp. or any ofour "significant subsidiarics," ifany, could rcsult in cross-dcfaults
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 othercounterparties to demand collateral. In the event ofany such default, it would be difficult forus to obtain financing on reasonable terms to
pay creditors or fund operations. We would also likely be prohibited from paying dividends on our cornmon 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 we 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 lrad 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 I , 201 6. We
may be requrred to post cash or letters ofcredit as collateral depending on fluctuations in the fair value ofthe derivative instruments. Settlement ofinterest
mtc swap dcrivativc instruments in a liability position could rcquire a significant amount of cash, which could ncgativcly 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 affect 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 lenders and counterparties. In addition, credit rating downgrades could reduce the number of
counterpartics willing to do busincss with us or result in thc tcrmination ofoutstanding regulatory authorizations for ccrtain financing activitics.
2t
Appendix 6 to Joint Application Page 28 of 414
Table of Contcnts
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 ofcounterpartics and conccntrations ofgeographic location may affcct our overall cxposure to credit risk bccausc thc countcrparties may bc
similarly aflected by changes in conditions.
U-tilitv Repulatorv Risk Foclors
Regulators may not grant rates that provide timely or sulficient recovery ofour costs or allow a reasonable rate ofreturn 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 growth. 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 ofdeferred expenses is disallowed, it could have a negative effect on our operating revenues, net income and cash flows. During
Decembcr 20 I 6, the UTC dcnicd our most rcccnt clcctric and natural gas gcneral ratc rcquests and granted zcro rate relicf. Pending bcforc thc 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 rates. The UTC has
provided notice that it expects to rule on the Petition on or before March I 6, 20 I 7. Ifour efforts to obtain rates that are fair,just, reasonable and sufficient are
not successful, our 20 I 7 eamings are expected to decrease by $0.20 to $0.3 0 per diluted share as compared to 201 6 actual results. See further discussion in
"Item 7. Management's Discussion and Analysis - Regulatory Matters."
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 ordecoupled revenues not recovered through rates at the time such amounts are incurred, even ifwe are
expected to recover these amounts from customers in the future.
See furthcr discussion at '\lotc I ofthc Notcs to Consolidated Financial Statcments - Rcgulatory Dcfcned Chargcs and Crcdits."
Enerpv Commodilv Risk Factors
Energy commodity price changes affect our cash flows and results ofoperations.
Energy commodity prices can be volatile. We rely on energy markets and other counterparties for energy supply, surplus and optimization
transactions and commodity pricc hcdging. A combination offactors exposes our opcrations to commodity price risks, including:
. our obligation to serve ourretail 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 arrangements (however, a
significant portion ofour encrgy rcsource costs arc not fixed), and
22
Appendix 6 to Joint Application Page 29 of 414
Table of Contents
AVISTA CORPORATION
. the potential non-performance by commodity counterparties, vr'hich could lead to replacement ofthe scheduled energy ornatural gas at
highcr priccs.
Because we urust supply the amount ofenergy dernanded 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 higherprices in wholesale energy markets (and the risk ofselling energy at lowerprices 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 arangements. Price volatility can cause collateral requirements to change quickly and significantly.
Cash flow deferrals related to energy commodities can be significant. 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 staternent recognition and recovery from customers for some oftlrese differences, which are recorded as deferred charges with the
opportunity for future recovery through retail rates. These deferred costs are subject to review for prudence 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 becomc part ofcustomer rates affect our rcsults ofopcrations.
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 cntcr into contracts to hcdge a portion ofour purchasc and sale commitmcnts 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
forwards, futures, 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
liabilitics, and opcrating cash flows. In addition, actual loads and rcsources typically vary from forccasts, sometimes to a significant dcgrcc, which rcquirc
additional transactions or dispatch decisions that impact cash flows.
The hedges we enter into are reviewed for prudence by our various regulators 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 our obligation to serve
customcrs and mcct the dcmands ofour countcrparty agreements. Thcre is the potcntial that some ofour gcneration sourccs, such as coal, may becomc
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.
0p erational Risk Factors
We are subject to various operational and event risks.
Our operations are subject to operational and event risks that include:
severe weather or natural disasters, including, but not limited to, avalanches, wind storms, wildfires, eanhquakes, 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
Appendix 6 to Joint Application Page 30 of 414
Table of Contents
AVISTA CORPORATION
. fuel cost and availability, including delivery constraints,
. explosions, fires, accidents, or mechanical breakdowns that may occur while operating and maintaining our generation, transmission and distributi on
systems,
. damage or injuries to third parties caused by our generation, transmission and distribution systems,
. natural disasters that can disrupt energy generation, transmission and distribution, and general business opemtions, and
. terrorist attacks or other malicious acts that may disrupt or cause damage to our utilrty 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 wc seek to ncgotiate indcmnification arrangcmcnts with contractors for certain cvent risks- Howcvcr, insurancc or indcmnification agreemcnts may
not be adequate to protect us against liability, extra expenses and operating disruptions fiom 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 irnplement 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 llom multiple facilities to provide backup sewice to
firm customers when necessary; however, a single hydroelectric power generation facility, the Snettisham hydroelectric project, provides approximately two-
thirds ofAEL&P's hydroelectric power generation. Any issues that negatively aflect AEL&P's abi lity to generate or transmit power or any decrease in the
dernand for the power generated by AEL&P could negatively affect our results ofoperations, financial condition and cash flows.
Comoliance Risk Factors
There have been numerous changes in Iegislation, related administrative rulemakings, and Executive Orders, including periodic audits ofcompliance
with such rules, which may adversely affect our operational and financial performance.
Wc cxpect to continuc to be affcctcd by legislation at thc national, state and local lcvcl, as well as by administrative rulcs and requircments publislrcd 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 Company. Failure to comply with the FERC, the NERC, or the WECC requirements can result
in financial penalties ofup to $ I million per day per violation.
Future lcgislation or administrativc rules could havc a material advcrse effcct on our opcrations, rcsults ofopcrations, 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 efforts at the state, national and intemational levels conceming climate change and other environmental issues could
have significant impacts on our operations. The electric and natural gas utility industries are fiequently affected by proposals to curb greenhouse gas and
other air emissions. Various regulatory and legislative proposals 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
rcsources as wcll as the distribution ofnatural gas to our customcrs.
We expect continuing activity in the future and we are evaluating the extent to which potential changes to environmental laws and regulations may:
. incrcase the opcrating costs ofgencrating plants,
. incrcasc the lead time and capital costs for the construction ofnew gcncrating plants,
. require modification ofourexisting generating plants,
24
Appendix 6 to Joint Application Page 3l of4l4
Table of Contents
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 orpotential 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 I 9 ofthe Notes to Consolidated Financial Statements" for further details ofthese matters.
Technologv Risk Factors
Cyber attacks, terrorism or other malicious acts could disrupt our businesses and have a negative impact on our results of operations 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 personal 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 enors. In particular, cyber attacks, terrorism or other malicious acts could damage, destroy or drsrupt these systems.
Additionally, thc facilities and systcms ofclicnts, suppliers and third party scrvice providcrs could bc vulnerablc to thcse same risks and, to thc cxtcnt of
interconnection to our technology, may impact us. Any failure, unexpected, orunauthorized use oftechnology systems could result in the unavailability of
suclr systems, and could result in a loss ofoperating revenues, an increase in operating 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
morc common and sophisticatcd, wc could bc rcquircd to incur costs to strcngthen our systcms and rcspond to emcrging 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.
Wc arc currcntly planning to rcplacc all of our clcctric mctcr infrastructurc in Waslrington statc with two-way communication advanccd mctcring
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 ornonfunctioning metering and/ordelayed or inaccurate customerbills orunplanned
outages, which could have a material adverse effect on ourresults 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.
Strutesic Risk Factors
Our strategic business plans, which may 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 extent ofour business development efforts where potential future business is uncertain.
Our strategic business plans could be affected by or result in any ofthe following:
. disruptive innovations in the marketplace may outpace our ability to compete or manage our risk,
. potential difliculties 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
Appendix 6 to Joint Application Page 32 of 414
Table of Contents
AVISTA CORPORATION
. market or other conditions may adversely affect our operations or require changes to our business strategy, which could result in a non+ash
goodwill impairmcnt chargc that would rcduce asscts and rcduce our net income, and
. potcntial rcputational risk arising from repcatcd gencral ratc case filings, degradation in thc quality ofscrvicc, or from failcd stratcgic invcstments
and opportunities, which could erode shareholdet customer and community satisfaction with our Company.
External Mandates Risk Factors
Extemal mandate risk involves forces outside the Company, which rray 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 "Forwand-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]NRESOLVED STAFF COMMENTS
As of thc filing date of this Annual Rcport on Form l0-I! wc have no unresolvcd comments from thc staffof thc SEC.
26
Appendix 6 to Joint Application Page 33 of 414
Tabk of Contents
AVISTA CORPORATION
ITEM 2. PROPERTIES
AVISTAUTILITIES
Substantially all ofAvista Utilities'properties are subject to the lien ofAvista Corp.'s mortgage indenture.
Ourutility electric pmperties, located in the states ofWashington, Idaho, Montana and Oregon, include the following:
Genere6on Properties
No. of
Units
Hydroelcctric Gencrating Stations (River)
Washington:
Long Lake (Spokane)
Little Falls (Spokane)
Mne Mile (Spokane) (3)
Uppcr Falls (Spokanc)
Monroe Street (Spokane)
Idaho:
Cabinet Gorge (Clark Fork) ( )
Post Falls (Spokanc)
Montana:
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 (simple-cycle, natural gas)
Boulder Park GS (simplc-cycle, 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 Properties
(l )
(2)
(3)
(4)
Namcplate
Rating
(M!\') ( r )
Prcsnt
Capability
(Mrl) (2)
4
4
4
I
I
4
6
5
I
I
2
6
2
2
70.0
32.0
36.8
10.0
14.8
88.0
35.6
29.0
10.2
I 5.0
265.0
14.8
27).0
15.4
487.8 562.4
50.7
7.2
6l .8
24.6
53.5
6.9
64.8
24.6
931.2
166.5
233.4
295.0
t,028.6
166.5
222.0
295.0
839.2 833.3
1.770.4 I,861 .9
Nameplate rating, also referred to as "installed capacity," is the manufacturer's assigned power capability under specified conditions.
Present capability is the maximum capacity ofthe plant under standard test conditions without exceeding specified lirnits oftemperature, stress and
environmental conditions. Information is provided as ofDecember 3 1 ,2016.
The project to replace Units I and 2 was completed during 20 I 6. The present capability shoum is the maximum plant generation we have seen given
thc watcr we havc had available, because wc lrave not yct had pcak watcr conditions sincc Units I and 2 wcnt into scrvice. As conditions change, wc
will test plant capability and revise this number accordingly.
For Cabinet Gorge, we have water rights pennitting 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
generation of265 MW. The present capability disclosed above represents the capability based on maximum stream flow conditions when we are
allowed to generate above our water rights.
Appendix 6 to Joint Application
27
Page 34 of 414
(5)
(6)
Table of Contents
AVISTA CORPORATION
These generating stations can operate as separate single-cycle plants or combined-cycle with the natural gas plant providing exhaust heat to the
wood boiler to increase efliciency.
Jointly owned; data refers to our l5 percent interest.
Electric Distribution and Transmission Plant
Avista Utilities owns and operates approximately 19,000 miles of primary and secondary electric distribution lines providing service to retail customers. We
have an clcctric transmission systcm of 685 milcs of 230 kV line and 1,565 milcs of I 15 kV line. We also own an I I perccnt intcrest in approximatcly 500
miles of a 500 kV line between Colstrip, Montana and Townsend, Montana. Our transmission and distribution systems also include numerous substations
with transfonners, switches, monitoring and metering devices, and other equipment.
The 230 kV lines are the backbone ofour transmission grid and are used to transmit power from generation resources, including Noxon Rapids, Cabinet
Gorgc and thc Mid-Columbia hydroclcctric projects, to thc major load centcrs in our scrvicc arca, as wcll as to transfer powcr bctween 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 Ilom generating facilities outside ofour service area, including
Colstrip, Coyote Springs 2 and the Lancaster Plant.
These lines also provide a lneans for us to optimize resources by entering into short-term 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 thc othcr's transmission systcm. We hold a long-tcrm transmission agrccmcnt with thc BPA that allows us to scruc our rlativc load customcrs that arc
connected through the BPA's transmission system.
Natural Gas Plant
Avista Utilities has natural gas distnbution 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. Our natural gas system includes numerous regulator
stations, scrvicc distribution Iines, monitoring and metering devices, and othcr cquipmcnt.
Wc own a onc-third intcrcst in Jackson Prairic, an underground natural gas storagc ficld locatcd near Chchalis, Washington. Scc "Part I - Itcm l. Busincss -
Avista Utilities - Natural Gas Operations" for further discussion of Jackson Prairie.
28
Appendix 6 to Joint Application Page 35 of 414
Table of Contetrts
AVISTA CORPORATION
ALASKA ELECTRIC LIGHT AND POWER COMPANY
Substantially all of AEL&P's utility properties 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 Generating Stations
Snettisham (3)
Lake Dorothy
Salmon Creek
Annex Creek
Gold Creek
Total Hydroelectric
Diesel Genemting Stations
Lcmon Creek
Auke Bay
Gold Creek
Industrial Blvd. Plant
Total Dicsel
TotaI Generation Properties
No. of
Units
Nameplatc
Rating
(Mw)(l)
Present
Capability(M!\) (2)
J
I
I
2
3
78.2
14.3
8.4
4.1
1.6
78.2
14.3
5.0
3.6
t.6
t 06.6 102.7
lt
3
5
I
61.4
28.4
8.2
23.5
51.8
25.2
7
23.5
t2t.5 107.5
210.2
(l ) Nameplate rating, also rcferrcd 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 ,2016.(3) AEL&P does not own this 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 I . Item I . Business - Alaska Electric Light and
Power Company."
In addition to the generation properties above, AEL&P owns approximately 6l miles of transmission lines, which are primarily comprised of 69 kV line, and
approximately 184 miles of distribution lines.
ITEM 3. LEGAL PROCEEDINGS
See "Note I 9 ofNotes to Consolidated Financial Statements" for information with respect to legal proceedings.
ITEM 4. MII{E SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FORREGISTRANT'S COMMONEOTIITY.RELATED STOCKHOLDERMATTERSANDISSUERPURCHASES OF EOUITY
SECURITIES
Avista Corp. Market Information 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 8y' I 0 registered
shareholders ofour common stock.
Avista Corp.'s Board of Drectors considers the level of dividends on our common slock on a regular basis, taking into account numerous factors including,
without limitation:
. ourresults ofoperations, cash flows and financial condition,
the success ofour business strategies, and
general economic and competitive conditions.
Appendix 6 to Joint Application
29
Page 36 of 414
228.1
Table of Contents
AVISTA CORPORATION
Avista Corp.'s net income available for dividends is generally derived from our regulated utility operations (Avista Utilities and AEL&P).
The payment ofdividends on corilnon stock could be limited by:
. certain covenants applicable to the Company's outstanding long-term debt and committed line ofcredit agreements (see "Item 7.
Management's Discussion and Analysis - Capital Resources" for compliance with these covenants),
. the hydroelectric licensing requirements ofsection I 0(d) ofthe FPA (see "Note I ofNotes to Consolidated Financial Statements"),
. ccrtain requirements under the OPUC approval of the AERC acquisition in 2014. Thc OPUC's AERC acquisition ondcr requircs Avista
Utilities to maintain a capital structure of no less than 40 percent common equity (inclusive of short+erm debt). This limitation may be
revised upon request by the Company with approval from the OPUC, and
. certain covenants applicable to preferred stock (when outstanding) contained in the Company's Restated Articles oflncorporation, as
amended (currently there are no preferred shares outstanding).
On February 3, 2017, Avista Corp.'s Board of Directors declared a quarterly dividend of $0.3575 per share on the Company's common stock. This was an
increase of$0.0 I 50 per share, or 4.4 percent from the previous quarterly dividend of$0.3425 per share.
For additional information, see "Notes I , 1 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
March
3l
June
30
September December
3l30
201 6
Dividends paid per common share
Trading price range per common share:
High
Low
201 5
Dividends paid per common share
Trading price range per common slrare:
High
Low
$0.3425 $0.3425 $0.3425 S
44.80 $
38.70 $
0.33 $
34.25 $
30.41 $
44.97 S
40.43 $
0.33 $
0.3425
42.63
39.1I
0.33
36.06
32.86
0.33 $
38.30 $
32.22 S
$
$
$
$
4t.12 $
34.67 $
$
33.99 $
29.93 $
For information with respect to securities authorized for issuance under equity compensation plans, see "ltem I 2. Security Ownership ofCertain Beneficial
Ownen and Management and Related Stockholder Matters."
30
Appendix 6 to Joint Application Page37 of4l4
Table of Contents
AVISTA CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
(in thouunds, except per share data and ratios)
Operating Revenues:
Avista Utilities
AEL&P
Other
Intersegment eliminations
Total
lncome (Loss) from Operatious (pre-tax):
Avista Utilities
AEL&P
Other
Total
Net income from continuing operations
Net income from discontinued operations
Years Ended December 3 I ,
2016 201 5 2014 2013 2012
s r,372,638 $
46,276
23,569
l,4 t 1,863 $
44,778
28,685
(ss0)
|,413,499 S
21,644
39,219
(r,800)
1,403,995 $ l,3s4,l8s
39,549
(1,800)
3 8,95 3
(l,800)
!____1113i!l_
s 2'7',7.070
15,434
(2.701)
241,228 S
14,072
(2,086)
239,976 $
6,221
6,391
$l 77651,472,562$1,441,744$1,391,338
232,572 $ 188,778
(1,483)(1,680)
$ 289,803 $ 253,214 $ 252,588 $ 231,089 $ 187.098
$
$ 137,316 $ll8,l70 $
5,147
104,333 $
7,961
I 19,866
72,411
$76,803
I,997
Net income S
Net income attributable to noncontrolling interests $
Net Income (Loss) attributable to Avista Corporation shareholders:
Avista Utilities $
AEL&P
Ecova - Discontinued operations
Other
137,316 $
(88) S
132,490 S
7,968
(3,230)
123,317 s
(e0) s
t 13,360 $
6,641
5,147
0,921)
t92,2'77 $
(236) $
112.294 $
(1,217) $
7,129
(4,650)
7 8,8 00
(se0)
1,825
(s,3 l 9)
t13,263 $
3,152
72,390
3,236
108,598 $ 81,704
NetincomeattributabletoAvistaCorp.shareholdcrs $ 137,228 $ 123,227 $ 192,041 $ lll,077 $ 78,210
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 cornmon share attributable to Avista Corp. shareholders. basic:
Eamings pcr common share from continuing opcrations $ 2.16 $
Eamings per common share from discontinued operations
Total eamings per common share attributable to Avista
Corp. shareholders, basic
1.90 $
0.08
r.94 S
l.l8
t.74 S
0.1I
62,301
62,708
62,313
61,632
6r,887
62,243
59,960
59,997
60,077
59,028
5 9,201
59,813
1.30
0.02
$2.16 $1.98 $3.12 $1.85 $1.32
Eamings per common share attributable to Avista Corp. shareholders. diluted:
Eamings per common share from continuing operations $ 2.1 5 S
Eamings per common share from discontinued operations
Total eamings per common share attributable to Avista
Corp. shareholders, diluted
3l
I.89 s
0.08
1.93
t .17
1.74 $
0.1I
s 1.30
0.02
2.ts $\.9'.7 $3.10 $1.85 $1.32
Appendix 6 to Joint Application Page 38 of4l4
$
Table of Contents
AVISTA CORPORATION
(in thousands, except per share data and ratios)
Dividends declared per common share
Book value per common share
Total Assets at Year-End:
Avista Utilities
AEL&P
Othcr
Total (l)
Avista Utilities
AEL&P
Ecova - Discontinued operations (l )
Other
Net income attributable to Avista Corporation slrareholders
$ 1.37 $ 1.32 $ 1.27 $ 1.22
$ 25.69 $ 24.53 $ 23.84 $ 2t.61
$ 4,975,555 $ 4,601,708 S 4,357,760 $ 3,930,251
273,770 265,735 263,070
60,430 39,206 80,141 81,282
Years Ended December 3 I
2016 2015 2014 2013 2012
$
s
l.t 6
2t.06
$ 3,883,602
95,6 3 8
$ 3,979,240s 5,309,7ss $ 4,906,649 $ 4,700,971 $ 4,0r r,533
Long-Term Debt and Capital Leases (including current portion) $ 1,682,004 $ 1,573,278 $ 1.487,126 $ 1,262,036 S 1,217,520
Nonrecoune Long-Term Debt ofSpokane Energy (including
currentportion) $ - $ - S 1,431 S 17,838 $ 32,803
Long-TermDebttoAffiliatedTrusts S 51,547 S 51,547 S 51,547 $ 51.547 $ 51,547
Total AvistaCorp.Shareholders'Equity S 1,648,727 $ 1,528,626 $ 1,483,671 $ 1,298,266 S 1,259,477
Ratio of Eamings to Fixed Charges (2) 3.32 3.13 3.39 3.02 2.48
(l) Thetotal assetsatyear-endfortheyears20l3and20l2 excludethetotal assetsassociatedwithEcovaof$339.6rnillion andS322.7 million,
respectively.
(2) See Exhibit I 2 forcomputations.
ITEM 7, MANAGEMENT'S DISCUSSION ANTD ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Sesments
As of December 3 1 , 201 6, we have two reportable business segments, Avista Utilities and AEL&P. We also have other businesses which do not represent a
rcportablc busincss scgmcnt and arc conductcd by various dircct and indircct subsidiarics ofAvista Corp. Scc "Part I. Item I . Busincss - Company Overvicw't
lor funher 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 December 3 I (dollars in thousands):
20t6 201 5 2014
s 132.490 $
7,968
(3,230)
l 13,360 $
6,641
5,147
(1,921)
I t3,263
3,152
72,390
3,236
$ 137,228 S 123,227 S t92,04t
(l) TheresultsfortheyearendedDecember3l,20l4includethenetgainonsaleofEcovaof$69.7million.
Execudve Level Summarv
Overall Results
Net income attributable to Avista Corp. shareholden was $ l3 7.2 million for 2016, an increase from $ I 23.2 million for 201 5. Avista Utilities' eamings
incrcased primarily duc to an increase in electric and natural gas gross margin as a result ofgcneral ratc incrcascs and the implementation ofdecoupling
mechanisms in Idaho and Orrgon. See "Re sults 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 o{fset 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 normal 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.
Appendix 6 to Joint Application
5Z
Page 39 of4l4
Table of Contents
AVISTA CORPORATION
201 6 llashington General Rate Cases
In Dcccmber 20 I 6, thc UTC issucd an ordcr related to our Washington clcctric and natural gas gcncral ratc cascs that wcre originally filcd with the UTC in
February 20 I 6. The UTC order 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 Dcccmbcr 201 6, wc filcd a Pctition for Re consideration or, in thc altcmative, Rehearing (Pctition) with thc UTC. Thc UTC providcd noticc inviting partios
to respond to our Petition, stating th at it expects to rule on the Petition on or before March I 6, 2 0 I 7. If our eflorts to obtain rates th at are fair, just, reasonable
and sufficient are not successfirl, our 20 I 7 eamings will suffer a significant adverse impact. We believe the UTC order will not allow us to eam a reasonable
letum on investments that we have already made in our infrastructure. 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 expcct our operating costs to continuc to grow along thc same trcnd we have becn cxpcricncing reccntly; howcvcr, ifour currcnt 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 201 7 of$0.20 to $0.30 perdiluted share as compared to 201 6 actual results.
See "ltern 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 l,20l4,we acquired AERC, based in Juneau, Alaska. The completion ofthistransaction limitsthecomparability ofthe financial resultsfor20l6 and
201 5 to those for20l4 since the first halfof20l4 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 ofthe Notes to
Consolidated Financial Statements."
Ecova Disposition
On June 30, 20 I 4, Avista Capital completed the sale ofits interest in Ecova for a sales price of533 5.0 million in cash, less the payment ofdebt and other
customary closing adjustmcnts. Thc salc ofEcova provided total caslr proceeds to Avista Corp., nct ofdcbt, paymcnt to option and minority holdcrs, income
taxes and transaction expenses, of $ I 43.7 million and resulted in a net gain of $74.8 million. Most of the net gain was recognized in 20 | 4 with some minor
true-ups during 20 I 5.
Thc complction ofthis transaction limits the comparability ofthe financial results for 20 I 6 and 20 I 5 to thosc for 2014 since the first halfof2O I 4 contains
the financial results ofEcova (in discontinued operations) and 20 I 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."
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 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 asscssmcnt of our need for rate relief and thc dcvclopmcnt of rate case plans takcs 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
20 I 4 General Rale Cases
In Novernber20l4, the UTC approved an all-party settlement agreement related to ourelectric and natural gas general rate cases filed in February 2014 and
new rates became effective on January I , 20 I 5. The settlement was designed to increase annual electric base revenues by $ 1 2.3 million, or 2.5 percent. The
settlement was designed to increase annual natural gas base
JJ
Appendix 6 to Joint Application Page 40 of 414
Table of Contents
AVISTA CORPORATION
revenues by S8.5 million, or 5.6 percent. The settlement agreement also included the implementation ofdecoupling mechanisms for electric and natural gas
and a related after-the-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 percentrate ofretum on rate base (ROR) used in conjunction with the a{ter-the fact eamings test discussed under "Decoupling and
Eamings Sharing Mcchanisms" bclow. Thc clcctric and natural gas rcvcnuc incrcascs wcrc ncgotiatcd numbcrs, with cach pafty 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 Rate Cases
ln January 20 1 6, we rcccivcd an ordcr (Ordcr 05) that concludcd our elcctric and natural gas general ratc cascs that wcrc originally filcd with the UTC in
February 201 5. New electric and natural gas rates were effective on January I 1,2016.
The UTC-approved rates are designed to provide a I .6 percent, or $8. I million decrease in electric base revenue, and a7 .4 percent, or $ I 0.8 million increase
in natural gas base revenue. The UTC also approved an ROR of7.29 percent, with a cornmon equity ratio of48.5 percent and a 9.5 percent ROE.
UTC Order Denying Industrial Customers of Northwest Uilities / Public Counsel Joint Motion.for Clarification, WC Staff Motion to Reconsider
and WC Staff Molion to Reope n Record
On January 19, 201 6, the lndustrial Customers of Northwest Utilities (ICNU) and the Public Counsel Unit of the Washington State Office of the
Attomey General (PC) filed a Joint Motion for Clarification with the UTC. In the Motion for Clarification, ICNU and PC requested that the UTC
clarif,thecalculationoftheelectricattritionadjustmentandtheend-resultrevenuedecreaseof$8.1 rnillion.ICNUandPCprovidedtheirown
calculations in their Motion, and suggested that the revenue decrease should have been $ I 9.8 mil lion based on their reading ofthe UTC's Order.
On January 19, 2 0 I 6, the LITC Staff, which is a separate party in the general rate case proceedings from the UTC Advisory Staff, filed a Motion to
Reconsiderwith the UTC. In its Motion to Reconsider, the Staffprovided calculations and explanations that suggested that the electric revenue
dccrcaseshouldhavebeenarcvcnucdecreaseofS2T.4 millioninstcadof$8.1 million,basedonitsrcadingofthcUTC'sOrder.Furthcr,onFcbruary
4,2O16,the UTC Stafffiled a Motion to Reopen Record forthe Limited Purpose of Receiving into Evidence Instruction on Use and Application of
Stafl's Attrition Model, and sought to supplement the record "to incorporate all aspects of the Company' Power Cost Update." Within this Motion,
UTC Staffupdated its suggested electric revenue decrease to $ I 9.6 million.
Nonc of the partics in their Motions raiscd issucs with the UTC's dccision on thc natural gas rcvcnuc incrcase of $ I 0.8 million.
On February l9,20l6,theUTC issued an order(Order06)denying the Motionssurnmarized above and affirmed Order05 including an $8.1 million
decrease in electric base revenue.
PC Petitionfor Judicial Review
On March 18,2016, PC filed in Thurston County Supcrior Coun a Pctition for Judicial Review of thc UTC's Ordcr 05 and Ordcr 06 described abovc
that concluded our 20 I 5 electric and natural gas general rale cases. In its Petition for Judicial Review, PC seeks judicial review offive aspects of
Order 05 and Order 06, alleging, among other things, that (1 ) the UTC exceeded its statutory authority by setting rates for our natural gas and electnc
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
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 adjustmcnts; (3) thc UTC ened in applying thc "cnd rcsults test" to sct ratcs for our clcctric opcrations 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.
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
thc ratcs approvcd in Order 05 and rcaffirmed in Ordcr 06 arc unlawful and not fair, just and reasonablc; (4) rcmand the mattcr to thc UTC for furthcr
proceedings consistent 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
Appendix 6 to Joint Application Page 4l of 414
Table of Contents
AVISTA CORPORATION
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,
anintermediateappellatecourtintheStateofWashington.Aflerbnefingandargument,thematterwascertifiedon Apil29,2016 andacceptedby
the Court of Appeals on July 29,2016. The parties are providing briefs to the Court, after which the Court wi ll set the matter for argument. A decision
from the Court is not expected until late 2017,at the earliest.
The ncw ratcs cstablishcd by Order 05 will continuc in cffect whilc thc Pctition for Judicial Rcvicw is being considcrcd. Wc bclicvc thc UTC's Ordcr
05 and Order 06 frnalizing 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 with a reasonable opportunity to
eam the rate ofretum authorized by the UTC.
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 2016. The UTC order denied the Company's proposed electric and natural gas rate increase requests of $3 8.6 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, 20 I 6 we filed a Petition for Reconsideration or, in the altemative, Rehearing (Petition) with the UTC related to our 201 6 general rate cases.
TIre WC's Order and Avista Corp.'s Response
The primary rcason given by the UTC in reaching its conclusion is that, in our rcqucst, wc did not follow an "appropriatc mcthodology" to show thc
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 offact 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 order points 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 testrmony, UTC
Staffagreed that current rates were not sufficient.
. Thc costs associatcd with thc growth in ratc base and opcrating expcnscs arc growing at a fasterpacc than rcvcnuc from rctail salcs, and
therefore a revenue adjustment is necessary to close this gap. The revenue adjustment to close this gap is sometimes called an attrition
adjustrnent. In previously filed testimony, UTC Staffagreed that a revenue adjustment is necessary to close this gap.
. All ofthe capital projccts and opcrating expenscs we includcd in thc casc are neccssary in the timc frame proposcd in order for us to continuc
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 (otherthan Public Counsel's general opposition to AMI).
. We presented all of the studies and analyses in this case, consistent with ourprevious filings with the UTC, and the UTC Staffacknowledged
in previously filed testimony, that we provided such studies.
. We earned close to our allowed retum on equity during each of the years 201 3 through 20 I 5, and into 20 I 6. This opportunity was possible
only with the revenue increases related to attrition adjustrnents, and an attrition adjustment is also necessary for 2Ol7 .
In previously filed testimony, the UTC Staffsupported electric and natural gas revenue increases totaling $28.4 million. Commissioner Jones
dissented and did not support the decision. In his dissent, Commissioner Jones supported an electric rcvenue increase of$26.0 million, and a natural
gas increasc of$2.4 million, based on UTC Staffs analysis.
35
Appendix 6 to Joint Application Page 42 of 414
Table of Contcnts
AVISTA CORPORATION
In response to our Petition, on December 27, 20 I 6 the UTC issued a "Notice ofOpportunity to File Answers to Petition for Reconsideration or
Rchcaring." In its Noticc thc UTC rcqucsted partics to thc case to filc writtcn answcrs to our Pctition and all intercstcd partics filcd writtcn answcrs to
the Petition in January 2017 .The UTC's notice indicated that it expects to enter an order resolving the Petition no later than March I 6, 20 I 7.
In UTC Staff s Answer to our Petition, UTC Staffessentially abandoned its previous recommendations to the UTC, and suppo(ed no electric and
natural gas revenue increases. In our Motion to Respond, and Response Comments, to the Answers ofthe parties, filed January 20, 20 I 7, 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 forthe opportunity to eam ourallowed retum in a period when growth rates in investment in plant and operating expenses
outpace growth in cncrgy sales, and whethcr our current spending lcvcls are both nccessary and immcdiate to provide safe and reliablc scrvice to our
customels.
We may also seek an order from the UTC allowing for the deferral for later recovery of ongoing costs associated with AMI.
Accounting Order to DeJbr Existing Washington Electric Meters
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
cxisting elcctric metcrs )r/ith new two-way digital metcrs and thc rclatcd softwarc and support serviccs through ourAMI projcct in Washington State.
Replacement ofthe meters is expected to begin in the second halfof20 I 7.
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 approxirnately $ I 9.1 rnillion. 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.
Idoho General Rate Cases
20 I 5 Generul Rale Cases
In Dccembcr 20 I 5, the IPUC approvcd a settlcmcnt agrccmcnt bctwccn Avista Utilities and all intcrcsted partics relatcd to our elcctric and natural gas gcncral
rate cases, wh ich were originally fi led 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.
Thc scttlemcnt agreement also rcflccts the following:
. the discontinuation ofthe after-the-fact eamings test Orovision for eamings sharing) that was originally agreed to as part ofthe settlement of
our 20 I 2 electric and natural gas general rate cases, and
. the implementation ofelectric and natural gas Fixed Cost Adjustment mechanisms, as discussed below.
20 1 6 General Rate Cases
In Decernber 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 20 I 6. New rates took efltct on January I , 201 7 under the settlement agreement. We did not fi le a natural gas general
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
Appendix 6 to Joint Application Page 43 of4l4
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
customcrs, the scttlcmcnt agrecmcnt includcs thc continucd rccovery ofapproximatcly $4.1 million in costs related to thc Palousc Wind Projcct through thc
PCA mechanism rather than through base rates.
In our original request we reguested an overall increase in base electric rates of6.3 percent (designed to increase annual electric revenues by $ I 5.4 million),
effective January l,2Ol7 .
Ouroriginal request was based on a proposed ROR of7.78 percent with a colnmon equity ratio of50 percent and a 9.9 percent ROE.
Oregon General Rate Cases
20 I 3 General Rate Case
In January 20l4,thc OPUC approvcda settlementagreemcnt in ournatural gas gencral mtc case (originally filed in August20l3). Asagrccd to in the
settlement, new rates were implemented in two phases: February I , 20 l4 and November I , 20 14. Effective February I , 20 14, rates increased for Oregon
natural gas customers 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 customers were to increase on a billed basis by an overall I .6 percent (designed to increase annual revenues by $ I .4 million).
The billed rate increase on November I , 20 I 4 was dependent upon the completion ofProject Compass and the actual costs incurred through September 3 0,
20 I 4, and the 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 I , 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 of7.47 percent, with a common equity ratio of48 percent and a 9.65 percent ROE.
20 I 4 General Rilte Case
In March 2015,we filed an all-party settlement agreementwith the OPUC related to ournalural gasgeneral rate case,which wasoriginally filed in September
20 I 4. Tlre 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 Aom customers through a separate rate 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 16,2015 . On April 9,2015, the OPUC issued an Order
approving the settlcment agreemcnt as filed.
This settlement agreement provided for an overall authorized ROR of7.5 I 6 percent with a common equity ratio of5 I percent and a 9.5 percent ROE.
201 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 201 5. The OPUC orderapproved 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 I 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 order provided an authorized ROR of 7.46 percent with a common equity ratio of 50 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 describcd bclow. Scc furthcr dcscription and a summary of the balanccs rccorded undcr this mechanism below.
201 6 General Rate 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 mitlion). Our request is based on a proposed ROR of7.83 percent with a common equity ratio of50
pcrccnt and a 9.9 pcrccnt ROE. Thc OPUC has up to I 0 months to revicw our request and issue a dccision.
Alaska Electric Lipht and Power Comoany
Alaska General Rate Case
In Septcmber 2016, AEL&P filed an elcctric gcneral rate casc with the RCA. AEL&P was granted a refundable intcrim basc rate incrcase of 3.86 percent
(designed to increase electric revenues by $ I .3 million), that took effect in November 20 I 6.
37
Appendix 6 to Joint Application Page 44 of 414
Table of Contents
AVISTA CORPORATION
AEL&P has also requested a permanent base rate increase of an additional 4.24 percent (designed to increase electric revenues by $ I .5 million), which, if
approvcd, could take effect in Fcbruary 201 8. This represents a combined total ratc increase of8.1 pcrcent (designcd to increasc clectric revenues by $2.8
million).
Included in the general rate case are additional annual revenues of$2.9 mitlion from the Greens 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 l5 months) from the date of filing, unless othcrwise cxtcnded by
consent ofthe parties. The statutory timeline for the AEL&P GRC, with the consent ofthe pa(ies, has been extended to February 8, 20 I 8.
The rate request is based largely on the addition ofa new backup generation plant (Industrial Blvd. Plant) to rate base.
Avistu afiUfies
Purchased Gas Adjustuents
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) I 0 percent ofthe difference between actual and projected natural gas costs included in
retail ratcs for supply that is not hcdged. Total nct dcfcred natural gas costs among all jurisdictions wcre a liability of$30.8 million as ofDecembcr 3 l, 20 I 6
and a liability of$ I 7.9 million as ofDecember 3 l, 201 5, and these deferred natural gas costs balances represent amounts due to customers.
The following PGAs went into effect in our various jurisdictions during 2014,2015 and 20 I 6:
Jurisdiction PGA Effcctivc Datc
Percentage Increase / (Decrease)
in Billcd Rates
Washington Novcmbcrl,20l4
Novemberl,20l5
Novemberl,20l6
1.2%
(15.0)%
(8.0)%
Idaho Novemberl,20l4
Novemberl.20l5
Novemberl,20l6
(2.1)%
(t45)%
(7.8)%
Oregon Novemberl,20l4
Novemberl.20l5
83%
(t 4.1)%
November I 2016
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$2 I .3
millionasofDecember3l,20l6comparedtoaliability$lS.0millionasofDecember3l,20l5,andthesedeferredpowercostbalancesrrpresentamounts
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 gcneration,
. the level and availability ofthermal generation (including changes in fuel prices), and
. retail loads.
Undcr the ERM, Avista Utilities absorbs the cost or receives the benefit from the initial amount ofpower supply costs in excess ofor below the lcvcl in rctail
rates, which is referred to as the deadband. The annual (calendaryear) deadband amount is $4.0 million.
38
Appendix 6 to Joint Application Page 45 of 414
Table of Contents
AVISTA CORPORATION
The following is a summary of the ERM:
Annual Power Sunolv Cost VariabiliN
within +/- $0 to $4 million (deadband)
higher by $4 million to $ l0 million
lowerby $4 million to $10 million
higher or lower by over $ I 0 million
Dcfoled for Futurc
Surcharge or Rebate
to Customers
Expense or Benefit
to the Compily
0%
50%
75%
90%
100%
500/,
) <o/^
t0%
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 of and audit the ERM deferred power cost transactions for the prior calendar year. We made our annual filing on March 3 I ,
20 I 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 onder. The
20 I 5 ERM defened 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
customcrs. The Octobcr I rate adjustmcnts recover or rcbatc power supply costs deferred during the preccding July-June twclve-month pcriod. Total nct
power supply costs deferred under the PCA mechanism were a liability of $2.2 million as of December 3 I , 201 6 compared to an asset of $0.2 million as of
December3l,2015.
Decoupling and Earnings Sharing Mechanisms
Decoupling is a mechanism designed to severthe 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 ce(ain customer rate classes, rather than
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 customers beginning in the following year.
Washingtorr Decoupling and Earnings Sharing
In Washington, the UTC approved our decoupl ing 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
lorward forrecovery 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 calendaryear, separate electric and natural gas eamings
calculations are made forthe priorcalendaryear. These eamings tests reflect actual decoupled r€venues, norrnalized powersupply costs and other
normalizing adjustments.
. IfwehaveadecouplingrebatebalancefortheprioryearandeaminexcessoftheauthorizedROR(7.32percentfor20l5 and7.29 percentfor20l6),the
rebate to customers would be increased by 50 percent ofthe eamings in excess ofthe authorized ROR.
. Ifwe have a decoupling rebate balance forthe prioryearand oureamings are equal to orless than the authorized ROR, only the base amount ofthe
rebate to customen 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 autlrorized ROR, the base amount ofthe
surcharge to customers would be made.
See below for a sumrnary ofcumulative balances under the decoupling and eamings sharing mechanisms.
Idaho FCA and Eamings Sharing Mechanisms
ln ldaho, 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 yean, beginning January I , 201 6.
39
Appendix 6 to Joint Application Page 46 of 414
Table of Contents
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 morc than a 9.8 perccnt ROE, wc werc required to share with customers 50 pcrccnt of any camings abovc thc 9.8 pcrccnt. Thcrc
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
ofour 20 I 5 Idaho electric and natural gas general rates cases (discussed in further detail above).
See below for a summary of cumulative balanccs undcr thc dccoupling and eamings sharing mcchanisms.
Oregon Decoupling Mechanism
In February 2016, the OPUC approved the implementation of a decoupling mechanism fornatuml gas, similarto the Washington and Idaho mechanisms
described above. The decoupling mechanism became effective on March I , 201 6. There wil I be an opportunity for interested parties to review th e mechanism
and recommend changes, ifany,by September20l9. Ar eamingsreviewis conducted on an annual basis,which is filed by uswith the OPUC on orbefore
June I of each year for the prior calendar year. In the annual eamings review, if we eam more than I 00 basis points above our allowed retum on equity, one-
third ofthe eamings above the I 00 basis points would be deferred and later retumed to customers. See below for a summary ofcumulative balances under the
decoupling and camings sharing mechanisms.
Cumulative Decoupling and Earnings Sharing Mechanism Balances
AsofDecember3l,20l6andDecember3l,20l5,wehadthefollowingcumulativebalancesoutstandingrelatedtodecouplingandeamingssharing
mechanisms in ourvarious jurisdictions (dollars in thousands):
December 3 l,
2016
December 3 l,
201 5
Washington
Decouplingsurcharge $ 30,408 $ 10,933
Provision for eamings sharing rebate (5,1 13) (3,422)
Idaho
Decoupling surclrarge $ 8,292 nla
Provision forcamings sharing rebatc (5,184) (8,814)
Oregon
Decoupling surcharge $ 2,021 nla
Provision for eamings sharing rebate
(n/a) This mechanism 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.
Resulb of 0nerations - 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 seglnent discussions (Avista Utilities, AEL&P, Ecova - Discontinued Operations and the other
businesses) that lollow this section.
As discussed in "Executive Level Summary," Ecova was disposed of as of June 30, 201 4. As a result, in accordance with CAAP, all of Ecova's operating
results were removed from each line item on the Consolidated Statements oflncorne 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 oflncorne. Beginning on July I , 20 I 4, AEL&P is included in
the overall utility results.
40
Appendix 6 to Joint Application Page47 of414
Tabl€ of Contetrts
AVISTA CORPORATION
201 6 compared to 201 5
ThefollowinggraphshowsthetotalchangeinnetincomefromcontinuingoperationsfortheyearendedDecember3l,20l5totheyearendedDecember3l,
20 I 6, as well as the various factors that causcd such change (dollars in millions):
s105 5
s19 1
$15.1)s{10.5)s(7-e)s112.5)S117.0)
s3.9
s(37,2)
L ility Rwnu6 OtherTotal Change in -
Na{ lnromafrom
Contnuing
Oparatlons
Lrtility Rgdrce UtilityoFntng UtiLV N6-utility ltrm. T.xCods &pelg DapEdllbh &d OF.ting &p.ne
Aldizaton ErFltg.nd
Dcredtuoh ed
Arudtsation
No{tlily
Rc6ucs
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 foreamings 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 rcvenues.
Non-utility revenues decreased due to the long-tem fixed nte electric capacity contract that was previously held by Spokane Energy being transferred to
Avista Corp. during thc sccond quarter of20 I 5. Thc capacity rcvcnue from this contract was includcd in non-utility rcvcnues whcn it was held by Spokanc
Energy during the fint quarter of20 I 5. After the transfer, the revenue is included in Avista Utilities' revenues. The contract expired during December 20'l 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 lowcr volumes purchased and lower wholcsale prices) and a dccrcase in fucl for gencration (due in part to increased hydroelectric gcneration).
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
cxpenses increascd duc to an incrcase in mcdical costs of$3.0 million, electric generation operating and maintcnance expcnses 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 oflset by excess tax benefits of$ I .6 million during 20 I 6
rclating to the settlemcnt ofsharc-based payment awards. See 'Notc 2 ofthe Notes to Consolidatcd Financial Statements" for furthcr discussion ofthc cxccss
tax benefits. Our effective tax rate was 36.3 percent for both 20 I 6 and 20 I 5.
Other was primarily related to an increase in interest expense, due to additional debt being outstanding during 20 1 6 as compared to 20 I 5 and partially due to
an increase in the overall interest rate. AIso, tlrcre wcrc losses on invcstments at our subsidiaries, mainly due to initial organization costs and managemcnt
fees associated with a new investment.
4t
tl't
oo
lt
o
mo,1f
gor}
(Do,
(D
o
'Io,1
=.
Appendix 6 to Joint Application Page 48 of 414
Tabl€ of Contetrts
AVISTA CORPORATION
2015 compared to 2014
ThefollowinggraphshowsthetotalchangeinnetincomefromcontinuingoperationsfortheyearendedDecember3l,20l4totheyearendedDecember3l,
201 5, as well as thc various factors that causcd such change (dollars in millions):
572.1
s21.3
S{1.7}
$(10.s)s{10.5)
s(13.e)
s4.8
So.8
Other
&pcn*
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 2015 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 wanner weather that was
partially offset by the decoupling mechanism in Washington and general rate increases.
Other non-utility revenues decreased primarily due to the long-term fixed rate electric capacity contract that was previously held by Spokane Energy being
transferred to Avista Corp. during the second quarter of20 I 5. The capacity revenue fiom this contract was included in non-utility revenues when it was held
by Spokanc Energy. After tlrc transfcr, the rcvcnue is included in Avista Utilities'rcvenues.
Utility resource costs decreased due to a decrease at Avista Utilities, parti ally offset by an increase at AEL&P. AEL&P's resource costs increased $6. I mi llion
due to a full year of AEL&P results in 2015 as compared to six months in 2014. Avista Utilities' electric resource costs decreased primarily due to a decrease
in purchased power (from lower volumes purchascd, partially offset by higher wholcsale priccs) and a decrease in othcr fuel costs. Natural gas resourcc costs
decreased due to a decrease in natural gas purchased resulting from lower prices, partially offset by higher volumes.
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 cxpcnscs incrcascd $5.3 million duc to a full ycar of AEL&P rcsults in 201 5 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$9.8
million and increased pension and other post-retirement benefit expenses of$ 1 0.0 million. In addition, Avista Utilities incurred incremental storm restoration
costs associated with the November 20 I 5 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 months ofAEL&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 2014. The decrease in expense was primarily
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 20 I 5 as compared to 2O14. Also, there were
losses on investments at our subsidiaries.
42
Tot.l chang. ln'
ilat ln@hrfrom
Contm,ng
Opcrations
s(16.'rl
l,rlility 8drnu6 ilo.ljliliv t tllfty Eeurc. t tilityopc6tni UtilltyFa@83 Co5t3 ErpanG Oapndltlfi &d
Amr6latia
No-Utility
Or6ating
Expans and
Dcprcciation !nd
Amdizrfion
16come Tax
mor
a
5atoo0o
o
(]o6
oo)
o
o
mo,
=.
Appendix 6 to Joint Application Page 49 of 414
Ieus-ql-esucnls
AVISTA CORPORATION
Non-GAAP Finencial 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 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
opcrating costs, as wcll as to analyze how changes in loads (duc to weatheq cconomic or othcr 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 performance. The calculations ofelectric and natural gas gross margins are
presented below.
Results of Ooerations - Avista Utilities
201 6 compared to 201 5
The following table presents Avista Utilities' operating revenues, resource costs and resulting gross margin for the years ended Decernber 3 I (dollars in
millions):
Electric Natural Gu Intracompany Total
20 t6 201 5 2016 201 5 2016 201 5 2016 201 5
Operating revenues S
Resource costs
996,9s9 $
3 60,591
('9s,2ts) $
(9s,2t s)
(107,020) $
(l 07,020)
1,372,638 $
539.352
Gross margin $ 636,368 $ 596,963
$ 470,894 $ 521,010
273,916 35l,r0l
$ 196,9r8 $ r69,909
997 ,87 3
400,91 0
$
$$$ 833,2 86 S 7 66,87 2
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, lowerresource costs, the implementation ofdecoupling in Idaho and a $6.6 million decrease in the
provision for camings sharing (which is an offset to rcvcnue ), partially offset by lower electric loads. Thc wcather was warmer than thc prior ycar 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
o{Iset by the effect ofweather that was cooler than the prior year in the first and fourth quarters (which increased electric heating loads). Overall, weather was
warmer than normal for most ofthe 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
bencfit of $5.1 million undcr thc ERM in Washington compared to a benefit of $6.3 million for 201 5.
The increase in natura! 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 naturdl 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 irnpact 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
condcnscd consolidated financial statemcnts but arc included in thc separate rcsults for clcctric and natural gas presentcd below.
43
Appendix 6 to Joint Application
1,411,863
644,991
Page 50 of 414
Tabl€ 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 MWhs in thousands):
Electric Operating Revenues
\ii!r tir!n
\l,ii, \il,ll
!lr? 1 Slll l{$ l: t '\':l III II \_[ : \\: "\i.l.lII \l-'I
I
1re;t&tnrr$ e rrrrrr't\c{i\r$ trr.\uslrr$ $t.'oNt''N s,;r\ct ,'i l$c\ (lr\rcr \\'t
I :016 :0r5
(1) Othcrclcctricrevcnucsinthcgraphabovcincludcspublicstrcctandhighwaylighting,whichisconsidcredpartofrctailelectricrcvcnucs.
Electric Energy lllWh Sales
i.il!t i.t?t
\a*tNtt"$Co*arercr'il \t 'Irr$tr$rlftt'\c:IS
I :olo I :(rl5
44
Appendix 6 to Joint Application Page 5l of4l4
tr
i. lr{i .i. lr)7 i. r{::'ft\
l.?r'.i t.xtl
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 yean ended December 3 1 (dollars in thousands):
Electric Operating
Rcvcnues
2016 201 5
Washington
Decouplingsurcharge $ 11,324 $ 4,740
Provision for eamings sharing (1) 221 Q,423)
Idaho
Decoupling surcharge $ 6,025 nla
Provision foreamings sharing (2) 7ll (2,198)
(1 ) The provision for eamings sharing in Washington in 201 6 resulted from a $2.5 mill ion reduction in the 20 I 5 provision for eamings sharing (which
increased 20 1 6 revenues) oilset 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 ldaho.
(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), partially 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, partially offset by a general 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 founh 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 pcrcent above 20 I 5. The impact from incrcased heating loads was offset by decrcased cooling loads in the
summer. 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 number 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 part to energy efliciency measures adopted by customers. See "Item I . Business - Avista Utilities Operating Statistics" for the three-year
summary of residential use per customer.
. a $ 1 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, 544.0 million ofthese sales were made to our natural gas operations and are included as intracompany revenues and r€source costs. For 20 I 5,
$50.0 million of these sales were made to our natural gas operations.
. a $l 2.6 million increase in electric rcvenue 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 201 5
provision for eamings sharing in Washington and a $0.7 million reduction in the 201 5 provision for eamings sharing in Idaho recorded in 201 6. For
201 6 electric operations, we recorded a 52.3 million provision for eamings sharing.
45
Appendix 6 to Joint Application Page 52 of 414
Table of Contents
AVISTA CORPORATION
The following graphs present Avista Utilities'natural gas operating revenues and therms delivered for the years ended December 3'l (dollars in millions and
therms in thousands):
Natural Cns Operating Revenues
yei i tlr:i lr $:o{ i
tr ii.l
l,i-: {r 1,x'.tII tle: st(l III
frcr'lc\tlt$C or$srercrg\\\\!N$''ic Or\rcr \\\
I l0lrr I :015
(l) Othcrnatural gas rcvcnues in thc graph above includcs intcmrptiblc and industrial revcnues, which arc considercd part ofretail natural gas revenucs.
Therms Delivered
rlt!J, I i:
{,fi,.[. i I 7
lli(r,J{r! l7('.nlj I8.}.(dtJ l7{.})l
I l:.(rs(' 117.!t,,.1
Bcs'$cr'rt$Clrnlrrrcftt$$$o\csi{r'0$\cr
3016 I tors
46
Appendix 6 to Joint Application Page 53 of 414
tr
Tible of Contenls
AVISTA CORPORATTON
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 December 3 I (dollars in thousands):
Nanrral Gas
Operating Revenues
2016 201 5
Washington
Decoupling surcharge $ 8,191 $ 6,004
Provision for eamings sharing (2,7 67)
Idaho
Decoupling surcharge $ 2,206 nla
Provision for eamings sharing n/a
Oregon
Decoupling surcharge 1,912 nla
Provision for eamings sharing
(n/a) This mechanism did not exist during this time period.
Totalnatural gasrevenuesdecreased$50.1 millionfor20l6ascomparedto20l5duetothefollowing:
. a 53.4 million decrease in retail natural gas revenues due to lower retail rates (decreased revenues $ I 8.4 rnillion), partially offset by an increase in
volumes (increased revenues $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 20 I 6 as compared to 201 5 primarily due to cooler weather in the first and fourth quarters, as well as
customcr groMh. Comparcd to 20 I 5, rcsidcntial usc pcr customcr incrcascd 5 perccnt and commcrcial usc pcr customcr incrcascd 3 pcrcent.
Heati ng degree days i n Spokan e were I I percent below histori cal average lor 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 million) and a decrease in volumes
(decreased revenues $28.0 million). In 2016,$51.2 million ofthese saleswere made to ourelectric generation operations and are included as
intracompany revenues and resource costs. [n 20 I 5, S57.0 million ofthese sales were made to our electric generation operations. Differences
between revenues and costs from sales ofresources in excess ofretail load requirements and llom resource optimization are accounted for through
the PGA mechanrsms.
. a $6.3 million increase fornatural gas decoupling revenues due primarily to the implementation ofdecoupling mechanisms in ldaho and Oregon, as
wcll as an incrcasc in thc dccoupling surchargc in Washington.
. a $2.8 million increase in the provision for eamings sharing (which decreases revenues) representing the 20 I 6 provision for Washington natural gas
opemtions.
The following table presents Avista Utrlities'average number ofelectric and natural gas retail customers for the years ended December 3 I :
Electric
Customcrs
Namral Gas
Customcrs
2016 201 5 2016 20t5
Residential
Commercial
Intemrptible
Industrial
Public street and highway Iighting
Total retail customers
330,699
4t ,7 85
1,342
558
327,057
4t,296
1,353
529
300,883
34,868
37
255
296.005
34,229
35
261
374,384 370,235 336,O43 330,530
47
Appendix 6 to Joint Application Page 54 of 414
Table 0f Contetrts
AVISTA CORPORATION
The following graphs present Avista Utilities' resource costs for the years ended December 3 I (dollars in rnillions):
Electric Resource Costs
tlt6 6
f,t.il s
!ll{' rl tt:il t{
y{.,t7:.+II $1,.,:1.lt III
\'ot*$'
psrchascu
gcntrtrron it\ti i,(\sti O$\t(
fuPt lor ()r\1ct
I :r)th I trl5
Natural Gas Resource Costs
tjil 5
sI( L.l
t:: {'il.,6
Ncturll gas purcltasctl l)thcr
lol6 :o! 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 20 I 6 as compared to 20 I 5 due to the following:
. a $26.1 million decreasc in power purchased due to a decrease in the volumc of power purchascs (decrcascd costs $9.3 million) and a dccrease 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 forgeneration primarily due to a decrease in thermal generation (due in part to increased hydroelectric generation)
and a dccrcasc in natural gas fuel priccs.
. a $7.5 million decrease in other fuel costs.
. a $3.0 million decrease from amortizations and deferrals ofpowercosts.
. a 55.6 million increase in other electric rcsource costs primarily due to a benefit that was recorded during 20 I 5 related
Appendix 6 to Joint Application
48
Page 55 of 414
Table of Contents
AVISTA CORPORATION
to a capacity contract of Spokane 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 duc to following:
. an $80.1 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 oflset by an
incrcase in retail sales.
. a $ 1.6 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.
201 5 compared to 2014
The following graphs presents Avista Utilities' operating revenues, rcsource costs and resulting gross margin for the years ended December 3 I (dollars in
millions):
Electric Natural Gas Intracompany Total
2015 2014 2015 2014 20t5 2014 201 5 20t4
Opcrating revcnues g 997,873 S
400,91 0
998,988 $ s2r,0l0
418,541 35l,l0l
$ s56,664 $
395.956
$ (142,1s3) $
(142,153)
| ,411 ,863 S
644,991
(l 07,020)
( l 07,020 )
t ,413,499
672,344Resource costs
Gross margin $ 596,963 $ 580,447 $ 169,909 $ 160,708 $$$ '766.872 $ 741,155
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 wanner than normal and warmer than the prioryear, which decreased
heating loads in the first quarter and increased cooling loads in the second quarter. Loads in the third quater were slightly higher than the prior yeat. Loads
for the fourth quarter were 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 201 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 prirnarily 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 quarters).
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 revenues. The decrease in natural gas rcvenues resulted from lower heating loads primarily from significantly
warmcr weathcr that was partially offset by general ratc incrcascs. The eamings impact ofthc decrease in hcating loads was partially offsct by thc decoupling
mechanism in Washington, which had a positive effect on natural gas revenues and gross margin (see the details by jurisdiction in the table below).
Intracompany revenues and resource costs represent purchases and sales ofnatural gas between our natural gas distribution operations and our electric
gcncration opcrations (as fucl for our gencration plants). These transactions arc climinated in the prescntation oftotal rcsults for Avista Utilitics and in thc
consolidated financial statements but are reflected in the presentation ofthe separate results for electric and natural gas below.
49
Appendix 6 to Joint Application Page 56 of4l4
Table of Contents
AVISTA CORPORATION
ThefollowinggraphspresentAvistaUtilities'electricoperatingrevenuesandmegawatt-hour(MWh)salesfortheyearsendedDecember3l (dollarsin
millions and MWrs in thousands):
Electric Operating Revenues
\i ii r. \i il'
Slll lt sllr'x !it:i r $lill:II II \\:" \si'II tr: I s:.l Jf-
sc$i&rrtt$\ Ccrooercto\ \oAotot"\ gfis\eec\c SSeso{fue\ o{ner $\
l0t 5 :l rl .l
(1) Othcrelectricrcvcnucsinthcgraphabovcincludespublicstreetandhighwaylighting,whichisconsideredparlofretailclcctricrevenucs.
Electric Energy lllWh Sales
r.!7t i.6u.t l.6Mr
3- l,)7 :r t$r}i. t{5
l.xtl I li6:,a
gcstNrttd Crrorsrercra\\adrr*trrtf \ri\a\nt$'$e
:tll 5 :0t{
50
Appendix 6 to Joint Application Page 57 of 414
tr
tr
Table of Contetrts
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 (dollars in thousands):
Elcctric Operating
Revenues
201 5 2014
Washington
Decoupling $ 4,74O nla
Provision for eamings sharing (3.423) nla
Idaho
Decoupling nla n/a
Provision for eamings sharing (2,198) (7,503)
(n/a) This mechanism did not exist during this time period.
Total clcctric revcnucs decrcascd $ I .l million for 2 01 5 as comparod to 20 14, affcctcd by thc 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 $ 15.3 million). The increase in revenue per MWh was primarily due to a general rate increase in
Washington. Thc dccrcasc in total MWhs sold was primarily thc rcsult of weathcr that was significantly warmcr than normal and warmcr than thc
pnoryear,which decreased the electricheating Ioad in the firstquarter. Compared to 20l4,residential electric use percustomerdecreased 5 percent
and commercial use per custolner decreased 2 percent. Heating degree days in Spokane were I 4 percent below normal and I 0 percent below 20 I 4.
The impact from reduced heating loads was partially offset by increased coohng loads in the summer. Year-to-date cooling degree days were 1 4 I
percent above normal and 28 percent above the prior year.
. a S I 0.9 million decrease in wholesale electric revenues due to a decrease in sales volumes (decreased revenues $2 I .9 million), partially offset by an
increase in sales prices (increased revenues $ 1 1 .0 million). The fluctuation in volumes and prices was prirnarily 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 optimizatron activities. For
20 I 5, $50.0 million ofthcsc salcs wcrc made to our natural gas opcrations and arc includcd as intracompany rcvenucs and rcsourcc costs. For 20 I 4,
$67.4 million of these sales were made to ournatural gas operations.
. a 54.7 million increase in electric revenue due to decoupling, which reflected decreased heating Ioads in the first and fourth quarters, partially offset
by incrcascd cooling loads in thc sccond and third quaftcrs.
. a $ I .9 mi llion decrease in the provision for eamings sharing, primarily due to a decrease of $5.3 million for our Idaho electric operations, partially
oftetby an increase of $3.4 million forourWashington electnc operations. In 20l4,we recorded aprovision foreamings sharing of $7.5 million for
Idahoclcctnccustomcrswith55.6millionrcprescntingourcstimatcfor20l4andSl.9millionrcpresentinganadjustmcnttoour20l3cstimatc.
5l
Appendix 6 to Joint Application Page 58 of 414
Tabl€ of Contctrts
AVISTA CORPORATION
ThefollowinggraphspresentAvistaUtilities'naturalgasoperatingrevenuesandthermsdeliveredfortheyearsendedDecember3l (dotlarsinmillionsand
therms in thousands):
Natural Gas Operating Revenues
t::x:
5lr.i l.tltt-l 1 $:lu:
sx,.8 $!1r3.:I I S:(. I ti:t e
II
Ba"$t"tttt\C crrrrsrtrct'*$\ttt\ei'rtr 0{\c{
I t{}15 I0t1
(1) Othcrnaturalgasrcvcnucsinthcgraphabovcincludcsintcmiptibleandindustrialrcvcnues,whichareconsidcrcdpartofrctailnaturalgasrcvcnucs.
Therms Delivered
r{{r), l::
!li.ri:0
l76.6li lro.lTl t7.t.Dl 17.i.{{rilr)7,$r){ I 16.7-}tl
BcslNnrl:$C rrrrrrrrertl$ri\rtr\tiJe ()t\tl
I :ori I :{}l{
52
Appendix 6 to Joint Application Page 59 of4l4
&fuEs.EleEs
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 December 3 I (dollan in thousands):
Natural Gas
Opcrating Rcvcnues
20r5 20 t4
Washington
Decoupling $ 6,004 nla
Provision for eamings sharing nla
Idaho
Decoupling nla
Provision for eamings sharing (221)
(n/a) This rnechanism did not exist during this time period.
Total natural gas rcvcnucs dccrcascd $35.7 million for 20 I 5 as comparcd to 20 I 4 duc to the following:
. a $ I 6.4 mill ion decrease in retail natural gas revenues due to a decrease in volumes (decreased revenues $23.6 million), partial ly oIIset 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 gcncral ratc cases. This was partially offsct by PGA mte decrcasss implcmcntcd in Novcmbcr 20 I 5, which passcd through
lower costs. We sold less retail natural gas in 201 5 as compared to 2014 primarily due to weather that was warmer than normal and warmer than the
prior year. Compared to 20 I 4, residential use per customer decreased 9 percent and commercial use per customer decreased 9 percent. Heating
degree days in Spokane were I 4 percent belorv historical average for 20 I 5, and I 0 percent below 20 14. Heating degree days in Medfbrd were 1 5
percent below historical average for 20 I 5, and 4 percent above 20 I 4.
. a S23.9 million decrease in wholesale natural gas revenues due to a decrease in prices (decreased revenues $90.4 rnillion), padially offset by an
increase in volumes (increased revenues $66.5 million). In 20 I 5, $5 7.0 million ofthese sales were made to our electric generation operations and are
included as intracompany revenues and resource costs. In 2014,$74.7 million ofthese sales were made to our electric generation opemtions.
Differences between revenues and costs from sales ofresources in excess ofretail load requirements and from resource optilnization are accounted for
through the PGA mechanisms.
. a 56.0 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 custorners for the years ended December 3 I :
Elcctric
Customers
Natural Gas
Customers
2015 2014 201 5 2014
Residential
Commercial
hrtcmrptible
Industri al
Public street and highway lighting
Total retail customers
327,057
4t,296
324,1 88
40.988
296,005
7A ))O
35
261
291,928
34,047
5t
2641,353
529
t,385
531
370,235 367,092 330,530 326,276
53
Appendix 6 to Joint Application Page 60 of 414
Tabl€ of Contents
AVISTA CORPORATION
ThefollowinggraphspresentAvistaUtilities'resourcecostsfortheyearsendedDecember3l (dollarsinrnillions):
Electric Resource (losts
iltS tr
t'lor'(,
Sl:o.,{ 1 lr,.l
t?1.{trr: {II vrr 1.1,1 7IN
to.*I^ .ef\€$llorr
a$(chssEu t.rprtor
n i.\$co6s !)r\rct
ottcr
lt,l i :0 l{
Naturnl G*s Resource Costs
lrrT 7
liil r
$lu o
-t'l 7
Naturrl gls purchrserl ( )lltcr
:ots I :or{
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 $ 1 7.6 mitlion for 201 5 as compared to 20 I 4 due to the following:
. an $ 1 8.3 million dccreasc in power purchased due to a decrease in the volumc of power purchascs (decreased costs $23.6 mi Ilion), 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 incrcasc in fuel forgeneration primarily due to an increase in thcrmal generation (due in part to dccrcased hydroclcctric generation),
partially offset by a decrease in natural gas fuel prices.
. a $ I 0.0 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 resource costs primarily due to the benefit from a capacity contract ofSpokane
Appendix 6 to Joint Application
54
Page 6l of 414
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 rnillion for20l 5 as compared to 2014 due to the following:
. a $66.1 million decreasc in natural gas purchascd duc to a dccreasc in the pricc of natural gas (decrcascd costs $ I 3 8.3 million), partially offset by an
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 $2 I .8 million incrcasc from amortizations and deferrals ofnatural gas costs. This rcflccts lowcr natural gas priccs and thc deferral oflower costs for
future rebate to customers.
Results ofOperations - Alaska Electric Liqht and Power Company
AEL&P was acquired on July I , 201 4 and on ly the results for the second half of 2014 are included in th e actual overall results of Avista Corp. The discussion
below is only for AEL&P's eamings that were included in Avista Corp.'s overall eamings.
201 6 compared to 201 5
Nct incomc for AEL&P was $8.0 million for the year cnded Deccmber 3 I , 2016, comparcd to $6.6 million for 201 5. Thc increase in camings for 2016 was
primarily due to an increase in gross margin and an increase in equity-related AFUDC (increased eamings) due to the construction ofan additional back-up
generation plant which was completed during the fourth quarter of20 I 6.
Thc increasc in gross margin was primarily rclated to a dccreasc in costs associatcd with thc Snettisham hydroclcctric projcct (due to a rcfinancing tmnsaction
during 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 20 I 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 3 I , 201 5, compared to 53.2 million for the second half of 201 4. Since AEL&P was
acquiredonJulyl,20l4,theresultsfor20l5arenotcomparableto20l4as20l4onlyincludesresultsforthesecondhalfoftheyear.
Results ofOperations - Ecova - Discontinued Operations
Ecova was disposed ofas ofJune 30, 20 I 4. As a result, in accordance with GAAP, all ofEcova's operating results were removed from each line item 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 attnbutable to our other businesses. However, in accordance with GAAP, this gain is
included in discontinucd operations; thcrcforc, we included the analysis ofthc gain in thc Ecova discontinucd operations scction rather than in the othcr
businesses section.
20 I 6 compared to 20 I 5 and 20 I 4
There was zero net income or loss for 201 6. Ecova's net income was $ 5.1 mi llion fot 20 I 5, compared to net income of $72.4 mil lion for 2014. The net incotne
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 oftheworking capital and indemnification escrowaccounts during 2015. The resultsfor20l4 included $69.7 million ofthe net
gain recognized on the sale ofEcova.
Results of Ooerations - Other Businesses
2016 compared to 2015
The net loss from these operations was $3.2 million for 2016 compared to a net loss of $ I .9 million for 201 5. Net losses for 2016 were primarily related an
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 METALIi for the year-todate.
55
Appendix 6 to Joint Application Page 62 of 414
Table of Contents
AVISTA CORPORATION
2015 compared to 2014
Thenetlossfromtheseoperationswas$1.9rnillionfor20l5comparedtonetincomeof$3.2millionfor20l4.Thedecreaseinnetincomecornparedto20l4
was primarily due to the sefilement of the Califomia power markets litigation in 201 4, where Avista Energy received settlement proceeds fiom a litigation
with various Califomia parties related to the prices paid forpowerin the Califomia spot markets during the years 2000 and 2001. This settlement resulted in
an incrcasc in prc-tax eamings ofapproximatcly $15.0 million. Thiswaspartially offsctby aprc-tax contribution of $6.4 million ofthc proceedsto the
Avista Foundation.
In addition, the decrease in eamings for 201 5 related to an increase in net losses on investmenls, partially offset by an increase in net income at METALII
and a slight dccrcase in corporatc costs, including costs associatcd with cxploring stratcgic opportunitics.
Accounting Standards to be Adopted in 2017
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 201 7. However, we will be adopting ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)" rn 201 8 upon its effective date. This is
a significant ncw accounting standard that rcquircs an extensivc amount oftimc and cffort to implcmcnt. We currently cxpcct to use a modificd retrospcctivc
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 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 ofpowerand natural
gas) but has not yet idcntificd any significant diffcrcnces in rcvcnuc rccognition bctwcen currcnt GAAP and the ncw rcvcnue 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 low 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 standards adopted in 20 I 6 and accounting standards expected to be adopted in future periods, see "Note 2 oftlre Notes to
Consolidated Financial Statements."
Critical Accountins Policies and Estimates
The preparation ofour consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts
repo(ed in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material
cffect on our consolidated financial statemcnts and thus actual rcsults could diffcr from the amounts rcported and discloscd herein. Thc 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 oflncome 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 oflncome during the period in which it occurs (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,
likc dccoupling, thc rcvcnue must bc cxpcctcd to be collectcd from customcrs within 24 months ofthe deferral to qualify for rccognition in thc
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 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 ofdefcnal. We also make thc assumption that there are regulatory precedcnts for many ofour rcgulatory items and that we will be
56
Appendix 6 to Joint Application Page 63 of 414
Table of Contcnts
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 oftlrese costs, we could be required to recognize significant write-offs ofregulatory assets and liabilities in the Consolidated Statements of
Income. See 'T.,lotes I and 20 of the Notes to Consolidated Financial Statements" for further discussion of our regulatory accounting policy.
Utility energy commodity derivative asset and liability accounting, where we estimate the fair value of outstanding commodity derivatives and we
offset energy commodity derivative assets or liabilities with a regulatory asset or lrability. This accounting treatment is intended to defer the
rccognition ofmark-to-markct gains and losses on encrgy commodity transactions until thc pcriod ofdclivcry. This accounting trcatment 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 cornmodity derivatives on a regular basis
in the Consolidated Statements oflncome, which could lead to significant fluctuations in net income. See "Notes I and 6 ofthe Notes to
Consolidated Financial Statements" for further discussion ofour energy derivative accountrng policy.
Intercsl rate sb,ap 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 treatrnent 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
rccovcry ofthese costs, we could bc rcquircd to recognizc significant changcs in fair valuc ofthcsc interest ratc swap derivativcs on a rcgular basis in
the Consolidated Statements oflncome, which could lead to significant fluctuations in net income.
Pension Plqns and Other Postretirement Benefit Plazs, discussed 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 ifit is probable that an asset is impaired or a liability has been incurred and the amount ofthe loss or
impairmcnt can bc rcasonably estimatcd. We also disclosc losses that do not mcet these conditions for accrual, ifthcrc is a rcasonablc possibility that
a potential loss may be incurred. For all material contingencies, we have made a judgment 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 I and I 9 ofthe Notes to Consolidated
Financial Statements" for further discussion ofour commitments and contingencies.
Pension Plcns and Aher Postrctirement Beneft Plans - Avista Utilities
We have a defined benefit pension plan covering substantially all regular full+ime employees at Avista Utilities that were hired prior to January l, 20l4.For
substantially all regular non-union full-time employees at Avista Utilities who were hired on or after January I ,2014, a defined contribution 40 I (k) plan
replaced the defined benefit pension plan.
The Finance Committee ofthe Boand 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 for managing/monitoring the individual investment managers. The
investment managen' 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.
Ourpension 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, tlre 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 lor each asset class. The target
invcstmcnt allocation pcrccntagcs arc typically thc midpoint ofthc cstablishcd rangc. During 20 I 6, wc revised thc targct investment allocation perccntagcs.
See "Note I 0 ofthe Notes to Consolidated Financial Statements" for the target investment allocation percentages and fu(her discussion ofthe revision.
57
Appendix 6 to Joint Application Page 64 of 414
I4@I-&!!9E!!
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 I 986 and the deferral ofsalary under deferred
compensation plans.
Pension costs (including the SERP) were $26.8 million for2016,52'1 .l million for20l5 and $14.6 million for20l4. 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 expcrience 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 ofincrease in employee compensation,
. life expectancy ofparticipants and otherbeneficiaries, and
. expected method ofpayment (lump 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 future 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 of the SERP) was 4.26 percent compared to 4.5 8 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 $27.7 million in 20 I 6 and decreased the obligation by 53 I .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 201 6, 5.30 percent in 201 5 and 6.60 percent in 2014. This
change decreased pension costs by approximately $0.5 million in 201 6. The actual retum on plan assets, net offees, was a gain of$43.2 million (or 8.1
percent) for2016, a loss of$4.3 million (or0.8 percent) for20l5 and a gain of$56.0 million (or 1 1.6 percent)for20l4.
The following chart rcflects the scnsitivities associated with a change in certain actuarial assumptions by the indicatcd perccntagc (dollars in thousands):
Chmgc in
Assumption
Et'f'ect on Projected
Benefit Obligation
Efl'ect on
Pension CostActuarial Assumption
Expected long-term retum on plan assets
Expcctcd long-tcrm rctum on plan assets
Discount rate
Discount rate
(0.5)%
0.5 %
(0.s\%
0.5 %
47,738
(42,462)
$*$2,551
(2,ss1)
3,842
(3,44t)
* 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 that employees provide service. Assumed health care cost trend rates have a significant effect on the amounts reported for our
postretirement plans. A one-perccntage-point increase in thc assumed health care cost trcnd rate for cach year would increase our accumulated postretirement
benefitobligationasofDecember3l,20l6by$8.6millionandtheserviceandinterestcostby$l.0million.Aone-percentage-pointdecreaseintheassumed
health
58
Appendix 6 to Joint Application Page 65 of 414
Table of Contents
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.
Liouiditr and Caoital Resources
Overall Liouiditv
Avista Corp.'s consolidated operating cash flows are primarily derived from the operations ofAvista Utilities. The primary source ofoperating cash flows for
Avista Utilities is revenues frorn 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 interest, 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 ofutility 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 2016. The UTC order denied the Company's proposed electric and natural gas rate increase requests totaling $43.0 million. If
this order is not changcd as a rcsult ofrcconsidcration, rchearing orjudicial revicw, we expcct it will havc a ncgative impact on our net incomc in 20 I 7. Scc
furtherdetails in the section "Regulatory Matters."
For Avista Utilities, when power and natural gas costs exceed the levels currently recovered fiom retail customers, net cash flows are negatively affected.
Factors that could cause purchased power and natural gas costs to exceed the levels cunently recovered from our customers 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 either weather or customer growth),
. low availability ofstreamflows 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 currently allowed in retarl 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, with interest, are recovered from customers.
In addition to the above, Avista Utilities enters into derivative instruments to lredge our exposure to certain risks, including fluctuations in commodity
market prices, foreign exchange rates and interest 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
scttlcmcnt, in thc cvent ofa downgrade in the Company's credit ratings or changcs in markct priccs. In pcriods ofpricc volatility, thc lcvcl ofcxposure 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 cornmodity 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 3 I , 2016, we had $245.6 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 April202l and AEL&P's $25.0 million credit facility that expires in
Novcmbcr 20 1 9, we believe that we havc adequate liquidity to mcct our nccds for thc next 1 2 months.
59
Appendix 6 to Joint Application Page 66 of 414
Table of Contents
AVISTA CORPORATION
Review of Consolidated Cash Flow Statement
Overall
During 20 I 6, cash flows from operating activities were $35 8.3 rnillion, proceeds Aom 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+erm debt of$ I 63.2
million (including the $70.0 million bridge loan), dividends of$87.2 million and cash paid for the settlement ofinterest rate swap derivatives of$54.0
million.
201 6 compored to 201 5
Consolidated Ooerating Activities
Netcash providcd by opcrating activiticswas$358.3 million for20l6 compared to $375.6 million for20l5. The decrease in nctcash provided by opcrating
activities was primarily related to the cash settlement of interest 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 Decernber 20 I 6. In addition, our accounts receivable
balances increased during 20 1 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 flow decreases were partially offset by higher net income after non-cash adj ustments of$446.4 million in 20 I 6, compared to $392.3 million in
20r5.
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 20 I 5.
Pension contributions were $ 12.0 million for both 201 6 and 201 5.
Net cash received ftom income tax refunds increased to $13.5 million for20l6 compared to $10.0 million for20l5. In addition, the income tax receivable
increased $33.9 rnillion in 2016. We are in a refund position with regards to incorne taxes because the Company generated a net operating loss for tax
purposes in 20 I 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 rnillion will be carried back against a
priortax retum with the remaining 59.8 million to be carried forward to future federal tax periods.
The provision fordefened income taxeswas S124.5 million for20l6,compared to $51.8 million for20l5. The change in theprovision fordeferred income
taxes was primarily related to deferred taxes on property, plant and equipment, investrnent tax credits associated with our capital projects, deferred taxes on
the decoupling regulatory assets and deferred taxes on interest rate swap derivatives.
Consolidated Investing Activities
Nct cashuscd in invcsting activiticswas$432.5 mitlion for20l6,an incrcase comparcd to $387.8 million for20l5. During 20l6,wepaid $406.6 million for
utilitycapitalexpenditures,comparedto$393.4millionfor20l5. Inaddition,during20l6,oursubsidiariesdisbursed$10.1 millionfornotesreceivableto
third parties and received $5.0 rnillion in repayments on these notes receivable. Our subsidiaries also made $7.8 million in investments and purchased
buildings and other property as investments for $5.3 million.
During 20 1 5, wc rcccived cash procccds (rclatcd to thc scttlcment ofthc escrow accounts) ofS I 3.9 million from the salc ofEcova.
Consolidated Financing Activities
Netcash provided by financing activitieswas$72.2 million for20l6 compared to netcash provided of$0.5 million for20l5.ln 2016 wehad 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 of the $90.0 million in first mortgage
bonds that matured in August 20 I 6,
60
Appendix 6 to Joint Application Page 67 of 414
Table of Contents
AVISTA CORPORATION
issuance and sale of$ I 75.0 million ofAvista Corp. first mortgage bonds in December 20 I 6, the proceeds ofwhich were used to repay the $70.0
million term loan, with the remainder being used to pay down a portion of our committed line of credit,
payment of $ I 63.2 million for the redemption and maturity of long+erm debt (including the $70.0 million term loan),
increase in cash dividendspaid to $87.2 miltion (or$1.37 pershare)for20l6 from$82.4 million (or$1.32 pershare) for20l5,
$ 15.0 million net incrcasc in the balance of our committed linc of crcdit, and
issuance of$67.0 million ofcommon stock (net ofissuance costs).
See bclow for a list ofsignificant financing transactions occurring in 20 I 5.
2015 compared to 2014
Consolidated Ooeratins Activities
Net cash provided by operating activities was $375.6 million for 201 5 compared to $267.3 million for 2014. The increase in cash provided by operating
activitieswasdue to highernet income afternon-cash adjustments of$392.3 million in 2015, compared to $348.2 million in 2014. Tlregross gain on the sale
ofEcova of$0.8 million for20l 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 ofS I 60.6 million.
Net cash used by certain current assets and liabilities was $4.1 million for 201 5, compared to net cash used of $50.0 mi llion for 20 I 4. The net cash used
during 201 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 deferred income taxes was $5 I .8 million for 2015 compared to $ 144.3 million for 20 14. The decrease in 20 I 5 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 201 5 compared 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 lnvestins Activities
Net cash used in investing activitieswas $387.8 million for20l5,an increase compared to $103.7 million for20l4. During 20l5,we received cash proceeds
(relatcd to thc settlcment of ths cscrow accounts) of $ I 3.9 million for the salc of Ecova. Wc reccivcd thc majority of thc proceeds ($229.9 million) from the
sale ofEcova duing2014. The proceeds received in 2014 were used to pay offthe balance ofEcova's long-term borrowings 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 Iiability
associated with the gain on sale and to fund common stock repurchases. Utility property capital expenditures increased by S67.9 million for 20 1 5 as
compared to 2014. During 2014, we received $ I 5.0 million in cash (net of cash paid) related to the acquisition of AERC.
Consolidated Financins Activities
Netcash provided by financing activitieswas$0.5 million for20l5 compared to net cash used of$224.0 million for20l4. In 2015 we had the following
signifi cant transactions:
. issuance and sale of $ I 00.0 million of Av ista Corp. first mortgage bonds in December 201 5,
. payment of $2.9 million for the rcdcmption and maturity of long-tcrm debt,
. cashdividendspaidincreasedto$82.4million(or$l.32pershare)for20l5from$78.3million(or$1.27pershare)for20l4,
. issuance of$1.6 million ofcommon stock (net ofissuance costs), and
. repurchase of $2.9 million of our common stock.
In 20 I 4, we had the following significant transactions:
6l
Appendix 6 to Joint Application Page 68 of 414
Table 0f Contetrts
AVISTA CORPORATION
. issuance of $ t 50.0 million of long-term debt ($60.0 million of Avista Corp. first mortgage bonds, $75.0 million of AEL&P first mortgage bonds and
a $ 15.0 million AERC unsecured note representing 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 salein2014,
. issuance of 54.l million of common stock (net of issuance costs) excluding issuances related to the acquisition of AERC. We issued $150.1 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 incrcasc in cash related to the fluctuation in the balance of customer fund obligations at Ecova.
Caoital Resources
Our consolidated capital structure, including the current portion oflong-term debt and short+erm bonowings, and excluding noncontrolling interests,
consisted ofthe following as ofDecember 3 1,2016 and20l 5 (dotlars in thousands):
December3l,20l6 December3l,2015
Amount
Percent
of total Amount
Percent
of total
Current portion oflong-term debt and capital leases
Short-term borrowings
Long-term debt to affiliated trusts
Long{erm debt and capital leases
Total debt
Total Avista Corporation shareholden' equity
Total
$3,287
120,000
51,547
t,6'78,717
0.1% $
3.4%
l.5o/o
4',7.9%
93,167
105,000
51,547
I,480,1 I I
2.9o/o
3.2%
1.6%
45.4%
1,853,55r
|,648,727
52.9%
47.lyo
1,729,825
1,528,626
53.1%
46.9%
$100.0% s 3.258,451 100.0%
Our shareholders' equity increased $ I 20.1 million 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 out
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 requirements.
Conmitted Lines of Credit
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
2016 to extend the maturity of the credit facility agreement to April 2021 . As of December 3 l, 201 6, 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 1, 20 1 6, we were in compliance with this
covenant with a ratio of52.9 pcrccnt.
AEL&P has a $25.0 million committed line of credit that expires in November 20 I 9. As of December 3 I , 201 6, there were no borrowings 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
Appendix 6 to Joint Application Page 69 of 414
Table of Contents
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 (dollan in thousands):
2016 20t5 2014
Balance outstanding at end ofyear $ 120,000 $ 105,000 $ 105,000
Letters ofcredit outstanding at end ofyear $ 34,353 $ 44,595 $ 32,5'79
Maximum balance outstanding during the year $ 280,000 $ I 80,000 $ I 7l ,000
Average balance outstanding during the year $ I 7 I ,090 $ 95,573 $ 62,088
Average interest rate during the year 1 .26% 0.98% 1.01%
Average intcrest rate at end of year 1 .50% 1.18% 0.93%
As ofDecember 3 t, 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 Debl Borrowings
In August 2016, we entered into a term loan agreement with a commercial bank in the amount of $70.0 million with a maturity date of December30,20l6.
We bonowed the entire $70.0 million available underthis agreement, which was used to repay a portion ofthe $90.0 million of first mortgage bonds that
matured in August 2016. We repaid this term loan in its entirety in December using the proceeds from first mortgage bonds that were issued in December
20t6.
InDecembcr20l6,weissuedandsold$lT5.0mitlionof3.54pcrccntfirstmortgagebondsduein205l punuanttoabondpurchaseagrccmcntwith
institutional investors in the private placement market. In connection with the pricing ofthe first mortgage bonds in August 201 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, which will be amortized as a component
ofinterest expense over the 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 ck Repurchase Programs
During 20 1 4 and 20 1 5, Avista Corp.'s Board ofDirectors approved programs to repurchase shares ofour outstanding cortmon 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 1 5. All repurchased shares revcrted to the status ofauthorized but unissued shares.
We did not repurchase any ofour outstanding common stock during 201 6.
Equity Issuances
In March 20 1 6, we entered into four separate sales agency agreements underwhich Avista Corp.'s sales agents may offer and sell up to 3.8 million new shares
of Avista Corp.'s common stock, no par value, from time to time. The sales agency agreements expire on February 29,2020.In 2016, 1 .6 million shares were
issued under thcse agreements resulting in total net proceeds of$65.3 million, leaving 2.2 million slrarcs rcmaining to be issued.
In 20 I 6, we also issued $ I .7 million (net ofissuance costs) ofcorffnon stock undcr the employee plans.
2 0 1 7 Liq uidity Exp ectatio ns
In the second half of 2017, 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.
AAer considering the expected issuances oflong-term debt and common stock during 2017 ,we expect net cash flows from operating activities, together with
cash available under our committed line ofcredit agreements, to provide adequate resources to fund capital expenditures, dividends, and other contractual
commitments.
63
Appendix 6 to Joint Application Page 70 of 414
Table of Contetrts
AVISTA CORPORATION
Limilations on Issuances ofPrefened Stock and First Mortgage Bonds
We are restricted under our Restated Articles oflncorporation, as amended, as to the additional prefened stock we can issue. As ofDecember 3 I , 20 I 6, we
could issuc $1.5 billion ofadditional prefened stock at an assumed dividend rate of6.3 percent. Wc arc not planning to issue prcfcrrcd 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 of:
. 66-2/3 percent ofthe cost or fair value (whichever is lower) ofproperty additions ofthat entity which have not previously been made the
basis ofany application under that entityrs Mortgage, or
. an equal principal amount ofretired fint mortgage bonds ofthat entity which have not previously been made the basis ofany application
under that entity's Moftgage, 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
consccutive calcndar months out ofthc prcceding I 8 calcndar months that werc at least tur'icc thc annual intcrcst requirements on that cntity's mortgage
securities at the time outstanding, including the first mortgage bonds to be issued, and on all indebtedness ofprior 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$ I .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 our actual and expected capital expenditures as ofand for the year ended December 3 I , 20 I 6 (in
thousands):
Avista Utilities AEL&P
2016 Actual capital expenditures
Capital cxpcnditures (pcr thc Consolidatcd Statcmcnt ofCash Flows) (l )3 90,690 t 5,954
Expected total annual capital expenditures (by year)
20t7
201 8
2019
405,000
405,000
405,000
6,900
6,700
12,900
(l) ActualannualcapitalexpenditurespertheConsolidatedStatementofCashFlowsmaydifferfromourexpectedannualaccrual-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
Appendix 6 to Joint Application Page 7l of 414
Table of Contents
AVISTA CORPORATION
The following graph shows the Avista Utilities' capital budget for 20 I 7:
Capitel Budgel forAvisln Utililie$ for20l7
(dollars in millions)
Other: S{l
Environruenlll $l l Transnrrssion &
Distnlrutir'rn Slli?
Naturrrl Cas ${9
(icncratron 5i,)
lnfornr at ron 1o'Snqrlo$!'
$50
Custnnrer Crou'tlr $J7
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 requirements.
OIf-Balance Sheet Arransements
As of December 31 , 2016, we had $34.4 million in letters of credit outstanding under our $400.0 million comrnitted line of credit, compared to $44.6 million
asofDecember3l,20l5.
Pension Plan
Wecontributed $12.0 million to the pension plan in 2016. We expectto contribute atotal of$110.0 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 fairvalue ofpension plan assets, changes in actuarial assumptions (in particularthe 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 l 0 ofthe 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 of the Notes to Consolidated Financial Statements." The following table summarizes our credit ratings as of February 2l ,2017:
Standard & Poor's (l)Moody's (2)
Corporate/Issuer ratin g
Senior secured debt
Senior unsecured debt
BBB
BBB
Baal
A2
Baal
(l )
(2)
Standard & Poor's lowest "investment grade" credit rating is BBB-.
Moody's lowest "investment grade" credit rating is Baa3.
Appendix 6 to Joint Application
65
Page 72 of 414
Table 0f Contents
AVISTA CORPORATION
A security rating is not a recommendation to buy, sell or hold securities. Each security rating is subject to revision or wrthdrawal at any time by the assigning
rating organization. Each security rating agency has its own methodology forassigning ratings, and, accordingly, each rating should be considered in the
context ofthe applicable methodology, independent ofall othermtings. The rating agencies provide ratings at the request ofAvista Corp. and charge fees for
their sewices.
Dividends
On February 3, 2017, Avista Corp.'s Board of Directors declared a quarterly dividend of $0.35 75 per share on the Company's common stock. This was an
increase of$0.015 pershare, or4.4 percent from the previous quarterly dividend of$0.3425 pershare.
See "ltem 5. Market for Registrant's Common Equity, Related Stocklrolder Matters and Issuer Purchases of Equity Securities" for a detailed discussion of our
dividend policy and the factors which could limit the payment ofdividends.
Contractual Oblisations
The following table provides a summary of our future contractual obligations as of December 3 I , 201 6 (dollars in millions):
2017 201 8 201 I 2020 2021 Thereafter
Avista tltilities:
Long-tem debt maturities
Long-term debt to affiliated trusts
lnterest payments on long{erm debt (l )
Short+erm borrowings
Energy purchase contracts (2)
Operating lease obligations (3)
Othcr obligations (4)
Information technology contracts (5)
Pension plan funding (6)
Unsettled interest rate swap derivatives (7)
$$273$90$
228
s2s 1,124
52
836
I,125
2
189
$
80
t20
298
I
34
2
22
t2
252
I
29
I
22
54
l6
70
l6
22
(3)
3l
58
l5l
22
(2)
l5
4
126
l5
(l )
295
5663
2',7
22
3233
AERC (consolidated) total contractual commitments (8)
Avista Capital (consolidated) total contractual commitments
(e)
Total contractual obligations
8 8 7 4
$s93 g 726 $ 471 $ 332 $ 247 S 3,626
(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 ratc debt is calculatcd using tlre ratc in effect at Dcccmber 3 I , 20 I 6.(2) Energy purchase contracts were entered into as part ofthe obligation to serve our retail 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) Rcpresents operational agreemcnts, settlemcnts and other contractual obligations for our gcncration, transmission and distribution facilities. These
costs are generally recovered through base retail rates.(5) Includes information service contracts which are recorded to other operating expenses in the Consolidated Statements oflncome.(6) Represents our estimated cash contributions to pension plans and other postretirement benefit plans through 202 I . We cannot reasonably estimate
pension plan contributions beyond 202 1 at this time and have excluded them from the table above.(7) Rcpresents tlre nct mark-to-markct fair valuc of outstanding unscttled interest ratc svr'ap derivativcs as of Deccmbcr 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 market 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 of53.6 million that are already posted with counterparties against the outstanding
interest rate swap derivatives.
Appendix 6 to Joint Application Page 73 of 414
66
(8)
(e)
Table of Contents
AVISTA CORPORATION
Prirnarily 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 cornmitment to fund a limited liability company in exchange for equity ownership, made by
a subsidiary of Avista 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 approx irnately $ I 5.5 rnillion rernaining asset retirement obl igations 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.
Comoetition
Our utility electric and natural gas distribution business has historically been recognized as a natural monopoly. In each regulatory jurisdiction, our rates for
retail electric and natural gas services (other than specially negotiated retail rates for industrial or large commercial customerc, 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 invcstments, an opportunity forus to cam a reasonable retum on invcstment as allowcd by ourrcgulators.
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 solat 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 of customers utilizing these technologies.
advances in power generation, encrgy cfficicncy, energy storage and other altcmative cncrgy technologics could Icad to morc wide-spread usage ofthcsc
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 oi l, 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
dclivcry rates by mcans ofindividual contracts. These individual contracts arc subject to statc rcgulatory rcview and approval. Wc havc long-tcrm
transportation contracts with several ofour largest industrial customers under which the customer acquires its own commodity while using our infrastructure
for delivery. Such contracts reduce the risk of these 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 cncrgy we sell.
In wholesale markets, competition for available electric supply is influenced by the:
. localized and system-wide demand forenergy,
. type, capacity, location and availability ofgeneration resources, and
. variety and circumstances ofmarket participants.
These wholesale markets are regulated by the FERC, which requires electric utilities to:
. transmit power and energy to or for wholesale purchasers and sellers,
. enlarge or construct additional transmission capacity for the purpose ofproviding these services, and
. transparently price and offertransmission services without favorto any party, including the merchant functions ofthe utility.
Participants rn the wholesale energy markets include:
. otherutilities,
. federalpowermartetingagencies,
. energy marketing and trading companies,
67
Appendix 6 to Joint Application Page 74 of 414
Table of Contents
AVISTA CORPORATION
independent power producers,
fi nancial 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
publ ications, 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.
Avisla Utilities
We track multiple economic indicaton affecting the three largest metropolitan statistical areas in our Avista Utilities sewice area: Spokane, Washington,
Coeur d'Alene, Idaho, and Medford, Oregon. Several key indicaton are employment change, unemployment rates and foreclosure rates. On a year-over-year
basis, December 20 I 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 avemge. 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 pennits signal continued growth over the next I 2 months. Therefore, in 20 I 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 December20l5 and December20l6. In Spokane, Washington employment groMh was 3.6 percent with gains in all majorsectors
except manufacturing and leisure and hospitality. Employment increased by 2.5 percent in Coeur dAlene, Idaho, reflecting gains in all major sectorc except
mining and logging and professional and business services. In Medford, Oregon, employment growth was 3.8 percent, with gains in all major sectors except
mining and logging. U.S. nonfarm scctor jobs grcw by I .5 pcrccnt in thc samc l2-month pcriod.
Scasonally adjustcd uncmploymcnt rates went down in Dcccmbcr 20 I 6 from thc year carlicr in Spokanc, Coeur d'Alcnc, and Mcdford. In Spokanc the ratc
was 6.5 percent in December20l5 and declined to 6.3 percent in December20l6; in Coeurd'Alene the ratewent 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 201 6 national rate was 0.07 percent, compared to 0.07 percent in Spokane County, Washington; 0.02 percent in Kootenai County
(Coeur d'AIene), 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
fiequency ofeconomic data is more limited. Therefore, the dates ofJuneau's economic data may significantly lag the period ofthis filing.
The Quarterly Census of Employment and Wages for Juneau shows employment declined I .2 percent between secon d quarter 201 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 from 4.7 percent to 4.5 percent.
The Juncau forcclosurc rate is below the U.S. ratc. Thc Decembcr 20 I 6 mtc was 0.02 pcrccnt comparcd to 0.07 perccnt for the U.S.
Forecasled Customer and Load Growth
Bascd on ourforccast for2017 through 2020 for Avista Utilitics'servicc arca, wc expect annual elcctric customer groMh to avcragc l.l perccnt, within a
forecast range of0.7 percent to 1.5 percent. We expect annual natural gas customergrowth to average 1.3 percent, within a forecast range of0.8 percent to 1.8
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
grofih to average 1 .2 percent, within a forecast range of0.7 percent and I .7 percent. The forecast ranges reflect (1 ) 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
Appendix 6 to Joint Application Page 75 of 414
Table of Contcnts
AVISTA CORPORATION
In AEL&P's service area, we expect residential customer gromh near 0 percent (no residential customer growth) for 201 7 through 2020. We also expect no
significant groMh in commcrcial and govemmcnt customcrs ovcr thc same period. We anticipate avcragc annual total load growth will bc in a narrow range
around 0.3 percent, with residential load growth 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 growh 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 weatherand economic and competitive conditions,
. intemal analysis ofcompany-specific data, such as energy consumption pattems,
. intemal business plans,
. an assumption that we will incur no material loss ofretail customers due to self-generation or retail 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.
Envi ronmental Issues and Contingencies
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, particularly 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 for the construction ofnew generating plants;
. requirc modification ofour cxisting gcnerating plants;
. require cxisting generating plant opcmtions to bc curtailed or shut dowr;
. 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 highercost; and
. increase costs of,distributing 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 cunently requires a Title V operating pennit for
Colstrip (expires in 2017), Coyote Springs 2 (expires in 201 8), 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 lirnited operation and emissions. The Title V operating permits are renewed every five years 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 for the
District of Montana, Billings Division, against the owners of Colstrip. The Complaint alleged certain violations of the Clean Air Act. On July I 2, 20 I 6, all of
the parties to this action filed a Consent Decree with the
69
Appendix 6 to Joint Application Page 76 of 414
Table of Contents
Court settling all claims contained in the Complaint. See "Sierra Club and Montana Environmental Information CenterLitigation" in "Note l9 of the Notes
to Consolidated Financial Statements" for further information on this matter.
Hazardous Air Pollutanls (HAPs)
The EPA regulates hazardous air pollutants from a published list ofindustrial sources referred to as "source categories" which must meet control
technology requirements ifthey emit one or more ofthe pollutants in significant quantities. In 2012, the EPA finalized the Mercury Air Toxic Standards
(MATS) for thc coal and oil-fircd source catcgory. At thc timc of issuancc in 2012, wc cxamincd thc existing cmission 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 rernaining portion ofthe rule that utilized Particulate Matter as a surrogate for air toxics (including rnetals 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 O-year plans, including application ofBest Available Retrofit Technology (BART) requirements. BART is a retrofit
program applicd to large emission sourccs, including clcctric generating units built bctween I 962 and 1977 . In the case whcrc a Statc opts out of
implementing the Regional Haze program, the EPA may act directly. On September 18,2012, the EPA finalized the Regional Haze federal
implementation plan (FIP) for Montana. The FIP includes both emission limitations and pollution controls forColstrip Units I & 2. Colstrip Units 3 & 4,
the only units ofwhich we are a minority owner, are not curently 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 a I A sh M a nag em e nt/Disp o s a I
On April I 7, 20 I 5, the EPA pub Iished a final rule regarding coal combustion residuals (CCRs), also termed coal combustion byproducts or coal ash in the
FcdcralRcgister,andthisrulebccameeffcctivconOctoberl5,20l5.Colstrip,ofwhichwcareal5pcrccntowncrofUnits3&4,produccsthisbyproduct.
The rule establishes 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. We, in conjunction with the otlrer owners, are developing a multi-year compliance plan to strategically
address the new CCR requirements and existing state obligations while maintaining operational stability. During 20 1 5, the operator ofColstrip provided an
initial cost estimate of the 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 obl igations of$ I 2.5 million with a corresponding increase in the cost basis ofthe utility plant. During 20 I 6, due
to additional information and updated estimates, we increased the asset retirement obligation (ARO) to $13.6 million (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 our ARO, 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 unceftainty about thc compliancc stratcgies that will be uscd and the prcliminary naturc ofavailablc data used to cstimate 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
Concems about long-term 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 o( 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.
70
Appendix 6 to Joint Application Page77 of4l4
AVISTA CORPORATION
Table of Contents
AVISTA CORPORATION
Our Climate Policy Council (an interdisciplinary team ofmanagement 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 Regulatory 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 from certain 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 punuant to Section I I I (d) of the CAA and applies to C02 emissions from existing EGUs. The Final CPP is intended to
rcduce national CO2 cmissions by approximatcly 32 pcrccnt below 2005 lcvcls by 2030. Thc Final CPS mlc was issucd pursuant to Scction I I I (b) ofthc
CAA and applies to the emissions ofnew, modified and reconstructed EGUs. The two rules are the fint 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 Federal 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 I 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 (l 5 percent ofUnits 3 & 4) ofColstrip in Montana and Coyote Springs 2 in Oregon. States rnay 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 diflering 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-
fircd EGUs undcr CAA scction I I I (b). Thcsc EGUs fall into thc samc two catcgorics ofsources rcgulatcd by thc Final CPP: stcam gcncrating units (also
known as "utility boilers and IGCC units"), which primarily bum coal, and stationary combustion turbines, which primarily bum natural gas.
GHG emission standards could result in significant compliance costs. Such standards could also preclude us from developing, operating or contracting
with certain types of generating plants. Additionally, the Climate Action Plan requirernents related to preparing the U.S. for the impacts of climate
change could affect us and others 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 raternaking process.
Climate Change - State Legislation and State Regulatory Activities
Thc states ofWashington and Oregon havc adopted non-binding targcts to reducc GHG emissions. Both states cnacted their targcts with an cxpcctation
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. Thc EPS prcvcnts utilitics from constructing or purchasing gcneration facilities, or cntcring into power purchasc agrccmcnts offive ycars or
longer duration to purchase energy produced by plants, that in any case, have emission levels higher than I ,l 00 pounds of GHG per MWh. The
Washington State Department of Commerce (Commerce) initiated a procass to adopt a lower emissions performance standard in 2012; any new standard
will be appticable until at least 201 7. Commerce published a supplemental notice of proposed rulemaking on January I 6,
7l
Appendix 6 to Joint Application Page 78 of 414
Table of Cont€nts
AVISTA CORPORATION
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
llashington
Energy Independence Act @lA)
The EIA in Washington requires electric utilities with over 25,000 customers to acquire qualified renewable energy resources and/or renewable energy
credits equal to I 5 percent of the utility's total retai I load in Washington in 2020. I-93 7 also requires these uti lities to meet bienn ial energy conservation
targcts beginnin g in 2012. Thc rcnewablc cncrgy standard increased from three pcrccnt in 20 I 2 to nine perccnt in 20 I 6. Failure to comply with
renewable energy and efficiency standards could result in penalties of 550 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 requirernents ofEIA through a variety ofrenewable energy generating means, including,
but not limited to, some combination ofhydro upgrades, wind, biomass and renewable energy credits. In 20 I 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
uscd to mcet thc rcnewable cncrgy standards.
Clean Air Rule
In Scptembcr 201 6, the Washington Statc Dcpartmcnt of Ecology @cology) adoptcd the Clean Air Rule (CAR) to cap and rcduce GHG cmissions across
the State ofwashington in pursuit of the State's GHG goals, which were enacted in 2008 by the Washington State Legislature (Legislature). The CAR
applies to sources ofannual GHG emissions in excess of I 00,000 tons for the first 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 suppliers, 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 l 7 percent annually until 2035. Cornpliance can be demonstrated by achieving emission reductions and/or surrendering Ernission
Reduction Units (ERU), 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 Scptembcr 201 6, Avista Corp., Cascadc Natural Gas Corp., NW Natural and Pugct Sound Encrgy @SE) (collcctivcly, Petitioncrs) jointly filcd an
action in the U.S. District Court for the Eastem District 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 clairn, Petitioners assert that:
. Ecology lacks statutory authority to rcgulate natural gas utilitics bccausc thc CAR holds thcm rcsponsiblc for the indircct emissions oftheir
customers;
. Ecology does not have the authority to create an emission reduction trading program (ERUs);
. Ecology failed to comply with the requirements of the State Environrnental Policy Act; and
. thc 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) generated 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 of2017 .
Initiotiye I-732
An Initiative to the Legislature (I-732) to impose a carton 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
72
Appendix 6 to Joint Application Page 79 of 414
Table of Contents
AVISTA CORPORATTON
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 UTC issued a letter finding that PSE's 20 I 3 Electric Integrated R esource Plan meets the requirements of the R evised Code of
Washington and the Washington Administrative Code. In its letter, however, the UTC expressed concem regarding the continued operation ofthe
Colstrip plant as a resource to scrvc retail customcrs. Although tlre UTC rccognizcd that thc results ofthe analyses prcscnted by PSE "diffcred
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 or partial-closure plan." As part of the Sierra Club litigation that was settled in 201 6, Un its 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, wc cannot cstimate thc cffect ofsuch procceding, should it occur, on the futurc owncrship, operation and opcrating costs ofour
share ofColstrip Units 3 & 4. Ourremaining investment in Colstrip Units 3 & 4 as ofDecember3l,20l6 was $131.0 million.
In Orcgon, lcgislation was enactcd in 20 I 6 which rcquires Portland Gcncral Elcctric and PacifiCorp to removc coal-fircd gencration from their Orcgon
rate base by 2030. This legislation does not directly relate to Avista Corp. because Avista Corp. is not an electric utility in Oregon. However, because
these two utilities, along with Avista Corp., hold rninority interests in Colstrip, the legislation could indirectly impact Avista Corp., though specific
impacts cannot be identified at this time. While the legislation requires Portland General Electric and PacifiCorp to eliminate Colstrip frorn 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 from 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 WildlW
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 lrave 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 project on the Clark Fork River under a 45-year
FERC operating license for Cabinet Gorge and Noxon Rapids (issued March 2001 ) that incorporates a comprehensive settlement agreement. The restoration
ofnativc salmonid fish, including bull trout, is a kcy part ofthc agrccmcnt. The result is a collaborativc nativc salmonid rcstoration program with thc U.S.
Fish and Wildlife Sewice, Native American tribes and the slates of ldaho and Montana on the lower Clark Fork River, consistent with requirements of the
FERC license. The U.S. Fish & Wildlife Service issued an updated Critical Habitat Designation forbull trout in 2010 that includesthe lowerClark Fork
Riveq 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 Clart Fork and Spokane River FERC licenses. See "Fish
Passagc at Cabinct Gorgc and Noxon Rapids" in "Notc I 9 ofthc Notes to Consolidated Financial Statcmcnts" 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 rccovercd through the future ratemaking prccess.
Other
For othcr cnvironmcntal issucs and othcr contingencies scc "Note I 9 ofthe Notes to Consolidated Financial Statcmcnts."
EnterDrise Risk Manaeement
The material risks to our businesses are discussed in "Item 1 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.
Appendix 6 to Joint Application Page 80 of4l4
Tabl€ of C'ontents
AVISTA CORPORATION
We consider the management ofthese risks an integral part ofmanaging our core businesses and a key element ofour approach to corporate govemance.
Risk management includes identiffing 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 Committees take an active role in the oversight ofrisk affecting the Company.
Our risk management d€partment facilitates the collection ofrisk information across the Company, providing senior management with a consolidated view of
the Company's major risks and risk mitigation measurcs. Each arca identifics risks and implcmcnts the rclatcd mitigation mcasurcs. Thc cnterprisc risk
process supports management in identifuing, assessing, quantiSing, managing and mitigating the nsks. Despite all risk mitigatron measures, however, risks
are not eliminated.
Ourprimary identified categories ofrisk exposure are:
. Financial
. Utility rcgulatory
. Energy commodity
. Operational
Financial 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 "ltem I A. Risk Factors."
We mitigate financial risk in a variety ofways 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 devclop ratc strategies for the Company. Rate stratcgies, such as dccoupling, hclp mitigate thc impacts ofrcvenuc fluctuations duc to
weather, conservation or the economy. We also have a Treasury depatment that monitors our daily cash position and future cash flow needs, as well as
monitoring market conditions to determine the appropriate course ofaction for capital financing and/or hedging strategies.
Weather Risk
To partially mitigate the risk offinancial underperfonnance due to weather-related factors, 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
"Rcgulatory Mattcrs" for further discussion of our dccoupling mcchanisms.
Access to Capital 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 support access to caprtal markets on reasonable terms. We manage our capital structure
to maintain a financial risk profile that we bclicvc thcsc partics will decm pmdcnt. We forccast cash rcquircmcnts to dctcrminc liquidity nccds, 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. Ourregulatory strategies include working with state public utility
commissions and filing for rate 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 borowing 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 ofour Board ofDirectors periodically reviews and discusses interest rate risk management
processcs and thc stcps managcmcnt has undcrtaken to control intcrest ratc risk. Our RMC also revicws our intcrcst ratc risk managemcnt plan. Additionally,
interest rate risk is managed by monitoring 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 lredges 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
. Tcchnology
. Strategic
. External Mandates
Appendix 6 to Joint Application Page 8l of 414
Tabk of Contetrts
AVISTA CORPORATION
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.
Evcn though wc work to manage our exposurc to intcrcst ratc risk by locking in ce(ain long-tcrm intercst ratcs 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 cornmodity 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 over the term ofthe associated debt.
ThefollowingtablesummarizesourinterestrateswapderivativesoutstandingasofDecember3l,20l6andDecernber3l,20l5(dollaninthousands):
December 3 I
20t6
December 3l
2015
Numbcr of agrccments
Notional amount
Mandatory cash settlement dates
Short+erm derivative assets (l )
Long-tcrm dcrivative assets (l )
Short{erm derivative liability (l) (2)
Long-term derivative liability (l ) (2)
$
$
JJ
500,000 s
201? to2O22
3,393 $
5,357
(6,02s)
(28,705)
23
45 5,000
2016 to 2O22
23
(19,264)
(30,67e)
(l) ThereareoffsettingregulatoryassetsandliabilitiesfortheseitemsontheConsolidatedBalanceSheetsinaccordancewithregulatoryaccounting
practices.
(2) ThebalanceasofDecember3l,20l6andDecember3l,20l5reflectstheollsettingof$34.9millionand$34.0million,respectively,ofcashcollateral
against the net derivative positions where a legal right ofoffset exists.
We estrmate that a l0-basis-point increase in forward LIBOR interest rates as ofDecember3l,20l6 would decrease the interest rate swap derivative net
liability by $ I 0.4 million, while a I O-basis-point decrcase would incrcase the interest rate swap derivative net liability by $ I 0.7 million.
We estimated that a l0-basis-point increase in forward LIBOR interest rates as ofDecember3l,20l5 would have decreased the interest rate swap derivative
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 $5 1 .5 million oflong-term debt to affiliated trusts is adjusted quarterly, reflecting current market rates. Amounts borrowed under our
committed line ofcredit agreements have variable interest rates.
The following table shows our long{erm debt (including cunent portion) and related weighted-average interest rates, by expected maturity dates as of
December 3 l, 20 I 6 (dollars in thousands):
2017 201 8 2019 2020 2021 Thcrcaftcr Total Fair Valuc
Fixed rate long-term
debt(l)$-$272,500$105,000$52,000$-$1,t98,500$1,628,000$1,723,912
Wcightcd-avcragc
interest rate 6.07% 5.22% 3.89% 4.91% 5.09%
Variable rate long-term
debt to affiliatedtrusts $ 5l,547 $ 51,547 $ 38,660
Weighted-average
intcrcst ratc 1.81% 1.81%
(l ) Thcsc balances includc the fixcd rate long-tcrm dcbt 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-ofyear market 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
Appendix 6 to Joint Application
75
Page 82 of 414
Table of Contcnts
AVISTA CORPORATION
policies, objectives and strategies that seek an appropriate retum forthe pension plan and it revrews and approves changes to the investment and funding
policies. Wc manage intcrcst ratc risk associatcd with our pcnsion and othcr post-rctircmcnt bencfit plans by investing a targeted amount ofpension plan
assets in fixed income investments that have maturities with similar profiles 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
C ou n t e rp a rty N o n-P etfo rma n ce R isk
Counterparty non-performance risk relates to potential losses that we would incur as a result ofnon-performance ofcontractual obligations by counterparties
to deliverenergy ormake financial settlements.
Changes in market prices may dramatically alter the size ofcredit risk with counterparties, even when we establish conservative credit limits. Should a
counterparty fail to perform, we may be required to honor the underlying commitment or to replace existing contBcts with contracts at then-current 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 speciff credit terms and protections against default,
. applying crcdit limits and duration criteria to cxisting and prospcctivc counterpartics,
. actively monitoring current crcdit cxposurcs,
. 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 eilectively 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 cach countcrparty dcpcnds on thc cxtent offonvard contracts, unscttlcd transactions, intcrcst rates and markct prices. Thcrc is a risk that wc do
not obtain sufficient additional collateral from counterparties that are unable or unwilling to provide it.
C red it R isk Liq u id i ty C o n sid era t io 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 current operating year. Executing this extended hedging program may increase credit risk and demands for collateral. Our credit risk
managemcnt proccss is designcd to mitigatc such credit risks through limit sctting, contract protections and countcrparty 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 Iimits 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 fiom 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 of December 3 1 , 201 6, we had cash deposited as collateral of $ I 7.1 million and letters of credit of $24.4 mill ion 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"
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 December 3 I , 20 I 6, we would potentially be required to post additional collateral ofup to $6.0 million. This
amount is
76
Appendix 6 to Joint Application Page 83 of414
Table of Contctrts
AVISTA CORPORATION
diflerent 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 mte swap derivatives that we enter into periodrcally, we may be required to post cash or letters ofcredit as collateral depending on
fluctuations in thc fair valuc ofthc instrumcnt. As ofDcccmber 3 I , 20 I 6, we had intcrcst ratc svr'ap agrccments 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 "investment grade" based on our interest rate swap derivatives outstanding at December 3 I , 20 I 6, we
would have to post $2 l.l million ofadditional collateral.
Foreign Currency Risk
A significant portion ofourutility natural gas supply (including fuel forelectric 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 committcd bascd on Canadian cunency prices. Thc short+crm natural gas transactions are typically settlcd within sixty days with U.S. dollars.
We economically hedge a portion ofthe foreign cuffency risk by purchasing Canadian currency 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 currency
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 Resulatorv Risk
Because we are primarily a regulated utility, we face the risk that regulators may not grant rates that provide timely or sufficient recovery ofour 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
su{ficient are not successful, we expect our 201 7 eamings will be adversely impacted. See further discussion at "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Regulatory Matters."
We mitigate regulatory risk through oversight from our Board of Directorc and from senior management. We have a separate regulatory group which
communicates with commission regulaton and staffregarding the Company's business plans and concems. The regulatory group also considers the
rcgulator's prioritics and ratc policics and makcs recommendations to scnior managcment on regulatory stratcgy for thc Company. Sce "Rcgulatory Mattcrs"
for further discussion ofregulatory matters affecting our Company.
Enersv Commoditv Risk
Energy commodity risks are associated with fulfilling our obligation to serye customers, managing variability of energy facilities, rights and obligations and
fulfilling the terms of our energy commodity agreements with counterparties. These risks include, arnong otherthings, those described in "Item l A. Risk
Factors."
We mitigate energy commodity risk primarily through our energy resources risk policy, which includes oversrght from the RMC and oversight from the Audit
Cornmittee and the Environmental, Technology and Operations Committee ofour Board ofDirectors. In conjunction with the oversight comrnittees, our
management team develops hedging strategies, detailed resource procurement plans, resource optimization strategies and long-term integrated resource
planning to mitigate some ofthe risk associated with energy commodities. The various plans and strategies are monitored daily and developed wrth
quantitativc 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 measurernent 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 rcsourccs or bccause fuel cost is not locked in through fixed price contracts or dcrivative instrumcnts, our risk policy guides thc process to managc
this open
77
Appendix 6 to Joint Application Page 84 of4l4
Table of Contcnts
AVISTA CORPORATION
forward position over a period of time. 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 ma*ets, 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 relativc economics ofsubstitute market purchascs for generating plant opcration.
To address the impact on our operations ofcncrgy market price volatility, our hedging practices for elcctricity (including fuel for generation) and natural gas
extend beyond the current operating year. Executing this extended hedging program may increase our credit risks. Our credit risk management process is
designed to mitigate such credit risks through limit setting, contract protections and counterparty diversification, among other practices.
Our projected retail natural gas loads and resources are regularly reviewed by operating management and the RMC. To manage the impacts ofvolatile natural
gas priccs, wc seek to procure natural gas through a divcrsified mix ofspot markct purchascs and forward fixed pricc purchases from various supply basins
and time periods. We have an active hedging program that extends into future years with the goal ofreducing 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 throughout
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 I , 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
Year
2017
201 8
2019
2020
202t
Thcrcaftcr
Physical (l) Financial (l) Physical (l) Financial (l) Physical (l) Financial (l) Physical (l) Financial (l)
$(4,274) $
(s,5 98)
(3,123)
t,939 $e7$
(23s)
(266)
576 $
854
975
(2,036) $
(e l0)
(927)
(1,288)
(86e)
709
103
(4,005) s
(2,170)
(3,732\
(3 70)
(22s) $
(33)
(40)
(3,440)
The following table presents energy commodity derivative fair values as a net asset or (liability) as ofDecember 3 I , 20 I 5 that were expected to settle in each
respective year (dollars in thousands):
Purchases Sales
Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivatives
Year Physical ( I )
2016 $ (6,928) $ (14,e88) $ (5,895) $ (41,006) $ 82 $ 28,857 $ t73 $ 22,44s
2017 (6,403) 36 (l ,0s0) (e,473) (23) 3,971 (l ,l 25) 3 I 3
2018 (5,614) (3,ss4) (50) (1.t72) (162)
20te (3,072') (22) (1,e64) (44) (t,220)
2020 3s (r8) (t,130)
Thereafter - 1679) -
(l ) Physical transactions represent commodity 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 wrll be included in the various recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to eventually
bc collccted through rctail rates from customcrs.
Scc "ltem l. Business- Elcctric Opcrations," "ltcm 1. Busincss-Natural GasOpcrations," and "Item lA. Risk Factors" foradditional discussion ofthc risks
associated with Energy Commoditres.
78
Physical ( | )Financial(l) Physical(l) Finmcial(l)Financial (l) Physical (l) Financial (l)
Appendix 6 to Joint Application Page 85 of 414
AVISTA CORPORATION
Operational Risk
Operational risk involves potential disruption, losses, or excess costs arising from extemal 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 disasterrecovery plans, maintain insurance
coverage against some, but not all, potential losses and seek to negotiate indemnification arrangements with contractors for certain event risks. In addition,
we design and follow detailed vegetation management and asset management inspection plans, which help mitigate wildfire and storm event risks, as well as
identiff utility assets which may bc failing and in nccd of rcpair or replacement. Wc also have an Emergency Opcrating Ccntcr, whiclr is a tcam of cmployccs
that plan for and train to deal with potential emergencies or unplanned 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, avaitabitity and delivery restraints, we have an energy resources risk policy, which includes our wholesale energy
markets credit policy and control procedures to manage energy comrnodity 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 perfonned by the Environmental, Technology and Operations Committee ofour Board ofDirectors
and from senior management 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 of applicable laws, rules and regulations. We have extensive compliance obligations. Our primary compliance risks and obligations include,
among othcrs, thosc dcscribcd in "Itcm I A. Risk Factors."
We mitigate compliance risk through oversight from the Environmental, Technology and Operations Committee and the Audit Committee of our Board of
Directors and liom senior management. We also have separate Regulatory and Environmental Compliance departments that monitor legislation, regulatory
orders and actions to detennine the overall potential itnpact to our Company and develop strategies for complying with the various rules and regulations. We
also engage outside attomeys, and consultants, when necessary, to help ensure compliance with laws and regulations.
See "Item l. Business, Regulatory Issues" through "ltem l. Business, Reliability Standards" and "Environmental Issues and Contingencies" for further
discussion ofcornpliance issues that impact our Company.
Technolosv Risk
Our prirnary technology risks are described in "Item I A. Risk Factors."
We mitigatc tcchnology risk through trainings and cxcrciscs at all levels of the Company. The Environmcntal, Tcchnology and Opcrations Committcc of our
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. In 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 syslems. There are regular
training sessions for the technology and security team. This group also evaluates the Company's technology for obsolescence and makes recommendations
forupgrading or rcplacing systcms as ncccssary. Additionally, this group monitors for intrusion and sccurity cvcnts that may includc a data brcach.
Stratesic Risk
Stmtegic risk relates to thc potcntial impacts rcsulting from incorrect assumptions about extemal and intemal factors, inappropriatc busincss 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 I A. Risk Factors."
79
Page 86 of 414
Table 0f Contents
Appendix 6 to Joint Application
Table of Contents
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
lcads strategic initiativcs, to scarch for and cvaluatc opportunitics for thc Company and makcs rccommcndations to scnior managcmcnt. Wc 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, maintaining an appropnate
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
ffom senior management. We have a Climate Council which meets intemally to assess the potential impacts of climate policy to our business and to identify
strategies to plan for changc. Wc also havc cmployecs dcdicatcd to actively engagc and monitor federal, statc and local govcmmcnt positions and legislativc
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
outrcach stratcgy and a Low Incomc Ratc Assistance Plan,
. tailoring our intcmal company initiativcs to focus on choices for our customers, to incrcase thcir ovcrall satisfaction with thc Company, and
. engaging in tlre legislative process in a manner that fosters the interests ofour customers and the communities we serve.
ITEM 7A. OUANTITATIVE AN'D OUALITATIVE 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 AN'D SI.]PPLEMENTARY DATA
The Report oflndependent Registered Public Accounting Firm and Financial Statements begin on the next page
80
Appendix 6 to Joint Application Page 87 of 414
Table ol Contcnts
REPORT OF INDEPENDENT REGISTERED PI,tsLIC ACCOI]NTING 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 l, 20 I 6 and 20 I 5,
and the related consolidated statements ofincome, comprehensive income, equity and redeemable noncontrolling interests, and cash flows for each ofthe
thrce years in the pcriod endcd Dcccmbcr3l,20l6. These financial statements arc the rcsponsibility ofthe Company's management. Our rcsponsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards ofthe Public Company Accounting Oversight Board (Jnited States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whetherthe 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 ouropinion, such consolidated financial statements present fairly, in all material respects, the financial position ofAvista Corporation and subsidiaries at
December3l,20l6and20l5,andtheresultsoftheiroperationsandtheircashflowsforeachofthetlrreeyearsintheperiodendedDecember3l,20l6,in
conformity with accounting principles generally accepted in the United States ofAmerica.
We havc also audited, in accordancc with thc standards of thc Public Company Accounting Oversight Board (Unitcd Statcs), the Company's intemal control
over financial reporting as ofDecember 3 I , 20 I 6, based on the criteria established in Inlernal Control - Integrated Framev,ork (20,/3) issued by the
Committee ofSponsoring Organizations ofthe Treadway Comrnission, and our report, dated February 21,2017 expressed an unqualified opinion on the
Company's intemal control over financial reporting.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 2l,2017
8l
Appendix 6 to Joint Application Page 88 of 414
Trble of Contents
CONSOLIDATED STATEMENTS OF INCOME
Avisla Corporation
For thc Years Ended Dcccmbcr 3 I
Dollars in thousands, except per share amounts
2016 201 5 2014
Utility revenues $l t4$l 1$l
Total revenues 1,442,483 1,484,776 1,472,562
Other
Taxes other than income taxes
315,795
98,73 5
303,221
97,657
286,832
94,300
25,501 29,526 30,41 8
Total operating expenses
Interest
interest
lncome from continuing operations before income taxes 215.402 I 85,619 t92,106
Net income from continuing operations
Net income
Net income attributable to Avista Corp. shareholders
137.316 192,277
$ 137,228 $ 123,227 $ I 92,041
The Accompanying Notes are an Integral Part ofThese Stalements-
82
Appendix 6 to Joint Application Page 89 of 414
t.152,680 I,231,562 I ,2t9,97 4
289,803
86,496
634
(2,65 l)
(r 0,078)
)\1 )ta
79,968
473
(3,546)
(9,300)
252,588
7 5,302
450
(3,924)
(1 1,346)
t37,316 I I {i,170
5.t 47
I 19,866
72,4n
123,317
(e0)
IeDJwf-@teEE
CONSOLIDATED STATEMENTS OF INCOME (continued)
Avista Corporatiotr
For thc Years Ended Decembcr 3 I
Dollan in thousands, except per share amounts
20t6 201 5 20t4
Net income from $ t37,228 $ 118,080 $ 1
Net income attributable to Avista Corp. shareholders s l 92,041
common shares dilutcd 61,887
common share from
Total eamings per cornmon share attributable to Avista Corp. shareholders, basic $
2.16 $1.90 $1.94
2.16 $1.98 S 3.12
per common share from
Total eamings per common share attributable to Avista Corp. shareholders, diluted $
2.t5 $
2.15 S
1.89 $
t.97 $
1.93
3.10
The Accompanying Noles are an Integral Part ofThese Statements.
83
Appendix 6 to Joint Application Page 90 of414
$ t37,228 $
63,508
63,920
s
62,301
62,708
0.08
S 1.37 $1.32 $1.27
Tabl€ of Contents
CONSOLIDATED STATEMENTS OF COMPRE}IENSIVE INCOME
Avista Corporation
For the Years Ended December 3 I
Dollars in thousands
2016 201 5 2014
Other Comprehensive Income (Loss):
Reclassification adjustment forrealized gains on investment securities included in net
incomc - net oftaxcs of$0, $0 and $(l ),
Change in unfunded benefit obligation for pension and other postretirement benefit plans -
net oftaxes $667 and $(1,967),(e l8)r,238
Comprehensive income
Comprehensive income attributable to Avista Corporation shareholders
190,208
s 136,310 $ 124,465 S t89,972
The Accompanying Notes arc an Integral Part ofThese Statements.
84
Appendix 6 to Joint Application Page 9l of 414
$ 137,316 $ 123,317 S 192,277
1,126
(2)
462
(3,6s 5 )
(91 8)1,238 (2,069)
136,398
(8 8)
124,555
(e0)
Table of Contetrts
CONSOLIDATED BALANCE SMETS
Avisla Corporatiorr
As ofDecember 3 I
Dollars in thousands
2016 201 5
Current Assets:
Accounts and notes receivable-less allowances of55,026 and $4,530,
Materials fuel stock and stored natural
Other current assets
180,265
53,314
49,625
t69,413
54,t48
30,620
Construction work in
Less: Accumulated
Other Non-current Assets:
and amortization 1,509,473
Goodwill
Other and investments-net and other non-current assets
Deferred Charges:
asscts for 240,1t4 235,009
asset for interest rate l 6l ,508 83,973
Othcr
Total assets $ 5,309,755 S 4,906,649
The Accompanying Notes are an Integral Part ofThese Statements.
85
Appendix 6 to Joint Application Page 92 of 414
$
35t,341 306.046
5,506,499
150,47 4
5,129,t92
202,683
5,331,875
1 ,433,286
4,147,500 3,898,5 89
11,547
57,672
1) ))l
I I ,547
57,672
14,694
59,7 33
141,443 143,646
669,4',7 |558.368
Table of Contents
CONSOLIDATED BALANCE SHEETS (continued)
Avista
Dollars in thousands
2016 2015
Current Liabilities:
Current debt and leases 93,167
derivative liabilities 14,268
Accrued taxes than income taxes
and other benefits
Total cuncnt liabilitics
debt to affiliated trusts
Pensions and bcncfits
Non-current interest rdte derivative
Total liabilities 78,362
Common stock, no par value; 200,000,000 shares authorized:64,187,934 and 62,312,651 shares issued and
Retained
as ofDecember 3 2016 andDecember3l
The Accompanying Notes are an Integral Part ofThese Statements.
1,004,336
58r,014 530,940
$ 5,3 09,755 $ 4,906,649
Intcrcsts
Total liabilities and equity
86
Appendix 6 to Joint Application Page 93 of414
$l 15,545 $
3,287
120,000
7 0'15
t 5,869
33,37 4
30,820
t0,994
70,604
407,528
I ,67I,717
5t,547
273,983
226,552
840,928
28,705
153,319
474,680
I,480,r I I
51,547
26t,594
201,453
747,471
30,679
130,821
3,661,279
1,648,',727
(25 r)
|,528,626
(33e)
t,648,476 1,528,287
Trble of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
Avista Corporatiott
For the Years Ended December 3 I
Dollars in thousands
Opcrating Activities:
Net income
Non-cash items included in net income:
Depreciation and amortization
Provision for deferred income taxes
Power and natural gas cost amortizations (deferrals), net
Amortization of debt expense
Amortization ofinvestment in exchange power
Stock-based compensation expense
Equity-relatcd AFUDC
Pension and other postretirement benefit expense
Amortization of Spokane Energy contract
Gain on sale ofEcova
Othcr rcgulatory assets and liabilitics and dcfcrrcd dcbits and credits
Change in decoupling regulatory deferral
Other
Contributions to defined benefit pension plan
Cash paid for settlement ofinterest rate swap derivatives
Changes in certain current assets and liabilities:
Accounts and notes receivable
Materials and supplies, fuel stock and stored natural gas
Collateral posted for derivative instruments
Income taxes rcceivablc
Other current assets
Accounts payable
Other current Iiabilities
Nct cash providcd by opcrating activities
lnvesting Activities:
Utility property capital expenditures (excluding equity-related AFUDC)
Other capital expenditures
Cash received (paid) in acquisition, net
Issuancc ofnotcs rcccivablc at subsidiarics
Repayments from notes receivable at subsidiaries
Investments made by subsidiaries
Increase in funds held for clients
Purchasc ofsccuritics availablc for sale
Sale and maturity ofsecurities available for sale
Proceeds from sale ofEcova, net ofcash sold
Other
Net cash used in investing activities
2016 201 5 2014
$ 137,3 16 $ 123,3 17 S t92,277
164,925
124,543
r 6,835
3,477
2,450
7,891
(8,47 s)
3 8,786
14,694
(26,24s)
(29,789)
s 55?
( l 2,000)
(5 3,966)
(11,170)
834
10.7 t2
(33,923)
(3,e07)
5,17 6
10,546
| 47 ,835
5l ,801
2l ,358
15r6
2,450
6,9t4
(8,33r)
3 7,05 0
13,508
(777)
4,569
(10,933 )
(517)
(12,000)
(10,538)
12,208
(13,30r)
t9,772
2,338
(8,1 38)
(6,471)
138,337
144,269
(14,821)
3,692
2,450
8,1 l4
(8,8 0 8)
22,943
12,417
(160,612)
7,906
1,103
(32,000)
16,425
(l e,3e4)
(23,3 0 l )
(36,1 10)
(7 ,t t7)
(12,s62)
32,060
358,267 375,640 267,268
(406,644)
(353)
(10,094)
5,000
(r 3,097)
(3e3,42s)
(88s )
(es)
(2,307)
(t,944')
13,856
(3,027\
(325,5 r 6)
(6,427)
t 5,007
(l,2oo)
(t,072\
(r 8,93 l )
(12,267)
14,612
229,903
2,155(7,278)
$ (432,466) $ (38? ,827) $ (103,736)
The Accompanying Notes are an Integral Part ofThese Statemerrts.
Appendix 6 to Joint Application
87
Page 94 of 414
Tebl€ of Contetrts
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Dollars in thousands
2016 201 5 2014
Net increase committed line of credit 15,000 $$ (66,000)
Proceeds liom issuance
ofcommon stock
debt 245.000 100,000
(2,920)
l 50,000
debt
lncrease in client fund 16,216
to option holders and redeemable interests for sale ofEcova (20,871
Net caslr by (uscd actlvrtres 1) )11
Cash and cash
Supplemental Cash Flow Information:
Interest 86,319 S 79,673 $ 73,526
Non-cash activities:
Valuation for rcdeemablc
Non-cash stock issuance for acquisition ofAERC
lnterests (l 5,873
150,1 l9
The Accompanying Notes are on Integral Parl of These Slatemenls.
88
Appendix 6 to Joint Application Page 95 of 414
66,953
(87,1 s4)
(4,410)(l 1,379)
528 (223.963)
(t,e77)
10,484
(l 1,659)
22,143
(60,431)
82,57 4
s 8,507 $10,484 $ 22,143
S
30,252 35,248
Table of Contents
CONSOLIDATED STATEMENTS OF EQIJITY AND REDEEMABLE NONCONTROLLING INTERESTS
Avista
For Years Ended December 3 I
Dollars in thousands
Common Stock, Shares:
Shares outstanding at beginning ofyear
Shares issued through equity compensation plans
Shares issued through Employee Investment Plan (401 -K)
Shares issued through Dividend Reinvestment Plan
Shares issued through sales agency agreements
Sharcs issucd for acquisition
Shares repurchased
Shares outstanding at end ofyear
Common Stock, Amount:
Balance at beginning ofyear
Equity compcnsation cxpcnsc
Issuance ofcommon stock through equity compensation plans
Issuance ofcommon stock through Employee Investment Plan (40 l -K)
Issuance of common stock through Dividend Reinvestment Plan
Issuance ofcommon stock through sales agency agreements, net ofissuance costs
Issuance ofcommon stock for acquisition, net ofissuance costs
Payment of minimum tax withholdings for share-based payment awards
Repurchase of common stock
Equity transactions of consolidated subsidiaries
Payment to option holders and redeemablc noncontrolling interests for sale ofEcova
Excess tax benefits
Balance at end ofyear
Accumulated Other Comprehensive Loss:
Balance at beginning ofyear
Other comprehensive income (loss)
Balance at end ofyear
Retained Eamings:
Balance at beginning ofyear
Nct incomc attributable to Avista Corporation sharcholdcrs
Cash dividends paid (common stock)
Repurchase of common stock
Valuation adjustments and other noncontrolling interests activity
Balance at end ofyear
Total Avista Corporatioll sharchol dcrs' equity
The Accompanying Noles are an Inlegral Parl ofThese Statements.
581.014 530,940 491,599
$ 1,648.727 $ 1,528,626 $ 1,483,671
62,312,651
203,727
26,556
62,243,374
125,620
3 3,05 7
201 6 201 5 2014
60,076,752
51,127
33,1 68
l r 0,501
1,645.000
(89,400)
4 ^501 ,44t
(2,s29,615)
64,18'.7,934 62,312,651 62,243,374
$r,004,336
7,065
624
I ,061
65,267
(3,o72)
999,960 $
6,035
462
t,099
896,993
7,676
108
1,005
3,441
149.625
(40,486)
(r,062)
(20,87 t)
3,53 r
$
(r,832)
(1,43r)
43
1,075,281 1,004,336 999,960
(6,650)
(e l8)
(7,888)
1,238
(s,819)
(2,069)
(7,s68)(6,6s0)(7,888)
530,940
137,228
(87,1 s4)
491,599
1)1 ))1
(82,397)
( r ,489)
407,092
192,041
(78,314)
(39,370)
t 0,1 50
89
Appendix 6 to Joint Application Page 96 of 414
Table of Cont€nts
CONSOLIDATED STATEMENTS OF EQIJITY AND REDEEMABLE NONCONTROLLING INTERESTS (continued)
Avista Corporation
For the Years Ended December 3 I
Dollan in thousands
20t6 201 5 20 l4
Balance at $ 20,001
Deconsolidation ofnoncontrolling interests related to sale ofEcova
Balance at end ofyear
Redeemable Noncontrolling Interests:
Nct incomc attributablc to interests
Valuation (l s,873)
The Accompanying Notes arc an Inlegral Parl ofThese Statements.
90
Appendix 6 to Joint Application Page97 of4l4
$
s
$(33e) $
(2sr)(33e)(42e)
$ 1 ,648,47 6 $ r.528,287 $ 1,483,242
$S 15.889
$s
9088
(4)
(12)
Table of C-ontents
AVISTA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I. ST]MMARY OF SIGNIFICANT ACCOT]NTING POLICIES
Nuture 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 regulatcd utility operations in the Pacific Northwest. Avista Utilitics providcs clcctric distribution and transrnission, 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 Utilities'Noxon Rapids generatrng 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 operations
in Alaska. AERC was acquired by Avista Corp. on July l,2014 and there are no AERC eamings included in the overall results ofAvista Corp. priorto that
date. See Note 4 for information regarding the acquisition of AERC.
Avista Capital, a wholly owned non-regulated subsidiary of Avista Corp., is the parent company of all of the 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 oumed subsidiary prior to its disposition on June 3 0, 20 14. See Note 5 for information regarding the disposition
ofEcova and Note 2l 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
subsidiarics and variablc interest entities for whiclt thc Company or its subsidiarics arc thc primary bencficiarics. Ecova's rcvcnues and cxpcnses are includcd
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
rcsulting from its intercsts in jointly owncd plants (scc Notc 7).
Use of Estimates
The prcparation ofthe consolidated financial statements in conformity with GAAP rcquircs managcmcnt to makc cstimatcs and assumptions that affcct thc
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,
. pcnsion and otherpostrctirement bencfit 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.
System ofAccounts
The accounting records ofthe Company's utility operations are maintained in accordance with the uniform system ofaccounts prescribed by the FERC and
adoptcd by the state rcgulatory commissions in Washington, Idaho, Montana, Oregon and Alaska.
9t
Appendix 6 to Joint Application Page 98 of 414
Table 0f Conterts
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 wcll as various other federal agencies with rcgulatory ovcrsight ofparticular aspects ofits operations.
Utility Revenues
Utility revenues relatcd to the sale ofcncrgy arc recorded when service is rendered or energy is deliveted to customcrs. Revenues and resourcc 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 customen is based on the reading oftheir meters, which occurs 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,
' meter reading dates,
' actual native load forelectricity,
' actual throughput fornatural gas, and
. electric line losses and natural gas system losses.
Any diffcrence bctween actual and estimatcd revenue is automatically corrected in thc following month when the actual meter rcading and customer billing
occurs.
Accounts receivable includes unbilled energy revenues ofthe following amounts as ofDecember 3 I (dollars in thousands):
201 6 201 5
Unbilled accounts receivable 72,377 $ 62,003
0t her Non-Utility Reve nues'
Revenues from the otherbusinesses are primarily derived from the operations of AM&D, doing business as METALfi<, 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 quarter of20 I 5
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 1 :
2016 2015 2014
Avista Utilities
Ratio ofdepreciation to average depreciable property
Alaska Electric Light and Power Company
Ratio ofdepreciation to average depreciable property
92
$
3.t1%
2.390/o
3.09%
2.42%
2.97o/o
2.43%
Appendix 6 to Joint Application Page 99 of414
Table of Contents
AVISTA CORPORATION
The average service lives for the following broad categories ofutility plant in sewice are (in years):
Electric thermal/other producti on
Hydroelectric production
Electric transmission
Elcctric distribution
Natural gas distribution property
Other shorterlived general plant
Utility related taxes
Propcrty taxcs
Other taxes
Total
$
Avista Utilities
Alaska Electric Light and
Powcr 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 franchise 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 reconded as operating revenue and expense. Taxes other than income taxes consisted ofthe foltowing items for the yean
ended December 3 I (dollars in thousands):
20t6 201 5 2014
57.745 $
3 8.5 05
2,485
59,t73 $
3 5,948
2,536
s8,250
11q1'
2,118
s 98,735 $97,657 $94,300
Allowance for 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 Consolidatcd Statements oflncome in thc line item "capitalizcd interest." The equity component ofAFUDC is includcd in thc Consolidatcd Statement of
Income 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 after the related utility plant is placed in service. Cash inflow
related to AIUDC does not occur until the related utility plant is placed in service and included in rate base. The effective AFUDC rate was the following for
the years ended December 3 I :
2016 2015 20t4
Avista Utilities
Effective AFUDC rate
Alaska Electric Light and Power Company
Effective AFUDC rate
7.29%7.32o/o 7.64%
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 future taxable income the Company expects to recognize in future tax retums. Deferred tax assets and liabilities arise when
thcrc are temporary differenccs resulting from differing trcatmcnt ofitcms for tax and accounting purposcs (such as dcprcciation). A dcfcrrcd income tax assct
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 liom a change in tax rates is recognized in income in the period that includes the enactment date unless a regulatory order
spccifics deferral ofthe cffcct ofthc changc in tax ratcs over a longcr period oftimc. The Company establishes a valuation allowancc when it is more likcly
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
Appendix 6 to Joint Application Page 100 of4l4
Table of Contents
AVISTA CORPORATION
positions in 2016,2015 or2Ol4. The Company would recognize interest accrued related to income tax positions as interest expense and any penalties
incurred as other operating expense.
Sto c k-B ase d C o mp e nsati o n
The Company currently issues three types ofstock-based compensation awards - restricted shares, market-based awards and performance-based awards.
Historically, these stock compensation awands have not been material to the Company's overall financial results. Compensation cost relating to share-based
paymcnt transactions is rccognized in thc Company's financial statemcnts based on thc fair value ofthe cquity or liability instruments issued and rccorded
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 Decernber 3 I (dollars in thousands):
20t6 201 5 2014
Stock-based compensation expense $ 7,891 $ 6,914 $ 6,007
lncome tax benefits (l) 4,359 2,420 2,102
(l) Incometaxbenefitsfor20l6include$l.6millionassociatedwithexcesstaxbenefitsonsettledshare-basedemployeepayments.Theexcesstaxbenefits
wererecognized in the Statement oflncome for20l6 due to theadoption ofASU20l6-09,effective January 1,2016. SeeNote 2 forfurtherdiscussion.
Restricted share awards vest in equal thirds each yearovera three-yearperiod and are payable in Avista Corp. common stock at the end ofeach yearifthe
service condition is mct. In addition to thc scrvice condition, the Company must mcct a return on cquity target in order for thc Chicf Executive Officcr'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 2014. Botlr types ofawards vest after a period ofthree years and are payable in cash or Avista Corp. common stock at the end ofthe
three-year period. The method ofsettlement is at the discretion ofthe Company and historically the Company has settled these awands through issuance of
Avista Corp. common stock and intends to continue this practice. Both types ofawards entitle the recipients to dividend equivalent rights, are subject to
forfeiture under ccrtain circumstanccs, and are subject to mccting specific market or pcrformance conditions. Based on thc lcvcl ofattainmcnt oftlre 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 cquity awards and compensation cost for thcsc awards is recognizcd ovcr
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 sewice 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 ofthe three-year service period, if the 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 fairvalue ofeach TSR award is estimated on the date ofgrant using a statistical model that incorporates the probability ofmeeting the market targets
based on historical rctums relative to a pecr group. The estimated fair value ofthc cquity component ofCEPS awards was cstimated 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
Appendix 6 to Joint Application Page 101 of4l4
Table of Contents
AVISTA CORPORATION
The following table summarizes the number ofgrants, vested and unvested shares, eamed shares (based on market metrics), and other pertinent information
rclated to the Company's stock compensation awards for the years ended December 3 I :
2016 20t5 20t4
Restricted Shares
Shares granted during the year
Shares vested during the year
Unvested shares at end ofyear
Unrecognized compensation cxpcnse at cnd ofyear (in thousands)
TSR Awards
TSR shares granted during the year
TSR shares vested during the year
TSR shares eamed 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 market metrics
Unvested CEPS shares at end ofyear
Unrecognized compensation expense (in thousands)
58,259 59,025
$
$
$
58,61 0
(52,385)
t 09,806
1,853 $
5 8,3 02
(60,379)
106,091
1,705 $
62,075
(52,899)
I t2,042
1,349
I 17,550
(l 67,s84)
9'.7,199
287,834
2,833
58,017
t,577
t 16,435
(l r 1,665)
I 32,887
f f f 1f a
3,409 $
5'.7,521
(ss,83s)
90,460
110,452
t ,671 $
tt6A3s
(r71,334)
222,734
223,697
3,219 $
I I 1,887
l,840 s
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. Thesc liability awards are rcvalued on a quartcrly basis taking into account the numbcr ofawards outstanding, historical dividend ratc, the change in
the value of the Company's common 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 3 1, 20 I 6 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 Income - net consisted ofthe following items for the years ended December 3 I (dollars in thousands):
2016 20t5 20l4
Interest income
Intcrcst on rcgulatory dcfcnals
Equity-related AIUDC
Net gain (loss) on investments
Other income
Total
$
9,300 $I t,346
t,823 $
1,308
8A7s
(2,1s2)
624
653 S
48
8,331
(637)
905
987
220
8,808
276
1,055
s r 0,078 $
Appendix 6 to Joint Application Page I 02 of 414
Earnings per Common Share Attributable to Avista Corporation Shareholders
Basic eamings per common share attributable to Avista Corp. shareholders is computed by dividing net income attributable to Avista Corp. shareholders by
the weighted-average number ofco[lmon shares outstanding for the period. Diluted eamings per comrnon 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 comrnon 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 I 8 for eamings per corunon share calculations.
95
Table of Contents
AVISTA CORPORATION
Cash and Cash Equivalents
For the purposes ofthe Consolidated Statements ofCash Flows, the Company considers ail temporary investments with a maturity ofthree months or less
when purchascd to be cash equivalcnts.
A I I o wanc e lo r Do ubtful Ac c o unts
Thc Company maintains an allowancc for doubtful accounts to provide for estimated and potential losses on accounts rcccivable. Thc Company dctermincs
the allowance for utility and other customer accounts receivable based on historical write-offs as compared to accounts receivable and operating rcvenues.
Additionally, the Company 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 2015 2014
Allowance as ofthe beginning ofthe year
Additions expensed during the year
Net deductions (l )
Allowancc as ofthe cnd ofthe vcar 5,026 $4,s30 $4,888
s 4.s30 $
6,05 3
(s.s s 7)
4,888 $
5,802
(6,1 60)
44,309
5,296
(44.717)
$
Materials and supplies
Fucl stock
Stored natural gas
Total
$40,700 $
4,5 85
8,029
37,1 0 I
4,27 3
12,77 4
$53,314 $54,148
Utility Plant in Service
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 retired plus the cost ofremoval less salvage is charged to accumulated depreciation.
A sset Reti rement Ob lig atio ns
The Company records the fair value of a liability for an ARO in the period in which it is incuned. Wren the liability is initially recorded, the associated costs
ofthe ARO are capitalized as part ofthe carrying amount ofthe related longJived 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 becornes available as an increase or decrease to the liability, with the offset recorded
to the related long-lived 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 for the difference between asset retirement costs currently 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
Appendix 6 to Joint Application Page 103 of4l4
(l) During20l4,theCompanyreceived$l5.0millioningrossproceedsrelatedtothesettlementofitsCalifomiawholesalepowermarketslitigation.The
gross proceeds cffectivcly scttled all outstanding rcccivables and payablcs at Avista Energy (which had bcen fully rcsewed against since 200 I ). As a
result ofthe settlement, the Company reversed $ I 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 Natural 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
marketforournon-regulatedoperationsandconsistedofthefollowingasofDecember3l (dollarsinthousands):
20 I 6 2015
Tablc of Contents
AVISTA CORPORATION
The Company recovers certain asset retirement costs through rates charged to customers as a portion ofits depreciation expense for which 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 3 I (dollars in thousands):
2016 2015
Rcgulatory liability for utility plant retirement costs $ 273,983 $ 261 ,594
Goodwill
Goodwill arising from acquisitions represents the future economic benefit arising from other assets acquired in a business combination that are not
individually identified and separately recognized. The Company evaluates goodwill for impairment using a qualitative analysis (Step 0) forAEL&P and a
combination ofdiscounted cash flow models and a market approach for the other subsidiaries on at least an annual basis or more Iiequently ifimpairment
indicators arise. The Company completed its annual evaluation ofgoodwill for potential impairment as ofNovember 30, 20 I 6 and determined that goodwill
was not impaired at that time.
The changes in the carrying amount of goodwill are as follows (dollars in thousands):
Accumulated
AEL&P orher 'tfftT;* Totar
Balance as ofJanuary l, 201 5
Adjustmcnts
Balance as ofthe December 3 1 , 20 I 5
Balance as ofthe December 3 I , 20 I 6
s 52,730 S
(304)
12.979 $(7,733) S 57 ,97 6
(3 04)
52,426 12,979 (7,733t 57,672
$52,426 $12,979 $(7,733\ $ s7,672
Accumulated impairment losses are attributable to the othcl businesscs. The goodwitl adjustments recorded during 20 1 5 relate to the final true-up ofincome
taxes associated v/ith the acquisition of AERC, which occurred on July I , 201 4. See Note 4 for information regarding this business acquisition and Note 2 I
regarding the Company's reportable segments.
Derivative 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 ofdelivery. Realized benefits and costs result in adjustments to retail rates through PGAs, the ERM in Washington, the PCA rnechanism in Idaho, and
periodic general rates cases. The resulting regulatory assets have been concluded to be probable ofrecovery through future rates.
Substantially all forward contracts to purchasc or scll powcr and natural gas are recorded as dcrivative assets or liabilities at cstimated 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 oftlre contract that is determined to be other-than-temporary.
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 overthe term ofthe associated debt. The Company records an offset ofinterest rate swap derivative assets and liabilities with regulatory assets and
liabilities, based on the priorpractice ofthe commissions to provide recovery through the ratemaking process.
As of December 3 l, 201 6, the Company has multiple master netting agreements 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
prcscntation in the Consolidatcd Balancc Shccts.
97
Appendix 6 to Joint Application Page 104 of4l4
EEte!!.Contclts
AVISTA CORPORATION
Fair 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 thc mcasurcmcnt datc. Energy commodity dcrivative asscts and liabilities, dcfcrted compcnsation asscts, as well as derivativcs related
to interest rate swap derivatives and foreign currency exchange derivatives, are reported at estimated fairvalue on the Consolidated Balance Sheets. See Note
I 6 for the Company's fair value disclosures.
Regulatory Deferred 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 designcd to recovcrthe cost ofproviding the regulated serviccs, and
. in vicw ofdemand for the regulated serviccs and thc lcvel ofcompetition, it is reasonable to assume that ratcs can bc charged to and
collected fiom 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 defened 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 ofrcvcnue shortfall or exccss due to fluctuations in customerusage), subjcct to certain limitations, and a rcgulatory assct/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 rcvenue must be expected to be collected from customers within 24 months ofthe deferral to qualif 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
dccoupling rcvenue being recognizcd in a futurc period.
Ifat some point in the future the Corrpany 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 write offits regulatory assets, and
. precluded from the future deferral ofcosts or decoupled 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.
Unamortized Debt Expense
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 Debl Repurchase Cosls
For the Company's Washington regulatory jurisdiction and for any debt repurchases beginning in 2007 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 ovcr the life ofthe new dcbt. In thc Company's other rcgulatory jurisdictions, prcmiums paid to repurchase debt prior to 2007 arc 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 cornponent ofinterest expense.
Accumulated (hher Comprehensive Loss
Accumulated other comprehensive loss, net oftax, consisted ofthe following as ofDecember 3 I (dollars in thousands):
2016 2015
Unfunded benefit obligation for pensions and other postretirernent benefit plans - net oftaxes of$4,075 and $3,580,
respectively $7,568 s 6,650
98
Appendix 6 to Joint Application Page 105 of4l4
Table of Contents
AVISTA CORPORATION
The following table details the reclassifications out ofaccumulated other comprehensive loss by component for the years ended December 3 I (dollars in
thousands):
Amounts Reclmified from Accumulated Other Comprehensive Los
Details about Accumulated Other Comprehensive Loss Components 2016 201 5 2014
Affcctcd Linc ltcm in Statcmcnt
of Incqme
Realized gains on inveshnent securities
Real ized losses on investrnent securities
Amortization ofdefined benefit pension items
Arnortization ofnet prior service cost
Amortization of net loss
Adjustment due to effects ofregulation
(l,l 7l) $
(7,602)
7,360
3l $
2,623
(7 4e)
$s $(3)
735
(a)
(a)
Total before tax
Tax expense (a)
Net of tax
732
(272)
$$s 460
(1,0e4) (b)
(83,301) (b)
78,773 (b)
(1,413)
495
1,905
(667)
(5,622) Total before tax
1.96'1 Tax benefit (expense)
(el 8) $t,238 $(3,655) Net of tax
(a) These amounts wcre included as part ofnct incomc from discontinued opcrations for all periods presentcd (see Notc 5 for additional dctaits).
(b) These accumulated other comprchensive loss components arc included in the computation ofnet periodic pension cost (see Note I 0 for additional
details).
Approprtakd Retained Earnings
Inaccondancewiththehydroelectriclicensingrequirementsofsection l0(d)oftheFederalPowerAct(FPA),theCompanymaintainsanappropriatedretained
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 I 0(d) ofthe FPA, the Company must maintain these excess eamings in an appropriated retained eamings account until the termination ofthe
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 hydroclectric projcct licenscs identificd above for Avista Utilities, the rcquiremcnts ofsection I 0(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 2015
Appropriated retained eamings $ 25,564 $ 21,030
Operating 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 rnaterial as ofDecember 3 I , 20 I 6.
Capital Leases
The Company has two capital leases, one at Avista Corp. and one at AEL&P. The capital lease at Avista Corp. expires in 20 I 8 and is not material to the
financial statements as ofDccember 3 l, 20 I 6. The capital lease at AEL&P is a PPA (treated as a lcase 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 depreciation
ofthe capital lease asset) is recorded as a regulatory asset and amortized during the later years ofthe lease when
99
Appendix 6 to Joint Application Page 106 of4l4
$
$
Table of Conlents
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 3 I , 20 I 6, 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. NEWACCOUNTING STANDARDS
ASU No. 20 1 4-09, "Revenue from Contracts rtith Cuslomers (Topic 606)"
In May 2014, thc FASB issucd ASU No. 201449, which outlines a single comprchensivc modcl for cntitics 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 identi$ tlre 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 affer December
1 5,2016 and early adoption was not permitted. ln August 20 1 5, the FASB issued ASU No. 20 1 5-1 4, "Revenue fiom Contracts with Customers (Topic 606):
Defenal ofthe Effective Date," which defened the effective date ofASU No. 2014-09 for one year, with adoption as ofthe original date permitted.
The Company has fonned a revenue recognition 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 eflective date. The Company is currently expecting to use a
modified retrospective method ofadoption, which would require a cumulative adjustment to opening retained eamings, as opposed to a full retrospective
application. Thc Company is not far enough along in thc adoption proccss to dctcrmine thc amount, ifany, ofcumulativc adjustmcnt necessary.
Sincc the vast majority ofAvista Corp.'s rcvenue is from rate-regulatcd sales ofclcctricity and natural gas to retail customers and rcvcnue is rccognized 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 current GAAP and ASU 2014-09.
During the implcmentation proccss, thc Company has idcntified scvcral unrcsolvcd issucs, thc most significant ofwhiclr 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.
Utilitv Related Taxes Collected lrom 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. Under current 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 I 4-09 or whether they should be presented on a net basis. To quali! 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.
Collectibilitv -Thcre arc qucstions rcgarding thc rcquircment that collcction ofa salc be probablc and how, or il utilitics should consider bad dcbt collection
mechanisms (riders, base rate adjustments, etc.) in assessing probability of collectron 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 delrvered to customers or not recognized at all.
The Company is monitoring utility industry implementation guidance as it relates to unresolved issues to determine if there will be an industry consensus
regarding accounting and presentation ofthese items.
100
Appendix 6 to Joint Application Page I 07 of 414
Table of Contents
AVISTA CORPORATION
ASU No. 201 5-02, "Consolidation (Topic 8 1 0): Amendments to the Consolidalion Analysis"
In February 20 I 5, the FASB issued ASU No. 201 5-02. This ASU changes the consolidation analysis required under GAAP, including the identification of
variable interest entities (VIE). The ASU also removes the deferral of the VIE analysis related to investments in certain investment funds, which results in a
different consolidation evaluation for these types ofinvestments. The Company adopted this standard effective January 1, 20 I 6. The adoption ofthis
standard resulted in the identification of several Avista Corp. investments in limited partnerships (or a functional equivalent) that are now considered MEs
undcr the new standard. Consolidation ofthcsc VIEs by Avista Corp. is not rcquired bccausc 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 for additional discussion ofVIEs.
ASU No. 20 1 6-02 "Leases (Topic 842)."
In Fcbruary 20 I 6, thc FASB issucd ASU No. 2016-02. This ASU introduccs a ncw lesscc model that rcquircs most lcascs to bc capitalized and shoriln on thc
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
exarnple, 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 rnust 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 practicaI expedients that
entities uray 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 20 1 9. The Company has formed a lease standard implementation team that is working through the implementation process. The most significant
implementation challenge identified thus far relates to identifting a complete population ofleases and potential leases under the new lease standard. Also,
the Company is rnonitoring utility industry implementation guidance as it relates to several unresolved issues to determine ifthere will be an industry
consensus, including whether right-of-ways are considered leases. The Company cannot, at this time, estimate the potential impact on its future financial
condition, results ofoperations and cash flows.
ASUNo.20l6-09 "Compensation-StockCompensalion (Topic 718): Improt'ements to Employee Share-Based Payment Accorrnting."
In March 20 1 6, the FASB issued ASU No. 20 I 6-09. This ASU simplifies several aspects ofthe accounting for employee share-based payment transactions
including:
. allowing excess tax benefits or tax deficiencies to be recognized as income tax benefits or expenses 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
operating activity,
. excess tax benefits and tax deficiencies will be excluded from the calculation ofdiluted eamings per share, whereas under current accounting
guidance, these arnounts must be estimated and included in the calculation,
. allowing forfeitures to bc accountcd foras they occur, instead ofcstirnating forfcitures, and
. changing the statutory tax withholding requirements for share-based payments.
This ASU is effective for periods beginning affer December 15,2016 and early adoption is permitted. The Company early adopted this standard during the
second quarter of20 I 6, with a retrospective effective date ofJanuary l, 20 I 6. The adoption ofthis standard resulted in a recognized income tax benefit of
$ I .6 million in 20 I 6 associated with excess tax bcncfits on scttled sharc-bascd cmploycc payments. In addition, the Consolidatcd Statcment ofCash Flows
for 20 I 6 included the excess tax benefits as an operating activity rather than as a financing activity. Periods prior to 20 I 6 were not restated for the adoption
ofthis accounting standard as the Company has adopted this standard on a prospective basis beginning January | , 20 I 6.
l0l
Appendix 6 to Joint Application Page 108 of414
Table of Contents
AVISTA CORPORATION
NOTE 3. VARIABLE INTEREST ENTITIES
Lanc a st er Power Purc ha se A g reement
The Cornpany has a PPA for the purchase ofall the output ofthe Lancaster Plant, a 270 MW natural gas-fired combined cycle combustion turbine plant
located in Kootenai County, Idaho, owned by an unrelated third-party (Rathdrum Power LLC), through 2026.
Avista Corp. has a variable intercst in the PPA. Accordingly, Avista Corp. madc an evaluation ofwhich intcrest holdcrs havc thc powcr to dircct thc actrvitics
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 monthly variable costs under the
PPA. Under the terms ofthe PPA, Avista Corp. makes the dispatch decisions, provides all natural gas fuel and receives all ofthe electric energy output ftom
the Lancaster Plant. However, Rathdrum Power LLC (the owner) controls the daily operation ofthe Lancaster Plant and makes operating and maintenance
dccisions. Rathdrum Power LI-C controls all ofthe rights and obligations oftlre Lancastcr Plant after thc expiration ofthc PPA in 2026 and Avista Corp. docs
not have any further obligations after the expiration. It is estimated that the plant will have I 5 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 includcd in Avista Corp.'s consolidated financial statemcnts. The Company has a futurc contractual obligation ofapproximatcly $283.6 million undcr thc
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. 2015-02 effective January l, 201 6. As a result ofthe adoption ofthis ASU, the Company evaluated all ofits existing
investmcnts to dctcrmine ifany cntities would bc considcrcd VIEs undcr thc ncw guidancc and whcthcr consolidation would bc rcquired. Undcr thc ASU, a
limited partnemhip or similar legal entity that is the functional equivalent of a limited partnership would be considered a ME regardless of whether it
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 pa(ner, 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 partnerships (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 of the funds, approval from greater than a simple majonty of the limited partners is required. As such, the limited partners do not have substantive kick-
out rights and these investments are considered MEs. Consolidation of these 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 MEs, Avista Corp. does not have any additional commitrnents beyond its initial investment. For the sixth VIE.
AvistaCorp.hasuptoa$25.0milliontotalcommitment,andasofDecember3l,20l6,hasinvested$2.1 million,leaving$22.9millionremainingtobe
invested. In addition, the Company is not allowed to withdraw any capital contributions from the investment funds until aftet the funds'expiration dates and
all liabilities ofthe funds are scttlcd. Thc cxpiration datcs rangc from 201 7 to 2032, with onc investmcnt lraving no termination datc (as it is pcrpctual). As of
December 31,2016, the Company has a total carrying amount in these investment funds of $7.0 million.
NOTE 4. BUSINESS ACQUSITIONS
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 ofAERC is AEL&P, a regulated utility which provides electric services to approximately I 7,000 customers in Juneau, Alaska. In
addition to the regulated utility, AERC owns AJT Mining, which is an inactive mining company holding certain properties.
t02
Appendix 6 to Joint Application Page I 09 of 414
Table of Contents
AVISTA CORPORATION
The purpose ofthe acquisition was to expand and diversify 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 1,44 I new shares ofcorffnon 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. Thc total fairvalue of all consideration transferrcd was $154.9 million and resultcd 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 , 2014 (after consideration of a working capital adjustment and income tax true-ups
during the second quarter of20 I 5) were as follows (in thousands):
July l,2014
Assets acquired:
Current Assets:
Cash
Accounts receivable - gross totals $3,928
Materials and supplies
Other currcnt asscts
Total current assets
Utility Property:
Utility plant in sewice
Utility property under long-term capital lease
Construction work in progress
Total utility propeny
Other Non-current Assets:
Non-utility propefiy
Electric plant held for future usc
Goodwill (l )
Other deferred charges and non-current assets
Total other non-current assets
Total assets
700
3,773
2,807
$19.'.704
3,851
2,017
999
26,571
| 13,964
7 t ,00'7
3440
188,41 I
6,660
3,711
52,426
5,368
68,1 65
283,147
Liabilities 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 deferred credits (l )
Total liabilities t28,236
Total net assets acquired I 54,91 I
(l) Duringthesecondquarterof20l5,theCompanyrecondedareductiontogoodwillofapproximately$0.3mitlionduetoincometaxrelatedadjustments.
The majority ofAERC's operations are subject to the rate-setting authority ofthe RCA and are accounted forpursuant to GAAP, including the accounting
guidance for regulated operations. Thc rate-sctting and cost recovery provisions currently in place for AERC's rcgulated opcrations provide revenucs derived
from costs, including a retum on investment, ofassets and
$
$
7,280
37,227
68,840
14,889
$
$
Appendix 6 to Joint Application
103
Page 1 l0 of4l4
Table of Contcnts
AVISTA CORPORATION
liabilities included in rate base. Due to this regulation, the fair values ofAERC's assets and liabilities subject to these rat.e-setting provisions were assumed to
approximatc their carrying values. Thcrc wcrc not any idcntifiable intangible asscts associatcd with this acquisition. The cxccss ofthc 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 utili(y investmenl.
The following table summarizes the supplemental pro forma information for the years ended December 3l related to the acquisition of AERC as if the
acquisition had occurred on January I , 20 I 3 (dollars in thousands - unaudited):
2016 201 5 2014
Actual Avista Corp. revenues from continuing operations (excluding AERC)
Supplemcntal pro forma AERC rcvcnucs (l )
Total pro forma revenues
Actual AERC revenues included in Avista Corp. revenues ( I )
Actual Avista Corp. net income liom continu'ing opemtions attributable to Avista Corp. shareholders
(excluding AERC)
Actual Avista Corp. net income from discontinued operatrons attributable to Avista Corp.
shareho I ders
Adjushnent to Avista Corp.'s net income for acquisition costs (net oftax) (2)
Supplemental pro forma AERC net income (l)
Total pro forma net income
Actual AERC net incomc includcd in Avista Corp. nct income (1)
s 1,395,989 $
46,494
t,439,807 $
44,969
I ,450,91 8
46,467
1,442.483 1,484.776 1.497,385
46,494 44,969 21,644
129,505 111,7'12 I 16,665
7,723
5,t47
22
6,3 08
12,224
870
8,806
t37.228 t23,249 198,565
$ 7,723 $ 6,308 $ 3,1s2
(l ) AIRC was acquired on July I , 20 I 4; therefore, all the revenues and net income for the second half of 201 4 through 201 6 are actual amounts that are
included in Avista Corp.'s overall results. All revenue and net income amounts prior to July I , 2014 are supplemental pro forma amounts and are
excluded from Avista Corp.'s overall results.
(2) This adjustmcnt is to trcat all transaction costs as ifthcy occurrcd on January 1,2013 and to removc thcm frorn thc periods in which thcy 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 December3l,2016, Avista Corp. lras expensed $3.0 million (pre-tax) in total transaction
fees. In addition to the amounts expensed, through December 3 1,2016, 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. DISCONTIIITJED OPERATIONS
On June 30,2014, Avista Capital, completed the sale of its interest in Ecova to Cofely USA Inc., an unrelated party to Avista Corp. The sales price was
$33 5.0 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 ofCofely 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, payfrent to option and minority holders, incorne 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 20 I 5.
t04
Appendix 6 to Joint Application Page 1 11 of 414
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
discontinucdoperationsfortheycarsendedDcccmber3l,20l5and20l4(dollarsinthousands):
201 5 2014
Revenues
Gain on salc ofEcova (l )
Transaction expenses and accelerated employee benefits (2)
Gain on sale ofEcova, net oftransaction expenses
lncomc beforc incomc taxcs
Income tax expense Oenefit) (3)
Net income from discontrnued operations
Net income attributable to noncontrolling interests
Net income fforn discontinued operations attributable to Avista Corp. shareholders
$$87,534
160,612
9,062
777
7t
706
706
(444t\
151,550
t56,025
83,614
5,147 72,41I
(1 87)
$5,147 $72,224
(l ) This represents the gross gain recorded to discontinued operations. The total gain net oftaxes and transactions expenses was $74.8 rnillion, ofwhich
$69.7 million was recognized during 2014.
(2) Avista Corp.'s portion of the 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 interest holders ofEcova) were
$ I I .1 mil lion, of which $5.5 mil lion was withheld from the net proceeds and the rcmaindcr was paid during 20 14. The transaction cxpenses wcre 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
E nergy C o mmo dity Derivatives
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
gcncral, thc risk offluctuation in the market pricc ofthe commodity bcing tradcd and is influcnced primarily by supply and dcmand. Markct risk includes thc
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 procurement and rnanagement 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 bc significantly diffcrcnt than monthly demand projcctions. On thc basis ofthcse projcctions, thc 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 (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 markets.
The Company is required to plan for sufficient 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
Appendix 6 to Joint Application Page I 12 of 414
Table of Contetrts
AVISTA CORPORATION
day. The Company optimizes its natural gas resources by using ma*et 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 higherpriced 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, wholcsale market sales ofsurplus natural gas supplies, purchases and sales ofnatural gas to optimizc use ofpipcline
and storage capacity, and pa(icipation in the transportation capacity release market.
The following table presents the underlying energy commodity derivative volumes as ofDecember 3 I , 20 I 6 that are expected to be settled in each respective
year (in thousands of MWhs and mrnBTUs):
Purchass Sales
Electric Dcrivatives Gas Dcrivatives Elccfic Dcrivativcs Cas Dcrivatives
Physical(l) Financial(l) Physical(l)
MWh MWh mnrBTUs
510
397
235
907 15.47 5 1.552
t,244
982
73.1 I 0
l5,lr3
4,020
Finmcial ( I )
mmBTUs
Physical ( I )
MWh
Finucial ( I )
MWh
Physical ( I )
mmBTUs
Financial (l )
mmBTUsYear
2017
20t 8
2019
2020
202t
Thereafter
I 10,380
5) 755
29,475
141<
316
286
158
4.165
1,360
1.345
l,430
l,060
610
910
The following table presents the underlying energy commodity derivative volumes as ofDecember 3 I , 20 I 5 that werc expected to be settled in each
respective year (in thousands of MWhs and mmBTUs):
Purchms Sales
Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivatives
Physical ( I )
MWh
Financial (l ) Physical (1 )
MWh mmBTUs
Financial ( I )
mmBTUs
Physical (1)
MWh
Financial ( 1 )
MWh
Physical ( I )
mmBTUs
Financial (1 )
mmBTUsYear
2016
2017
201 8
20t9
2020
Thereafter
1,954
97
t7,252
675
142,693
49,200
l5,l l8
6,93 5
905
2,656
483
3,1 82
l,360
1,360
1,345
1,430
1,060
112,233
26,965
2,738
280
255
286
158305
455
( I ) Physical tmnsactions represent commodity transactions in which Avista Utilities will take or make delivery of either electricity or natural gas;
financial transactions rcpresent derivative instruments with delivery ofcash in the amount ofbenefit or cost but with no physical delivery ofthe
comrnodity, 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 retaiI rates from customers. Any transactions that result in gains will be used to reduce retail rates charged to customers in the future.
Foreign Currency Exchange Derivalives
A significant portion ofAvista Utilities' natural gas supply (including fuel for power generation) is obtained liom Canadian sources. Most ofthose
transactions are executed in U.S. dollars, which avoids foreign currency risk. A portion ofAvista Utilities' short-term 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 commodity transactions are initiated. The foreign
curency exchange derivatives and the unhedged foreign currency risk have not had a material effbct on the Company's financial condition, results of
operations or cash flows and these diflerences in cost related to currency fluctuations are included with natural gas supply costs for ratemaking.
106
Appendix 6 to Joint Application Page 1 13 of4l4
407
397
397
235
Table of Contents
AVISTA CORPORATION
The following table summarizes the foreign currency hedges that the Company has entered into as ofDecember 3 I (dollars in thousands):
2016
Number ofcontracts
Notional amount (in Unitcd Statcs dollars)
Notional amount (in Canadian dollars)
75,000
275,000
70,000
20,000
60,000
201 5
$
2l
2,819 $
3,7 54
24
I,463
2,002
Interest Rale Swap Derivatives
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.
Thcsc interest rate swap derivativcs and U.S. Trcasury lock agreements are considered cconomic hedgcs 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 Shect Date Number of Contracts Notional Amount Mandatory Cash Settlemcnt Date
December3l,20l6 6
t4
6
2
5
2017
201 8
2019
2020
2022
December31,2015 I 1 5.000
45,000
245,000
3 0,000
20,000
2016
2011
201 8
2019
2022
6
3
ll
2
I
During the third quarter 20 1 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 of Avista Corp. first mortgage bonds that were issued in December 2016 (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 ofdcbt calculation for ratcmaking purposcs.
Thc fairvaluc ofoutstanding intcrcst rate swap derivativcs can vary significantly from period to period dcpending on the total notional amount ofswaps
outstanding and fluctuations in ma*et 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 lrigher than prevailing market rates at the date ofsettlernent. Conversely, the
Company receives cash to settle its interest rate swap derivatives when prevailing market rates at the time ofsettlement exceed the fixed swap rates.
Summary of Outstanding Derivalive Instrumenls
TheamountsrecordedontheConsolidatedBalanceSheetasofDecember3l,20l6andDecember3l,20l5reflecttheoffsettingofderivativeassetsand
liabilities where a legal right ofoffset exists.
107
Appendix 6 to Joint Application Page I 14 of 414
I4Els.lt,t.esllcr!
AVISTA CORPORATION
The following table presents the fair values and locations ofderivative instruments recorded on the Consolidated Balance Sheet as ofDecember 3 I , 20 I 6 (in
thousands):
Fair Value
Nel. Asset
Gross Collatcral
Netting
(Liability)
f)erivative arrd Balance Sheet Location Liability in Balance Sheet
Gros
Asset
Forei gn currency exchange derivatives
Other cunent liabilities
Interest rate swap derivatives
Other current assets
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 dcrivative instruments rccordcd on thc balancc shcct
Derivative and Baluce Sheet Location
$
3,393
5.7 54
3,951
18,682
16,335
13,071
(28) $
(3e7\
( l 5,756)
(57,825)
(16,7 87 )
(29,5 98)
(29,990)
9,731
25,t69
6,228
3,63 0
(23)
3,3 93
5,35'7
(6,025 )
(28,705)
1,895
(7,03 5 )
(l 3,2 8e)
s$$
$ 61,191 $ (150,38r) $ 44,758 $ (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
Gross
Asst
Gros
Liability
Collateral
Netting
Net Asset
(Liability)
in Balance Sheet
Foreign currency exchange derivatives
Other cunent liabilities
Interest rate swap derivatives
Other property and investments-net and other non-current assets
Other current liabilities
Non-current interest rate swap derivative liabilities
Energy commodity derivatives
Othcr currcnt asscts
Current energy commodity derivative liabitities
Other non-current liabi lities, regulatory liabilities and deferred credits
Total derivative instruments recorded on the balance sheet
$
23
I l8
I,407
1,236
6'1 466
6,613
(re) $
(23,262)
(62,236)
(ss3)
(8s,409)
(39,033 )
3,880
30,1 50
3,675
t 0,85 I
(t7)
23
(19,264)
(30,679)
683
(14,268)
(21,569)
2$$
$ 76,86s S (2 l 0,s l 2) S 48,ss6 $ (8s,09 l )
Exposure to Demands for Collateral
The Company's derivative contracts often require collateral (in the form ofcash or Ietters ofcredit) or other credit enhancements, or reductions or terminations
ofa portion ofthc contract through cash settlcment, in the evcnt ofa downgrade in the Company's crcdit ratings or changcs in markct priccs. In pcriods of
price volatility, the level ofexposure can change significantly. As a result, sudden and significant demands may be made against the Company's credit
lacilities and cash. The Company actively monitors tlre exposure to possible collateral calls and takes steps to mitigate capital requirements.
t08
Appendix 6 to Joint Application Page 1 15 of4l4
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 commodity derivatives
Cash collateral posted
Letters of crcdit outstanding
Balance sheet offsetting (cash collateral against net derivative posrtions)
s
Interest rate swap derivatives
Cash collateral posted
Letters of credit outstanding
Balance sheet offsetting (cash collateral against net derivative positions)
34,900
3,600
34,900
1,124 $
1,046
20t5
17,134 S
24,400
9,858
28,7 t 6
28,200
| 4,526
34,030
9,600
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
crcdit rating agcncies. Ifthe Company's crcdit ratings were to fall bclow "invcstment gmde," it would be in violation ofthese provisions, and thc
counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing collateralization on derivative instruments
in net liability positions.
Thc following table presents the aggrcgatc fair valuc ofall dcrivativc instrumcnts with credit-risk-relatcd contingcnt features that are in a liability position
andtheamountofadditionalcollateraltheCompanycouldberequiredtopostasofDecember3l (inthousands):
20t6 201 5
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 73,978 85,498
Additional collatcral to post 2 I ,l 00 I 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 southeastem 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(inclusiveoftheAROassetsandaccumulatedamortization)wereasfollowsasofDecember3l (dollarsinthousands):
2016 201 5
$7,090
6,980
Utility plant in service
Accumulated depreciation
See Note 9 for further discussion of AROs.
$380,406 $
\249,359)
362,199
(243,363)
109
Appendix 6 to Joint Application Page I 16 of 414
Tabl€ of Contents
AVISTA CORPORATION
NOTE 8. PROPERTY, PLANT AND EQUIPMENT
The balances ofthe major classifications ofproperty, plant and equipment are detailed in the following table as ofDecember 3 I (dollars in thousands):
2016 2015
Avista Utilities:
Elcctric production
Electric transmission
Electric distribution
Electric construction work-in-progress (CWIP) and other
Elcctric 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
Electric distribution
Electric production held under long-term capital lease
Electric CWIP and other
Electric total
Common plant
Total AEL&P
Other (l )
Total
$1,346,332 $
682,529
I ,525,17 5
296,912
1,217 ,t79
640,586
1,468,t57
358,846
3,850,948 3,684,768
44,6't2
954,298
57,601
I ,056,5'71
43,080
878,982
62,024
984,086
527 As8 456,796
5,434,977
94,839
20,252
20,057
7 t,007
7,190
5,125,650
72,292
18,8t7
19,005
7 t ,007
16,97 I
2t3,345
8,651
198,092
8,1 33
221,996
30,764
206.225
25,7 09
s 5,687 ,737 s 5 157 ,584
(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 December3l,20l6 and $10.6 million as ofDecember3l,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 ofsettlement 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 I 7, 20 I 5, the EPA published a final rule regarding coal combustion residuals (CCR), also termed coal combustion byproducts or coal ash, in the
Federal Register,and thisrule became effective on October 15,2015. Colstrip, ofwhich Avista Corp. is a l5 percent ownerofunits 3 &4,produces this
byproduct. The rule established technical requirements for CCR landfills and surface impoundments under Subtitle D ofthe Resource Conservation and
Rccovery Act, the nation's primary law for regulating solid waste. The Company, in conjunction with the othcr Colstrip owners, dcvelopcd a multi-ycar
compliance plan to strategically address the CCR requirements and existing state obligations while maintaining operational stability. During 20 I 5, the
operator ofColstrip provided an initial cost estimate ofthe expected retirement costs associated with complying with
Appendix 6 to Joint Application
110
Page I 17 of 414
Table of Contents
AVISTA CORPORATION
the new CCR rule. Based on the initial assessments, Avista Corp. recorded an increase to its ARO of $ 12.5 million during 201 5 with a corresponding increase
in the cost basis ofthe utility plant. During 20 I 6, due to additional information and updated estimates, the ARO increascd 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 certain 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 bccomes availablc, Avista Corp. will update the ARO for these changes in cstimates, which could bc material. The Company cxpccts
to seek recovery of any increased costs related to complying with the newrule through customerrates.
The following table documents the changes in the Company's asset retirement obligation during the years ended December 3 I (dollars in thousands):
2016 2015 2014
Asset retirement obligation at beginning ofyear
Liabilities incurred
Liabilities settled
Accretion expense
Asset retirement obligation at end ofyear
$| 5,997 $
430
(1.s29)
617
3,028 $
12,539
(2e)
459
2,859
(41)
210
$ 15,515 $ 15,997 S 3,028
NOTE IO. PENSION PLANS AND OTHER POSTRETIREMENT BEII-EFIT 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 multiemploycr plan for its union workers and a defincd contribution moncy purchasc pcnsion plan for its nonunion workers. METAL& (not
discussed below) has a defined contribution 40 I (k) 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 of all regular full-time employees at Avista Utilities that were hired prior to January l,
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 cmployees hircd on or aftcr January l, 20 I 4 participate in a dcfined contribution 40 I (k) plan in lieu ofa defined bcnefit pcnsion plan. Thc 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 contributed $ 12.0 rnillion in cash to the pension plan
in2016, $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 providcs additional pcnsion bencfits to exccutive officers and ccrtain kcy cmployccs ofthe Company. The SERP is
intended to provide benefits to individuals whose benefits underthe defined benefit pension plan are reduced due to the application ofSection 41 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 (dollars in thousands):
20t7 2018 2019 2020
Expected benefi t payments
2021 Total 2022-2026
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 portfolios with maturities similar to that ofthe expected term of
pension benefits.
TheCompanyprovidescertainhealthcareandlifeinsurancebenefitsforeligibleretiredemployeesthatwerehiredpriortoJanuary l,20l4.TheCompany
accrucs the estimated cost ofpostrctirement benefit obligations during the years that employees provide serviccs. The liability and cxpensc ofthis plan arc
included as other postretirement benefits. Non-union employees hired on or after January I , 20 I 4, wi ll have access to the retiree medical plan upon
retirement; however, Avista Corp. will no longerprovide a contribution toward their medical premium.
$ 30,971 $ 32,014 $ 33,047 $ 34,s4s $ 3s,892 $ 196,322
lll
Appendix 6 to Joint Application Page I l8 of4l4
Table of Contcnts
AVISTA CORPORATION
The Company has a Health Reimbursement Arangement (HRA) to provide employees with tax-advantaged funds to pay for allowable medical expenses
upon retirement. The amount eamed by the 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 other postretirement 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 omcer's annual base salary at the time ofdeath (or ifdeath
occurs after rctirement, a payment cqual to twicc the exccutive officcr's total annual pension benefit). The liability and cxpensc for this plan are included as
other postretirement benefi ts.
The Company expects that benefit payments under other postretirement benefit plans will total (dollan in thousands):
2O]l'1 2018 2019 2020 2021 Tota12022-2026
Expected benefi t payments 34,704$ 6,991 $ 7,302 $ 7,s80 $ 6,479 S 6,675 $
The Company expects to contribute $7.0 million to other postretirement 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 I measurement date for its pension and other postretirement benefit plans.
The following table sets forth the pension and other postretirement benefit plan disclosures as ofDecember 3 1,201 6 and 201 5 and the components ofnet
periodic benefit costs for the years ended December 3 1 ,2016,2015 and,2014 (dollars in thousands):
Pension Benefits
Other Post-
retirement Benefib
20t6 20r5 20t6 201 5
Change in benefit obligation:
Bcnefit obligation as ofbcginning ofyear
Service cost
Interest cost
Actuarial (gain/loss
Plan change
Cumulative adjustment to reclassify liability
Benefits pard
Benefit obligation as ofend ofyear
Change in plan assets:
Fair value ofplan assets as ofbeginning ofyear
Actual retum on plan assets
Employer contributions
Benefits paid
Fair value ofplan assets as ofend ofyear
Fundcd status
Unrecognized net actuarial loss
Unrecognized prior service cost
Prepaid (accrued ) benefit cost
Additional liability
Accrued bcnefi t liability
Accumulated pension benefit obligation
Accumulated postretirement benefi t obligation :
For retirees
For fu lly eligible employees
$
(32,874)(3 r ,061 )
$
33,365 $30,868
$
$ (125,558) $ (96,269) $ (103,088) $ (107,927)
For other participants
65,652
34,498
38,645
6l 3,503 $
18,302
27,544
1q qq7
634,67 4 $
19,7 91
26,t l7
(3s,7e0)
(228)
l 3 8,795 $
3,205
6,1t0
(3,648)
(1,042)
(6,967)
127,989
2,925
5,158
12,668
(1,000)
(1,s21)
(7,424)
s 666,472 $ 613,503 $ 136,453 S 138,795
517,234 $
43,212
12,000
(3 1,s32)
539,31 r $
(4,30s)
12,000
(2e.772)
30,868 $
2,497
31,3t2
(444)
$ 540,914 $ 51',7,234 $
(r 2s,s58) s
178,783
t5
(96,269\ $
162,961
25
( l 03,08 8) $
8t,979
(8,e8 | )
(107.e27)
92,433
(r 0,r 80)
53,248
( l 78,806)
66,7 t7
(l 62.986)
(30,090)
(72,998)
(25,67 4)
(82.25 3 )
$ 583,498 $ 542,209
$
$
60,670 s
34A2e $
41,354 $$
Appendix 6 to Joint Application
tt2
Page I 19 of 414
Tabl€ of Contents
AVISTA CORPORATION
Pcnsion Bcncfits
other Post-
retirement Benefits
2016 2015 2016 2015
Included in accumulated other comprehensive loss (income) (net oftax):
Unrecognized prior service cosl
Unrecognized net actuarial Ioss
Total
Lcss rcgulatory assct
Accumulated other comprehensive loss for unfunded benefit obligation for
pensions and other postretirement benefit plans
Weighted-average assumptions as of I)ecember 3l :
Discount ratc for bencfit obligation
Discount rate for annual expense
Expected long-tem retum on plan assets
Rate of compensation increase
Mcdical cost trend prc-agc 65 - initial
Medical cost trend pre-age 65 - ultimate
Ultimate medical cost trend year pre-age 65
Medical cost trend post-age 65 - initial
Medical cost trend post-age 65 - ultimate
Ultimate medical cost trend year post-age 65
Ponsion Benefits
$ls $
t16,209
16 $
105,925
(5,854) $
51 101
(6,6 r7)
60,081
I | 6,224
(l 08,903)
I 05,941
(99,414)
47,449
(47,202)
53,464
(53,341)
$7,321 S 6,527 $247 $t23
Pension Benefits
Other Post-
retirement Benefits
20t6 201 5 2016 2015
4.260/o
4.57%
5.40%
4.78%
457%
4.21%
5.30%
4.87%
4.23%
4.57%
6.03%
7.00%
5.00%
2023
7.00%
5.00%
2024
Other Post-retirement Benefits
4.57%
4.1 60/o
6.36%
7.00%
5.00%
2077
7.00%
5.00%
2023
2016 201 5 2014 2016 2015 2014
Components ofnet periodic benefit cost:
Scrvice cost
Interest cost
Expected retum on plan assets
Amortization of prior sewice cost
Net loss recognition
Net periodic benefit cost
$18,302 $
27,544
(27,547\
2
8,51 I
15,7 57 $
26,224
(32,r31)
22
4,73t
2,92s $
5,1 58
(r,99r)
(1,199)
5,095
t9,79t $
26,117
(28,299)
2
eAst
3,205 $
6,1 l0
(l ,861 )
(r,208)
5,',728
1,844
s.226
(1,903)
(r,l l 6)
4,289
$ 26,812 $ 27,062 $ 14,603 S 11,974 $ 9,988 $ 8,340
Plan Assets
The Financc Committcc ofthe Company's Board ofDircctors approves invcstment policics, objectives and strategies that seek an appropriatc rctum for thc
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' perlormance and related individual fund performance is periodically reviewed by an intemal benefits committee and by the Finance Committee to
monitor compliance with investmcnt policy objectivcs and stratcgics.
Pcnsion plan assets arc invested in mutual funds, trusts and partncrships that hold markctable dcbt and equity securitics, real estatc, absolute rctum and
commodity funds. In seeking to obtain the desired retum to fund the pension plan, the investment consultant recommends allocation percentages by asset
classes. These recomrnendations are reviewed by the intemal benefits committee, which then recommends their adoption by the Finance Cornmittee. The
Finance Committee has established target
Appendix 6 to Joint Application
ll3
Page 120 of 414
Table of Contents
AVISTA 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 2015
Equity sccuritics
Debt securities
Real estate
Absolute retum
37%
4s%
8%
'lOVo
410 /
58o/o
6%
9%
The 20 I 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 modified 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 ofthe 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 sales price; securities traded in the over-tlre-counter market are
valued at the last reported bid price. Investment securities for which martet 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
ofthe Company's investments in closely held investments and partnership interests 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 cunently 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 I 5.
Pension plan other postretirement plan assets whose fair values are measured using net asset value (NAV) are excluded from the fair value hierarchy and are
included as reconciling items in the tables below.
ll4
Appendix 6 to Joint Application Page 121 of 414
Table of Contcnts
AVISTA CORPORATION
The 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 reported as ofDecember 3 I ,2016 at fair value (dollars in thousands):
Levell Level2 Level3 Total
Cash equivalcnts
Fixed income securities:
U.S. govemment issues
Corporate issues
Intemational issues
Municipal issucs
Mutual funds:
U.S. equity securities
Intemational equity securities
Absolute retum (l )
Plan assets measured at NAV (not subject to hierarchy disclosure)
Common/collective trusts:
Real estate
Intemational equity securities
Pannership/closely held investments:
Absolute retum (l )
Private equity funds (2)
Real estate
Total
$s 10,179 $
30,919
t93,563
34,145
18,888
s 1 0,1 79
30,91 9
I 93,563
34,145
18,888
l 20,856
30,025
6,622
19,779
29,t 40
39,0'17
72
'7,649
I 20,856
30,025
6,622
$ 15 7,s03 $ 287 .694 $$ s40,9 t 4
The following table di scloses by level within the fair value hierarchy (see Note I 6 for a description of the fair value hi erarchy) of the pension plan's assets
measured and reported as ofDecember 3 I , 20 I 5 at fair value (dollars in thousands):
Lcvcl I Level 2 Level 3 Total
Cash equivalents
Fixed income securities:
U.S. govemment issues
Corporate issues
Intemational issues
Municipal issues
Mutual funds:
U.S. equity securities
lntemational equity securiti es
Absolute retum (l )
Plan assets measured at NAV (not subject to hierarchy disclosure)
Cornmon/collective trusts:
Real estate
Partnership/closely held investments:
Absolute retum (l )
Private equity funds (2)
Real estate
Total
s 86 $ 10.64r $$10,727
47,845
187,308
34,458
22,416
87,678
40,343
13,996
24.t47
3 8,3 02
73
9.94t
47,845
187,308
344s8
22,416
87,678
40,343
13,996
$ 5 17,234
This category invests in multiple strategies to diversif risk and reduce volatility. The strategies include: (a) event driven, relative value,
convertible, and fixed income arbitrage, (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.
$ 142,103 $302,668 $
(l)
(2)
Appendix 6 to Joint Application
I l5
Page 122 of 414
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 detennined based on the last reported sales price; securities traded in the over-the-counter market are
valued at the last reported 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
cquity securitics and 40 percent dcbt securitics in both 20 1 6 and 20 1 5.
The fair valuc ofothcr postretircment plan asscts was dctcrmined as ofDeccmber 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 reported as ofDecember 3 I ,2016 at fair value (dollan in thousands):
Level I Level2 Level 3 Total
Cash equivalents
Mutual funds:
Balanced index fund (l)
Total
$$6$$6
33,3 5 933,359
$ 33,359 $6$$33,365
( I ) The balanced index fund is a single mutual fund that includes a percentage ofU.S. equity securities, fixed income securities and Intemational securities.
The following table discloses by level within the fairvalue hierarchy (see Note l6 fora description ofthe fairvalue hierarchy) ofotherpostretirement plan
assets measurcd and rcported as ofDcccmbcr 3 I ,2015 at fair valuc (dollars in thousands):
Level I Levcl 2 Levcl 3 Total
Cash equivalents
Mutual funds:
Fixed income securities
U.S. equity securities
Intcmational equity securitics
Total
$$$99$
12,000
13,224
5 61{
12,000
t3,224
5.63 5
s 30,8s9 $9$$ 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 trend rate for each year would increase the accumulated postretirement benefit obligation as ofDecember 3 I ,2016 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 postretiremcnt bcncfit obligation as of Dcccmber 3 1, 2016 by $6.7 million and the scwice and intcrest cost by $0.7 million.
401 (k) Plans and Executive Deferral Plan
Avista Utilities and METALfiT have salary deferral 40 I (k) plans that are defined contribution plans and cover substantially all employees. Ernployees 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):
2016 201 5 2014
Employer 40 I (k) matching contributions s 8,7r0 $8,01 r $6,862
The Company has an Executive Deferral Plan. This plan allows executive oflicers and other key employees the opportunity to defer until the earlier oftheir
retirement, termination, disability or death, up to 75 percent oftheir base salary and/or up to 1 00 percent oftheir incentive payments. Defened compensation
funds are held by the Company in a Rabbi Trust.
I 16
Appendix 6 to Joint Application Page 123 of 414
Table of Conteots
AVISTA CORPORATION
There were deferred compensation assets included in other property and investments-net and corresponding deferred compensation liabilities included in
other non-current liabilities and defened credits on the Consolidated Balance Sheets ofthe following amounts as ofDecember 3 I (dollars in thousands):
20t6 2015
Dcferred cornpensation assets and I iabilities s 7,679 $8,093
NOTE I I. ACCOTJNTING FOR INCOME TAXES
IncometaxexpenseconsistedofthefollowingfortheyearsendedDecember3l (dollarsinthousands):
20t6 201 5 2014
Current income tax expense Oenefit)
Deferred income tax expense
Total income tax expense
$(46,4s7) $
124,543
12,2t2 $
55,237
(67,059)
139,299
$78,086 $ 67.449 g 72.240
State income taxes do not represent a significant portion oftotal income tax expense on the Consolidated Statements oflncome for any periods presented.
A reconciliation offederal income taxes derived from statutory federal tax rates (35 percent in 2016,2015 and 2014) applied to income before income taxes
as set forth in the accompanying Consolidated Statements oflncome is as follows for the years ended December 3 I (dollars in thousands):
20t6 2015 2014
Federal income taxes at statutory rates
Increase (decrease) in tax resulting from:
Tax effect ofregulatory treatment ofutility plant
differcnces
State income tax expense
Settlement ofprior year tax retums and adjustment oftax
reserves
Manufacturin g deducti on
Settlement of equity awards
Other
Total income tax expense
4,008
l3
(6e8) (0.4)(446) (0.2)
$ 78,086 36.3 % $ 67,449 36.3 % $ 72,240 37.60/o
$ 75,391 35.0 % $ 64,967 35.0 % $ 67,237 35.0%
3,297
1,3 l6
1.5
0.6
(0.7)
(0.1 )
4,358
1,0t2
(ee2)
(l,re8)
506
2.1
o.2
(0.s)
(0.6)
l,l 04
(l 6e)
0.6
(0 1)
(1,597)
(334)
tt7
Appendix 6 to Joint Application Page 124 of 414
2.3
0.5
Table of Contents
AVISTA CORPORATION
Defened income taxes reflect the net tax effects oftemporary 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
of December 3 I (dollarc in thousands):
201 6 201 5
Deferred income tax assetsi
Unfu nded benefi t obli gation
Derivatives
Regulatory dcferrcd tax crcdits
Tax credits
Power and natural gas deferrals
Deferred compensation
Other
Total gross deferred income tax assets
Valuation allowances lor deferred tax assets
Total deferred income tax assets aftervaluation allowances
Deferred income tax Iiabilities:
Dfferences between book and tax basis of utility plant
Regulatory asset on utility, property plant and equiprnent
Regulatory asset for pensions and other postretirement benefits
Utility energy commodity derivatives
Long-term debt and borrowing costs
Scttlcmcnt with Cocur d'Alcnc Tribe
Other regulatory assets
Other
Total deferred income tax liabilities
Net long+erm deferred income tax liability
Regulatory assets for deferred income taxes
Regulatory liabilities lor defered income taxes
$80,230 $
31.872
| 5,192
27,931
19,415
l l.l4l
,o < ra
7 5,716
47,009
I 5,01 I
12,866
t 0,354
29,47 |
215,293
(7,e46)
190,427
(2,862)
207,347 187,565
812.916
37,301
84,040
3 t,871
3l,955
I l,7l I
30,1 83
8,298
7 23,661
36,917
82,253
47,010
14,027
12,084
I I ,691
7,399
1,048,275 935.042
$ 840,928 $ 747,477
The realization ofdefened income tax assets is dependent upon the ability to generate taxable income in future periods. The Company evaluated available
evidcnce supporting thc rcalization ofits defcncd incomc tax assets and determincd it is morc likcly than not that dcferrcd income tax asscts will bc rcalizcd.
As of December 3 I , 201 6, the Company had $ I 7.1 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 I , 20 I 6. State tax credits expire from 20 I 9 to 2028.
The Company and its eligible subsidiaries file consolidated federal income tax retums. The Company also files state income tax retums in certain
jurisdictions, including Idaho, Oregon and Montana. Subsidiaries are charged or credited with the tax effects oftheir operations on a stand-alone basis. The
Intcmal Revcnue Service (IRS) has completed its examination ofall tax years through 201 I and all issues were rcsolved relatcd to thcsc years. Thc statute of
limitations for the IRS to review the 2012 tax year has expired, leaving the 20 I 3 through 20 I 5 tax years 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 ofcetain deferred income tax liabilities from customers through future rates as of
December 3 I (dollars in thousands):
2016 201 5
$109,853 S
28,966
101,240
17,609
NOTE 12. ENERGY PURCHASE 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 significant 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 range from one month to twenty-five years.
Appendix 6 to Joint Application
ll8
Page 125 of 414
Table 0f Contents
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):
2016 201 5 2014
UtilitypowerresourcesS402,5T5$511,937$556,915
Thc following tablc dctails Avista Utilities' futurc contractual commitmcnts for power rcsourccs (including transmission contracts) and natural gas rcsources
(including transportation contracts) (dollars in thousands):
2.017 20 I 8 20 I 9 2020 2021 Thereafter Total
Power resources
Natural gas resources
Total
202,494 $
95,549
187,080 $
65.230
17 4,285 $
53,860
I 09,878 S
41,340
96,485 $
29,306
77 5,548 $
349,468
$1,545,770
614 ?s r
$ 298,043 $ 252,3 l0 $228,145$r5r,218$125,791 $1,125,0r6$2,180,523
These energy purchase contracts were entered into as part ofAvista Utilities' obligation to serve its retail electric and natural gas customers' energy
requiremcnts, including contracts cntcred into for rcsourcc optimization. As a rcsult, thesc costs are recovcrcd eithcr through base retail ratcs 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 PLrDs 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 service obligation associated with the revenue bonds
outstanding at December 3 1, 2016 (principal and interest) was $65.2 million.
In addition, Avista Utilities has opcrating agrecmcnts, settlcments and other contractual obligations rclated to its gcnerating facilitics 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 fi.rture contractual commitments under these agreements (dollars in thousands):
2017 20 I 8 2019 2020 2t)21 Thereafter Total
Contractual obligations S 33,922 $ 28,783 S 32,549 $ 32,160 $ 27,019 $ 189,000 $ 343,433
NOTE 13. COMMITTED LINES 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 2021 .
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 bc greatcr than 65 pcrccnt at any time. As ofDeccmber 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 1 (dollars in thousands):
2016 zot5
Balance outstanding at end ofperiod $ I 20.000 $ I 05,000
Lcttcrs ofcrcdit outstanding at end ofpcriod $ 34,353 S 44,595
Average interest rate at end ofperiod 1.50% 1.18%
As of December 3 I , 20 I 6 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 l9
Appendix 6 to Joint Application Page 126 of 414
Table of Contents
AVISTA CORPORATION
AEL&P
AEL&P has a committed line of credit in the amount of $25.0 million that expires in November 201 9. As of December 3 I , 201 6 and 201 5, there were no
borrowings or letters ofcredit outstanding under this committed line ofcredit.
The committed Iine 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 greaterthan
67.5 pcrcent at any timc. As of Deccmber 31,2016, AEL&P was in compliance with this covcnant.
120
Appendix 6 to Joint Application Page 127 of4l4
Table of Contents
AVISTA CORPORATION
NOTE I4. LONG-TERM DEBT AI\D CAPITAL LEASES
The following details long+erm debt outstanding as ofDecember 3 I (dollars in thousands):
Maturity
Ycar Dercription
Interest
Ratc 2016 201 5
Avista Corp. Secured Long-Term Debt
2016 First Mortgage Bonds (l )
2018 First Mortgage Bonds
201 8 Secured Medium-Tenn Notes
2Ol9 First Mortgage Bonds
2020 First Mortgage Bonds
2022 First Mortgage Bonds
2023 SecuredMedium-TennNotes
2028 SecuredMedium-TermNotes
2032 Secured Pollution Control Bonds (2)
2034 Secured Pollution Control Bonds (2)
2035 First Mortgage Bonds
2037 First Mortgage Bonds
2040 First Mongage Bonds
2041 First Mortgage Bonds
2044 First Mortgage Bonds
2045 First Mortgage Bonds
2047 First Mortgage Bonds
2051 First Mortgage Bonds (3)
Total Avista Corp. secured long-term debt
Alaska Electric Light and Power Company Secured Long-Term Debt
2044 First Mortgagc Bonds
Total secured long+erm debt
Alaska Energy and Resources Company Unsecured Long-Term Debt
2019 Unsecured Term Loan
Total secured and unsecured long+erm debt
Other Long-Term Debt Components
Capital lease obligations
Settled interest rate swap derivatives (4)
Unamortized debt discount
Unamortizcd long-term debt issuance 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 )
0.84'h
5.95%
7.39%-7.45%
5.45%
3.89%
5.13o/o
7.18%-7s4%
6.37%
(2)
(2)
6.250/o
s.70%
5.550/,
4.45%
4.11%
4.37%
4.23%
3.54%
$$90,000
250,000
22,500
90,000
52,000
250,000
13,500
25,000
66,700
17,000
150,000
150,000
35,000
8 5,000
60,000
I 00,000
80,000
250,000
22,500
90,000
52,000
250,000
13,500
25,000
66,700
17,000
r 50,000
t 50,000
3 5,000
85,000
60,000
100,000
80,000
175,000
1,621,700
75,000
1,536,700
75,0004.54%
3.85%
r.696,700
15,000
I ,61 l ,700
15,000
I ,71 I ,700
65,435
|,626,700
(7e2)
(10,63 9)
68,60 t
(26,s 1 s)
(es6)
(l 0,8s2)
t ,7 65,104
(83,700)
(3,287)
1,656,978
(83,700)
(93,1 67)
$ r,678,717 $ 1.480,1il
In August 201 6, 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 I 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 201 6
This term loan was subsequently repaid in fulI in December using the proceeds fiom the first mortgage bonds issued in December 20 I 6 (discussed
below).
Appendix 6 to Joint Application
121
Page 128 of414
Table of Contents
AVISTA CORPORATION
(2)In Decernber 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 in2032 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.
duc to market conditions. Thc Company expccts that at a later date, subjcct to markct conditions, these bonds may bc remarkctcd 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.
InDccembcr20l6,AvistaCorp.issucdandsold$'lT5.0millionof3.54pcrccntfirstmortgagcbondsduein205l pursuanttoabondpurchasc
agreement vrith institutional investors in the private placement market. The total net proceeds from 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. ln connection with the execution ofthe bond purchase agreement, the Company cash-settled seven interest rate swap derivatives (notional
ag9regate amount of $ I 25.0 million) and paid a total of $54.0 million.
Prior to December 3 I , 20 | 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
morc appropriatc classification is as rcgulatory asscts and liabilities rathcr than as a componcnt oflong-tcrm debt. As such, as ofDecember 3 I , 20'l 6,
the Company has included unamortized settled interest rate swap derivatives of$91.9 million in regulatory assets and $12.4 million in regulatory
liabilities. The Company did not reclassifl any amounts as ofDecember 3 I , 20 I 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 forany periods as a
result ofthe balance shect rcclassification.
(3)
(4)
The following table details future long-term debt maturities including long-term debt to alfiliated trusts (see Note I 5) (dollars in thousands):
2017 20 I 8 2Ol9 2O2O 2021 Thereafter Total
Debt maturities $$ 272,500 $ 105,000 $ 52,000 S $ 1,250.047 g 1.679,547
Substantially all of Avista Utilities' and AEL&P's owned properties are subject to the lien of their respective mongage indentures. Under the Mortgages and
Dceds of Trust (Mortgages) securing their first mortgagc bonds (including secured medium-tcrm notes), Avista Utilities and AEL&P may cach issuc
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 fint mortgage bonds ofthat entity which have not previously been made the basis ofany application under that
entityrs Mortgagc, or
. deposit ofcash.
Howevel Avista Utilities and AEL&P rnay 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 that entity's Mortgage) for any period of I 2
consecutive calendar months out ofthe preceding I 8 calendar months that were at least twice the annual interest requirements on all mo(gage securities at
thc time outstanding, including the first mortgage bonds to be issued, and on all indcbtedness ofprior rank. As of Dccember 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$ I .2 billion in aggregate principal amount of
additional first rnortgage bonds at Avista Utilities and $20.8 million at AEL&P.
Snettisham Capital Lease Obligation
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, cxpiring in Decembcr 203 8, to purchase all the output ofthe 78 MW Snettisham Hydroclectric Projcct. For accounting
purposes, this power purchase agreement is treated as a capital lease.
122
Page 129 of 414Appendix 6 to Joint Application
Table 0f Contents
AVISTA CORPORATION
The balances related to the Snettisham capital lease obligation as ofDecember 3 I were as follows (dollars in thousands):
2016 20t5
Capital lease obligation (l )
Capital lcase assct (2)
Accumulated amortization ofcapital lease asset (2)
(l ) The capital lease obligation amount is equal to the amount ofAIDEA's revenue bonds outstanding
(2) These amounts are included in utility plant in sewice on the Consolidated Balance Sheets.
Interest on capital lease obligation
Amortization of capital lcasc assct
s 62,160 $
7 t ,007
9,r 04
64,455
71,007
5,462
Interest on the capital lease obligation and amo(ization ofthe capital lease asset are included in utility resource costs in the Consolidated Statements of
IncomeandtotaledthefollowingamountsfortheyearsendedDecember3l (dollarsinthousands):
2016 20r5
$3,157 $
3,642
3,587
3,641
AIDEA issued $ I 00.0 million ofrevenue bonds in I 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 newrevenue 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 under the power purchase 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 $ 10.0 million and $ 10.5 million per year, including the capital lease principal and
interest ofapproximately $5.5 million peryear.
Snettisham Electric Company, a non-openting subsidiary ofAERC, has the option to purchase the Snettisham project with certain conditions at any time for
the principaI amount ofthc 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 openrting
lease with a constant level ofannual rental expense (straight line expense). Because ofthis regulatory trealment, any difference between the operating lease
expense for ratemaking purposes and the expenses recognized under capital lease treatment (interest and depreciation ofthe capital lease asset) is recorded as
a regulatory asset and amortized during the lateryears ofthe lease when the capital lease expense is less than the operating lease expense included in base
rates.
The Company evaluated this agreement to determine ifit has a variable interest which must be consolidated. Based on this evaluation, AIDEA will not be
consolidatedunderASC8l0"Consolidation"becauseAIDEAisagovemmentagencyandASC8l0hasaspecificscopeexceptionwhichdoesnotallowfor
the consolidation of govemmenl organizations.
The following table details future capital lease obligations, including interest, under the Snettisham PPA (dollan in thousands):
2017 201 8 2019 2020 2021 Thcrcafter Total
Principal
Interest
Total
$$2,415
3,042
2,s3s $
2,921
2,660 $
2,795
2,800 $
2,662
2,935 $
) \))
48,81 5 $
16,674
62,160
30,61 6
$ 5,457 $ 5,456 s 5,455 S s,462 $ s,457 $ 6s,489 $ 92,776
NOTE I 5. LONG.TERM DEBT TO AFFILIATED TRUSTS
In 1997, the Company issued Floating Rate Junior Subordinated Defen-able 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 Preferred Trust Securities with a floating distribution
rate ofLIBOR plus 0.875 percent, calculated and reset quarterly.
Appendix 6 to Joint Application
123
Page 1 30 of 414
Table of Contents
AVISTA CORPORATION
The distribution rates paid were as follows during the years ended December 3 I
Low distribution rate
High distribution ratc
Distribution rate at the end ofthe year
zUlO 201 5 2014
1.29%
l.8l%
t.8t%
t.tt%
1.29%
1.29%
| .l0o/o
1 ,l lo/o
1 .l lo/o
Concurrent with the issuance of the Prefencd Trust Sccurities, Avista Capital II issued $ 1.5 million of Common Trust Securitics to thc Company. Thcsc debt
securities may be redeemed at the option of Avista Capital II at any time and mature on ltne I ,203'l .ln 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 Prefened Trust Securities will be mandatorily redeemed. The Company does not
includc thesc 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 Consolidated Balance Sheets. lnterest
expense to affiliated trusts in the Consolidated Statements oflncome represents interest expense on these debentures.
NOTE 16. FAIRVALI,]E
The carrying values ofcash and cash equivalents, accounts and notes receivable, accounts payable and short-term borrowings are reasonable estimates ol
their fair values. Long-tenn debt (including curent portion and material capital leases) and longterm debt to affiliated trusts are reported at carrying value on
the Consolidated Balance Sheets.
Thc fair valuc hierarchy prioritizcs thc inputs used to measurc fair value. The hierarchy givcs the highcst priority to unadjustcd quotcd priccs in active
ma*ets 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 I - Quoted prices are available in active markets for identical assets or liabilities. Active markets are those in which transactions for the asset or
liability occurwith 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 repo(ing date. Level 2 includes those financial instrurents that are valued using models or other valuation methodologies. These models are primarily
industry-standard models that considervarious assumptions, including quoted forward prices for commodities, time value, volatility factom, and current
market and contrdctual prices for the underlying instruments, as well as other relevant economic measures. Substantially all ofthese assumptions are
observable in the markctplace throughout thc full term ofthc instrumcnt, can be derived from observable data or are supportcd by observablc 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
devcloped mcthodologies that rcsult in management's best cstimate 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. Tlte
Company's assessment ofthe significance ofa particular input to the fair value measurement requires judgment, and may affect the valuation olfair 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 counterpartics involved and the impact ofcredit enhancements (such as cash deposits and letters ofcredit), but also tlre
impact of Avista Corp.'s nonperformance risk on its liabilities.
124
Appendix 6 to Joint Application Page 1 31 of 414
Table of Cont€trts
AVISTA CORPORATION
The following table sets forth the carrying value and estimated fair value of the Company's financial instruments not reported at estimated fair value on the
Consolidated Balance Sheets as ofDecernber3 I (dollars in thousands):
2016 2015
Carrying
Value
Estimatcd
Fair Value
Carrying
Value
Estimatcd
Fair Value
Long-term debt (Level 2)
Longterm debt (Level 3)
Snettisham capital lease obligation (Level 3)
Longterm debt to affiliated trusts (Level 3)
Interest rate swap derivatives
Foreign currency exchange derivatives
Total
$951,000 $
677,000
62,160
5t,547
l ,048,661 $
67 5,25t
62,800
3 8,660
95 |,000 s
592,000
64,455
5 t ,547
1,055,797
595,0t 8
63,1 s0
36,083
Thcse estimates of fair value of long-tcrm dcbt and long+erm dcbt to affiliated trusts were primarily bascd on available markct information, wlrich gencrally
consists ofestimated market prices liom third party brokers for debt with similar risk and terms. The price ranges obtained fiom the third party brokers
consisted ofpar values of75.00 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 classified as Level 2
because brokers must generate quotes and make estimates using comparable debt urith similar risk and terms ifthere is no trading activity near a period end.
Lcvel 3 long+crm dcbt consists ofprivate placcmcnt bonds and dcbt to affiliated trusts, which typically lrave no secondary trading activity. Fair valucs 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 estirnated fair value ofthese items was determined based on a
discounted cash flow model using available market information. Prior to December 3 I , 20 1 6, 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
2016, as suclr going forward, the Company is using thc Morgan Markets A Ex-Fin discount ratc, which is the closcst approximation to thc ratc prcviously
used.
The following table discloses by level within the fair value hierarchy the Company's assets and liabilities measured and reported on the Consolidated
Bafance Sheets as ofDecember 3 I , 2016 and 20 I 5 at fair value on a recurring basis (dollars in thousands):
Level I Level2 Level 3
Counterparty
and Cash
Collateral
Netting (l )Total
December 31,2016
Assets:
Energy commodity derivatives
Level 3 energy commodity derivatives:
Natural gas exchange agreements
Powcr exchangc agrecmcnt
Foreign currency exchange derivatives
Interest rate swap derivatives
Deferred compensati on assets:
Fixcd income sccuritics (2)
Equity securities (2)
Total
Liabilities:
Energy commodity derivatives
Level 3 cnergy commodity derivativcs:
Natural gas exchange agreement
Power exchange agreement
Power option agreement
s $ 47,994 $$ (46,0ee) $1,895
1,789
5,48 I
7,2'.70 $6t,097 $94 $ (s0,546) S 17,915
69
25
(69)
(2s )
(s)5
13,098 (4,348)8,750
|,789
5,48 I
s
$$56,871 $
73,9'.78
28
$ (5s,es7) $
(39,248)
(5)
9t4
5,885
13,449
76
34,730
23
5,954
13,47 4
76
(6e)
(25)
$$ l 30,877 $19,s04 $ (9s,304)$ s5,077
Appendix 6 to Joint Application
t25
Page 132 of 414
Table of Contents
AVISTA CORPORATION
Level I Level2 Level 3
Counterparty
and Cash
Collateral
Netting (l )Total
December 3 l, 201 5
Assets:
Energy commodity derivatives
Level 3 energy commodity derivatives:
Natural gas exchange agreement
Forcign currcncy exchangc dcrivativcs
lnterest rate swap derivatives
Deferred compensation assets:
Fixed income securities (2)
Equity securities (2)
Total
Liabilities:
Energy commodity derivatives
Level 3 energy commodity derivatives:
Natural gas exchange agreement
Power exchange agrcement
Power option agreement
Foreign cunency exchange derivatives
Interest rate swap derivatives
Total
$$7 4,637 $
2
1,548
$ (73,es4) $683
678
1,727
5,7 6t
1,548
1,727
5,761
$7,488 $76,187 $678 $ (74,634) $
s $97,193 $
t9
85,498
$(88,480) $
(678)
8,7r3
5,039
21,961
t7
85,498
5,7 t7
21,961
124
(2)
$$ 182,710 $27,802 $(89,160) $ 121,352
(l) TheCornpanyispermittedtonetderivativeassetsandderivativeliabilitieswiththesamecounterpartywhenalegallyenforceablemasternetting
agreement exists. In addition, the Company nets derivative assets and derivative Iiabilities 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 with 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. In 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 market 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 forwarrd 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 broken 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 arc cqual to the fixcd intcrcst ratc in thc swap comparcd to the floating market intcrest ratc multiplicd by thc
notiona[ amount for each period.
To establish fair value for foreign currency derivatives, the Company uses fonvard market 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.
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
Appendix 6 to Joint Application
t26
Page 1 33 of 414
(678)
(2)
9,7 19
Table of Contetrts
AVISTA CORPORATION
inthetableaboveexcludescashandcashequivalentsof$0.4millionasofDecember31,20l6and$0.6millionasofDecember3l,2015
Level 3 Fair Vulue
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 agreernent the Company estimates the difference between the
purchase price based on the future O&M charges and fonuand 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 llom the three surrogate nuclear power plants for the
current ycar. Because thc nuclcar power plant O&M chargcs are only known for onc year, all forward ycars are cstimated assuming an annual cscalation. 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 future based on historical average tnnsaction 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 curent 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 uscd to develop the intcmal forward pricc.
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), 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 cornmodity 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 from period to period,
the unobscrvablc cstimatcs ofthe timing and volume oftransactions can have a significant impact on the calculatcd fair value. Thc 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 conelated 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 of
December 3 1, 20 1 6 (dollan in thousands):
Fair Value (Net) at
December3l,2016 Valuation Technique Unobsenable Input Range
Power exchange agreement $(13,44e)Surrogate facility
pricing
O&M charges
Escalation factor
Transaction volumes
$33.59-$49.r s/MWh (r )
3%-2017 to2019
241 ,558 - 396,984 MWhs
Power option agrccment (7 6)Black-Scholcs-
Merton
Strikc price
Delivery volumes
Volatility rates
$37.83/MWh -2019
s54.40/MWh - 2018
157,517 - 285,979 MWhs
0.20 (2)
Natural gas exchange
agreement
(s,88s)Intemally derived
weighted-average
cost ofgas
Forward purchase
prices
Forward sales prices
Purchase volumes
Sales volumes
$1.83 -$3.06/mmBTU
$ I .90 - $5.1 4/mmBTU
I 15,000 - 3 I 0,000 mmBTUs
60,000 - 3 I 0,000 rnmBTUs
(l ) The average O&M charges for the delivery year beginning in November 20 I 6 were $39.22 perMWh. Forratemaking purposes the average O&M charges
to bc included for recovcry in retail mtes vary slightly betwecn regulatory jurisdictions. Thc avemgc O&M charges for thc delivcry ycar beginning in
201 6 were $44.33 for Washington and $39.22 for Idaho.
(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 20 I 8.
127
Appendix 6 to Joint Application Page 1 34 of 414
Table of Contetrts
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 offairvaluc 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 Gas
Exchange
Agreement
Powcr Exchange
Agreement
Powcr Option
Agreement Total
Year ended December 31, 201 6:
Balance as ofJanuary l, 20 I 6
Total gains or (losses) (realizcd/unrcalized):
Included in regulatory assets/liabilities (l )
Settlements
Ending balance as ofDecember 3 1,2016 (2)
Year ended December 31,2015:
Balancc as ofJanuary 1.201 5
Total gains or (losses) (realizediunrealized):
Included in regulatory assets/liabilities (l )
Settlerrents
Ending balance as ofDecember 3 I,2015 (2)
Year ended December 31,2014:
Balance as ofJanuary I ,20 I 4
Total gains or (losses) (realizediunrealized):
Included in regulatory assetsiliabilities (l )
Settlements
Ending balance as ofDecember 3 I,2014 (2)
259
(l,l 0s)
400
8,1 l2
$(s,o3e) $ (2r,e6r) $(t24) S (27,124)
48 707
7,007
!_______qi!:l_
s (3s)
(6.008 )
I.004
$ (13,44e) $(76) S (le3l0)
$ (23,29e) $
(6,1 e8)
7,536
(424) $ (23,7s8)
(l l,e06)
8,540
300
$(5,039) $ (21,961) $(124) S Q7,124)
$(l,2re) $ (14,44r) s (77s) $ (16,435)
351 (s,778)
(1,545)
3,873
(2,689)
(l 0,002)
I,144
s (3s) $ (23,2ee) $(424) $ (23,758)
(1) Allgainsandlosscsareincludedinothcrregulatoryassctsandliabilities.Therewcrenogainsandlosscsincludcdincithernctincomcorothcr
comprehensive income during any ofthe periods presented in the table above.(2) There were no purchases, issuances or transferc from other categories ofany derivatives instruments during the periods presented in the table above.
NOTE 17. COMMON STOCK
The payment of dividends on cornmon stock could be limited by:
. certain covenants applicable to preferred stock (when outstanding) contained in the Company's Restated Articles oflncorporation, as
amcnded (currently there arc no prcferred shares outstanding),
. certain covenants applicable to the Company's outstanding long-term debt and committed line ofcredit agreements,
. the hydroelectric licensing requirements ofsection I 0(d) ofthe FPA (see Note 1 ), 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 declarcd the following dividends for the year cnded Dccembcr 3 I
2016 2015 2014
Dvidends paid per common share $1.37 $1.32 $1.27
Appendix 6 to Joint Application
t28
Page 135 of414
Table of Contents
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 I . 201 6 was limited to 5263.4 rnillion.
The Company has I 0 million authorized shares ofpreferred stock. Tlre Company did not have any preferred stock outstanding as ofDecember 3l ,2016 and
2015.
Stock Repurc hase 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 1.57 in 2014 and $32.66 in 201 5. All repurchased shares reverted to the status ofauthorized but unissued shares.
Equily Issuances
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 of Avista Corp.'s common stock, no par value, from time to time. The sales agency agreernents 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, leaving 2.2 million shares remaining to be issued.
In 20 1 6, thc Company also issued S I .7 million (net ofissuancc costs) ofcornmon stock undcr thc employce plans.
NOTE 18. EARNINGS PER COMMON SHARE ATTRIBUTABLE TO AVISTA CORPORATION SHAREHOLDERS
The following table presents the computation ofbasic and diluted eamings per common share attributable to Avista Corp. shareholders for the years ended
December 3 I (in thousands, except per share amounts):
201 6 201 5 20t4
Numerator:
Net income from continuing operations attributable to Avista Corp. shareholders
Net income from discontinued operations attributable to Avista Corp. slrareholders
Subsidiary eamings adjustment for dilutive securities (discontinued operations)
Adjusted net income fiom 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 drlutive securities:
Performance and restricted stock awards
Weighted-average number of common shares outstanding-diluted
Earnings per common share attributable to Avista Corp. shareholders, basic:
Eamings per common share fiom 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 eamings per common share attributable to Avista Cory. shareholders, diluted
There were no shares excluded from the calculation because they were antidilutive.
129
$ 137 ,228 $ I 18,080 $ I 19,81 7
5,147 72,224
5
$$s,t47 S 11 'rao
63.5 0 8
412
62,301
407
61,632
255
63.920 62,708 6r,887
s
$
2.16 $
$
1.90 $
0.08 $
t.94
1.r 8
s 2.t6 $1.98 $3.12
$
$
$
$
s
$
2.t5 1.89
0.08
I .93
I .17
$2.1s $1.97 S 3.10
Appendix 6 to Joint Application Page 136 of4l4
Table of Contcnts
AVISTA CORPORATION
NOTE I9. COMMITMENTS AND CONTINGENCIES
In the course ofits business, the Company becomes involved in various claims, controversies, disputes and other contingent matters, including the items
dcscribed in this Notc. Somc ofthcsc claims, controvcrsies, disputcs and othcr contingcnt matters involve litigation or othcr contcstcd procccdings. For all
such matters, the Company intends to vigorously protect and defend its interests and pursue its rights. However, no assurance can be given as to the ultimate
outcome ofany particular matter because litigation and otlrer 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 al ifo rnia R efund Pro ce 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, asserted
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 &
Elcctric (PG&E), Soutlrem Califomia Edison, San Dicgo Gas & Elcctric, the Califomia Attomey Gcncral (AG), the Califomia Department of Water Rcsourccs
(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. 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 $ I 6.0 million even though no wrongdoing allegations are specifically
attributablc to Avista Energy. Avista Energy bclieves its settlemcnt with thc Califomia Partics in 2014 insulatcs 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.
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 December25,2000 and June 20,2001 werejust and reasonable. In June 2003, the FERC terminated the Pacific Northwest
refund proceedings, after finding that the equities do not justifu the imposition ofrefunds. In August 2007, the Ninth Circuit found that the FERC had failed
to take into account new evidence ofma*et 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, 20 I 3 expanded the temporal scope ofthe proceeding to permit pa(ies to
submit evidence on transactions during the period from January I , 2000 through and including June 20, 200 I .
On July 11,2012 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
typc hcaring bcfore an Administrativc Law Judge (ALJ) to permit parties to prcsent cvidcncc ofunlawful markct activity was conductcd in 20 I 3.
WithregardtotheScattleclaims,onMarch2S,2Ol4,thcPresidingALJissucdanlnitial Dccisionfindingthat: l)Seattlcfailedtodcmonstratcthateithcr
Avista Corp. orAvista Energy engaged in unlau{ul market activity and also failed to identify 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 orrate schedules. Accordingly, the ALJ denied all ofSeattle's claims underboth section 206 and section 309 ofthe FPA. On May 22,2015, the FERC
issued its Order on Initial Decision in which it upheld the ALJ's Initial Decision denying all ofSeattle'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 3 I , 20 I 5. Seattle appealed the FERC's decision
to the Ninth Circuit. In October 2016, Scattlc scttled all of the mattcrs with thc rcmaining parties and withdrcw its appcal 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, 201 6. There are no
remaining claims outstanding under this proceeding. The settlement did not have a material adverse effect on the Company's financial condition, results of
operations or cash flows.
130
Appendix 6 to Joint Application Page I 37 of 414
Table of Contents
AVISTA CORPORATION
Sierra Club and Montana Environmental Information Center Litigalion
In 201 3, the Sierra Club and Montana Environmental Information Center (MEIC) (collectively "Plaintiffs"), filed a Complaint in the United States District
Court for the District of Montana, Billings Division, against the Owners of the Colstrip Generating Project ("Colstrip"); Avista Corp. owns a I 5 percent
interest in Units 3 & 4 of Colstrip. The other Colstrip co-Oumers are Talen Montana, LLC (formerly PPL Montana, LLC, an indirect subsidiary of Talen
Energy Corporation), Puget Sound Energy, Portland General Electric Cornpany, NorthWestem Energy and PacifiCorp. The Complaint alleged certain
violationsoftheCleanAirAct,includingtheNewSourceReview,TitleVandopacityrequirementswithrespecttopost-January 1,2001 Colstripprojects.
The Plaintiffs requested that the Court grant injunctive and declaratory relief, order remediation 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 tiability trial was scheduled to start on May 3 l, 201 6. The parties engaged in settlement discussions with the Plaintiffs to resolve the claims raised in the
litigation. On July I 2, 20 I 6, the pa(ies filed a proposed Consent Decree with the court which contained the terms ofthe settlement ofthe matter with respect
to all four units at Colstrip. The settlement does not include any monetary payments by any party, dismisses all claims against all four units, and provides for
the shut-down ofunits I & 2 (which are owned solely by Talen Montana, LLC and Puget Sound Energy) no laterthan luly,2022. The Consent Decree was
cntercd on Scptcmber 6, 20 I 6. Thc parties havc pctitioned thc Court for costs and attomcys' fees. Thc Court dcnied thc dcfcndant's claim for fccs and reduccd
th e plaintiffs cl aimed fees from approximately $3.0 million to $ I .6 mill ion. On February l5,2017 the Court issued an Order adopting th is resolution in full
and closing the case.
The Company 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 Ahatement Plan
Dissolved atmospheric gas levels (refened to as "Total Dissolved Gas" or"TDG") in the Clark Fork Riverexceed state ofIdaho and federal waterquality
numeric standards downstream ofCabinet Gorge particularly during periods when excess river flows must be diverted over the spillway. Under the terms of
the Cla* Fork Settlement Agreement (CFSA) as incorporated in Avista Corp.'s FERC license for the Clark Fork Project, Avista Corp. has worked in
consultation with agencics, tribes and other stakcholdcrs to addrcss this issue. Undcr thc tcrms ofa gas supcrsaturdtion mitigation plan, Avista is rcducing
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
i ssue.
Fish Passage at Cabinet Gorge and Noxon Rapids
In | 999, the Un ited States Fish and Wildl ife Service (USFWS) I isted butl trout as threatened under the Endangered Species Act. In 201 0, the USFWS issued a
rcviscd dcsignation ofcritical habitat for bull trout, which includcs thc lowcr Clark Fork Rivcr. Thc USFWS issued a final recovcry plan in Octobcr 20 I 5.
Thc CFSA describcs programs intendcd to hclp restorc bull trout populations in thc projcct arca. Using thc conccpt ofadaptivc managcmcnt and working
closely with the USFWS, the Company evaluated the feasibility olfish passage at Cabinet Gorge and Noxon Rapids. The results of these studies led, in part,
to the decision to move forward with development ofpermanent facilities, among otherbull trout enhancement efforts. Parties to the CFSA are working to
resolve several issues. The Company believes its ongoing efforts through the CFSA continue to eflectively 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 ratcmaking proccss, ofall opcrating and capitalizcd costs rclatcd to fish passage at Cabinct Gorgc and Noxon Rapids.
C o I le ctive B argai ni ng Ag re e me nts
The Company's collectivc bargaining agreemcnts with the IBEW reprcscnt approximatcly 45 perccnt ofall ofAvista Utilities' cmployccs. A ncw three-ycar
agreement with the local union in Washington and Idaho representing the majority (approximately 90 percent) of the Avista Utilities'bargaining unit
employees was approved in March 20 I 6 and expires in March 201 9.
A three-ycar agrccmcnt in Orcgon, which covcrs approximately 50 employees was sct to cxpire in March 20 1 7. A ncw thrcc-ycar agrccmcnt has bccn
approved by the IBEW membenhip that will expire in March 2020. It is stitl awaiting approval from the National IBEW.
131
Appendix 6 to Joint Application Page 138 of414
Tabk of Contrnts
AYISTA CORPORATION
A collective bargaining agreement \ rith the local union of the IBEW in Alaska expires in March 201 7. 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. Howevel the Company
bclieves that the possibility ofthis occurring is rcmote.
Aher Contingencies
In the normal coune 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 Cornpany's estimates ofthe probability or amount ofa liability being incurred. Such a change, should it occur, could be significant.
The Conrpany 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 fiom insurance carriers. The Company's policy is to accrue and charge to current expense identified exposures related to
cnvironmcntal rcmediation sites bascd on cstimatcs ofinvestigation, cleanup and monitoring costs to bc incuncd. Formattcrs that affect Avista Utilitics'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 wildli fe 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 property rights, including water rights. In addition, the
company holds additional nonJrydro water rights. The state ofMontana is examining the status ofall water right claims within state boundaries through a
general adjudication. Claims within the Clark For* River basin could adversely affect the energy production ofthe Company's Cabinet Gorge and Noxon
Rapids hydroelectric facilities. The state ofldaho has initiated adjudication in northern Idaho, which will ultimately include the lower Clark Fork River, the
Spokane Rivcr and thc Coeur d'Alcnc basin. The Company is and will continuc to bc a participant in thesc and any othcr rclevant adjudication processcs.
The complexity ofsuch adjudications makes each unlikely to be concluded in the foreseeable future. As such, it rs not possible for the Company to estimate
the impact ofany outcome at this tirne. The Company will continue to seek recovery, through the ratemaking process, ofall operating and capitalized costs
related to this issue.
132
Appendix 6 to Joint Application Page I 39 of 414
Table of Contents
AVISTA CORPORATION
NOTE 20. REGI,JLATORY MATTERS
Regulatory Assets and Liabilities
The following table presents the Company's regulatory assets and liabilities as ofDecember 3 I , 20 I 6 (dollan in thousands):
Receiving
Rcgulatory Treatment
(2)
Expectcd
Recovery or
Refund
Regulatory Assets:
Investment in exchange power-net
Regulatory asset.s for deferred income tax
Regulatory assets for pensions and other
postretirement benefi t plans
Current regulatory asset for energy
cornmodity derivatives
Unamortized dcbt rcpurchasc costs
Regulatory asset for settlement with Coeur
d'Alene Tribe
Demand side management progralns
Defened maintenance costs
Decoupling surcharge
Regulatory asset for utility plant to be
abandoncd
Regulatory asset for interest rate swaps
Non+urrent regulatory asset lor energy
commodity derivatives
Othcr rcgulatory asscts
Total regulatory assets
Regulatory Liabilities:
Natural gas deferrals
Power deferrals
Regulatory liability forutility 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
2019 $
43,126
123.596
3,633 4,585
$ 270,641 $ 301,006 $ 128,181 $ 699,828 S 5'19,632
$30,820 $
23.528
17,880
18,7 47
273,983
Rcmaining
Amortization
Period
(r)
Eaming
A Rctum
Not
Earning
A Rcturn
Total
2016
Total
2015
6,533 $
101,372
13,700
45,265
I 9,1 00
37,912
8,481
240,t t4
I t,365
15,700
2,672
16,919
5 755
6,533 S
l 09,853
240,tt4
I 1,365
13,700
45.265
t5,700
2,672
43,126
r 9,1 00
I 6l ,508
16,919
13,973
8,983
101,240
235,009
17,260
I 5,5 20
46,57 6
3,168
4,823
13,312
83,973
32,420
17,348
$$
(3)
(4)
(s)
(6)
2059
(3)
201 8
201 8
(7)
(8)
(s)
(3)
(e)
(3)
(8)
(3)
2017
(3)
30,820 $
23,528
t2,442
2,405
2,505
28,966
3,69'7
3,257
8,749
6,600
273,983
28,966
2t,t9t
10.297
2,405
5,',762
261,594
17,609
23
12,237
2,373
3,420
(3) $
(3)
$
s 345,683 $ 35,920 $ 1s,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.
133
Appendix 6 to Joint Application Page 140 of4l4
Table of Contetrts
AVISTA CORPORATION
(5) The UTC and the IPUC issued accounting orders authorizing Avista Corp. to offset energy comrnodity 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 ofsettlement, subject to approval for recovery through retail rates. Realized gains and losses, subject to regulatory
approval, result in adjustmcnts to rctail rates through purchascd gas cost adjustmcnts, thc ERM in Washington, the PCA mcchanism in Idaho, and
periodic general rates cases.
(6) For the Company's Washington jurisdiction and for any debt repurchases beginning in 2007 in all jurisdictions, premiums paid to repurchase debt
arc amortized ovcr thc rcmaining life ofthe original dcbt that was rcpurchascd or, ifnew dcbt is issucd in connection with thc rcpurchasc, 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 arrortized over the 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.
(7) In March 201 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 forthe opportunity for laterrecovery. This accounting treatment is related to the Company's plan to
replace approximately 253,000 ofits existing electric meters with new two-way digital meters and the related software and support services through
its AMI project in Washington State. Replacement of the meters is expected to begin in the second half of 201 7. For ratemaking purposes, the
cxisting electric mctcrs won't bc rccorded as regulatory asscts until thcy arc physically rcmovcd from scrvice, but for GAAP purposcs, thcy are
regulatory assets upon the commitment by management to retire the meters.
(8) For intercst rate swap derivatives, each period Avista Utilities records all mark-to-market gains and losses in each accounting period as assets and
liabilities and records offsctting rcgulatory assets and liabilitics, such that there is no incomc statcmcnt impact. This is similar to thc trcatmcnt of
energy commodity derivatrves 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 and are also included as a part ofthe Company's cost ofdebt calculation for
ratemaking purposes. See Note I 4 regarding a reclassification ofsettled interest rate swap derivatives during 20 1 6. 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 dcrivativcs and scttlcd intcrcst ratc swap dcrivatives which have not been includcd in a gcncral rate casc arc classificd as cxpcctcd
recovery.
(9) This amount is dependent upon the cost ofremoval ofunderlying utility plant assets and the life ofutility plant.
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 defened 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 avarlability ofhydroelectric 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
201 6, 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 year with IPUC approval. Under the PCA
mcchanism, Avista Utilitics dcfcrs 90 pcrccnt ofthc diffcrcncc bctwccn ccrtain actual net powcr supply cxpcnscs and thc amount includcd in basc rctail ratcs
tbritsldahocustomers.TheOctoberl rateadjustmentsrecoverorrebatepowercostsdefenedduringtheprecedingJuly-Junetwelve-monthperiod.Totalnet
power supply costs deferred under the PCA mechanisrn were a liability of $2.2 million as of December 3 I , 201 6 compared to an asset of $0.2 rnillion as of
December3l,2015.
t34
Appendix 6 to Joint Application Page l4l of 414
Table of Contents
AVISTA CORPORATION
Natural Gas Cost Deferrals and Recovery Mechanisms
Avista Utilities files a PGA in all three states it serves to adjust natural gas rates for: I ) estimated commodity and pipeline transportation costs to serve natural
gas customcrs for thc coming year, and 2) thc diffcrcnce betwccn actual and cstimated commodity and transportation costs for thc prior year. Total net
deferrednaturalgascoststoberefundedtocustomerswerealiabilityof$30.8millionasofDecember3l,20l6comparedtoaliabilityof$lT.9millionasof
December3l,20l5.
Decoupling and Earnings Sharing Mechanisms
Decoupling is a rnechanism 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 ce(ain customer rate classes, rather than
KWh and therm sales. The difference between revenues based on the number ofcustomers and revenues based on actual usage is deferred and either
surchargcd orrebatcd to customcrs bcginning in tlre following ycar.
llashinglon Decoupling and Earnings Sharing
In Washington, the UTC approved the Company's decoupling mechan isms 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 3 percent on an annual basis, with any remaining surcharge
balance carried forward lorrecovery in a future period. There is no limit on the level ofrebate rate adjustments.
The electric and natural gas decoupling meclranisms 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, normalized power supply costs
and othernormalizing adjustments. See below fora summary ofcumulative balances underthe decoupling and eamings sharing mechanisms.
ldaho 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 I , 20 I 6.
For the period 20 I 3 through 20 I 5 tlre Company had an after-the-fact eamings test, suclr that ifAvista Corp., on a consolidated basis for electnc and natural
gas operations in Idaho, 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 I 5 Idaho electric and natural gas general rates cases. See below for a surnmary ofcumulative
balances under the decoupling and eamings sharing mechanisms.
Oregon Decoup I ing M ec h an ism
In February 2016, the OPUC approved the implementation ofa decoupling mechanism fornatural gas,similarto the Washington and Idaho mechanisms
dcscribcd above. Thc dccoupling mechanism bccame effectivc on March I , 20 I 6 and tltcrc will bc an opportunity for interestcd partics to revicw thc
mechanism and recommend changes, ifany, by September 20 1 9. An eamings review is conducted on an annual basis, which is filed by the Company with the
OPUC on or before June I of each year for the prior calendar year. In the annual eamings review, ilthe Company eams lnore than I 00 basis po ints above its
allowed retum on equity, one-third of the eamings above the | 00 basis points would be defened and later retumed to customers. The eamings review is
separate fiom the decoupling mechanism and was in place prior to decoupling. See below for a summary ofcumulative balances under the decoupling and
camings sharing mcchanisrns.
135
Appendix 6 to Joint Application Page I 42 of 414
Trbl€ 0f Contents
AVISTA CORPORATION
Cumulative Decoupling and Earnings Sharing Mechanism Balances
As ofDecember 31,2016 and December 3 1, 20 I 5, the Company had the following cumulative balances outstanding related to decoupling and eamings
sharing mcchanisms in its various jurisdictions (dollars in thousands):
December 3 I
2016
Washington
Decoupling surcharge $ 30,408 S 10,933
Provision for eamings sharing rebate (5,1 13) (3A22)
Idaho
Decoupling surcharge $ 8,292 nla
Provision for eamings sharing rebate (5,1 84) (8,814)
Oregon
Dccoupling surchargc $ 2,021 nla
Provision for eamings sharing rebate
(n/a) This mechanism did not exist during 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 determine the allocation ofresources.
The Company's management evaluates performance based on incorne (loss) Ilom operations before incorre taxes as well as net incorne (loss) attributable to
Avista Corp. shareholders. 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
scgmcnt as it has scparate financial rcports that arc revicwcd in detail by thc ChiefOpcrating Dccision Maker and its operations and risks are sufficicntly
different 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 Caprtal.
The following table presents infonnation for each ofthe Company's business segrnents (dollars in thousands):
Avista ,1jl'liJ';:T:, 'Jfi;::'ffiJ
Utilitics Company Total Utiliry Othcr ( I ) Total
For the year ended December 3 1,2016:.
Operating revenues
Resource costs
Other operating expenses
Depreciation and anrortization
hcome (loss) from operations
Interest expense (2)
Income taxes
Net income (loss) from continuing operations
attributable to Avista Corp. shareholders
Capital expenditures (3 )
December 3l
2015
$I,372,638 S
539,352
304,644
155,162
277,070
83,070
7 4,121
46,276 $
12,014
I l,l5l
5,352
15,434
3,5 84
5,321
7,968
15,954
136
1,418,914 S
551 ,366
315,795
1 60,5 l4
292,504
86,654
7 9,442
23,569 $
25,501
769
(2,701)
608
(1,3s6)
(l 32)
1,442,483
551,366
341,296
16t,283
289,803
87,1 30
78,086
r37,228
406,997
$
132,490
3 90,690
140,458
406,644
(3,230 )
353
Appendix 6 to Joint Application Page 143 of414
Tabl€ of Contents
AVISTA CORPORATION
Avista
utilities
Alaska Electric
Light and Powcr
Company Total Utility Other
Intersegment
Eliminations(l)Total
For the year ended December 3 I, 20 I 5:
Operating revenues
Resource costs
Other operating expenses
Depreciation and amortization
Income (loss) from operalions
Interest expensc (2)
Income taxes
Net income (loss) from continuing operations
attributable to Avista Corp. shareholders
CapitaI expenditures (3)
For the year ended December 31,2014:
Operating revenues
Resource costs
Other opcrating cxpcnscs
Depreciation and amortization
Income from opemtions
lnterest expense (2)
Incomc taxcs
Net income from continuing operations attributable
to Avista Corp. shareholders
Capital expenditures (3)
Total Assets:
AsofDecember3l,20l6
AsofDecember3l,20l5
As ofDecember 3l.2Ol4
s l .41 r .863 $
644,99r
292,096
138,236
241,228
76,405
64,489
r 13,360
38t,t7 4
1 ,413,499 $
672,344
280,964
126,987
239,976
73,7 50
67,634
tt3,263
323,93 t
$ 4,975,555 $
$ 4,601 ,708 $
$ 4.357.760 $
44,778 $
11,973
I 1,125
5,263
14,072
3,55 8
4,202
6.641
12,251
3,t52
1,585
273.770 s
265,73s $
263,O70 S
1,456,641 $
656,964
303,221
143.499
255,300
79,963
68,691
120,001
393,425
1,435,143 $
678,244
286,832
129,57 0
246,197
75,132
69,450
tt6At5
325,5t6
5,249,325 $
4,867,443 $
4,620,830 $
28,68s $ (s5o) $1 ,484,77 6
656,964
332,7 47
144,194
253,2 t 4
80,441
67,449
l 18,080
394,3 l0
I19,817
325,922
s 5,309,755
$ 4,906,649
$ 4,700,971
30,076
695
(2,086)
610
(1,242)
(ss0)
(1 32)
$2t,644 $
5,900
5,86 8
2,5 83
6,221
r,382
1,816
32,218
6t0
6,391
1,004
2,790
I,472,562
678,244
317,250
l 30,1 80
252,588
7 5,7 52
72,240
(t,e2t)
885
39,219 $ (1,800) $
(1,800)
(384)
3,236
406
166
60,430 $
39,206 $
80,141 $
(l ) Intersegment eliminations reported as operating rcvenues and resource costs represent intercompany purchases and sales ofelectric capacity and
energy between Avista Utilities and Spokane Energy (included in other). Intersegment elirninations reported as interest expense and net income
(loss) attributable to Avista Corp. shareholden represent intercompany interrst.(2) Including interest expense to affiliated trusts.(3) The capital cxpcnditurcs for thc other busincsscs arc included as other capital cxpenditures on thc Consolidated Statcments ofCash Flows. The
remainder ofthe balance included in other capital expenditures on the Consolidated Statements ofCash Flows for 2014 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, ternperatures and streamflow conditions.
137
Appendix 6 to Joint Application Page 144 of 414
Table of Contents
AVISTA CORPORATION
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 fiom operations
Net income (l )
Nct incomc attributablc to noncontrolling intcrcsts
Net income attributable to Avista Corporation shareholders (1 )
Outstanding common stock:
weighted-average, basic
wei ghted-average, diluted
Eamings pcr common share attributable to Avista Corp. shareholders,
diluted (l )
$
s 57,649 S 27.254 $
63,386
63,783
$0.43 $
Threc Monfis Ended
March 3 I June 30
Three Months Ended
June 30 September 30 Decembcr 3l
418,173 $
3 l 2,088
318,838 $
)\'7 )A-7
303,349 $
263,755
402,123
319,590
$ 106,085 s 61,591 $39.594 $82,533
57,665
(l 6)
27,287
(33)
t2.26t
(27)
40.1 03
(l 2)
12,234 S 40,091
62,605
62,907
63,857
64,325
64,1 85
64,620
0.620.92 $0.19 $
September 30 December 3 I
2075
Operatin g revenues from conti nuin g operations
Operating expenses Iiom continuing operations
Income frorn continuin g operations
Net incomc from continuing opcrations
Net income from discontinued operations
Net income
Net income attributable to noncontrolling interests
Net income attributable to Avista Corporation shareholders
Amounts attributable to Avista Corp. sharcholdcrs:
Net income from continuing operations attributable to Avista Corp.
shareholders
Net income frorn discontinued operations attributable to Avista Corp.
shareholderc
Net income attributable to Avista Corp. shareholders
Outstanding common stock :
wei ghted-average, basic
weighted-average, diluted
Eamings per common share attributable to Avista Corp. shareholders,
diluted:
Eamings per common share from continuing operations
Eamings per common share from discontinued opemtions
Total eamings per common share attributable to Avista Corp.
shareholders, diluted
$446,490 $
356.915
337,332 $
279,972
313,649 $
277,73'7
387,305
3 t 6,938
$89,575 $ 57,360 $35,912 $ 70,367
$ 46y'62 $ 2s,078 $12,754 $
289
33,876
4,662196
46,462
(13)
25,274
(28)
13,043
(32)
38,538
(17)
$ 46,449 S 25,246 $13,01l $ 38,521
$46,449 $25,050 $
t96
12,722 $
289
33,859
4,662
$ 46,449 $ 25,246 $13,0rl $ 38,521
$
62,3 l8
62,889
62,281
62,600
62,299
62,688
0.54
0.07
0.74 $0.40 $o.zt s
$0.74 $0.40 $o.2t $0.61
(l) Thc Company adopted ASU 2016-09 during the second quartcrof20l6,with a rctrospective cffcctive date ofJanuary 1,2016. Thc adoption ofthis
standard resulted in a recognized income tax benefit of$ I .6 million in 20 I 6 associated with excess tax benefits on settled share-based employee
payments. Because this standard was adopted in the second quarter of20 I 6, but has a retrospective effective date ofJanuary I , 20 I 6, the effects from the
adoption were pushed back to the firct quarter of20 I 6 and the results for that quarter were recast in the presentation above. In all future reports which
include the first quarter of20 I 6, the results for that quarter will be recast to include the eflects ofthe excess tax benefits recognized.
Appendix 6 to Joint Application
138
Page 145 of4l4
62,308
62,758
Table of Contetrts
AVISTA CORPORATION
Item 9. Chanqes in and Disaqreements with Accountants on Accountinq and Financial Disclosure
Not applicable.
Item 9A, Controls and Procedures
Conclusion Regarding the Elfectiveness ofDisclosure 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
rcquircd to be disclosed by thc Company in thc rcports that it filcs or submits under the Act is accumulatcd and communicatcd to thc 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 ollicer and principal financial officer, the Company's rnanagement 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
disclosurc controls and procedurcs can only provide reasonable assurance ofachieving their control objcctivcs. Based upon this evaluation, thc 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.
Management's Repofi on lntelnal Conttol Over Financial Reporting
The Cornpany's rnanagement, together with its consolidated subsidiaries, is responsible for establishing and rnaintaining adequate intemal control over
financial reporting (as defined in Rule I 3a-l 5(f) under the Securities Exchange Act of I 934). The Company's intemal control over financial reporting is a
process designed under the supervision ofthe Company's principal executive oflicer and principal financial officer to provide reasonable assuntnce
rcgarding thc reliability offinancial rcpofting and the prcparation ofthc Company's financial statcmcnts for cxtcmal reporting purposcs in accordancc with
accounting principles generally accepted in the United States ofAmerica.
The Company's intemal control over financial reporting includes policies and procedures that pertarn to the maintenance ofrecords that, in reasonable detail,
accurately 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 tirnely detection ofunauthorized acquisition, use or disposition ofthe Company's assets tlrat could have a material effect on the
Company's fi nancial statements.
Under the supervision and with the participation ofthe 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
cstablished in Intemal Control-lntcgratcd Framework (201 3) issucd by thc Committee of Sponsoring Organizations of the Trcadway Commission. Bascd 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 I , 20 1 6.
Changes in Internal Control Over Financial Reporling
There have been no changes in the Company's intemal control over financial reporting that occurred during the Company's last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's intemal control over financial reporting.
139
Appendix 6 to Joint Application Page I 46 of 414
AVISTA CORPORATION
REPORT OF INDEPENDENT REGISTERED PLtsLIC ACCOLINTING FIRM
To tlre Board ofDirectors and Shareholders of
Avista Corporation
Spokane, Washington
We have audited the intemal control over financial reporting ofAvista Corporation and subsidiaries (the "Company") as ofDecember 3 1,201 6, based on
criteria establishedin lntemal Conlrol - lntegrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Cornmission.
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 lnlernal Control Over Financial Reporting. Ov
rcsponsibility is to express an opinion on thc Company's intemal control ovcr financial rcporting bascd 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 other procedures as we considered
necessary in the circumstances. We believe that ouraudit provides a reasonable basis forouropinion.
A company's intemal control ovcr financial rcporting is a proccss dcsigncd by, or under the supcrvision of, thc company's principal cxccutivc and principal
financial officers, or persons perlorming similar functions, and effected by the company's board ofdirectors, management, and other personnel to provide
reasonable assurance regarding the reliability offinancial reporting and the preparation offinancial statements for extemal purposes in accordance witlr
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 tmnsactions and dispositions ofthe assets ofthe company; (2) provide
Icasonablc assurancc that transactions are rccordcd as necessary to pcrmit prcparation offinancial statcmcnts in accordance with gcncrally acccptcd
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.
Bccause ofthe inhcrent limitations ofintcmal control over financial rcporting, including the possibility ofcollusion or impropcr managcmcnt ovcrride of
controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections ofany evaluation ofthe
eflectiveness 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 I 6, based on the
criteria establish ed in Internal Control - Integrated Framework (20l3) issued by the Committee ofSponsoring Organizations ofthe Treadway Commission.
Wc havc also audited, in accordancc witlr the standards ofthc Public Company Accounting Ovcrsight Board (Unitcd States), the consolidatcd 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
Scattlc, Washington
February 2l ,2017
140
Appendix 6 to Joint Application
Table of Contents
Page 147 of 414
Table of Contents
AVISTA CORPORATION
Item 9B, Other Information
Nonc.
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 aftertlre date offiling with the SEC the Registrant's definitive Proxy Statement relating to its Annual Meeting ofShareholders scheduled to
be held on May I I, 2Ol'1.fuom such Proxy Statement; and. prior to such date, Iiom the Registrant's definitive Proxy Statement, dated M arch 3 I , 2 0l 6, relating to its Annual Meeting of Shareholders held on
May I 2, 201 6.
Exccutivc Officcrs of the Regisrrant
Namc Business Expcrience
Scott L. Morris 5 9 Chairman, President and ChiefExecutive Officer effective January I , 200 8. Director since February 9,
2007; President and ChiefOperating Officer May 2006 - December 2007; Senior Vice President February
2002 -May 2006; Vice Prcsidcnt Novcmbcr 2000 - Fcbruary 2002; Presidcnt - Avista Utilitics August
2000 - December2008; General Manager- Avista Utilities forthe Oregon and Califomia operations
October I 991 - August 2000; various other rnanagement and staffpositions with the Company since
1981 .
Treasurersince January 2013; SeniorVice 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 ChiefFinancial Offrcer March 2003 to January
2008; SeniorVice President and Chief Financial OfficerMarch 2000 to March 2003;ControllerMay
1997 to March 2000.
Senior Vice President, General Counsel and ChiefCompliance Oflicer since November 2005; Corporate
Secretary since May 20 I 6; Senior Vice President and General Counsel August 2005 - November 2005;
prior to cmploymcnt with thc Company: hcld sevcral lcgal positions with Unitcd Air Lincs, Inc. from 1995
to August 2005, most recently served as Vice President Deputy General Counsel and Assistant Secretary.
Senior Vice President ofHuman Resources since November 2005; Corporate Secretary November 2005 -
April 201 6; Vicc Prcsident ofHuman Rcsourccs and Corporatc Sccrctary March 2003 - Novcmber 2005;
Vice President of Human Resources and Corporate Services February 2O02 - March 2003; various human
resources positions with the Company April I 998 - February 2002.
Scnior Vice Presidcnt since January 20 | 0; Vicc Prcsidcnt July 2007- Decembcr 2009; hesidcnt - Avista
Utilities since January 2009; Vice Presrdent ofEnergy Resources and Optimization - Avista Utilities July
2007 - December 2008; President and Chief Operating Officer of Avista Energy February 2001 - July
2007; various other management and staffpositions with the Company since I 9 8 5.
Senior Vice hesident since January 20 I 4; Vice President ofEnergy Resources since December 2012;Yice
President ofCustomer Solutions - Avista Utilities June 20 I 2 - December 20 I 2; Vice President ofEnergy
DeliveryApril20ll-December2012;VicePresidentofFinanceJune2009-April20ll;variousother
management and staffpositions with the Company since 1996.
Vice President, Controllerand Principal Accounting Officersince October20l5; various otlter
management and staffpositions with the Company since 2001 .
Vice President of Customer Solutions since February 201 5; various other management and staffpositions
with the Cornpany since 2005.
Vicc President and Chief Information Officcr since January 2007; Chicf Information Officcr Fcbruary 2001
- December 2006; various other management and staffpositions with the Company since 1 996.
Vice President and ChielCounsel for Regulatory and Govemmental Aflairs since February 2004; Senior
Vicc Prcsident and Gcneral Counsel Septembcr 1 998 - Fcbruary 2004.
Marian M. Durkin
Karen S. Feltes 6l
Dcnnis P. Vcrmillion
141
Agc
53
63
55
Jason R. Thackston
Ryan L. Krasselt
Kevin J. Christie
Jamcs M. Kensok
David J. Meyer
47
47
49
58
63
Appendix 6 to Joint Application Page 148 of414
Mark T. Thies
Table of Contents
AVISTA CORPORATION
Executive Officers of the Registrant
Natnc Age
58
Business
Vice President since November 2000; Vice President ofState and Federal Regulation - Avista Utilities
since March 2002:Yice President and General Manager of Energy Resources - Avista Utilities August
2000 - March 2002; various other rnanagement and staffpositions with the Company since I 981 .
Vice Prcsident ofEncrgy Delivery sincc Dcccmbcr 20 I 5; various othcr managemcnt and staffpositions
with the Company since 1996.
Vice President and ChiefStrategy Officer since September 20 I 5; prior to employment with the Company,
Executivc Vicc Prcsident ofCorporatc Dcvelopmcnt at Ecova, Inc.
Kelly O. Norwood
Hcathcr L. Rosentratcr
Edward D. Schlect Jr.
39
56
All of the Company's executive officers, with the exception of James M. Kensok, David J. Meyer, Kelly O. Norwood, Kevin J. Christie and Heather L.
Rosentraterwere officerc ordirectors of one ormore ofthe Company's subsidiaries in 2016. The Company's executive omcers are elected annually by the
Board ofDirectors.
The Company has adopted a Code ofConduct for directors, o{ficers (including the principal executive officer, principal financial officer and principal
accounting officer), and ernployees. The Code of Conduct is available on the Company's website at $vw.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, Washington 99220 -3'7 27
Any changes to orwaivers for executive officers and directors ofthe Company's Code ofConduct will be posted on the Company's website.
Item I I. Executive Comoensation
The information required by this Item 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 relating to its Annual Meeting of Shareholders
scheduled to be held on May I I ,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 I 2. Securitv Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Security ownership ofcertain beneficial owners (orming 5 percent ormore ofRegistrant's voting securities):
Information rcgarding sccurity ownership ofccrtain bcncficial owners (owning 5 pcrccnt or more ofRcgistrant's voting sccuritics) has been
omitted pursuant to General Instruction G to Form l0-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
schedulcd to bc hcld on May I 1,201 7, from such Proxy StatemenU and
. prior to such date, from the Registrant's definitive Proxy Statement, dated March 3 I , 2016, relating to its Annual Meeting of
Shareholders held on May 12,2016; reference also being made to Schedules I 3G, as amended, in file with the SEC with respect to the
Registrdnt's voting securities (the infonnation contained in such schedules I 3G, as amended, not being incorporated herein by
reference).
(b) Securityownershipofmanagement:
The information required by this Item regarding the security ownership ofmanagement is omitted pursuant to General Instruction G to Form
1 0-K. Such information is incorporated hcrcin by rcfcrcnce 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 I , 20 I 7, 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.
142
Appendix 6 to Joint Application Page 149 of 414
Tabh of Contents
AVISTA CORPORATION
(c)
(d)
Changes in control:
None
Sccuritics authorized for issuance under equity compensation plans as ofDcccmbcr 3 I , 20 I 6
(a)
Number of sccuritics to bc
issued upon exercise of
outstanding options,
warants and rights
(1)
(b)
Wcightcd avcragc
exercise price of
outstanding options,
warrants and rights
(c)
Number of recurities remaining
available for future issuance undcr
equity compensation plans
(cxcluding securities reflected in
column (a))Plan category
Equity compensation plans approved by security
holders (2)$1,152,979
(l ) Excludes unvested restricted shares and performance share awards granted under Avista Corp.'s Long-Term Incentive Plan. At Decernber 3 I , 20 I 6,
I 09,806 Restricted Share awards were outstanding. Performance and market-based share awards may be paid out at zero 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 orperformance and market-based share awards, such shares are not included in the weighted-average price calculation.(2) Includes the Long-Term lncentive Plan approved by shareholders in I 998 and the Non-Employee Director Stock Plan approved by shareholders in
1996. In February 2005, the Board of Directors elected to terminate the Non-Employee Director Stock Plan.
Item I 3, Certain Relationships and Related Transactions. and Director Indeoendence
The information rcquircd by this Item is omitted pursuant to General Instruction G to Form 1 0-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 ofShareholders
scheduled to be held on May I 1,2017, from such hoxy Statement; and. prior to such date, from the Registrant's definitive Proxy Statement, dated March 3 I , 20'l 6, relating to its Annual Meeting of Shareholders
held on May 12,2016.
Item I 4. Princinel Accounting Fees and Services
The information rcquired by this Item 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 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 3l ,2016, relating to its Annual Meeting of Shareholders
held on May 12,2016.
143
Appendix 6 to Joint Application Page 150 of414
Table of Contcnts
AVISTA CORPORATION
PART IV
Item I 5. Exhibits. Financial Statement Schedules
(a) l. Financial Statements (Included in Part II ofthis report):
Report oflndependent Registered Public Accounting Firm
Consol i datcd Statcmcnts of Incomc for thc Ycars Ended December 3 1 , 20 1 6, 20 I 5 and 2014
Consolidated Statements ofcomprehensive Income for the Years Ended December 3 l, 20 16,2015 and 2Ol4
Consolidated Balance Sheets as ofDecember 3 I , 20 I 6 and 20 I 5
Consolidated Statements ofCash Flows for the Years Ended December 31,20'16,201 5 and 2014
Consolidated Statements of Equity and Redeemable Noncontrolling Interests for the Years Ended December 3 I , 20 I 6, 20 I 5 and 2014
Notes to Consolidated Financial Statements
(a) 2. Financial Statcmcnt Schcdulcs:
None
(a) 3. Exhibits:
Reference is made to the Exhibit Index commencing on page l47.The Exhibits include the management contracts and compensatory
plans or arrangements required to be filed as exhibits to this Form I 0-K pursuant to Item I 5(b).
144
Appendix 6 to Joint Application Page I 51 of414
Table of Contents
AVISTA CORPORATION
SIGNATT]RES
Pursuant to the requirements ofSection I 3 or I 5(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalfby the undersigned, thereunto duly authorized.
AVISTA CORPORATION
February 2l,2017 By /s/ Scott L. Morris
Datc Scott L. Morris
Chairman of the Board, President and Chief Executive Officer
Pursuant to the requiremcnts ofthc Sccuritics Exchange Act of I 934, this report has been signcd bclow by the following pcrcons on bchalfofthc
Registrant and in the capacities and on the dates indicated.
Sisnaturc Titlc Darc
/s/ Scott L. Morris Principal Executive Offi cer February 21,2017
Scott L. Morris
Chairman ofthe Board, President
and Chicf Exccutivc Officer
/s/ Mark T. Thies Principal Financial Offi cer February2l,20l7
Mark T. Thies (Senior Vice President,
Chief Financial Officer, and Treasurer)
/s/ Rvan L. Krasselt Principal Accounting Officcr Fcbruary 2l,2Ol7
Ryan L. Krasselt (Vice President,
Controller and Principal Accounting Officer)
/s/ Erik J. Anderson Director February 2l ,2017
Erik J. Anderson
/s/ Kristianne Blake Director February 21,2017
Kristianne Blake
isl Donald C. Burke Dire ctor February 21,2017
Donald C. Burkc
/s/ John F. Kelly Director February 21,2017
John F. Kelly
/s/ Rebecca A. Klein Director Febnrary 21,2017
Rebecca A. Klein
/s/ Marc F. Racicot February 21,2017
Marc F. Racicot
Appendix 6 to Joint Application
145
Director
Page I 52 of 414
Tabl€ of Contentr
AVISTA CORPORATION
/s/ Heidi B. Stanley
R. John Taylor
/s/ Janet D. Widmann
Director
Dircctor
Director
Dircctor
February 21,2017
Fcbruary 2l ,2017
February 21,2017
Fcbruary 21,2017
Janet D. Widmann
/si Scott H. Maw
Scott H. Maw
146
Heidi B. Stanley
/s/ R. John Taylor
Appendix 6 to Joint Application Page 153 of4l4
Table of Contcnts
AVISTA CORPORATION
3.1 (with June 30,2012 Form l0-Q) 3.1
3.2 3.2
4.1
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.1 0
4.1|
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
EXHIBIT INDEX
Restated Articles oflncorporation ofAvista Corporation, as amended and restated June
6,20t2.
Bylaws of Avista Corporation, as amended November I 4, 2014.
Mortgagc and Dced of Trust, datcd as of June I , I 93 9.
First Supplemental lndenture, dated as ofOctober I , I 952.
Second Supplemental Indenture, dated as ofMay l, I 953.
Third Supplemental Indenture, dated as ofDecember I , I 955.
Fourth Supplemental Indenture, dated as ofMarch I 5, I 967.
Fifth Supplemental Indenture, dated as ofJuly I , I 957.
Sixth Supplemental Indenture, dated as ofJanuary l, I 958.
Seventh Supplemental Indenture, dated as ofAugust l, I 958.
Eighth Supplemental Indenture, dated as ofJanuary l, I 959.
Ninth Supplcmcntal Indenturc, datcd as ofJanuary l, I 960.
Tenth Supplemental Indenture, dated as ofApril 1,1964.
Eleventh Supplemental Indenture, dated as ofMarch l, I 965.
Twelfth Supplemental Indenture, dated as of May l, 1966.
Thirteenth Supplcmcntal Indcnturc, datcd as ofAugust I , I 966.
Fourteenth Supplemental Indenture, dated as ofApril 1, 1 970.
Fifteenth Supplemental Indenture, dated as ofMay l, I 973.
Sixteenth Supplemental Indenture, dated as ofFebruary I ,197 5.
Seventeenth Supplemental Indenture, dated as ofNovember l,1976.
Eighteenth Supplemental lndenture, dated as ofJune I , I 980.
Nineteenth Supplemental Indenture, dated as ofJanuary l, I 98 l.
Twentieth Supplemental lndenture, dated as ofAugust 1,1982.
Twenty-First Supplemental Indenture, dated as ofSeptember l, I 983,
Twenty-Second Supplemental Indenture, dated as ofMarch 1, I 984.
t47
Previously Filed (l)
Wirh
Rcgistration
NumberExhibit
4.23
Exhibit
(with Form 8-K filed as of
November 14,2Ol4)
2407'7
2-9812
2-60728
2-13421
2-t3421
2-60728
2-60728
2-60728
2-60728
2-60728
2-60728
2-60728
2-60728
2-60728
2-60728
2-60728
2-60728
2-60728
2-69080
(with 1980 Form I 0-K)
2-79571
(with Form 8-K dated
September 20, I 983)
2-94816
B-3
4(c)
2b}2
4(b!3
4(b)-4
2(b)-5
20)-6
2(b)-7
2(b).8
2(b)-e
2(bll o
2(b)-l l
2(b)-12
2(b)'1 3
2(b)-r4
2(b)-r s
2(b)-r 6
2(b)-17
2(b>18
4(a)-20
4(a)-21
4(a)-22
4(a\23
Appendix 6 to Joint Application Page 1 54 of 414
Table of Contcnts
AVISTA CORPORATION
Previously Filed (l)
Wirh
Registration
Exhibit Number
As
Ex h ibit
4.24
4.25
4.26
4.27
4.28
4.29
4.30
4.31
4.32
4.33
(with 1986 Form l0-K)
(with 1987 Form l0-K)
(with 1989 Form l0-K)
33-5 l 669
(with 1993 Form l0-K)
(with 2001 Form I 0-K)
333-82502
(with June 30,2002 Form l0-Q)
333-3955 I
(with September 30,2003 Form I 0-
a)
333-646s2
(with Form 8-K dated as of
Decernber I 5, 2004)
(with Form 8-K dated as of
December I 5, 2004)
(with Form 8-K datcd as of
December 15,2004)
(with Form 8-K dated as of
Dcccmber 15,2004)
(with Form 8-K dated as ofMay 12,
200s)
(with Fonn 8-K dated as of
November I 7,2005)
(with Form 8-K dated as ofApril 6,
2006)
(with Form 8-K dated as of
December I 5, 2006)
(with Fonn 8-K dated as ofApril 3,
2008)
(with Form 8-K dated as of
November 26, 2008)
(with Form 8-K datcd as of
December I 6, 2008)
(with Form 8-K dated as of
Deccrnber 30, 2008)
(with Form 8-K dated as of
September I 5, 2009)
(with Fonn 8-K dated as of
November 25, 2009)
(with Form 8-K dated as of
December I 5, 20 I 0)
(with Form 8-K dated as of
December 20, 20 I 0)
Twenty-Third Supplernental Indenture, dated as ofDecember l, I 986.
Twcnty-Fourth Supplemcntal lndcnture, datcd as ofJanuary l, 1988.
Twenty-Fifth Supplemental Indenture, dated as ofOctober l, I 989.
Twenty-Sixth Supplemental Indenture, dated as of April I , I 993.
Twenty-Seventh Supplemental Indenture, dated as ofJanuary I ,1994.
Twenty-Eighth Supplcmcntal Indcnturc, datcd as of Scptcmber I , 200 I
Twenty-Ninth Supplemental Indenture, dated as ofDecember I , 200 I .
Thirtieth Supplemental Indenture, dated as of May 1,2002.
Thirty-First Supplemental Indenture, dated as of May 1,2003.
Thirty-Second Supplernental Indenture, dated as of September l, 2003.
Thirty-Third Supplemental Indenture, dated as of May 1,2004.
Thirty-Fourth Supplernental Indenture, dated as ofNovember l, 2004
Thirty-Fifth Supplemental Indenture, dated as ofDecember 1,2004.
Thirty-Sixth Supplemental Indcnturc, datcd as ofDcccmbcr 1,2004.
Thirty-Seventh Supplemental Indenture, dated as ofDecember 1,2004.
Thirty-Eighth Supplemental Indenture, dated as of May l, 2005.
Thirty-Ninth Supplemental Indenture, dated as ofNovember I ,2OO5 .
Fortieth Supplemental Indenture, dated as ofApril l, 2006.
Forty-First Supplementat lndenture, dated as ofDecember l, 2006.
Forty-Second Supplemental Indenture, dated as ofApril 1,2008.
Forty-Third Supplemental Indenture, dated as ofNovember l, 2008.
Forty-Fourth Supplcmcntal Indcnturc, dated as ofDcccmber 1,2008.
Forty-Fifth Supplemental Indenture, dated as ofDecember l, 2008.
Forty-Sixth Supplemental Indenture, dated as ofSeptember 1,2009.
Forty-Seventh Supplernental Indenture, dated as ofNovember l,2009.
Forty-Eighth Supplemental Indenture, dated as ofDecember I , 20 I 0.
Forty-Ninth Supplemental lndenture, dated as ofDecember I , 20 I 0.
4(a)-24
4(a)-2s
4(a)-26
4(aY27
4(a)-28
4(a)-29
4(b)
4(f)
4(b)
4(f)
4.34
4.35
4(a)33
4.t
4.2
4.3
4.4
4.1
4.1
4.1
4.1
4.1
4.1
4.1
4.3
4.t
4.1
4.5
4.1
4.36
4.37
4.38
4.39
4.40
4.4t
4.42
4.43
4.44
4.4s
4.46
4.47
4.48
4.49
4.50
Appendix 6 to Joint Application
148
Page 155 of414
Tabl€ of Contctrts
AVISTA CORPORATION
Previously Filed (l)
Exhibit
Wirh
Registration
Number
As
Exh ib it
4.51
4.52
4.53
4.54
4.55
4.56
4.57
4.58
4.59
4.60
4.61
4.62
4.63
4.64
(with Fonn 8-K dated as of
December 30, 20 I 0)
(with Form 8-K dated as of
Februaryll.20ll)
(with Form 8-K dated as of
Augustl6,20ll)
(with Form 8-K dated as of
December 14,2011)
(with Form 8-K dated as of
November 30, 20 I 2)
(with Form 8-K datcd as ofAugust
14,2013)
(with Form 8-K dated as of April
18,2014)
(with Form 8-K dated as of
December I 8, 2014)
(with Form 8-K dated as of
December I 6, 201 5)
(with Form 8-K dated as of
December I 6, 20 I 6)
(with Form 8-K dated as of
December I 5, 2004)
333-82165
4.1
4.1
4.1
4.1
4.1
4.t
4.1
4.1
4.1
4.1
4.5
4(a)
4.1
4.3
3.1
3.2
N/A
10.1
Fiftieth Supplemental Indenture, dated as ofDecernber I , 20 I 0
Fifty-First Supplemental Indenture, dated as ofFebruary l, 20 I I
Fifty-Second Supplemental lndenture, dated as ofAugust I , 20 I I
Fifty-Third Supplemental Indenture, dated as ofDecernber 1,201 I
Fifty-Fourth Supplemental Indenture, dated as ofNovember I , 20 I 2.
Fifty-Fifth Supplemcntal Indcnturc, datcd as ofAugust I , 20 I 3.
Fifty-Sixth Supplemental Indenture, dated as of April I ,201 4 .
Fifty-Seventh Supplemental Indenturc. dated as ofDecembel I , 20 I 4.
Fifty-Eighth Supplemental Indenture, dated as ofDecember I , 20 I 5
Fifty-Ninth Supplemental Indenture, dated as ofDecember l, 201 6
Supplcmcntal lndcnture No. l, dated as ofDecembcr 1,2004 to the Indcnturc dated as of
Apnl l, '1998 between Avista Corpomtion and JPMorgan Chase Bank, N.A.
Indenture dated as ofApril l, 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 of Forsyth, Montana Pollution Control Revenue Refunding Bonds
(Avista Corporation Colstrip Project) Series 20 1 0A dated as ofDecember I , 20 I 0.
Trust Indenture between City of Forsyth, and the Bank ofNew York Mellon Trust
Cornpany, N.A., as Trustee, $66,700,000 City of Forsyth, 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 of Forsyth, Montana Pollution Control Revenue Refunding Bonds
(Avista Corporation Colstrip Project) Series 20 I 0B dated as ofDecember I , 20 1 0.
Trust Indenture between City of Forsyth, and the Bank ofNew York Mellon Trust
Company, N.A., as Trustee, $ 17,000,000 City of Forsyth, Montana Pollution Control
Revenue Refunding Bonds (Avista Corporation Colstrip Project) Series 20 I 0B, dated as
ofDecembcr 1,2010.
Restated Articles oflncorporation ofAvista Corporation, as amended and restated June
6,2012 (see Exhibit 3.1 herein).
Bylaws of Avista Corporation, as amended Novernber 14,2014 (see Exhibit 3.2 herein).
Post-Effective Amendment No. I on Form l0/A, filed February 26,2015, to Registration
Statement on Fonn I 0, filed September I 952.
Credit Agreement, dated as ofFcbruary I 1 , 20 I I , among Avista Corporation, thc Banks
Party hereto, The Bank ofNew 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.
4.65
4.66
4.67
4.68
4.69
I 0.1
(with Form 8-K dated as of
December I 5, 20 I 0)
(with Form 8-K dated as of
Decernber I 5, 20 I 0)
(with Fonn 8-K dated as of
Decernber I 5, 20 I 0)
(with Fonn 8-K dated as of
Decernber I 5, 20 I 0)
(with June 30,2012 Form l0Q)
(with Form 8-K filed as of
November 14,2014)
(Form l0/A)
(with Form 8-K dated as of
February l l,2011)
4.2
4.4
Appendix 6 to Joint Application
149
Page I 56 of 414
Table of Contents
AVISTA CORPORATION
Previously Filed (l)
wilh
Registration As
Exh ib itExhibit Number
10.2
10.5 (with 2002 Form l0-K)l0(b)-3
10.6 (with 2002 Form I0-K)l0(b)4
10.7 (with 2002 Form I 0-K)l 0(b)-s
2-60728 5(g)
2-60728 s(g)-l
2-60728 s(h)
2-60728 s(h)-l
(with Scptembcr30,1985 Form 10- 1
a)
Second Amendment to Credit Agreement, dated as ofApril I 8, 20 I 4, 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 hcrcofas Continuing Lendcrs and Exiting Lendcr.
Bond Delivery Agreement, dated as ofApril I 8, 20 I 4, between Avista Corporation and
Union Bank, N.A.
First Amendurent and Waiver Thereunder, dated as of Decernber 14, 201 I , to the Credit
Agreement dated as ofFebruary I I , 20 | 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
Grant County, Washington and Avista Corporation dated Decernber 12,2001 (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 l, 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 I , 2005 for the Priest Rap ids Development and November I ,
2009 lorthe Wanapum Development).
Power Sales Contract (Wells Project) with Public Utitity District No. I of Douglas
County, Washington, dated as ofSeptember I 8, I 963.
Amendment to Power Sales Contract (Wells Project) with Public Utility District No. 1 of
Douglas County, Washington, dated as ofFebruary 9,1965.
Reserved Share Power Sales Contract (Welts 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
District No. I ofDouglas County, Washington, dated as ofFebruary 9,1965.
Settlemcnt Agreement and Covenant Not to Suc cxccutcd by the United Statcs
Department ofEnergy acting by and through the Bonneville Power Administration and
the Company, dated as ofSeptember I 7, I 985, describing the settlement ofProject 3
litigation.
Orvnership and Operation Agreement for Colstrip Units No. 3 & 4, dated as of May 6,
1981.
Avista Corporation Exccutivc Dcfcrral Plan. (3)
Avista Corporation Executive Deferral Plan. (3)(8)
Avista Corporation Supplemental Executive Retirement Plan. (3X8)
Avista Corporation Supplemental Executive Retirement Plan. (3X8)
Thc Company's Unfundcd Supplcmcntal Executivc Disability Plan. (3)
Income Continuation Plan of the Company. (3)
150
(with Fonn 8-K dated as of
April I 8, 2014)
(with Form 8-K dated as of
April 18,2014)
(with Form 8-K dated as of
December 14,201 l)
(with 201 1 Form l0-K)
(with 201 I Form I 0-K)
(with 201 I Form I 0-K)
(with 201 I Form I 0-K)
(with 1992 Form l0-K)
(with 2007 Form l0-K)
l 0.l
10.2
l0.l
I 0(s)-7
10.15
10.16
10.17
10.18
I 0(t)-l I
10.34
10.3
10.4
t 0.8
10.9
10.10
l0.l I
10.t2
10.14
10.15
10.16
10.17
10.18
10.19
10.13 (with 1981 Form l0-K)
Appendix 6 to Joint Application Page 1 57 of 414
Table of Contents
AVISTA CORPORATION
Previously Filed (l)
Wirh
Registration
Number Exhibit
Appendix A Avista Corporation Long-Term Incantive Plan. (3)
Avista Corporation Performance Award Plan Summary. (3)
Avista Corporation Performance Award Agreement 201 4. (3)
Avista Corporation Perfonnance Award Agreement 2015. (3)
Avista Corporation Performance Award Agreement 2016. (3)
Employment Agreement between the Company and Marian Durkin in the form of a
Letter of Employment. (3)
Employmcnt Agreemcnt bctwccn the Company and Mark T. Thics in the form of a
Letter of Employment. (3)
Non-Officer Employee Long-Term Incentive Plan.
Fonn ofChange ofControl Agreement between the Company and its Executive Officers.
(3X5)
Form of Change of Control Agreement between the Company and its Executive Omcers.
(3X6)
Form of Change of Control Agreement between the Company and its Executive Officers.
(3X7)
Form of Change of Control Agreement between the Company and its Executive Officers.
(3X7)
Avista Corporation Non-Employee Director Compensation.
Statement Re: computation ofratio ofeamings to fixed charges.
Subsidiaries of Regi strant.
Consent oflndependcnt Rcgistcrcd Public Accounting Firm.
Certification of Chief Executive Officer (Pursuant to I 8 U.S.C. Section I 350, as
Adopted Pursuant 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 of Corporate Officers (Pursuant to l8 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 ofthe Sarbanes-Oxley Act of2002).
The following financial information from the Annual Report on Form I 0 K for the
period ended December 3 I , 201 6, formatted in XBRL (Extensible Business Reporting
Language) and filed electronically herewith: (i) the Consolidated Statements oflncome;
(ii) Consolidated Statements ofComprehensive Income; (iii) the Consolidated Balance
Sheets; (iv) the Consolidated Statements ofCash Flows; (v) the Consolidated
Statements ofEquity and Redeemable Noncontrolling Interests; and (vi) the Notes to
Consolidated Financial Statements.
As
Ex h ibit
I 0.21
10.22
10.23
10.24
10.25
10.23
10.30
10.31
101
10.1
99. r
t 0.20
10.26
10.27
| 0.28
10.29
10.30
10.31
(with 2010 Definitive Proxy
Statement filed March 31, 2010)
(with 2010 Form I 0-K)
(with 2014 Form l0-K)
(with 201 5 Form I 0-K)
(2)
(with Form 8-K dated June 2 1,
200s)
(with Form 8-K dated August 13,
2008)
33347290
(with 2010 Form l0-K)
10.32
t2
2t
23
3l.l
(with 2010 Form I 0-K)
(with 2010 Form 10-K)
(with 201 0 Form I 0-K)
Incorporated herein by reference.
Fited 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. Vemillion.
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)
(2)
(2)
(2)
31.2
32
101
(2)
(4)
(2)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Appendix 6 to Joint Application Page 158 of4l4
Tahle of Contents
AVISTA CORPORATION
(8)Applies to executive officers appointed after February 4,201I . This applies to Kevin J. Christie, Ryan L. Krasselt, Ed D. Schlect and Heather L.
Rosentrater.
152
Appendix 6 to Joint Application Page I 59 of 414
Exhibit 10.24
AVISTA CORPORATION PERFORMAN C E AWARD AGRE EMENT
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 Administrato/).
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)
(b) The "Grant Date" is February 4,2016.
(c) 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 Cycle, 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, 2018.
2. Conditions to Award. Pursuant to this Award, the number of Performance Awards eamed will depend upon the
Company's performance against specific performance metrics. The performance metrics are (i) Relative Total Shareholder Retum,
which accounts for (# of) units of the total target award as set forth in section 'l(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 with 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 earned 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 1 of 10
Appendix 6 to Joint Application Page 1 60 of 414
Aivtsra X
performance goals), or in a combination of the two, as determined by the Plan Administrator in its sole discretion, 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 otherwise 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 Rights. Any Performance Awards may, in the Plan Administrato/s discretion, eam Dividend Equivalent Rights.
ln respect of any Performance Award 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
PerformanceAward 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 ol 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 other
portion of the Performance Award. In 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 delermines 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 rights 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 1 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
04105tr6 Page 2 of10 Aistsra
Appendix 6 to Joint Application Page I 6l of 414
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 Market Value of a share of Common Stock determined under the provision of section 3 as of the date of the Change in
Control. Distributions 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 Rights eamed by and payable to the Participant shall be reduced by the number of Performance
Awards and Dividend Equivalent Rights with respect to which payment was made to the Participant under this section.
8. Taxes. The Participant is liable for any and all taxes, including withholding taxes, arising out of the grant, vesting, payment or
settlemenl of any Performance Awards and Dividend Equivalent Rights. The Company shall have the 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 othenvise, 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 ol the amended and restated Avista Corp. Long Term
lncentive Plan.
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.
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.
Retirement. "Retirement" of the Participant shall mean retirement as of the individual's retirement date under the Retirement Plan
for Employees of Avista Corporation or other similar successor plan applicable to employees.
10. Assignabiiity. 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 permrt 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
04l05lt 6 Page 3 ofl0
(b)
(c)
(d)
Appendix 6 to Joint Application Page 162 of 414
Avtsta
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. PerformanceAwards 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.
11.2 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 lo 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 will
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 entifled 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 PIan 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 theAgreement is determined to be invalid, illegal or unenforceable in any jurisdiction, or
as to any person, or would disqualify any Performance Award under any law deemed applicable by the Plan Administrator, 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 the 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.
04/05tr6 Page 4 ofl0
Appendix 6 to Joint Application Page I 63 of4l4
frttsta
14. Arnendment. This Agreement may be amended by written agreement of the Padicipant 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 otheruise 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 manner and 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 othenrvise.
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 Page 5 ofl 0
Appendix 6 to Joint Application Page I 64 of414
*vtsta
EXHIBIT 1
Performance Award Plan
Relative Total Shareholder Return Metric and Goals
2016 - 201E Performance Cycle
The following graph and table represent the relationship between the Company's relative three-year Total Shareholder Retum ("TSR') commencing
January 1,2O16 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 to 2001o 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
among them. To receive '1 00% of the Award allocated under this metric, Avista must perform at the 50th percentile among the companies in the
S&P
400 Utilities lndex. To receive200o/o of theAward, Avista must rank at the l00thpercentile. 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 Relative TSR Percentile Rank
200Va
150%
100%
50%
0%40th 45th 50th 70th 85th
Target
Fz
Fd
e
Min
10oth
Max
Pavout Factor
200%
150%
125%
100%
7Oyo
40%
No Award
Relative TSR Percentile
Maximum
Target
Threshold
I 001h
8 5,h
70,h
50rh
45rh
40'h
<40'h
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.
04/05lt6 Page 6 of10
Appendix 6 to Joint Application Page I 65 of 414
lFrtsra
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.
Seftlement Formula 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 4Shpercentile after the three-year Performance Cycle, the Participant would receive 70o/o ol 970 or 679 shares of Avista
common stock plus
cash dividend equivalents.
Payout Factor
(oh olTarget)
Target Number of Perlbrmance Awards
Granted
Percentile Rank
100.0%
98.2%
17.8%
16.0%
| .7o/o
0.0o/o
Final Number of Common Stocks Issued
70%x 970 679 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 interpolating 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:
Comoanv Rankins
I
2
47 (ABC Corp)
48 (XYZ Corp)
56
5'7
TSR
201.6%
t35.9%
20.3%
16.0%
-3.3o/o
-10.5%
lf a company's TSR is 18.9%, the resulting percentile ranking would be 17%, calculated as follows: 17oh = 16.0o/0 + [(18.9% - 16.0%) I (20.3o/o -
16.0%) . (',t7.8% - 16.0%)I
Total Shareholder Return (tSR) 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 S34.45 (11128120'14). Dividends are reinvested on a daily basis. For this example, a fictional ex-date for dividends per
share is used for
04105116 Page 7 ofl 0
Appendix 6 to Joint Application Page I 66 of 414
Aststa
demonstration purposes. Daily retums are calculated over the performance cycle and added together resulting in the Cumulative TSR for the
performance cycle.
Date Closins Price Dividend
ll2t/2014 33.90 0
|t24t2014 33.80 0
lu25l20t4 34.06 0.3 175
I I 126/2014 34.29 0
t t t27 t2014 34.29 0
11128/2014 34.45 0
Cumulative TSR I I l2l 12014 ro I I12812O14
Daily TSR
NA
(0.29s0%)
1.7086%+
0.67 530/n
0.00%
0.4666%
2.5555%
* [(34.06 + 0.3175) / 33.80] -l
EXHIBIT 2
Performance Award Plan
Cumulative Earnings 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 200o/o of the target number of units allocated under this metric. The actual issuance of shares depends
on Avista's CEPS groMh performance over the three-year Performance Cycle. To receive 100% of the Performance Award allocated under this
metric, Avista must achieve CEPS compounded groMh of 4.50o/o based on eamings guidance. To receive 200o/o ol 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 out 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 Grorvth EPS
2OlYo
1s0%
100%
SOVo
0%
3o/o
Min
3.750/o 4.sa/o
Target
5.25Yo 6oy'a
Max
041051t6 Page 8 ofl0
Fz
EO
Appendix 6 to Joint Application Page 167 of414
*ttsta
Maximum
Target
3-Year Cumulative Grovth
6.0o/o
5.625%
5.250/"
4.87s%
4.5%
4.125%
3.75%
3.375%
3%
<30
Pavout Factor
200%
t75%
150%
125%
1000/o
85%
70%
55%
40%
No Award
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.
Seftlement Formula Example:
Assuming that 485 Performance Award units were allocated under this metric at the beginning of the Performance Cycle and Avista's cumulative
EPS grew 4.875% over three years, the Participant would receive 125o/o of 485 or 607 shares of Avista common stock plus dividend equivalents
in cash.
Target Number of Performance Awards
Granted Number of Common Stocks Issued
125%x 485 607 shares plus cash dividends
Using the example formulas in Exhibit 1 and Exhibit 2, the Participant would receive in total 88% of 1,455 (total target # of PerformanceAwards
granted) or 1,286 Shares of Common Stock plus cash dividend equivalents.
Payout Factor
(7o ofTarget)
Payout Factor
(o/" ofTarget)
Target Number of Performance
Awards Granted
TSR
CEPS
Total
7 0o/o
125%
E80h
x
x
x
970
485
1,455
Page 9 ofl0
679
607
I,286
04105n6
II
,*ststa
Appendix 6 to Joint Application Page 1 68 of 414
Number of Common Stocks Issued
ACCEPTANCE AND ACKNOWLEDGM ENT
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, warranties and acknowledgments, and undertake the indemnity and other obligations, therein specified.
Dated:
Social Security Number Signature of Employee
Printed Name
041051t6 Page l0 ofl0 /iiststa
Appendix 6 to Joint Application Page 169 of 414
Exhibit 10.32
Avista Corporation
Non-Employee Director Compensation - 201 6
Prior to August 17 ,2016, directors who were not employees of the Company received an annual retainer of $ I 40,000 with $65,000 of the total retainer to be
paid in stock each year. Directors had the option oftaking the remaining $75,000 in cash, stock or a combination ofboth cash and stock. The cash portion of
the retainerispaid quarterly. Directorswere also paid $1,500 foreach meeting ofthe Board orany Committee meeting ofthe Board. Directorswho served as
Board Committee Chairs received an additional $7,500 annual retainer, with the exception of the Audit Committee Chair, who received an additional
$13,000 annual rctaincrand thc Compcnsation Committcc Clrair, who rcceivcd an additional $10,000 annual rctainer. Thc Lcad Directorrcccived 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 17,2016 meeting, the Board reviewed survey results lrom Meridian regarding cunent pay practices for director compensation. The Board
approvcd an incrcasc in the annual retainerofan additional $5,000, effective Septembcr 1,2016. Thc total annual rctaincris now $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, Govemance,t{ominating Committee Chair is now $10,000, Environmental, Technology & Operations Committee
Chair is now $ 10,000 and the Finance Committee Chait Retainer is now $ 10,000.
Each director is entitled to reimbursement ofreasonable out-of-pocket expenses incurred in connection with meetings of the 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 ormership expectation for all Board members. Outside directors are expected to achieve a minimum investment of five
timcs thc minimum portion of thcir cquity rctaincr payablc in Company common stock within five ycars of becoming a Board mcmber, and rctain at least that
level of investment dunng his/her tenure as a Board member. Shares previously deferred under the former Non- Employee Director Stock Plan count for
purposes ofdetermining whether a director has achieved the ownership expectation. Directors are prohibited frorn engaging in shon-sales, pledging, or
hedging the economic interest in their Company shares.
The orvnership expectation illustrates the Board's philosophy ofthe importance ofstock ownership fordirectors to further strengthen the commonality of
interest between the Board and shareholders. The Govemance Committee annually reviews director holdings to determine whether they meet ownership
cxpcctations. All dircctors currently comply bascd on theirycars ofservicc completcd on thc Board.
There were no annual stock option grants or non-stock incentive plan compensation payments to directors for sewices 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 directorwho served during any part ofthe 201 6 fiscal year.
Appendix 6 to Joint Application Page 170 of4l4
Exhibit 12
AVISTA CORPORATION
Computation of Ratio of Eamings to Fixed Charges
Consolidated
(Thousands ofDollars)
Years Ended December 3 I
20 I 5 20t4 201 3 2012
$ 86,897 $
Total fixed $ 9l ,612 S ls $l$
9 $ t92,t06 $ 162,347 S 1r6,567
Ratio of eamings to fixed charges 3.32 3.13 3.39 3.02 2.48
Appendix 6 to Joint Application Page 171 of4l4
201 6
Fixed charges, as defined:
lnterest charges
Amortization ofdebt expense and premium - net
Interest portion of rentals
Eamings, as defincd:
Pre-tax income from continuing operations
Add (deduct):
Capitalized interest
Total fixed charges above
Total eamings
(3,546) (3,e24) (3,676) (2,401)
85,315 78,84'7 ',78,73t 76,940
(2,651)
91,612
$ 304,363 $ 267,388 g 267,029 $ 237,402 $ 191,106
Exhibit 2l
AVISTA CORPORATION
SUBSIDIARIES OF REGISTRANT
State or CountrySrrhsidiaru oflncomomtion
Avista Capital,Inc. Washington
Avista Development, Inc. Washington
Avista Energy, Inc. Washington
Avista Northwest Rcsources, LLC Washington
Pentzer Corporation Washington
Pentzerventure Holding II, Inc. Washington
Bay Area Manufacturing, Inc. Washington
Advanccd Manufacturing and Dcvelopment, Inc. Califomia
Avista Capital II Delaware
Steam Plant Square, LLC Washington
Steam Plant Brew Pub, LLC Washington
Courtyard Office Center, LLC Washington
Alaska Energy and Resources Company Alaska
Alaska Electric Light and Power Company Alaska
AJT Mining Properties, Inc. Alaska
SnettishamElectric Company Alaska
Salix, Inc. Washington
Appendix 6 to Joint Application Page I 72 of 414
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PT]BLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-33790,333-126577,333-179042 and 333-208986 on Form S-8 and in
Registration Statement Nos. 333-l 87306 and333-209714 on Form S-3, relating to the consolidated linancial statements ofAvista Corporation and
subsidiaries, and the effectiveness ofAvista Corporation's intemal control over financial reporting, appearing in this Annual Repon on Form 1 0-K ofAvista
Corporation for the year ended December 3 I , 20 I 6.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 21,2017
Appendix 6 to Joint Application Page 173 of414
Exhibit 3l.l
CERTIFICATION
I, Scott L. Morris, certif, that:
L I have revicwed this rcport on Form l0-K ofAvista Corporation;
Based on my knowlcdgc, this rcport does not contain any untrue statcment of a material fact or omit to state a matcrial fact ncccssary 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 matenal respects
thc financial condition, rcsults ofoperations and cash flows ofthe rcgistrant as of, and for, the periods prcsentcd in this report;
The registrant's other ccrtifiing officcr and I arc rcsponsiblc for establishing and maintaining disclosurc controls and proccdurcs (as dcfined 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(0 and
I 5d-l 5(0) for the 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 knou,n to
us by others within those entities, particularly during the period in which this report is being prepared;
Designed such intemal control overfinancial reporting, orcaused such intemal control overfinancial 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
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 certifuing officer and I have disclosed, based on our most recent evaluation ofintemal control over financial reporting, to
the registrant's auditors and the audit cornmittee 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 adversely affect the registrant's ability to record, process, summarize and repofi financial information; and
Any fiaud, whether or not material, that involves management or other employees who have a significant role in the registrant's
intema[ control over financial reporting.
Date: February 21,2017 /s/ Scott L. Moris
Scott L. Monis
Chairman ofthe Board, President
and ChielExecutive Offi cer
(Principal Executive Offi cer)
J
4.
a.
b
c.
d.
5.
b.
Appendix 6 to Joint Application Page I 74 of 414
Exhibit 31.2
CERTIFICATION
I, Mark T. Thies, certifi that:
I . I have rcviewed this report on Form I 0-K ofAvista Corporation;
Bascd on my knowlcdgc, this rcport docs not contain any untrue statcmcnt ofa material fact or omit to state a rnatcrial fact neccssary 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
thc financial condition, rcsults ofoperations and cash flows ofthc rcgistrant as of, and for, thc pcriods prcscntcd in this rcport;
Thc rcgistrant's othcr ccrtifuing officer and I arc rcsponsible for cstablishing and maintaining disclosure controls and procedures (as tlcfincd 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(0 and
I 5d-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 knou'n to
us by others within those entities, particularly dunng 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 ourconclusions
about the eflectiveness 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 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 certifuing officer and I have disclosed, based on our most recent evaluation ofintemal control over financial reporting, to
the registrant's auditors and the audit cornmittee ofthe registrant's board ofdirectors (or persons performing the equivalent functions):
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
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 reponing.
Date: Fcbruary 21,2017 /s/ Mark T. Thics
Mark T. Thics
Senior Vice President.
Chief Financial Ofllcer, and Treasurer
(Pnncipal Financial Offi cer)
-)
4
5.
a.
b.
Appendix 6 to Joint Application Page I 75 of 414
Exhibit 32
AVISTA CORPORATION
CERTIFICATION OF CORPORATE OFFICERS
(Fumished Pursuant to l 8 U.S.C. Section 1 350, as Adopted Pursuant to Section 906 ofthe
Sarbanes-Oxley Act of 2002)
Each of the undersigned, Scott L. Morris, Chairman of the Board, President and Chief Executive Officer of Avista Corporation (the "Company"), and Mark
T. Thies, Scnior Vice Presidcnt and ChiefFinancial Officer ofthc Company, lrcrcby ccrtifics, pursuant to I 8 U.S.C. Scction 1 350, as adoptcd pursuant to
Section 906 ofthe Sarbanes-Oxley Act of 2002, that the Company's Annual Report on Form I 0-K for the year ended December 3 I , 20 I 6 fully complies with
the requirernents ofSection I 3(a) ofthe Securities Exchange Act of I 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 21,2O17
/s/ Scott L. Morris
Scott L. Morris
Chairman ofthe Board, President
and Chief Executive Officer
/s/ Mark T. Thics
Mark T. Thies
Senior Vice President,
Chief Financial Officer, and Treasurer
Appendix 6 to Joint Application Page 1 76 of 414
T]NITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
Form 10-Q
(Mark One)
El QUARTERLYREPORTPURSUANT TOSECTTON r3 ORls(d)OFTHE SECURTTTESEXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENI'DED June 30. 2017 OR
tr TRANSITIONREPORT PURSUANT TOSECTION l3 ORI5(d)OFTHE SECURITIESEXCHANGE ACT OF l934
FOR THE TRANSITION PERIOD FROM TO
Commission file number l-3701
AVISTA CORPORATION
(Exact name ofRegistrant as specified in its charter)
Washington
(State or other jurisdiction of
incorporation or organization)
l4l I East Mission Avenue, Spokane, Washington
(Address of principal executive ollices)
Registrant's telephone number, including area code: 509-489{500
Web site: http://www.avistacorp.com
91-0462470
fl.RS. Employer
Identification No.)
99202-2600
(Zip Code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (l ) 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 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 tr
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, ifany, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T ($23 2.405 of this chapter) during the preceding I 2 months (or for such shorter period that
theregistrantwasrequiredtosubmitandpostsuch files). Yes E No E
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emcrging growth company. See thc definitions of"large accclcrated filcr," "acceleratcd filcr," "smallcr rcporting company," and "cmerging growth company"
in Rule I 2b-2 ofthe Exchange Act.
Large accelerated filer El Accelerated filer D
Non-accelerated filer E (Do not check ifa smallerreporting company) Smallerreporting company tr
Emerging growth company tr
Ifan emerging growth 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
IndicatebycheckmarkwhethertheRegistrantisashell company(asdefinedinRulel2b-2oftheExchangeAct): Yes tr No E
As of July 3l ,2017 ,64,411 ,244 shares of Registrant's Common Stock, no par value (the only class of common stock), were outstanding.
Appendix 6 to Joint Application Page I 78 of 414
Table of Contents
AVISTA CORPORATION
AVISTA CORPORATION
INDEX
Itcm No
Forward-Lookin e Statements
Available Information
Part I. Financial Information
Item l. Condensed Consolidated Financial Staternents
Condcnscd Consolidated Statemcnts oflncome -
Three and Six Months Ended June 30. 20 I 7 and 20 I 6
Condensed Consolidated Statements ofComorehensive Income -
Three and Six Months Ended June 30. 20 I 7 and 20 I 6
Condensed Consolidated Balance Sheets -
June 30. 201 7 and December3 l. 201 6
Condensed Consolidated Staternents ofCash Flows -
Six Months Ended June 30. 20 I 7 and 20 I 6
Condensed Consolidated Statements ofEouitv -
Six Months Endcd Junc 3 0. 20 I 7 and 20 1 6
Notes to Condensed Consolidated Financial Statements
Note l Summary ofSignificant Accounting Policies
Note 2. New Accounting Standards
Note 3. Derivatives and Risk Manaqement
Note 4. Pension Plans and Other Postretirement Benefit Plans
Note 5. Committed Lines of Credit
Note 6. Lone-Term Debt and Capital Leases
Note 7. Lons-Tenn Debt to Affiliated Trusts
Note 8. FairValue
Note 9. Common Stock
Note I 0. Eaminss oer Common Share Attributable to Avista Comoration Shareholders
Note I l. Commitrnents and Continsencies
Note 12. Information by Busincss Scqments
Note I 3. Subseguent Events
Report oflndependent Registered Public Accounting Firm
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
Business Sesments
Executive Level Sumrnary
Regulatory Matters
Results ofOoerations - Overall
Non-GAAP Fi nancial Measures
Results of Ooerations - Avista Utilities
Results of Operations - Alaska Electric Light and Power Comoany
Results ofOnerations - Other Businesses
Critical Accountine Policies and Estimates
Liouiditv and Caoital Resources
Overall Liouidit],
Review ofCash Flow Statement
Canital Resources
Capital Expenditurcs
Off-Balance Sh eet Arran gements
Pension Plan
Contractual Obliqations
Page
No.
I
!.
s
5
6
Z
9
ll
12
12
l4
l-6.
20
2t
22
21
23
27
28
28
?o
3l
32
33
33
J]n
40
42
42
5!
54
54
55
55
55
l5
57
57
51
57
Appendix 6 to Joint Application Page I 79 of 414
Table of Contents
AVISTA CORPORATION
Environmental Issues and Other Contineencies
Enterprise Risk Management
Item 3. Ouantitative and Oualitative Disclosures about Market Risk
Item 4. Controls and hocedures
Part II. Oth er In formation
Item l. Leeal Proceedines
Item lA. Risk Factors
Iterr 2.
Item 4.
Item 6.
Unresistered Sales ofEouitv Securities and Use ofProceeds
Mine Safetv Disclosures
Exhibits
Signature
ii
57
t-E
59.
59.
52
59
60
60
6r
62
Appendix 6 to Joint Application Page 180 of4l4
Table of Contents
AVISTA CORPORATION
Forward-Lookins Statements
From time to time, we makc forwardlooking statements such as statcmcnts rcgarding projcctcd or futurc:
. financial performance;
. cash flows;
. capital expenditures;
. dividends;
. capital structure;
. other financial items;
. strategic goals and objectives;
. business environment; and
. plans loroperations.
These statements are based upon underlying assumptions (many ofwhich are based, in tum, upon furtherassumptions). Such statements are made both in our
tcports filed under the Sccuritics Exchange Act of 1 934, as amendcd (including this Quarterly Repoft on Form 1 0-Q), and clscwhere. FonrardJooking
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 1 0-Q) are subject to a variety ofrisks, uncertainties and other factors.
Most ofthese factom 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 nsks, uncertainties and other factors include, among
others:
Financial Risk
. weathcr conditions (temperatures, precipitation lcvels and wind pattems), which affcct both cncrgy demand and elcctric generating capability,
including the effect ofprecipitation and temperature on hydroelectric r€sources, the eflect 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 ofdcbt and/or equity sccuritics, which can be affectcd 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, our ability 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 custorners;
. changes in actuarial assumptions, interest rates and the actual retum on plan assets for our pension and other postretirernent benefit plans, which can
aflect future funding obligations, pension and other postretirement benefit expense and the related liabilities'
. deterioration in the creditworthiness ofour customers;
. the outcome oflegal proceedings and othercontingencies;
. economic conditions in our service areas, including the economy's effects on customer demand forutility services;
. declining energy demand related to customerenergy efficiency and/orconservation 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 strcamflows to our hydroclcctric resourccs;
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 Iimited 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 resourcc plans for clectric and natural gas will not be acknowlcdged by thc state commissions;
Appendix 6 to Joint Application Page 181 of414
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 affcct opcrating income, caslt rcquirements to purchase clectricity and natural gas, value receivcd forwholesalc salcs, collateral rcquired 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 cnvironmental rcgulations affccting our ability to utilizc or resulting in the obsolcsccnce ofour power supply rcsources;
Operational Risk
. severe weather 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 suppo( services,
. explosions, fires, accidents, mechanical breakdowns orotherincidents that may impairassets and may disrupt operations ofany ofourgeneration
facilities, transmission, and electric and natural gas distribution systcms or othcr operations and may require us to purchasc replacemcnt power;
. 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, cyber attacks or other malicious acts that may disrupt or cause damage to our utility assets or to the national or regional economy in
general, including any effects ofterrorism, cyber attacks or vandalism that darnage 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 con struction 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 ouremployees and retirees;
. third party construction of buildings, billboard signs, towen or oth er structures within our rights of way, or placement of fuel receptacles within
close proximity to our transfonners or other equiprnent, including overbuild atop natural gas distribution lines;
. thc loss of kcy suppliers for materials or scrvices or disruptions to thc supply chain;
. adverse impacts to our Alaska opcrations that could rcsult from an extended outage of its hydroelectric gcn crating rcsourccs 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, rcliability and other laws and regulations that affect our opcrations and costs;
. the ability to comply with the temrs 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 result in unauthonzed disclosure ofprivate information, which could result in
liabilities against us, costs to investigate, remediate and defend, and damage to our reputationi
2
Appendix 6 to Joint Application Page 182of414
Table of Contcnts
AVISTA CORPORATION
. disruption to or breakdowns ofinformation systems, automated controls and other technologies that we rely on for our operations, communications
and customer scrvice;
. changes in costs that impcdc our ability to effectivcly implcment new information tcchnology systems or to operatc and maintain current production
technology;
. changes in technologies, possibly making some ofthe current technology we utilize obsolete or the introduction ofnew technology that may create
new cyber security risk;
. insufficient tcchnology skills, which could lcad to thc inability to devclop, modify or maintain our information systcms;
Strategic Risk
. growth or decline ofour customer base and the extent to which new uses for our services may mateialize 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 ornot, which could result in litigation or a decline in our
common stock priccl
. 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
liom existing businesses and the extent ofour business development efforts where potential future business is uncenain;
. 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
tcrmination fecs that could have a matcrial advcrsc effect on our results ofopcrations, financial condition, and cash flows;
. the announced mergertransaction could result in shareholderclass 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
compliancc with thcsc mattcrs;
. 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 ofdistributcd gcncration or clcctric-powcred transportation or on our encrgy supply sourccs, such as campaigns to halt coal-fircd 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 resource technologies that displace utility-
supplied energy or that may be sold back to the utility, and altemative energy suppliers and delivery arrangements;
. failure to identifo changes in legislation, taxation and regulatory issues which are detrimental orbeneficial to ouroverall business;
. policy and/or lcgislativc changes rcsulting from the new prcsidential administration in various rcgulated arcas, including, but not limitcd to,
potential tax reform, environmental regulation and healthcare regulations; and
. the risk ofmunicipalization in any ofour service territories.
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 assunnce 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 forwardJooking statement or statements to reflect events or circumstances that occur after the date on which such
statcment is made or to rcflcct the occurence ofunanticipated evcnts. New risks, unccrtaintics and othcr factors emcrgc from timc to timc, 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
3
Appendix 6 to Joint Application Page 183 of4l4
Table of Contetrts
AVISTA CORPORATION
extent that any such factor or combination offactom may cause actual results to differmaterially from those contained in any forwardJooking statement.
Available Information
Our website address is rrrvw.avistacorp.com. We make annual, quarterly and current 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 our website is not part of this report.
4
Appendix 6 to Joint Application Page I 84 of 414
Table ol Contents
Item 1. Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Avista Corporation
PART I. Financial Information
Dollars in thousands, except per share amounts
(Unaudited)
Operating Revenues:
Utility revenues
Non-utility rcvenues
Total operating revenues
Operating Expenses:
Uti I ity operating expenses:
Resource costs
Othcr opcrating cxpcnscs
Depreciation and amonization
Taxes other than income taxes
Non-utility operating expenses:
Othcr operating cxpcnscs
Depreciation and amortization
Total operating expenses
Income from operations
Interest expense
Irltercst expcnse to affiliated trusts
Capitalized interest
Other income-net
Income before income taxes
Income tax expense
Net income
Net loss (income) attributable to noncontrolling interests
Net income attributable to Avista Corp. shareholders
Weighted-average common shares outstanding (thousands), basic
Weighted-average common shares outstanding (thousands), diluted
Eamings per common share attributable to Avista Corp. shareholders:
Basic
Diluted
Dividends declared per common share
Three months ended June 30,Six months endcd June 30,
2.O17 20t6 20t7 2016
$308,729 $
5,772
312,888 $
5,950
739.266 s
I 1,705
725,681
I 1,330
314,501 318,838 750,971 737.0t1
102,7 5t
8l ,965
42,643
23,802
7,086
157
I09,8t5
78,666
39,678
22,615
6,281
t92
268,337
156.449
84,628
56,464
271,534
t54,445
78,870
52,000
13,265
345
12,t06
380
258404 257,247 579,488 569,335
56,097
23,670
200
(8e0)
(l,6s6)
6l .591
21,31 8
154
(837)
(3,04 l )
t7 I,483
47,215
385
(1,614)
(4,7 s7)
167,676
42,591
292
(1,7sl)
(s,463)
43,997
16,710
130.254
46,395
132,007
47,055
2t,722
19
27,287
(33 )
83,859
28
84,952
(4e)
s 2t,771 $ 27,254 S 83,887 $ 84,903
64,401
64,553
63,3 86
63,7 83
64,382
64.51 I
62,995
63,368
$0.34 $ 0.43 $1.30 $1.35
$0.34 $0.43 s 1.30 $1.34
$ 0.3575 $ 0.3425 $ 0.71 50 $ 0.6850
The Accompanying Notes are an Integral Part ofThese Statements.
5
Appendix 6 to Joint Application Page 185 of414
34,77 3
13,051
Ialtl4sil.4ls
CONDENSED CONSOLIDATED STATEMENTS OF COMPRETIENSWE INCOME
Avista Corporation
Dollars in thousands
(Unaudited)
Three months ended June 30,Six months ended June 30,
20t7 2016 20t6
Othcr Comprchcnsivc Incomc (Loss):
Total othercomprehensive income (loss)
attributable to lnterests
The Accompanying Notes are an Integrul Part ofThese Statemeuts.
6
Appendix 6 to Joint Application Page I 86 of 414
201'7
$ 7t,722 $ 27,287 $ 83.859 $ 84,952
183 140 366 ( l ,089)
183 r40 366 (1,089)
84,225 8 3,863
$ 21,954 $ 27,394 $ 84,253 $ 83,814
2l,905
49
27,427
(33)28 (4e)
Teble of Contents
CONDENSED CONSOLIDATED BALANCE SMETS
Avista Corporatiott
Dollan in thousands
(Unaudited)
June 30,
201',7
December 3 l,
20t6
Asscts:
Accounts and notes allowances of$5,607 and $5,026,180,265
Materials and fuel stock and stored natural 53,314
Other current assets 49,625
Net Utility
Construction work in
Less: Accumulated
Other Non-current Assets:
and amortization 1,558,773
Goodwill 57,672 57,672
Total other non-curent asscts 148,706 141,443
assets for deferred income tax
Other regulatory assets
Non-current asset derivatives
Total deferred
The Accompanying Notes are an Integral Part ofThese Statements.
7
Appendix 6 to Joint Application Page 1 87 of 414
$13,4t0 $
133,946
13,982
61,187
35,808
62,403
320,736 35t,341
5,6t7 ,233
I 69,000
5.506,499
150.47 4
5,656,973
1,509,473
4,147,500
r 18,984
234,046
r 34.533
168,084
15,023
5,432
l 09,853
240,114
135,75 r
I 61 ,508
I 6,91 9
5,326
6'76,102 669,47 t
$ 5,373,004 $ 5,309,755
Trble of Contents
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
Avisla Corporation
Dollars in thousands
(Unaudited)
June 30,
2017
Deccmbcr 3 1,
Current Liabilities:
Current dcbt and leases 2'/7,814 3,287
derivative liabilities 7,035
Accrued taxes otherthan income taxes
Current and other benefits 11,235
Other current liabilities
debt and leases t,403,064 | ,678,7 t7
retirement costs 2 80,5 80 273,983
income taxes 840,928
Other non-current liabilities and defened credits l53,3r9
Commitments and (See Notes to Condensed Consolidated Financial Statements)
Common stock, no par value; 200,000,000 shares authorized; 64,408,983 and, 64,187 ,934 shares issued and
ofJune 2017 and December3 I ,07 5,667
Retained
Interests
liabilities and equity $ 5,3 73,004 $ 5,309,7 55
The Accompanying Noles are an Integral Part ofThese Statenents.
8
Appendix 6 to Joint Application Page 188 of414
$
l0 3.66 I )10
1,075,281
(7,s68)
581,014
1,68?,173
(21e)
1.648,727
(25r)
l,686,894 I ,648,47 6
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Avisla Corporation
For the Six Months Ended June 30
Dollan in thousands
(Unaudited)
2017 2016
$ 84,952
and amortization 86,790 8l ,071
Power and natural cost 6,366 9,958
Amortization of investment in I,225 1,225
Allowance for Funds Used Construction (AIUDC)(3,292)(4,3 68)
Amortization of contract 7,192
defen-al 10,365 (24,787)
Contributions to defined beneflt plan (! 4,800)(8,000)
Accounts and notes receivable 45.37 5 50,062
Collateral for derivative instruments (s,4 60 )(8 3,499)
Other current assets (3,82s)(4A36)
Other current liabilities (3,787)3,197
,l 53
The Accompanying Notes are an Integral Part of These Statements.
9
Appendix 6 to Joint Application Page 189 of4l4
Investing Activities:
Utility propcrty capital cxpcnditurcs (cxcluding cquity-rclatcd AFUDC)
Issuance ofnotes receivable at subsidiaries
Equity and property investments made by subsidiaries
Distributions received from investments
Other
Net cash used in investing activities
228,526 155,951
(177 ,714)
(2,s00)
(l 0,347)
t,915
(e43)
(l 82,8 l s)
(9,668)
(6,98 8)
(r 89,s89)(206,624)
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Avisla Corporation
For the Six Months Ended June 30
Dollars in thousands
(Unaudited)
2017 2016
16,000 $55,000
1,247 47,t73
The Accompanying Notes are an Integral Parl ofThese Statemenls.
10
Appendix 6 to Joint Application Page 190 of4l4
Financing Activities:
Net increase in short-term borrowings
Maturity of long-tcrm debt and capital lcascs
Issuance ofcommon stock. net ofissuance costs
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
Cash and cash equivalents at end ofperiod
$
(34,034)53,7 t I
3.03 8
r 0y'84
4.903
8,507
$13,410 $t3,522
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF EQUTTY
Avista Corporation
For the Six Months Ended June 30
Dollars in thousands
(Unaudited)
20162017
Shares ofperiod 62,31
Shares outstanding at end ofperiod 63,704,295
Balance $ 1,075,281 $ 1,004,336
Issuance of common net ofissuance costs
Balance at end ofperiod
47,173
| ,0'7 5,667 1,052,1 90
Balance at
Balance at end ofperiod
581,014 530,940
Cash dividends on common stock
Total Avista shareholdcrs'I ,687 ,t'7 3 1,617,02'7
Balance at (33e)
Balance at end ofperiod
The Accompanying Notes are an Integral Part ofThese Staternents,
l1
Appendix 6 to Joint Application Page 191 of4l4
64,187,934
221,049
(7,s68)
366
(6,6s0)
(1,089)
(7,739)(7,202)
618,708 572,57 6
(251)
(28)
(27e)(2e0)
$ r,686,894 $ 1,6t6,737
49
Table of Contents
AVISTA CORPORATION
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, 20 I 7 and June 30,2016 are unaudited; however, in the opinion ofmanagement, the statements reflect all adjustments necessary for a fair statement
ofthe results for the intcrim periods. All such adjustments arc ofa normal recurring naturc. Thc condcnscd consolidated financial statcmcnts havc bccn
prepared in accordance with accounting principles generally accepted in the United States ofAmerica (GAAP) for interim financial information and with the
instructions to Form | 0-Q and Rule I 0-0 I ofRegulation S-X. Tlte 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
rcad in conjunction with the Company's auditcd consolidatcd financial statements includcd in the Company's Annual Rcport on Form I 0-K for thc ycar
ended December31,2016 (2016 Form l0-K). Please referto the section "Acronyms and Terms" in the 201 6 Form l0-Kfordefinitions ofcertain terms not
defined herein. The acronyms and terms are an integral part ofthese condensed consolidated financial statements.
NOTE I. SI,]MMARY OF SIGMFICANT ACCOT]NTING POLICIES
Nature of Business
Avista Corp. is primarily an electric and natural gas utility with certain otherbusiness 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 Utilities'Noxon Rapids generating facility.
Alaska Encrgy and Rcsources Company (AERC) is a wholly-owned subsidiary of Avista Corp. The primary subsidiary of AERC is Alaska Elcctric Light and
Power Company (AEL&P), which comprises Avista Corp.'s regulated utility operations in Alaska. Avista Capital, Inc. (Avista Capital), a wholly ou,r:red 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 of AERC.
Basis ofReporting
The condensed consolidated financial statements include the assets, liabilities, revenues and expenses ofthe Company and its subsidiaries and other majonty
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 from its interests in jointly owned plants.
Taxes Other Than Income Taxes
Taxes other than income taxes include state excise taxes, city occupational and franchise taxes, real and personal property taxes and certain other taxes not
based on income. Thesc taxes are generally bascd on revcnucs or thc value ofproperty. Utility relatcd taxcs collcctcd from customers (prirnarily statc cxcise
taxes and city utility taxes) are reconded as operating rcvenue and expense. Taxes other than income taxes consisted ofthe following items for the three and
six months ended June 30 (dollars in thousands):
Three months ended June 30.Six months ended June 30,
20],7 2016 2017 20t6
Utility related taxes
Property taxes
Other taxes
Total
s t3,552 $
9,432
818
12,5?3 $
9,290
752
35,1 36 S
I 9,83 8
1,490
30,93 8
19,710
1,352
$ 23,802 $22,615 S 56,464 $52,000
12
Appendix 6 to Joint Application Page 192 of 414
Table of Contents
AVISTA CORPORATION
Materials and Supplies, Fuel Stock and Storcd Nataral 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 net
rcalizable value for our non-regulated operations and consisted ofthe following as ofJune 30,2017 and Decembcr 3 I , 20 I 6 (dollars in thousands):
June 30, Dccember 3 I,
20t7 2016
Matenals and supplies
Fuel stock
Stored natural gas
Total
$4t,492 $
5,921
40,700
4,585
8,029l3774
$61,187 S 53,3 r 4
Defivative 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 Transportation Cornmission GITC) and the Idaho Public Utitities 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 to retail rates through purchased gas cost adjustments, the Energy Recovery Mechanisrn (ERM) in Washington, the Power Cost Adjustment
(PCA) mechanism in ldaho, 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 rcgulatory assct or liability. Contracts that arc not considercd derivatives arc accountcd for on the accrual basis until thcy are settlcd or realizcd
unless there is a decline in the fairvalue ofthe contract that is determined to be other-than-temporary.
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 tiabitities, 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 liabi lities with regulatory assets and
liabilities, based on the prior practicc ofthe commissions to provide rccovery through the ratcmaking process.
As of Junc 30,2017 , thc Company has multiplc master nctting agrccments with a varicty of cntities that allow for cross-commodity nctting of derivativc
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 Condensed Consolidated Balance Sheets.
Fair Value Meosuruments
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 measuremcnt date. Energy commodity dcrivativc asscts and liabilitics, defencd compcnsation asscts, as wc[[ as derivatives rclatcd
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 Company's fair value disclosures.
l3
Appendix 6 to Joint Application Page 193 of4l4
Table of Contetrts
AVISTA CORPORATION
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net oftax, consisted ofthe following as ofJune 30,2017 and December 3 I , 20 I 6 (dollars in thousands):
June 30,
201,7
Unfundcd benefit obligation for pcnsions and other postrctirement benefit plans - nct oftaxcs of$3,8 78 and $4,075,
respectively $7,202 s
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).
AmounLs Reclassificd from Accumulated Other Comprehensivc Loss
Three months ended June 30, Six months ended June 30,
December 3l
2016
Details about Accumulated Othcr Comprchcnsive Loss Componcnts 2017 2016 2017 2016
7,568
Affected Line ltem in Statement
of Income
Amortization of defined benefit pension items
Amortization ofnet prior service cost
Amortization of net loss
Adjustment due to effects ofregulation
S (299) $ (3ll) $ (5e8) $ (622) (a)
3,638 3,642 $ 7,276 $ 7,284 (a)
(3,0s7) (3,1 I 5) (6,1 I 5) (8,338) (u) (b)
282 216 563 (1,676) Total beforc tax
(76) (l 97) 587 Tax benefit (expense)
$ 183 $ 140 S 366 $ (1,089) Netoftax
(a) These accumulated othercomprehensive loss components are included in the computation ofnet periodic pension cost (see Note 4 foradditional
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 Cornpany 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 incurred. As ofJune 30, 20 1 7, the
Company has not recorded any significant amounts related to unresolved contingencies. See Note I I for further discussion ofthe Company's commitments
and contingencies.
NOTE 2. NEWACCOI,]NTING STANDARDS
ASU No. 201 4-09, "Revenue from Contracts with Cuslomers (Topic 606)"
In May 2014, the FASB issucd ASU No. 2014-09, which outlincs a single comprehcnsive model for cntities to usc in accounting for rcvenue 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 identify the various performance obligations in a contract, allocate the transaction price among the perfonnance obligations
and recognize revenue when (or as) the entity satisfies each performance obligation. This ASU is effective for periods beginning afler 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 cumulativc adjustment to opening rctained camings, as opposed to a full retrospcctive application. Bascd on work
performed to date, the Company has not identified any material cumulative adjustments necessary.
14
Appendix 6 to Joint Application Page 194 of 414
Table of C-ontents
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 ol
reviewing and analyzing certain 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:
Contributions in Aid ol Construction - There was the potential that contributions in aid ofconstruction (CIAC) could be recognized as revenue upon the
adoption of ASU No. 201449. Undercurrent GAAP, CIACs are accounted foras an offset to the cost of utility plant in service. Current preliminary
implementation guidance indicates that CIACs will continue to be accounted for as an oflset to utility plant in service.
Utilitv-Related Tdxes 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 CAAP, 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 evaluated whether this gross
presentation is appropriate underASU 2014-09 and the Company's preliminary assessment indicates that there will be no material changes to current
presentation.
Collectibililv -There were questions regarding the requirement that collection ofa sale be probable and how, or if, utilities should consider bad debt
collection mechanisms (ridcrs, base rate adjustmcnts, ctc.) in asscssing probability ofcollcction on sales to low income customers. Currcnt prcliminary
implementation guidance indicates that bad debt collection mechanisms should be considered; therefore, the Company does not expect a change to its
current presentation 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 dcscribed above, thc Company also expccts significant changcs to its rcvcnuc-rclated footnote disclosurcs. Thc Company continucs
to evaluate what information would be most useful forusers of the 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. 2 0 1 6-02 "Leases (Topic 84 2). "
In February 20 I 6, thc FASB issucd ASU No. 2016-02. This ASU introduccs a new lcssce modcl that rcquires most lcascs to be capitalized and shown on the
balance sheet with corresponding lease assets and liabilities. The standard also aligns certarn 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 ofbright-line lests 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 bc applicd using a modificd rctrospcctivc approach to the carliest pcriod prescntcd, which will likcly
require restatements ofpreviously issued financial statements. The modified retrospective approach includes a number ofoptional practical expedients that
entities may elect to apply. The Cornpany evaluated tlris 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 far relates to identifoing a complete population ofleases and potential Ieases under the new lease standard. AIso,
thc Company is monitoring utility industry implcmentation guidancc as it rclates to scveral unrcsolvcd issues to dcterminc ifthere will be an industry
consensus, including whether righrof-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 (Topic 7 I 8): lmprovemenls to Employee Share-Based Paymenl Accounting."
In March 2016, the FASB issued ASUNo.2016-09. ThisASUsimplified several aspectsofthe accounting foremployee share-based payment transactions
including:
l5
Appendix 6 to Joint Application Page 195 of4l4
Table of Contetrts
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 operaling activity.
. rcquiring exccss tax benefits and tax dcficiencics to be excluded liom the calculation ofdilutcd camings pcr sharc, whcrcas undcr prcvious
accounting guidance, these amounts had to 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 payrnents.
The Cornpany early adopted this standard during the second quarter of20 I 6, with a retrospective effective date ofJanuary I , 20 I 6. The adoption ofthis
standard resulted in a recognized income tax benefit of$ I .6 million in 20 I 6 associated with excess tax benefits on settled share-based employee payments.
Because this standard was adopted in the second quarter of20 I 6, but had a retrospective effective date ofJanuary I , 20 I 6, the effects from the adoption were
rcflcctcd in thc first quartcr of20 I 6 and thc Condensed Consolidatcd Financial Statcments for that quarter wcrc rccast from those presentcd when thc
financial statements were originally issued.
ASU No. 20 I 7-07 "Compensation-Retiremenl BeneJits (Topic 7 I 5): lmproving the Presentation oJ Net Periodic Pension Cost and Net Periodic
Postretiremenl Benefit Cosl "
In March 20 1 7, the FASB issued ASU No. 20 1 7-07, which amends the income statement presentation ofthe components ofnet 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 statcmcnts. ASU No. 2017 -07 rcquircs cntitics to (l ) disaggrcgatc the currcnt scrvicc-cost component from the othcr componcnts ofnet bcncfit 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 incorne statement and outside of income fiom operations.
In addition, only the service-cost component olnet benefit cost is eligible lor capitalization (e.g., as part ofutility plant). This is a change from current
practice, undcr which cntities capitalizc thc aggrcgate nct bcnefit cost to utility plant whcn applicablc, in accordancc with Fcdcral Energy and Rcgulatory
Commission (FERC) accounting guidance. Avista Corp. is a rate-tegulated entity and all components ofnet benefit cost are currently recovered from rate
payers as a component ofutility plant and under the new ASU these costs will continue to be recovered from rate payers in the same rnanner 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 mcthod to adopt the requircmcnt for scparate prcscntation in the incomc statemcnt and a prospcctivc transition mcthod to adopt the requircment to
limit the capitalizalion 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 AND 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.
E nergy Co mmo dity De rivative s
Avista Corp. is exposed to market nsks 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 dernand. 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 these risks.
As part oflAvista 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 serve Avista Corp.'s Ioad obligations and the use ofthese resources
to capture availablc cconomic valuc. Avista Corp. transacts in wholesalc markcts by selling and purclrasing electric capacity and energy, fuel for clcctric
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 of intra-hour up to multiple years.
t6
Appendix 6 to Joint Application Page 196 of4l4
Table 0f Contents
AVISTA CORPORATION
As part ofits resource procurement 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
serics oftransactions to hedgc a portion ofits projected natural gas rcquircmcnts through fonward markct transactions and derivative instrumcnts. Thcsc
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 requirernents unhedged forpurchase in short-term and spot markets.
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 otherthan 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 months, 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 ofJune 30,2017 that are expected to be delivered in each respective
year (in thousands of MWrs and mrnBTUs):
Purchases Sales
Elcctric Dcrivatives Gas Dcrivativcs Elcctric Dcrivativcs Gas Dcrivativcs
Physical ( I )
MWH
Financial ( I )
MWH
Physical ( I )
mmBTUs
Financial (l )
mmBTUs
Physical ( I )
MWH
Financial ( I )
MWH
Physical ( I )
mmBTUs
Financial ( I )
mmBTUsYcar
Remainder 201 7
201 8
2019
2020
2021
Thereafter
185
397
235
999
307
737
7,418
610
910
63,423
78,488
42,77 5
? 615
154
254
158
1.129
1,244
982
3,378
1,360
1.345
1,430
1,049
43,940
46,805
26,590
The following table presents the underlying energy cornmodity derivative volumes as ofDecember 3 I , 20 I 6 that are expected to be delivered in each
respective year (in thousands of MWhs and mmBTUs):
Purchues Sales
El€ctric Derivatives Gas Derivativcs Elcctric Derivatives Gas Derivatives
Physical ( I )
M\4+I
Financial (1)
MWH
Physical (1 )
mmBTUs
Financial ( I )
mmBTUs
Physical ( I )
MWH
Financial ( I )
MWH
Physical ( I )
mnrRTl Is
Financial ( I )
mmBTUsYear
2017
201 8
2019
2020
2021
Thereafter
510
397
235
907 t5,475 I 10,380
52,7 55
29,47 5
) 1)\
316
286
158
t,552
t,244
982
73,1 l 0
l5,l l3
4,020
4,1 65
1,i60
1,345
1.430
1,060
610
910
(1) Physical transactions represent commodity transactions in which Avista Corp. will take ormake delivery ofeitherelectricity ornatural 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 futurcs, swap dcrivativcs, options, or fonvard 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 (ERM, PCA, and Purchased Gas Adjustments (PGA)), or in the general rate case process,
and are expected to be collected through retail rdtes from customers.
Appendix 6 to Joint Application
t7
Page 197 of4l4
Table of Contents
AVISTA CORPORATION
Foreign Currency Exchange Derivatives
A significant portion ofAvista Corp.'s natural gas supply (including fuel for power generation) is obtained from Canadian sources. Most ofthose transactions
arc cxccuted in U.S. dollars, which avoids forcign currency risk. A porlion ofAvista Corp.'s short-tenn natural gas transactions and long-tcrm 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 currency exchange
derivatives and the unhedged foreign culrency 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 for ratemaking.
The following table summarizes the foreign cunency exchange derivatives that Avista Corp. has outstanding as ofJune 30,2017 and December 3 I , 20 I 6
(dollars in thousands):
June 30, Deccmber 3 l,
2017 2016
Number ofcontracts
Notional amount (in United States dollars)
Notional amount (in Canadian dollars)
Interest Rate Derivatives
Avista Corp. is affected by fluctuating interest rates related to a portion ofits existing debt, and future bonowing 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 dcbt issuanccs.
The following table summarizes the unsettled interest rate swap derivatives that Avista Corp. has outstanding as ofJune 30,2017 and December 3 I , 20 1 6
(dollan in thousands):
Balance Sheet Date Number of Contracts Notional Amount Mandatory Cash Settlement Date
$
24
7,588 $
10,075
2t
2,8t9
3.754
June 30,201 7 6
l4
6
.,
5
s 75,000
27 5,000
70,000
30,000
60,000
2017
201 8
2019
2020
2022
December3l,20166S75,0002017
t4 275.000 20r 8
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 colnpared to the interest rates fixed by the swaps. Avista Corp. is required to rnake cash
payments to settle the interest rate su'ap 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 derivatives 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
Appendix 6 to Joint Application Page 198 of4l4
Tabk of Contents
AVISTA CORPORATION
Summary of Outstanding Derivalive Instruments
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 fairvalues and locations ofderivative instruments recorded on the Condensed Consolidated Balance Sheet as ofJune 30,
2017 (in thousands):
Fair Value as of June 30, 20 1 7
Dcrivative and Balancc Shcct Location Liability
Net Asset
(Liability)
on Balance
Shcct
Gross
Assct
Gross Collateral
Ncttcd
Foreign currency exchange derivatives
Other current assets
Interest rate swap derivatives
Othcr currcnt asscts
Other properry and investments-net and other non-current assets
Current interest nrte swap derivative liabilities
Non-current interest rate swap derivative liabilities
Energy commodity derivatives
Other cunent assets
Current energy commodity derivative liabilities
Other non-current liabilities, regulatory liabilities and deferred credits
Total derivative instruments recorded on the balance sheet
Derivative and Balance Sheet Location
$
5,626
5,676
168
22,577
12,532
(208)
(t,64s)
(78,077)
(336)
(11)
(36,716)
(27,55s)
41,570
5,831
3,936
187
5,418
4,031
(36,s07)
(336)
157
(8,3 08)
(l l,087)
187 $$$
$ 46,766 $ (144,s48) $ s1,337 $ (46,44s)
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 Deccmber 3 I , 20 I 6
Gross
Aset
Gross
Liabiliry
Collatcral
Netted
Net Asset
(Liabiliry)
on Balance
Sheet
Foreign currency exchange derivatives
Other current I iabilities
Interest rate swap derivatives
Other curenl assets
Other property and investments-net and other non-current assets
Current interest rate swap derivative liabilities
Non-current intercst ratc swap dclivative liabilities
Energy commodity derivatives
Other current assets
Current energy commodity derivative tiabilities
Othcr non-cuncnt liabilities, regulatory liabilities and deferred credits
Total denvative instruments recorded on the balance sheet
$s$(28) $
(3e7)
(l s,756)
(s 7,82s )
(16,787)
(29,s98)
(29,990)
$(23)
1 tg1
5157
(6,02s)
(28,705)
1,895
(7,03s)
( l 3,289)
3,393
5,7 54
3,9s 1
18,682
16,335
I 3,071
q 71t
25,169
6,228
3,630
$ 6l,19l $ (1s0,381) $ 44,7s8 $ (44,432)
Exposurc to Demandsfor Collateral
Avista Corp.'s dcrivative contracts oftcn rcquire collatcral (in the form ofcash or lcttcrs ofcrcdit) or othcr credit enhancemcnts, or rcductions or tcrminations
ofa portion ofthe contract through cash settlement. [n the event ofa downgrade in Avista Corp.'s credit ratings or changes in market prices, additional
collateral may be required. In periods ofprice volatility. the level ofexposure can change significantly. As a result, sudden and significant demands may be
made against Avista Corp.'s credit
Appendix 6 to Joint Application
l9
Page 199 of414
Table of Contents
AVISTA CORPORATION
facilities and cash. Avista Corp. actively monitors 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 of June 30, 201 7 and Decernber 3 I , 20 I 6 (in
thousands):
June 30,
z0t'7
December 3 l,
2016
Energy commodity derivatives
Cash collateral posted
Letters of credit outstandin g
Balancc shcct offsctting (cash collatcral against nct dcrivativc positions)
Interest rate swap derivatives
Cash collateral posted
Letters of credit outstanding
Balance sheet offsetting (cash collateral against net derivative positions)
Energy commodity derivatives
Liabilities with credit-risk-related contingent features
Additronal collateral to post
Interest rate swap derivatives
Liabilities with credit-risk-related contingent features
Additional collateral to post
$15 ,924 $
37,2s0
9,7 67
4t.570
13,100
41,570
t'7,134
24,400
9,858
34,900
3,600
34,900
Certain of Avista 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 fairvalue 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 ofJun e 30,201'1 and December 3 I , 20 I 6 (in thousands):
June 30,
2017
December 3 I
2016
$
80,266
ll,2t0
I,124
1,046
73,978
21,100
648
648
$
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 currently deductible forincome tax purposes. The Company contributed $14.8 million in cash to the pension plan fortlre six months ended
June 3 0, 2017 and expects to contribute a total of $22.0 million in 20 I 7. The Company contributed $ I 2.0 mill ion in cash to the pen sion plan in 20 I 6.
20
Appendix 6 to Joint Application Page 200 of 414
Table of Contcnts
AVISTA CORPORATION
The Company uses a December 3 I measurement date for its defined benefit pension and other postretirement benefit plans. The following table sets lorth the
components ofnet periodic benefit costs forthe three and six months ended June 30 (dollan in thousands):
Pension Benefits Other Post-retirement Benefits
201'7 2016 201'7 2016
Three months ended June 30;
Service cost
lnterest cost
Expected retum on plan assets
Amortization ofprior scrvicc cost
Net loss recognition
Net periodic benefit cost
Six months ended June 30:
Service cost
Intcrcst cost
Expected retum on plan assets
Amortization of prior service cost
Net loss recognition
Nct periodic bcncfit cost
1.623 $
2,'77 3
(es0)
(624)
2,593
1,583
3,093
(es0)
(624)
2,859
s 5,092 $
6,976
(7,900)
2,317
4,569 $
6,900
(6,87s)
799 $
t,374
(47 s)
(312)
I,320
804
I,534
(47 s)
(3t2)
1,4942,201
$ 6,485 $ 6,79s S 2,706 $ 3,04s
$r0,134 $
13,927
(r s,800)
4,863
9,088 $
13,800
(r 3,62s)
4,091
$ 13,124 $ 13,354 $ 5,41s $5,961
Total net periodic benefit costs in the table above are recorded to the same accounts as labor expense. Labor and benefits expense is recorded to various
projects based on whether the work 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 LINES 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
committed 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.
Bonowings outstanding and interest rates ofborrowings (excluding letters ofcredit) under the Company's revolving committed line ofcredit were as follows
as ofJune 30,2017 and December 3 I , 20 1 6 (dollars in thousands):
June 30, December 3 1,
20t't 2016
Borrowings outstanding at end ofperiod $ 136,000 $ 120,000
Letters ofcredit outstanding at end ofperiod $ 56,703 S 34,353
Average interest rates at end ofpenod 1 .99% 1.50t%
As ofJune 30, 20 I 7 and December 3 I , 20 I 6, the borrowings outstanding under Avista Corp.'s committed line ofcredit were classified as short-term
borrowings on the Condensed Consolidated Balance Sheet. The additional short-term borrowrngs outstanding as ofJune 30.201'7 on the Condensed
Consolidated Balance Sheet relate to a short-term note payable by a subsidiary for the acquisition of land that will be repaid in early 20 I 8.
AEL&P
AEL&P has a cornmitted line of credit in the amount of $25.0 million that expires in Novernber 201 9. As of June 30,2017 and December 3 I , 201 6, there were
no borrowings or lettem ofcredit outstanding under this committed line ofcredit. The committed line ofcredit is secured by non-transferable first mortgage
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 undcrthe committed linc of crcdit.
2t
Appendix 6 to Joint Application Page20l of4l4
Table of Cotrtents
AVISTA CORPORATION
NOTE 6. LONG.TERM DEBT AND CAPITAL LEASES
The following details long-term debt outstanding as ofJune 30,2017 and December 3 1, 20 I 6 (dollars in thousands):
Maturity InterestYear Desription Rate
June 30,
20t7
December 3 I
20t6
Avista Corp. Secured Long-Term Debt
201 8 First Mortgage Bonds
2018 Secured Medium-Term Notes
2019 First Mortgage Bonds
2020 First Mortgage Bonds
2022 First Mortgage Bonds
2023 Secured Medium-Term Notes
2028 Secured Medium-Tem Notes
2032 Securcd 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
TotaI securcd long-term dcbt
Alaska Energy and Resources Company Unsecured Long-Term Debt
2019 Unsecured Term Loan
Total secured and unsecured long+erm debt
Other Long-Term Debt Components
Capital lease obligations
Unamortized debt discount
Unamortized long-term debt issuance costs
Total
Sccured Pollution Control Bonds held by Avista Corporation (1)
Cunent portion oflong-term debt and capital Ieases
Total long-term debt and capital leases
(l)
5.95%
7.39%-7.45%
5.45%
3.89%
5.13%
7.18%-7.54%
6.37%
(t)
(r )
6.2s%
5.70%
5.55%
4.45%
4.1t%
4.37%
4.23%
3.54%
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
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
175,000
$
I ,621,700
75,000
t,621,700
75,0004.54%
3.85%
1,696,700
15,000
1,696,700
15,000
1 ,7 11 ,700 I,711,700
63,791
(70e)
( l 0,204)
65.435
(7e2)
(l 0,63 9)
I ,7 64,57 8
(83,700)
(27 7 ,814)
| .7 65,704
(83,700)
(3,2 8 7)
$ 1,403,064 $ 1,678,717
In Dcccrnber 2010, $66.7 million and $ I 7.0 million of thc City of Forsyth, Montana Pollution Control Rcvcnue Refunding Bonds (Avista
Corporation Colstrip hoject) due in 2032 ard 2034, 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 investors. So long as Avista Corp. is the holder ofthese bonds, the bonds will not be reflected as an asset ora liability on Avista Corp.'s
Consolidated Balance Shccts.
22
Appendix 6 to Joint Application Page 202 of 414
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 $51.5 million to Avista
Capital tr, an affiliated busincss trust formcd by the Company. Avista Capital II issued $50.0 million ofPrcferred 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, 20 I 7 and the year ended December 3 I , 20 I 6:
June 30, December 3 l,
2017 20t6
Low distribution rate
High distribution ratc
Distribution rate at the end ofthe period
l.9loa
2.08%
2.08o/o
t.29%
t.81%
1.81%
Concurrent with the issuance of the Preferred Trust Securities, Avista Capital II issued $ I .5 million of Common Trust Securities to the Company. These debt
securities may be redeemed at the option of Avista Capital II at any time and mature on June I , 203 7. In December 2000, the Company purchased $ I 0.0
million of these 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 II has funds available for such payments from the respective debt
securities. Upon maturity or prior redemption ofsuch debt securities, the Prefened Trust Securities will be mandatorily redeemed. The Company does not
include thesc capital trusts in its consolidated financial statcmcnts as Avista Corp. is not thc primary bcncficiary. As such, thc sole asscts 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. 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 current portion and material capital leases) and long-term debt to alliliated 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 I measurement) and the lowest priority to fair values derived from unobservable inputs (Level 3
measurement).
The three levels ofthe fair value hierarchy are defined as follows:
Level I - Quotcd prices are available in active markcts for idcntical asscts or liabilitics. Activc markets arc those in which transactions for the asset or
liability occurwith 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
dcveloped mcthodologics that rcsult in managcment's best ostimate offairvaluc.
Financial assets and liabilities are classified in their entircty based on the lowest lcvel ofinput that is significant to the fair value mcasurcment. Thc
Company's assessment ofthe significance ofa particular input to the fair value measurement requires judgment, and may affect the valuation offair value
assets and liabilities and their placement within the flair 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
Appendix 6 to Joint Application Page 203 of 414
Table of Contents
AVISTA CORPORATION
The following table sets forth the carrying value and estimated fair value of the Company's financial instruments not reported at estimated fair value on the
Condensed Consolidated Balance Sheets as ofJune 30,2017 and December 3 I , 20 I 6 (dollars in thousands):
June 30, 20 I 7 December3l.20l6
Carrying
Value
Estimatcd
Fair Value
Canying
Value
Esrimatcd
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)
June 30, 201 7
Assets:
Energy comrnodity derivatives
Lcvcl 3 cncrgy commodity dcrivativcs:
Natural gas exchange agreement
Forei gn currency exchange derivatrves
Interest rate swap derivatives
Defened cornpensalion assets:
Fixed income securities (2)
Equity securities (2)
Total
Liabili6es:
Energy comrnodity derivatives
Level 3 energy commodity derivatives:
Natural gas exchange agreement
Power exchan ge agreement
Power option agreernent
Intercst mtc swap dcrivatives
Total
7,783 $ 46,687 S
$951,000 $
6'.?7,000
60,953
51,547
1,076.925 $
701,924
62,600
43,042
Level 3
951,000 s
67"1 ,O00
62,1 60
5 t ,547
r ,048,66 r
675,251
62,800
3 8,660
Total
These estimates of fair value of long-term debt and long-term debt to affiliated trusts were primarily based on available mar*et information, which generally
consists ofestimated market prices fiom third party brokers for debt with similar risk and terms. The price ranges obtained from the third party brokers
consistcd of par valucs of 83 .5 0 to I 2 8.87, whcrc a par value of I 00.0 reprcscnts tlre carrying value rccordcd on thc Condensed Consolidated Balancc Shccts.
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 longterm 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
naturc ofthe Sncttisham capital lcasc obligation, the estimatcd fair value ofthcse items was determincd based on a discounted cash flow modcl 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 following table discloses by level within the fair value hierarchy the Company's assets and liabilities measured and reported on the Condensed
Consolidatcd Balancc Sheets as ofJune 30,2017 and Dcccmbcr 3 I , 20 I 6 at fair value on a tccurring basis (dollars in thousands):
Level I Level 2
Counterparty
and Cash
Collateral
Netting (l)
$$35,r 98 $$(3s,041) $
(1e)
(1,853)
157
187
9449
1,716
6,067
'79
187
I I,302
1,7 t6
6,067
s 79$(36,973) $17,576
s $ 46,203 $$(44,808) $
(7e)
1,395
a )\)
r3,784
43
4,173
13,7 84
43
36,843
s
80,266
s 126.469
(43423)
$18,079 $(88,310) $ 56,238
Appendix 6 to Joint Application
24
Page 204 of 414
&tut-@Ie$!
AVISTA CORPORATION
Level 2 Level 3
Counterparty
and Cash
Collateral
Netting (l )Total
December 31,2016
Assets:
Energy commodity derivatives
Level 3 energy commodity derivatives:
Natural gas exchange agreement
Powcr cxchangc agreemcnt
Foreign currency exchange derivatives
Interest rate swap derivatives
Deferred compensati on assets:
Fixed income securities (2)
Equity securities (2)
Total
Liabilities:
Energy commodity derivatives
Level 3 energy comrnodity derivatives:
Natural gas exchange agreement
Porver exchan ge agreement
Power option agreement
Foreign currency exchan ge derivatives
Intcrcst rate swap dcrivativcs
Total
$$47,994 $$ (46,099) $1,895
8,750
I,789
5,48 t
69
25
(6e)
(2s)
(5)
(4,348)
1.789
5,481
S 7,270 $6l,o97 $94 $ (50,546) $17,915
$$56,871 $
28
'73,978
$ (5s,e57) $
(5)
(3 9,24 8)
914
5,885
13,449
76
23
34,730
5.954
13,47 4
76
(6e)
(2s)
55,077
(l ) The Company is permitted to net derivative assets and derivative liabilities with the same counterparty when a legally enforceable master netting
agreement exists. In addition, the Company nets derivative assets and derivative liabilities against any payables and receivables for cash collateral held
or placcd with thcsc same countcrpafties.(2) Theseassetsaretradingsecuritiesandareincludedinotherpropertyandinvestments-netandothernon-currentassetsontheCondensedConsolidated
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 discloscd on the Condensed Consolidated Balance Sheets is due to netting arrangemcnts with certain counterpartics. See Note 3 for additional
discussion of derivative netting.
To establish fair value for energy commodity derivatives, the Company uses quoted market prices 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 ma*et 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
derivativc asset or liability is includcd in Levcl 2.
To establish fair valucs for intercst rate swap dcrivatives, the Company uscs forward markct curves for interest rates for the term ofthc swaps and discounts thc
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
diffcrcnce between thc locked-in price and the market pricc by the notional amount ofthe derivativc. Forward forcign currency market cuwes arc provided by
thind party brokers. The Company's credit spread is factored into the locked-in price ofthe foreign exchange contracts.
$$ 130,877 $19,504 $ (95,304)$
Appendix 6 to Joint Application
25
Page 205 of 414
Level I
5
13,098
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 traded 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 3l , 201 6.
Level 3 FairValue
Under thc power cxchangc agreemcnt the Company purchases powcr at a price that is based on tlre avcrage opcrating and maintcnance (O&M) chargcs from
three surrogate nuclear power plants around the country. To estimate the fair value of this 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 are estimated assuming an annual escalation. In
addition to the forward price bcing cstimated using unobscrvable inputs, thc Company also cstirnatcs thc volumcs ofthc transactions that will take placc in
the future 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.
Forthe natural gas commodity exchangc agrccment, thc Company uscs thc same Levcl 2 brokcrcd quotcs describcd abovc; howcvcr, 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 from 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 becn highly conelatcd with markct prices and markct 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 3 0,
2017 (dollars in thousands):
Fair Value (Net) at
June 30, 20 I 7 Valuation Technique
Unobservable
Input Range
Power exchange agreement $(l 3,784)Surrogate facility
pricing
O&M charges
Escalation factor
Transaction volumes
$33.59-$49.1 5A,IWh (l )
3ol, - 2Ol7 to 2019
396.984 M\[hs
Power option agreement $(43)Black-Scholes-
Mcrton
Strike price
Delivery volumes
$35.g2lMwh - 2019
$48.39iMWh - 2018
128,6t1 -254,363 MWhs
Natural gas exchange
agreement
S (4,17 3)Intemally derived
weighted average
cost ofgas
Forward purchase
prices
Forward sales prices
Purchase volumes
Sales volumes
$ 1.66 - $2.38/mmBTU
$1.67-53.29lmmBTU
I 1 5,000 - 3 10,000 mmBTUs
60,000 - 310,000 mmBTUs
(l ) The average O&M charges for the delivery yearbeginning in November 2016 are $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 1 6
are $44.33 for Washington and $39.22 for Idaho.
26
Appendix 6 to Joint Application Page 206 of 414
Table of Contents
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
lcast 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 three and six months ended June 30 (dollars in thousands):
Natural Gas
Exchange PowerExchange PowerOption
Agreement Agreement Agreement Total
Three months ended June 30, 201 7:
Balance as ofApril 1,201 7
Total gains or (losses) (realized/unrealized):
Included in regulatory assets/liabilities ( I )
Settlements
Ending balance as ofJune 30,2017 (2)
Three months ended June 30,2016:
Balance as ofApril l, 20 I 6
Total gains or (losses) (realized/unrealized):
Includcd in rcgulatory assets/liabilitics (l)
Settlements
Ending balance as ofJune 30,2016 (2)
Six months ended June 30,2017:
Balance as ofJanuary 1,20 I 7
TotaI gains or (losscs) (realizediunrealizcd):
Included in regulatory assets/liabilities (l )
Settlements
Ending bafance as ofJune 30,2017 (2)
(4,278) $ (l4,4le) $(266) $ (18,e63)
(l es)
(43) S (r 8,000)
(6,006) $ (20,1 e3) S (97) S (26,2e6)
$
300
(672)
1,307
223 (644)
1,607
S (4,173) $ (13,784) $
s
(1,ss l )
700
4,400
1,179
(8)2,84t
1,879
$(6,857) $ (14,6 | 4) $(r 05) $ (2 1,s76)
$(s,88s) $, (r 3,449) $(76) S (l e,4l o)
1,817
(r 0s)
(s,r 6s)
4,830
33 (3,315)
4,725
s (4,173) $ (13,784) $(43) $ (l 8,ooo)
Six months ended June 30,2016:
Balance as ofJanuary I. 20 I 6
Total gains or (losses) (real izedlunrealized):
lncluded in regulatory assets/liabilities (1 )
Settlements
Ending balance as ofJune 30, 20 I 6 (2)
s (s,039) $ (2r,961) $(t24) $ (27.124)
19 (t,309)
6,857
(3,2e6)
1,478
1,968
5,379
$(6,8s7) $ (14,614) S (ros) $ (2 r,s76)
(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 2016, the Company entered into fourseparate sales agency agreementsunderwhich Avista Corp.'ssalesagentsmay offerand sell up to 3.8 million
new shares of Avista Corp.'s common stock, no par value, from time to time. The sales agency agreements expire on February 29,2020. As of June 30, 201 7,
1.6 million shares have been issucd under thesc agreemcnts, leaving 2.2 million sharcs remaining to be issued. No shares wcrc issued under these agrccments
in the six months ended June 30, 20 I 7.
In the six months ended June 30, 201 7, Avista Corp. issued 0.2 million shares of common stock, most of which were under employee incentive plans. The
Company also issucd a small numbcr of sharcs under thc 401ft) employee investment plan. Total net proceeds for all issuanccs werc $ I .2 million.
27
Appendix 6 to Joint Application Page207 of4l4
Tabk of Conteots
AVISTA CORPORATION
NOTE IO. EARNINGS PER COMMON SHARE ATTRIBUTABLE TO AVISTA CORP. SHAREHOLDERS
The following table presents the computation ofbasic 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 cnded Junc 30,Six months cndcd June 30,
20t7 20t6 2017 20t6
Numerator:
Net income attributable to Avista Corp. shareholders
Denominator:
Wcighted-averagc numbcr of common sharcs outstanding-basic
Effect of dilutive securities:
Performance and restricted stock awards
Wei ghted-average number of common shares outstanding-diluted
Earnings per common share attributable to Avista Corp. shareholders:
Basic
Diluted
Thcrc wcre no sharcs cxcludcd liom thc calculation bccausc thcy wcrc antidilutivc.
$ 2t,771 S 27,254 $ 83,887 S 84,903
64,401
152
63,386
397
64,382
129
62,995
373
64,553 63,783 64,511 63,368
$0.34 $0.43 $1.30 $1.35
$0.34 $0.43 $ 1.30 s 1.34
NOTE 11. COMMITMENTS AND CONTINGENCIES
In the course ofits business, the Company becomes involved in various 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 pursue 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 Proceeding
In Fcbruary 201 6, APX, a market maker in thc Califomia Refund Procccdings in whose markcts Avista Encrgy participated in thc surnmer of 2000, asscrtcd
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 Fonn 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 summerof 2000.
APX has identificd Avista Encrgy's sharc ofAPX's cxposure to bc as much as $ I 6.0 million cvcn though no wrongdoing allegations are spccifically
attributable to Avista Energy. Avista Energy believes its 2014 settlement v/ith 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 (referred 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 over the spillway. Under the terms of
the Clark Fork Scttlement Agreemcnt (CFSA) as incorporated in Avista Corp.'s FERC licensc for the Clark Fork Projcct, Avista Corp. has workcd 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
Appendix 6 to Joint Application Page 208 of 414
Table of Contents
AVISTA CORPORATION
Fish Passage at Cabinet Gorge and Noxon Rapids
In I 999, th e Un ited States Fish and Wildlife Service (USFWS) I isted butl trout as threatened under the Endangered Species Act. In 201 0, the USFWS issued a
revised designation ofcritical habitat forbull trout,which includesthe lowerClark Fork River. The USFWS issued a final recovery plan in October20l5.
The CFSA describes programs intended to hclp restorc bull trout populations in thc project area. Using the conccpt ofadaptivc managcmcnt and working
closely with the USFWS, the Company evaluated the feasibility of fish passage at Cabinet Gorge and Noxon Rapids. The results ofthese studies led, in part,
to the 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 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 thc ratemaking process, ofall operating and capitalizcd costs rclatcd to fish passagc at Cabinct Gorgc and Noxon Rapids.
Other Contingencies
In the normal course ofbusiness, thc Company has various othcr legal claims and contingcnt mattcrs outstanding. Thc Company believcs that any ultimatc
liability arising from these actions will not have a material impact on its financial condition, results ofoperatrons 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 I 6 Form I 0-K for additional discussion regarding other contingencies.
NOTE 12. INFORMATION BY BUSII\ESS 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 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
diflerent fiom 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 segrnents (dollars in thousands):
Avista iJ"rI;:',;H:, ',Jffi;::fl"Jj
Utilities Company Total Utility Other ( I ) Total
For the three months ended June 30. 201 7:
Opcrating rcvenucs
Resource costs
Other operating expenses
Depreciation and amortization
Income (loss) from operations
lnterest expense (2)
Income taxes
Net income (loss) attributable to Avista Corp
sharcholders
Capital expenditures (3 )
$296,7 47 S
99,46t
78,970
41,195
53,97 |
22,826
12,892
2t ,'7 65
88,612
11 ,982 $
3,290
2,995
1,448
1 5q7
895
1,075
I ,681
2,339
29
308,7 29 $
102,7 5l
8l ,965
42,643
5 7,5 68
23,721
13,967
23,446
90,951
s,772 $3 14,50 I
102.7 51
89,05 l
42.800
5 6.09 7
23,870
l 3,05 l
$
7,086
157
(1,47 t)
t/b
(el6)
(1,67s)
134
(27)
21 ,771
91 ,085
Appendix 6 to Joint Application Page 209 of 414
Table of Contcnts
AVISTA CORPORATION
Avista
Utilities
302,641 $
106,607
7 5,790
38,35 I
59,862
20,462
| 6,349
26,771
88,048
80,204
t74,0t5
702,788 $
265,685
149,046
7 6,217
161,107
40,880
45,021
81,758
172,483
Alaska Electric
Light and Powcr
Company
1,058
5,889
4,01 9
10,332
Total Utility Other
Intsrsegment
Eliminations(l)Total
For the three months ended June 30,2016:
Operating revenues
Resource costs
Other operating expenses
Depreciation and amortization
Income (loss) from operations
Intcrest cxpensc (2)
Income taxes
Net income (loss) attributable to Avista Corp.
shareholders
Capital expenditures (3)
For the six months ended June 30, 201 7:
Operating revenues
Resource costs
Othcr opcratin g cxpenscs
Depreciation and amortization
Income (loss) from operations
Interest expense (2)
Incomc taxcs
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
Dcprcciation and amortization
Income (loss) from operations
Interest expense (2)
Income taxes
Net income (loss) attributable to Avista Corp.
sharehol ders
Capital expenditures (3 )
Total Assets:
As ofJune 30,2017:
As ofDecember 31,2016:
10,247 $
3,208
2,876
I,327
2,252
895
676
3 r 2,888 $
109,815
78,666
39,678
62,t t 4
21,357
17,025
$
27,829
93,937
739,266
268,337
156,449
84,628
173,388
47,298
47,447
85,73 8
177,7 t4
85,7 7 7
182,815
5,950 S
6,281
t92
(523)
149
(3 ls)
(57s )
46
s 1 1,705 $
l 1,330 s
t2,106
380
(l,l s6)
310
(537)
(874)
165
59,7 56 S
60,43 0 $
318,838
109,815
84,947
39,870
61 ,59 I
2t,472
I 6,71 0
27,254
93.9 8 3
$7 50,97 1
268,337
t69,7 t4
84,97 3
171,483
47,600
46,39s
83,887
I 77,883
s
84,903
182,980
$ 5,3 73,004
$ s,3 09,7 s s
$
(34)
$712,128 $
262,O74
150,682
8t,733
162,606
45,509
43,909
27,138 $
6,263
s,7 67
2,895
10,782
l,789
3,538
13,265
34s
(r,90s)
343
(r,052)
(41)
5,534
3,699
(r,851)
169
$22,893 S
5,849
5,399
2,653
11)<
I,790
2,571
725,68t $
271,534
154,445
78,870
I 68,832
42,670
47,592
737,01I
271 ,534
166,551
79,250
167 ,67 6
42,883
47,055
(e7)
$ 5,034,778 $ 278,470 $ 5,313,248 $
s 4,975,555 $ 273,770 $ 5,249,325 S
(l ) Intersegment eliminations reported as interest expense represent intercompany interest.(2) Including interest expense to affiliated trusts.(3) The capital expenditures forthe otherbusinesses are included in otherinvesting activities on the Condensed Consolidated Statements ofCash Flows.
30
Appendix 6 to Joint Application Page 210 of4l4
Tabl€ of Contetrts
AVISTA CORPORATION
NOTE I3. SI,tsSEQI.IENT 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 Onc (US parcnt), and Olympus Corp., a wholly owned subsidiary of US parcnt (Mcrgcr Sub). Hydro Onc,
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.
Thc Mcrgcr Agrccmcnt provides for Avista Corp. to bccomc an indircct, wholly-owned subsidiary of Hydro Onc. At thc cffectivc time of thc mcrgcr, 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 automatically
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
thc Mcrgcr, including approval from the FERC, thc Committcc on Forcign Invcstmcnt in thc Unitcd States (CFIUS), thc Fcderal 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
ofthe applicable waiting period under the Hart-Scott-Rodino Antitrust hnprovements Act of I 976. 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 halfof2O I 8.
The Merger Agreement also contains customary representations, warranties and covenants ofAvista 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,
subjcct to ccrtain cxceptions. In addition, thc partics arc requircd to usc rcasonablc bcst cfforts to obtain any rcquired rcgulatory 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-public information or entering into discussions or negotiations concerning proposals relating to altemative business combination
transactions, except as and to the extent permitted under the Merger Agreement wrth 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 directon
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 v/ith its fiduciary duties underapplicable 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 cerlain
circumstances, including iftheMcrgcrisnotconsummatcd by Scptcmbcr30,20l8 (subjcct to an cxtcnsion ofup to six monthsby eithcrparty ifall ofthc
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 cefiain additional termination rights for each of Avista Cory. 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 \Mith
rcspcct to a Supcrior Proposal, or (ii) tcrmination by Hydro Onc following a withdrawal by Avista Corp.'s board or dircctors of its rccommcndation 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 Tennination Fee in the event Avista Corp. signs or consummates any specified altemative transaction within twelve
months following the termination of the Merger Agreement under certain circumstances. ln 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 $ I 03.0 million.
31
Appendix 6 to Joint Application Page211 of414
Table of Contcnts
REPORT OF INDEPENDENT REGISTERED PIJBLIC 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 30,201 7
and 20 I 6 and thc relatcd condcnsed consolidated statcmcnts ofequity and cash flows for thc six-month pcriods endcd June 30, 2017 and 20 I 6. These intcrim
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards ofthe Public Company Accounting Overcight 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
thern to be in conformity with accounting principles generally accepted in the United States ofAmerica.
We have previously audited, in accordance with the standards ofthe Public Company Accounting Oversrght Board (United States), the consolidated balance
shcct ofAvista Corporation and subsidiarics as ofDcccmbcr 3 I , 20 I 6, and thc rclated consolidated statcmcnts ofincomc, comprchcnsive incomc, equity and
redeemable noncontrolling interests, and cash flows for the year then ended (not presented herein); and in our report dated February 2l ,2O17 ,we expressed
an unqualified opinion on those consolidated financial statements. In ouropinion, the information set forth in the accompanying condensed consolidated
balance sheet as ofDecember 3 I , 20 I 6 is fairly stated, in all material respects, in relation to the consolidated balance sheet fiom which it has been derived.
/s/ Deloitte & Touche LLP
Seattle, Washington
August 1,2017
32
Appendix 6 to Joint Application Page 212 of 414
Table of Contents
AVISTA CORPORATION
Item 2. Management's Discussion and Analvsis 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 of Financial 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
Cornpany's 2016 Fonn l0-K.
Business Sesments
Our busincss scgmcnts havc not changcd during the six months ended June 30, 20 I 7. See thc 20 1 6 Form I 0-K as well as "Note 1 2 ofthe Notcs to Condenscd
Consolidated Financial Statements" for further information regarding our 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
three and six months ended June 30 (dollars in thousands):
Three rnonths ended June 30,Six rnonths ended June 30,
2017 2016 201'7 20t6
Avista Utilities
AEL&P
Other
Net income altributable to Avista Corp. shareholders
$2t,765 S
1,681
(l,67s)
26,771 $
I,058
(5 75)
80,204 $
5,534
(r,8sl)
8l .758
4,019
(874)
2t ,771 $27.254 $83,887 $84,903
Execudve Level Summerv
Overall Results
Net income attributable to Avista Corp. shareholders was $21 .8 million for the three months ended June 30, 201 7, a decrease from $27.3 million for the three
months ended June 30, 20 I 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 for both the second quarter and first halfof2O I 7 was due to a decrease in eamings at Avista Utilities and an increase in losses at our
other businesscs, partially offset by an increasc in eamings at AEL&P.
Avista Utilities' eamings decreased for both the second quarter and year-to-date 20 I 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 expense. As previously
discussed, our 20 I 6 rcquests for gencral ratc incrcases in Washington were dcnied; therefore, we are not rcceiving regulatory recovcry ofthe incrcase 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 growth and lower electric resource costs. See "Results of Operations - Overall - Non-GAAP Financial Measures" for funher discussion
of gross margin.
AEL&P eamings increased for the second quarter and year-to-date 20 1 7 primarily as a result ofan increase in electric gross margin (operating revenues less
resource costs), due to an interim gencral rate incrcase and highcr loads duc to colder weather in the first quarter, partially offsct by an increasc in opcrating
expenses and a decrease in AFUDC and capitalized interest due to the construction ofan additional back-up genemtion 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 ofoursubsidiaries and additional losscs on investmcnts as compared to 2016.
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 I 9, 201 7, Avista Corp. entered into a Merger Agreement that provides for Avista Corp. to become an indirect, wholly-owned subsidiary of Hydro
One. Subject to thc satisfaction orwaiverofspccified closing conditions, the merger is cxpectcd to closc during thc second halfof20l8. At thc effcctive timc
ofthe merger, each share ofAvista Corp. Common Stock issued and outstanding other than Dissenting Shareholder Shares (as defined in the Merger
Agreement) and shares olAvista Corp. Comrnon Stock that are owned by Hydro One, US Parent or Merger Sub or any oftheir 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 l3 of the Notes to
Condensed Consolidated Financial Statements" and Avista Corp.'s Current Report on Form 8-K filed with the SEC on July 19,2017.
33
$
Appendix 6 to Joint Application Page 213 of 414
Table of Contents
AVISTA CORPORATION
Resulatorv Matters
Generul Rate Cqses
Wc rcgularly rcview thc nced for elcctric and natural gas ratc changcs in cach statc in which we providc scrvice. Wc expect to continuc to file for ratc
adjustments to:
. seek rccovery ofoperating costs and capital investments, and
. seek the opportunity to earn reasonable retums as allowed by regulators.
With regards to tlre tirning and plans for future filings, the assessment of our need for rate relief and the development of rate 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.
Avtsta Utilities
ll/ashington General Rate Cases
20 I 5 General Rate Cases
In January 20 I 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
Fcbruary 201 5. New clcctric and natural gas ratcs were effcctive on January 11,2016.
Thc UTC-approved rates wcre dcsigncd to provide a I .6 pcrcent, or $ 8.1 million dccrcasc in clcctric basc revenuc, and a 7.4 pcrcent, or $ I 0.8 million increasc
in natural gas base revenue. The UTC also approved a rate ofretum (ROR) on rate base of7.29 percent, with a common equity ratio of48.5 percent and a 9.5
percent retum on equity (ROE).
UTC Order Denying Industrial Customers of Northwest Utililies / Public Counsel Joint Motion.for Clarification, UTC Staff Motiotl to Reconsider
and WC Staff Motion to Reopen Record
On January 19,2016, the Industrial Custorncrs ofNorthwest Utilities flCNt-J") and thc Public Counsel Unit of the Washington Statc Oflicc of thc
Attomey General (PC) filed a Joint Motion for Clarification with the UTC. In the Motion for Clanfication, ICNU and PC requested that the UTC
clarif the calculation ofthe electric attrition adjustment and the end-result revenue decrease of$8.1 rnillion. ICNU and PC provided theirown
calculations in theirMotion, and suggested that the revenue decrease should have been $19.8 million based on theirreading ofthe UTC's Order.
On January I 9, 20 I 6, the UTC Staff, which is a scparatc party in the gcncral ratc casc procccdings from thc UTC Advisory Stafi filcd a Motion to
Reconsider with the UTC. In its Motion to Reconsider, the Staffprovided calculations and explanations that suggested that the electric revenue
decrease sl.rould 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 Instruction on Use and Application of
Staff s Attrition Model, and sought to supplement the record "to incorporate all aspects of the Company's Power Cost Update." Within this Motion,
UTC Staffupdatcd its suggcsted clcctric rcvenuc dccrcase 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 $'l 0.8 rnillion.
On February 19 ,2016, the UTC issued an order (Order 06) denying the Motions surnmarized above and aflirming Order 05, including an $ 8.1 million
decrease in electric base revenue.
PC Petition for Judicial Review
On March I 8, 20 I 6, PC fi led 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 rutes 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
arbitrarily and capriciously rn 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 IITC erred in applying the "end results test" to set rates forourelectric operations that are not
supported by the record; (4) the UTC did not correct its calculation ofour electric rates after significant erors were brought to its attention; and (5)
the UTC's calculation ofour electric rates lacks substantial evidence.
34
Appendix 6 to Joint Application Page 214 of 414
Table ol C'ontents
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 rn Order 05 and reaffirmed in Order 06 are unlawfill and not fair,just and reasonable; (4) remand the matter to the UTC for funher
proceedings consistent with these rulings, including a delennination ofour revenue requirement for electric and natural gas services; and (5) find the
customers are entitled to a refund.
On April I 8, 201 6, PC filed an application with thc Thurston County Superior Court to certify this mattcr for rcvicw dircctly by thc Court of Appcals,
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 12,2017 before the court. A
decision from the Court is not expected until late 2Ol7,al the earliest.
In its briefto the Court, the UTC, while defending the use ofits attrition adjustment nevertheless requested a partial remand back to the IITC 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 powercost update at issue represents approximately $12.0 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 Order06 finalizing the electric and natural gasgeneral rate casesprovide areasonableend result forall parties. Ifthe outcome ofthejudicial
reviewwere to result in an electric rate reduction greaterthan the decrease ordered bytheUTC, it may result in a refund liability to customers ofup to
$9.5 million,which is net ofan approximately $2.5 million refund forWashington electric customersrelated to the 2016 provision forearnings
sharing that we have already accrued.
20 I 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. TheUTC orderdenied the Company's proposed electric and natural gasrate increase requests of$38.6 million and $4.4 million,
rcspectivcly. Accordingly, our current electric and natural gas retail rates rcmained unchangcd in Washington Statc, following the ordcr.
Our original requests were based on a proposed ROR of 7.64 percent with a common equity ratio of48.5 percent and a 9.9 percent ROE.
On December 23, 20 I 6 we filed a Petition for Reconsideration or, in the altemative, Rehearing (Petition) with the UTC related to our 20 1 6 general rate cases.
On February 27 ,2017 ,we received an order from the UTC denying our Petition 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 I 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-tcrm value can be achicved through focusing on ncw general rate cascs than through appcaling thc UTC's dccision in thc courts.
Following the conclusion of the 2016 case, wc met with the Commissioncrs to bcttcr undcrstand their conccms and their cxpectations going forward. Thc
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 of any future general rate case.
20 1 7 General Rate Cases
On May 26,2017,we filcd two requcsts with thc UTC to rccovcr costs rclatcd to powcr supply and systcm maintcnance as wcll as capital invcstments made
since the last determination ofour rate base in the 20 1 5 Washington general rate cases.
The two filings are summarized as follows:
Power Cosl Rate Adjustmenl
The first filing is an electric only power cost rate adjustment that would update and reset power supply costs, effective September l, 201 7. We
rcquestcd an overall incrcasc in bitled clcctric ratcs of2.9 pcrcent (dcsigned to incrcasc annual clectric rcvcnucs by $ I 5.0 million). Thc kcy drivcrs
behind this request are related to the expiration ofa capacity sales
35
Appendix 6 to Joint Application Page 215 of 414
Table of Contents
AVISTA CORPORATION
agreementwith anotherutility and an increase in theprice ofnatural gas to fuel ourgenerating plants. Any newratesresulting from the powercost
ratc adjustmcnt would expirc upon thc conclusion ofthe clectric general ratc casc (discusscd in further detail bclow), ifapproved.
On June l6,2017,ICNU filcd a Motion with the UTC to dismiss the power cost rate adjustmcnt filing, or in thc altcmative, consolidatc thc 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 elcctric and natural gas gcncral rate cases. Wc filed three-ycar ratc plans for clectric and natural gas and have rcqucsted
the following for each year (dollars in millions):
Elcctric Natural Gas
Effective Date
Proposed Revenue
Increase
Proposed Base
Rate Increase
Proposed Revenue
Increase
Proposed Base
Rate Increase
May I . 2018 (l )
May 1,2019(2)
May t ,2020 (2)
$
$
$
8.3
4.2
4.4
6r.4
14.0
r4.4
t2.s% $
25% $
2.s% $
9.3%
4.4%
4A%
(1 ) The $6 ! .4 million electric revenue increase includcs the $ I 5.0 million power cost rate adjustment discussed abovc.
(2) As a part ofthe electric rate plan, we have proposed to update power supply costs through a Power Supply Update, the effects ofwhich would
also go into effect on May 1,2019 and May l,2020. The requested rcvenue increases for 201 9 and2020 do not include any power supply
adjustments.
Our request is based on a proposed ROR of 7.76 pcrccnt with a common cquity ratio of 50.0 perccnt and a 9.9 perccnt ROE.
As a part ofthe three-year ratc plan, ifapproved, we would not file another gcneral rate case until June l, 2020, with new ratcs 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 Falls biomass plant that will ensure efficient generation and operations.
. The ongoing proj ect to systematically replace portions ofnatural gas distribution pipe in our scrvice area that were installed prior to 1 9 8 7, as
well as replacement ofother natural gas service equipment.
. Transmission and distribution system and asset maintenance, such as wood pole replacements, feeder upgrades, and substation and transmission
line rebuilds to maintain rcliability for our customers.
. Technology upgrades that support necessary business processes and operational efficiencies that allow us to effectively manage the uti lity and
serye customels.
. A refresh ofthe 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 Washington 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 ofour
existing electric meters with new two-way digital meters and the related software and support services through our AMI project in Washington State.
Replacement of the meters is expected to
36
Appendix 6 to Joint Application Page 216 of 414
Table of Contents
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 20 I 7, we identified approximately 70,000 natural gas encoder receiver transmitters (ERTs) that will need to be replaced as part ofthe AMI project. In
May 201 7, wc filed a Pctition with thc UTC requesting dcfcncd accounting trcatmcnt for the investmcnt costs associated with thc Washington AMI projcct,
including components such as meter commun ication networks, information management systems and the natural gas ERTs. The Petition requests the defen*al
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 Rale Cases
201 6 General Rute Case
In December 20 I 6, the IPUC approved a settlement agreement between us and other padies in our electric general rate case, concluding our Idaho electric
general rate case originally filed in May 20 1 6. New rates took effect on January I ,2017 under the settlement agreement. We did not file a natural gas general
rate case in 20 I 6.
The scttlement agrcement increased annual electric base ratcs by 2.6 percent (dcsigned to incrcase annual clcctric revenues by $6.3 million). The scttlcmcnt
revenue 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 $4.1 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 Rale Cases
On June 9,2Ol7,we filed electric and natural gas general rate requests with the IPUC to recover increased power supply costs and capital investments rnade
since the last determination ofour rate base in the 201 6 Idaho electric general rate case and the 201 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 Rcvcnuc
Increase
Proposed Base Proposed Rcvcnuc Proposcd Basc
January 1,2018 $ 18.6 7.5% $ 3.5 8.8%
January 1,2019(l) $ 9.9 3;7% $ 2.1 5.0%
(l ) We are not proposing to update base power supply costs for year two of the 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 prior to January I , 2020.
The major drivers ofthese general rate case requests is to recovcr 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 integraled energy services grid.
Among the capital investments included in the filings are:
. Generator maintenance at the Kettle Falls biomass plant that will ensure efficient gencration and operations.
. The ongoing project to systematically replace pofiions ofnatural gas distribution pipe in our service area that were installed prior to I 987, as well as
replacement of other natural gas service equipment.
Effective Date Rate [ncrease lncrease Rate Increase
Appendix 6 to Joint Application Page217 of414
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 customers.
. Technology upgrades that support necessary business processes and operational effciencies that allow us to effectively manage the utility and serve
customers.
. A rcfrcsh ofthc customer-facing wcbsite, providing relevant information, greater acccssibility on mobilc dcvices, casier navigation, and a
streaml ined 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 orbelore
January 1,2018.
Oregon General Rate Cases
201 5 General Rate Case
On Fcbruary 29,2016,thc OPUC issued a prcliminary ordcr (and a final order on March I 5, 20 I 6) concluding our natural gas gcneral ratc casc, which was
originally filed with the OPUC in May 201 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 mill ion). New rates went into effect on March I , 20 I 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 order provides for an overall 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 ofthe 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 1 7.
The settlement proposes that, effective October 1,201 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 agreelnent, we agreed to non-recovery ofcertain utility plant expenditures, which resulted in a write-offof
approximately $0.8 million in the second quarter of 2O17.
The proposed settlement agreement reflects a 7.35 ROR with a corrrmon equity ratio of 50 percent and a 9.4 percent ROE.
Alasks Electric Light and Power Compan!
Alaska General Rate Case
In Scptembcr 2016, AEL&P filed an clectric gcneral rate case with thc RCA. AEL&P was grantcd a rcfundable intcrim basc ratc incrcasc of 3.86 pcrccnt
(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 $ I .5 million), which, if approved, could take eflect in February 201 8. Tlr is 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 customers that would otherwise occur.
The RCA must rule on permanent rate increase requests within 450 days (approximately l5 months) from the date of filing, unless otherwise extended by
consent ofthe parties. The timeline for the AEL&P general rate case, with the consent ofthe parties, was extended to February 8, 20 1 8.
The rate request is based largely on the addition ofa new backup generation plant (Industrial Blvd. Plant) to rate base.
Avista Utilities
Parc hased 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. [n 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
dcfcned natural gas cosrs among all junsdictions were a liability of $29.0 million as of Jun c 30,2017 and a liability of $3 0.8 million as of Decembcr 3 I ,
20 I 6. These balances represent amounts due to customers.
38
Appendix 6 to Joint Application Page218 of4l4
Table of Contents
Table of Contents
AVISTA CORPORATION
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
fucl, and thc amount included in basc retail ratcs for our Washington customcrs and dcfcr these diffcrcnces (ovcr the $4.0 million dcadband and sharing
bands) for future surcharge or rebate to customers. See the 20 I 6 Form I 0-K for a full drscussion ofthe mechanics ofthe ERM and the various sharing bands.
Total net defened powercosts underthe ERM wasa liability of$23.5 million as ofJune 30,2017, compared to a liability of$21.3 million as ofDecember3l,
20 I 6. These deferred power cost balances represent amounts due to customers.
Avista Utilities has a PCA mechan ism in Idaho that allows us to modif, electric rates on October I of each 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 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 rnillion as ofDecernber 3 I , 20 I 6. These deferred power cost balances represent amounts due to customers.
Decoupling and Earnings Sharing Mechanisms
Decoupling is a mechanisrn 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 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 defened and either surcharged or rebated to customers beginning in the following year. Only
the residential and commercial customer classes are included in our decoupling mechanisms described below.
llushinglon 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
carricd forward for rccovcry in a future period. Thcre is no limit on the lcvcl ofrebatc ratc adjustmcnts.
The decoupling mechanisms each include an afterthe-fact eamings test. At the end ofeach calendar year, sepamte electric and natural gas eamings
calculations are made for the calendar yearjust ended. These eamings tests reflect actual decoupled revenues, norrnalized power supply costs and other
nonnalizing adjustments. The operation ofthe 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 2016 Form I 0-K. See below for a summary of cumulative balances
under the decoupling and earnings sharing mechanisms.
ldaho Fixed Cost Adjustment (FCA) and Eanrings Sharing Mechanisms
In Idaho, the IPUC approved the implementation ofFCAs for electnc 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 pcriod 20 I 3 through 20 I 5, we had an after-thc-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. 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.
Ore go n Dec oup I in g Me c h ani sm
In February 201 6, 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 , 201 6. There will be an opportunity for interested parties to review the rnechanism
and recommend changes, ifany, by September 20 1 9. An eamings review is conducted on an annual basis, which is filed by us with the OPUC on or before
June I of each year for the prior calendar year. In the annual eamings review, if we eam more than I 00 basis points above our allowed retum on equ ity. on e-
third ofthe eamings above the I 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.
39
Appendix 6 to Joint Application Page219 of 414
Table of Contents
AVISTA CORPORATION
Cumulative Decoupling and Earnings Sharing Mechanism Balances
As of June 30, 201 7 and December 3 1 , 2016, 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 2016
Washington
Decouplingsurcharge S 24,031 S 30,408
Provision for eamings sharing rebate (5,860) (5,1 I 3)
Idaho
Decoupling surcharge $ 6,345 $ 8,292
Provision for eamings sharing rebate (3,73 | ) (5,1 84)
Oregon
Dccoupling surchargc (rcbate) $ (l 9) $ 2,021
Sec "Rcsults ofOpcrations - Avista Utilitics" for furthcr discussion ofthc amounts rccordcd to operating rcvcnucs in 20 I 7 and 20 I 6 rclated to thc dccoupling
and eamings sharing mechanisms.
Results ofOperations - Overall
The following provides an ovewiew ofchanges in our Condensed Consolidated Statements oflncome. More detarled explanations are provided, particularly
for opcrating rcvenucs and operating cxpenscs, in thc busincss scgmcnt discussions (Avista Utilitics, AEL&P, and thc othcr busincsses) that follow this
secti on.
The balances included below for utility operations reconcile to the Condensed Consolidated Statements oflncome.
Three months ended June 30, 201 7 compared to the thtee n onths ended June 30,2016
The following graph showsthetotal change in net income attributable to AvistaCorp. shareholders forthe second quarterof20l6 to the second quarterof
20 I 7, as well as the various factors that caused such change (dollars in millions):
s7.1
53.7
9(3.3)5{3.0)
IotalCh.n8ein Nd UilityRaenu6
&sts
s{0.2)5(o.El
s(4.2)
S(s.s)
s{4.E|
GherUtilltyOFrnry UtilityD@.eciaoon h-Utlly lncmeTartp€n*ExFnEs rndAmodzrtlon Op.rdl6gE&nr6
rnd D+rdladon
cndhortiu6tim
Utility revenucs decreascd due to a dccrcasc at Avista Utilities, partially offsct by an incrcasc at AEL&P. Avista Utilities'revcnues decrcascd 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 mte increase in Idaho, a natural gas general rate increase in Oregon and higherretail electric and natural gas heating loads due to
customer gro*th and weather that was cooler than the prior year. There were electric decoupling surcharges during both the second quarter o f 2017 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 I 7.
The surcharges were larger in 20 I 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
ooo
oI
o
o
mo
=.a@
-iD -.1
=o:. 0.6o
o
Appendix 6 to Joint Application
40
Page 220 of 414
Table of Contetrts
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
gcneral rate case settlemcnt. There were also merger transaction costs incurred during thc sccond quafier 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 due to a decrease in income before income taxes. Our effective tax rate was 37.5 percent for the second quarter of20 I 7 colnpared 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 prirnarily due to revenue related taxes and property
taxes. Lastly, therc was an increase in losses on investments at our subsidiaries.
Six months ended June 30,2017 conpored lo the sk months ended June 30,2016
The following graph shows the total change in net income attributable to Avista Corp. shareholders for the six months ended June 30, 20 I 6 to the six months
ended June 30,201 7, as well as the various factors that caused such change (dollars in millions):
s13.6
53.2
So.7s0.4
s{1.1)s(t.o)
s(s.8)
5(2.0)
Tot.lChsnF in Xd utilityRaenE Non Utlity
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 ldaho, 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. 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 halfof201 6. These increases were partially offset by a change in the electric
provision for eamings sharing, which incrcascd revenuc during 20 I 6 (duc to a reduction to the 20 I 5 provisions in Washington and Idaho rccordcd 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, partially 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
4t
Sllool
Utllity Rsilrcc uillty OF.6q Wlity orydatm bn-Utlity lncfre t r Eryne Other
Costs [tFrss rnd Amdhlm OFratlr{ Epcnias
.ad DeddonddAMk tu
mo
=
GI
mo
l.l0q
,ooo
o
o
oo
oo
o
Appendix 6 to Joint Application Page221 of4l4
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 1 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 decrcased primarily duc to a dccrcase in income before incomc taxes. Our effectivc tax ratc was 35.6 pcrcent for the first six months of20 I 7 and
20t6.
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 prirnarily due to revenue related taxes and property
taxes. Lastly, therc was an increase in losses on investments at our subsidiaries.
Non-GAAP 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 measurc 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 vr'eather, economic or other conditions), rates, supply costs and other factors impact our
rcsults ofoperations. In addition, we present electric and natural gas gross margin separately bclow for Avista Utilities sincc cach business has diffcrent 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 performance. The calculations ofelectric and natural gas gross margins are
presented below.
Results of Ooerations - Avista Utilities
Thrce months ended June 30,201 7 compared to the three n onlhs ended June 30,2016
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 Gre Intracompany Total
20't7 201 6 20t'7 2016 20t7 2016 2017 2016
Operating revenues $ 230.558
69.421
s l6l.13l
$ 234,791 $
7 3,350
80,430 $
44,275
80,955 $
46,362
(t4,241) $
(14,241)
(r 3,1 os) $
(l3,l0s)
296,747 $
99,461
302,641
I 06,607Resource costs
Gross margin $ 161,441 $ 36,155 S 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 $ I .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 201 6), rnostly offset by a general rate increase in Idaho, customer groMh and
lower resource costs. For the second quarter of 201 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 20 I 7 since our 20 I 6 request for a general electric mte 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 201 7. See further discussion of tlre Washington order in "ltem 2. Management's Discussion and Analysis - Regulatory Matters."
The incrcasc in natural gas gross margin was primarily due to a gcncral ratc increasc 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
condcnscd consolidated financial statcments but are included in thc separatc results for electric and natural gas prcsented bclow.
42
Appendix 6 to Joint Application Page 222 of 414
Table of Contents
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 tlrousands):
Electric Operating Reven ues
$7{ I 37-!.{ $7.1 7
507 )
3:7 I S:6.e $27.7 g: I .e S:0.8$17.(t $tts fl8:
*trslst]"1t''{Coun.tt'"to\ $rrl,r$rr'$t $rroresau S$'ri ot$t$
'l'I$tlli''
:(lt7 I :{}t6
(l) This balance includes public street and highway lighting, which is considered part ofretail electric revenucs and it also includcs rcvcnucs and rebatcs
from decoupling.
Electric Energy lllWh Sales
$:.1
Botd"nt*o'( ,':rrrrtr'rcrc\r\\+drrtttrs\fr\ttt\eq'lt\'
I :0t7 l0ltr
43
Appendix 6 to Joint Application Page 223 of 414
75$751 ?0.1 ?t0
{{.1 .l iH
n
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 Opcrating
Revenues
2017 2016
Washington
Decoupling surcharge $ 3,661 S 4,553
Provision foreamings sharing (l) (130) 1,1 19
Idaho
Decoupling surcharge $ 862 $ 2,651
Provision foreamings sharing (2) nla 711
( I ) The provision for eamings sharing in Washington for the second quarter of 20 I 7 represents an adj ustrnent of the 20 I 6 prov ision for eam ings sharing.
We are not expecting a provision for eamings sharing in Washington relating to 2017 eamings. The provrsion for eamings sharing in Washington in
thesecondquarterof20l6resultedftoma$l.2millionreductioninthe20l5provisionforeamingssharing(whichincreased20l6revenues),partially
offsct by a $0. I million provision for thc sccond quartcr of 20 I 6.
(2) Theprovisionforeamingssharinginldahointhesecondquarterof20l6resultedfromareductioninthe20l5provisionforeamingssharing(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 rnillion forthe second quarterof20lT as compared to the second quarterof20l6 primarily reflecting the 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
perMWh (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 groMh. Compared to the second quarter of20 I 6, residential electrjc use
per customer increased 6 percent and commercial use per customer decreased 2 percent. Heating degree days in Spokane were I 2 percent
below normal, but 45 percent above th e second quarter o f20 I 6. Cool ing degree days rn Spokane were 54 percent above normal, but I 2
pcrcent belo\r'thc sccond quartcr of20 I 6.
. The increase in revenue per MWh was primarily due to a general rate increase in Idaho and a greaterportion ofretail revenues from
residential customers in the second quarter of20 I 7.
. a $ I 0.1 million decrease in wholesale electric revenues due to a decrease in sales prices (decreased reven ues $7.2 rnill ion) 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 $1.1 million increase in sales offuel due to an increase in sales ofnatural gas fuel as part ofthermal generation resource optimization activrties. For
the second quarter of20 I 7, $5.3 million ofthese sales were made to our natural gas operations and are included as intracornpany revenues and
resource costs. For the second quarter of20 I 6, $8.0 million ofthese sales were made to our natural gas operations.
. a$2.7 million decrease in electric revenue due to decoupling. Weatherwas generally warmerthan normal in both penods, which resulted in
decoup ling surcharges for both the second quarter o f 2017 and 20 I 6; however, the surcharges were larger during 20 I 6 since the weather di flered
morc from normal in 2016 than it did in 2017 . Dccoupling mecltanisms arc not impactcd by fluctuations in weathcr comparcd to prior ycar, thcy are
only impacted by weather fluctuations as compared to normal weather.
44
Appendix 6 to Joint Application Page 224 of 414
Table of Con(ents
AVISTA CORPORATION
The following graphs present ourutility natural gas operating rcvenues and therms delivered forthe three months ended June 30 (dollars in millions and
therms in thousands):
Natural Gas Operating Revenues
$,iJ s
il76 tl.) ('
$15.0
llt) ?Sllo 1t0 l
f.l q
B*l'dslttrrr\Cor$$et$$\\ih!'\eil$c
'l.slti:i'''
lot 7 :ol6
(l) Thisbalanceincludcsintemrptiblcandindustrialrevenues,whichareconsidcrcdpartofrctailnaturalgasrevenucsanditalsoincludesrcvcnuesand
rebates from decoupling.
Therms Delil'eretl
l i l.(r l:
uq.$$"!
,r t.q7l
+5,6,1.1 { t.07.t
::.348 to.:e7 I 5. t6.l
g.]tlN\tld C rrrrrrrrcrcd \ih\t\es'Jt\c l'\$$:r
I :rtr I trrlr,
45
Appendix 6 to Joint Application Page 225 of 414
Table of Contents
AVISTA CORPORATION
The following table presents Avista Utilities'decoupling and customereamings sharing mechanisms byjurisdiction that are reflected in utility natural gas
operating revenues for the three months ended June 30 (dollan in thousands):
Natural Gas Opcrating
Revenues
20t7 2016
Washington
Decoupling surcharge $ 30 S 3,595
Provision for eamings sharing (617) (320)
Idaho
Decoupling surcharge (rebate) $ (l 06) $ 589
Oregon
Dccoupling surcharge (rebatc) $ (121) $ 1,690
Total natural gas revenues decreased $0.5 million for the second quarter of20 I 7 as compared to the second quarter of20 I 6 primarily reflecting the
lollowing:
. a $ I 0.3 million increase in natural gas retail revenues due an increase in volumes (increased revenues S | 4.4 million), partially offset by lower retail
ratcs (dccrcased rcvcnues $4.1 million).
. Wesoldmoreretailnatural gasinthesecondquarterof20lTascomparedtothesecondquarlerof20l6duetoweatherthatwascoolerthan
the prior year. Compared to the second quarter of20 I 6, resrdential natural gas use per customer increased 39 percent and commercial use
pcr customcr incrcascd 33 pcrccnt. Hcating dcgrcc days in Spokanc wcrc I 2 pcrccnt bclow normal, but 45 pcrcent abovc thc sccond quarter
of20 I 6. Heating degree days in Medford were I I percent below normal, but 60 percent above the second quarter of20 I 6.
" Lower retail rates were due to PGAs, partially offset by a general rate increase in Oregon.
. afi4.7 rnillion 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). lnthe second quarlerof2017, $9.0 rnillion ofthese saleswere made to ourelectric
generationoperationsandareincludedasintracompanyrevenuesandresourcecosts. Inthesecondquarterof20l6,$5.1 millionofthesesaleswere
made to our electric genemtion operations. Differences between revenues and costs from sales ofresources in excess ofretail load requirements and
from resource optimization are accounted for through the PGA mechanisms.
. a $6.1 million decrease in natural gas revenue due to decoup ling. Weather was generally warmer than normal during the second quarter 20 I 7;
however, due to the shape ofthe normal usage curve 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
20 I 6. Decoupling mechanisms are not impacted by fluctuations in weather compared to prior year, they are only impacted by weather fluctuations
as comparcd to normal wcather.
The following table presents our average number ofelectric and natural gas retail customers for the three months ended June 30:
Electric Natural GasCustonrers Customers
2017 2016 201'7 2016
Rcsidcntial
Commercial
Intemrptible
Industnal (l )
Public street and highway lighting
Total retail customers
333,465
42,07 4
1,328
558
329,551
41,732
3 06,23 8
15 1q7
38
250
299,860
34,867
5t
255I,346
559
377,425 373,1 88 34t,723 335,019
(l ) The decrease in electric industrial customers as compared to the second quarter of20 1 6 is primarily related to a decrease in Washington irrigation
customers.
46
Appendix 6 to Joint Application Page 226 of 414
Table of Contents
AVISTA CORPORATION
The following our uti I
Total resource costs in the graphs above include intracompany resource costs of S I 4.2 million and $ I 3.1 million for the three months ended June 3 0, 20 I 7
and Junc 30,2016, rcspectively.
Total electric resource costs decreased $3.9 million for the second quarter o f 2017 as compared to the second quarter of 20 I 6 reflecting the fol lowing:
. a S 7.3 million dccrcase in purchased power duc to a decrcasc in thc volumc of powcr purchascs (decrcascd costs S I .I million) and a decreasc 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 decrcasc in fucl forgencration primarily due to a decrcase in thcrmal gcneration (due in part to incrcased 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
Electric Resource Costs
Sl5 t)$lr s
$t{} 0
t0t 7
s3
$t.r 0
c$s\s'(.)t\t:{i.\$
O{tc{
:0t6II
sre S $18.0
to.*lA .e$e(slro$
g$rchosEu f upltct n
Natural (las Resource (:osts
s] i
$le I
$7 1
-s0:
Natuml 5its purdhirsud
:ol6
Othcr
I :or7
Appendix 6 to Joint Application
4'7
Page227 of4l4
$lt 7
tr
Table of Contents
AVISTA CORPORATION
part of the resource optimization process. When the fuel or related derivative instruments are sold, that revenue is included in sales of fuel.
. a $7.0 million increase from amortizations and deferrals ofpower costs. This change was primarily to result oflower net power supply costs.
. a $0.2 million net increase from othcr regulatory amortizations and other clcctric rcsource costs.
Total natural gas resource costs decreased $2.1 million for the second quarter of 201 7 as compared to the second quarter of 20 16 reflecting the following:
. a $5.4 million increase in natural gas purchased due to an increase in the market price ofnatural gas (increased costs $ I 6.0 million), partially 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 of natural 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 months ended June 30, 201 6
The following table presents our operating revenues, resource costs and resulting gross margin for the six months ended June 30 (dollan in thousands):
Elcctric Natural Gas Intracompany Total
201't 2016 201'7 2016 2017 2016 2017 2016
0peraling revenues
Resource costs
Gross margin
$ 494.276
160,302
s 333.9',7 4
$ 497,s93
167.702
$ 2so.642
134,562
s l 16,080
$ 236,365 $
129,153
(32,790) $
(32,790)
(3 1,1 70) $
(3 l,l 70)
'7 t2,t28 $
262,074
702,788
265,685
$ 329,891 $ t07,212 $$$ 450,054 $ 437,103
The gross margin on electric sales increased $4. I million and th e 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 ldaho, 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 for20l'1 as compared to 2016). Forthe six months ended June 30,2017, we recognized
a pre-tax benefit of $4.6 million underthe ERM in Washington compared to a benefit of $4.2 million forthe 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 our natural gas distribution operations and our electric
generation operations (as fuel forourgeneration plants). These transactionsare eliminated in the presentation oftotal results forAvistaUtilitiesand in the
condensed consolidated financial statements but are included in the separate results for electric and natural gas presented below.
48
Appendix 6 to Joint Application Page 228 of 414
Table of Contents
AYISTA CORPORATION
The following graphs present our utility electric operating revenues and megawatt-hour (MWh) sales for the six months ended June 30 (dollars in millions
and MWhs in thousands):
Electric Operating Reven ues
$la{ q
Sltr8 0 $l5l.r 91.1q.(t
S53 I SSt 6 $-<8I
$.1q 5 s36 8 Si6 0 5-11 I$ls t
R*tU'rtrst otr'$€rira\ rtdusud \Nho\cEc\e Sr\es
.,i to"\0t\rr:rc
l0t 7 t :0t6
Electric Energ.v- lllWh Sales
l.q('.1
t.r5l 1.676I.567 1.55 I t.lil
Ec"0cltlttt\C $rt$lcts-r*\\rr$rrs$1$\ftfrt'NsN
torT I toro
49
Appendix 6 to Joint Application Page 229 of 414
867 liltl
tr
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):
Elcctric Opcrating
Revenucs
2017 201 6
Wrshington
Decoupling surcharge (rebate) $ (1,461) S 8,634
Provision foreamings sharing (l) (130) 2,169
Idaho
Decoupling surcharge (rebate) $ (1,096) $ 5,031
Provision foreamings sharing (2) n/a 7ll
( I ) The provision for eamings sharing in Washington for the six months ended June 3 0, 201 7 represents an adj ustment 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, 2016 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 3 0, 2016.
(2\ The provision for eamings sharing in Idaho in the six months ended June 30, 201 6 resulted from a reduction in th e 201 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 $3.3 million for the six months ended June 30, 20 I 7 as compared to the six months ended June 30, 20 1 6 primarily
refl ecting the following:
. a $30.6 million increase in retail electric revenue due to an increase in total MWhs sold (increased rcvenues $22.2 million) and an increase in
revenue per MWh (increased revenues $8.4 million).
. The increase in total retail MWrs sold was the result of weather that was cooler than the prior year (which increascd electric heating loads,
partially offset by a decrease in cooling loads), as well as customer growh. Compared to the six months ended June 3 0, 20 I 6, residential
electric use per customer increased I 0.6 percent and commercial use per customer increased 0. I percent. Heating degree days in Spokane
were 6 percent above normal and 29 percent above the first six months of20 I 6. Year+o{ ale 2016 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 per MWh was primarily due to a general rate increase in Idaho and a greater portion ofretail revenues from
residential customers in 2017.
' a $l 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 rnillion 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 30,201? , $ I 3.3 million ofthese sales wer€ made to our natural gas operations and are included 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 1 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.
50
Appendix 6 to Joint Application Page 230 of 414
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
fl:6 l
$t0l l
s6tl.6 $0t 6 $61 6
t{{ e
i:o 5
s3:
Bc+$crrrr:r\C orrrrlctctil \{hrNi''$e ()$\c'1
f :r-)t7 :0lo
Therms Deliveretl
ilt-r55
lt8.-r05
r:8.7 rq
98.5q9 lo5. l9a q5.5s(r
77,t21
5(r.19.]
BertSe$lt$C rrrr*tc{c$\$\!Nir\'r ('!$\el
I :0t7 t t{rto
51
Appendix 6 to Joint Application Page231 of4l4
Table 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 six months ended June 30 (dollars in thousands):
Natural Gas Operating
R€venues
2017 2016
Washington
Decoupling surcharge (rebate) $ (5,221) $ 6,766
Provision foreamings sharing (617) (536)
Idaho
Decoupfing surcharge (rebate) $ (883) S 2,126
Oregon
Dccoupling surchargc (rebate) $ (2,050) S 1,858
Total natural gas revenues increased $14.3 million for the six months ended June 30,201 7 as compared to the six months ended June 30,201 6 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
rctail ratcs (dccrcascd rcvcnucs $9.8 million).
. Wesoldmoreretail natural gasinthesixmonthsendedJune30,20lTascomparedtothesixmonthsendedJune30,20l6due tocooler
weather and customer groMh. Compared to the first six months of20 I 6, residential natural gas use per customer increased 28 percent and
commcrcial use pcr customcr incrcascd 29 pcrccnt. Hcating dcgrcc days in Spokane wcrc 6 pcrccnt abovc normal and 29 pcrcent abovc thc
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 oflset by a general rate increase in Oregon.
. a $l.0 rnillion 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 $2 1 .6 million). ln the six months ended June 3 0, 20 1 7, $ I 9.5 million ofthese sales were made to our electric
generation operations and are included as intracompany revenues and resource costs. In the six months ended June 30,2O16, $14.9 million ofthese
sales were made to our electric generation operations. Differences between 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 million decrease in natural gas r€venue due to decoupling. For the year-to-date, weather was overall cooler than normal in 20 I 7, which
resulted in decoupling rebates for the first halfof20 I 7. Weather was warmer than nonnal in the first halfof20 I 6. which resulted in significant
decoupling surcharges. Decoupling mechanisms ale not impacted by fluctuations in weathercompared to priolyear, they are only impacted by
weather fluctuations as compared to normal weather.
The following table presents our average nurnber ofelectric and natural gas retail customers for the six months ended June 30:
Elcctric
Customers
Natural Gas
Customers
20t7 2016 2017 20t6
Residential
Commercial
Intemrptiblc
Industnal (l )
Public street and highway lighting
Total retail customers
333,885
42,070
1,327
562
329,810
41.698
306,231
35,2t7
37
251
299,966
34,87 4
38
2561,347
555
377,844 373,410 341,736 335,1 34
(l ) The decrease in electric industrial customers as compared to the fint halfof2Ol 6 is primarily related to a decrease in Washington irrigation customers.
52
Appendix 6 to Joint Application Page 232 of 414
Table of Contents
AVISTA CORPORATION
The following graphs present our utility resource costs for the six months ended June 30 (dollars in millions):
Electric Resource (losts
s?l r
S("1 I
${:t til
li:il:$l.l : $j0 q $30 7
\r.t tt{,
\rtrr c\rrr:tt gt$cts\1$\i$s\((rbls 0r\rgr
tuP\ tot O$t'$
:or7 I rort,
Netural Gas Resource (lo$t$
$lts i
$ild 8
S(i I
$tt {
Natur:rl gls putchirstd Clllrrr
f :ot7 :0lo
Total resource costs in the graphs above include intracompany resource costs of$32.8 million and $31.2 million forthe six months ended June 30,2017 and
June 30,201 6, respectively.
Total electric resource costs decreased $7.4 million for the six months ended June 30, 20 I 7 as compared to the six months ended June 30, 20 I 6 reflecting the
following:
. a $7.0 million decrcase in purchased power due to a decrease in wholesalc prices (decreased costs $7.5 million), partially offset by an increase in the
volume ofpower purchases (increased costs $0.5 million). The fluctuation in volumes and prices was primarily the result ofour optimization
activities during tlre period.
. an $ I 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 otherfuel costs.
. an $8.2 million increase fiom amortizations and deferrals of power costs. This change was primarily to result of lower
Appendix 6 to Joint Application
53
Page 233 of 414
s:l .)
Table 0f Contents
AVISTA CORPORATION
net power supply costs.
. a $0.6 million increase in other regulatory amortizations and other electric resource costs.
Total natural gas rcsource costs incrcascd $5.4 million for the six months cndcd Junc 30, 20 I 7 as comparcd to thc six months endcd June 30, 20 I 6 rcflccting
the following:
. a $ I 3.7 million increase in natural gas purchased due to an increase in the price of natural gas (increased costs $24.0 mi llion), partial ly offset by a
dccrcase in total thcrms purchascd (dccreased costs $ I 0.3 million). Total thcrms purchased dccrcased duc to a dccrcase in wholesalc salcs, partially
offset by an increase in retail sales.
. an $1 1.8 million decrease from amortizations and delerrals ofnatural gas costs. This reflects lowernatural gas prices compared to ourauthorized
PGA rates and the deferral ofthese lower costs, which occurred in the current period for future rebate to customers.
' a S3.5 million incrcase in othcrregulatory amortizations.
Results ofOperations -Alaska Electric Light and Power Comoany
Three months ended June 30, 201 7 compared to the three months ended June 30, 201 6 and six months ended June 30, 201 7 compared to the six months
ended June 30, 20 I 6
NetincomeforAEL&Pwas$l.TmillionforthethreemonthsendedJune30,20lTcomparedto$l.l millionforthethreemonthsendedJune30,20l6.Net
incomc was $5.5 million for thc six months endcd Junc 3 0, 201 7 comparcd to $4.0 million for thc six months cndcd Junc 30, 20'l 6.
The increase in eamings for both the second quarter and year-to-date was primarily due to an increase in electric gross margin which was $8.7 rnillion 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 million for the six months ended June 30, 20 I 6. The increase in electric gross margin was partially offset by
an increase in operating expenses and a decrease in equity-related AFUDC due to the construction ofan additional back-up generation plant in 2016.
The increase in electric gross margin was primarily related to an interim general rate increase, effective in November 20 I 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 incrcase in rcsource costs primarily duc to purchascd power expcnse, defcned powcr supply expenscs and fucl cxpense.
While thc coolcr wcather did have somc cffcct on AEL&P revenucs during 201 7, AEL&P has a relativcly stablc load profilc as it docs not havc a largc
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
year, which drives higher revenues during those periods.
Operating cxpenses incrcascd primarily due to supplics cxpcnsc for thc ncw back-up gcncration plant, which wcnt into scrvice at thc cnd of20 I 6.
Results of Ooerations - Other Businesses
Net losses lor our other businesses were $ I .7 miltion for the three months ended June 30, 20 I 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, 201 6.
Net losses forthe second quarter20l 7 and the six months ended June 30,201 7 were primarily related to renovation expenses and increased compliance costs
at one ofour subsidiaries and additional losses on investments as compared to 20 I 6. These were partially offset by a decrease in corporate costs (including
costs associated with exploring strategic opportunities).
Critical Accountinq 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
eflect on our consolidated financial statements and thus actual results could differ fiom 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
di scussion.
54
Appendix 6 to Joint Application Page 234 of 414
Table of Contetrts
AVISTA CORPORATION
LiouidiW and Canital Resources
Overall Liouidiw
Ou.rsources ofoverall tiquidity and the requirements forliquidity have notmaterially changed in the six months ended June 30,2017. See the 2016 Form l0-
K for further discussion.
As of Junc 30, 201 7, we had $207.3 million of availablc liquidity under thc Avista Corp. committed linc of crcdit and $25.0 million undcr thc AEL&P
committedlineofcredit.Withour$400.0millioncreditfacilitythatexpiresin Apil202l andAEL&P's$25.0millioncreditlacilitythatexpiresin
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
Overall
During thc six months endcd Junc 30, 20 I 7, positivc cash flows from opcraling activitics were $228.5 million, which includcd contributions to our pcnsion
plan of $ 14.8 million. Other cash requirements included utility capital expenditures of $ I 77.7 million, dividends of $46.2 million.
Operatins Activities
Net cash provided by operating activities was $228.5 nrillion for the six months ended June 30, 20 I 7 corrpared to $ I 56.0 rnillion for the six months ended
June 30, 20 I 6. The increase in net cash provided by operating activities was primarily related to the amount ofcollateral posted for derivative instruments
where we posted $5.5 million in the firsthalfof20lT,compared to S83.5 million posted in the first halfof20l6. Or:rcollateral increased in 2016 due to a
decrease in the fair value ofoutstanding interest rate swap derivatives at that time and also due to fewer counterparties accapting 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 I 7, we had increased net income
(after consideration of non-cash items included in net income) of $235.5 million, compared to $224.0 million in 201 6.
We also increased our pension contributions from $8.0 million in the first half of 201 6 to $ 14.8 million in the first half of 201 7.
lnvestinp Activities
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 thc first half of 201 7, we paid $ 177.7 million for utility capital expcnditurcs comparcd to $ I 82.8 million for the first half of 2016. Also,
during the first halfof20 I 7, our subsidiaries invested $ I 0.3 million in equity and property, compared to $7.0 mitlion invested during the first halfof20 I 6.
Financing 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 ofS53.7 million for the six
months ended June 30, 20 I 6. We had the following significant transactions:
short-term borrowings increased by $ I 6.0 million in the first halfof20 I 7, compared to an increase of$55.0 million in 20 I 6,
cash dividendspaid to Avista Corp. shareholders increased to $46.2 million (or$0.715 pershare) forthe firsthalfof20lT from $43.3 million (or
$0.685 per share) for the first halfof20 I 6, and
issuance of$ I .2 million (net ofissuance costs) under share-based compensation plans. In 20 I 6, we issued $47.2 million ofcomrnon stock under
sales agency agreements.
55
Appendix 6 to Joint Application Page 235 of 414
Table of Contents
AVISTA CORPORATION
Caoital Resources
Our consolidated capital structure, including the current portion oflong+erm debt and short-tenn borrowings, and excluding noncontrolling interests,
consisted ofthe following as ofJune 30,2017 and December 3 I , 20 I 6 (dollars in thousands):
Junc 30, 201 7 Dcccmber3l,20l6
Amount
Pcrccnt
of total Amount
Pcrccnt
of total
Current potion oflong-term debt and capital leases
Shon-tcrm borrowings
Long-term debt to affiliated trusts
Long-term debt and capital leases
Total debt
Total Avista Corporation shareholders' equ i ty
Total
Borrowings outstanding at end ofperiod
Lcttcrs ofcredit outstanding at cnd ofpcriod
Maximum borrowings outstanding during the period
Average borrowings outstanding during the penod
Average interest rate on borrowings during the period
Avcragc intcrest ratc on borrowings at cnd ofpcriod
$2'77,814
136,398
51,547
t ,403,064
7.8% $
3.8%
15%
39.5%
3,287
120,000
51,547
t,67 8,717
0.lo/o
3.4%
15%
47.9%
I,868,823
I,687,173
52.6%
47.4%
l,853,5s 1
I,648,727
52.90h
47.1o/o
$ 3.5 5 5.996 100.0% $ 3,502,278 100.0%
Our shareholders' cquity incrcased $38.4 million during thc first six months of20 I 7 primarily due to nct 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 requircmcnts.
Committed Lines of Credit
Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million that expires in Apil2O2l . As of June 30,
20 I 7, there were $ I 36.0 rnillion ofcash borrowings and $56.7 million in letters ofcredit outstanding (which were prirnarily issued as collateral for our energy
commodity and interest rate swap derivatives), leaving $207.3 million ofavailable liquidity under this line ofcredit.
The Avista Corp. credit facility contains customary covenants and default provisions, including a covenant which does not permit ourratio of"consolidated
total debt" to "consolidated total capitalization" to be greater than 65 percent at any time. As ofJune 30, 201 7, we were in compliance with this covenant
with a ratio of 52.6 pcrcent.
AEL&P has a $25.0 million committed line of credit that expires in November 201 9. As of June 30, 2017, there were no borrowings or letters of credit
outstanding under this committed line ofcredit.
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 30,2O17, AEL&P was in compliance with this covenant with a ratio of 54.1 percent.
Balances outstanding and interest rates of bomowings (excluding letters of credit) under Avista Corp.'s committed line of credit were as follows as of and for
the six months ended June 30 (dollan in thousands):
2017 2016
$
$
$
$
136,000 $
56,703 S
136,000 $
I 05,1 57 S
t.67%
1.99%
I 60,000
45,795
r 60,000
l 18,832
1.22%
1.22%
Appendix 6 to Joint Application Page 236 of 414
There were no borrowings outstanding under AEL&P's committed line ofcredit as ofJunc 30, 20 I 7 and June 30, 20 I 6.
,{,s of June 30, 2017, Avista Corp. and its subsidiaries were in compliance with all of the covenants of their financing agreements, and none of Avista Corp.'s
subsidiaries constituted a "significant subsidiary" as defined in Avista Corp.'s committed line of credit.
Equiu Issaances
See 'Note 9 ofthe Notes to Condensed Consolidated Financial Statements" for a discussion ofour equity issuances during 2O16 and 2017 .
56
Table of Contents
AVISTA CORPORATION
201 7 Liquidity Expectations
In the second half of 20l7,we expect to issueup to $90.0 million oflong-term debt andup to $70.0 million ofcommon stock in orderto fund planned
capital expenditures and maintain an appropriate capital structure.
After considering the expected issuances oflong+erm debt and common stock during 2017 ,we expect net cash flows from operating activities, together with
cash available under our committed line ofcredit agreements, to provide adequate resources to fund capital expenditures, dividends, and other contractual
commitments.
Canital Exnenditures
We are rnaking 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 30,
201 7. See the 201 6 Form I 0-K for further information.
Olf-Balance Sheet Arra nsements
As of June 30, 201 7, we had $56.7 million in letters of credit outstanding under our $400.0 million comrnitted line of credit, compared to $34.4 million as of
December 3 1, 20 I 6. The increase in outstanding letters ofcredit is partially related to negotiations with interest rate swap counterparties to accept letters of
credit as collateral ratherthan cash collateral and also due to issuing additional letters ofcredit as collateral based on changes in the fairvalue ofinterest rate
swap and energy commodity dcrivativcs during the six months cnded Junc 30,2O17 .
Pension Plan
Avistu Atifities
In the six months ended June 30,2017 we contributed $14.8 million to the pension plan and we expect to contribute a total of $22.0 million in 2017. We
expectto contribute a total of$l 10.0 million to thepension plan in theperiod 2017 through 202l,with annual contributions of$22.0 million overthat
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 ourpension 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 infonnation regarding the pension plan.
Contractual Ohlisations
Our future contractual obligations have not materially changed during the six months ended June 30,2017 . 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, 20 I 7.
See the 20 I 6 Fonn I 0-K for all other environrnental issues and contingencies.
Climate Change - Federul Regulatory Actions
The Environmental Protection Agency (EPA) released the final rules for the Clean Power Plan (Final CPP) and the Carbon Pollution Standards (Final CPS) on
August 3, 201 5. The Final CPP and the Final CPS are both intended to reduce the carbon dioxide (CO2) emissions liom certain coal-fired and natural gas
electric generating units (EGUs). These rules were published in the Federal Register on October 23, 20 I 5 and were immediately challenged via lawsuits by
other parties.
ln a separate but related rulemaking, the EPA fin alized, CO2 new source performance standards (NSPS) for new, modified and reconstructed fossil fuel-fired
EGUs under CAA section I 1 I (b). These EGUs fall into the same two categories ofsources regulated by the Final CPP: steam generating units (also known as
"utility boilcrs and IGCC units"), which primarily bum coal, and stationary combustion turbines, which primarily bum natural gas.
Thc promulgated and proposed grccnhouse gas rulcmakings mcntioncd above havc bccn lcgally challcnged in multiple venucs. On February 9,2016, the
U.S. Supreme Court granted a request forstay, halting implementation of the CPP. On March 28,2017,the Department of Justice has filed a motion v/ith the
U.S. Court of Appeals for the District of Columbia Circuit (D.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.
57
Appendix 6 to Joint Application Page237 of414
Table of Contents
AVISTA CORPORATION
CircuitissuedorderstoholdthelitigationregardingtheCleanAirAct{lll(d)CleanPowerPlanandthe$l1l(b)NewSourcePerformanceStandardsfor
powcr plants in abcyance for a period of60 days with status rcports due from the EPA evcry 30 days. Thc 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 2017 transmitted a draft proposed rule to the OfIice of Management and
Budget. The contents olthat 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 I 0-K and have not materially changed during the six months ended June 30, 20 I 7.
Refer to the 20 I 6 Fonn I 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, 201 7. Refer to the 201 6 Fonn I 0-K Tlre financial risks included below
are required interim disclosures, even ifthey have not materially changed fi'om December 3 I ,2016.
Intercst Rate Rish
We use a variety oftechniques to manage our interest rate risks. We have an interest rate risk policy and have establ ished a policy to limit our variable rate
exposures to a percentage oftotal capitalization. Additionally, interest rate risk is managed by monitoring market conditions when timing the issuance of
long+erm debt and optional debt redemptions and establishing fixed rate long-term debt with varying maturities. See "Note 3 ofthe Notes to Condensed
Consolidated Financial Statements" for a summary ofour interest rate swap derivatives outstanding as ofJune 30,2017 and December 3 1,201 6.
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 I 7,
we had cash deposited as collateral in the amount of$15.9 million and letters ofcredit of$37.3 million outstanding related to ourenergy derivative
contracts. Price movements and/or a downgrade in our credit ratings could impact further the amount olcollateral required. See "Credit Ratings" in the 20 I 6
Form I 0-K for furthcr information. For cxamplc, in addition to limiting our ability to conduct transactions, ifour crcdit ratings wcrc lowered to bclow
"investmentgrade"basedonourpositionsoutstandingatJune30,20lT,wewouldpotentiallyberequiredtopostupto$4.1 millionofadditionalcollateral.
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
collatcral.
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
million and we had deposited cash in the amount of $41 .6 million and letters of credit of $ I 3.1 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.
Enerpv Commoditv Risk
Our energy commodity risks have not materially clranged during the six rnonths ended June 30, 20 I 7, except as discussed below. Refer to the 20 I 6 Form I 0-
K. The following table presents energy commodity dedvative fair values as a net asset or (liability) as ofJune 30, 2017 that are expected to settle in each
respective year (dollars in thousands):
Purchses Sales
Electric Derivatives Gas Derivatives Elcctric Derivatives Gas Derivatives
Ycar
Remainder 201 7
201 8
2019
2020
2021
Thereafter
(2,48s) $
(6,880)
(4,321)
s (732) $
(280)
(3s7)
(14,207\ $
(9,41 6)
(6,1 60)
(48e)
1,995 $
4,234
4,569
Physical (1) Financial (1) Physical (1) Financial (l) Physical (1) Financial (1) Pltysical (l) Financial (l)
$456
(347 )
(l,r 68)
(70) $
(24)
(l e)
(21 3) $
(870)
(8el)
(1,2s6)
(840)
5,808
3,402
1,557
58
Appendix 6 to Joint Application Page 238 of 414
Table 0f Contents
AVISTA CORPORATION
Electric Derivatives Gas Dcrivativcs Elcctric Derivatives Gas Dcrivatives
Ycar
2017
201 8
2019
2020
2021
Thereafter
Physical(l) Financial(l) Physical(l) Financial(l) Physical(l) Financial(l) Physical(l) Financial(l)
$(4,274\ $
(5,5e8)
(3,123)
(4,00s) $
(2,170)
(3,732)
(370)
l.939 $97$
(23s)
(266)
s 5'.16
854
975
$ (2,036) $
(el0)
(e27)
( l ,288)
(86e)
(3,440)
709
103
( I ) Physical transactions represent commodity transactions where we 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 vr'ith 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 ratcs 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 Effectiveness ofDisclosute Controls ond 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 1 934, 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
rcquired to bc disclosed by thc Company in thc reports that it filcs or submits under the Act is accumulatcd 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 oflicer 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
disclosurc controls and proccdures can only provide reasonable assurance ofachieving their control objcctives. Based upon this cvaluation, thc 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 changes in the Company's intemal control over financial reporting that occurred during the second quarter o f 201? thar have materially
aflected, or are reasonably likely to materially affect, the Company's intemal control over financial reporting.
PART II. Other Information
Item l. Lesal Proceedinss
See "Note I I ofNotes to Condensed Consolidated Financial Statements" in "Part I. Financial Information Item l. Condensed Consolidated Financial
Statements."
Item lA, Risk Factors
Pleasc rcfcr to the 20 I 6 Form 1 0-K for disclosurc ofrisk factors that could have a significant impact on our results ofopcrations, financial condition or cash
flows and could cause actual results or outcomes to differ materially fiom 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 frorn the disclosures provided in
the 20 I 6 Form I 0-l( except for the following:
59
Appendix 6 to Joint Application Page 239 of 414
The following table presents energy commodity derivative fair values as a net asset or (liability) as ofDecember 3 I , 20 I 6 that are expected to be delivered in
each respective year (dollars in thousands):
Purchmes Sales
(22s)
(33)
(40)
Iablc-ul.es$cu!
AVISTA CORPORATION
RISKS RELATED TO THE PROPOSED MERGER WITH IIYDRO ONE
The Conditions to the Merger May Not Be Satisfied.
The proposed Merger with Hydro One requires approval by the holders of a majority of Avista Corp.'s outstanding shares of common stock and the receipt of
regulatory approvals, inctuding from the FERC, the CFIUS, the FCC, the UTC, IPUC, MPSC, OPUC, and the RCA. Such approvals may not be obtained or the
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 incrcasc the cost ofthe transaction. In addition, thc failure to satisfu othcr closing conditions could rcsult in a termination ofthc 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 $ 103.0 million.
We will also be required to pay Hydro One the Termination Fee in tlre event we sign orconsummate 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
eflect 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 consurnmate 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 result 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 thcsc risk factors, scc also "Forward-Looking Statemcnts" for additional factom which could havc a significant impact on our opcrations,
results ofoperations, financial condition or cash flows and could cause actual results to differ materially from those anticipated in such statements.
Item 2. Unregistered Sales of Equitv Securities and Use of Proceeds
(a) Not applicable
(b) Not applicable
(c) Not applicable
Item 4, Mine SafeN Disclosures
Not applicable.
60
Appendix 6 to Joint Application Page 240 of 414
Table of Contents
AVISTA CORPORATION
Item 6. Exhibits
2.1 Agreement and Plan of Merger, dated as of July I 9, 201 7, by and among Avista Corporation, Hydro One Limited, Olympus Holding
Corp. and Olympus Corp. (l )
l2 Cornputation of ratio of camings to fixcd chargcs (2)
15 Letter Re: Unaudited Interim Financial Information (2)
3 I . I Certification ofChiefExecutive OIficer (Pursuant to I 8 U.S.C. Section I 350, as Adopted Pursuant to Section 302 ofthe Sarbanes-
Oxley Act of2002)(2)
3 I .2 Certification ofChiefFinancial Officcr (Pursuant to I 8 U.S.C. Scction I 350, as Adoptcd Pursuant to Scction 302 ofthe Sarbanes-
Oxley Act of20D2)(2)
32 Certification ofCorporate Officers (Fumished Pursuant to I 8 U.S.C. Section I 350, as Adopted Pursuant to Section 906 ofthe
Sarbanes0xley Act of 2002) (3)
l0l ThefollowingfinancialinformationfromtheQuarterlyReportonForml0-QfortheperiodendedJune30,20lT,iormattedinXBRL
(Extensible Business Reporting Language) and filed electronically herewith: (i) the Condensed Consolidated Statements oflncome;
(ii) Condensed Consolidated Statements ofComprehensive Ilcome, (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)
(l ) Previously filed as exhibit 2.1 to the registrant's Current Repo( on Form 8-K, filed as ofJuly 19,2017 and incorporated herein by
reference.
(2) Filed herewith.
(3) Fumished herewith.
61
Appendix 6 to Joint Application Page24l of4l4
Table of Conlents
AVISTA CORPORATION
SIGNATURE
Pursuant to the requirements ofthe Securities Exchange Act of I 934, the registrant has duly caused this repo( to be signed on its behalfby the undersigned
thereunto duly authorized.
AVISTA CORPORATION
(Registrant)
Date: August 1,2017 /s/ Mark T. Thies
Mark T. Thies
Senior Vice President
Chief Financial Offi cer, and ir"u.ur".
(Principal Financial Offi cer)
nt
Appendix 6 to Joint Application Page 242 of 414
Exhibit l2
AVISTA CORPORATION
Computation of Ratio of Eamings to Fixed Charges
Consolidated
(Thousands ofDollars)
Six months ended Years Ended December 3 I
30,2017 2016 20t5 2014 2013 2012
s 47,s38 $ 86,897 $ 80,613 $ 74,02s $ 73,772 $ 71,843
t,324 1,287
s 49,748 $ 9l t2$15 $ 78,847 $ 78,731 $ 76,940
s 130,2s4 $ 21s,402 $ l8s,6l9 $ r92,106 t62.347 I16,567
Ratio of eamings to fixed charges 3.59 3.32 3.13 3.39 3.02 2.48
Appendix 6 to Joint Application Page 243 of 414
Fixed charges. as defined:
Interest charges
Amortization ofdebt expense and premium - net
Interest portion of rentals
Total fixed charges
Eamings, as defined:
Pre-tax income from continuing operations
Add (deduct):
Capitalized interest
Total fixed charges above
Total canrings
(r,614)
49,748
(2,6s t)
9t,612
(3,546)
85,315
(3,924)
78,84'.7
(3,67 6)
78,731
(2,401)
76,940
s 178,388 $ 304,363 $ 267,388 $ 267,029 $ 237 ,402 S l9l ,r 06
Exhibit l5
August 1,2017
To the Board ofDirectors and Shareholders ofAvista Corporation
l4l I East Mission Ave
Spokane, Washington 99202
Wc havc rcvicwed, in accordancc with thc standards ofthe Public Company Accounttng Oversight Board (Unitcd Statcs), the unaudited intcrim financial
information ofAvista Corporation and subsidiaries for the periods ended June 30,2017 and 201 6, as indicated in our report dated August l, 201 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 Report on Form I 0-Q for the quarter ended June 30, 20 I 7, is incorporated
by reference in Registration Statement Nos. 333-33790,333-126577,333-179042 and 333-208986 on Form S-8 and in Registration Statement No. 333-
209714 on Form S-3.
We also arc aware that thc aforcmcntioned rcport, pursuant to Rulc 436(c) undcr the Sccurities Act of I 933, is not considcrcd a pa* ofthe Registration
Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning ofSections 7 and I I ofthat Act.
/s/ Deloitte & Touche LLP
Scattlc, Waslrington
Appendix 6 to Joint Application Page 244 of 414
Exhibit 3l.l
CERTIFICATION
I, Scott L. Morris, certify that:
l. I havc rcvicwcd this rcport on Form I 0-Q ofAvista Corporation;
2.Bascd on my knowledgc, this rcport docs not contain any untrue statemcnt ofa material fact or omit to statc a rnaterial fact ncccssary to makc
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, rcsults ofoperations and cash flows ofthe registrant as o{ and for, thc periods prcscntcd in this rcport;
Thc rcgistrant's other ccrtifuing officcr and I are responsiblc for establishing and maintaining disclosurc controls and proccdurcs (as dcfincd 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
I 5d-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 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 ourconclusions
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 founh fiscal quarter in the case ofan annual report) that has materially affected, or is
reasonably likely to matenally affect, the registrant's intemal control over financial reporting; and
The registrant's other certifing 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 adversely aflect the registrant's ability to record, process, summarize and repoft financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant ro [e in the registrant's
intemal control overfinancial reporting.
/si Scott L. Moms
3.
4.
5.
Datc: August 1,2017
Scott L. Morris
Chairman ofthe Board, President
and Chief Executive Officer
(Principal Executi ve Offi cer)
Appendix 6 to Joint Application Page 245 of 414
Exhihit 3l.2
CERTIFICATION
I, Mark T. Thies, certify that:
l. I havc rcvicwed this report on Form I 0-Q ofAvista Corporation;
Date: August l, 20 I 7
2.Bascd on my knowledge, this rcport docs not contain any untrue statcment ofa matcrial fact or omit to statc a rnatcrial fact ncccssary 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
thc financial condition, results ofopcrations and cash flows ofthe registrant as ol, and for, the periods prcscntcd in this report;
The rcgistrant's other certifying officcr and I are responsiblc for establishing and maintaining disclosure controls and procedures (as defincd 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
I 5d-l 5(0) for the 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 this report based on such
evaluation; and
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 certirying officer and I have disclosed, based on our most recent evaluation ofintemal control over financial reponing, to
the registrant's auditors and the audit cornmittee ofthe registrant's board ofdirectors (or persons performing the equivalent functions):
a. All significant deficiencies and nraterial 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 involves management or other employees who have a significant role in the registrant's
intemal control over financial reporting.
3.
4.
a.
b.
d.
isl Mark T. Thies
Mark T. Thics
SeniorVice President
Chief Financial Offi cer, and rr.uru...
(Principal Financial Offi cer)
Appendix 6 to Joint Application Page 246 of 414
c.
5.
Exhibit 32
AVISTA CORPORATION
CERTIFICATION OF CORPORATE OFFICERS
(Fumished Pursuant to I 8 U.S.C. Section I 350, as Adopted Pursuant to Section 906 ofthe
Sarbanes-Oxley Act of 2002)
Each ofthe undersigned, Scott L. Morris, Chairman of the Board, President and Chief Executive Officer of Avista Corporation (the "Company"), and Mark
T. Thies, Sen ior Vicc Prcsidcnt and Chicf Financial Officer ofthe Company, hcreby certifics, pursuant to I 8 U.S.C. Scction I 3 50, as adopted pursuant to
Section 906 o f the Sarbanes-Oxley Act of 2002, that the Company's Quarterly Repon on Form I 0-Q for the quarter ended Jun e 30,2017 fully complies with
the requirements ofSection I 3(a) ofthe Securities Exchange Act of I 934, as amended, and that the information contained therein fairly presents, in all
material respects, the financial condition and results ofoperations ofthe Company.
Date: August 1,2017
/s/ Scott L. Morris
Scott L. Morris
Chairman ofthe Board, President
and Chief Executive Officer
/s/ Mark T. Thics
Mark T. Thies
Senior Vice President,
Chief Financial Officer, and Treasurer
Appendix 6 to Joint Application Page247 of4l4
hyd,oOn e
D
I
D
T ,f.Y rr
f f ,/.a,.t.*-
{
II
\
l
tfl -t
DDA
2016 ANNUAL REPORT
ONE OF NORTH AMERICA'S LARGEST ELECTRIC UTILITIES (TSX: H!
Appendix 6 to Joint Application Page 248 of 414
Hydro One Limited is Conodo's lorgest pure-ploy electric
tronsmission ond distribution utility with $ZS billion in ossets
ond onnuol revenues of over $6.5 billion. lt tronsmits ond
distribules electricity sofely ond reliobly ocross the Province
of Ontorio, home to 38 percent of the country's populofion.
Hydro One owns qnd operoles o 3O000 circuit km
high-voltoge lrqnsmission network tronsmitting
98 percent of Ontorio's electric copocity, ond o
123,000 circuit km lower-volioge dishibution network
serving 75 percent of the geogrophy of the province
ond more thon 1.3 million residentiol ond business
cuslomers. Hydro One limiled become o public
compqny coincident with its initiol public offering in
November 2015, ond ib common shqres ore listed
on lhe Toronlo Stock Exchonge (TSX: H).
HYDRO ONE'S
BUSINESS
YEAR ENDED DECEiIBER 3I,
(CAD $ millions, except per shore omountsl 20r6 20r5
Revenues
Purchosed power
Revenues (net of purchosed potr-rl
Operotion, mointenonce ond odministrotion
Depreciotion ond omorlizotion
lncome before finoncing chorges ond income tox expense
Finoncing chorges
lncome tox expense
Nel income ottribur,oble lo common shoreholders
Diluted eornings per common shore
Adiusted diluted eornings per common shore r
Net cosh from {used in) operoting octivities
Adiusted net cosh from operoting octivities2
Copitol investments
S 6,552
3,427
3,125
t,069
778
1278
393
t39
721
t.2l
t.2t
r,656
1,656
1,697
$ 6,538
3,450
3,088
t,135
7s9
1,194
376
105
690
1.39
l.l6
{r,2s3l
1,557
1,663
Tronsmission - overoge monthly Ontorio 60-minute peok demond /Mfl 20,690 20,344
Appendix 6 to Joint Application
26,289
Page249 of414
Distribution - electricity distributed to Hydro One customers /GWhl 28,764
' 2015 Adiusted eornings per shore (EPS) is colculoted using lhe number o[ common shores outstonding ol December 31, 2016
' 2015 omount excludes the $2,810 million non-cosh impoct o{ lPOreloted odiustments
TRANSMTSSTON -----------l DISTR|BUTION
#{Tftrd ItHtliu-u
987" ol copocily
.r=_dL
iltli:s-z
and 25Y" of end cuslomers
75"/" oQ geogrophy
HYDRO ONE'S ROIE
IN THE ELECTRIC POWER SYSTEM
MYIFI
,i1+7 l[
Elechiciry Tronsformer
(lncreosed t<r
higher voltoge
Tronsmission
System
Tronsformer
{Decreosed lo
medium voltoge)
Distribution
Syslem
Tronsformer
lDecreosed Io
lower volloge)
Generolion
Sources
Percentoge of
Onlqrio morkel
lndushiol,
Residentiol,
Commerciol
Cuslromers
TOIAT ASSETS
$25.35
BILLION
O Tronsmission rl Diskibution O Other
TOTAT SHAREHOLDER RETURN'
NOVEMBER 5, 2OI5 IPO TO DECEMBER 3I, 2OI6
HYDRO ONE
I.IMITED
S&P/TSX
CAPPED UTITITIES
RATE BASE
$rz.as
BILLION
R.EVENUES
(NET OF PURCHASED
POWER COSTS)
REGUTATED EARNINGS
BEFORE FINANCING CHARGES
AND INCOME TAXES
2
3
4
6
8
l0
II
t2
14
49
53
98
99
$3,t25 $t,gte
MTLUON Mil.LtON
CONTENTS
letter from the Boord Choir
Letter from the President ond CEO
Tronsmission Operotions
Distribution Operotions
Customers ond Communities
Environmentol Sustoinobility
Corporote Governonce
Why lnvest in Hydro One
Monogemenl's Discussion ond Anolysis
Consolidoted Finonciol Stolements
Notes to Consolidoted Finonciol Stotements
Boord of Directors ond Senior leodership
Corporote ond Shoreholder lnformotion
2x
s&P/TSX
COMPOSITE
INDEX
INDEX
s&P 500
EI.ECTRIC UTII.ITIES
INDEX
s&P 500
INDEX
"Source: Bloomberg ond S&P
19.7%
15.9%
16.3%
9.?
Appendix 6 to Joint Application HyDxo oNE LrmrrED oNE oF NoRTH AMERTcA's ,-o*orr, ,Ba$€ &6r0eof 4I4
37x
\
/
t
17.4% '
\
.t
"Hydro One hos ochieved much over this
post yeor while moking significonf progress
in loying the foundotion ond building
lhe orgonizotionol momentum lo deliver
increosing vqlue for its customers ond
shoreholders in fhe yeors to come."
A MESSAGE FROM
THE CHAIR OF THE BOARD
Deor fellow shoreholders,
2016 wos Hydro One's first full yeor os
o public compony, ond its evolution to
o more broodly owned ond customer-
focused orgonizotion is well underwoy.
The compony hos ochieved much over
this post yeor, including executing its
20l6 finonciol ond operoting plons ond
generoting totol shoreholder return of
19.7% since the November 2015 initiol
public offering. lt hos olso mode significont
progress in loying lhe foundotion to deliver
increosing volue for its customers ond
shoreholders in lhe yeors to come.
One of President ond Chief Executive
Officer Moyo Schmidt's key obiectives over
the post yeor wos to significontly strengthen
lhe compony's senior leodership teom, ond
in thot regord we now hove new execulives
heoding Hydro One's operotions, customer
service, legol, ond slrotegy functions. Eoch
of these indlviduols hos brought significont
experience ond copobilities to Hydro One,
ond the Boord of Directors is very confident
thot we now hove in ploce fie depth ond
breodth of leodership expertise thot will
further occelerote the compony's evolution.
ln April 2016, lhe Province of Ontorio sold
on odditionol 15% of its stoke in Hydro One
to the public in o very successful secondory
offering. This followed the November
2015 initiol public offering o[ the shores
of Hydro One, ond served to double the
public f oot of the compony lo 3O% of
shores outstonding while ot the some time
meosurobly increosing the troding volume
ond liquidity of the shores. This konsoction
wos not dilutive to our existing public
shoreholders, ond wos onolher step by lhe
Province towords its stoted gool of reducing
its ownership of Hydro One to 40%.
While the Province of Ontorio remoins
o significont shoreholder of Hydro One,
lhe outonomy of the compony ond
independence of our Boord of Direclors
is enshrined in o governonce ogreement
between Hydro One ond the Province.
This governonce ogreement wos executed
in odvonce of lost yeor's initiol public
offering ond hos operoted os designed
to ensure thot the compony is governed
os on independenl commerciol entily
with the Province's role limited to thot of
o shoreholder.
I would like lo recognize my fellow Boord
members for their service over lhis busy
period of chonge. Our Boord is comprised
of o diverse ond occomplished group of
proren leoders, eoch of whom is very
committed lo the success of Hydro One
ond the highest stondords of corporole
governonce. The Boord hos been highly
engoged with AAoyo Schmidt ond his
leodership teom in defining the strotegy
for the orgonizotion ond chorting the
poth forword over the course of the next
few yeors.
I would olso like to ocknowledge the
hord work ond commitment o[ the more
thon 5,500 regulor employees of Hydro
One. This teom of dedicoted professionols
works lirelessly - often oround the clock
ond in potentiolly hozordous weolher ond
conditions - to ensure thot eleclric power is
tronsmitted ond distributed sofely, reliobly
ond cost-effectively to the millions of citizens
of Ontorio ond the communities in which
they live ond work.
Thonk you for your investmenl ond
conlinued support,
DAVID F. DENISON, O.C.
Choir of the Boord
Hydro One Limited
ABpenCixdte Jnffi$ AnplntqafiOnroRT rsX: H Page25l of4l4
t
"We hove ossembled q teom of tolented
ond deeply experienced leoders who
ore dedicoted to tronsforming Hydro
One into o more disciplined, cuslomer-
focused ond commerciolly oriented
electric tronsmission ond distribution
service provider."
I
A MESSAGE FROM
THE PRESIDENT AND CEO
Deor fellow shqreholders,
This is o new ero ot Hydro One. 2016 wos
o konsformotive yeor os we emborked on
our iourney from good to greot. ln this first
full yeor os o public compony, we underlook
o compony-wide syslemotic review of our
business. Through this intensive process,
we idenlified o number of iniliotives, metrics
ond torgels thot will enoble us to drive
greoter efficiency ond effectiveness ocross
cuslomer service, operotions, procurement,
network plonning, copitol dep oyment
ond odministrotion.
Accordingly, we hove ossembled o teom
of tolented ond deeply experienced leoders
who ore dedicoted lo tronsforming Hydro
One into o more disciplined, customer-
focused ond commerciolly oriented eleckic
lronsmission ond distribution 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 portners.
Mony Ontorions feel the pressure of
increoses to their electricity 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 wilh
meoningful conservotion progroms so they
con loke greoter control of their consumption
ond monoge their bills. Port of this move
involves informolion lechnology inveslmenls
lhot enoble the shift from poper-bosed
systems to increosingly mobile, online ond
poperless technologies.
Hydro One's employees hove embroced
our tronsformotionol iourney to becoming
o commerciol enterprise, one focused
on delivering volue for customers ond
shoreholders. This tronsformotion is centrol
to our octions ond strotegies, ond is
enshrined in oll thot we endeovour lo
ochieve. As we move the orgonizotion
forword ond modernize Ontorio's electricol
grid, I believe thot we hove multiple
opportunities to creote increosing volue for
our cuslomers ond shoreholders olike.
While we ore fortunole to hove o skong
foundolion for growth upon which to
build, we ore olso owore thot there ore
opportunities for us to enhonce cuslomer
service ond improve our execution
copobilities ocross the business- We olso
oppreciote the criticolily of occeleroting
the poce of upgroding Ontorio's oging
electric power system ond the significont
infroslructure investmenl thot is needed to
build ond mointoin o skong, modern ond
relioble grid.
We mode importont progress this yeor
on the regulolory front, where we now
hove o plon wilh o cleor line of sight
to the imminent konsition from o cost of
service-bosed regulotory model to o more
dynomic performonce-bosed, customer-
focused regulotory model. We ore fully
engoged ond goining troction on this front
in both segments of our reguloted business.
We expect to complete the lronsition to o
performonce-bosed regulotory fromework
in our distribution segment in eorly 2018 ond
in our tronsmission segmenl in eorly 2019.
ln oddition lo the significont volue we intend
lo creote in improving the performonce of
our subslonliol existing operotions, there
is olso volue lo be creoted in conlinuing
to leod the consolidotion of whot is still
o frogmenled system of electric utility
ossels in Ontorio. As such, during 2016
we significontly sfepped up the rigour
ond copobilities oround how we ocquire
ond integrote other eleckic utilities. Our
successful integrotion of the Holdimond ond
Woodstock municipol utilities is o good
indicotor of things to come. During the yeor,
we olso compleled lhe ocquisition of Greot
Lokes Power Tronsmission ond onnounced
lhe ocquisilion of Orillio Power Distribution,
two reguloted electric utililies in Onlorio
which further odd to our leodership position.
My thonks go out to the thousonds of
Hydro One employees ocross Ontorio for
embrocing this tronsformotionol lourney
ond their unwovering commitment 1o our
customers. I olso extend my oppreciotion
to our Boord of Directors for its supporl
ond confidence in monogemenl.
The future is bright ond we will continue
to power forword,
7rt@
MAYO SCHTIIDT
Presldenl ond Chief Execulive Officer
Hydro One Limited
Appendix 6 to Joint Application HyDRo oNE L,/*'ED oNE oF NoRTH AMERtcA's Lanorsr rPa&€ &fr'?$f $14
,f
' -.1
\m
!N 2016, HYDRO ONE CO'IIPLETED THE PURCHASE OF GREAT LAKES POWER TRANS'NISSION,
THE SECOND LAR,GEST EIECTRICITY TRANSMITER !N ONTARIO. THIS ACOUISITION INCREASED
HYDRO ONE'S TRANST|ilSSION CAPACITY lN ONTARIO TO 98/", WHItE lrtlPROVlNG rHE
CO'VIPANY'S ABILITY TO CONNECT GENERATORS IN NORTHERN ONTARIO TO ELECTRICITY
DEXIAND IN SOUTHERN ONTARIO.
ETECTRIC TRANSMISSION
SEGMENT
The scole of Hydro One's tronsmission
operotions increosed during 2016 to
opproximotely 30,000 circuit-kilomekes
of high-voltoge lines. Hydro One tronsmits
high-voltoge eleckicity from nucleor,
hydroeleclric, nolurol gos, wind ond solor
generotion sources to locol distribution
componies ond to directly connected
industriol customers ocross Onlorio.
Hydro One's lronsmission ossets con
be divided into three moin cotegories:
Tronsmission slotions
Used for the delivery of power, voltoge
tronsformolion ond switching, the stotions
serve os connection points for both
customers ond generotors.
Tronsmission lines
Bulk tronsmission lines deliver power from
generoting stotions or connections lo
receiving ferminol stotions. Areo supply lines
loke power from the network ond konsmit
it to customer supply lronsmission stotions
ot customer lood cenkes.
Network operolions
The Ontorio Grid Control Cenlre
monoges oll of Hydro One's tronsmission
ond sub-tronsmission operotions.
During 2016, copitol investmenls in
Hydro One's lronsmission segmenl totoled
$988 million, including expenditures
on the following proiects:
TORONTO MIDTOWN TRANSMISSION
REINFORCEMENT PROJECT
ln 20.l6, Hydro One substontiolly completed
work on the $l l8 million Toronto Midlown
Tronsmlssion Reinforcement Prolect which
refurbished the existing tronsmission
infroslructure lhot serves midtown Toronlo
ond oreos to the wesl. This fiveyeor proiect
reploced ,14,500 melres of tronsmission
cobles ond provides 100 megowotts of
odditionol copocity lo serve the locol
distribution compony ond its cuslomers.
GUEI.PH AREA TRANSM]SSION
REFURBISHMENT PROJECT
Hydro One substontiolly completed the
$87 million Guelph Areo Tronsmissior'
Refurbishment Prolect thot will help meet
the electricity needs of the growing
southwestern Ontorio region. The proiect
included upgroding o five-kilomeke section
of existing tronsmission lines, ond instolling
new konsformer ond swilching equipment
ot the tronsformer stolion. More thon 340
conslruclion professionols were involved in
the construcllon phose of the proiect.
COTTABORATION WTH TONDON HYDRO
Hydro One entered inlo o colloborotive
investment with London Hydro lo modernize
lhe 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 the stotion to be
consistent wlth the other six locol tronsformer
stotions, ollowing lhe entire London Hydro
system lo be inlerconnected. The prolect
will olso increose the reliobility of supply
to on imporlont stotion thot serves much
of downlown London.
These proiects together with mony others
underwoy ensure thot Ontorions continue lo
receive o sofe, relioble supply of electricily
now, ond for yeors to come.
o,ooo
+ffi-E3
CIRCUIT KILOMETR.ES
OF HIGH.VOLTAGE LINES
E!==
illlltililil A
TRANSMtSSION
STATIONS
306
PROV|NCtAt
CAPACITY
Appefijffife JoffiI Anpliqafioa'oRT TSX: H
a
o o//o
Page 253 of 414
I
ONE OF NORTH
AMERICA'S IARGEST
ELECTRIC POWER
TRANSMITTERS
to Joint.{
b.
:
\-"l
,l
I)/,,
ONE OF NORTH AMERICA,S TARGEST E.E.I11I3 UlIL]I,EIJ J
Photo coulesy o{ Brion Pielas Photogrophy
m.pietersphoto.com
HYDRO ONE's 5,5OO SKIIIED AND DEDICATED E'VIPLOYEES SERVE T.3 MlttION
VATUED R,ESIDENTIAI AND BUSINESS CUSTO'YIERS ACROSS ONTARIO. HYDRO ONE
IS THE PROVINCE'S TARCEST TOCAL EIECTR,IC POWER DISTRIBUTION COiIPANY
WITH APPN,OXIAIATELY I23,OOO CIN,CUIT KIIO'IIETR,ES OF POWER IINES.
ETECTRIC DISTRIBUTION
SEGMENT
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 significont economies of scole
ond brings fo beor o slrong commitment
to ensuring o modern ond relioble locol
eleckicity system for ils 'l.3 million
cuslomers. This commitmenl olso includes
serving customers in 2l remote communilies
spreod ocross the for reoches of northern
Ontorio thot ore nol connected to the
electricity tronsmission grid.
CUSTOMER CONSUTTATION
ln mid-2016, Hydro One onnounced
o province-wide consuhotion process to
seek inpul from ils cuslomers on lhe
development of o fiveleor rote plon thot
wlll help shope future inveslments in Hydro
One's electric distribution system. The gool
of the consultotion wos to better understond
how Hydro One's customers' needs ore
being met by lhe current syslem, ond the
types o[ reliobility ond service improvements
customers would volue most. This included
oddressing oging eleclricity infroskucture,
system repoirs ond responding lo power
outoges, power quolity ond costs, os
well os new producls, services ond
web-enobled tools to moke il eosier for
cuslomers lo do business wilh Hydro One.
The feedbock influenced detoiled plons
thot the compony will submlt lo the
Ontorio Energy Boord, who will uhimotely
delermine lhe investments ond role plons
for Hydro One's locol distribution segmenl
for fie 2018 through 2022 period.
ACQUISITION OF ORII.IIA POWER
ln August 2016, Hydro One onnounced
thot it reoched o definitive ogreement
to ocquire Orillio Power Distribution
Corporotion in o tronsoclion volued ot over
$41 million. Hydro One will integrote into its
operolions opproximolely .l4,000 customers
locoted in Simcoe County, home to o
populotion of more thon 30,000 ond port
of the Huronio region of Cenlrol Ontorio.
Hydro One's current service territory
includes lhe oreos surrounding the City of
Orillio ond this ocquisition enobles Hydro
One lo reolize operolionol synergies over
time. After closing, Hydro One olso intends
to conskuct severol grld conkol ond
operoting focilities in Orillio. The ocquisition
is conditionol upon the sotisfoction of
customory closing conditions ond opprovol
o[ the Ontorio Energy Boord.
SERVING MANITOUTIN ISI.AND
ln October 2016, Hydro One onnounced
thot o new distribution stolion will be built
to serve customers on Monitoulin lslond,
locoted in northern Ontorio on Loke Huron.
The new distribution stotion will reploce the
Liille Current Distribution Stotion, which wos
originolly built in ,1950, ond will help
improve rellobillty ond increose copocity
for the opproximotely 10,000 customers
who live on Moniloulin lslond.
CIR.CUIT KITOMETRES
OF LOCAL DISTRIBUTION LINES
GEOGRAPHY
OF PROVINCE
SERVED
l23,OOO
r.3M ri
RESIDENTIAL
& BUSTNESS
CUSTOMERS
ACROSS ONTARIO
AppenCix6te,lnffia Anphiqalio€'oRT TSX: H Page 255 of 414
t
it
tI
t'
l
'I
?
I
Appendix 6 to Joint HYDRO ONE II'IAITED
ONTARIO'S
TARGEST TOCAT
ETECTRIC POWER
DISTRIBUTION
COMPANY
\
a
,t\
\
.s
lt,(
&: .ri.t.
-
f,\
<-J
o
\
a
il-,
a
f,
,.. .:j
l'I*
)
-{
a
,:'tts
a
,
ONE OF NORTH AMERICA,S I.ARGEST EI.EU] iII. UIILI I;EJ I
'i
F
a
Ia
I
I
-
of 414
€t
l'
F
I1,fr
a r/
"1
tt(,
l IFT-/)\lL/--
hydro 7 -1
I-/t
\
{
F=t "l \t
A
I II
SERVING
CUSTOMERS AND
COM'YIUNITIES
RELIABTY AND
SAFETY
\l
Tij
'l I
7
s
\
1
/t
\
I&ffiirr! Lr...ltEr) r,,,, ir.*,-r...rpoR' TSX, H
,/Page
v
(9 For further informotion on
Hydro One's commitments
to customers go to
) HydroOne.com/
Commitments
Throughout 2016, Hydro One's skilled ond
dedicoted employees responded 24 hours o doy,
seven doys o week fo quickly ond sofely restore
power for cuslomers through often extremely
chollenging weother, terroin ond circumstonces.
Hydro One olso continued to provide new ond
enhonced progroms ond services lo further define
the compony's commitment lo customer service
ond energy conservolion.
PROACTIVE OUTAGE AI.ERTS
ln eorly 2016, Hydro One wos the first utility in
Conodo to offer cusfomers prooctive outoge olerls.
Customers who register for lhis service receive
personolized emoil or lexl olerls obout ouloges thol
moy offect lheir homes, colloges, forms or smoll
businesses, os well os informotion on estimoted
times of restorolion. Since lounching the progrom,
Hydro One hos senl hundreds of thousonds of
prooctive olerts to customers. This service is on
extension of Hydro One's exisling suile of outoge
communicotion tools, which includes online outoge
mops ond smortphone opps.
GET tOCAt IN FIRSI NATIONS COMMUN]TIES
Hydro One begon fo offer o new service model
in First Notions ond M6tis communities which
focuses on locol, foce-to{oce inleroclions lo ensure
cuslomers ore informed of ond hove occess lo oll
of the conservolion ond ossistonce progroms the
compony offers. Meeting with Chiefs ond Councils,
representolives from Hydro One's Customer Service
leom visit communities throughout the province ond
conduct informotion-shoring sessions with customers.
FAR,M RAPID RESPONSE TEAM
Hydro One onnounced the lounch of its Form Ropid
Response Teom thot ossists lhe compony's 13,000
[orming cuslomers to identify, ossess ond mitigote
onJorm electricol issues. This new opprooch better
serves the needs of Hydro One's forming customers
ond wos developed in portnership with the Ontorio
Federotion of Agriculture. This streomlined process
olso provides Hydro One's forming customers o
single, speciolized point of contoct to better ossisl
with their specific on{orm concerns.
PAPERTESS BII.IING AND HIGH USAGE ATERTS
ln lote 2016, Hydro One lounched poperless
billing notificotions ond high usoge olerls to provide
customers with more visibility ond control over their
occounts ond energy use. With billing notificotions,
customers sign up to receive poperless billing
together with personolized insights ond progrom
promotions, which olso provide o new online self-
service chonnel for customers os on olternotive to
contocting the coll centre. With high usoge olerls,
customers receive emoils or fexl messoges if their
usoge during o billing period is trending higher
thon o predefined threshold. Customers olso receive
guidonce on how they con odiusl their energy use
before the end of ihe billing period. Through the
enhonced web portol, cuslomers con olso eosily
find more informolion obout lheir energy use, os
well os explore o wide ronge of energy tips ond
conservotion progroms provided by Hydro One.
SERVING
CUSTOMERS & COMMUNITIES
CUSTOMER
SERVICE
FIRST NATIONS
PARTNERSH IPS
RE LIABILITY
SUSTAINABILITY
SAFETY
DIVERSITY
COMMUNITY INVESTMENT
Throughout 2016, Hydro One commified
millions o[ dollors in donolions ond sponsorships
to communilies it serves ocross Onlorio. The
conlribulions supporled communily proiects such
os the Morksfoy outdoor ice rink roof-building
proiect for the locol municipolity, benefiting the
community's locol youth. Ofher communily initiotives
include the compony's portnership wifi Righl b
Ploy's Promoting Life-Skills in Aboriginol Youih
progrom, o non-profit orgonizotion thot oims to
deliver so[e, fun ond educotionol progromming to
Aboriginol youlh.
Appendix 6 to Joint Application HyDRo oNE ,r trED oNE oF NoRTH AMERTcA's Lanorsr rP&gr€ &fi,,8.Of 4la
TRANSMITTING AND
DEIIVERING SOME
OF THE CTEANEST
ETECTRIC POWER
IN NORTH AMERICA
l
it-@
f;
';.
rr{
l[r
*'t-rp
##7.-t
a
t
I
.
ff
Ft.
d.
-\ol. t.
..i.3'
)**t
AS A STEWARD OF THE GR,ID, HYDRO ONE IS FOCUSED ON TRANS'YIITTING AND DETIVERING SAFE,
CTEAN AND SUSIAINABLE ENER,GY. THIS YEAR, THE COMPANY PRODUCED ITS FIR,ST CORPON.ATE
SOCIAL RESPONSIBITIY REPORI, ONE WHICH ADHER,ES TO THE GUIDETINES FOR THE G4 GtOBAt
R,EPORTING INlrIATlvE AND !S PART OF A CONTINUED EFFORT BY THE CO'ITPANY TO ENHANCE THE
TR.ANSPAR,ENCY, ACCOUNIABITITY AND IINE OF SIGHT TO ITS SUSIAINABTE OPERATIONS.
ENVIRONMENTAT
SUSTAINABILITY
HEBER DOWN CONSERVATION AR,EA
Hydro One's Forestry teom portnered with the
Centrol Loke Ontorio Conservotion Authority
ond neighbouring utillties to mitigote the
spreod of Phrogmiles, on invosive species,
on 3,500 squore metres of o right-of-woy
corridor in lhe Heber Down Conservotion
Areo. Chollenging ond cosfly to remove,
such invosive species threolen lokes, rivers
ond forests. Together with o locol controctor
ond using o voriety of control methods
bosed on locotion, density ond sunounding
vegetotion of eoch oreo, the compony
begon work on eliminoting the invosive
species from its right-of-woy. With thousonds
of kilometres of tronsmission Iine corridors
crossing the province, the compony hos
token o leodership role in engoging with
locol stokeholders, toklng o prooctive
opprooch to lond monogement ond pooling
community resources to monoge lhe spreod
of invosive species.
VEGEIAflON MANAGE'ilENT
To ensure the continued sofe operotion of
Hydro One's tronsmission ond distribution
lines, the compony conducls province-wide
vegetotion monogement operolions to
mointoin reliobility ocross the system. As port
of the compony's ongoing commitmenl lo
locol communities, Hydro One hos consulted
with conservotion outhorities ond is working
with locol seed distributors to develop ond
test pollinotor-friendly seed mixes. Pollinotors
include vorious forms of bees, wosps, onts,
flies, moths, beetles, bots ond birds These
species leed 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-friendly seed os
port of its vegetotion monogement work in
oppropriote oreos os on olternotive 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 A[[oirs.
CORPORATE KNIGHT'S BEST
50 COR,PORATE CIIIZENS
Hydro One wos ronked os the top utility
in the l5th onnuol ronking of the 2Ol5
Corporote Knights Conodo's Best 50
Corporote Cltizens. The Best 50 Corporote
Citizens in Conodo ronking ossesses o
brood ronge of Conodion enterprises on
o set o[ l2 sustoinobility metrics, including
corbon, woter ond woste productivity, percenl
o[ 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 lestoment to Hydro One's core
volues ond demonstrotes thot the compony
continues to develop o slrong culture of
sustoinobility ond corporote responsibility.
Customers, investors ond citizens of Ontorio
should expect thot Hydro One will power
forword in its responsible leodership on
Corporote Citizenship in Conodo.
tor furlher informotion on Hydro One's
commitments lo lhe environment, go lo
) HydroOne.com/OurCommilment
AppenCix6lo JnffiI Anplrqafiotr'oRl TSX: H
(0
Page259 of4l4
rS I.'\.
\I
@@@@
CORPORATE GOVERNANCE
OVERVIE\V
f crtnrn O MEMBER
BOAR,D OF DIR,ECTORS
AND CO'YTMTTTEES
Dovid Denison - Choir
NOMINAIING,
CORPORATE GOVERNANCE,
PUBLIC POTICY AND
REGUIATORY
HUiIAN
RESOURCEg
HEAITH, SAFETY,
ENVIRON'IiENT AND FIRST
naroxs aruo mirrs
Moyo Schmidt - President ond CEO
lon Bourne o *
Chorles Brindomour a o
Morc Coiro oa
Chrislie Clork o o
George Cooke a o
Morionne Hor'ls o *
lomes Hinds o O
Kothryn Jockson a a
Roberto .lomieson a o
Fronces Lonkin a o
Phi ip Orstno *o
lone Peveretl *o
Gole Rubenstein o a
Hydro One ond its independent Boord of Direclors recognize the
lmportonce of corporote governonce to the effective monogement
of the compony. lndependence, lntegrity ond occountobility ore the
foundolion of the compony's opprooch to corporote governonce.
It is in the long-term best interests of shoreholders os well os customers
ond promotes ond strengthens relotionships with employees, the
communilies in which lhe compony operotes ond other stokeholders
of the compony. The Boord of Directors is firmly supported in these
commitments by o governonce ogreement between Hydro One ond
the Province of Ontorio, which wos executed in odvonce of the
November 2015 initiol public offering of the compony ond ossures
thot the Province's role is limited to thot of o shoreholder ond not
o monoger of the business.
Hydro One's Boord o[ Directors ls 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 monogement required to meet lhe compony's strotegic
obiectives. Hydro One is committed to best proctices o[ corporote
governonce, ond regulorly reviews the compony's governonce
proctices in response to chonging governonce expectotions 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 requirements.
HYDRO ONE'S GOOD GOVERNANCE PR,ACTICES
FULI.Y
IN DEPENDENT
BOARD
{EXCLUDTNG CEO)
CODE OF BUSINESS
CONDUCT AND
WHISTI,EBI.OWER
HOTI.INE
ANNUAI, REVIEWS
OF BOARD AND
COMMITTEE
PERFORMANCE
COMMITTEE
AUTHORITY TO
RETAIN
INDEPENDENT
ADVISORS
BOARD AND
COMMITTEE
IN.CAMERA
DrscusSroNs
DIRECTOR SHARE
OWNERSHIP
GUIDETINES
GOVERNANCE
AGREEMENT WIIH
PROVINCE
BOARD EDUCATION
SESSIONS
TERM I.IMITS
FOR DIRECTORS
SEPARATE BOARD
CHAIR AND CEO
COMMITMENT TO
DIRECTOR DIVERSITY
MAJORITY VOTING
FOR DIRECTORS
@ For o complete description of Hydro One's corporote
governonce slructure ond proctices ond individuol
director biogrophicol informolion, go to
) HydroOne.com/l nvestors
Appendix 6 to Joint Application HyDro oNE ,rvurED oNE oF NoRTH AMERTcA's Lrnorsr rR&$r€ &60rOf 41a
AUDIT
Business is 99 percent
reguloted ond operotes in
o stoble, tronsporent ond
colloborolive rote-reguloted
environment
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 lo commodity prices
2
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 coincident
with tronsition to Ontorio's
incentive bosed regulotory
fromework expected to
creote volue for both
customers ond shoreholders
6
Consistent rote bose growlh
expecled under muhi-yeor
copitol inveslment progrom
to upgrode oging electric
power system infrostructure
4
Attroctive dividend yield with
70 - 80 percent lorget poyout
rotio ond opporlunity for growth
with role bose exponsion,
efficiency reolizotion ond
continued consolidotion
B
Strong A-roted investment
grode bolonce sheet with
one of the highest-quolity
credit profiles in the North
Americon utility sector
I
Proven monogement teom
with demonstroted experience
in lronsforming orgonizotions,
occeleroting performonce
ond creoting significont
shoreholder volue
7
A unique opportunity to porticipote in the tronsformotion of o premium, lorge-scole utilityI
TEN REASONS TO INVEST
IN HYDRO ONE
I:! [!YbkO Clr: L,l,..lllD ] )lr,\l'.lil-/.r iEPORT TSX: H Page261 of4l4
hydroon e
2OT 6 FINANCIAL REPORT
TIIANAGE'IIENT'S DISCUSSION AND ANAYSIS
Consolidoted Finonciol Highlights ond Stotistics
Overview
Resuhs of Operotions
Common Shore Dividends
Copilol lnveslments
Summory of Sources ond Uses of Cosh
l-iquidity ond Finoncing Strotegy
Regulotion
Olher Developments
NonCAAP Meosures
Reloted Porty Tronsoctions
Risk Monogement ond Risk Foctors
Foword-looking Stotements ond lnformotion
CONSOUDATED FINANCIAI. STAIE'IIENTS
Monogement's Reporl
lndependent Auditors' Report
Consolidoted Stotements of Operotions ond Comprehensive lncome
Consolidoted Bolonce Sheets
Consolidoled Stolemenls of Chonges in Equity
Consolidoted Stolemenls of Cosh Flows
NOTES TO CONSOTIDATED FINANCIAL STATEiTENTS
BOARD OF DIR,ECTORS AND SENIOR IEADER,SHIP
CORPORATE AND SHAREHOTDER. INFOR}IATION
t4
14
t5
17
l8
20
22
23
25
26
28
29
30
44
53
98
99
49
47
48
49
50
5t
52
>=z>ez
za>g
=:a=
o;
I
(-)C6
oz
I
<40>U
=L<8m=Zod>.
m
=z
zot
2
=zzo_>r
62
EoaO
r,2fr(t
=om=zar>@lmI
3
Appendix 6 to Joint Application HyDRo oNE urvurED oNE oF NoRTH AMERTcA's r.o*otsr P&gfr ?,6trof 614
hyd,oon e
AAonogement's D
For the yeors ended December 31, 2Ol6 ond 201
ISCUSSION ON
5
d Ano ys rs
The following Monogement's Discussion ond Anolysis {MD&A) of the
finonciol condition ond results o[ operotions should be reod together
with the consolldoted finonciol stolemenls ond occomponying notes
(the Consolidoted Finonciol Stotements) of Hydro One Limited (Hydro
One or the Compony) for the yeor ended December 3 I , 20,l 6. The
Consolidoled Finonciol Stotements ore presented in Conodion dollors
ond hove been prepored in occordonce with United Stotes (USl
Generolly Accepted Accounting Principles (GAAP). All finonciol
informotion in this MD&A is presented in Conodion dollors, unless
otherwise indicoted.
Consolidoted Finonciol Highlights And Stotistics
Yeor ended Decenber 3l
lmillions of dollors, except os othervvise noted)
The Compony hos prepored this MD&A in occordonce with Notionol
lnstrument 5l-102 - Continuous Disclosure Obligotions o[ the
Conodion Securities Administrotors. This MD&A provides informotion
for the yeor ended December 31 , 2016, bosed on informotion
ovoiloble to monogement os of Februory 9, 2017.
The comporotive informotion consists of the results of Hydro One lnc.
up to October 3I , 2015, ond the consolidoted results of Hydro One
ond Hydro One lnc. from November l, 2015 to December 3,),
2015. See further detoils in section "Other Developments - Chonge
in Hydro One Ownership Structure".
2016 2015 Chonge
Revenues
Purchosed power
Revenues, net of purchosed power
Operotion, mointenonce ond odminisfrotion costs
Depreciotion ond omortizotion
Finoncing chorges
lncome tox expense
Net income ottributoble to common shoreholders of Hydro One
Bosic eornings per common shore (EPS)
Diluted EPS
Bosic pro formo odiusted nonGAAP EPS (Adiusted EPS)r
Diluted Adiusted EPSI
Net cosh from (used in) operoting octivities
Adiusted net cosh from operoling octivitiesr
Funds from (used in) operotions (FFO)r
Adiusted FFOI
Copitol investments
Assets ploced in-service
Tronsmission: Averoge monthly Ontorio 6Gminute peok demond /MW
Distribution: Electricity distributed to Hydro One customers /GWhl
6,552
3,427
3,r25
r,069
778
393
139
721
$ l.2l
$ l.2l
$ l.2l
$ l.2l
1,656
1,656
1,494
1,494
1,697
1,605
20,690
26,289
6,538
3,450
3,088
r,t35
759
376
r05
690
r,663
1,476
20,344
28,764
$ i.:s$ t.rs
$ t.to$ t.to
11,248)
1,562
11,479)
1,331
lo.7/"1
l.l/o
(s.8%)
2.5%
4.5%
32.4%
4.5%
112.e%)
l2.e%l
r', <o/
4.5%
232.7%
6.0%
201.o%
I l.l /o
l.U /o
a 70/
| -/ /o
(8.6%)
December 3 I 2016 2015
Debt to copitolizotion rotio2 52.6%50.7%
I See section "Non€AAP Meosures" for description ond reconciliolon of Adiusted EPS, odiusted nel cosh from operoting octivities, FFO ond Adiusted FFO.
2 Debt to copilolizotion rotio hos ben colculoted os totol debt (includes totol longlerm debt ond short-term borrowings, net o[ cosh ond cosh equivolenh)
divided by totol debt plus totol shoreholders' equity, including preferred shores but excluding ony omounts reloted to noncon]rolling interesl.
ABpendirc6lp',lns Appljp,a,tisnpoRT TSX: H Page 263 of 414
Overview
Hydro One is the lorgest electricity konsmission ond distribution
compony in Ontorio. Through its wholly owned subsidiory, Hydro
One lnc., Hydro One owns ond operoles substontiolly oll of Ontorio's
electricity tronsmission network, ond on opproximotely 123,000 circuit
km lowvohoge distribution network. Hydro One hos three business
segments: (i) tronsmission; (ii) distribution; ond (iiil other business.
Tronsmission Segment
Hydro One's lronsmission business owns, operotes ond mointoins
Hydro One's tronsmission system, which occounls for opproximotely
98% of Ontorio's konsmission copocity bosed on revenue opproved
by the Ontorio Energy Boord (OEB). The Tronsmission Business
consists of the 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 Limiled Portnership (B2M LPl, o limited portnership between
Hydro One ond the Sougeen Olibwoy Notion in respect of the
BruceloMilton tronsmission I i ne. The Compony's tronsm ission
business is o rotereguloted business thol eorns revenues moinly from
chorging lronsmission rotes thot ore opproved by the OEB. The
tronsmission business represented opproximotely 51% of the
Compony's totol ossets os ot December 31, 2016, ond
opproximotely 5'1 % ol its 20.1 6 revenues, net of purchosed power.
2016 2015
2*0z
za>g.=tATa=d
I6.)C<tax
Z
I
Electricity tro nsmified r /MWh,/
Tronsmission li nes sponning the province lcircuit-kibmetres)
Rote bose lmillions of dollors)
Copitol investments /mll/ions of dollors)
Assets ploced in-tu*i.. l^illiont of dollort)
136,989,747
30,259
10,775
988
937
137,Ot | ,780
29,35s
10,175
943
696
r Elechicity honsmitted represents totol elechicity tronsmission in Ontorio by oll honsmitters.
Distribution Segment
Hydro One's distribution business is the lorgest in Ontorio ond
consists of the distribution system operoted by Hydro One lnc.'s
subsidiorles Hydro One Networks ond Hydro One Remote
Communities Inc. The Compony's distribution business is o rote
reguloted business thot eorns revenues moinly by chorging distribution
rotes thot ore opproved by the OEB. The distribution business
represented opproximotely 37/" ol the Compony's totol ossets os ot
December 31 , 2O16, ond opproximotely 47% of its 201 6 revenues,
net of purchosed power.
O Residentiol
& Generol Service
O Lorge Users
O Embedded Diskibutors
2016 20 r5
Electricity distributed to Hydro One customers /GWhl
Electricity distributed through Hydro One lines /GWhlt
Distribution lines sponning the province lckcuitkilonetres)
Distribution customers lnumber of cuslomers)
Rote bose lmillions of dollors)
Copitol investments /mil/ions of dollors)
Assets ploced in-service lmillions of dollors)
26,289
37,394
122,599
1,355,302
7,056
703
662
28,764
40,721
123,425
1 ,347,231
6,739
711
775
I Units dishibuted through Hydro One lines represent totol distribution syslem requirements ond include elechicity distributed to consumers who purchosed
power dirrtly lrom the lndependent Eleclricity System Operotor (IESO].
Other Business Segment
l-1ydro One's other business segmenl consisls of the Compony's
telecommunicolions business ond certoin corporote oclivlties. The
telecommunicotions business provides lelecommunicolions support for the
Compony's lronsmission ond distribution businesses, ond olso offers
communicotions ond lT solutions to orgonizotions with broodbond
network requirements utilizing Hydro One Telecom lnc.'s (Hydro One
Telecom) fibre optic network to provide diverse, secure ond highly
relioble broodbond connectivity. Hydro One's other business segment is
nol rotereguloled. This segment represenled opproximolely 12% o[
Hydro One's totol ossets os ot December 3 I , 201 6, ond opproximotely
2% ol ns 2Ol 6 revenues, net of purchosed power.
Appendix 6 to Joint Application HyDRo oNE Lrrr{rED oNE oF NoRTH AMERTCA'S T.ARGEST PEAgft ?6fit$f *14
28.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Primory Foctors Affecting Results Of Operotions
Tronsmission Revenues
Tronsmission revenues primorily consist o[ the Compony's tronsmission
rotes opproved by the OEB which ore chorged bosed on the monthly
peok electricity demond ocross Hydro One's highvoltoge network.
Tronsmission rotes ore designed to generote revenues necessory lo
construct, upgrode, extend ond support o tronsmission system with
sufficienl copocity to occommodote moximum lorecosted demond
ond o reguloted return on the Compony's investment. Peok eleckicity
demond ls primorily influenced by weother ond economic condilions.
Tronsmission revenues olso include exporl revenues ossocioted with
tronsmitting electricity lo morkets outside of Ontorio. Ancillory
revenues include revenues lrom providing mointenonce services to
power generotors ond from third-porty lond use.
Distribution Revenues
Distribution revenues include the distribution rotes opproved by the
OEB ond omounts to recover the cost of purchosed power used by
lhe customers of lhe distribution business. Distribution rotes ore
designed to generole revenues necessory to conslruct ond support the
locol dlstribution system with sufficient copocity to occommodote
existing ond new custorner demond ond o reguloted return on the
Compony's inveslment. Accordingly, distribution revenues ore
influenced by distribution rotes, the cost o[ purchosed power, ond the
omount of electricity the Compony distributes. Distribution revenues
olso include oncillory dislribution service revenues, such os fees
reloled to the ioint use o[ Hydro One's distribution poles by the
telecommunicotions ond coble television induskies, os well os
miscelloneous revenues such os chorges for lole poyments.
Purchosed Power Costs
Purchosed power cosls ore incuned by the distribution business ond
represent the cost of the eleclricity purchosed by the Compony for
delivery to cuslomers within Hydro One's distribulion service territgry.
These costs comprise the wholesole commodity cost of energy, in
oddition to wholesole morket service ond lronsmission chorges levied
by the IESO. Hydro One posses the cost of electricily thot it delivers
lo its cusfomers, ond ls therefore nol exposed to wholesole electricity
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 lronsmission
ond distribulion syslems, ond olher costs such os property loxes
reloted to tronsmission ond distribution llnes, stolions ond buildings.
Tronsmission OM&A costs ore incurred to sustoin the Compony's
high-vohoge tronsmission slotions, lines ond rights-of-woy, ond include
preventive ond corrective mointenonce costs reloted to power
equipment, overheod tronsmission lines, tronsmission stotion sites, ond
lorestry control to mointoin sofe dislonce between line spons ond
kees. Distribution OA/&A costs ore required lo mointoin the
Compony's lowvoltoge distribution system, ond include costs reloted
to diskibution line cleoring ond forestry control to reduce power
outoges coused by trees, line mointenonce ond repoir, os well os
lond ossessment ond remediotion. Hydro One monoges its costs
through ongoing efficienry ond productivity initiotives, while
continuing to complele plonned work progroms ossocioted with the
development ond mointenonce of its tronsmission ond distribution
networks.
Depreciotion ond Amortizotion
Depreciotion ond omortizotion cosls relole primorily to depreciotion
of the Compony's properry, plont ond equipment, ond omorlizolion
ol certoin inlongible ossets ond regulotory ossets. Depreciotion ond
omortizotion olso includes the costs incurred to remove property, plont
ond equipment where no osset relirement obligotions hove Gen
recorded on the bolonce sheet.
Finoncing Chorges
Finoncing chorges relole lo the Compony's finoncing octivities, ond
include interest expense on the Compony's longlerm debt ond short-
ierm borrowings, goins ond losses on interesl rote swop ogreements,
nel of interest eorned on short-term investments. A portion of finoncing
chorges incurred by the Compony is copitolized to lhe cost of
properly, plont ond equipment ossocioted with the periods during
which such ossets ore under conslruction before being ploced
in-service-
lncome Toxes
Hydro One ond its subsidiories were exempt from regulor Conodion
federol ond Ontorio income lox (Federol Tox Regime) ond insteod
poid on equivolent omount referred to os poyments in lleu o[
corporole income toxes (Pllsl to the Ontorio Eleclricity Finonciol
Corporotion {OEFC) under tl'e Electricity Acl (PlLs Regime) until
October 2015. Since then, Hydro One ond its subsidiorles hove
been subiect to the Federol Tox Regime.
ABpen,#rc6fe Jnfint Applipn$iompoRT TSX: H Page 265 of 414
Results of Operotions
Nei lncome
Net income ottributoble lo common shoreholders for the yeor ended
December 31, 20l6 wos $721 million, on increose o[ 4.5%fron
the prior yeor. Eornings were positively offected by lower OAI8,A
ond higher revenues net ol purchosed power. These positive effects
were portly offset by non-recurring items reloted to the Compony's
IPO in 20,15, nomely on increose in the effective tox rote primorily
driven by lPOreloted tox benefit of $ I 9 million recorded in 20 I 5
ond divestiture of Hydro One Brompton lnc. (Hydro One Brompton)
in 2015. Excluding these lPOreloted effects, net income increosed
by 10.9%.
Revenues
Yeor ended December 3l
lmillions of dollors, except os othervvise notedl
Bosic EPS ond Adiusted Bosic EPS
Bosic EPS wos $.l.21 in 2Ol6 (2015 - $1.391. Bosic EPS is
significontly offected by the weighted overoge number of shores in
issue being different from lost yeor due to the elfects of the lPO, ond
is the most significont reoson for the lower EPS compored to lost yeor
Adiusbd Bosic EPS, which odiusts {or the inconsislent number of
shores in issue, wos $t.2t in 20l6 (2015 - $.].16), driven by
increosed nel income compored to lost yeor. See section
"NonCA"AP Meosures" for description of Adlusted EPS.
2016 201 5 Chonge
,*az
iB>r!-s6T6a6
Iq.)Ca@x
z
I
Tronsm ission
Distribution
Other
1,584
4,915
53
r,536
4,949
5J
3.17"
lo.7%l
6,552 6,538 o.2%
Tronsmission volumes: Averoge monthly Onlorio 6Gminute peok demond lMWi
Dlstribution volumes: Electricity distributed to Hydro One customers /GWhl
20,690
26,289
20,344
28,764
| -/ /o
18.6%)
Tronsmission Revenues
Tronsmission revenues increosed 6y 3.1% in 20,16 primorily due to
the following:
r prior yeor revenues were of{ected by o regulotory driven reduction
of $28 million reloted to differences between octuol ond forecost
provincewide conservotion ond demond monogement sovings
during 2014, which did not recur in 20l6;
. higher overoge monthly Ontorio 6Gminute peok demond moinly
due to wormer weother in the second ond third quorlers of 201 6,
os well os the impoct of severol extremely cold doys thot more
thon offset the overoll milder weother in the fourth quorter of
20 1 6; ond
r increosed OEBopproved tronsmission rotes for 20,]6.
Operotion, Mointenonce ond Administrotion Costs
Yeor ended December 3 I
lmillions of dollors)
Distribution Revenues
Distribution revenues decreosed by O.7% in 2O I 6 primorily due to
the following:
r the divestlture of Hydro One Brompton in August 20,l5, which
olso coused the moiority o[ the decreose in distribution volumes;
ond
o lower overoll energy consumption resulting from milder weother in
the first ond fourth quorters of 201 6; portiolly offset by
. higher power costs from generotors thol ore possed on to
customers, excluding the impoct of diveslilure of Hydro One
Brompton;
o increosed OEBopproved distribulion rotes for 2016; ond
r increosed revenues due to o rote order reloted lo shoredrse
revenue.
2016 201 5 Chonge
Tronsmission
Distribution
Other
382
608
79
414
633
BB
17.7%)
13 e%)
lo.2%)
r,069 1.135 {5.8%)
Appendix 6 to Joint Application HyDRo oNE LtrvurED oNE oF NoRTH AMERtcA's ,o*orsr P&gft ?fi6egf *14
MANAGEMENT'S DISCUSSION AND ANALYSIS
Tronsmission OM&A Costs
Tronsmission OM&A decreosed by 7 .7% in 20I 6 primorily due to
lower proiect cost ond inventory writedowns coupled wilh lower
octivity reloted to tronsformer equipment refurbishments ond stotions
moinlenonce.
Distribution OM&A Costs
Dislribution OM&.A decreosed by 3.9% in 201 6 primorily due to the
following:
o decreose in bod debl expense including the impoct of revised
estimotes of uncollectible occounts;
r the divestiture of Hydro One Brompton in August 2015;
o lower support services costs; ond
o lower costs ossocloted with underground distribution coble
locotes; portiolly offset by
. higher volume of vegetotion monogement octivities.
Other OM&A Costs
Other OM&A decreosed by 10.2% in 20 I 6 primorily due to lower
costs reloting to lhe integrotion of ocquired locol distribution
componies ond lower consulting cosls.
Depreciotion ond Amortizolion
The increose ol $ I 9 million or 2.5% in depreciotlon ond
omorlizotion costs for 20 l6 wos moinly due to the growth in copitol
ossels os the Compony continues to ploce new ossets in-service,
consistent with its ongoing copilol investmenl progrom.
Finoncing Chorges
The increose of $17 million or 4.5%in finoncing chorges lor 2016
wos moinly due lo the following:
. on increose in inlerest expense on longlerm debt moinly due to the
increose in weighted overoge longlerm debt bolonce outstonding
during the yeor, portiolly oflset by o decreose in the weighted
overoge interest rote for long-term debt; ond
o on increose in interest expense on short1erm notes moinly due to
the increose in weighted overoge shorl-term notes bolonce
outstondlng during the yeor, os well os on increose in the
weighted overoge interest rote for short-lerm notes.
lncome Tox Expense
Income tox expense in 2016 increosed by $34 million compored lo
20 I 5, ond the Compony reolized on effective lox rote o[
opproximolely 1 5.7% io 201 6, compored to opproximotely 1 2.8%
reolized in 2Ol5. The increose in the tox expense is primorily due to
the effect of on lPOreloted posillve tox odiustment of $,l9 million in
201 5, coupled with higher income before toxes in 20 I 6.
Common Shore Dividends
ln 20,16, the Compony declored ond poid cosh dividends to comrnon shoreholders os follows:
Dote Declored Record Dote Poyment Dote Amount per Shore
Totol Amounl
{nillions of dollors)
Februoryll,2Ol6
Moy 5, 20l6
August I 1,2016
November ,l0,2016
Morch 17, 2016
lone 14, 2016
September 14,2O16
December 14,2016
Morch 31, 2Ol6
lune 30, 2016
September 30, 2016
December 30, 201 6
$0.3a'
$o.z t
$0.21
$o.z t
202
125
125
125
577
rThiswos$efirstcommonshoredividenddecloredbytheComponyfollowingthecompletionolihinitiol publicofferinginNovember20l5.The$0.34per
shore dividend included $0. I 3 for the post{PO period from November 5 to December 3 I , 201 5, ond $0.21 for the quorter ended Morch 3 I , 201 6.
Following the conclusion of the fourth quorter of 20,16, the Compony declored o cosh dividend to common shoreholders os follows:
Dote Declored Record Dote Poyment Dote Amount per Shore
Totol Amount
(millions of dollors)
ABpenr#rc6te.Jnr$ Appli,q'4.liottpoRT TSX: H
Morch 3l. 2017 $0.21
Page267 of4l4
Februory 9,20)7 Morch l4,2Ol6 125
Divestiture of Hydro One Brompton
On August 31 , 2015, o dividend wos pold to the Province of
Ontorio (Province) by konslerring to o compony wholly owned by the
Province oll of the issued ond outstonding shores o[ Hydro One
Brompton ond intercompony indebledness owed to Hydro One Inc.
by Hydro One Brompton. Hydro One's 20,)5 consolidoted results of
operotions lnclude the resuhs of Hydro One Brompton up to
August 3'l , 2015. The following tobles present quorterly results of
Hydro One Brompton thol were included in consolidoted results o[
Hydro One for the yeor ended December 3l , 20,15.
Quorter ended
lnillions of dollors)
Mor. 3l ,
201 5
lun. 30,
2015
Sept. 30,
2015
Dec.3l,
201 5
2015
Totol
>;oz
ZA>g-t;sa=
<;
I6.)C@aoz
I
Revenues
Purchosed power
OM&A
Depreciotion ond omortizotion
Income lox expense
125
t07
6
5
129lll
6
4
I
100
BB
4
2
(t)
354
306
16il
Net income 777 21
Copitol investments il 28
Selected Annuol Finonciol Stotistics
Yeor ended December 3l
lmillions of dollors, except per shore onounts) 2016 2Ol5 2014
Totol revenue 6,552 6,538 6,548
Net income ottribuloble to common shoreholders 721 690 731
Bosic ond diluted EPS $ L21 $ ].39 $ t.SS
BosiconddilutedAdiustedEPS $ t.zt $ t.lO $ 1.23
Dividends per common shore declored $ 0.97r $ 1.83 $ 0.56$r.12 $r.03 $r.38
rThe$0.gTpershoredividendsdecloredin20l6included$0.l3fortheposrlPOperiodfromNovember5toDecember3l,20l5,ond$0.84fortheyeor
ended December 31, 2O16.
December 3 I
(millions of dollors)2016 201 5 20)4
9
Totol ossets
Totol non-current finonciol liobilities
25,35 r )A )AA 22,550
207 373I
Quorterly Results of Operotions
Quorter ended
(nillions of dollors, except EPS)
Dec.3l,
201 6
Sep. 30,
2016
Jun.30,
2016
Mor. 31,
2016
Dec.3],
201 5
Sep. 30,
20 r5
lun. 30,
20r5
Mor. 3],
20r5
Revenues
Purchosed power
Revenues, net of purchosed power
Net income to common shoreholders
Bosic EPS
Diluted EPS
Bosic Adiusted EPS
Dilured Adiusted EPS
1 ,614
858
756
128
1,686
896
790
208
r,563
838
725
t3t
1,706
870
836
233
1,546
803
743
152
1,522
786
736
143
1,645
856
789
r88
1,808
970
838
228
$ o.22
$ 0.21
$ 0.22
$ o.2l
$ 0.39
$ o.3e
$ o.3e
$ o.3e
$ 0.26
$ o.2s
$ 0.26
$ 0.25
$ 0.35
$ 0.3s
$ 0.3s
$ 0.35
$ o.zo
$ 0.26
$ o.za
$ o.zt
$ o.ss
$ o.ss
$ o.sz
$ o.sz
$ o.zz
$ o.zz
$ o.zz
$ 0.22
$ o.tz
$ o.az
$ o.ss
$ 0.38
Voriotions ln revenues ond net income over the quorters ore primorily due to the impoct of seosonol weother conditions on customer demond ond
morket pricing.
Appendix 6 to Joint Application HyDRO ONE LtrvurED ONE OF NORTH AMERtCA',s
'.o*orsr
Prage ?l6ffeof 614
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
Copitol lnvestments
The Compony mokes copitol investmenls to mointoin the sofety,
reliobllily ond lntegrity of its tronsmission ond distribution ossets ond lo
provide lor the ongoing growh ond modernizolion required to meet
the exponding ond evolving needs of ils customers ond the electricity
morket. This is ochieved through o combinolion of susloining copitol
investments, which ore required to support the continued operolion o[
Hydro One's existing ossets, ond developmenl copitol investments,
which involve both odditions to existing ossets ond lorge scole
proiects such os new tronsmisslon lines ond tronsmission stotions.
2016 201 5 Chonqe
The following toble presents Hydro One's 2O I 6 ond 20 I 5 copitol investments:
Yeor ended December 3l
(millions of dollors)
Tronsmission
Sustoin ing
Development
Other
750
r56
82
706
166
71
16.o%)
I5.5%
988 943 4.8%
Dishibution
Susloining
Development
Other
384
217
102
(3.s%)
11.4%)
9.7%
398
220
93
703 711 l.r
Other 6
1,697 r,663
33.3
l.U /o
I
Totol copitol investments
Tronsmission Copitol lnvestments
Tronsmission copitol investments increosed by $45 million or 4.8%in
2016. Principol impocts on the levels of copiiol investments included:
r on increosed volume o{ work on overheod line refurbishmenls ond
insulotor replocements;
r on increosed volume of integroled stotion component replocemenls
lo sustoin certoin oging ossels ot tronsmission stotions;
r continued work on moior locol oreo supply network development
proiecls, such os the Hollond Tronsmission Stotion, the Howthorne
Tronsmission Stotion, ond the Toronto Mldtown Tronsmission
Reinlorcemenl; ond
o increosed investments reloting to informotion iechnology
infrostructure ond customer progroms, enhoncemenl proiects,
including investments to integrote mobile technology with the
Compony's existing work monogement tools; portiolly offset by
o decreosed investments in syslem enhoncement projects, primorily
due to completion of certoin proiects ond o difference in timing o[
work on other proiects; ond
o completion of the Guelph Areo Tronsmission Refurbishment proiect.
Distribution Copitol lnvesiments
Distribution copitol investments decreosed by $8 million or l.l% in
2016. Principol impocts on the levels of copitol inveslments included:
. reduced copilol expenditures due to the diveslilure o[ Hydro One
Bromplon in 2015; ond
o o lower volume of work within stotion refurbishment progroms ond
lower volume of spore tronsformer purchoses; portiolly offset by
o lncreosed investmenls reloted to informolion technology
infrostructure ond customer progroms together wilh upgrode ond
enhoncemenl proiecls, including investments to integrote mobile
technology with the Compony's existing work monogement tools;
ond
. investmenls in smort grid technology to mitigote power quolity
impocts o[ distributed generotion ond to improve ouloge response
times.
ABpen,#rc6tc.Jnts ApplieEtionpoRT TSX: H Page 269 of 414
Moior Tronsmission Copitol lnvestmenl Proiects
The following toble summorizes the stotus of significont lronsmission proiecls os ot December 3 I , 20 I 6:
Proiect Nome locotion Type
Anticipoted
ln-Service
Dote
Estimoted
Cost
Copitol Cost
ToDote
Development Proiects:
Guelph Areo Tronsmission
Refurbishment
Toronto Midtown Tronsmission
Reinforcement
Supply to Essex County
Tronsmission Reinforcement
Clorington Tronsmission Stolion
Northwest Bulk Tronsmission Line
Eost-Wesl Tie Stotlon Exponsion
Guelph oreo
Southwestern Ontorio
Toronto
Soulhwestern Ontorio
Windsor-Essex oreo
Southwestern Ontorio
Oshowo oreo
Southwestern Ontorio
Thunder Boy
Northwestern Ontorio
Northern Onlorio
Tronsmission line
upgrode
New tronsmission
line
New tronsmission
line ond stotion
New tronsmission
stotion
New lronsmission
line
September
2016r
December
20162
To be
determined
201 B $73 million $]3 million
20rI $262 million $
,l92 million
$87 million $86 million
$1 'l B million $l l3 million
To be
determined
Stotion exponsioo 2O2O $ 166 million
,*az
za>tr
3Aa1
<n
I6oc
=z
I
Susloinment Proiects:
Bruce A Tronsmission Stotion
Richvlew Tronsmission Stotion
Circuit Breoker Replocement
Lennox Tronsmission Stotion
Circuit Breoker Replocement
Beck #2 Tronsmisslon Stotion
Circuit Breoker R"plSlgrglt
Tiverton
Southwestern Ontorio
Toronto
Southwestern Ontorio
Noponee
Southeostern Ontorio
Niogoro oreo
Soulhwestern Ontorio
Stotionsusloinment 20,l9
Stotionsustoinment 20]9
Stotion sustoinmenl 2O2O
Stotion sustoinmenl 2021
$.l09 million $83 million
$102 million $68 million
$95 million $15 million
$93 million $28 million
lMojorportionsof theproiectwerecompletedondplocedin-serviceinSeptember20l6.Workoncertoinminorportionsof theproiectcontinuesinlhefirst
quoder o| 2017.
2 Mojor portions of fie proiect were completed ond ploced in-service in December 2016. Work on certoin minor portions of the proiect continues in the firsl
quorter of 20 1 7.
Future Copitol lnvestments
Following is o summory of estimoted copitol investments by Hydro
One over the next five yeors. The Compony's eslimoles ore bosed on
monogement's expectotions of lhe omount of copitol expenditures thot
will be required to provide tronsmission ond distribution services thot
ore efficient, relioble, ond provide volue for customers, consistent with
the OEB's Renewed Regulotory Fromework. These estimotes differ
lrom the prior yeor disclosures, reflecting onnuol increoses of
$ I 26 million for 2017 , $ I 1 3 million for 201 B, $239 million for
2019, ond $360 million for 2O2O. These future copitol inveslments
reflect monogement's best estimotes ond, os opplicoble, proieclions
included in rote filings currently in process. These proiections ond lhe
timing of expenditures ore in lorge port subiect to opprovol by the
OEB, ond will be odiusted going foword os oppropriote to reflect
rote decisions by the OEB.
Appendix 6 to Joint Application HYDRo oNE LIMITED oNE oF NoRTH AMERIcA,s LARGESI P€gE ?T7ETOfA14
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following toble summorizes Hydro One's onnuol projected copilol investmenlsfor 2Ol7 to 2021 , by business segment:
[millions o{ dollors) 2Ol7 201 I 2019 2020 2021
Tronsmission
Distrlbution
Other
1,086
648
12
1,132
647
9
1,217
771
B
1,278
71<
6
1,486
749
B
Totol copitol investments 1,746 1,788 1,996 2,019 2,243
The following loble summorizes Hydro One's onnuol projected copitol investmenls for 2017 lo 2021 , by cotegory:
lmillions of dollors) 2017 2018 2019 2020 2021
Susloinlng
Development
Otherr
t,t07
414
225
1 ,165
400
aaa
1,219
484
293
1,327
487
20s
1,546
490
207
Totol copitol investments 1,746 1,788 1,996 2,019 2,243
I "Other" copibl expenditures consisl of spmiol proiects, such os those reloting to informotion technology.
Summory Of Sources And Uses Of Cosh
Hydro One's primory sources of cosh flows ore funds generoted lrom operotions, copitol morket debt issuonces ond bonk credit focilities thot ore
used lo sotisfy Hydro One's copitol resource requirements, including the Compony's copitol expenditures, servicing ond repoyment o[ debt, ond
dividend poyments.
Yeor ended December 3l
lmillions of dollors) 2016 2015
Cosh provided by (used in) operoting octivities
Cosh provided by finoncing octivilies
Cosh used in invesling oclivities
1,656
t6t
(1,86r)
11,248)
2,954
11,712)
Decreose in cosh ond cosh equivolents 144)(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 deferred tox recovery of $2.8 billion recorded in 2015 thot resulted os
o consequence of leoving the PlLs Regime ond entering the Federol Tox Regime.
Primory fociors behlnd the decreose in cosh
provided by finoncing octivities
Sources o[ cosh
. The Compony received $2.3 billion proceeds from issuonce of
long-term debt in 20,16, compored to $350 milllon recelved lost
yeor.
. The Compony received $3,03 1 million proceeds from issuonce of
short-term notes in 20,16, compored to $2,891 million received
lost yeor.
r In 20,l5, the Compony received $2.6 blllion proceeds lrom
common shores issued to the Province prior to the completion o[
the initiol public offering (lPO).
Uses of cosh
r Dividends poid in 20,l6 were $596 million, consisting of
$572 million common shore dividends ond $ l9 million preferred
shore dividends, compored to $BBB million poid in 20.)5. 20l5
dividends consisted of $25 mlllion common shore dividends,
$13 million preferred shore dividends, os well os on $800 million
speciol dividend poid to the Province prior to the completion o[ the
rPo.
e The Compony repoid $4,053 million o{ short-term noles,
compored to $ I ,400 million repoid lost yeor.
o The Compony repoid $502 million of long-term debt in 20,l6
compored to $585 million repoid lost yeor.
ABpendirc6te',lnri$ ApplipntionpoRT TSX: H Page271 of4l4
Primory foctors behind the increose in cosh used
in investing octivities
Uses of cosh
o Copitol expenditures were $29 million higher in 201 6, primorily
due to increosed konsmission copilol investments consistent with the
Compony's ongoing copitol investment progrom.
Liquidity ond Finoncing Strotegy
Short-term liquidity is provided through funds from operotions, Hydro
One lnc.'s commerciol poper progrom, ond the Compony's
consolidoted bonk credit focilities. Under the commerciol poper
progrom, Hydro One Inc. is outhorlzed to issue up to $.1.5 billion in
short-term noles with o term lo moturi! of up to 365 doys. At
December 3,l, 20,16, Hydro One lnc. hod $469 million in
commerclol poper borrowings outstonding, compored to
$1,49.1 million outstonding ot December 3,), 2015. 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 focilities for working copitol ond generol corporote
purposes. The short-term liquidity under lhe commerciol poper
progrom, the credit focilities ond onticipoted levels of funds from
operolions ore expected to be suf{icient to fund the Compony's
normol operoling requirements.
At December 3 1 , 201 6, the Compony's longlerm debt ln the
principol omount of $ l0,6Zl million included $ 10,523 million long-
term debt issued under Hydro One lnc.'s Medium Term Note (MTN)
Progrom ond long-term debt in the principol omount of $148 million
held by Greot Lokes Power. At December 31, 2016, the moximum
outhorized principol omount o[ notes issuoble under the current MTN
Progrom prospectus filed in December 20'l 5 wos $3.5 billion, with
$ I .2 billion remoining ovoiloble for issuonce until Jonuory 20,) 8. The
Credit Rotings
At December 3 I , 201 6, Hydro One's corporote credit rotings were os follows:
Rothg Agency
o ln 2016, 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 Inc. (Holdimond Hydro) ond
Woodstock Hydro Holdings lnc. (Woodstock Hydro).
e ln Augusl 2015, on investmento{ $53 million wos mode in Hydro
One Bromplon prior to its divestilure lo the Province.
longlerm debt consists o[ notes ond debentures thot moture between
2017 ond 2064, ond ot December 3 I , 20 I 6, hod on overoge
term to moturily of opproximotely 15.9 yeors ond o weighted
overoge coupon of 4.3%.
On Morch 30, 20I 6, Hydro One filed o finol universol short form
bose shelf prospectus (Universol Bose Shelf Prospectus) wilh securilies
regulotory outhorities in Conodo. The Unlversol Bose Shelf Prospectus
ollows Hydro One to offer, from time to lime in one or more public
oflerings, up to $8.0 billion of debt, equity or olher securities, or ony
combinotion thereof, during the 25-month period ending on April 30,
2018. Hydro One filed the Universol Bose Shelf Prospectus in port to
Iocilitote the secondory offerings of outstonding shores of the
Compony by the Province, ond to provide lhe Compony with
increosed finoncing flexibility going lorword. ln 2016, Hydro One
completed o secondory offering of o portion of its common shores
previously owned by the Province. See section "Other Developments
- Chonge in Hydro One Ownership Structure" for detoils of this
tronsoction. Upon closing of the konsoction, $6,030 million
remoined ovoiloble under the Universol Bose Shelf Prospectus.
At December 3l , 2016, the Compony ond Hydro One lnc. were in
complionce with oll finonciol covenonts ond limitotions ossocioted
with the outstonding borrowings ond credit focilities.
Corporote Credit
Roting
>*oz
>g
=>@+aA
Ga
oCaaoZ
I
Stondord & Poor's Roting Services {S&P}
Hydro One hos not obtoined o credil roling in respect of ony of its
securilies. An issuer roting from S&P is o forwordlooking opinion
obout on obligor's overoll creditworthiness. This opinion focuses on
the obligor's copocity ond willingness to meet its finonciol
commitments os lhey come due but it does not opply to ony specilic
finonciol obligotion. An obligor with o long-term credit roting o['A'
hos strong copocity lo meet its finonciol commilrnenls but is somewhot
more susceptible to the odverse effects o[ chonges in circumslonces
ond economic conditions thon obligors in higher-roted cotegories.
The roting obove is not o recommendotion lo purchose, sell or hold
ony of Hydro One's securities ond does not comment on the morket
price or suitobility of ony of the securities for o porticulor investor.
There con be no ossuronce thot the roting will remoin in effect for ony
Appendix 6 to Joint Application HyDRo oNE LrilrrED oNE oF NoRTH AMERTCA'S uncesr Pea$ft ?rlaegf 'A14
MANAGEMENT'S DISCUSSION AND ANALYSIS
given period of time or thol the roting will not G revised or
withdrown entirely by S&P ot ony time in the future. Hydro One hos
mode, ond onticipotes moking, poyments to S&P pursuonl to
ogreements entered into wilh S&P in respect o[ the roting ossigned to
Hydro One ond expecls lo moke poyments to S&P in the luture to the
extent it obioins o roting specilic to ony o[ its securities.
Long{erm Debt
Roting
At December 3l , 20,l6, Hydro One Inc.'s long-term ond shortlerm debt rotings were os follows:
Short+erm Debt
Roting Agency Roting
DBRS Limited
Moody's lnvestors Seryice
S&P
R-l (low)
Prime2
A-t
{his
A3
A
A
Effect of lnterest Rotes
The Compony ls exposed to fluctuotions of interest rotes os its
reguloted return on equiV (ROE) is derived using o formuloic
opprooch thot tokes into occount chonges in benchmork interest rotes
for Government of Conodo debt ond ihe A-roted utility corporote
bond yield spreod. See section "Risk Monogement ond Risk Foctors -
Risks Reloting to Hydro One's Business - Morkel, Finonciol Instrument
ond Credit Risk" for more detoils.
Pension Plon
In 20,l6, Hydro One contributed opproximotely $l0B million to its
pension plon, compored to contributions of opproximotely
$177 million in 2015, ond incurred $ll6 milhon in net periodlc
pension benefit costs, compored to $ 163 million incurred in 2015.
lnJune 2016, Hydro One lnc. filed on octuoriol voluotion of its
Pension Plon os ot December 31, 20.l5. Bosed on this voluolion ond
201 6 levels of pensionoble eornings, the 20,l 6 onnuol employer
contributions hove decreosed by opproximotely $72 million from
$ I 80 million os estimoted ot December 3 I , 201 5, primorily due to
improvements in lhe funded stotus of the plon ond future octuoriol
ossumplions. The decreose olso reflects the impoct o{ chonges
implemented by monogement to improve lhe bolonce belween
employee ond Compony conlributions to the Pension Plon. The
updoted octuoriol voluotion resulted in o $25 million decreose in
20 I 6 revenue with o corresponding decreose in OM&A costs, os
the lower pension contributions will be returned to customers through
the penslon cost vorionce deferrol occount in fulure role opplicotions.
The Compony estimotes thot lolol pension contributions for 2017 ond
20I 8 will be opproximorely $ 105 million ond $ 102 million,
respectively.
The Compony's pension benefits obligotion is impocted by vorious
ossumptions ond estimotes, such os discount rote, role o[ return on
plon ossefs, rote o[ cost of living increose ond mortolity ossumptions.
A full discussion of the signlficont ossumptions ond estimotes con be
found in the section "Criticol Accounting Estimotes - Employee Future
Benefits".
Other Obligotions
Off-Bolo nce Sheet Arro ngements
There ore no off-bolonce sheet orrongements thot hove, or ore
reosonobly likely to hove, o moterlol current or future effect on the
Compony's finonciol condition, chonges in finonciol condition,
revenues or expenses, results of operofions, liquidity, copitol
expenditures or copitol resources.
ABpen,#rc6lo',Inri$ Applinn6ionpoRT TSX: H Page 273 of 414
Summory of Controctuol Obligotions ond Other Commerciol Commitments
The following toble presents o summory of Hydro One's debt ond other moior conlroctuol obligotions ond commerciol commitments:
December 3l , 201 6 Less thon I -3 3-5
(millions of dollorsl Totol I yeor yeors yeors
More thon
5 yeors
Controctuol obligotions (due by yeor)
Longlerm debt - principol repoyments 10,671
Longlerm debt - interest poyments 8,145
Short-term notes poyoble 469
Pension conkibutionsr 207
Environmentol ond osset retirement obligotions 243
Outsourcing ogreements 374
Operoting leose commitmenls 42
Long-term softwore,/meler ogreement 73
602
456
469
r05
27
r65
lt
17
1,484
827
102
5t
196
t6
33
r,156
754
65
4
t3
l8
Totol controctuol obligotions 20,224 1 ,852 2,7Oq 2,010 13,653
Other commerciol commitments lby yeor of expiry)
Credit focilitiesz 2,550 2,550
Letters of credit3 174 174
Guoronteesa 330 330
Totol other commerciol commitments 3,054 504 2,550
I Conlributions to the Hydro One Pension Fund ore generolly mode one month in orreors. The 201 7 ond 201 8 minimum pension conhibutions ore bosed on
on octuoriol voluotion os ol December 31, 2015 ond proiected levels of pensionoble eornings.
2 On August 15,2O16, Hydro One lnc. terminoted its creditfocilities totolling $2.3 billion moturing in June2020 ond October 2018, ond entered inb o new
$2.3 billion credit focility moluring in June 2021 . On November 7,2O16, the moturity dote of Hydro One's $250 million credit focility wos exbnded from
November 2020 to November 2021.
3 Letters of credil consist of o $ 150 million letter of credit reloted lo retirement compensotion orrongements, ond le[ers of credit totolling $24 million provided
os prudentiol support.{ Guorontees consist of prudentiol support provided to fie IESO by Hydro One lnc. on beholf of its subsidiories.
Regulotion
The OEB opproves both the revenue requiremenls o[ ond the rotes
chorged by Hydro One's reguloted tronsmission ond dishibution
businesses. The rotes ore designed lo permit the Compony's
tronsmission ond distribution businesses lo recover lhe ollowed costs
The following toble summorizes the stotus of Hydro One's moior regulotory proceedings:
Applicotion Yeor(s)Typ"
ond to eorn o formulo-bosed onnuol rote of return on its equity
invested in the reguloted businesses. This is done by opplying o
specified equity risk premium to forecosted interest roles on longlerm
bonds. In oddition, the OEB opproves rote riders to ollow {or the
recovery or disposition of specific regulotory defenol occounts over
specified time fromes.
Stotus
Z>9z
>d>g346Ads(,oc<n<,oz
I
ElechiciV Rotes
Hydro One Networks
Hydro One Networks
Hydro One Networks
B2M LP
Greot Lokes Power
2015-2016
2017-2018
2015-2017
201 5,20 r 9
2017
Tronsmission - Costof-service
Tronsmission - Costof-service
Distribulion - Custom
Tronsm ission - Costof-service
Tronsm ission - Costof-service
OEB decision received
OEB decision pending
OEB decision received
OEB decision received
OEB decision pending
Mergers Acquisitions Amolgomotions ond Divestitures
Greol Lokes Power
Orillio Power
n/o
n/o
Acquisition
Acquisilion
OEB decision received
OEB decision pending
Leove to Construct
Supply lo Essex County Tronsmission Reinforcemenl Project n/o Section 92 OEB decision received
Appendix 6 to Joint Application HyDRo oNE LrrurED oNE oF NoRTH AMERTCA'S ,orors, P€ge ?r7rt$f A14
7,429
6,r08
'to0
9
2
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
Hydro One hos obtoined revenue requirement opprovols from the
OEB, subiect to certoin onnuol odiustments, for Hydro One
NeMorks' tronsmission business through 20l6,lor B2M LP through
2019, ond for Hydro One Networks'dislrlbution business to the end
ol 2017. The following loble summorizes the key elements ond slotus
of Hydro One's electricity rote opplicotions:
Applicotion Yeor
ROE
Allowed (A)
or Forecost (F)Rote Bose Rote Applicotion Stotus
Rote Order
Stotus
Tronsmission
Hydro One Nefworks 2016
2017
20r B
9. r9% (A)
B.7B%\Al
8.7e%lF)
$ 10,040 million
$ 10,554 million
$ll,226million
Approved in Jonuory 20 1 5
Filed in Moy 2016
Filed in Moy 2016
Approved inlonuory 20l6
To be filed in 20l Z Ql
To be filed in 2017 Q4
B2M LP 2016
2017
20r B
2019
9.19% (A)
B.7B7"l )
8.78%lF)
8.78%lFl
$5 l6 million
$509 million
$502 million
$496 million
Approved in December 20l5
Approved in December 20l5
Approved in December 20 1 5
Approved in December 20,15
Approved inJonuory 2016
Filed in December 2016
To be filed io 2Ol7 Q4
To be filed in 2Ol B G4
Greot Lokes Power 2017 9. r9% (F)$2 I 8 million Filed in December 20l6 Filed in December 2a16
Dishibution
Hydro One Nel'works 2016
2017
9.19%lA)
8.78%l l
$6,863 million
$7, 190 million
Approved in Morch 20,15
Approved ln Morch 20]5
Approved in April 2015
Approved in December 20 I 6
Hydro One Networks
On Moy 3l , 20,16, Hydro One Networks [iled o cost-of-service
opplicotion with the OEB {or 2017 ond 2018 konsmission rotes. The
opplicotion seeks opprovol o{ role bose of $ i0,554 million for
2017 ond $1 1 ,226 milllon lor 20 I 8. In October 20 I 6, the OEB
issued updoted cost o[ copitol porometers for rotes effective in 2O]7,
including on updoted 20 17 ollowed ROE of B.ZB%. The opplicotion
olso loys out o plonned lronsmission copitol inveslment progrom for
the five-yeor period ending on December 3l , 2021, with investments
in copitol spending primorily to oddress reliobility, sofety ond
customer needs, in o costelfective monner. Monogement expects thot
o decision will be received in the lirst holt of 2017 , ond thot new
rotes will be retrooctive toJonuory 1 , 2017. Future lronsmission rote
opplicotions ore onlicipoted to be filed under the OEB's incentive
bosed regulotory fromework.
Hydro One Networks plons to submit on opplicotion for 2O18-2022
distribution rotes under the OEB's incenlivebosed regulotory
fromework in the first quoner ol 2017.
B2M LP
OnJonuory 14,2O16, the OEB issued its Decision ond Rote Order
opproving the B2M LP revenue requiremenl recovery through the
20 I 6 Uniform Tronsmission Rotes. On December I , 201 6, B2M LP
filed o Droft Rote Order with o revised 2017 revenue requirement o[
$34 million, reflecting updoted 2017 cosl of copitol porometers
issued by the OEB in October 20,l6.
Other Regulotory Developments
OEB Pension ond Other Post-Employment
Benefits (OPEB) Generic Heoring
ln 2015, the OEB begon o consullotion process lo exomine pensions
ond OPEBs in rotereguloted utilities, with the obiectives of developing
stondord principles to guide its review of pension ond OPEB reloted
costs in the future, ond to estoblish specific requirements lor
opplicotions ond oppropriote ond consistent regulotory mechonisms for
cost recovery. Hydro One ond other stokeholders [iled written
submissions with respect lo initiol OEB queslions intended to solicit
views on the key issues o[ interest to the OEB. Following o stokeholder
forum inJuly 2016, updoled writlen submissions were filed with the
OEB in September 20 1 6. lt is onticlpoted thot subsequent to the
OEB's review o[ the updoted written submissions, the OEB will outline
principles to guide its review o[ penslon ond OPEB reloted costs in the
fulure, ond provide further guidonce on opplicolion requirements ond
regulotory mechonisms for cost recovery.
Other Developments
Chonge in Hydro One Ownership Structure
In November 2015, Hydro One ond the Province completed on IPO
on lhe Toronto Stock Exchonge o[ opproximotely 89.3 million
common shores o[ Hydro One, representing l5% of the Province's
ownershlp position. Prior to the complelion of the lPO, Hydro One
ond its subsidiory, Hydro One lnc., completed o series o[
lronsocllons (PrelPO Tronsoctions) thot resulted in, omong other
things, the ocquisition by Hydro One of oll of the issued ond
ABpenr8r6lp',lfiis Applion6ionpoRT TSX: H Page 275 of 414
outstonding shores of Hydro One lnc. from the Province ond the
issuonce of new common shores ond prefened shores of Hydro One
to the Province. Both Hydro One ond Hydro One lnc. ore reporting
issuers. ln April 2016, lhe Province completed o secondory offering
of 83.3 million common shores of Hydro One on the Toronto Stock
Exchonge. Hydro One did not receive ony o[ the proceeds lrom
eilher of the soles of common shores by the Province. At
December 3l , 2016, the Province directly holds opproximotely
70.1% of Hydro One's totol issued ond outstonding common shores.
Closs Action Lowsuit
Hydro One lnc., Hydro One Networks, Hydro One Remote
Communities lnc., ond Norfolk Power Distribulion Inc. ore defendonts
in o closs oction suit in which the representotive plointiff is seeking up
to $ I 25 million in domoges reloted to ollegotions of improper billing
proctices. A certilicotion motion in the closs oction is pending. Due to
the preliminory stoge of legol proceedings, on estimote of o possible
loss reloted to this cloim connol be mode.
Acquisitions
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
20,)6, the Compony successfully completed the integrotion o[ both
entities, including the integrotion of employees, customer ond billing
informotion, business processes, on{,operolions.
tronsmission business operoting olong the eostern shore of [oke
Superior, north ond eost of Soult Ste. Morie, Ontorio. The totol
purchose price for Greot Lokes Power wos opproximotely
$376 million, including the ossumplion o[ opproximotely
$150 million in outstonding indebtedness. OnJonuory 16,2O17
Greot Lokes Power's nome wos chonged to Hydro One Soult Ste.
Morie LP.
On December 23,2016, Greot Lokes Power filed on opplicotion for
2017 rotes, requesting on increose to the opproved 2016 revenue
requiremenl ol 1.9%, resulting in on u@oted revenue requiremenl of
$41 million.
Acquisition of Orillio Power
In August 2016, the Compony reoched on ogreement to ocquire
Orillio Power Distribution Corporotion (Orillio Power), on electricil'y
distribution compony locoted in Simcoe Counly, Onlorio, lor
opproximotely $41 million, including the ossumption of
opproximotely $15 million in outstonding indebtedness ond
regulotory liobilities, sublect to closing od justments. The ocquisilion is
subiect to regulotory opprovol by the OEB.
Hydro One Work Force
l-1ydro One hos o skilled ond llexible work force of opproximotely
5,500 regulor employees ond over 2,@0 nonregulor employees
provincewide, cornprising o mix o[ skilled trodes, engineering,
professionol, monogeriol ond executive personnel. Hydro One's regulor
employees ore supplemented primorily by occessing o lorge externol
lobour force ovoiloble through orrongements wlth the Compony's trode
unions for vorioble workers, sometimes refened to os "hiring holls', ond
olso by occess to conlroct personnel. The hiring holls offer Hydro One
the obiliry to flexibly utilize highly troined ond oppropriotely skilled
workers on o proiect-byproiect ond seosonol bosis.
Acquisition of Greot Lokes Power
On October 31 , 2O16, following receipt of regulotory opprovol of
the tronsoction by the OEB, Hydro One completed the ocquisition of
Greot Lokes Power, on Ontorio reguloted electricity
The following toble sets oul lhe number o[ Hydro One employees os ot December 3 I , 201 6.
Regulor
Employees
Non-Regulor
Employees Totol
z>9z
za>gr=taea=
C;
I6.)C(n
<,ttoz
I
Power Workers' Union (PWU)
The Society of Energy Professionols {Society)
Conodion Union of Skilled Workers (CUSWI ond conslruction building trode
un ions2
3,470
r,365
698r
44
4,168
1,409
1,275 1,275
Totol employees represented by unions
Monogement ond non-represented employees
4,835
659
2,017
2B
6,852
687
Totol employees 5,494 2,045 7,539
I lncludes 528 nonregulor "hiring holl" employees covered by the PWU ogreement.
z Employees ore iointly represented by both unions. The construction building kode unions hove colleclive ogreemenh with the Electricol Power Systems
Conskuction Associotion (EPSCA).
Appendix 6 to Joint Application HyDRo oNE uxUrED oNE oF NoRTH AMERtcA's,o*ors, P€ge?r76rgf *14
MANAGEMENT'S DISCUSSION AND ANALYSIS
Shore-bosed Com pensotion
During 2016, the Compony gronted owords under its longlerm
Incenlive Plon, consisting of Performonce Stock Units (PSUs] ond
Restricted Stock Unils (RSUs), oll o[ which ore equity settled. At
December 3 I , 20 I 6, 230,600 PSUs ond 254,1 50 RSUs were
outstonding. No long-term incentive owords were gronted during
2015.
poid on prelerred shores, ond (iii] distributions lo noncontrolling
interest. Adiusted FFO is defined os FFO, od justed for the impoct of
the deferred income tox osset thot resulted os o consequence o[
leoving the PlLs Regime ond entering the Federol Tox Regime.
Monogement believes thot FFO ond Adiusted FFO ore helpful os
supplementol meosures of the Compony's operoting cosh flows os
they exclude timing-reloted flucluotions in non-cosh operoting working
copitol ond cosh flows not ottributoble to common shoreholders, ond,
in the cose of Adiusted FFO, the impoct of the lPGreloted deferred
income lox osset. As such, these meosures provide consistent
meosures o[ the cosh generoting performonce of the Compony's
ossels.
2016 201 5
Non-Goop Meosures
Funds from Operotions (FFO) ond Adiusted FFO
FFO is defined os net cosh from operoting oclivities, odlusted for
{i} chonges ln noncosh bolonces reloted to operolions, (ii) dividends
The following toble presents the reconciliotion of nel cosh from operoting octivities to FFO ond Adiusted FFO:
Yeor ended December 3l
(millions of dollors)
Net cosh from (used in) operoting ocllvities
Chonges in non-cosh bolonces reloted to operotions
Preferred shore dividends
Distributions to noncontrolling inleresl
1,6s6 | ,2481
(r 34) 1213)(re) (r 3)(e) (5)
FFO
Less: Deferred income tox ossetl
Adiusted FFO 1 ,494 r,33l
r lmpoct of defurred income tox ossel lhot resulted os o consequence of leoving the PlLs Regime ond entering the Federol Tox Regime.
Adiusted EPS
The following bosic ond diluted Adlusted EPS hos been prepored by
monogement on o supplementory bosis which ossumes lhot the
totol number of common shores outstonding wos 595,000,000 in
eoch of the yeors ended December 3 l, 20,1 6 ond 201 5. The
supplementory pro formo disclosure is used internolly by monogement
subsequent to the IPO of the Compony's common shores in
November 20l5 to ossess lhe Compony's performonce ond is
Yeor ended December 3 I
considered useful becouse it eliminotes the lmpoct of o different ond
noncomporoble number o[ shores outstonding ond held by the
Province prior to ihe 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, the IPO provides users with o comporotive bosis to
evoluote the operotions of the Compony.
2016 20r5
Net income ottributoble lo common shoreholders lmillions of dollors)
Pro formo weighted overoge number of common shores
Bosic
Effect o[ dllutive stock'bosed compensotion plons
721
s9s,000,000
1,700,823
690
595,000,000
94,691
Diluted
Adiusted EPS
Bosic
Diluted
596,700,823 595,094,691
$
$
1.21
1 .21
I .16
I .16
$
$
ABpenr#r6tp JnrS ApplipntionpoRT TSX: H Page277 of4l4
1 494 t] 47ql
(2,8 r0)
Adiusted Net Cosh from Operoting Activities
Adiusted net cosh from operoting octivilies is defined os net cosh from
operoting octivilies, odiusted for the impocl of the defened income
tox osset thot resulted os o consequence of leoving the PlLs Regime
ond entering the Federol Tox Regime. Monogement believes thot this
meosure is helpful os o supplementol meosure o[ the Compony's net
cosh from operoting oclivities os il excludes the impoct o[ the
lPOreloted defened income lox osset. As such, odiusted net cosh
from operoting octivities provides o consislent meosure o[ the
Compony's cosh from operoting octivities compored to prior periods.
201 5
The lollowing loble presents the reconciliotion of net cosh from operoting oclivllies to od justed net cosh from operotlng oclivilies:
Yeor ended December 3 I
lmillions of dollors) 2016
,t9z
z- \t>{-64
aa6g
oCaaoz
I
Net cosh lrom {used in) operoting octivities
Less: Deferred income lox osselr
1,656 11,24Bl
12.8 l0)
net cosh from octivities
I lmpoct of deferred income tox osset thot resulted os o consequence of leoving the PlLs Regime ond entering the Federol Tox Regime.
To the extent thot odiusted nel income is used in future conlinuous
disclosure documents of Hydro One, itwill be defined os net income,
odlusted for certoin items, including nonrecurring items ond other
onetime items thot monogemenl does not consider to be reflective of
the operotlng perlormonce of the Compony. No such odiustments to
nel income ore presenled in this MD&A. Monogemenl believes thot
this meosure will be helpful in ossessing the Compony's finonciol ond
operoling performonce in the future.
562
FFO, odlusted FFO, odlusted bosic ond diluted EPS, odiusted net
cosh from operoling octivities, ond odiusted net income ore nol
recognized meosures under US GAAP ond do not hove o
stondordized meoning prescribed by US GAAP. They ore therefore
unlikely to be directly comporoble to similor meosures presented by
other componies. They should not be considered in isolotion nor os o
substitule for onolysis ol the Compony's flnonciol informolion reported
under US GAAP.
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 lhey ore controlled or significontly influenced by fie Province. The following is o summory ol the
Compony's reloted porty tronsoctions during the yeor ended December 31, 2016:
Yeor ended December 3 I
2016 2015
(millions of dollors)RelotedPorty fronsoction
Provincel Dividends poid
Common shores issued2
IPO costs subsequently reimbursed by the Province3
451 8BB
2,600
7
IESO Power purchosed
Revenues for konsmission services
Distribution revenues reloted to rurol rote protection
Distribution revenues reloted to the supply of eleckicity to remote northern communilies
Funding received reloted to Conservotion ond Demond Monogement progroms
2,096
1,549
12s
32
63
2,31 B
t,548
127
1a
70
OPG Power purchosed
Revenues reloted to provision o{ construction ond equipment mointenonce services
Costs expensed reloled to the purchose of services
6
5
I
1l
7
I
OEFC Poyments in lieu of corporote income loxesa
Power purchosed lrom power conlrocts odministered by the OEFC
lndemnificotion fee poid (terminoted effective October 3l , 20,15)
2,933
6
B
OEB
Hydro One
Bromptonl
Revenues from monogement, odministrotive ond smort meter network services
r On August 3 'l , 20 l 5, Hydro One lnc. completed the spinoff of its subsidiory, Hydro One Brompton, to the Province.
2 On November 4,2O15, Hydro One issued common shores to the Province for proceeds of $2.6 billion.
3 ln 2015, Hydro One incurred certoin IPO reloted expenses totolling $7 million, which were subsequently reimbursed to the Compony by the Province.
a ln 201 5, Hydro One mode PlLs to the OEFC totolling $2.9 billion, including deporture tox of $2.6 billion.
Appendix 6 to Joint Application HyDRo oNE UM|TED oNE oF NoRTH AMERtcA',s tARGEST P€&ft ar?ffrof4l4
OEB I 12
2
r,656
MANAGEMENT'S DISCUSSION AND ANALYSIS
At December 31 ,2O16,lhe omounts due from ond due to reloted
porties os o result of the lronsoctions described obove were
$ I 5B million oad $\47 millton, compored to $ l9l million ond
$ I 38 million ot December 3l , 2015, respectively. At
December 3 I , 20 I 6, included in omounts due to reloted porties
were omounts owing lo the IESO in respect of power purchoses of
$ 143 million, compored to $ l 34 million ot DecemGr 3 l , 201 5.
Risk Monogement ond Risk Foctors
Risks Reloting to Hydro One's Business
Regulotory Risks ond Risks Reloting to Hydro
One's Revenues
Risks Re/oling to Obtoining Rote Orders
The Compony is subject to lhe risk thot the OEB will not opprove lhe
Compony's tronsmission ond distribulion revenue requirements
requested in outstonding or luture opplicolions for rotes. Role
opplicotions for revenue requiremenls ore subiect to the OEB's revlew
process, usuolly involving porticipotion from iniervenors ond o public
heoring process. There con be no ossuronce thot resulting decisions
or role orders issued by the OEB will permil Hydro One to recover oll
cosls octuolly incurred, costs o[ debt ond income toxes, or to eorn o
porticulor ROE. A foilure to obtoin occeptoble rote orders, or
opprovols o[ oppropriote returns on equity ond costs octuolly
incuned, moy moleriolly odversely offect: Hydro One's lronsmission
or distribution businesses, the undertoking or timing o[ copitol
expenditures, rolings ossigned by credit rollng ogencies, the cost ond
issuonce o{ longlerm debt, ond other motlers, ony of which moy in
lurn hove o moleriol odverse effecl on the Compony. In oddition,
there is no ossuronce thot the Compony will receive regulotory
decisions in o timely monner ond, therefore, costs moy be incurred
prior to hoving on opproved revenue requirement.
Risks Re/oting to Actuol Performonce Agoinst
Forecasts
The Compony's obility to recover lhe octuol costs of providing service
ond eorn the ollowed ROE depends on the Compony ochieving its
forecosts estoblished ond opproved in the rotesetting process. Actuol
costs could exceed the opproved forecosls if, for exomple, the
Compony incurs operolions, moinlenonce, odministrotion, copitol
ond linoncing costs obove those included in the Compony's
opproved revenue requirement. The inobilily to obtoin occeptoble
role decisions or to recover ony significont difference belween
Iorecost ond octuol expenses could moterlolly odversely offect the
Compony's finonciol condition ond results of operolions.
Further, the OEB opproves the Compony's lronsmission ond
distribution rotes bosed on proiected electricity lood ond consumption
levels, omong other loctors. l[ octuol lood or consumplion moteriolly
folls below projected levels, the Compony's revenue ond nel income
for either, or bolh, of lhese businesses could be moleriolly odversely
offected. Also, the Compony's current revenue requirements for these
businesses ore bosed on cost ond olher ossumplions thot moy not
moteriolize. There is no ossuronce thot the OEB would ollow rote
increoses sufficient to offsel unfovouroble finonciol impocls from
unonticipoted chonges in electricity demond or in the Compony's
costs.
The Compony is subiect to risk of revenue loss from other loctors,
such os economic kends ond weother conditions thot influence the
demond for electricily. The Compony's overoll operoling results moy
[luctuote substontiolly on o seosonol ond yeor-toyeor bosis bosed on
these lrends ond weother conditions. For instonce, o cooler thon
normol summer or wormer thon normol winter moy reduce demond
for electricity below thot forecost by the Compony, cousing o
decreose ln the Compony's revenues from the some period o{ the
previous yeor. The Compony's lood could olso be negotively
offecled by successlul Conservotion ond Demond Monogement
progroms whose results exceed forecosled expectotions.
Ris/<s Re/oting to Rote'selling ltAodels for
Tro nsmission o nd Di stribution
lhe OEB opproves ond periodicolly chonges the ROE for
tronsmission ond distribution businesses. The OEB moy in the future
decide to reduce the ollowed ROE for either of lhese businesses,
modify the formulo or methodology it uses to determine the ROE, or
reduce the weighting o[ the equity componenl of the deemed copitol
structure. Any such reductlon could reduce the net income o[ lhe
Compony.
The OEB's recent Custom lncentive Rote-setting model requires thot
the term o[ o cuslom rote opplicotion be o minimum liveyeor period.
There ore risks ossocioted with forecosling key inputs such os
revenues, operoting expenses ond copitol, over such o long period.
For lnstonce, i[ unonticipoted copitol expenditures orise thot were not
contemploled in the Compony's most recent rote decision, lhe
Compony moy be required to incur costs thot moy not be recoveroble
until o luture period or nol recoveroble ot oll in future roles. This could
hove o moteriol odverse effecl on the Compony.
After rotes ore set os port o[ o port o[ o Custom lncentive Rote
opplicotion, fie OEB expects there to be no further rote opplicotions
for onnuol updotes within the fiveyeor lerm, unless there ore
exceptionol circumstonces, with the exception of the cleoronce o[
esloblished deferrol ond vorionce occounts. For exomple, the OEB
does noi expect to oddress onnuol role opplicotions for updotes for
cost o{ copitol {including ROE}, working copitol ollowonce or soles
volumes. lI there were on increose ln inlerest rotes over the period of
o rote decision ond no corresponding chonges were permitted to the
Appendir6le',ln'lr$ Applipn$iompoRT TSX: H Page 279 of 414
Compony's ollowed cost of copitol (includlng ROE), then the result
could be o decreose in the Compony's finonciol performonce.
To the extent thot the OEB opproves on In-Service Vorionce Account
lor the tronsmission ond/or distribution businesses, ond should the
Compony [oil 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 lo 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 setling
lronsmission ond distribution rotes, which include the impoct of copitol
expendilures on rote bose or cost of service. There con be no
ossuronce thot oll copitol expenditures incuned by Hydro One will be
opproved by the OEB. Copilol cost overruns moy not be recoveroble
in tronsmission or distribution roles. The Compony could incur
unexpected copitol expenditures in mointoining or improving its
ossets, porliculorly given thot new technology moy be required to
support renewoble generotion ond unforeseen technicol issues moy
be identified through implementotion of proiects. There is risk thot the
OEB moy not ollow [ull recovery ol such expenditures in the future. To
the extent possible, Hydro One oims to mitigote this risk by ensuring
prudent expenditures, seeking from the regulotor cleor policy 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 o[ ony copitol expenditures would leod to o lower thon
expected opproved revenue requirement or rote bose, potentiol ossel
impoirment or chorges to the Compony's results of operotions, ony of
which could hove o moleriol odverse effect on the Compony.
Risks Re/otin g to Deferred Iox Assel
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 deferred tox osset due to the revoluoiion of lhe tox bosis
of Hydro One's fixed ossets ol their foir morket volue ond recognition
of eligible copitol expenditures. Monogement believes this will result
in onnuol net cosh sovings over ol leost the next five yeors due to the
reduction o[ cosh income toxes poyoble by Hydro One ossocioted
primorily with o higher copitol cost ollowonce. There is o risk thot, in
current or future rote opplicotions, the OEB will reduce the
Compony's revenue requirement by oll or o portion of those net cosh
sovings. lf the OEB were lo reduce the Compony's revenue
requiremenl 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 subiect to the risk thot it will nol obtoin required
regulotory opprovols for other motters, such os leove to conskucl
opplicotions, opplicotions for mergers, ocquisitions, omolgomotions ond
divestitures, ond environmenlol opprovols. Decisions to ocquire or divesl
other reguloted businesses licensed by the OEB ore sublect to OEB
opprovol. Accordingly, fiere is he risk thot such motters moy not be
opprwed or thot unfovouroble conditions will be imposed by he OEB.
First Notions ond M6tis Cloims Risk
Some of the Compony's current ond proposed tronsmission ond
distribution ossets ore or moy be locoted on reserve (os defined in the
lndion Act (Conodo); Reserve) londs, ond londs over which First
Notions ond M6tis hove Aboriginol, treoly, or other legol cloims.
Some First Notions ond M6tis leoders, communilies, ond their
members hove mode ossertions reloted to sovereignty ond iurisdiclion
over Reserve londs ond troditionol terrilories ond ore increosingly
willing to ossert their cloims through the courts, tribunols, or by direct
oction. These cloims ond/or settlement of these cloims could hove o
moteriol odverse effect on the Compony or otherwise moteriolly
odversely impoct the Compony's operotions, including the
development ol current ond future proiects.
The Compony's operotions ond octivities moy give rise to the
Crown's duty to consult ond potentiolly occommodote First Nolions
ond M6tis communities. Procedurol ospects of lhe duty to consult moy
be delegoted to the Compony by the Province or the lederol
government. A perceived loilure by the Crown to sulficiently consult o
First Notions 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 judiciol review or iniunction proceedings, or could
potentiolly result in direct oction ogoinst the Compony by o
community or its citizens. ll this occurs, it could disrupt or deloy the
Compony's operotions ond octivities, including current ond {uture
proiects, ond hove o moteriol odverse effect on the Compony.
Risk from Tronsfer of Assels Locoted on Reserves
The tronsfer orders by which the Compony ocquired certoin of Ontorio
Hydro's businesses os of April I , 1999 did not tronsfer title to ossels
locoted on Reserves. The tronsfer of tille to these ossets did not occur
becouse outhorizotions originolly gronted by the lederol government
for the construction 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.
>*ozi6>g-a;s@?
<;(f
6.)Caaoz
I
Appendix 6 to Joint Application HyDRo oNE uMrrED oNE ot NoRTH AMERTCA'S LARGEST EPEAgft arffe rOf 41 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
Currently, the Ontorio Electricity Finonciol Corporolion holds legol tille
to these ossets ond it is expected thot the Compony will monoge
them until it hos obtoined permils to complete the title tronsfer. To
occupy Reserves, the Compony musl hove volid permits issued by
Her Mojesty the Queen in the Right of Conodo. For eoch permit, the
Compony must negoliote on ogreement (in the form of o
memorondum o[ understonding) with the First Notion, the Ontorio
Elecxicity Finonciol Corporolion ond ony members o[ the First Notion
who hove occuponcy rights. The ogreement includes provisions
whereby the First Notion consenls to the federol government (presently
lndigenous Affoirs ond Northern Development Conodo) issuing o
permit. For konsmission ossets, the Compony must negotiote terms of
poyment. lt is diflicult to predict the oggregote omounl thol the
Compony moy hove to poy, either on on onnuol or onelime bosis, to
obtoin the required ogreements from First Notions. lf the Compony
connot reoch sotisfoclory ogreements with ihe relevont First Notion to
obtoin federol permits, it moy hove to relocote these ossets to other
locotions ond restore the londs ol o cost thot could be substontiol. In
o limited number of coses, il moy be necessory to obondon o line
ond reploce it with diesel generotion locilities. ln either cose, the
costs reloting to these ossets could hove o moteriol odverse effect 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, environmenlol lows, employment lows
ond heolth ond sofety lows. The foilure o[ the Compony to comply
with these lows could hove o moteriol odverse effect 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 wlth the lerms of their licences,
with codes ond rules issued by lhe OEB, ond with other regulotory
requirements, including regulotions o[ the Notlonol Energy Boord. In
Ontorio, lhe Morket Rules issued by the IESO require the Compony
to, omong other lhings, comply with the reliobility stondords
estobllshed by the North Americon Eleclric Reliobility Corporotion
(NERCI ond Northeost Power Coordinoting Council, Inc. (NPCCI.
The incrementoi costs ossocioted 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 o[
oll of such incrementol costs. Foilure to obtoin such opprovols could
hove o moteriol odverse effecl 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 o[ severe weother
conditions, nolurol disoslers, mon-mode events including but not
limited to cyber ond physicol tenorist type ottocks, events which
originote from third-porly connected syslems, or ony other polentiolly
cotostrophic events. The Compony's focilities moy nol wilhslond
occurrences of this type in oll circumstonces. The Compony does not
hove insuronce for domoge lo its tronsmission ond dislribution wires,
poles ond lowers locoted outside its lronsmission ond distribution
slotions resulting from these or other events. Where insuronce is
ovoiloble lor other ossets, such insuronce coveroge moy hove
deductibles, limits ond/or exclusions. Losses from losl revenues ond
repoir costs could be substontiol, especiolly for mony o[ the
Compony's focilities thot ore locoled in remole oreos. The Compony
could olso be sublect to cloims for domoges coused by its foilure to
tronsmit or distribute electricity.
Risk Associoted with lnformotion Technology
lnfrostructure ond Doto Security \
The Compony's obility to operote effectively in the Onlorio electricity
morket is, in port, dependent upon it developing, mointoining ond
monoging complex informolion lechnology syslems which ore
employed to operote ond monitor its tronsmission ond dlstribution
focilities, finonciol ond billing systems ond other business systems. The
Compony's increosing relionce on informotion systems ond
exponding doto networks increoses ils exposure to inlormotion
security lhreots. The Compony's tronsmission business is required to
comply with vorious rules ond stondords lor lronsmission reliobility,
including mondotory stondords estoblished by the NERC ond the
NPCC. These include slondords reloting lo ryber-security ond
informolion technology, whlch only opply to certoin of the Compony's
ossets (generolly being those whose foilure could impoct the
functioning of the bulk electricity system). The Compony moy mointoin
dilferent or lower levels o[ informotion technology security {or ils ossets
thot ore not subiect to these mondolory stondords. The Compony must
olso comply with legislotive ond licence requiremenls reloting to the
collection, use ond disclosure of personol informotion ond inlormolion
regording consumers, wholesolers, generolors ond reloilers.
Cyber-ottocks or unouthorized occess lo corporote ond informotion
technology systems could result in service disruplions ond system
[oilures, which could hove o moteriol odverse elfect on the
Compony, including os o result of o foilure to provide electricity to
cuslomers. Due to operoting criticol infrostructure, Hydro One moy be
ot greoter risk of cyber-ottocks lrom third porties (including slole run or
controlled porties) thot could impoir or incopocilote its ossets. ln
oddltion, in the normol course of its operotions, the Compony
collects, uses, processes ond stores informotion, which could be
ABpendir6ln Jnrnfi Appl,ipE$ionpoRT TSX: H Page 281 of 414
exposed in the event o[ o cyber-security incident or other
unouthorized occess, such os informotlon oboul customers, suppliers,
counterporties ond employees.
Smurity ond system disosler recovery controls ore in ploce; however,
there con be no ossuronce thot there will not be syslem Ioilures or
security breoches or thol such threots would be detected or mitigoted
on o timely bosis. Upon occurrence ond detection, the focus would
shih from prevention to isolotlon, remediotion ond recovery until the
incident hos been fully oddressed. Any such syslem foilures or securily
breoches could hove o moteriol odverse effect on the Compony.
Work Force Demogrophic Risk
By the end o[ 2016, opproximotely 22% of the Compony's
employees who ore members o[ the Compony's defined benefit
pension plon were eligible for retirement under thot plon, ond by the
end ol 2017, up to opproximotely 23% could be eliglble. These
percentoges ore not evenly spreod ocross the Compony's work force,
but tend to be most significont in the most senior levels of the
Compony's stoff ond especiolly omong monogement stoff. During
eoch o{ 2Ol6 ond 20.l5, opproximotely 3% of the Compony's work
force elected to retire. Accordingly, the Compony's continued success
will be tied to its obility lo continue to ottroct ond retoin suflicient
quolified stoff to reploce the copobility lost through retirements ond to
meel lhe demonds of lhe Compony's work progroms.
Lobour Relotions Risk
The substontiol moiority of lhe Compony's employees ore represented
by either the PWU or the Society. Over the post severol yeors,
signilicont effort hos been expended to increose Hydro One's
flexibiliry to conduct operotions in o more costeflicient monner.
Although the Compony hos ochieved improved flexibility ln its
colleclive ogreements, the Compony moy not be oble to ochieve
further improvements. The Compony reoched on ogreement with lhe
PWU for o renewol collective ogreement with o threeyeor term,
covering the period from April 1 , 201 5 to Morch 3,l , 201 8 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 , 20.1 9.
The Compony olso reoched o renewol collective ogreement with the
Conodion Union of Skilled Workers for o threeyeor lerm, covering
the period from Moy | , 201 4 to April 30, 201 7. Additionolly, 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 , 2015 to April 30, 2020. Future
negotiotions with unions present the risk o[ o lobour disruption ond
the obilily to sustoln the continued supply of energy to customers. The
Compony olso foces finonciol risks reloted to its obilit/ to negotiole
colleclive ogreements consislent with ils rote orders. In oddition, in the
event of o lobour dispute, the Compony could foce operotionol risk
reloted to contlnued complionce with its requirements of providing
service lo customers. Any of these could hove o moleriol odverse
effecl on the Compony.
Risk Associoted with Arronging Debt Finoncing
The Compony expects to borrow lo repoy its existing indebledness
ond to fund o portion of copitol expenditures. Hydro One lnc. hos
substontiol debt principol repoyments, including $602 million in
2O)7,$753 million in 20.l8, ond $Z3l million in 20.l9. ln
oddition, from time to time, the Compony moy drow on its syndicoled
bonk lines ond or issue shortlerm debt under Hydro One lnc.'s
$ l .5 blllion commerciol poper progrom which would moture within
opproximotely one yeor of issuonce. The Compony olso plons to
incur continued moteriol copitol expenditures for eoch of 2017 ond
20,1 B. Cosh generoied from operotions, oher the poyment ol
expected dividends, will not be sufficient to lund the repoyment of the
Compony's existing indebtedness ond copitol expenditures. The
Compony's obility to ononge sufficient ond cost-effective debt
finoncing could be moteriolly odversely offected by numerous foclors,
including the regulotory environment in Ontorio, the Compony's
results of operotions ond finonciol posilion, morket conditions, the
rotings ossigned to its debt securities by credit roling ogencies, on
inobility of the Corporotion to comply with its debt covenonts, ond
generol economic conditions. A downgrode in the Compony's credit
rolings could restrict the Compony's obility to occess debl copitol
morkets ond increose the Compony's cost of debt. Any foilure or
inobility on the Compony's port to bonow the required omounts o{
debt on sotisfoctory terms could impoir its obllity to repoy moturing
debt, fund copitol expenditures ond meet other obligotions ond
requirements ond, os o result, could hove o moteriol odverse effect
on the Compony.
Morket, Finonciol lnstrument ond Credit Risk
Morket risk refers 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 inlerest rotes os its reguloted ROE is derived
using o formuloic opprooch thot tokes inlo occount onticipoted
interest rotes, but is not currently exposed to moteriol commodity price
risk or moteriol foreign exchonge risk.
>=z>oz
>B>gr-t}T6a6(f6r)caaoZ
I
Appendix 6 to Joint Application HYDRO ONE Lti trED ONE OF NORTH AMERtCA',S ro*Cry Pragft ?fffleofsl 4
In oddition, the Compony expects the skilled lobour morket for its
industry to be highly competitive in the future. Mony o[ the
Compony's current 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 quolified personnel
for Hydro One's business could hove o moteriol odverse effect on the
Compony.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The OEBopproved odiustment formulo for colculoting ROE in o
deemed regulotory copilol structure of 60% debt ond 4O% equity
provides for increoses ond decreoses depending on chonges in
benchmork interest roles for Governmenl of Conodo debt ond the
A-roted utility corporote bond yield spreod. The Compony estimotes
thot o decreose of I 0O bosis points in the combinotion of the
forecosted long-term Government o[ Conodo bond yield ond the
A-roted utility corporote bond yield spreod used in determining its rote
o[ return would reduce the Compony's tronsmission business' 2Ol B
net income by opproximotely $23 million ond ils distribution business'
20lB net income by opproximotely $,)5 million. The Compony
periodicolly utilizes inlerest rote swop ogreements to mitigote
elements of interest rote risk-
Finonciol ossets creote o risk thol o counterporty will foil to dischorge
on obligotion, cousing o finonciol loss. Derivotive finonciol
instruments resull in exposure to credit risk, since there is o risk of
counterporty defouh. Hydro One monilors ond minimizes credil risk
through vorious techniques, including deoling with highly roted
counterporties, limiting totol exposure levels with individuol
counlerporties, entering inlo ogreements whlch enoble net settlement,
ond by monitoring the linonciol condition of counterporties. The
Compony does not trode in ony energy derlvotives. The Compony is
required to procure eleckicily on beholf o[ competitive retoilers ond
cerloin locol distribution componies for resole to their customers. The
resulting concentrotions o[ credit risk ore mitigoted through the use of
vorious security orrongements, including letters o[ credit, which ore
incorporoted into 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 moleriol
odverse effect on the Compony.
Risks Reloting to Asset Condition ond Copitol
Proiects
The Compony continuolly incurs susloinment ond development copitol
expenditures ond monilors the condition of its tronsmission ossels to
monoge the risk o[ equipment foilures ond to determine the need for
ond timing o{ moior refurbishments ond replocements o[ its
konsmission ond distribution infrostructure. However the lock o[ reol
time monltoring o[ distribution ossets increoses the risk of distribution
equipment foilure. The connection of lorge numbers of generotion
focilities to the distribution network hos resulted in greoter thon
expected usoge of some of the Compony's equiprnent. This increoses
mointenonce requirements ond moy occelerote the oging o[ the
Compony's ossets.
Execulion ol the Compony's copitol expenditure progroms,
porticulorly for development copitol expenditures, is porliolly
dependent on externol foctors, such os environmentol opprovols,
municipol permits, equipmenl outoge schedules thot occommodote
the IESO, generotors ond tronsmission-connected customers, ond
supply choin ovoilobility for equlpment suppliers ond consulting
services. There moy olso be o need for, omong other things,
Envionmenlol Assessmenl Acl (Ontorio) opprovols, opprovols which
require public meelings, oppropriote engogement with First Notions
ond M6tis communilies, OEB opprovols of expropriotion or eorly
occess to property, ond other octivitles. Obtoining opprovols ond
corrying out these processes moy olso be impocted by opposition to
lhe proposed site of the copitol investments. Deloys in obtoining
required opprovols or foilure to complete copitol proiects on o timely
bosis could moteriolly odversely offect tronsmission reliobility or
customers' service quolity or increose moinlenonce costs which could
hove o moteriol odverse effect on the Compony. Externol foctors ore
considered in the Compony's plonning process. lI lhe Compony is
unoble to corry out copitol expenditure plons in o timely monner,
equipment performonce moy degrode, which moy reduce nelwork
copocity, result in customer lnlerruplions, compromise the reliobility of
the Compony's networks or increose the costs o[ operoting ond
mointoining these ossets. Any of these consequences could hove o
moteriol odverse eflect on the Compony.
Increosed compelilion for lhe development o[ lorge tronsmission
proiects ond legislotive chonges reloting to the selection o[
lronsmillers could impoct lhe Compony's obility to expond its existing
tronsmission system, which moy hove on odverse effect on the
Compony. To the extent thot other porlies ore selected to conslrucl,
own ond operole new tronsmission ossets, lhe Compony's shore of
Ontorio's tronsmission network would be reduced.
Heolth, Sofety ond Environmentol Risk
The Compony is subject to provinciol heolth ond sofe1y legislotion
Findings of o [oilure to comply with this legislotion could result in
penolties ond reputotionol risk, which could negotively impoct the
Compony.
The Compony is subiect to extensive Conodion federol, provinciol ond
municipol environmentol regulotion. Foilure lo comply could subject the
Compony to [ines or other penolties. ln oddition, the presence or
releose o[ hozordous or other hormful substonces could leod to cloims
by third porties or governmentol orders requiring the Compony to toke
specific octions such os investigoting, controlling ond remedloting the
effects of these substonces. Contominotion o[ the Compony's
properties could limit its obihly to sell or leose these ossets in the future.
ln oddition, octuol future environmentol expenditures moy vory
moteriolly from the estimotes used in the colculotion of the
environmentol liobilities on the Compony's bolonce sheet. The
Compony does not hove insuronce coveroge lor these environmentol
expenditures.
ABpen,#r6le Jffs Aoplip'a$ionpoRT TSX: H Page 283 of 414
There is olso risk ossocioted with obtoining governmentol opprovols,
permits, or renewols of existing opprovols ond permits reloted to
conshucling or operotlng locilities. This moy require environmenlol
ossessment or result in the imposition of condilions, or both, which
could result in deloys ond cosl increoses.
Hydro One emits cerloin 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 oddltionol
moteriol costs on Hydro One.
Any future regulotory decision to disollow or limit the recovery o[ such
costs could hove o moleriol odverse effect on the Compony.
Pension Plon Risk
Hydro One hos the Hydro One Deflned Benefil Pension Plon in ploce
for the moiority of its employees. Contributions to the pension plon
ore estoblished by octuoriol voluotions which ore required to be [iled
with the Finonciol Services Commission of Ontorio on o kienniol
bosis. The mosl recently filed voluotion wos prepored os ot
December 3l , 201 5, ond wos filed in June 2016, covering o three
yeor period from 20,l 6 to 201 8. Hydro One's contribulions to its
pension plon sotisfy, ond ore expected to sotisfy, minimum funding
requiremenls. Contributions beyond 2018 will depend on the funded
position o[ the plon, which is determined by investment returns,
interest rotes ond chonges in benefits ond octuoriol ossumplions ot
thot time. A determinotion by the OEB thot some of the Compony's
pension expenditures ore nol recoveroble through rotes could hove o
moteriol odverse effect on the Compony, ond this risk moy be
exocerboted if lhe omount o[ required pension conlributions
increoses.
The OEB hos begun o consultolion process thot will exomine
pensions ond other postemployment benefits in reguloted utilities. See
"- Other Post-Employment ond Post-Retirement Benefits Risks". The
outcome ol this consultotion process is uncertoin ond the Compony is
unoble to ossess the impoct of lhe 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-retirement benefits, sublect
to restrictions ond requirements imposed by the collective borgoining
process. Should ony element o[ totol compensotion costs be disollowed
in whole or port by the OEB ond not be recoveroble from customers in
rotes, the costs could be moteriol ond could decreose net income, which
could hove o moteriol odverse effecl on the Compony.
Other Post-Employment ond PosFRetirement
Benefits Risks
The Compony provides other posfemployment ond post-relirement
benefits, including workers compensotion benefits ond long-term
disobilily benefits to quolifying employees. The OEB hos begun o
consultotion process thot wlll exomine pensions ond other post-
employment benefits in reguloted utilities. The objectives of the
consultotion ore lo develop stondord principles to guide the OEB's
review of pension ond other post-employment ond post-retirement
benefits costs in the future, lo esloblish specific inlormotion
requirements for opplicotion ond to estoblish oppropriote regulotory
mechonisms for cosl recovery which con be opplied consistently
ocross the gos ond electricity sectors for rote+eguloted utilities. The
outcome of this consultotion process is uncertoin ond lhe Compony is
unoble lo ossess the impoct o{ the potentiol chonges stemming from
the review ot lhis time. A determinotion thot some of the Compony's
postemploymenl ond post-retirement benelit costs ore nol recoveroble
could hove o moteriol odverse effect on the Compony.
Risk Associoted with Outsourcing Arrongements
Consislent with Hydro One's strotegy o{ reducing operoting costs, it
hos enlered into on outsourcing orrongement with o third porty for the
provision o[ bock office services ond coll centre services. l[ the
outsourcing orrongement or stotements of work thereunder ore
terminoted for ony reoson or expire before o new supplier is selected
ond fully tronsilioned, the Compony could be required to incur
significont expenses to tronsler to onother service provider or insource,
which could hove o moteriol odverse effecl on the Compony's
business, operoling resulls, finonciol condition or prospects.
Risk from Provinciol Ownership of Tronsmission
Corridors
The Province owns some o[ 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 of the tronsmission conidors by third porties in coniunction with
the operolion o[ the Compony's syslems rnoy increose sofety or
environmentol risks, which could hove o moleriol odverse effecl on
the Compony.
Litigotion Risks
ln the normol course of the Compony's operolions, it becomes
involved in, is nomed os o porty to ond is the subject 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
Z>az
za>g
=;Y7aadIa
c
;
z
I
Appendix 6 to Joint Application HYDno oNE uMrrED oNE oF NoRTH AMERTcA's ,.o*ort, Prage ?ff#,egf 414
Risks Reloting to the Compony's Relotionship
with the Province
Ownership ond Continued lnfluence by the
Province ond Voting Power; Shore Ownership
Restrictions
The Province currently owns opproximotely 70.1% o[ the outstonding
common shores of Hydro One. the Electricity Act restricts the
Province from selling voting securities of Hydro One (inciuding
disputes. The outcome of outstonding, pending or future proceedings
connot be predicted with certoinly ond moy be determined odversely
to the Compony, which could hove o moteriol odverse effecl on lhe
Compony. Even if the Compony prevoils in ony such legol
proceeding, the proceedings could be costly ond timeconsuming
ond would divert the ottention o[ monogemenl ond key personnel
from the Compony's business operotions, which could odversely
offect the Compony. See olso "Other Developmenls - Closs Action
Lowsuit".
Tronsmission Assets on Third-Porty Londs Risk
Some o[ the londs on which the Compony's tronsmission ossets ore
locoted ore owned by third porties, including the Province ond
federol Crown, ond ore or moy become subiect to lond cloims by
Firsl Notions. The Compony requires volid occupotion rights to
occupy such londs (which moy loke the form of lond use permils,
eosernents or otherwise). lf the Compony does not hove volid
occupotionol rights on third-pori/ owned londs or hos occupotionol
rights thot ore subiect to expiry, it moy incur moteriol cosls lo obtoin
or renew such occupolionol rights, or if such occupolionol rights
connol be renewed or obtoined il moy incur moteriol costs lo remove
ond relocole ils ossets ond restore the subiect lond. lf the Compony
does not hove volid occupotionol rights ond musl incur costs os o
result, this could hove o moteriol odverse effect on the Compony or
othewise moteriolly odversely impoct the Compony's operotions.
Reputotionol ond Public Opinion Risk
Reputotion risk is the risk of o negolive impoct to the Compony's
business, operotions or [lnonciol condition thot could resuh from o
deteriorotion of Hydro One's reputolion. The Compony's reputotion
could be negotively impocted by chonges in public opinion, oltltudes
towords the Compony's privolizotion, loilure to deliver on ils cuslomer
promises ond other externol forces. Adverse reputolionol events could
hove negotive impocts on the Compony's business ond prospects
including, but not limlted to, deloys or deniols of requisite opprovols
ond occommodolions for the Compony's plonned proiects, escoloted
costs, legol or regulolory oction, ond domoge to stokeholder
reloiionships.
common shores) of ony closs or series if it would own less thon 40%
ol the oulstonding number o[ voting securities of thot closs or series
oher the sole ond in cerloin circumstonces olso requires the Province
to toke steps to moinloin thot level of ownership. Accordingly, the
Province is expected to continue to mointoin o significont ownership
interest in voting securities of Hydro One for on indefinite period.
As o result o[ its significont ownership o[ the common shores of Hydro
One, the Province hos, ond is expected indefinitely to hove, the
obllity to determine or significontly lnfluence the outcome o[
shoreholder votes, subiect to the restrlctions in the governonce
ogreement enlered into belween Hydro One ond the Province doted
November 5, 2015 (Governonce Agreement; ovoiloble on SEDAR
ol www.sedor.com). Despite the terms o[ lhe Governonce Agreement
in which lhe Province hos ogreed to engoge in the business ond
offoirs of the Compony os on investor ond nol os o monoger, there is
o risk thol the Province's engogement in lhe business ond offoirs o[
the Compony os on inveslor will be informed by its policy obiectives
ond moy influence the conduct of the business ond o[[oirs of the
Compony in woys thot moy not be oligned with the interests o[ other
shoreholders.
The shore ownership restrictions ia lhe Electricity 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 o[ Hydro One.
They olso moy limit or discouroge tronsoclions involving other
lundomenlol chonges to Hydro One ond the obility o[ other
shoreholders to successfully contest the election of the directors
proposed for election pursuonl to the Governonce Agreemenl. The
Shore Ownership Reskictions moy olso discouroge troding in, ond
moy limit the morket for, the common shores ond olher voting
securities.
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 to the Governonce
Agreement, lhere 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 poliry oblectives
ond give disproportionole weight to the Province's inlerests in
exercising their business judgment ond boloncing the interesls of the
stokeholders o[ Hydro One. This, combined with the {oct certoin
motters require o twothirds vote of the Boord of Dlrectors, could
ollow the Province to unduly influence certoin Boord octions such os
confirmotion o[ the Choir ond confirmotion of the Chief Executive
Officer.
Appen,#r6lo',lnriiled App[ipn0ionpoRT TSX: H Page 285 of 414
MANAGEMENT'S DISCUSSION AND ANALYSIS
Boord Removol Rights
Under the Governonce Agreement, lhe Province hos the right to
withhold from voting in fovour ol oll director nominees ond hos the
right to seek to remove ond reploce lhe entire Boord of Directors,
including in eoch cose its 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 interest, which moy not be oligned with the
interests of other shoreholders,
More Exlensive 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 thol ils intention is to ochieve
its policy obiectives through legislotion ond regulotion os it would
with respect to ony other utility operoting in Ontorio, there is o risk
thot the Province will exercise its leglslotive ond regulotory power to
ochieve policy obiectives in o monner thol hos o moteriol odverse
eflect on the Compony.
Prohibitions on Selling the Compony's
Tronsmission or Diskibution Business
Ihe Electricity Acr prohibits the Compony from selling oll or
substontiolly oll of the business, property or ossets reloted to its
honsmlssion system or distribution system lhot is reguloted by the
OEB. There is o risk thot these prohibitions moy limit the obility of the
Compony to engoge in sole tronsoclions involvlng o substonliol
portion of eilher system, even where such o tronsoction moy
otherwise be considered to provide substontiol benefits to the
Compony ond the holders of lhe common shores.
Future Soles of Common Shores by the Province
The Province hos indicoted thot it cunently intends to sell further
common shores of Hydro One over time, until it holds opproximotely
40% of the common shores, subiect to the selling restriclions ogreed
with the Underwriters. The regiskotion rights ogreement between
Hydro One ond the Province doted NovemGr 5, 2O I 5 (ovoiloble
on SEDAR ot www.sedor.com| olso gronts the Province the right to
request thot Hydro One file one or more prospectuses ond toke other
procedurol steps to focilitote secondory offerings by the Province o[
the common shores of Hydro One. Future soles o[ common shores o{
Hydro One by the Province, or the perception thot such soles could
occur, moy moterlolly odversely offect morket prices for these
common shores ond impede Hydro One's obility to roise copitol
through the issuonce of odditionol common shores, including the
number of common shores lhot Hydro One moy be oble to sell ot o
porliculor time or the totol proceeds thot moy be reolized.
Appendix 6 to Joint Application
Limitotions on Enforcing the Governonce
Agreement
The Governonce Agreement lncludes commitments by the Province
restricting the exercise o[ its rights os o holder o[ voting securitles,
including with respect lo the moximum number of directors thot the
Province moy nominote ond on how the Province will vole with
respect to other director nominees. Hydro One's obility to obtoin on
eflective remedy ogoinsl the Province, il the Province were not to
comply with these commitments, is limited os o result of the
Prrceedings Agoinst the Crown Act lOntorio). This legislotion
provides thot the remedies of injunction ond specific performonce ore
not ovoiloble ogoinst the Province, olthough o court moy moke on
order declorotory of the rights of the porties, which moy influence the
Province's octions. A remedy o[ domoges would be ovoiloble to
Hydro One, but domoges moy not be on effective remedy,
depending on the noture of the Province's noncomplionce wlth the
Governonce Agreement.
Criticol Accounting Estimotes ond
Judgments
The preporotion o[ Hydro One Consolidoted Finonciol Stotements
requires the Compony to moke key estimoles ond criticol iudgments
thot offect the reported omounts of ossets, liobillties, revenues ond
costs, ond reloted disclosures of contingencies. Hydro One boses its
estimotes ond iudgments on historicol experience, currenl conditions
ond vorious other ossumptions thot ore believed lo be reosonoble
under the circumslonces, lhe resuhs of which form the bosis for
moking judgments oboul 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
results moy differ from these estimotes ond iudgments. Hydro One hos
identified the following criticol occounting estimotes used in the
preporotion o[ its Consolidoted Finonciol Stotements:
Revenues
Distribution revenues ottributoble to the delivery of elechlcily ore
bosed on OEBopproved distribution rotes ond ore recognized on on
occruol bosis ond include billed ond unbilled revenues. Billed
revenues ore bosed on electricity delivered os meosured from
cuslomer meters. At the end of eoch month, electricity delivered to
cuslomers since the dote of the lost billed meter reoding is estimoted,
ond the corresponding unbilled revenue is recorded. The unbilled
revenue estimote is offected by energy consumption, weother, ond
chonges in the composition of customer closses.
HyDRo oNE uiurED oNE oF NoRTH AMERTCA'S ,.enoesr P&Se ?rft 6rgf *1 4
z>9z
zG)>tr
366a
a;I
oC@<toZ
I
MANAGEMENT'S DISCUSSION AND ANALYSIS
Accounts Receivoble ond Allowonce for
Doubtful Accounts
The ollowonce for doubtful occounts reflecls the Compony's best
estimole of losses on billed occounts receivoble bolonces. The
Compony estimotes the ollowonce for doubtful occounts on customer
receivobles by opplying internolly developed loss rotes to the
outslonding receivoble bolonces by oging cotegory. Loss rotes
opplied to the occounts receivoble bolonces ore bosed on hisloricol
overdue bolonces, customer poyments ond write-offs.
Regulotory Assets ond Liobilities
Hydro One's regulotory ossets represent certoin omounts receivoble
from future eleckicily customers ond costs thot hove been deferred for
occounting purposes becouse it is proboble thot they will be
recovered in future rotes. The regulotory ossets moinly include costs
reloted to the pension benefit liobility, deferred income tox liobilities,
post-retirement ond postemployment benefit liobility, shorebosed
compensotlon cosls, ond environmenlol liobilities. The Compony's
regulotory liobilities represent certoin omounts thot ore refundoble to
{uture electricily cuslomers, ond pertoin primorily to OEB deferrol ond
vorionce occounts. The regulotory ossets ond liobilities con be
recognized for rotesetting ond finonciol reporting purposes only i[ the
omounts hove been opproved lor inclusion in the electricily roles by
the OEB, or iI such opprovol is iudged to be proboble by
monogement. l[ monogement iudges thot it is no longer proboble thot
the OEB will ollow the inclusion of o regulotory osset or liobiliry in
future electricity rotes, the opplicoble corrying omount of the
regulotory osset or liobility will be reflected in results of operotions in
the period thot the iudgment is mode by monogement.
Environ menfol Liobiliiies
Hydro One records o liobility for the eslimoted future expenditures
ossocioled with the removol ond destruction of PCBcontominoted
insuloting oils ond reloted electricol equipment, ond for the
ossessmenl ond remediotion of chemicolly contominoted londs. There
ore uncertointies in estimoling future environmentol costs due to
polentiol externol events such os chonges in legislotion or regulotions
ond odvonces in remediotion technologies. ln determining lhe
omounts to be recorded os environmenlol liobilities, the Compony
eslimotes lhe current cost ol compleling required work ond mokes
ossumptions os to when the future expenditures will octuolly be
incurred, in order to generote future cosh flow informotion, All foctors
used in eslimoting the Compony's environmentol liobllities represenl
monogement's best estimotes of lhe present volue of costs required lo
meet exisling legislotion or regulolions. However, it is reosonobly
possible thot numbers or volumes of contominoted ossets, cost
estimotes to perform work, inflotion ossumptions ond the ossumed
pottern of onnuol cosh flows moy differ significontly lrom the
Compony's current ossumptions. Environmentol liobililies ore
ABpen,#rc61p',lm$ ApplipngionpoRT TSX: H
reviewed onnuolly or more lrequently i[ significont chonges in
regulotions or olher relevonl foclors occur. Estimote chonges ore
occounted f or prospectively.
Employee Future Benefits
Hydro One's employee future benefits consist o[ pension ond post-
retirement ond postemployment plons, ond include pension, group
life insuronce, heolth core, ond longlerm disobility benefits provided
to the Compony's currenl ond retired employees. Employee future
benefils costs ore included in Hydro One's lobour costs thot ore either
chorged lo resulls o[ operotions or copllolized os port of the cosl o{
property, plont ond equipment ond intongible ossets. Chonges in
ossumptions offect the benefit obligotion of the employee future
benefits ond lhe omounts thoi will be chorged lo results of operotions
or copitolized in fulure yeors. The following significont ossumptions
ond estimotes ore used to determine employee future benefit costs
ond obligotions:
Weighted Averoge Discount Rote
The weighled overoge discounl rote used to colculote the employee
fulure benefits obligotion is determined ot eoch yeor end by relerring
to the most recently ovoiloble morket interest rotes bosed 6n "[fr"-
roted corporote bond yields reflecting the durolion of the opplicoble
employee future benefit plon. The discount rote ot December 3,l,
20 I 6 decreosed ro 3.9O% llron 4.00% ot December 3 l, 20 1 5) for
pension bene{its ond decreosed to 3.90% (from 4. 10% used ot
December 3 I , 20,) 5) for the post-retirement ond postemployment
plons. The decreose in the discount rote hos resulted in o
corresponding increose in employee future benefits liobilities for the
pension, post-retiremenl ond postemployment plons for occounling
purposes. The liobilities ore delermined by independent octuories
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 rote o[ return on pension plon ossets is bosed on
expectotions of longlerm roles of return ot the beginning of the yeor
ond reflects o pension osset mix consistenl with the pension plon's
current investment policy.
Rotes of return on the respective portlolios ore delermined with
reference lo respective published morket indices. The expected rote
of return on pension plon ossets reflecls the Compony's long-term
expeciotions. The Compony believes thot this ossumption is
reosonoble becouse, with the pension plon's bolonced inveslment
opprooch, the higher volotility o[ equity investment returns is intended
to be oflsel by the greoter stobility of fixed-income ond short-term
inveslment returns. The net result, on o longlerm bosis, is o lower
relurn lhon might be expected by investing in equities olone. ln the
short term, the pension plon con experience fluctuotions in octuol
rotes o[ relurn.
Page287 of414
Rote of Cost of Living lncreose
The role o[ cost of living increose is determined by considering
diflerences between long-term Governmenl of Conodo nominol
bonds ond reol return bonds, which increosed from 1 .50% per
onnum os ot December 3l ,2015 lo opproximolely i .80% per
onnum os ot December 3l , 2016. Given the Bonk of Conodo's
commitmenl to keep long-term inflotion between l.0O% ond 3.OO%,
monogement believes thot the current rote is reosonoble to use os o
longlerm ossumption ond os such, hos used o 2.0% per onnum
inflotion rote lor employee {uture Gnefits liobiliry voluotion purposes
osotDecember3l,20l6.
Mortolity Assumptions
The Compony's employee future benefits liobiliv is olso impocted by
chonges in life expectoncies used in mortolity ossumptions. lncreoses
in life expectoncies of plon members result in increoses in the
employee future benefits liobilit/. The mortoliry ossumption used ot
December 3 I , 20.l 6 is 95% of 20,l 4 Conodion Pensioners
Mortolity Privote Sector toble projected generotionolly using
improvement Scole B (compored to .l00% of 2014 Conodion
Pensioners Mortolity Public Sector toble proiected generotionolly
using improvement Scole B used ot December 31, 20l5). The
mortolity toble wos updoted bosed on o review of the historicol
mortolity experience o[ the pension plon members.
Rote of lncreose in Heolth Core Cost Trends
The costs o[ post-retirement ond postemployment benefits ore
delermined ot the beginning of the yeor ond ore bosed on
ossumplions for expected cloims experience ond fulure heolth core
cost inflotion. A 'l% increose in the heolth core cosl trends would
result in o $23 million increose in 20,16 interestcost plus service
cost, ond o $289 million increose in the benefit liobiliV ot
December 31, 20,]6.
Business Combinotions
Monogement's judgment is required to estimote the purchose price,
to identi{y ond to determine foir volue of oll ossets ond liobilitiei
ocquired. The determinotion of the [oir volue ol ossels ond liobilities
ocquired is bosed upon monogement's estimotes ond certoin
ossumptions.
Toxes
Hydro One ossesses the likelihood thot deferred tox ossels will be
recovered from future toxoble income. To the extent monogement
considers it is more likely thon not thot some porlion or oll of the
deferred tox ossels will not be reolized, o voluotion ollowonce is
recognized.
Asset lmpoirment
Within Hydro One's reguloted businesses, the corrying costs of most
of the long-lived ossets ore included in the rote bose where they eorn
on OEBopproved rote o[ 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 port, or if such o disollowonce is
judged to be proboble. The Compony regulorly monitors the ossets of
its unreguloted Hydro One Telecom subsidiory for indicotions of
impoirment. As ot December 3,), 20,16, no osset impoirment hod
been recorded lor ossets within Hydro One's reguloted or
unreguloted businesses.
Goodwill is evoluoted for impoirment on on onnuol bosis, or more
frequently if circumstonces require. Hydro One hos concluded thot
goodwill wos not impoired ot December 3 1 , 201 6. Goodwill
represenls the cost of ocquired distribution ond tronsmission
componies thot is in excess o{ the foir volue of the net identi{ioble
ossets ocquired ot the ocquisition dote.
Disclosure Controls And lnternol Controls
Over Finonciol Reporting
Internol conlrols hove been documented ond tested for odequocy ond
effectiveness, ond continue lo be refined over oll business processes.
ln complionce with the requirements o[ Notionol lnskument 52-109,
the Compony's Certifying Officers hove reviewed ond certified the
Consolidoted Finonciol Stotements for the yeor ended December 3l ,
2016, together with other finonciol informotion included in the
Compony's securities filings. The Certi{.ying Officers hove olso certified
thot disclosure conhols ond procedures (DC&P) hove been designed to
provlde reosonoble ossuronce thot moteriol lnformotion reloting to lhe
Compony is mode known within the Compony. Further, the Certilying
Officers hove certified thot internol controls over finonciol reporting
(ICFR) hove been designed to provide reosonoble ossuronce
regording the reliobility ol finonciol reporting ond the preporotion of
the Consolidoted Finonciol Stotemenls. Bosed on the evoluotion ol the
design ond operoting effectiveness of the Compony's DC&P ond ICFR,
the Certifying Officers concluded thot the Compony's DC&P ond ICFR
were effeclive os ot December 3 I , 201 6.
>;oz
2B>g-64
o=
<;
Uac)Caaoz
I
Appendix 6 to Joint Application HyDRo oNE LrMrrEo oNE oF NoRTH AMERTCA'S T.ARGE$ PEAgft ?ffffegf$l4
MANAGEMENT'S DISCUSSION AND ANALYSIS
New Accounting Pronouncements
The following lobles present Accounling Stondords Updotes {ASUs) issued by the Finonciol Accounting Stondords Boord thot ore opplicoble to
Hydro One.
Recently Adopted Accounting Guidonce
ASU Dote issued D.r.ripti-Effective dote lmpoct on Hydro One
2014-16 November
2014
This updote clorifies thot oll relevonl lerms ond feolures Jonuory I , 201 6
should be considered in evoluoting the noture of o
host controcl for hybrid finonciol instruments issued in
the form of o shore. The noture of the host controct
depends upon the economic chorocteristics ond risks
of lhe entire hybrid finonciol instrument.
No moteriol impoct upon odoption
20l 50 l lonuory 20 l 5 Extroordinory items ore no longer required to be
presented seporotely in lhe income stolemenl.
.lonuory 1 , 201 6 No moteriol impoct upon odoption
201 5A2 Februory
2015
Guidonce on onolysis to be performed to determine
whether certoin lypes of legol entities should be
consolidoted.
Jonuory 1, 2016 No moteriol impoct upon odoption
2015O3 April 2015 Debt issuonce costs ore required to be presented on
the bolonce sheet os o direct dedudion from the
corrying omount o[ the reloled debt liobilily consistent
with debt discounts or premiums.
Reclossificotion of deferred debt
issuonce costs ond net unomortized
debt premiums os on olfset to longlerm
debt. Applied retrospectivelv.
.lonuory 1,2016
2015-05 April 2015 Cloud computing orrongements thot hove been
ossessed to contoin o soflwore licence should be
occounled for os internol-use sof]wore.
.lonuory 1 , 20 1 6 No moieriol impoct upon odoption
2015-16 September
201 5
Adiustments to provisionol omounls thot ore identified
during the meosurement period o[ o business
combinotion in the reporting period in which the
odiustment omount is determined ore required to be
recognized. The omount recorded in cunent period
eornings ore required to be presented seporolely on
the foce of the income stotement or disclosed in the
notes by line ilem.
Jonuory 1,20.)6 No moteriol impocl upon odoption
2015'17 November
2015
All deferred tox ossets ond liobilities ore required to
be clossified os noncurrent on the bolonce sheet,
This ASU wos eorly odopted os o[
April 1 , 201 6 ond wos opplied
prospectively. As o result, the current
portions of the Compony's deferred
income tox ossels ore reclossified os
noncurrent ossets on the consolidoled
Bolonce Sheet. Prior periods were nol
retrospeclively odiusted.
)onvory 1 ,2017
201609 Morch 2Ol6 Severol ospects of the occounting for shorebosed
poyment tronsoctions were slmplified, including the
income tox consequences, clossificotion of owords os
either equity or liobilities, ond clossilicotion on the
stotement of cosh flows.
This ASU wos eorly odopted os o[
October 1,2O16 ond wos opplied
retrospectively. As o result, the
Compony occounts for forfeitures os
they occur. There were no other
moteriol impocts upon odoption.
Jonuory l, 2017
Appendir6l€',lnri$ Applipp$ion'o*'TSX: H Page 289 of 414
Recently lssued Accounting Guidonce Not Yet Adopted
ASU Doie issued Description Effective dote Anticipoted impoct on Hydro One
2O14Oq Moy 2014 -
2015'14 December
20r6.08 20r6
20r6-r0
2016-12
2016-20
ASU 20I 4O9 wos issued in Moy 201 4 ond lonuory 'l , 20 I 8
provides guidonce on revenue recognilion reloting to
the konsfer of promised goods or services to
customers in on omount thot reflects the considerotion
to which the entity expects to be entitled in exchonge
{or those goods ond services. ASU 20.l5-'14 deferred
the effecrive dote of ASU 2O14Qq by one yeor.
Additionol ASUs were issued in 201 6 thot simplify
honsition ond provide clority on certoin 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
deloiled ossessment is now underwoy
ond will continue through to the third
quorter o{ 2017, wilh the end result
being o determinotion of the finonciol
irrpoct o[ this stondord. Tl'e Compony is
on trock for implementotion of this
>7az
za>(!;aa=
<;
(7
oC
UZ
I
20I60I Jonuory 2O16
stondord the effective dote.
Under ossessmenlThis updote requires equity investments lo be lonuory l, 2018
meosured ot foir volue with chonges in [oir volue
recognized in nel income, ond requires enhonced
disclosures ond presenlotion of finonciol ossets ond
liobilities in the finonciol stotements. This ASU olso
simplilies the impolrment ossessment of equity
investments wifiout reodily determinoble {oir volues by
requiring o quolitotive ossessment to identify
impoirment.
2O\6Q2 Februory
2016
Lessees ore required to recognize the rights ond
obligotions resulting lrom operoting leoses os ossets
{right to use the underlying osset for the term of the
leose) ond liobilities (obligotion to moke future leose
poyments) on the bolonce sheet.
An initiol ossessment is currently
undewoy encompossing o review of oll
existing leoses, which will be followed
by o detoiled review of relevont
conlrocts. No quontitotive determinotion
hos been mode ot this time. The
Compony is on trock for implementotion
Jonuory 1, 2019
of this stondord the eflective dote.
20 1605 Morch 2016 The omendmenls cloriFy thot o chonge in lhe
counterporly to o derivotive inshument thol 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 occounting criterlo continue to be met.
Jonuory i, 201 8 Under ossessment
201606 Morch20l6 Contingentcoll (put) optionsthotoreossessedto Jonuory1,2017 Nomoteriol impoct
occelerote the poyment o[ principol on debt
instrumenls need to meet the criterio o[ being "cleorly
ond closely reloted' to their debl hosts.
2ObA7 Morch 20 I 6 The requirement to retrooctively odopl the equity Jonuory 1 , 201 7 No moteriol impoct
method of occounting if on investment quolifies for use
of the equily method os o result of on increose in the
level of ownership or degree of influence hos been
eliminoted.
201&l 1 Moy 2016 This omendment covers lhe SEC Stoff's rescinding of Jonuory 1, 2019
certoin SEC Stof{ observer comments thot ore codified
in Topic 605 ond Topic 932, effective upon the
odoption of Topic 606 ond Topic B ,15, effective to
No moleriol impocl
colncide with the effective dote of 2014-16
Appendix 6 to Joint Application HyDRo oNE UrrurED oNE oF NoRTH AMERICA'S Lo*ous, P€&e ?r?e rgfd l4
MANAGEMENT'S DISCUSSION AND ANALYSIS
ASU Dote issued Description Effective dote Anticipoted impoct on Hydro One
20.l6-13 lune 2016 The omendmenl provides users with more decision- Jonuory l, 2019
useful informotion obout the expected credit losses on
finonciol instruments ond other commilments to extend
credit held by o reporting entity ot eoch reporting
dote.
Under ossessment
20,l6i5 August 2016 Theomendmentsprovideguldonceforeightspecific Jonuory'l ,2018 Underossessment
cosh flow issues with the obiective o[ reducing the
existino diversilv in proclice.
2016- l6 October
2016
The omendment eliminoles the prohibition of Jonuory ) , 2O1B
recognizing current ond deferred income toxes for on
intro€ntity osset honsfer, other thon inventory, until the
osset hos been sold lo on oulside pony. The
omendment will permit income tox consequences of
:r.l,t:".*"*
to be recognized when the tronsfer
Under ossessment
2016-lB November
2016
The omendment requires thot restricled cosh or Jonuory 1, 2018
restricted cosh equivolents be included wlth cosh ond
cosh equivolents when reconciling the beginning ond
end-of-period bolonces in the slotemenl of cosh flows.
Under ossessment
2017{1 Jonuory 2017 The omendment clorifies the definition o{ o business Jonuory 1, 2O1B Under ossessment
ond provides odditionol guidonce on evoluoting
whelher tronsoctions should be occounted for os
ocouisilions (or disposols) o[ ossets or businesses.
ARpen,#r6le Jni$ ApplicEtionpoRT TSX: H Page29l of 414
Summory of Fourth Quorter Results of Operotions
Three months ended December 3l
lmillions of dollors, except EPS)2016 201 5 Chonge
Revenues
Distribution
Tronsmission
Other
1,228
373
t3
r,t48
361
la
7.0%
3.3%
>7oziB>g;aat
<;
I
.)Caa
UZ
I
14
786 Y.l/o
1\.6%
122.27"1
(10.3%)
8s8
r63
98
26
146
)26
29
Costs
Purchosed power
OM&A
Distribution
Tronsmission
Other
Depreciotion ond omortizotion
287
204
30r
193
14.7%l
5.7/"
1,349 1,280 < /o/
lncome before finoncing chorges ond income toxes
Finoncing chorges
265
r0r
a/a 9.5%
7.4%94
lncome before income toxes
lncome tox expense
164
29
t48 r0.8%
r 00.0%
Net income r35 147
Net income ottributoble to common shoreholders of One
Bosic EPS
Diluted EPS
128
$ o.22
$ o.zt
143
$ 0.26
$ 0.26
11s.4%)
l)e.2%)
Copitol investments
Distribution
Tronsmission
Other
201
274
2
t98
251
2
1.5%
9.2%
477 451 < ool
Net lncome
Nel income ottributoble to common shoreholders for the quorter
ended December 3l,2Ol6of $l28 million isodecreoseof
$ 15 mlllion or .10.5% from the prior yeor. Excluding the effect o[ on
lPOteloted positive tox odiustment of $ l9 million in the fourth quorter
of 201 5, net income lor the quorter increosed by 3.2%.
Revenues
The quorterly increose of $l2 million or 3.3% in tronsmission
revenues wos primorily due to higher overoge monthly Ontorio
60-minute peok demond os severol extremely cold doys during the
quorter increosed peok lronsmission demond ond OEB-opproved
lronsmission rote increoses.
The quorterly increose of $80 million or 7 .Q% in distribution revenues
wos primorily due to higher power costs from generolors thot ore
possed on to customers ond increosed OEBopproved distributlon
rotes for 2O I 6, portiolly offset by lower energy consumption resulling
from milder weother.
Appendix 6 to Joint Application HyDRo oNE LtntrED oNE oF NoRTH AMERTCA'S TARGEST PdAgft ?flfirgfAl 4
1,522
t8 )%1
{10.5%)
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 lo lower proiect cost ond inventory
writedowns ond lower expenditures reloted to forestry control ond
line cleoring on the Compony's konsmission rights-o{-woy.
The quorterly increose of $ I Z mlllion or 1 1 .6% in distribution OM&A
cosls wos primorily due to higher volume o[ vegetotion monogement
octivilies, portiolly offset by lower costs reloted to restoring power
services ond storm response.
Depreciotion ond Amortizotion
The increose of $ I I million or 57% io depreciotion ond
omortizotion costs for the fourth quorler of 20]6 wos moinly due to
the growth in copitol ossets os the Compony continues to ploce new
ossets in-service, consistent with its ongoing copitol investment
progrom.
Finoncing Chorges
The quorterly increose of $7 m illion or 7 .4% in f inoncing chorges
wos primorily due lo on increose in interest expense on long-lerm
debt resulting from the increose in weighted overoge long-term debt
outstonding during the quorter.
lncome Tox Expense
Income lox expense for the fourth quorter of 2016 increosed by
$28 million compored to 20.15, ond the Compony reolized on
effeclive tox role of opproxim otely 17 .7% in the fourth quorler of
20 1 6 compored to opproximotely O.7% in 2Ol 5 . The increose in
tox expense is primorily due to the following:
o the elfect of on lPOreloted positive tox odjustment of $ I 9 million
in the fourth quorter of 2015;
t higher income before toxes in lhe {ourth quorter of 2016; ond
o o decreose in deductible temporory differences such os
copitolized pension deducted for tox purposes.
Copitol lnvestments
The increose in tronsn:ission copilol investments during the lourth
quorler wos primorily due to
o on increosed volume of work on insulotor replocements;
o on increosed volume of integroted stotion componenl replocements
to reploce deterioroted ossets ot tronsmission stotions, ond
. higher volume of demond work ossocioted with equipment foilures
ond spore kons{ormer equipment purchoses, portiolly offset by
r reduced work on the Clorington Tronsmission Stotion os the proiecl
neors completion.
The increose in dishibution copitol investments during lhe fourth
quorter wos primorily due to
o increosed investmenls reloted to informotion technology
inlrostructure ond customer progroms together with upgrode ond
enhoncement proiects, includlng inveslments to integrote mobile
technology with the Compony's existing work monogement tools;
. higher volume o[ focility upgrodes ond consiruction o[ new
operotion centres; ond
. higher volumes of work ossocioted with further enobling certoin of
Hydro One's ossels to be lointly used by the telecommunicotions
ond coble television industries, os well os relocotion o[ poles,
conductors ond other equipment os required by municipol ond
provinciol rood outhoritles; portiolly offset by
. higher storm restorolion work in the prior yeor primorily os o result
o[ two slgnificont wind storms during the fourth quorter of 2015.
Forword-looki ng Stotements And
lnformotion
The Compony's orol ond written public communlcotions, including
this docurnent, ohen contoin forword-looking slotements thot ore
bosed on currenl expeclotions, estimotes, forecosts ond projections
obout the Compony's business ond the industry, regulolory ond
economic environments in which it operotes, ond include beliefs ond
ossumptions mode by lhe monogement of the Compony. Such
stotements include, but ore not limited to: slotements regording the
Compony's tronsmission ond distribution rotes resulting from rote
opplicotions; slotements regording the Compony's llquidity ond
copitol resources ond operotionol requirements; stotements obout the
stondby credit focilities; expectotions regording the Compony's
finoncing octivities, stolements regording the Compony's moturing
debt; slotements reloled to credit rotings; stotements regording
ongoing ond plonned projects ond,/or initiolives, including expected
results ond completion dotes; stotements regording expected future
copitol ond developmenl inveslments, the timing of these expenditures
ond the Compony's investmenl plons; stotements regording
conkoctuol obligolions ond other commerciol commitments;
stotements reloted to the OEB; stotements regording future pension
conlributions, the pension plon ond voluolions; expectolions reloted to
work force demogrophics; stotements obout collective ogreements;
stotements reloted to dividends; stolements reloted to cloims;
expectotions regording toxes; stotements reloted to occupotionol
rights; stotements obout nonGAAP meosures; slolemenls reloted to
crilicol occounting estimotes, including expectotions regording
employee future benefits, environmentol liobilities, ond regulotory
ossets ond liobilities; expectotions reloted to the effect of interest
roles; slotements obout the Compony's reputotion; stotements
regording cyber ond doto security; slotements reloted to future soles
ol shores of Hydro One; stotemenls reloted to the Compony's
Appen,#r6ro'Jn'lS Applip,adionpoRT TSX: H Page 293 of 414
relotionship with the Province; stotements regording recenl
occounling-reloted guidonce; expectotions reloted to tox impocts;
slotements reloled to the Universol Bose Shelf Prospectus; ond
stolemenls reloted to the Compony's ocquisitions, including stotements
obout Greot Lokes Power ond Orillio Power. Words such os
"expecl", "onticipote", "intend", "ottempt", "moy", "plon", "will",
"believe", "seek", "estimote", "gool" , "oim", "torget", ond voriotions
o[ such words ond similor expressions ore intended to identify such
forwordlooking stolements. These stotements ore not guoronlees o[
future performonce ond involve ossumptions ond risks ond
uncertointies thot ore difficult to predict. Therefore, octuol outcomes
ond results moy differ moteriolly lrom whot is expressed, implied or
forecosted in such forword-looking stotemenls. Hydro One does not
intend, ond it discloims ony obligotlon, to updote ony forword-
looking stotements, except os required by low.
These forword-looking stotements ore bosed on o voriely ol foctors
ond ossumptions including, bul not limited to, the following: no
unforeseen chonges in the legislotive ond operoting fromework for
Ontorio's electricity morkel; fovouroble decisions from the OEB ond
other regulotory bodies concerning outstonding ond luture rote ond
other opplicotions; no unexpected deloys in obtoining the required
opprovols; no un{oreseen chonges in role orders or rote setting
methodologies Ior the Compony's distribution ond tronsmission
businesses; continued use of US GAAP; o stoble regulotory
environment; no unfovouroble chonges in environmentol regulotion;
ond no significont event occurring outside the ordinory course o[
business. These ossumptions ore bosed on informotion cunently
ovoiloble to the Compony, including informotion obtoined from thlrd-
porty sources. Actuol resuhs moy dilfer moteriolly from those predicted
by such forword-looking slotements. While Hydro One does not
know whot impoct ony of these differences moy hove, the
Compony's business, results of operotions, finonciol condition ond
credit stobility moy be moteriolly odversely offected. Foctors lhot
could couse octuol results or outcomes to differ moteriolly from the
results expressed or implied by fowordlooking stotements include,
omong other things:
o risks ossocioted with the Province's shore ownership o[ Hydro One
ond other relotionships with the Province, including polentiol
conflicts of interest thot rnoy orise between Hydro One, the
Province ond reloted porlies;
o regulotory risks ond risks reloting to Hydro One's revenues,
including risks reloting to rote orders, octuol performonce ogoinst
forecosts ond copitol expenditures;
o the risk thot the Compony moy be unoble to comply with
regulotory ond legislotive requirements or lhot lhe Compony moy
incur odditionol cosls for complionce thot ore not recoveroble
through rotes;
r the risk of exposure of the Compony's focilities to the effects of
severe weolher conditions, nolurol disosters or other 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;
o the risk thot Hydro One moy incur significont costs ossocioled with
tronsferring ossets locoted on Reserves (os defined in the /ndlon
Act (Conodo));
r the risks ossocioted with informotion system security ond
mointoining o complex informotion technology system
infrostructure;
r 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 terms consistent with the
Compony's rote decisions;
o risk thot the Compony is not oble to orronge sufficient cosleffective
finoncing to repoy moturing debt ond to fund copllol expenditures;
o risks ossocioted with fluctuotions in interest roles ond foilure to
monoge exposure to credit risk;
r the risk thot the Compony moy not be oble to execute 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 with environmentol regulotions or foilure
to mitigote significont heolth ond sofety risks ond inobilily to
recover environmentol expenditures in rote opplicotions;
o the risk fiol ossumptions thot form the bosis of the Compony's
recorded environmenlol liobilities ond reloted regulolory ossets
moy chonge;
o the risk of not being oble to recover the Compony's pension
expenditures in future rotes ond uncertointy regording the future
regulolory treotment of pension, other postemployment benefits
ond post-retirement benef its cosfs;
o the potentlol thot Hydro One moy incur slgni{icont expenses to
reploce functions currently outsourced if ogreements ore lerminoted
or expire before o new service provider is selected;
o the risks ossocioted with economic uncertoint/ ond finonciol
morket volotility;
. the inobility to prepore [inonciol stotements using US GAAP; ond
. the impoct o[ the ownership by the Province of londs underlying
the Compony's lronsmission system.
Hydro One coutions the reoder lhot lhe obove list of foctors is not
exhoustive. Some of these ond other foctors ore discussed in more
detoil in the section "Risk Monogement ond Risk Foctors" in lhis
MD&A.
Z>az
za>g
3A
6=
o;(,6oCU,
oz
I
Appendix 6 to Joint Application HyDRo oNE umrrED oNE oF NoRTH AMERTCA'S TARGEST PEAgfr ?TQ AtAt Al4
MANAGEMENT'S DISCUSSION AND ANALYSIS
ln oddition, Hydro One coutions the reoder lhot informotion provided
in this MD&A regordlng the Compony's outlook on cerloin motters,
including potentiol future investments, is provided in order to give
conlext to the noture of some of the Compony's fulure plons ond moy
not be oppropriote for other purposes.
Additionol informolion obout Hydro One, including the Compony's
Annuol Informotion Form, is ovoiloble on SEDAR ol www.sedor.com
ond the Com pony's website ot www. HydroOne.com/lnvestors.
ARpentiip6t€.ln'iilS Applinesioft poRT TSX: H Page 295 of 414
AAo nogement's Report
The Consolidoted Finonciol Stolemenls, Monogement's Discussion
ond Anolysis (MD&A) 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,
consistenry ond reliobility of oll such in{ormotion 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 Notionol Instrument 5l .102.
The preporotion of the Consolidoted Finonciol Stolements ond
informotion in the MD&A involves the use of estimotes ond
ossumptions bosed on monogement's iudgment, porticulorly when
tronsoctions olfecting the current occounting period connot be
flnolized with certointy until luture periods. Estimotes ond ossumptions
ore bosed on hisloricol experience, cunenl conditions ond vorious
ofier ossumptions believed to be reosonoble in lhe circumstonces,
with criticol onolysis o[ the significont occounting policies followed by
the Compony os described in Note 2 to the Consolidoted Finonciol
Stotements. The preporotion o[ the Consolidoted Finonciol Stotemenls
ond the MD&A includes informotion regording the estimoted impoct
o[ future events ond tronsoctions. The MD&A olso includes informotion
regording sources of liquidity ond copitol resources, operoling trends,
risks ond uncertoinlies. Actuol resulls in lhe future moy differ moteriolly
from the present ossessmenl of this informotion becouse future events
ond circumstonces moy not occur os expected. The Consolidoted
Finonciol Slotements ond MD8,A hove been properly prepored within
reosonoble limits of moteriolity ond in light of informotion up to
Februory 9,2017.
Monogement ls responsible for estoblishing ond mointoining
odequote internol control over finonciol reporting for the Compony. ln
meeting its responsibility {or the reliobility of finonciol informotion,
monogement mointoins ond relies on o comprehensive system o[
internol conkol ond internol oudit. The system o[ internol control
lncludes o written corporole conduct policy; implementotion of o risk
monogement fromework; effective segregolion ol duties ond
delegotion o[ outhorities; ond sound occounting policies thot ore
regulorly reviewed. This structure is designed to provide reosonoble
ossuronce thot ossets ore sofeguorded ond thot relioble informotion is
ovoiloble on o timely bosis. ln oddition, monogement hos ossessed
lhe design ond operotlng effectiveness of the Compony's internol
control over finonciol reporling in occordonce wilh the criterio set
forth in Internol Control - Integroted Fromework (2013), issued by the
Committee 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 31, 2016. The effectiveness of these
internol controls is repoded to the Audit Committee of the Hydro One
Boord o[ Directors, os required.
The Consolidoted Finonciol Stoiements hove been oudited by KPMG
LLP, independent externol oudilors oppoinled by the shoreholders o[
the Compony. The externol oudltors' responsibility is to express their
opinion on whether the Consolidoted Finonciol Stotements ore loirly
presented in occordonce with United Stotes Generolly Accepted
Accounling Principles. The Independent Audilors' Report outlines the
scope ol 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 conkols. The Audit Committee of
Hydro One met periodicolly wilh monogement, the internol ouditors
ond the externol ouditors lo sotisfy itself thot eoch group hod properly
dischorged its respective responsibiliry ond to review the
Consolidoled Finonciol Stotements before recommending opprovol
by the Boord o[ Directors. The externol ouditors hod direct ond lull
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 certified 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 o[ Hydro One's monogement:
TrtJ:4- ,4,4
Moyo Schmidt
President ond Chief
Executive Officer
Michoel Vels
Chief Finonciol Officer
Appendix 6 to Joint Application HyDRo oNE LrMrrED oNE oF NoRTH AMERTcA's ,.o*ors, P€ge ?frfiegf &14
To the Shoreholders of Hydro One Limiled
We hove oudited the occomponying Consolidoted Finonciol
Stotements of Hydro One Limited, which comprise the
consolidoted bolonce sheets os ot December 3,l, 2Ol6 ond
December 31, 20,i5, the consolidoted stotements of operotions ond
comprehensive income, chonges in equity ond cosh {lows for the
yeors then ended, ond notes, comprising o summory of significont
occounting policies ond other explonotory informotion.
Mo n o ge m e nlt Responsib i I i ty fo r th e Con sol i d o ted
Finonciol Stolemenls
Monogemenl is responsible for the preporotion ond foir presentolion
of these Consolidoted Finonciol Stotements in occordonce with
United Sloles Generolly Accepted Accounling Principles, ond for such
internol control os monogemenl determines is necessory to enoble the
preporotion ol Consolidoted Finonciol Stolements lhot ore free from
moteriol misstotement, whether due lo froud or error.
Auditors' Responsibility
Our responsibility is to express on opinion on these Consolidoted
Finonciol Stotements bosed on our oudits. We conducted our oudits
in occordonce with Conodion generolly occepted ouditing
slondords. Those stondords require thol we comply with ethicol
requirements ond plon ond perlorm the oudit to obtoin reosonoble
ossuronce obout whether the Consolidoted Finonciol Stotements ore
free from moteriol misstotement.
An oudit involves performing procedures to obtoin oudit evidence
obout the omounts ond disclosures in the Consolidoted Finonciol
Slotemenls. The procedures selected depend on our iudgment,
including the ossessment of the risks of moteriol misstotement of the
Consolidoted Finonciol Slotements, whether due to froud or error. ln
moking those risk ossessments, we consider internol conkol relevont lo
the entity's preporotion ond foir presentotion of the Consolidoted
Finonciol Stotements in order to design oudit procedures lhot ore
oppropriote in the circumstonces, bul not for the purpose of
expressing on opinion on the effectiveness of the entity's internol
control. An oudit olso includes evoluoting the opproprioteness of
occounting policies used ond the reosonobleness of occounting
estimotes mode by monogement, os well os evoluoting the overoll
presenlotion of the Consolidoted Finonciol Stotements.
We believe thot the oudit evidence we hove obtoined in our oudlts is
sufficient ond oppropriote to provide o bosis for our oudit opinion.
Opinion
ln our opinion, lhe Consolidoted Finonciol Stotements present foirly,
in oll moteriol respecls, the consolidoted finonciol position of Hydro
One Limited os ot December 3.l, 20,l6 ond December 3,l, 20,l5,
ond its consolidoted results of operotions ond its consolidoted cosh
flows for the yeors then ended in occordonce with United Stotes
Generolly Accepted Accounting Principles.
r'ha /4?
Chortered Professionol Accountonts, Licensed Publ ic Accountonts
Toronto, Conodo
Februory 9,2O17
ARpendir6ln .lnfts Appl,ipntionpoRT TSX: H Page297 of414
Independent Auditors' Report
Consol idoted Stotements of
ond Comprehensive lncome
Operotions
For the yeors ended December 3 I , 20 I 6 ond 201 5
Yeor ended December 31 lmillions of Conodion dollors, excepl per shore omounts)2016 20r5
Revenues
Distribution {includes $ 160 relored porty revenues; 20.]5 - $ 159) lNote 26)
Tronsmission (includes $ I ,553 reloted porly revenues; 201 5 - $ I ,5541 lNote 26)
Other
4,915
1,584
53
4,949
r,536
53
6,552 6,538
Cosh
Purchosed power (includes $2,103 reloted porty costs; 20l5 - $2,335|t (Note 26)
Operotion, moinfenonce ond odminiskotion (Note 261
Depreciotion ond omorlizotion /Nofe 5l
3,427
t,069
778
3,450
r, r35
759
5,274 5,344
lncome before finoncing chorges ond income toxes
Finoncing chorges fNole 6i
1,278
393
1,194
376
lncome before income toxes
lncome loxes lNotes 7, 26)
88s
139
BlB
r05
@o;o1-7tr6r9Zod>.mI
lz
z.)t
2
Net income 746 713
Other comprehensive income
Comprehensive income 746 714
Nel income ottributoble to:
Nonconkolling interest /Nole 25i
Preferred shoreholders
Common shoreholders
6
t9
721
t0
t3
690
746 713
Comprehensive income ottributoble to:
Noncontrolling ;"terest /Nole 25i
Preferred shoreholders
Common shoreholders
6
t9
721
to
t3
691
746 714
Eornings per common shore /Note 23l
Bosic
Diluted
$ 1.21
$ r.2i
$ t.sq
$ t.sc
Dividends per common shore declored (Note 22)$ 0.97 $ 1.83
See occomponying notes to Consolidoted F tnonciol Sfofements.
Appendix 6 to Joint Application HyDRo oNE LrxurED oNE oF NoRTH AMERTcA's lo*"r., PAge ?rQffrgf4l4
CONSOLIDATED FINANCIAL STATEMENTS
At December 3 I , 2Ol 6 ond 201 5
Decembr 3l lmillions of Conodion dollors)
Consol idoted Bolcnce Sheets
2016 2015
Assets
Cunent ossets:
Cosh ond cosh equivolents
Accounts receivoble /Note 8/
Due from reloted porties (Note 26)
Olher current ossets /Note 9/
50
838
r58
102
94
776
t9t
105
148 r66
Property, plont ond equipmenl /Note l0i
Olher long-term ossets:
Regulotory ossets /Note l2i
Deferred income tox ossets /Note Z/
lntongible ossets /Nole I li
Goodwill lNote 4)
Other ossets
19,140 17,968
3,145
1,235
349
327
7
3,0r 5
r,636
336
163
10
5,063 5,1 60
Totol ossets 25,351 24,294
Liobilities
Cunent liobilities:
Shortlerm notes poyoble /Note l5l
Long-term debt poyoble within one yeor /Nole l5i
Accounls poyoble ond other current liobilities /Note l3l
Due to reloted porlies /Nofe 26/
469
602
945
147
1,491
500
868
138
2,163 2,997
Long-term liobilities:
Longlerm debt {includes $548 meosured otfoirvolue; 20,l5 - $5,l}/No,es 15, 16]
Regulotory liobilities lNote l2)
Defened income tox liobilities (Note 7)
Other long+erm liobilities (Note l4)
10,078
209
60
2,752
8,207
236
207a Taa
13,099 11 ,373
Torol liobiliries 15,262 14,370
Contingencies ond Commitments /Noles 28, 29)
Subsequent Events /Note 3li
Noncontrolling interest subiect to redemption lNote 25)
Equity
Common shores /Notes 21, 22)
Prefened shores /Notes 21, 22)
Additionol poid-in copitol (Note 24)
Retoined eornings
Accumuloted other comprehensive loss
22
5,623
418
34
3,950
(81
5,623
4tB
t0
3,806
(B)
23
Hydro One shoreholders' equity
Noncontrolling interest /Nofe 25/
10,o17
50
9,849<o
Totol equity 10,067 9,90r
25,35 r 24,294
See occom po nyi n g n ole s to C onsol i doted F i no nci ol Sfofemenfs.
On beholf o[ the Boord of Direclors:
Dovid Denison
Choir
\F (>
Philip Orsino
Choir, Audit Committee
ABpendirc6lp rJnia$ Applip'a.tionpoRT TSX: H Page 299 of 414
\f>r-..;
Consolidoted Stotements of Chonges in Equily
For the yeors ended December 3 I , 2Ol 6 ond 2Ol 5
Yeor ended December 3 I , 201 6 Common Preferred
Shores Shores
Accumuloted Norr
Additionol Other Hydro One conholling
Poid-in Retoined Comprehensive Shoreholders' lnterest lolol
of Conodion Loss
Jonuory 1,2016 5,623 418 r0 3,806
740
(8)9,849
740
52
4
(6)
9,90r
744Nel income
Other comprehensive income
Distributions lo nonconlrolling inferest
Dividends on preferred shores
Dividends on common shores
Stock-bosed compensotion /Note 24/ - - 24
(l e)
ls77l
(r el
(s771
24
(6)
(t el
ls77l
24
December3l,20l6 5,623 418 34 3,950 (8) 10,017 50 10,067
Yeor ended Decembr 31, 2015 Common
Shores
Pre[ened
Shores
Accumuloted Non-
Additionol Other Hydro One controlling
Poid-in Retoined Comprehensive Shoreholders' Interest Totol
of Conodion Loss
lonuory i,2015
Net income
Other comprehensive income
Distributions to noncontrolling interest
Dividends on prefened shores
Dividends on common shores
Hydro One Brompton spin-off /Note 4/
PrelPO Tronsoctions /Note 2 ii
Stock-bosed compensotion /Note 24J
3,3 r4 4,249
703
(1 3l
l87sl
(2s81
(e)
1
7,554
703
I
49
7
t[l
7,603
710
I
t4t
(t 3)
(BZ5)
1454)
2,923
l0
(13)
lB7 sl
14541
2,523
10
(re6)
2,505 418
r0
December 3l , 2015 5,623 418 l0 3,806 (Bl I 849 529 901
See occomponying notes to Consolidoted Finonciol Stofemenls.
AC\>\J1/TA;9za
a>.mU
=z
Z.)
2
Appendix 6 to Joint Application HyDRo oNE LrxurED oNE or NoRTH AMERTcA's ,o*ors, Pagft 30e rof4l4
CONSOLIDATED FINANCIAL STATEMENTS
Consolidoted Stotements of Cosh Flows
2016 201 5
Operoting octivities
Net income
Environmento I expenditures
Adiustments for non<osh items:
Depreciotion ond omortizotion (excluding removol costsl
Regulotory ossets ond liobilities
Deferred income toxes lNote 7)
Other
Chonges in noncosh bolonces reloted to operotions /Note 2Zl
746
(20)
713
(le)
688
(16)
It4
t0
134
668
(31
12,844)
24
213
Net cosh from (used in) operoting octivities 1,656 \1,248)
Finoncing octivities
Long-term debt issued
Long-term debt repoid
Shortlerm notes issued
Short-term noles repoid
Common shores issued
Dividends poid
Dishibutions poid to noncontrolling interest
Chonge in bonk indebtedness
Other
2,300
(502)
3,03 r
(4,0s3)
350
(58s)
2,891
11,400)
2,600
(888)
(5)
t2)
t7)
(5e6)
(e)
(t 0l
Net cosh from finoncing octivities l6t 2,954
lnvesting octivities
Copitol expenditures lNote 27)
Property, plont ond equipment
lntongible ossets
Copitol contribulions received lNole 27)
Acquisitions lNote 4)
lnvestment in Hydro One Brompton (Note 4)
Other
(r,600)
(61)
21
12241
{r,595)
t37l
57
(e0)
(s3)
6J
Net cosh used in investing octivities (1,86r) 11,7121
Net chonge in cosh ond cosh equivolents
Cosh ond cosh equivolents, beginning o[ yeor
144l
94
(6)
r00
Cosh ond cosh equivolents, e1d {yggl 50 94
See occom po nyi ng note s to Co n sol i dot ed F i no n ci ol Sfofemenfs.
Appent{ir6to Jn'ls ApplipntiottpoRT TSX: H Page 301 of 414
For the yeors ended December 3 I , 2Ol 6 ond 2Ol 5
Yeor ended December 3l lmillions of Conodion dollors)
For the yeors ended December 3 I , 201 6 ond 2Ol 5
I . Description of The Business
Hydro One Limited {Hydro One or the Compony) wos incorporoted
on August 31 , 20,l5, under the Business Corporofions Act (Ontorio).
On October 31, 2015, the Compony ocquired Hydro One lnc., o
compony previously wholly owned by the Province of Onlorio
(Province). The ocquisition ol Hydro One lnc. by Hydro One wos
occounted for os o common control konsoction ond Hydro One ls o
contlnuotion of business operotions of Hydro One lnc. At
December 31 , 2016, the Province holds opproximotely 70.1%
12015- B4%lof thecommonshoresof HydroOne. Seenote2l lor
further detoils regording the reorgonizotion of Hydro One.
The principol businesses of Hydro One ore the tronsmission ond
distribution of electricity to customers wilhin Ontorio.
2. Significont Accounting Policies
Bosis of Consolidotion ond Preporotion
These Consolidoted Finonciol Stotements include the occounts of the
Compony ond its subsidiories. lntercompony konsoctions ond
bolonces hove been eliminoted.
The comporotive informotion to these Consolidoted Finonciol
Slotements hos been presented in o monner similor to the
pooling-of-interests method. The comporotive inlormotion consists of
the results of operotions of Hydro One lnc. prior to October 31,
2015, ond the consolidoted results of operotions of Hydro One from
the dote of incorporotion on August 3 1, 2015 to December 3,1,
2015, which include the results of Hydro One Inc. subsequent to its
ocquisition on October 31 , 2015. The comporotive informolion hos
been combined using historicol omounts. ln oddition, Hydro One's
issued ond oulstonding common shores prior to October 3 I , 201 5
hove been retrooctively odiusted for the purposes of presentotion to
reflect the effects of the ocquisition of Hydro One lnc. using the
exchonge rotio estoblished for the ocquisition. The Consolidoted
Finonciol Stotements ore refened to os "consolidoted' for oll periods
presented.
On August 3 1 , 201 5, Hydro One lnc. completed the spin-off of its
subsidiory, Hydro One Brompton Networks lnc. {Hydro One
Brompton) to the Province {see note 4). The comporotive informotion
to these Consolidoted Finonciol Stolements includes the results of
Hydro One Brompton up to August 3 1 , 20 I 5.
Stotements
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 Eslimotes
The preporotion of finonciol stotements requires monogement to moke
estimotes ond ossumptions thot offect the reported omounts of ossets
ond liobllities ot the dote of the finonciol stotements ond the reported
omounts of revenues, expenses, goins ond losses during the reporting
periods. Monogemenl evoluotes lhese estimoles on on ongoing bosis
bosed upon historicol experience, current conditions, ond
ossumptions believed to be reosonoble ot the time the ossumptions
ore mode, with ony odiustments being recognized in resuhs of
operolions 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 impoirmenls,
contingencies, unbilled revenues, ollowonce for doubtful occounts,
derivotive instruments, ond deferred income tox ossets ond liobilities.
Actuol resulls moy differ signilicontly from these estimotes.
Rote Setting
The Compony's Tronsmission Business consisis of the tronsmission
buslness of Hydro One Inc., which includes the lronsmission business
of Hydro One Networks lnc. (Hydro One Networks), Hydro One
Soult Ste. Morie LP (previously Greot Lokes Power Tronsmission LP
{Greot Lokes Power}}, ond its 66% interest in B2M limited Portnership
(B2M LP). The Compony's Distribution Business consists of the
dishibution business o[ Hydro One Inc., which includes the
distribution businesses o[ Hydro One Networks, os well os Hydro
One Remote Communities lnc. (Hydro One Remote Communities).
Tronsmission
In November 20,15, the OEB opproved Hydro One Networks'
201 6 tronsmission rotes revenue requirement of $ I ,480 million
ln December 20 1 5, the OEB opproved B2M LP's 20,l 5-20 i 9 rotes
revenue requirements of $39 million, $36 million, $37 million,
$38 million ond $37 million lor the respective yeors. OnJonuory 14,
201 6, the OEB opproved the B2M LP revenue requirement recovery
through the 201 6 Uniform Tronsmission Rotes, ond the estoblishment
of o deferrol occount to copture costs of Tox Rote ond Rule chonges.
Notes to Consolidoted Finoncio
azz6>;ufr62IoaOi,2fra
=om=z0r>a1mI
3
Appendix 6 to Joint Application HyDRo oNE LtrrurED oNE oF NoRTH AMERtcA,s lo*crsr PASft SrQfirOfAl4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Distribution
ln Morch 2015, the OEB opproved Hydro One Networks'
distribution revenue requirements of $.1,326 million for 2015,
$1,430 million for 2016 ond $1,486 million for 2017. The OEB
hos subsequently opproved updoted revenue requirements o[
$1,410 million for 20l6 ond $1,4.l5 million for 2017.
On Morch 17,2U6, the OEB opproved on increose ol 2.1O%to
Hydro One Remote Communities' bosic roles for the distribution ond
generotlon of electricil'y, with on effective dote of Moy 1 , 2016.
Regulotory Accounting
The OEB hos the generol power to include or exclude revenues,
costs, goins or losses ln the rotes o[ o specific period, resulting in o
chonge in the timing of occounling recognition from thot which would
hove been opplied in on unreguloted compony. Such chonge in
timing involves the opplicotion of rotareguloted occounting, giving
rise to the recognltion o[ regulotory ossets ond liobilities. The
Compony's regulotory ossels represeni certoin omounls receivoble
from future customers ond costs thot hove been defened for
occounting purposes becouse it is proboble thot they will be
recovered in future rotes. ln oddition, lhe Compony hos recorded
regulotory liobilities thot generolly represent omounts thot ore
refundoble to future customers. The Compony continuolly ossesses the
likehhood o[ recovery of eoch of ils regulotory ossels ond contlnues to
believe thot it is proboble thot the OEB will include its regulotory
ossets ond liobilities in setting of future rotes. lf, ot some future dote,
the Compony iudges thot il is no longer proboble thot the OEB will
include o regulotory osset or liobiliry in setting future rotes, the
oppropriote corrying omount would be reflected in results of
operotions in the period thol the ossessment is mode.
Cosh ond Cosh Equivolents
Cosh ond cosh equivolents include cosh ond short-term investments
with on originol moturity of three months or less.
Revenue Recognition
Tronsmission revenues ore collected through OEBopproved rotes,
whlch ore bosed on on opproved revenue requirement thot includes
o rote of return. Such revenue is recognized os electricity is
tronsmitted ond delivered to customers.
Distribution revenues ottribuloble to the delivery o[ electricity ore
bosed on OEBcpproved distribution rotes ond ore recognized on on
occruol bosis ond include billed ond unbilled revenues. Billed
revenues ore bosed on electricily delivered os meosured from
customer meters. At the end o[ eoch month, electriclty delivered to
cuslomers since lhe dote of the lost billed meter reoding is estimoted,
ond the conesponding unbilled revenue is recorded. The unbilled
revenue estimote is offected by energy consurnption, weother, ond
chonges in the composition o[ customer closses.
Distribution revenue olso includes on omount reloting to rote
prolection for rurol, residentiol, ond remole customers, which is
received kom the lndependent Electricity System Operotor (IESO)
bosed on o stondordized customer rote thot is opproved by the OEB.
Revenues olso include omounls reloted to soles of other services ond
equipment. Such revenue is recognized os services ore rendered or
os equipmenl is delivered.
Revenues ore recorded net o[ indlrect toxes
Accounts Receivoble ond Allowonce for
Doubtful Accounts
Billed occounts receivoble ore recorded ot the invoiced omounl, net
of ollowonce for doubtful occounts. Unbilled occounts receivoble ore
recorded ot their estimoted volue. Overdue omounts reloled to
reguloted blllings beor interest ot OEBopproved rotes. The ollowonce
for doubtful occounls reflects the Compony's best estimote of losses
on billed occounls receivoble bolonces. The Compony estimotes the
ollowonce for doubtful occounls on billed occounts receivoble by
opplying internolly developed loss rotes to the outstonding receivoble
bolonces by oging cotegory. Loss rotes opplied to the billed occounls
receivoble bolonces ore bosed on hisloricol 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 interesl represents the portion of equity ownership in
subsidiories lhot is not ottributoble lo shoreholders of Hydro One.
Noncontrolling interest is initiolly recorded ot foir volue ond
subsequently the omounl is odiusted for the proportionote shore of nel
income ond other comprehenslve income ottributoble to the
nonconkolling interest ond ony dividends or distributions poid lo the
noncontrolling interest.
lf o konsoction results in the ocquisition of oll, or port, ol o
noncontrolling interesl in o subsidiory, the ocquisition of 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 result of chonges in the noncontrolling
inlerest, unless o chonge resuhs in lhe loss of control by the
Compony.
ABpendirc6le',lnfiS ApplipntionpoRT TSX: H Page 303 of 414
lncome Toxes
Prior to the lPO, Hydro One wos exempt from tox under the /ncome
Iox Act (Conodo) ond the Toxotion Act, 2007 lOntorio) {Federol Tox
Regime). However, under lhe Electricity Act, Hydro One wos
required to moke poyments in lieu o[ tox (PlLs) to the Ontorio
Electricily Finoncing Corporotion {OEFC) (PlLs Regime). The PlLs were,
in generol, bosed on the omount o[ tox thot Hydro One would
othewise be lioble to poy under the Federol Tox Regime if it wos not
exempt lrom toxes under lhose stotutes. ln connection with the IPO of
Hydro One, Hydro One's exemption from tox under the Federol Tox
Regime ceosed to opply. Upon exiting the PlLs Regime, Hydro One is
required lo moke corporote income tox poyments to the Conodo
Revenue Agency {CRA) under the Federol Tox Regime.
Current ond defened income toxes ore computed bosed on the lox
roles ond tox lows enocted os ot the bolonce sheet dote. Tox benefits
ossocioted with income tox positions loken, or expected to be token,
in o tox return ore recorded only when the "morelikely-thon-not"
recognition threshold is sotisfied ond ore meosured ot the lorgest
omounl of benefit thot hos o greoter thon 50% likelihood of being
reolized upon settlement. Monogemenl evoluotes eoch position
bosed solely on the technicol merits ond focts ond circumstonces of
the position, ossuming the position will be exomined by o toxing
outhority hoving full knowledge o[ oll relevont informotion. Significont
monogement iudgment is required lo determine recognition thresholds
ond the reloted omount of tox benelits to be recognized in the
Consolidoted Finonciol Slolements. Monogement reevoluoles tox
posilions eoch period using new inlormolion obout recognition or
meosurement os it becomes ovoiloble.
Deferred lncome Toxes
Deferred income toxes ore provided for using the liobilily method.
Deferred income loxes ore recognized bosed on the estimoted {uture
lox consequences ottributoble to temporory differences between the
corrying omount of ossets ond liobilities in the Consolidoted Finonciol
Stotemenls ond their conesponding tox boses.
Deferred income tox liobilities ore recognized on oll toxoble
temporory differences. Deferred tox ossets ore recognized to the
extent thot it is morelikely-thon-not thot these ossets will be reolized
from toxoble income ovoiloble ogoinst which deductible temporory
differences con be utilized.
Deferred income toxes ore colculoted ot the tox rotes thot ore
expected to opply in the period when the liobiliry is settled or the
osset is reolized, bosed on the tox rotes ond tox lows thot hove been
enocted os ot the bolonce sheet dote. Defened income toxes thol ore
not included in the rotesetting process ore chorged or credited lo the
Consolidoted Stotements of Operolions ond Comprehensive lncome.
lf monogemenl determines thot it is morelikelython-not thot some or
oll o[ o defened income tox osset will not be reolized, o voluotion
ollowonce is recorded ogoinst the defened income tox osset lo report
the net bolonce ot 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 benefit will be reolized.
The Compony records regulotory ossets ond liobilities ossocioted with
deferred income loxes thot will be included in lhe rote-setting process.
The Compony uses the flow-through method to occount for investment
tox credits (lTCs) eorned on eligible scientilic reseorch ond
experimentol development expenditures, ond opprenticeship iob
creotion. Under this method, only non-refundoble lTCs ore recognized
os o reduction to income tox expense.
Moteriols ond Supplies
Moteriols ond supplies represenl consumobles, smoll spore ports ond
construction moteriols held for internol construction ond moinlenonce
of property, plont ond equipment. These ossets ore corried ot
overoge cost less ony impoirments recorded.
Property, Plont ond Equipment
Properiy, plont ond equipment is recorded ot originol cost, net of
cuslomer contributions, ond ony occumuloled impoirmenl losses. The
cost of odditions, including bettermenls ond replocemenl ossel
components, is included on the Consolidoted Bolonce Sheets os
property, plont ond equipment.
The originol cost of property, plont ond equipment includes direct
moteriols, direct lobour {including employee benefits), controcted
services, ottributoble copltolized f inoncing costs, ossel retiremenl
costs, ond direct ond indirect overheods thot ore reloted to the copitol
proiect or progrom. Indirect overheods include o portion o[ corporote
costs such os finonce, treosury, humon resources, lnformotion
technology ond executive costs. Overheod costs, including corporote
functions ond field services costs, ore copitollzed on o fully ollocoted
bosis, consislent with on OEBopproved methodology.
Properly, plont ond equipment in service consists of tronsmission,
distribution, communicotion, odminisirotion ond service ossets ond
lond eosements. Property, plont ond equipment olso includes luture
use ossets, such os lond, moior components ond spore ports, ond
copitolized proiect development cosls ossocioted wlth deferred
copitol proiects.
=Zzo>r
-fi6-.
=6aO
i,9fra
=om=zor>@1mtf,
3
Appendix 6 to Joint Application HyDRo oNE umtrED oNE oF NoRTH AMERtcA's Lrnoesr P&&ft 004r0f414
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tronsmission
Tronsmission ossets include ossets used lor the tronsmission of high-
vohoge electricity, such os konsmission lines, supporl structures,
foundotions, insulotors, connecting hordwore ond grounding systems,
ond ossets used to step up the voltoge of electricity from generoting
stotions lor tronsrnission ond to step down vohoges for distribution,
including trons{ormers, circuit breokers ond switches.
Distribution
Distribution ossels include ossets reloted to the distribution of
lowvoltoge electricity, including lines, poles, switches, konsformers,
proleclive devices ond melering systems.
Communicotion
Communicotion ossets include fibre optic ond microwove rodio
systems, opticol ground wire, towers, telephone equipment ond
ossocioled bulldings.
Adminislrotion ond Service
Administrotion ond service ossets include odministrotive buildings,
personol computers, tronsport ond work equipment, tools ond other
minor ossels.
Eosements
Eosements include stotutory rights of use for tronsmission corridors ond
obutting londs gronted under the Re/loble Energy ond Consumer
Protection Act, 2002, os well os other lond occess rights.
lntongible Assets
lntongible ossels seporotely ocquired or inlernolly developed ore
meosured on initiol recognilion ot cost, which comprises purchosed
softwore, direct lobour (including employee benefits), consulting,
engineering, overheods ond ottributoble copitolized [inoncing
chorges. Following initiol recognition, intongible ossets ore corried ol
cost, net of ony occumuloled omortizolion ond occumuloted
impolrment losses. The Compony's intongible ossets primorily
represent moior computer opplicolions.
Copifolized Finoncing Costs
Copitolized finoncing costs represent interest costs ottributoble to the
conslruction o[ properly, plont ond equipment or development of
intongible ossefs. The finoncing cost of ottribuloble borrowed funds is
copitolized os poil of the ocquisition cost of such ossets. The
copitolized linoncing costs ore o reduction o[ finoncing chorges
recognized ln the Consolldoted Stotements o[ Operotions ond
Comprehensive lncome. Copitolized finoncing costs ore colculoted
using the Compony's weighted overoge effective cost of debl.
Construction ond Development in Progress
Conslruction 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 Amortizotion
The cosl of property, plonl ond equipment ond inionglble ossets is
deprecioted or omortized on o stroight-line bosis bosed on the
estimoted remoining service life of eoch osset cotegory, except for
konsport ond work equipment, which is deprecioled on o declining
bolonce bosis.
The Compony periodicolly initioles on exlernol independent review o[
its property, plont ond equipment ond intongible osset depreciotion
ond omortizotion rotes, os required by the OEB. Any chonges orising
from OEB opprovol of such o revlew ore lmplemented on o
remoining service life bosis, consistent with their inclusion in electricity
rotes. The losl review resulted in chonges to rotes elfectiveJonuory 1,
20,15. A summory of overoge seryice lives ond depreciotion ond
omorlizotion rotes for the vorious closses o[ ossets is included below:
Averoge
Service Life
Rote
Ronge Averoge
Property, plont ond equipment:
Tro nsmission
Distribution
Communicotion
Admlnistrotion ond service
Intongible ossets
56 yeors
46 yeors
I 6 yeors
I 8 yeors
I 0 yeors
17" - 3%
1"/" - 7o/"
17" -1 57"
17" -20%
10%
l/o
6%
7%
o%
Appen,#rc6le,,lfiftS ApplipE$ionpoRT TSX: H Page 305 of 414
ln occordonce with group depreciotion proctices, the originol cost of
property, plont ond equipment, or moior componenls thereof, ond
lntongible ossets thot ore normolly retired, is chorged to occumuloted
depreciotion, with no goin or loss being reflected in results o[
operotions. Where o disposition of property, plont ond equipment
occurs through sole, o goin or loss is colculoled bosed on proceeds
ond such goin or loss is included in depreciotion expense.
Acquisitions ond Goodwill
The Compony occounts {or business ocquisitions using lhe ocquisition
method of occounting ond, occordingly, the ossels ond liobilities of
the ocquired enlilies ore primorily meosured ot their estimoted foir
volue ot the dote o{ ocquisition. Goodwill represents the cost of
ocquired componies thol is in excess of the foir volue of the net
identifioble ossels ocquired ot the ocquisition dote. Goodwill is not
included in rote bose.
Goodwill is evoluoted for impoirment on on onnuol bosis, or more
frequently if circumstonces require. The Compony performs o
quolitotive ossessment to determine whether it is morelikelython-not
thot the [oir 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 morelikelython-not thot the foir
volue o[ the oppllcoble reporting unit is less thon its corrying omount,
no further testing is required. lf the Compony determines, os o result
of its quolitotive ossessment, thot il is morelikelython-not thot the foir
volue o{ the opplicoble reporling unit is less thon its corrying omount,
o goodwill impoirment ossessment is performed using o hruostep, foir
voluebosed test. The [irst step compores the foir volue of the
opplicoble reportlng unit to its corrying omount, including goodwill. lf
the corrying omount of the opplicoble reporting unit exceeds its foir
volue, o second step is performed. The second step requires on
ollocotion of foir volue to the individuol ossets ond liobilities using
purchose price ollocoiion in order to delermine the implied foir volue
of goodwill. lf the lmplied Ioir volue of goodwill is less thon the
corrying omount, on impoirment loss is recorded os o reduction to
goodwill ond os o chorge to results o[ operolions.
For the yeor ended December 3l, 20,16, bosed on the quolitotive
ossessment performed os ot September 30, 2016, the Compony hos
determined thot it is not morelikelython-not thot lhe foir volue o[ eoch
opplicoble reporting unit ossessed is less thon its corrying omounl. As
o result, no further testing wos perlormed, ond the Compony hos
concluded thot goodwill wos not impoired ot December 3 I , 20,1 6.
Long-Lived Asset lmpoirment
When circumstonces indicole the corrying volue o[ long-lived ossets
moy not be recoveroble, the Compony evoluotes whether the
corrying volue of such ossets, excluding goodwlll, hos been
impoired. For such long-lived ossets, the Compony evoluotes whether
impoirment moy exist by esllmoting future estimoted undiscounted
cosh flows expected to result from the use ond eventuol disposition o[
the osset. When olternolive courses of oction to recover the corrying
omount o[ o long-lived osset ore under considerotion, o probobility
weighled opprooch is used to develop estimotes of future
undiscounted cosh flows. l[ the corrying 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 o[ the
corrying volue of the osset over its foir volue. As o result, the ossel's
corrying volue is odiusted to ils eslimoted foir volue.
Within its reguloted business, the corrying costs of most of Hydro One's
longllved ossets ore included in role bose where they eorn on
OEBopproved rote of return. Asset corrying volues ond the reloted return
ore recovered through opproved rotes. As o result, such ossels ore only
tested for impoirment in the event thot the OEB disollows recovery, in
whole or in port, or if such o disollowonce is iudged to be proboble.
Hydro One regulorly monitors the ossets of its unreguloted Hydro
One Telecom subsidiory for indicotions o[ impoirment. Monogement
ossesses the [oir 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 relerence ond internolly developed discounted
cosh flow onolysis. Signiliconl chonges in morket conditions, chonges
to the condition of on osset, or o chonge in monogement's intent lo
utilize the ossel ore generolly viewed by monogement os triggering
evenls lo reossess the cosh flows reloted to these longllved ossets. As
ot December 3 1 , 20 1 6 ond 20 1 5, no osset impoirment hod been
recorded for ossets within either the Compony's reguloted or
unreguloted businesses.
Costs of Arronging Debt Finoncing
For finonciol liobillties clossified os other thon held{or-troding, the
Compony defers the externol tronsoclion costs reloted lo obtoining
debt finoncing ond presents such omounts net o[ reloted debt on the
Consolidoted Bolonce Sheets. Deferred debl issuonce cosls ore
omortized over lhe conlroctuol life of the reloted debt on on effective-
interest bosis ond the omorlizotion is included within finoncing
chorges in the Consolidoted Stolements of Operotions ond
Comprehensive lncome. Tronsoction costs for items clossified os
held{or-troding ore expensed immediotely.
Comprehensive lncome
Comprehensive income is comprised of nel income ond other
comprehensive income {OCl). Hydro One presents net income ond
OCI in o single continuous Consolldoted Stotement o[ Operotions
ond Comprehensive lncome.
azzo>=-fr62IoaO,9fra
=om=z9d5mC,
3
Appendix 6 to Joint Application HyDRo oNE LrMrrED oNE oF NoRTH AMERTCA'S unorv Ptagft 306eOf4l4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Finonciol Assets ond Liobilities
All finonciol ossets ond liobilities ore clossified into one of lhe
following five cotegories: heldlomoturity; loons ond receivobles;
held{or-troding; other liobilities; or ovoiloblefor-sole. Finonciol ossets
ond liobllities clossified os held{or-troding ore meosured ol foir volue.
All other finonciol ossets ond liobilities ore meosured ot omortized
cosl, excepl occounls receivoble ond omounts due from reloted
porties, which ore meosured ot the lower of cost or foir volue.
Accounts receivoble ond omounts due lrom reloled porties ore
clossified os loons ond receivobles. The Compony considers the
corrying omounts o[ occounts receivoble ond omounts due {rom
reloted porties to be reosonoble estimoles of [oir volue becouse o[ the
short time to moturity of lhese instrumenls. Provisions for impoired
occounts receivoble ore recognized os odjustments to the ollowonce
for doubilul occounls ond ore recognized when there is obiective
evidence thot the Compony will not be oble to collect omounts
occordlng to the originol terms. All [inonciol instrumenl tronsoctions
ore recorded ot trode dote.
Derivolive instruments ore meosured ot foir volue. Goins ond losses
from loir voluotion ore included within finoncing chorges in lhe period
in which they orise. The Compony determines the closslficotion o[ its
[inonciol ossets ond liobilities ot the dote o[ initiol recognition. The
Compony designotes certoin o[ its finonciol ossets ond liobililies lo be
held ot foir volue, when il is consistent with the Compony's risk
monogernent policy disclosed in Note l6 - Foir Volue of Finonciol
lnstruments ond Risk Monogement.
Derivotive lnstruments ond Hedge Accounting
The Compony closely monitors the risks ossocioted with chonges in
inleresl rotes on its operotions ond, where oppropriote, uses vorious
instrurnents to hedge lhese risks. Certoin of lhese derivolive instruments
quolify for hedge occounting ond ore designoled os occounting
hedges, while others either do not quolify os hedges or hove not
been designoted os hedges (hereinofter referred to os undesignoted
controcts) os they ore port of economic hedging relotionships.
The occounling guldonce for derivolive instrumenls requires the
recognition o[ oll derivolive inslruments not identified os meeting the
normol purchose ond sole exemptlon os eilher ossels or liobilities
recorded ot foir volue on the Consolidoted Bolonce Sheels. For
derivolive inskuments lhot quolify for hedge occounting, the Compony
moy elect to designote such derivollve instruments os either cosh flow
hedges or foir volue hedges. The Compony offsets foir volue omounls
recognized on its Consolidoted Bolonce Sheets reloted to derivotive
instruments execuled with the some counterporty under the some
moster netting ogreement.
For derivotive instruments thot quolify for hedge occounting ond which
ore designoted os cosh flow hedges, the effective portion o[ ony goin
or loss, net of fox, is reported os o component of occumuloted OCI
{AOCI) ond is reclossified to results of operotions in the some period
or periods during which the hedged tronsoction offects results of
operolions. Any goins or losses on lhe derivotive instrument thot
represent either hedge ineffectiveness or hedge components excluded
Irom the ossessment of effectiveness ore recognized in results of
operotions. For [oir volue hedges, chonges in [oir volue of both the
derivoiive instrument ond the underlying hedged exposure ore
recognized in the Consolidoted Stotements of Operotions ond
Comprehensive Income in the cunent period. The goin or loss on the
derivotive inslrumenl is included in the some line item os the offsetting
goin or loss on lhe hedged item in the Consolidoted Stotements of
Operolions ond Comprehensive lncome. The chonges in folr volue o[
the undesignoted derivotive inskuments ore reflected in results of
operotions.
Embedded derivolive instruments ore seporoted from their host
controcts ond ore corried ot [oir volue on the Consolidoted Bolonce
Sheets when: (o) the economic choroclerislics ond risks of the
embedded derivotive ore not cleorly ond closely reloted to the
economic chorocteristics ond risks o[ the host conlroct; (b) the hybrid
instrument is not meosured ot foir volue, with chonges in [oir volue
recognized in results of operotions eoch period; ond (c) the
embedded derivolive itself meets lhe definition o[ o derivotive. The
Compony does not engoge in derivotive troding or speculotive
octivities ond hod no embedded derivolives ot December 31 , 2016
or 2Ol 5.
Hydro One periodicolly develops hedging strotegies loking into
occount risk monogement obiecllves. At the inception of o hedging
relotionship where the Compony hos elected to opply hedge
occounting, Hydro One formolly documents the relotionship between
the hedged item ond the hedging lnskument, the reloled risk
monogernent objeclive, the noture o[ 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
instruments ore effective in offsetting chonges in [oir volues or cosh
flows of the hedged items.
Employee Future Benefits
Employee luture benefits provided by Hydro One include pension,
post-retirement ond post-employment benefits. The costs o[ the
Compony's pension, posl-retirement ond post-employment benelit
plons ore recorded over lhe periods during which employees render
service.
Appendirc6lo.lm$ Applipe0ionpoRT TSX: H Page307 of414
The Compony recognizes the funded stotus of its defined benelit
pension, post-retirement ond postemploymenl plons on ils
Consolidoted Bolonce Sheets ond subsequently recognizes fie
chonges in funded stotus ot the end of eoch reporting yeor. Dellned
benefit pension, post-relirement ond postemployment plons ore
considered to be underfunded when the proiected benefit obligotion
exceeds the foir volue of the plon ossets. Liobilities ore recognized on
the Consolidoted Bolonce Sheets lor ony net underfunded projected
benelit obligotion. The net underfunded proiected benefit obligotion
moy be disclosed os o cunenl liobility, long-lerm liobility, or both. The
current portion is lhe omount by which the octuoriol present volue o[
benefits included in the benefit obligotion poyoble in the next 'l 2
months exceeds the foir volue ol plon ossets. lf the foir volue of plon
ossets exceeds the proiected benefit obligotion o[ the plon, on osset
is recognized equol to the net overfunded prolected benefit
obligotion. The post-retirement ond postemployment benelit plons ore
unfunded becouse there ore no reloted plon ossets.
Hydro One recognizes its conkibutions to the defined contribution
pension plon os pension expense, wilh o portion being copitolized
os port of lobour costs included in copitol expenditures. The
expensed omounl is included in operotion, moinlenonce ond
odministrotion costs in the Consolidoted Stolements of 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 projected benefit method proroled on service ond ore
bosed on ossumplions thot reflect monogement's best eslimole of lhe
effect of future events, including future compensotion increoses. Posl
service costs from plon omendmenls ond oll octuoriol goins ond
losses ore omorlized on o stroight-line bosis over the expected
overoge remoining service period of octive employees in the plon,
ond over the estimoted remoining life expectoncy o[ inoctive
employees in the plon. Pension plon ossets, consisting primorily of
lisled equity securities os well os corporote ond government debt
securilies, ore foir volued ot the end of eoch yeor. Hydro One
records o regulotory osset equol to the net underfunded prolected
benefit obligotion for its pension plon.
PosFretirement ond Postcmployment Benefits
Post-retirement ond postemployment beneflts ore recorded ond
included in rotes on on occruol bosis. Costs ore determined by
independent octuories using the projected benefit method proroted on
service ond bosed on ossumptions thot reflect monogemenl's besl
estimotes. Post service costs from plon omendments ore omortized to
results of operotions bosed on the expected overoge remoining
service period.
For post-relirement benefits, oll octuoriol goins or losses ore de{ened
using the "corridor" opprooch. The omount colculoted obove the
"corridor" is omortized lo results of operotions on o skoight-line bosis
over the expected overoge remoining service life o[ octive employees
in the plon ond over the remoining life expectonry of inoctive
employees in the plon. The post-retirement 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 of the remeosurement odiustment.
For postemployment obligotions, the ossociofed regulotory liobilities
representing ocluoriol goins on lronsition to US GAAP ore omortized
lo results o[ operolions bosed on the "corridor" opprooch. The
octuoriol goins ond losses on postemployment obligotions thot ore
incurred during the yeor ore recognized immediotely to results of
operotions. The postemployment benefit obligotion is remeosured to
its foir volue ot eoch yeor end bosed on on onnuol octuoriol reporf,
with on offset to the ossocioted regulotory osset, to the extent of the
remeosurement odiustment.
All post-retirement ond postemployment fulure benefit costs ore
ottribuled to lobour ond ore either chorged to results of operotions or
copitolized os port of the cost of property, plont ond equipment ond
intongible ossets.
Stock-Bosed Compensotion
Shore Gront Plons
Hydro One rneosures shore gront plons bosed on foir volue of shore
gronts os estimoted bosed on the gront dote shore price. The cosls
ore recognized in the finonciol slotemenls using the grodedvesting
ottribulion method for shore gront plons thot hove both o perlormonce
condition ond o service condition. The Compony records o
regulotory osset equol to the occrued costs of 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 ossocioled with its Directors' DSU
Plon ol foir volue ot eoch reporting dote until sefllement, recognizing
compensotion expense over fhe vesting period on o stroight-line
bosis. The folr volue of the DSU liobility is bosed on the Compony's
common shore closing price ot the end of eoch reporting period.
Long{erm 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 lhey occur.
az70.>1
62
=oaOi,9fra
=om=za:>a4mI
3
Appendix 6 to Joint Application HyDRo oNE Lt*urED oNE oF NoRTH AMERtcA's ,o*ors, P&gft }rQffrOfSl 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss Contingencies
Hydro One is involved in cerloin legol ond environmentol motters lhot
orise in lhe normol course of business. In the preporolion ol its
Consolidoted Finonciol Stotements, monogement mokes iudgments
regording the future outcome o[ contingent events ond records o loss
for o conlingency bosed on its best estimote when it is determined
thot such loss is proboble ond the omount of lhe loss con be
reosonobly estimoted. Where the loss omount is recoveroble in future
roles, o regulolory osset is olso recorded. When o ronge estimote for
the proboble loss exists ond no omount within the ronge is o better
estimote thon ony olher omount, the Compony records o loss ot the
minimum omounl wilhin the ronge.
Monogement regulorly reviews currenl informolion ovoiloble to
determine whether recorded provisions should be odiusted ond
whether new provisions ore required. Estimoting proboble losses moy
require onolysis of multiple forecosts ond scenorios thot often depend
on judgments obout potenliol octions by lhird porties, such os federol,
provinciol ond locol courts or regulotors. Contingent liobilities ore
often resolved over long periods o[ time. Amounts recorded in the
Consolidoted Finonciol Stotements moy differ from the octuol oulcome
once the contingency is resolved. Such differences could hove o
moteriol lmpoct on luture results o[ operotions, finonciol position ond
cosh flows of the Compony.
Provisions ore bosed upon current eslimotes ond ore subiect to
greoter uncertoinl"y where the projeclion period is lengthy. A
signiflcont upword or downword trend in the number of cloims [iled,
the noture of the olleged iniuries, ond the overoge cost of resolving
eoch cloim could chonge the estimoted provision, os could ony
substontiol odverse or fovouroble verdict ot triol. A federol or
provinciol legislolive ouicome or skuciured settlement could olso
chonge the estimoted liobility. Legol fees ore expensed os incurred.
Environ mentol Liobilities
Environmentol liobilities ore recorded in respect of post contominotion
when il is determined thot future environmentol remediolion
expenditures ore proboble under existing stolute or regulolion ond the
omount of lhe future expenditures con be reosonobly eslimoted.
Hydro One records o llobility for the estimoted future expenditures
ossocioted with contominoted lond ossessment ond remediotion ond
for the phoseout ond destruction of polychlorinoted biphenyl (PCB)-
conlominoled 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 credilodiusted risk{ree interesl role on [inonciol instruments with
comporoble moturities to the pottern o[ future environmentol
expenditures. As the Compony onticipoles lhot the future expenditures
will continue to be recoveroble in future roles, on offsetting regulolory
osset hos been recorded to reflect lhe future recovery ol these
environmentol expendilures from cuslomers. Hydro One reviews its
estirnotes of future environmenlol expenditures onnuolly, or more
frequently if lhere ore indicotions thot circumstonces hove chonged.
Asset Retirement Obligotions
Assel retirement obligotions ore recorded for legol obligotions
ossocioted with the future removol ond disposol of longJived ossets.
Such obligotions moy resuh from the ocquisition, construclion,
development ond/or normol use of the osset. Conditionol osset
retirement obligotions ore recorded when there is o legol obligotion
to perform o future ossel retirement octivi! but where the timing ond/
or method of settlement ore conditionol on o fulure evenl thot moy or
moy nol be wilhin lhe control of the Compony. ln such o cose, the
obligotion to perform lhe osset reliremenl octivity is unconditionol
even though uncertointy exists obout the timing ond/or method of
settlemenl.
When recording on ossel relirement obligotion, the presenl volue o[
the estlmoted luture expenditures required to complele the ossel
retiremenl oclivity is recorded in lhe period in which the obligotion is
incurred, iI o reosonoble eslimote con be mode. In generol, the
present volue of the estimoted future expenditures is odded to the
corrying omount of the ossocioted osset ond the resulting osset
retirement cost is deprecioted over the estimoted useful life of the
osset. Where on ossel is no longer in service when on osset
retirement obligotion is recorded, lhe osset retirement cost is recorded
in results of operotions.
Some o[ the Compony's tronsmission ond dislribution ossets,
porticulorly lhose locoted on unowned eosemenls ond rightso[woy,
moy hove osset retirement obligotions, conditlonol or otherwise. The
mo jority of the Compony's eosements ond righlsof-woy ore either of
perpetuol durotion or ore outomoticolly renewed onnuolly. Lond rights
wilh finite lerms ore generolly subiect to exlension or renewol. As the
Compony expects to use the moiority of its focilities in perpetuity, no
osset retirement obligotions hqve been recorded for these ossets. l[, ot
some fulure dote, o porticulor focility is shown not to meel lhe
perpeluily ossumption, il will be reviewed to determine whether on
estimoble osset reliremenl obligotion exists. ln such o cose, on osset
retirement obligotion would be recorded ot thot time.
The Compony's osset reliremenl obligotions recorded to dote relote to
estimoted future expenditures ossocioled with the removol ond
disposol of osbesloscontoining moteriols instolled in some of its
focilities ond wlth the decommissioning o[ specific swilching stotions
locoled on unowned sites.
Appendir6le',lm€6 ApplipEtionpoRT TSX: H Page 309 of4l4
3. New Accounting Pronouncements
The following tobles present Accounting Stondords Updotes {ASUs) issued by the Finonciol Accounting Stondords Boord IFASBI thot ore opplicoble
to Hydro One:
Recently Adopted Accounting Guidonce
ASU Dote issued Description Effective dote lmpocl on Hydro One
2014-16 November
2014
This updote clorifies thot oll relevont terms ond Jonuory 1, 2016 No moteriol impoct upon odoption
feotures should be considered in evoluoting the
noture of o hosl conhoct for hybrid finonciol
insfruments issued in the form of o shore. The
noture of the host controct depends upon the
economic chorocteristics ond risks of the entire
hybrid f inonciol instrumenl.
20 'l 50 I Jonuory 201 5 Extroordinory ilems ore no longer required to be Jonuory 1 , 20 I 6 No moteriol impoct upon odoption
. presented seporotely in lhe income stolement.
20\ 5O2 Februory Guidonce on onolysls to be performed to Jonuory 1 , 2016 No moteriol impoct upon odoption
2015 delermine whefier certoin lypes of legol entities
should be consolidoted.
2015O3 April 2015 Debl issuonce costs 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
discounts or premiums.
Jonuory 1, 20,l6 Reclossificotion of deferred debt issuonce costs
ond net unomortized debt premiums os on offset
to longlerm debt. Applied rehospectively (see
note 15).
20,l 5O5 April 20 1 5 Cloud computing orrongements thot hove been Jonuory I , 20 I 6 No moteriol impocl upon odoption
ossessed lo contoin o softwore licence should
be occounted {or os internol-use softwore.
2015-16 September
201 5
Adiustments to provisionol omounb thol ore Jonuory 1 , 2016 No moteriol impoct upon odoption
identified during the meosuremenl period of o
business combinolion in he reporting period in
which the odfustment omount is delermined ore
required lo be recognized. The omount
recorded in currenl period eornings ore required
to be presented seporotely on the foce of the
income stotement or disclosed in the notes by
line item.
2015-17 November
20 r5
All deferred tox ossets ond liobilities ore
required to be clossified os noncurrent on the
bolonce sheet.
Jonuory 1 ,2017 lhis ASU wos eorly odopted os of April 1 ,
20 1 6 ond wos opplied prospectively. As o
result, the current portions of lhe Compony's
defened income lox ossets ore reclossified os
noncurrent ossets on the consolidoted Bolonce
Sheet. Prior periods were not retrospectively
odiusted (see note Z).
azzo.>q
6-.
E6aOi,2mo
=om=z9r>Aj mI
3
201 609 Morch 201 6 Severol ospects of the occounting for shor+
bosed poyment tronsoctions were simplilied,
including the income tox consequences,
clossificotion of owords os either equily or
liobilities, ond clossificotion on the stotement of
cosh flows.
Jonuory I , 201 7 This ASU wos eorly odopted os of October 'l
,
20,16 ond wos opplied rekospectively. As o
result, the Compony occounts for forfeitures os
lhey occur. There were no olher moteriol
impocts upon odoption.
Appendix 6 to Joint Application HyDRo oNE UtilrED oNE oF NoRTH AMERtcA's uncrsr P€Sft ffie rOf414
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently lssued Accounting Guidonce Not Yet Adopied
ASU Dote issued O"r.ripti." eff".W
201409
2015-14
2016-08
2016-10
2016-12
20)6-20
Moy 2014 -
December
2016
ASU 201 4-09 wos issued in Moy 201 4 ond
provides guidonce on revenue recognition
reloting to the lronsfer of promised goods or
services lo customers in on omounl thot reflects
the considerotion to whlch the entity expects lo
be entitled in exchonge for those goods ond
services. ASU 20,]5-,l4 defened the effective
dore o{ ASU 2014{9 by one yeor. Additionol
ASUs were issued in 201 6 thot simplify
tronsition ond provide clority on certoin ospects
of the new stondord.
Jonuory 1, 2018 Hydro One hos completed its inltiol ossessment
ond hos identified relevont revenue slreoms. No
quontitolive determinolion hos been mode os o
detoiled ossessmenl is now underwoy ond will
continue through to the third quorter ol 2O17,
with the end result being o determinotion of the
[inonciol impoct o[ this stondord. The Compony
is on trock for implementotion o{ this stondord by
the effective dote.
2016-0.1 Jonuory
20)6
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 presentotion of
finonciol ossets ond liobilities in the finonciol
stotemenls. This ASU olso simplifies the
impoirment ossessment of equity investments
without reodily determinoble foir volues by
requiring o quolilotive ossessment to identify
impoirment.
.lonuory 1, 20lB Under ossessment
2016{2 Februory
2016
Lessees ore required to recognize the rights ond lonuory 1 ,2019 An initiol ossessment is currenlly underwoy
obligotions resulting lrom operoting leoses os enconpossing o review of oll exisling leoses,
ossets (right to use the underlylng osset for the whlch will be followed by o detoiled review o[
term o{ the leose) ond liobilities {obligotion to relevont controcts. No quontltotive determinotion
moke future leose poyments) on the bolonce hos been mode ot this lime. The Compony is on
sheet. trock lor implementotion o[ this stondord by the
effective dote.
201605 Morch 20.1 6 The omendments clorify thot o chonge in the
counterporty to o derivotive instrument thot hos
been designoled os the hedging instrument
under Topic 815 does not, in ond of itself,
require dedesignotion of thol hedging
relotionship provided thot oll other hedge
occounting criterio conlinue to be mel.
Jonuory l, 2018 Underossessmenl
201 606 Morch 201 6 Contingent coll (put) options thot ore ossessed to Jonuory 1 , 2017 No moleriol impoct
occelerole the poyment of principol on debt
instrumenls need lo meet the criterio of being
"cleorly ond closely reloted" lo lheir debl hosts.
2Ol607 Morch 20,16 The requirement lo retrooclively odopt the equity Jonuory 1 ,2017 No moteriol impoct
method of occounling if on investment quolifies
for use of the equily method os o result of on
increose in the level of ownership or degree of
influence hos been eliminoted.
20 r 6-il Moy 2016 This omendment covers the SEC Stoff's Jonuory 1, 2019 No moteriol impoct
rescinding of cerloin SEC Stoff observer
comments thot ore codilied in Topic 605 ond
Topic 932, effective upon the odoption o[ Topic
606 ond Topic 815, effective to coincide with
the effective dote of Updote 2O14-16.
Appenr#r6tp.InrS Appliap.tionpoRT TSX: H Page 3l I of 414
ASU Dote issued Description Effective dote Anticipoted impoct on Hydro One
2016-13 June20I6 Theomendmentprovidesuserswithmore Jonuory I,20I9 Underossessment
decision-useful informotion obout the expected
credil losses on finonciol instruments ond other
commitments to extend credit held by o
ol eoch dote
20,1615 August2016 Theomendmentsprovideguidonceloreight .Jonuory 1,20i8 Underossessment
specific cosh flow issues with the obiective o[
reducing the existing diversity in proctice.
20 16-,l6 October
2016
The omendment eliminotes the prohibition of Jonuory 1 , 2018 Under ossessment
recognizing currenl ond defened income toxes
for on introenlily ossel tronsfer, other thon
inventory, until the osset hos been sold to on
outside porty. The omendment will permit
income tox consequences of such tronsfers to be
recognized when the tronsfer occurs.
2016-l B November
2016
The omendment requires thot reshicted cosh or Jonuory 1, 201 8 Under ossessmenl
restricted cosh equivolents be included with
cosh ond cosh equivolents when reconciling the
beginning ond endof-period bolonces in the
stotement of cosh flows.
2017Q1 Jonuory
2017
The omendment clorlfles 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 , 20,18 Under ossessrnent
4. Business Combinotions
Acquisition of Greot Lokes Power
On October 31 , 2016, Hydro One ocquired Greot Lokes Power, on
Ontorio reguloled eleciricity tronsmission business operoling olong the
eoslern shore of Loke Superior, north ond eost of Soult Ste. Morie,
Ontorio from Brookfield Infrostruclure Holdings lnc. The totol purchose
price for Greot Lokes Power wos opproximotely $376 million,
lmillions of dollors)
inciuding the ossumption of opproximotely $ 150 million in
oulstonding indebtedness. The following toble summorizes the
delerminolion o[ the finol foir volue of the ossets ocquired ond
liobilities ossumed:nzZO>=2fia2PoaOi,2fr@
=om=zar>@1mo
3
Cosh ond cosh equivolents
Properl'y, plont ond equipment
lntongible ossets
Regulotory ossels
Goodwill
Working copitol
Long-term debt
Pension ond postemployment benefit liobilities, net
De{erred income toxes
5
221
I
50
r59
l2t
(r 86)
(s)
226
Goodwill o{ opproximotely $ 159 million orising from the Greol Lokes
Power ocquisilion consists lorgely of the synergies ond economies of
scole expected from combining the operotions of Hydro One ond
Greot Lokes Power. Greot Lokes Power contributed revenues of
Appendix 6 to Joint Application HyDRo oNE UM|TED oNE oF NoRTH AMERICA'S Lo*ousr P€gft 3rtr?eOf41 4
NOTES TO CONSOTIDATED FINANCIAL STATEMENTS
$6 million ond less thon $l million of net income tothe Compony's
consolidoted finonciol resuhs for the yeor ended December 3l ,
2016. All costs reloted to the ocquisilion hove been expensed
through the Consolidoted Stotements o[ Operotlons ond
Comprehensive Income. Greot Lokes Power's finonciol informolion is
not moteriol to the Compony's consolidoted finonciol resulls for the
yeor ended December 3 I , 20 I 6 ond therefore, hos not been
disclosed on o pro formo bosis. On Jonuory 16, 2017 , the nome of
Greot Lokes Power wos chonged to Hydro One Soult Ste. Morie LP.
Agreement to Purchose Orillio Power
On August 15, 2016, the Compony reoched on ogreement to
ocquire Orillio Power Distribution Corporotion (Orillio Power), on
electricity distribution compony locoted in Simcoe County, Ontorio,
from the City of Orillio for opproximotely $4,I million, including the
ossumption of opproximotely $ l5 million in outstonding indebtedness
ond regulotory liobililies, subiect to closing odjustments. The
ocquisition is subject to regulotory opprovol by the OEB.
Acquisilion of Woodstock Hydro
On Oclober 3 I , 20,1 5, Hydro One ocquired Woodstock Hydro
Holdings lnc. (Woodstock Hydro), on electricity distribution compony
locoted in southwestern Ontorio. The totol purchose price for
Woodstock Hydro wos opproximotely $32 million. The purchose
(millions of dollors)
price wos finolized ond the Compony mode the flnol purchose price
poyment ol $3 million in 2016. The following toble summorizes the
determinotion o[ the foir volue of the ossets ocquired ond liobilities
ossumed:
Working copitol
Property, plont ond equipmenl
Intongible ossets
Deferred income tox ossets
Goodwill
Long-term debt
Derivolive instruments
Post-retirement ond postemploymenl bene[it liobility
Regulotory liobilities
Other long-tern liobilities
4
27
I
2
22
t17l
(3)
(r)
(l)
t2t
32
Goodwill of opproximotely $22 million orising {rom the Woodslock
Hydro ocquisition consists lorgely o[ lhe synergies ond economies ol
scole expected from combining the operotions o[ Hydro One ond
Woodstock Hydro. All of the goodwill wos ossigned to Hydro One's
Diskibution Business segment. Woodstock Hydro conlributed
revenues of $ l2 million ond net income of $2 million to the
Compony's consolidoted finonciol resuhs for the yeor ended
December 31, 2015. All costs reloted to the ocquisilion hove been
expensed through the Consolidoted Stotemenls of Operolions ond
Comprehensive lncome. Woodstock Hydro's linonciol in{ormolion is
not moteriol to the Compony's consolidoted finonciol results for the
yeor ended December 3 I , 201 5 ond therefore, hos not been
disclosed on o pro formo bosis.
Acquisition of Holdimond Hydro
On June 30, 20 1 5, Hydro One ocquired Holdimond Counly Utililies
lnc. {Holdimond Hydro), on electricity distribution cornpony locoted ln
soulhwestern Ontorio. The totol purchose price for Holdimond Hydro
lmillions of dollors)
wos opproximotely $23 million. The purchose price wos finolized in
20 16. The lollowing toble summorizes the determlnolion o[ the foir
volue of the ossets ocquired ond liobilities ossumed:
Cosh ond cosh equivolents
Working copitol
Property, plont ond equipmenl
Deferred income tox ossets
Goodwill
Long-term debt
Regulotory liobilities
3
5
52
,|
33
(18)
(3)
73
Appenr#rc6tn rJnus Applip'a.liompoR, TSX: H Page 313 of414
Goodwill of opproximotely $33 million orislng from the Holdimond
Hydro ocquisition consists lorgely o[ lhe synergies ond economies of
scole expected from combining the operotions of Hydro One ond
Holdimond Hydro. All of the goodwill wos ossigned to Hydro One's
Distribution Business segmenl. Holdimond Hydro contributed revenues
of $32 million ond net income of $6 million to lhe Compony's
consolidoted finonciol results for the yeor ended December 3l ,
20,l5. All costs reloted to the ocquisition hove been expensed
through the Consolidoted Stotements ol Operotions ond
Comprehensive Income. Holdimond Hydro's finonciol informotion is
not moteriol to the Compony's consolidoted finonciol results for the
yeor ended December 3 I , 20 1 5 ond therefore, hos not been
disclosed on o pro formo bosis.
Hydro One Brompton Spin-off
On August 3 I , 201 5, Hydro One completed the spinoff of its
subsidiory, Hydro One Brompton. The spinoff wos occounted os o
non-monetory, nonreciprocol tronsfer with the Province, bosed on its
corrying volues ot August 3 I , 20.1 5. Tronsoctions thot immed iotely
preceded the spin-off os well os the spinoff were os follows:
. Hydro One subscribed for 352 common shores o[ 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-kind; ond oll of the long-term
intercompony debt in oggregote principol omount of $ lg3 million
plus occrued interest of $3 million owed by Hydro One Brompton
to Hydro One os o return of stoted copltol o[ $196 million on its
common shores.
2015
As o result of the spinoff, goodwill reloted to Hydro One Bromplon of $60 million wos eliminoted from the Consolidoted Bolonce Sheet.
5. Depreciotion And Amortizotion
Yeor ended December 3 I
lmillions of dollors)201 6
Deprecioiion of property, plont ond equipment
Asset removol costs
Amortizotion of intongible ossets
Amortizotion of regulotory ossets
612
90
56
20
595
9l
54
t9
778 759
6. Finoncing Chorges
Yeor ended December 3l
lnillions of dollors)2016 20r5
lnterest on long-term debt
Interest on short-term notes
Other
Less: Interest copitolized on conslruction ond development in progress
Interest eorned on inveslmenls
424
9
l6
(54)
t2t
4)7
2
14
ls2)
(3)
azzo>r
6-.
EdaOi9ma
=om=zar>a1mI
3
Goin on interesl-rote swo
393 376
Appendix 6 to Joint Application HYDRO ONE Lt'ntrED oNE oF NoRTH AMERtcA',s unorsr P€88 3rlL4rOf414
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. lncome Toxes
lncome toxes ,/ provision for PlLs differs from the omount thot would hove been recorded using the combined Conodion {ederol ond Ontorio
stolutory income tox rote. The reconciliotion between the stotutory ond the effective tox roles is provided os follows:
Yeor ended December 3l
(nillions o{ dollors) 2016 2015
Income toxes ,/ provision for PlLs ot stotutory role
Increose (decreose) resulting from:
Net temporory differences recoveroble in future roles chorged lo cuslomers:
Copitol cost ollowonce in excess of depreciotion ond omortizotion
Pension contribulions in excess o[ pension expense
Overheods copitolized for occounting but deducted for tox purposes
lnterest copitolized for occounting but deducted for tox purposes
Envlronmentol expend itures
Other
235 217
(s3)
(16)
(t 6)
(14)
(s)
5
l37j
125l
(t 5)
(t 3)
(5)
(6)
Net tem porory d ifferences
Net tox benefit resuhing from tronsition lrom PlLs Regime lo Federol Tox Regime
Hydro One Brompton spin-off
Net perlonert differences
(ee)(r0r )
(te)
7
I3
Tolol incolre toxes / provision for PlLs 139 r05
The moior components of income tox expense ore os follows:
Yeor ended December 3l
lmillions of dollors)2016 20r5
Current income toxes ,/ provision for PlLs
Deferred income toxes ,/ provision for (recovery o[) PlLs
25
114
) ala
12,B44l
Totol income toxes ,/ provision for PlLs r39 105
Effective income tox role 15.7%)2.8%
The provision for current income toxes / PlLs is remitted to the CRA
(Federol Tox Regime) ond the OEFC (PlLs Regime). At December 3 l,
2016, $14 million {2015 - $l million} receivoble from the CRAwos
included in other current ossets ond $6 million (2015 - $12 millionl
receivoble from the OEFC wos included in due from reloted porlies
on the Consolidoled Bolonce Sheet.
ln conneclion with the IPO in 2015, Hydro One's exemption from tox
under the Federol Tox Regime ceosed to opply. Under the PlLs
Regime, Hydro One wos deemed lo hove disposed o[ its ossets
immediotely be{ore it lost its tox exempt stotus under the Federol Tox
Regime, resuhing ln Hydro One moking poyments in lieu o[ tox
(Deporture Tox) totolling $2.6 billion. To enoble Hydro One to moke
the Deporlure Tox poyment, the Province subscribed for common
shores o{ Hydro One for $2.6 bilhon in 2Ol5 (see note 21). Hydro
One used the proceeds of this shore subscription to poy the
Deporture Tox.
The 20l5 totol income toxes,/ provision for PlLs included o current
provision of $2,600 million ond o deferred recovery o[
$2,BlO million resuhing from the tronsition from the PlLs Regime to lhe
Federol Tox Regime. The defened recovery wos not included in the
rotesetting process. Deferred income tox bolonces expected lo be
included in the rofe-setting process ore offset by regulotory ossets ond
liobilities to reflect the onticipoted recovery or disposition o[ these
bolonces within future electricil.y rotes.
Appentiir6te.InrHS ApplirqnlionpoRT TSX: H Page 31 5 of 414
Deferred lncome Tox Assets ond Liobilities
Deferred income tox ossets ond liobilities orise from differences between the corrying omounts ond tox bosis o{ the Compony's ossets ond
liobilities. At December 3l , 2016 ond 2015, deiened income tox ossets ond liobilities consisted of the following:
Decenber 3l
(millions of dollorsl 2016
Deferred income tox ossets
Depreciotion ond omorlizotion in excess o[ copitol cost ollowonce
Non-deprecioble copitol properl'y
Post-retiremenf ond postemployment benefits expense in excess of cosh poyments
Envi ronmentol expenditures
Non-copilol losses
lnvestment in subsidiories
Other
201 5
495
271
607
74
213
75
30
937
271
578
7\
62
55
t0
Less: voluotion ollowonce
1,765
(3s2)
1,988
(333)
Totol delerred income tox ossels
Less: currerl porlion
1,413 r,655
t9
1,413 1,636
December 3 I
lmillions of dollors)2016 201 5
Deferred income tox liobilifies
Regulotory omounts thot ore not recognized for lox purposes
Goodwill
Copitol cost ollowonce in excess of depreciolion ond omortizotion
Other
(r 53)
(10)
164l
(t I l
(153)
(t0)
142)
t2t
Totol defened income tox liobilities
Less: current portion
(238)l2o7l
(238)\207)
Net deferred income tox ossets 1,175 1,448
The net defened income lox ossets ore presented on the Consolidoted Bolonce Sheets os follows:
hcember 3l
lnillions of dollorsl 2016 201 5
Current:
Other current ossets
Longlerm:
Delerred income tox ossets
Deferred income tox liobililies
1,235
(60)
19
r,636
t2o7)
azzo>:1
62Po6Oi,9ma
=oME:zar>a4m(f
3
Nel de{erred income tox ossels 1,175 1,448
Appendix 6 to Joint Application HyDRo oNE L, trED oNE oF NoRTH AMERtcA's ,o*crs, PAge &[6rgf4l 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The voluotion ollowonce for defened tox ossels os ot December 3l
201 6 wos $352 million (20I 5 - $333 million). The voluotion
ollowonce primorily relotes to temporory differences lor
nondeprecioble ossets ond investments in subsidiories. As of
Yeor of expiry
lmillions of dollors)
December 31 , 2016, the Compony hod non-copilol losses corried
forword ovoiloble to reduce future yeors' toxoble income, which
expire os follows:
2016 20 r5
2434
2435
2436
2
222
s80
2
232
Totol losses 804 234
8. Accounts Receivoble
December 3 I
(millions of dollors)2016 201 5
Accounts receivoble - billed
Accounts receivoble - unbilled
431
442
379
458
Accounts receivoble, gross
Allowonce lor doubtful occounts
873 837
Accounts receivoble, net B3B
The following toble shows the movements in the ollowonce for doubtful occounts for the yeors ended December 3l , 20,)6 ond 2Ol5
Yeor ended December 3l
lnillions of dollors) 2016
Allowonce for doubtful occounts -Jonuory 1
Writeoffs
Additions to ollowonce for doubtful occounts
776
201 5
(61)
37
(66)
37
t32\ll
Allowonce for doubtful occounls - December 3l {35)(6rI
9. Other Current Assets
December 3l
lmillions of dollors)201 6 20 r5
Regulotory ossets /Note l2i
Moteriols ond supplies
Deferred income tox ossets /Notes 3, Zi
Prepoid expenses ond other ossets
37
t9
36
21
t9
2946
102 r05
Appen,#rc6ro JfilS Appl,ipE$ionpoRT TSX; H Page 317 of414
t61l
10. Property, Plont And Equipment
December 31, 2016
(millions of dollors)
Property, Plont
ond Equipment
Accumuloted
Depreciotion
Construction
in Progress Totol
Tronsmission
Distribution
Communicotion
Administrotion ond service
Eosements
14,692
9,656
1,233
1,632
628
910
243
20
6l
10,740
6,594
476
769
561
4,862
3,305
777
924
67
27,841 9,935 1,234 19,140
December 31, 2Ol5
(millions of dollors)
Property, Plont
ond Equipment
Accumuloted
Depreciolion
Construction
in Progress Totol
Tronsmission
Distribution
Communicotion
Adminiskotion ond servlce
Eosemenls
\3,704
9,205
1,165
1,531
622
853
238
2B
36
9,936
6,266
489
719
558
4,621
3,177
704
B4B
64
26,227 9,414 I ,155 17,968
Finoncing chorges copitolized on property, plont ond equipment under construction were $52 million in 201 6 (201 5 - $50 million)
ll.lntongibleAssets
December 31, 2Ol6
(millions of dollors)
lntongible
Assets
Accumuloted
Amortizolion
Development
in Progress Tolol
Computer opplicotions softwore
Other
621
5
326
4
348
I
53
626 330 53 349
December 31,2015
(millions of dollors)
lntongible
Assets
Accumuloted
Amortizotion
Development
in Prooress Totol
Computer opplicotions sofh^r'ore
Other
579 270
4
24 333
7 3
586 274 24
Finoncing chorges copitolized to intongible ossets under development were $2 milllon in 2016,2015 - $l million). The estimoled onnuol
omortizotion expense for intongible ossets is os follows: 20 17 - $54 million; 20,] 8 - $54 million; 20,l9 - $45 million; 2O2O - $2T nillion;
ond 2021 - $26 million.
336
=zzo.>+
6-.
E6oO\2fra
=om=Z9;rmg
3
Appendix 6 to Joint Application HyDRo oNE uiilrED oNE or NoRTH AMERtcA's rorces, PAge &lLffrOf4la
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Regulotory Assets And Liobilities
Regulotory ossets ond liobilities orise os o result ol the rotesetting process. Hydro One hos recorded the lollowing regulotory ossets ond liobilities:
Decenber 3 I
(nillions of dollors) 2016 2015
Regulobry ossets:
Defened income lox regulotory osset
Pension benefit regulotory osset
Post-retirement ond postemployment benefits
Environmentol
Retoil settlement vorionce occounl
Debt premium
Shorebosed compensotion
Distribution system code exemption
2015'2017 rote rider
B2M LP stort-up costs
Penslon cost vorionce
Other
1,587
900
243
204
145
32
31
t0
7
5
4
14
1,445
952
240
207r0
r0
r0
20
B
37
12
Tolo regulotory ossets
Less: current porlion
3,182
37
3,05 r
36
Regulotory liobilities:
Green Energy expenditure vorionce
Externol revenue vorionce
CDM deferrol vorionce
Deferred income tox regulotory liobllity
Other
76
87
53
23
l6
69
64
54
4
I8
Tolo regu otory liobilities
Less: currenl porlion
209 255
t9
209 236
Deferred lncome Tox Regulotory Asset ond
Liobility
Deferred income toxes ore recognized on temporory differences
between the corrying omount o[ ossets ond liobilities in lhe finonciol
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 loxes thol flow
through the rotesetting process. In the obsence o{ rolereguloted
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 through
future rotes. As o result, the 20l6 income tox expense would hove
been higher byopproximotely $ l04 million (20.15 - $lOl million).
Pension Benefit Regulotory Asset
ln occordonce with OEB rote orders, pension costs ore recovered on
o cosh bosis os employer contributions ore poid to the pension fund
in occordonce wilh the Penslon Benefits Acf (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 benefit costs
will be recovered in the future through the rotesetting process. The
pension beneflt 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 of the remeosurement
odiuslmenl. In the obsence o[ rotereguloted occounting, 20,16 OCI
would hove been higher by $52 million (20,)5 - $284 million).
Post-Reti rement o nd Post-E m ployment Benef its
The Compony recognizes the net unfunded stotus of post-retirement
ond post-employment obligotions on lhe Consolidoted Bolonce
Sheets with on incrementol offset to the ossocioted regulotory ossets.
A regulotory ossel is recognized becouse monogement considers it lo
ABpenr#r6le.Jnift ApplioEtionpoRT TSX: H Page 319 of4l4
3,145 3,015
be proboble thol post-retirement ond postemployment benefit costs
will be recovered in the future through the rotqsetting process. The
post-relirement ond post-employment benefit obligotion is remeosured
to its foir volue ot eoch yeor end bosed on on onnuol octuoriol
report, with on offset to lhe ossocioted regulotory osset, lo fie exlent
of the remeosurement odiustment. ln the obsence o[ rotereguloted
occounting, 20 I 6 OCI would hove been lower by $3 million (201 5
- higher by $33 milhon).
Environmentol
Hydro One records o llobiliry for the estimoted fulure expenditures
required to remediote environmenlol contominotion. Becouse such
expendibres ore expected to be recoveroble in future rotes, the
Compony hos recorded on equivolent omount os o regulotory osset.
ln 20.l6, the environmentol regulotory osset decreosed by $ 1 million
(20.l 5 - $24 millionl to reflect reloted chonges in the Compony's
PCB liobiliry, ond increosed by $lO million (20,l5 - $l million) due
to chonges in the lond ossessment ond remediolion liobiliry. The
environmenlol regulotory osset is omorlized to results of operolions
bosed on the pottern of octuol expenditures incurred ond chorged to
environmentol liobilities. The OEB hos the discretion lo exomine ond
ossess the prudency ond the timing of recovery of oll of Hydro One's
octuol environmentol expenditures. ln the obsence of rote-reguloted
occounting, 201 6 operotion, mointenonce ond odminishotion
expenses would hove been higher by $9 million {201 5 - lower by
$23 million). ln oddition, 20,l6 omortizotion expense would hove
been lower by $20 mlllion (201 5 - $ l9 million), ond 2016
finoncing chorges would hove been higher by $B million (2015 -
$ lO millionl.
Retoil Settlement Vorionce Account (RSVA)
Hydro One hos deferred certoin retoil settlemenl vorionce omounls
under the provisions of Artlcle 490 of the OEB's Accounting
Procedures Hondbook. ln Morch 201 5, the OEB opproved the
disposition of the totol RSVA bolonce occumuloted lrom Jonuory
2012 to December 20 13, including occrued interest, lo be
recovered through the 2O15'2017 Rote Rider.
Debt Premium
The volue o{ debt ossumed in the ocquisition of Greot Lokes Power
hos been recorded ot foir 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 osset hos
been recorded for the difference between the foir volue ond foce
volue of this debt. The debt premium is recovered over the remoining
term ol the debt {see note 15).
Shore-bosed Compensotion
The Compony recognizes costs ossocioted with shore gront plons in
o regulotory osset os monogement considers it proboble thot shore
gront plons costs will be recovered in the future through the rote
setting process. In fie obsence of rotereguloted occounting, 2016
operotion, mointenonce ond odministrotion expenses would hove
been higher by $9 mlllion 12015 - $5 million).
Distribution System Code (DSC) Exemption
lnlune 2010, Hydro One Networks filed on opplicotion 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 thol were
olreody connected or thot hod received o connection impoct
ossessment prior to October 21 ,2009. The opplicotion sought
opprovol to record ond defer the unonticipoted costs incurred by
Hydro One Nefworks thot resulted lrom the connection of certoin
renewoble generotion focilities. The OEB ruled thot identified specific
expenditures con be recorded in o defenol occount subiect to the
OEB's review in subsequent Hydro One Network distribution
opplicotions. ln Morch 2015, the OEB opproved the disposition o[
the DSC exemption deferrol occount ot December 3 1 , 20 I 3,
including occrued interest, which is being recovered through the
20,l5 2017 Rote Rider. In oddition, the OEB olso opproved Hydro
One's requesl to discontinue this deferrol occounl. There were no
odditions to this regulotory occount in 20 I 5 or 20 I 6.
2015-2017 Rote Rider
ln Morch 2015, os port of its decision on Hydro One Networks'
distribution rote opplicotion Ior 2015-2019, the OEB opproved the
disposition o[ certoin defenol ond vorionce occounls, including
RSVAs ond occrued interest. The 20'l 5-20,l7 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-month period ending on December 31 , 2017.
B2M LP Stortup Costs
In December 20,15, OEB issued its decision on B2M LP's opplicotlon
for 2Ol5-2019 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 fouryeor period which begon in 2016, in
occordonce with the OEB decision.
Pension Cosl Vorionce
A pension cosl vorionce occount wos estoblished for Hydro One
Networks' tronsmission ond distribution businesses to trock the
difference between the oduol pension expenses incurred ond
=zzo>1
6-.
E6aOi,9fr(u
=om=zad\fiU
3
Appendix 6 to Joint Application HyDRo oNE LrMrrED oNE oF NoRTH AMERTCA'S Lnncesr #eagft O?+fregf A14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimoted pension cosls opproved by the OEB. The bolonce in this
regulotory occount rellects the excess of pension costs poid os
compored to OEBopproved omounts. ln Morch 2015, the OEB
opproved the disposition of the distribution business portion of the
totol pension cost vorionce occount ot December 3.1, 20,1 3,
including occrued interesi, which is being recovered through the
2015'2017 Rote Rider. In the obsence of rote-reguloted occounting,
20,l6 revenue would hove been higher by $25 million {2015 -
lower by $6 millionI
Green Energy Expenditure Vorionce
ln April 20 1 0, the OEB requested the estoblishment of defenol
occounts which copture the difference between the revenue recorded
on the bosis of Green Energy Plon expenditures incurred ond lhe
octuol recoveries received.
Exiernol Revenue Vorionce
In Moy 2009, the OEB opproved forecosted omounts reloted to
export service revenue, externol revenue from secondory lond use,
ond externol revenue from slotion mointenonce ond engineering ond
construclion work. In Novem\er 2012, the OEB ogoin opproved
.l3. Accounts Poyoble ond Other Current Liobilities
December 3 I
(millions of dollors)
Iorecosted omounts reloted to lhese revenue cotegories ond extended
the scope to encomposs oll other externol revenues. The externol
revenue vorionce occount bolonce reflects the excess of octuol
exlernol revenues compored to the OEBopproved forecosted
omounts.
CDM Deferrol Vorionce Account
As port of Hydro One Networks' opplicotion for 20,1 3 ond 2014
tronsmission rotes, Hydro One ogreed to estoblish o new regulotory
defenol vorionce occount lo trock the impoct of octuol Conservotion
ond Demond Monogement (CDMI ond demond response resulh on
the lood forecost compored to the estimoted lood forecost included in
the revenue requirement. The bolonce in the CDM deferrol vorionce
occount relotes lo the octuol 20 I 3 ond 20,1 4 CDM compored to the
omounts included in 20 I 3 ond 20,1 4 revenue requirements,
respectively. There were no odditions to this regulotory occount in
2016.
2016 20r5
Accounts poyoble
Accrued liobilities
Accrued inlerest
Regulotory liobilities (Note l2)
t8r
659
r05
r55
598
96
l9
945 868
14. Other Long-Term Liobilities
Decembr 3l
lmillions of dollors)2016 201 5
Post-retirement ond post-employment benefll liobiliry /Note l8l
Pension benefit liobiliry lNote l81
Environmentol liobilities (Note I 9)
Asset retirement obligotions lNote 20)
Long-term occounts poyoble ond other liobilities
1,641
900
177
9
25
r,560
t85
9
17
Appendirc6ln r,lnrS Applip,a6ionpoRT TSX: H
2,752
Page321 of4l4
2,723
.l5. Debt ond Credit Agreements
Short-Term Notes ond Credit Focilities
Hydro One meets its shorl-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 o{ $ I .5 billion. These shortlerm 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 1 5, 2016, Hydro One lnc. terminoted its $ I .5 billion
revolving stondby credit focility moturing inJune 2020 ond its
$800 million threeyeor senior, revolving term credit focllity moturing
in October 2018 (colleclively Prlor Credit Focilitiesl. On the some
dote, Hydro One lnc. entered into o new credit ogreement for o
$2.3 billion revolving credit focility moturing inJune 202,1 (New
Credit Fociliry). The New Credit Focility ronks equolly with ony
existing ond future senior debt of Hydro One lnc., ond hos customory
covenonts substontiolly similor to lhe covenonts under the Prior Credit
Focilities. ln oddition, on November 7, 2016, the moturity doie 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:
lmillions of dollors) l&tu1ry 4q
Hydro One lnc.
Revolving stondby credit focility
Hydro One
Fiveyeor senior, revolving term credit {ocility
)une 2021
November 202 I
2,300
250
Totol 2,550
The Compony moy use the credit focilities for working copitol ond
generol corporote purposes. lf used, interest on the credit focilities
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 thot no evenl o[ defoult hos
occurred or would result lrom such credit exlension.
Appendix 6 to Joint Application
Long-Term Debt
At December 3 I , 201 6, $ I 0,523 million long-term debt wos issued
by Hydro One lnc. under Hydro One Inc.'s Medium-Term Note
(MTN| Progrom. The moximum outhorized principol omount of notes
issuoble under lhe cunenl MTN Progrom prospectus filed in
December 20.l5 is $3.5 billion. At December 3i, 20i6,
$ i .2 billion remoined ovoiloble for issuonce untilJonuory 20,1 B. ln
oddition, ot December 31, 20,l6, the Compony hod long-term debt
of $ I 84 million ossumed os port of the Greot Lokes Power
ocquisition.
HyDRo oNE uMtrED oNE oF NoRTH AMERtcA,s Lancrsr P€&ft 0frA$f Al4
=zzo_>r
6-.
E6aOrr\>Y1Zfia
=om=zor>q1mI
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following loble presents outstonding long-term debt ot December 3 I , 20.l 6 ond 20 'l 5
December 3l
lmillions of dollors)2016 201 5
4.64% Series I 0 notes due 20,l 6
Flooting-rote Series 27 notes due 2016r
5.18% Series l 3 notes due 2017
2.78%Series 2B notes due 20l8
Fiooling-rote Series 3l notes due 20l9l
I .48% Series 37 notes due 20.l92
4.40% Series 20 noles due 2O2O
i.62% Series 33 notes due 20202
I.84% Series 34 notes due 2021
3.20% Series 25 notes due 2022
2.77% Series 35 notes doe 2026
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 l2 notes due 2037
6.03% Series IZ notes due 2039
5.49% Series l8 notes due 2O4O
4.39% Series 23 notes due 2O4l
6.59% Series 5 notes due 2043
4.59% Series 29 notes due 2043
4.17% Series 32 notes due 2044
5.00% Series I I notes due 2046
3 .9I % Series 36 notes due 2046
3 .72% Series 3 8 notes doe 2047
4.00% Series 24 notes due 205 I
3.79% Series 26 notes due 2062
4.29% Series 30 notes due 2064
6o;
750
228
s00
300
350
s00
600
500
400
s00
38s
600
400
300
500
300
315
435
3s0
325
350
450
225
3r0
50
450
50
600
750
228
300
350
400
500
385
600
400
300
s00
300
3r5
435
350
325
tl)
310
50
600
Hydro One lnc. long-term det r 0,523 8,723
6.6% Senior Secured Bonds due 2023 {Foce volue - $ I I 2 mlllion)
4.6% Note Poyoble due 2023 (Foce volue - $36 million)
144
40
Greot Lokes Power lorgterm debt 184
10,707 8,723
Add: Net unomortized debt premiums3
Add: Unreolized mork-io.morket loss (goin)2
Less: Deferred debt issuonce costs3
15
l2l
(40)
17
(34)
Totol long-term debt i 0,680 8,707
I The interesl rotes of the flooting-rote notes ore referenced to the 3month Conodion dollor bonkers'occeptonce rote, plus o morgin.
2 The unreollzed mork-to-morket net goin relotes lo $50 million o[ the Series 33 notes due 2020 ond $500 million Series 37 notes due 201 9 (20I 5 - loss
relotesto$50millionof theSeries33notesdue2020). Iheunreolizedmork-lomorketnetgoinisoffsetbyo$2million(20,l5-$l million) unreolized
mork-tomorket net loss (2015 - goinl on the reloted fixed-teflooting interesl-role swop ogreements, which ore occounted for os [oir volue hedges. See note
I 6 - Foir Volue of Finonciol lnstruments ond Risk Monogement for detoils of {oir volue hedges.
3 Effective Jonuory I , 20l, 6, defered debt issuonce costs ond net unomortized debt premiums were reclossified from other longJerm ossets ond other long-term
liobilities, respectively, os on offset to long-term debt upon odoption of ASU 20 I 5-03 (see note 3). Bolonces os ot December 3 I , 20 I 5 were updoted to
reflect the retrospective odoplion of ASU 20 1 5-03.
ABpen,#r6fp.Jnns ApplienlionpoRT TSX: H Page 323 of 414
The totol long-lerm debt is presenled 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 Iiobilities:
Long-term debl
602
10,078
500
8,207
Totol long-term debt r 0,680 8,707
ln 20,l 6, Hydro One issued $2,300 million (201 5 - $350 million; o[ long-term debt under the MTN Progrom, ond repoid $502 million (201 5 -
$550 million) of totol long+erm debt.
Principol repoyments ond reloted weighted overoge inlerest rotes ore summorized by the number of yeors to moturily in the following toble:
Long{erm Debt Weighted Averoge
Principol Repoyments lnlerest Rote
(millions of dollors) (7")Yeors to Moturity
1 yeor
2 yeors
3 yeors
4 yeors
5 yeors
602
753
731
653
503
5.2
2.8
1.4
2.9
1.9
6 - l0 yeors
Over 1O yeors
3,242
1,234
6,195
2.8
3.3
5.2
10,671 4.3
Inlerest poyment obligotions reloted to long-lerm debt ore summorized by yeor in the following toble:
Yeor
lnterest Poyments
(millions of dollors)
2017
20r I
2019
2020
2021
456
425
402
384
370
azzo>r
6-.EdaO
r,9fr(u
=om=z0r>
mI
3
2022-2026
2027+
2,O37
1703
4,405
8,1 45
I 6. Foir Volue of Finonciol lnstruments ond Risk
Monogement
Foir volue is considered to be the exchonge price in on orderly
konsoction beMeen morkel porticiponts to sell on osset or lronsfer o
liobility ot the meosurement dote. The foir volue definition 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 clossi{ies its foir volue meosurements bosed on the
following hierorchy, os prescribed by the occounting guidonce for
foir volue, which prioritizes the inputs to voluolion lechniques used to
meosure [oir volue into three levels:
Level 1 inputs ore unodlusted quoted prices in octive morkets for
identicol ossets or liobilities thot Hydro One hos the obility to occess.
Appendix 6 to Joint Application HyDRo oNE UiUTED oNE oF NoRTH AMERtcA',s Lenoesr rP€sE ofrAtrgf Al4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An octive morket for the osset or liobiliry is one in which tronsoctions
for lhe osset or liobility occur with sufficienl frequency ond volume lo
provide ongoing pricing inlormotion.
Level 2 inputs ore those other thon quoted morket prices thot ore
observoble, either directly or indirectly, for on osset or liobility.
Level 2 inputs include, but ore not limited to, quoted prices for similor
ossels or liobilities in on octive morket, quoted prices for identicol or
similor ossels or liobilities in morkels thot ore nol octive ond inpuls
olher thon quoted morket prices thot ore observoble {or the osset or
liobiliry, such os interest-rote curves ond yield curves observoble ot
commonly quoted intervols, volotilities, credit risk ond defoult roles. A
Level 2 meosurement connot hove more thon on insignificonl portion
of the voluotion bosed on unobservoble inputs.
Level 3 inputs ore ony foir volue meosurements thot include
unobservoble inputs for the osset or liobility for more thon on
insigni{icont portion o[ the voluotion. A Level 3 meosuremenl moy be
bosed primorily on Level 2 inputs.
Non-Derivotive Finonciol Asseis ond Liobilities
At December 3 I , 201 6 ond 20,1 5, the Compony's corrying
omounls o[ cosh ond cosh equivolents, occounls receivoble, due from
reloted porties, shortlerm notes poyoble, occounts poyoble, ond due
to reloted porties ore representolive of foir volue becouse of the short-
term nolure of these inslrurrents.
2At 5
Foir Vo ue
Foir Volue Meosurements of Long-Term Debt
The foir volues ond corrying volues of the Compony's longlerm debt ot December 31, 20l6 ond 2015 ore os follows:
December 3t 2016 2016 2Ol5
lmillions of dollors/ Corrying Volue Foir Volue Corrying Volue
Long-term debl
$50 million of MTN Series 33 notes
$500 million of MTN Series 37 notes
Other notes ond debentures
50
498
r0,r32
50
498
11 ,462
5l
8,656
5l
9,942
r 0,680 12,010 8,707 9,993
Foir Volue Meosurements of Derivotive
lnstruments
At December 31 , 2O16, Hydro One lnc. hod interest-rote swops in
lhe omount of $550 million (20I 5 - $50 millionl thot wos used to
conveil fixed-rote debt to flooting-rote debt. These swops ore
clossified os o foir volue hedges. Hydro One Inc.'s foir volue hedge
exposure wos equol to obout 5% l2}l 5 - 1%l ol its totol longlerm
debt. At December 3 I , 201 6, Hydro One Inc. hod the follow;ng
inleresl-rote swops designoted os foir volue hedges:
. o $50 million fixed-tqflooting interest-rote swop ogreemenl to
convert $50 million of the $350 million MTN Series 33 noles
moturing April 30, 2020 into three-month vorioble role debt; ond
. two $,l25 million ond one $250 million fixed-toflooting interest-
role swop ogreements to convert the $500 million MTN Series 37
notes moturing November lB, 20l9 into thresmonth vorioble role
debt.
At December 3l , 2016 ond 20,l5, the Compony hod no interest-
rote swops clossified os undesignoted controcts.
Level 2 Level 3
Foir Volue Hierorchy
The [oir volue hierorchy o[ finonciol ossets ond liobilities ot December 3l , 2O16 ond 20,15 is os follows:
December 3l , 2Ol 6 Corrying Foir
(millions of dollors) Volue Volue Level I
Assets:
Cosh ond cosh equivolents 50 50 50
50 50 50
Liobilities:
Short-term notes poyoble
Long-lerm debt, including currenl portion
Derivolive instruments
Foir volue hedges - interest-rote swops
469
r 0,680
2
469
i 2,010
2
469
I 2,010
2
ABpenr#r6lo',ln'if$ 4pplia,s$io{rpoRT TSX: H
I t,t5l 12,481 471 12,010
Page 325 of 414
December 31,2015
(millions of dollors)
Corrying
Volue
Foir
Volue Level 'l Level 2 Level 3
Assets:
Cosh ond cosh equivolents
Derivotive instrumenls
Foir volue hedge - interest-rote swop
949494
95 95 95
Liobilities:
Short-term notes poyoble 1 ,491
Long-term debt, including current portion 8,ZOZ
1,491
9,993
1,491
i 0,1 98 I I ,484 1,491 9,993
Cosh ond cosh equivolents include cosh ond short-term investments.
The corrying volues ore represenlolive of foir volue becouse of the
shod-lerm noture o{ these instruments.
The foir volue of the hedged portion of the long+erm debt is primorily
bosed on the present volue o[ future cosh flows using o swop yield
curve to determine the ossumption for interest rotes. The foir volue of
the unhedged portlon of the long-term debt is bosed on unodiusted
periodend morket prices for the some or similor debt of the some
remoining molurities.
There were no significont lronsfers between ony of the [oir volue
levels during the yeors ended December 31, 20,l6 ond 2015.
Risk Monogement
Exposure to morket risk, credit risk ond liquidlty risk orises in the
normol course of the Compony's business.
Morket Risk
Morket risk refers primorily to lhe risk ol loss thot results from chonges
in costs, foreign exchonge rotes ond inlerest rotes. The Compony is
exposed to fluctuotions in interest roles 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
moteriol commodity price risk or moteriol foreign exchonge risk.
The Compony uses o combinotion of fixed ond vorioblerote debt to
monoge the mix of its debt portfolio. The Compony olso uses
derivotive finonciol instrumenls to monoge interest-rote risk. The
Compony utilizes inlerest-rote swops, which ore I'ypicolly designoted
os foir volue hedges, os o meons to monoge its interest rote exposure
to ochieve o lower cost of debt. The Compony moy olso utilize
inlerest-rote derivotive instruments to lock in interest-rote levels in
onticipotion of future linoncing.
A hypotheticol '100 bosis poinls increose in interest roles ossocioled
with vorioblerote debt would not hove resulted in o significont
decreose in Hydro One's net income for the yeors ended
December 3 l, 20l 6 or 201 5.
For derivotive instruments thot ore designoted ond quolify os foir volue
hedges, the goin or loss on lhe derivotive instrument os well os the
oflseiling loss or goin on the hedged item ottributoble to the hedged
risk ore recognized in the Consolidoted Slotements of Operotions
ond Comprehensive lncome. The net unreolized loss {goin) on the
hedged debt ond the reloted inlerest-rote swops for the yeors ended
December 31, 20l6 ond 20.l5 wos not significont.
Credir Risk
Finonciol ossets creole o risk thot o counterporty will foil to dischorge
on obligotion, cousing o finonciol loss. At December 3.1, 2016 ond
20 l5, there were no significont concentrotions ol credit risk with
respect to ony clogs o[ finonclol ossets. The Compony's revenue is
eorned from o brood bose of cuslomers. As o result, Hydro One did
nol eorn o significont omount of revenue {rom ony single customer. At
December 3 I , 201 6 ond 201 5, fiere wos no significont occounts
receivoble bolonce due from ony single customer.
At December 3,1, 20.l6, the Compony's provision for bod debts wos
$35 million (20,15 - $61 million). Adiustments ond writeoffs were
determined on the bosis of o review o{ overdue occounts, loking into
considerotion historicol experience. At December 31, 2016,
opproximotely 6% ,,2015 - 6%) ol the Compony's net occounts
receivoble were oged more thon 60 doys.
Hydro One monoges its counterporly credit risk through vorious
techniques lncluding: enlering inlo konsoclions with highly roted
counlerporties; limiting totol exposure levels wlth individuol
counterporties; entering into mosler ogreements which enoble net
settlement ond the controcluol right of offset; ond monitoring the
[inonciol condition of counterporties. The Compony monitors current
azzo>r
6u,.EdaOi,gmo
=om=zvdrmI
3
Appendix 6 to Joint Application HyDRo oNE urvurED oNE oF NoRTH AMERTcA'sla*ors, P€&e ?A6$f *14
9,993
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
credit exposure to counlerporties both on on individuol ond on
oggregofe bosis. The Compony's credit risk for occounts receivoble is
limited to the corrying omounts on the Consolidoted Bolonce Sheets.
Derivotive finonciol instruments resuh ln exposure lo credil risk since
there is o risk of counterporty defoult. The credit exposure o[
derivotive controcls, before colloterol, is represenled by the foir volue
o[ conlrocts ot lhe reporting dote. At December 31, 2016 ond
2015, the counterporty credit risk exposure on the [oir volue of these
interesl-rote swop controcts wos not significont. At December 3'] ,
2016, Hydro One's credit exposure for oll derivotive instruments,
ond opplicoble poyobles ond receivobles, hod o credit roting of
investment grode, wlth four finonciol inslilutions os lhe counterporfy.
Liquidity Risk
Liquidiry risk refers to the Compony's obility to meet its finonciol
obligotions os they come due. Hydro One meets its short-term
liquidity requlrements using cosh ond cosh equivolents on hond, funds
December 3 I
lmillions of dollors)
from operotions, the issuonce of commerciol poper, ond lhe revolving
stondby credit focilities. The short-term liquidity under the Commerciol
Poper Progrom, revolving stondby credit focilities, ond onticipoted
levels o{ [unds from operotions ore expected to be sufficient lo fund
normol operoling requirerrenls.
At December 31 ,2O16, occounts poyoble ond occrued liobilities in
the omount of $840 million {201 5 - $753 million) were expected to
be settled in cosh ot lheir corrying omounts within the next l2 months.
1 Z. Copitol AAonogement
The Compony's oblectives with respect lo its copitol slructure ore to
mointoin effective 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 skong credit quolity. At December 3l , 20l6 ond 20,)5,
the Compony's copitol structure wos os follows:
2016 20r5
Long-term debt poyoble within one yeor
Short-term notes poyoble
Less: cosh ond cosh equivolenls
602
50
469
s00
1,491
94
Long-term debt
Prefened shores
Common shores
Retoined eornings
1,021
10,o78
418
5,623
3,950
Totol
Hydro One lnc. ond Greot Lokes Power hove cuslomory covenonls
typicolly ossocioted with longlerm debt. Hydro One Inc.'s long-term
debt ond credit focility covenonts limit permissible debt to 75% of ils
totol copitolizotion, limit the obility to sell ossets ond lmpose o
negotive pledge provision, subject to customory exceptions. At
December 3 1 , 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 Benef its
Hydro One hos o defined benefit pension plon (Pension Plon), o
defined contribution pension plon (DC Plon), o supplemenlory
pension plon, ond posfretirement ond postemployment benefit plons
21 090 t9 951
Defined Conlribution Pension Plon
Hydro One estoblished o DC Plon effectlveJonuory l, 20,16. The
DC Plon is mondolory ond covers eligible monogement employees
hired on or oflerlonuory 1 ,2016, os well os monogement
employees hired before Jonuory 1 , 20 1 6 who were not eligible or
hod not irrevocobly elected to join the Pension Plon os of
September 30, 20,15. MemGrs of the DC Plon hove on option to
conlribute 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 3,l, 20l6 were less thon $l million (2015 - $nil). At
December 3l , 20.16, Compony contribulions poyoble included in
occrued liobilities on the Consolidoted Bolonce Sheets were less thon
$l million {201 5 - $nil).
ABpendirc6lp JAIS ApplipntignpoRT TSX: H Page327 of4l4
1,897
8,207
418
5,623
3,806
Defined Benefit Pension Plon, Supplementory
Pension Plon, ond Post-Retirement ond
Post-Employment Plons
The Pension Plon is o defined benefit contributory 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 ofterJonuory ),2004, ond for Society of Energy
Professionols-represenled stoff hlred olter November 17, 2005,
benefits ore bosed on highest liveyeor overoge pensionoble
eornings. After relirement, pensions ore indexed to inflotion.
Membership in the Pension Plon wos closed to Monogement
employees who were not eligible or hod not inevocobly elected to
ioin the Pension Plon os of September 30, 20,l5. These employees
ore eliglble to ioin the DC Plon.
Compony ond employee contributions to lhe Pension Plon ore bosed
on ocluoriol voluotions performed ot leost every three yeors. Annuol
Pension Plon contributions for 2Ol6 of $l0B million (20,]5 - $lZZ
million) were bosed on on octuoriol voluotion effeciive December 3 l,
201 5 {20I 5 - bosed on on ocluoriol voluotion effective
December 3l , 20,1 3) ond the level o[ pensionoble eornings.
Estimoted onnuol Pension Plon contributions{ror 2017 ond 20lB ore
opproximotely $105 million ond $102 million, respectively, bosed
on the octuoriol voluotion os ot December 3,1, 20,15 ond proiected
levels of pensionoble eornings.
Yeor ended December 3 I
lnillions of dollors)
Future minimum contributions beyond 2018 will be bosed on on
octuoriol voluotion eflective no loter thon December 3l , 2018.
Contributions ore poyoble one month in orreors. All of the
contributions ore expected to be in the form of cosh.
Hydro One recognizes the overfunded or underfunded stotus of the
Penslon Plon, ond post-retirement ond postemployment benefit plons
(Plons) os on osset or hobility 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 recognized in AOCI. The impoct o[
chonges in ossumptions used to meosure pension, post-retirement ond
postemployment benefit obligotions is generolly recognized over the
expecled overoge remoining service period of the employees. The
meosuremenl dote for the Plons is December 3I .
Penslon Benefits
2016 2015
Posl-Retirement ond
Post-Employment Bene[its
2016 201 5
Chonge in proiected benefit obligotion
Proiected benefit obligotion, beginning o[ yeor
Current service cosl
Employee contributions
lnlerest cost
Benefits poid
Net octuoriol loss (goinl
Chonge due to Hydro One Brompton spinoff
7,683
144
45
308
{3s4)
(s2)
7,535
\46
40
302
{334)
I ,610
42
67
(43)
14
1,582
43
64
l47l
127)
(s)
(61
azzo>r6\
=oaOt2fr@<om=ZOr>@1m(,
3
Projected benefit obligotion, end of yeor 7 ,774 7 ,683 I ,690 1 ,6] O
Chonge in plon ossets
Foir volue of plon ossets, beginning of yeor
Actuol return on plon ossels
Benefits poid
Employer conkibutions
Employee contribulions
Administrotive expenses
6,731
370
(354)
l0B
45
(261
6,299
582
(ss4)
177
40
(3 3l
147)
47
tagr
43
Foir volue of plon ossets, end o[ yecr 6,874 6,73)
Un[unded stotus 900 952 1,690 I ,610
Appendix 6 to Joint Application HyDRo oNE umtrED oNE or NoRTH AMERTcA's ,o*ous, P€&e O2fiOt*14
The Hydro One Supplementol 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 Act (Conodol. The Supplementol Plon
obligotion is included with other post-retiremenl ond post-employment
benefit obligotions on the Consolidoted Bolonce Sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hydro One presents its benelit obligotions ond plon ossets net on its Consolidoted Bolonce Sheets os follows:
December 3 I
(millions of dollors)
Pension Benefits
2016
Post-Retirement ond
Post-Employment Bene[ils
2016 201520t 5
Other ossets
Accrued ltobilities
Pension benefit liobility
Post-retirement ond postemployment benelit liobility
lr
900 952
5056
1,6412 1,560
Nel unfunded stotus 899 952 1,697 I ,610
I Represents the funded stotus of Greot Lokes Power's defined benefit pension plon.
2 Includes $7 million (2015 - $nil) reloting to Greot lokes Power's postemployment benefit plons.
The funded or unfunded stolus of the pension, posl-retirement ond
postemployment benefit plons refers to the dilference between the foir
volue of plon ossets ond the projecled benefit obligotions for lhe
Plons. The funded,/unfunded slotus chonges over time due to severol
foclors, including contribution levels, ossumed discount rotes ond
octuol returns on plon ossets.
The following toble provides the proiected benefit obligotion (PBO), occumuloted benefit obligolion (ABO) ond Ioir volue of plon ossets for the
Pension Plon:
December 3l
(millions of dollors) 2016 2015
PBO
ABO
Foir volue o[ plon ossets
7,774
7,O94
6,874
7,683
7,O20
6,731
On on ABO bosis, the Pension Plon wos funded o197"/" ol
December 3,1, 20l6 (2015 -96%1. On o PBO bosis, the Pension
Plon wos funded ot 88% ot December 3.l, 20l6 (20,]5 - BB%). The
ABO differs from the PBO in thot the ABO includes no ossumption
obout fulure compensotion levels.
Components of Net Periodic Benefit Costs
The following toble provides the components o[ the net periodic benefit costs for the yeors ended December 31, 20,16 ond 2015 for the Pension
Plon:
Yeor ended December 3l
lmillions of dollors) 2016 2015
Cunent service cost, net of employee contributions
Interesl cost
Expected return on plon ossets, net of expenses
Amortizotion o[ octuoriol losses
Prior service cosl omortizotion
144
308
(4321
96
146
302
1406)
119
2
Net periodic benefit costs 116 163
Chorged to results o[ operotions]4B
I The Compony follows the cosh bosis of occounting consistent with the inclusion of pension costs in OEBcpproved rotes. During the yeor ended
December 3.l, 2016, pension costs of $108 million l2)l5 - $177 millionl were ottributed to lobour, of which $48 million (2015 - $81 million) wos
chorged to operotions, ond $60 million {20 i 5 - $96 million} wos copitolized os port of the cost of property, plont ond equipment ond inlongible ossets.
8r
Appendirc6fe',lnid$ ApplipnlionpoRT TSX: H Page 329 of 414
The following toble provides the components ol the net periodic benefit cosls for the yeors ended December 3.l, 2016 ond 20l5 lor the post-
retirement ond postemployment benefit plons:
Yeor ended December 3l
(millions of dollors) 2016 201 5
Current service cost, nel o[ employee contributions
lnlerest cost
Amortizotion of octuoriol losses
Prior service cost omortizotion
42
67
t5
43
64
t4
Net periodic benefit costs 124 121
Chorged to resulls of operotions 55 55
Assumptions
The meosurement of the obligotions of the Plons ond lhe costs o[
provlding benefits under lhe Plons involves vorious foctors, including
the development of voluolion ossumptions ond occounting poliry
elections. When developing the required ossumptions, the Compony
considers historicol inlormotion os well os future expeclotions. The
meosurement of bene{il obligotions ond cosls is impocted by severol
ossumplions including the discount rote opplied to benefit obligotions,
the long-term expected rote o[ return on plon ossets, Hydro One's
expected level of contributions to the Plons, lhe incidence o{ mortolity,
the expected remoining service period ol plon porticiponts, the level
The following weighted overoge ossumplions were used to delermine the benefit obligotions ot December 3 I , 201 6 ond 201 5:
Post-Retirement ond
Pension Benefits Post-Employment Benefits
Yeor ended December 31 2016 2015 2016 2015
Significont ossumptions:
Welghted overoge discounl rote
Rote of compensotion scole escolotion (long-term)
Rote of cost o[ living increose
Rote of increose in heolth core cost trendsr
16.25o/operonnumin2OlT,grodingdownlrc4.36%peronnuminondoher203l (2015-6.38%in20l6,grodingdownto4.36%peronnuminond
ofter 2031).
The lollowing weighted overoge ossumptions were used to delermine the nel periodic benefit costs for the yeors ended December 3 l, 20.l6 ond
2015. Assumptions used lo determine cunentyeorend beneflt obligotions ore the ossumptions used to estimote the subsequentyeor's net periodic
benefit costs.
Yeor ended Decenber 31 2016 2015
Pension Benefits:
Weighted overoge expected role of return on plon ossets
Weighted overoge discount rote
Rote of compensotion scole escolotion {long-term)
Rote o{ cost of living increose
Averoge remoining service life of employees /yeors/
of compensolion ond rote of compensotion increoses, employee oge,
length o[ service, ond the onticipoted rote of increose of heolth core
cosls, omong other foctors. The impoct of chonges in ossumptions
used lo meosure the obligotions o[ the Plons is generolly recognized
over the expecled overoge remoining service period o{ the plon
porticiponts. In selecting the expecled rote of return on plon ossets,
Hydro One considers historicol economic indicolors thot impoct osset
relurns, os well os expectotions regording future long-term copilol
morket performonce, weighted by torget osset closs ollocotions. ln
generol, equity securities, reol estole ond privote equity inveslments
ore forecosted to hove higher returns thon fixed-income securities.
3.90%
2.50%
2.00%
4.OO%
a <Ao/
2 00%
3.90%
2.50y"
2.00%
4.36%
4.10%
2.50%
2.OO%
4.36%
6.50y"
4.007"
2.507"
2.OOy"
t5
6.50%
4.OO%
2.50%
2.OO%
13
azzo->r
62PoaOi,9fi6<om=z9r>a1m(,
3
Post-Retirement ond Post-Employment Benefits:
Weighted overoge discount rote
Rote of compensotion scole escolotion (long-term)
Rote of cost of living increose
Averoge remoining service life of employees lyeorsi
Rote of increose in heolth core cost kendsl
4.107"
2.50v"
2.OO%
15.3
4.36%
4.OO%
2.50%
2.0O7"
13.8
4.36%
r 6.38% per onnum in 201 6, groding down to 4.36% per onnum in ond ofter 2031 (2015 - 6.52% in 201 5, groding down to 4.36% per onnum in ond oher
2031).
Appendix 6 to Joint Application HYDRO ONE TIIIITED oNE oF NoRTH AMERTcA's Lnncesr Pe0$ft Srierof*l4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The dlscount role used lo determine the current yeor pension
obligotion ond the subsequenl yeor's net periodic benefit costs is
bosed on o yield curve opprooch. Under the yield curve opprooch,
expecled future benefit poyments for eoch plon ore discounted by o
rote on o lhird-porr/ bond yield curve corresponding lo eoch
durotion. The yield curve is bosed on "AA" long-term corporole
bonds. A single discount rote is colculoted thot would yield the some
present volue os the sum of the discounted cosh flows.
Theelfeciof o l%chongeinheolthcorecosttrendsontheprojectedbene{itobligotionforthepost-retirementondpost-employmentbenefitsot
December 3I , 20,]6 ond 2015 is os follows:
December 3 I
(millions of dollorsl 2016 2015
Prolected benefit obligotion :
Effect of o I % increose in heolth core cost lrends
Effect of o l% decreose in heolth core cost trends
289
12211
lJl
(re6)
Thee{feclof o l%chongeinheollhcorecostkendsontheservicecostondintereslcostfortheposl-retirementondpost-employmentbenelitslor
the yeors ended December 3 I , 20I 6 ond 20,l 5 is os follows:
Yeor ended December 3 I
(millions of dollors)2016 2015
Service cost ond interest cost:
Effect of o 'l% increose in heolth core cost trends
Effect of o 'l% decreose in heolth core cost lrends
23
117l
22
(16)
The following opproximole life expectoncies were used in the mortolity ossumptions to determine the projected benefit obligotions for the pension
ond posl-reliremenl ond postemployment plons ot December 31 , 2016 ond 20 i5:
December3l,20l6
Life expectoncy ot 65 for o member currently ot
Aqe 65 Age 45
December 3 1, 20] 5
Life expectoncy ot 65 for o member currently ot
Age 65 Age 45
Mole Femole Mole Femole Mole Femole Mole Femole
2624252324IJ2422
Estimoted Future Benefit Poyments
At December 3,1, 20 16, estimoted future benefit poyments to the porticiponts of the Plons were:
(millions of dollors)
Post-Retirement ond
Pension Benefits PostEmployment Benefits
2017
20r 8
2019
2020
2021
2022 rhrovgh to 2026
321
331
340
349
358
t.910
56
ca
60
ot
64
355
Appendirc6te',lfiint ApplipEJionpoRT TSX: H
3,609
Page 331 of4l4
Totol estimoted futur" b"nufit poyr"ntr lh,o,654
Components of Regulotory Assets
A portion o[ octuoriol goins ond losses ond prior service costs is
recorded within regulotory ossels on Hydro One's Consolidoted
Bolonce Sheets to reflect the expected regulotory inclusion o[ these
Yeor ended Dxenber 3l
(millions of dollors)
omounts in fulure rotes, which would otherwise be recorded in OCl.
The following toble provides the ocluoriol goins ond losses ond prior
service costs recorded within regulotory ossets:
2016 201 5
Pension Benefits:
Acluoriol oss (goin) lor the yeor 35 {l B ] )
Amorlizolion o[ octuorio osses (96) (ll9)
Prior service cost omortizotion - (2)
{6i) (s02)
Post-Retirement ond Post-Employment Benefits:
Actuoriol loss (goin) for the yeor
Amorlizotion of octuoriol losses
Prior sevice cost omortizotion
14
(t s)
t27)
(14)
(rl
The following toble provides the components of regulotory osseb thot hove not been recognized os components of net periodic benefit costs for
the yeors ended December 3,), 2Ol 6 ond 201 5:
Yeor ended December 3l
lmillions of dollors)2016
(41)
20r5
Pension Benefits:
Prior service cost
Actuoriol loss 900 952
900 952
Post-Reti rement ond PostEm ployment Benef its:
Actuoriol loss 243 240
243 240
The following toble provides the components of regulotory ossets ot December 3l thot ore expected to be omortized os componenls of net
periodic benefit costs in the lollowing yeor:
December 3 I
lmillions of dollors)
Pension Benefils2016 2015
Posl-Retirement ond
Post'Employmenl Benefits2016 2015
azZA>=
62>oaOi2fro
=om=zai>a1m(,
3
Prior service cost
Actuoriol loss B69679
79 96 86
Appendix 6 to Joint Application HyDRo oNG urrurED oNE oF NoRTH AMERtcA's Le*oes, PAge ffifirgfAl4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pension Plon Assets
lnvestment Strotegy
On o regulor bosis, Hydro One evoluotes lls inveslment slrolegy lo
ensure thot Pension Plon ossets will be sufficient to poy Pension Plon
benefits when due. As port o[ this ongoing evoluotion, Hydro One
moy moke chonges to its torgeted osset ollocolion ond investment
strolegy. The Pension Plon is monoged ol o net osset level. The moin
obiective o[ the Pension Plon is to sustoin o certoin leve] o[ net ossets
in order to meet the pension obligotions of the Compony. The
Pension Plon fulfills its primory objective by odhering to specific
investment policies outlined in its Summory of Investment Policies ond
Procedures {SIPP), which is reviewed ond opproved by the Humon
Resource Committee o[ Hydro One's Boord o[ Directors. The
Compony monoges net ossels by engoging knowledgeoble externol
inveslment monogers who ore chorged wlth the responsibiliry o{
investing existing funds ond new funds {current yeor's employee ond
employer contributions) in occordonce with the opproved SiPP. The
performonce of the monogers ls monilored through o governonce
struclure. Increoses in net ossets ore o direcl result of investmenl
income generoled by investments held by the Pension Plon ond
conlributions to the Pension Plon by eligible employees ond by the
Compony. The moin use o[ net ossets is for benefit poyments to
eligible Pension Plon members.
Pension Plon Asset Mix
At December 3I , 20,)6, the Pension Pon torget ossel ollocotions ond weighted overoge osset ollocotions were os follows:
Torget Allocotion (%) Pension Plon Assets (%)
Equily securities
Debt securities
Otherr
55.0
35.0
r 0.0
58.7
33.6
7.7
100.0 r 00.0
I Other investments include reol estote ond infrostruclure inyestmenls.
At December 31, 2016, the Pension Plon held $l l million (2015 -
$9 million) Hydro One corporote bonds ond $450 million (2015 -
$420 million) of debt securities of the Province.
Concentrotions of Credit Risk
Hydro One evoluoied its Pension Plon's osset portfolio for the
exislence o[ significont concentrolions o[ credit r]sk os ot
December 3 1 , 20 I 6 ond 20 1 5. Concentrotions thot were evoluoted
include, but ore not limited to, investment concentrotions in o single
enlify, concentrotions in o type o[ induslry, ond concentrotions in
individuol [unds. At December 3,l, 2016 ond 20,]5, there were no
significont concenlrolions {defined os greoter thon 1O% of plon ossets)
of risk in the Pension Plon's ossets.
The Pension Plon monoges its counlerporly credit risk with respect to
bonds by investing in investment-grode ond government bonds ond
with respect to derivotive instruments by tronsocting only with linonciol
institutions roted ot leost "A+" by Stondord & Poor's Roting Services,
DBRS Limiied, ond Fitch Rotings lnc., ond 'Al" by Moody's lnvestors
Service, ond olso by utilizing exposure limits to eoch counterporty
ond ensuring thot exposure is diversified ocross counterporties. The
risk o[ defoult on lronsoclions in listed securities is considered
minimol, os the trode will Ioil 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 within the foir volue
hierorchyot December 3,l, 20,16 ond 2015:
December 3l,2Ol6
(millions of dollorsl Level I Level 2 Level 3 Totol
20Pooled funds
Cosh ond cosh eouivolenls
Short-term securilies
Corporote shores - Conodion
Coroorote shores - Foreion
Bonds ond deber^tures -to.odion
146
9I
2,985
127
445
146
1279ll
3,098
1,943
193
r3
1,943
193
or2
Bonds ond debentures -
Totol [oir vo ossetsl 042 2,396
r At December 3l ,2O16, the totol foir volue of Pension Plon ossels excludes $22 million of interest ond dividends receivoble, $15 million of purchosed
inyestments poyoble, $9 million of pension odministrotion expenses poyoble, ond $7 million of sold investments receivoble.
425 6,863
Appenrijr6lp',lnif6 Appliaa$ionpoRT TSX: H Page 333 of414
December 31,2015
lmillions of dollors)Level I Level 2 Level 3 Totol
Pooled funds
Cosh ond cosh equivolenls
Short-term securities
Corporote shores - Conodion
Corporote shores - Foreign
Bonds ond debenlures - Conodion
Bonds ond debentures - Foreign
t9t
BO7
2,931
80
30r Jt4
t9l
80
BO7
3,047
2,072
201
116
2,072
20l'
Totol [oir volue of plon ossetsl 3,529 2,492 30r
rAtDecember3l,20l5,thelotol foirvolueof PensionPlonosselsexcludes$2Tmillionof intereslonddividendsreceivoble,ond$lSmillionrelotingto
occruols for pension odminishotion expense ond foreign exchonge controcls poyoble.
See note l6 - Foir Volue of Finonciol lnskuments ond Risk Monogement for o description o[ levels within the foir volue hierorchy.
6,722
Chonoes in the Foir Volue of Finonciol
lnstruilents Clossified in Level 3
The following toble summorizes the chonges in [oir volue o[ [inonciol
inslruments clossified in Level 3 for the yeors ended December 31,
2016 ond 2015. The Pension Plon clossilles finonciol instrumenls os
Yeor ended December 3 I
lmillions of dollors)
Level 3 when the foir volue is meosured bosed on ot leost one
significont input thol is not observoble in lhe morkets or due to lock of
liquidity in certoin morkets. The goins ond losses presented in the
toble below moy include chonges in [oir volue bosed on both
observoble ond unobsenvoble inputs.
2016 201 5
Foir volue, beginning o[ yeor
Reolized ond unreolized goins
Purchoses
Soles ond disbursemenls
30r
23
l5l
(50)
144
5l
106
Folr vo end of
There were no significont tronsfers between ony ol the foir volue
levels during the yeors ended December 3l , 20.l6 ond 20,)5.
The Compony performs sensitivily onolysis for loir volue meosurements
clossified in Level 3, substituting the unobservoble inputs with one or
more reosonobly possible olternotive ossumptions. These sensilivity
onolyses resulted in negligible chonges in the foir volue o[ finonciol
instruments clossified in this level.
Voluotion Techniques Used to Determine Foir
Volue
Pooled funds moinly consisl o[ privote equity, reol estote ond
infrostruclure investments. Privote equity investments represent privote
equity funds thol invest in operoling componies thot ore not publicly
troded on o stock exchonge. lnvestment skotegies in privote equily
include limited portnerships in businesses thot ore chorocterized by
high internol growth ond operotionol efficiencies, venture copitol,
leveroged buyouts ond speciol situotions such os distressed
inveslments. Reol estole old infrostructure inveslments represent funds
thot invest in reol ossets which ore not publicly troded on o stock
Appendix 6 to Joint Application
425 30r
exchonge. lnvestment strotegies in reol eslote include limited
portnerships thot seek to generote o totol return through income ond
copitol growth by investing primorily in globol ond Conodion limited
portnerships. lnvestment strolegies in inlrostructure include limited
portnerships in core infrostructure ossets focusing on ossets thot
generote stoble, long+erm cosh flows ond deliver incrementol returns
relotive to conventionol fixed-income inveslments. Privote equity, reol
estote ond infrostructure voluotions ore reported by the fund monoger
ond ore bosed on the voluotion of the underlying inveslmenls which
includes inputs such os cosl, operoting results, discounted future cosh
{lows ond morket-bosed comporoble doto. Since these voluotion
inputs ore not highly observoble, privote equity ond infrostructure
investments hove been cotegorized os Level 3 within pooled funds.
Cosh equivolents consist of demond cosh deposits held with bonks
ond cosh held by the investment monogers. Cosh equivolents ore
cotegorized os Level l.
Shorl-term securities ore volued ot cost plus occrued interest, which
opproximotes foir volue due to their short-term noture. Short-term
securilles ore cotegorized os Level 2.
HyDRo oNE uMrrED oNE oF NoRTH AMERTcA's Lo*ors, Pagft 3fi4r0f41 4
azzo.>r
6-.
EdaO
1,2fio
=om=zad\mI
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Corporote shores ore volued bosed on quoted prices in octive
morkets ond ore cotegorized os Level I . lnveslments denominoted in
foreign currencies ore tronsloted into Conodion currency ot yeorend
rotes of exchonge.
Yeor ended December 31, 2016
lmillions of dollors)
Bonds ond debentures ore presenled ot publlshed closing trode
quotolions, ond ore cotegorized os Level 2.
PCB
Lond
Assessment ond
Remediotion
I 9. Environmentol Liobiliiies
The lollowing tobles show the movements in environmentol liobilities for the yeors ended December 3 I , 20 i 6 ond 20,) 5:
Totol
Environmentol liobilities, Jonuory 1
lnlerest occretion
Expenditures
Revoluotion odiustment
r48 59 207
718
(r l (e) (201(r) r0 e
Environmentol liobilities, December 3 I
Less: current portion
143
l8
6l
I
204
27
125 52 177
Yeor ended December 31, 201 5
lmillions of dollors)PCB Totol
[ond
Assessment ond
Remediotion
Environmentol liobilities, Jonuory I
lnterest occretion
Expenditures
Revoluotlon odiustment
172
8
(8)
t24)
67
2
(il)
I
239
t0
(t e)
123)
Environmentol liobiltties, December 3 I
Less: current porlion
148
12
59
r0
207
22
136 49
The following tobles show the reconciliotion between the undiscounted bosis of the environmentol liobilities ond the omount recognized on the
Consolidoted Bolonce Sheets ofter foctoring in the discount rote:
r85
December 3l,2Ol6
lnillions of dollors)PCB
Lond
Assessment ond
Remediotion Totol
Undiscounted environmentol liobililies
Less: discounting occumuloled liobililies to present volue
r58
t5
66 22A
205
Discounted environmentol liobilities 143 6l 204
December 31, 2Ol 5
lmillions of dollors)PCB
Lond
Assessment ond
Remediotion Totol
Undiscounted environmentol liobilities
Less: discounting occumuloled liobilities to present volue
r68
20
61 t,tv
222
Appendir6tp JmS Applip'a6ioftpoRl TSX: H
148 59
Page 335 of 414
Discounted environmentol liobililies 207
At December 31 ,2016, the estimoted future environmentol expenditures were os follows
lmillions of dollors)
2017
20r B
2019
2020
2021
Thereofter
27
26
25
36
8t
224
Hydro One records o liobility for the estimoted future expenditures for
lond ossessment ond remediotion ond for the phoseout ond
destruction of PcB€ontominoted minerol oil removed from electricol
equipment when it is determined thot future environmentol remediotion
expenditures ore proboble under existing stotute or regulotion ond the
omounl o[ the future expenditures con be reosonobly estimoted.
There ore uncertointies in estimoting future environmenlol costs due lo
potentiol exlernol evenls such os chonges in legislotion or regulotions,
ond odvonces in remediotion technologies. ln determining the
omounts to be recorded os environmenlol liobilities, the Compony
estimotes the currenl cost of completing required work ond mokes
ossumptions os to when the fulure expenditures will octuolly be
incurred, in order to generote future cosh flow informotion. A long-
term inllotion rote ossumption of opproximolely 2% hos been used to
express fiese currenl cosl estimotes os estimoted future expenditures.
Future expenditures hove been discounted using foctors ronging from
opproximotely 2.0%1o6.3%, depending on the oppropriote rote for
the period when expendilures ore expected to be incurred. All foctors
used in estimoting the Compony's environmentol liobilities represenl
monogement's best estimoles of the present volue of costs required lo
meel existing legislolion or regulolions. However, it is reosonobly
possible thot numbers or volumes of contominoted ossets, cosl
estimotes to perform work, inflotion ossumptions ond the ossumed
pottern o[ onnuol cosh flows moy differ significontly from the
Compony's current ossurnptions. ln oddition, with respect to the PCB
environmentol liobility, the ovoilobility of criticol resources such os
skilled lobour ond replocement ossets ond the obility to toke
mointenonce outoges in criticol focilities moy influence the timing of
expenditures.
PCBs
The Environmenl Conodo regulotions, enocled under the Conodion
Environmentol Protection Act, 1999, govern the rnonogement,
storoge ond disposol of PCBs bosed on certoin criterio, including
type of equipmenl, inlse stotus, ond PC&contominotion thresholds.
Under cunent regulotions, Hydro One's PCBs hove to be disposed of
by the end of 2025, with the exception of speclflcolly exempted
equipment. Contominoted equipment will generolly be reploced, or
will be decontominoted by removing PCB<ontominoted insuloting oil
ond retro filling with replocement oil thot conloins PCBs in
concenlrotions of less thon 2 ppm.
The Compony's best estimole of the totol estimoled fulure
expenditures to comply wilh cunent PCB regulotions is $
,158 million
(2015 - $
.l68 million). These expendiiures ore expmted to be
incuned over the period hon 2017 to 2025. As o resuh of its onnuol
review of environmentol liobilities, the Compony recorded o
revoluotion odiustment in 20l6 to reduce the PCB environmenlol
liobility by $ 1 million (201 5 - $24 million).
Lond 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.l5 - $61 million). These expenditures ore
expected to be incurred over the period Irom 2017 to 2032. As o
result o[ ils onnuol review o[ environmenlol liobilities, the Compony
recorded o revoluotion odiustment in 20 i 6 to increose the lond
ossessment ond remediotion environmentol liobility by $ I 0 million
(2015-$l million).
20. Asset Retirement Obligotions
Hydro One records o liobility Ior the estimoted future expenditures lor
the removol ond disposol of osbeslos-contoining moteriols instolled in
some of its focilities ond for the decommissioning of specific switching
stotions locoted on unowned sites. Asset retirement obligotions, which
represent legol obligotions ossocioted with the retirement of certoin
tongible long-lived ossels, ore computed os lhe present volue of the
projected expenditures for the future retirement of speci{ic ossets ond
ore recognized in the period in which the liobilit/ is incuned, if o
reosonoble estimote of Ioir volue con be mode. lI the osset remoins in
service ot lhe recognition dote, the presenl volue of the liobility is
odded to the corrying omount of the ossocioted osset in the period
the liobiliry is incurred ond this odditionol corrying omount is
deprecioted over the remoining li{e of the ossel. lf on osset retirement
obligotion is recorded in respecl of on outof-service osset, the ossel
retirement cost is chorged lo resuhs of operotions. Subsequent to the
azzo_>r
6-.
EdaO>Y1Zmo
=om=zar>q1 6I
Appendix 6 to Joint Application HyDRo oNE uMrrED oNE oF NoRTH AMERTCA'S T.ARGEST EPEASft 3fr.6egf *14
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
initiol recognition, the liobilhy is odiusted for ony revisions to the
eslimoted fulure cosh flows ossocioted with the ossel retiremenl
obligotion, whlch con occur due to o number of loctors including, but
not limited lo, cost escolotion, chonges in technology opplicoble to
the ossets to be retired, chonges in legislotion or regulotions, os well
os lor occretion of the liobility due to the possoge o[ time until the
obligotion is settled. Depreciotion expense is odiusted prospectively
for ony increoses or decreoses to the corrying omount of the
ossocioted osset.
In determining the omounts to be recorded os ossel retirement
obligotions, the Compony estimoles the currenl foir volue for
compleling required work ond mokes ossumptions os to when the
future expenditures will octuolly be incurred, in order to generote
future cosh flow informotion. A long-term inflotion ossumption of
opproximotely 2% hos been used to express these cunenl cost
estimotes os estimoted fulure expenditures. Future expendilures hove
been discounted using foctors ronging lrom opproximotely 3.0% to
5.0%, depending on the oppropriote rote for the period when
expenditures ore expected to be incuned. All foctors used in
estimoting the Compony's ossel retirement obligotions represenl
monogement's best estimotes o[ the cost required to meet existing
legislotion or regulotions. However, it is reosonobly possible thot
numbers or volumes of contominoted ossets, cost estimotes to perform
work, inflotion ossumptions ond the ossumed pottern of onnuol cosh
flows moy differ significontly from the Compony's current ossumptions.
Assel retirement obligotions ore reviewed onnuolly or more frequently
if significont chonges in regulotions or other relevont foctors occur.
Estimote chonges ore occounled for prospectively.
At December 3 1 , 201 6, Hydro One hod recorded ossel retirement
obligotions of $9 million (20,15 - $9 million), primorily consisling of
the estimoted future expenditures ossocioted with the removol ond
disposol o[ osbestos<ontoining moleriols instolled in some of its
focilities. The omount of interesl recorded is nominol.
21. Shore Copitol
Common Shores
The Compony is outhorized to issue on unlimited number of common
shores. At December 3 l, 201 6 ond 2Ol 5, the Compony hod
595 million common shores issued ond outstonding.
The omount ond timing of ony dividends poyoble by Hydro One is ot
the discretion of the Flydro One Boord of Directors ond is estoblished
on the bosis o{ Hydro One's resulls of operotions, mointenonce of its
deemed regulotory copitol slrucfure, finonciol condition, cosh
requirements, the sotisfoction of solvency lests imposed by corporote
lows for the declorotion ond poyment o[ dividends ond other foctors
thot the Boord of Directors moy consider relevont.
Common Shore Offerings
ln November 2015, Hydro One ond the Province completed on
initiol public offerlng (lPO) on the Toronto Stock Exchonge of
opproximotely l5% of its 595 million outstonding common shores. ln
April 201 6, the Province completed o secondory offering of
opproximolely 83.3 million or l4% common shores of Hydro One on
the Toronto Stock Exchonge. Hydro One did not receive ony of lhe
proceeds from the sole of 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 3l , 2016, two series of
prefened shores ore outhorized for issuonce: the Series 1 prefened
shores ond the Series 2 prefened shores. At December 31, 20.16,
the Compony hod ,l6,720,000 Series 1 prelerred shores ond no
Series 2 preferred shores issued ond outslonding.
Hydro One moy from time to lime 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 lhe series ond
determine the designolion, rights, privileges, restrictions ond
conditions ottoching to thot series o[ prefened shores. Holders of
Hydro One's prelerred shores ore not entitled to receive notice o[, to
ottend or to vole ot ony meeting of the shoreholders o[ Hydro One
excepl 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 of
preferred shores ronks on porily 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 distr;bution 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 of the Series I
prefened shores ond ending on ond including November 19, 2020,
the holders of Series I prelerred shores ore entitled to receive fixed
cumulotive preferentiol dividends of $'l .0625 per shore per yeor, if
ond when declored by the Boord of Directors, poyoble quorterly. The
dividend rote will resel on November 20,2O2O ond every five yeors
thereofter ot o rote equol to the sum of the then fiveyeor Government
of Conodo bond yield ond 3.53%. The Series 1 prelerred shores will
not be redeemoble by Hydro One prior lo November 20, 2020, but
will be redeemoble by Hydro One on November 20, 2O2O ond on
November 20 of every fihh yeor lhereofter ol o redemption price
equol to $25.00 for eoch Series 1 preferred shore redeemed, plus
ony occrued or unpoid dividends. The holders ol Series 1 preferred
shores will hove the right, ot their oplion, on November 20, 2O2O
ond on November 20 of every fifth yeor thereofter, to convert oll or
ony of their Series 1 preferred shores into Series 2 prefened shores
Appendirc6lp',lfih$ Applipe0ioft poRT TSX: H Page 337 of 414
on o oneforone bosis, subject to cerloin restriclions on conversion. Al
December 3l , 2016, no preferred shore dividends were in orreors.
The holders of Series 2 preferred shores will be entitled to receive
quorlerly flooting rote cumulotive dividends, if ond when declored by
the Boord of Directors, ot o rote equol to the sum of the then three
month Government of Conodo lreosury bill rote ond 3.53% os reset
quorterly. The Series 2 prelerred shores will not be redeemoble by
Hydro One prior to 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 o[ every fifth yeor thereofier, or $25.50
for eoch Series 2 prelened shore redeemed, if redeemed on ony
other dole ofter November 20, 2O2O , in eoch cose plus ony
Common shores issued - purchose ond concellotion of preferred shores k/
Acquisition of Hydro One lnc. /di
Common shores o[ Hydro One lnc. ocquired by Hydro One
Common shores o[ Hydro One issued to Province
Prefened shores of Hydro One issued to Province
Common shores issued /ei
occrued or unpoid dividends. The holders of Series 2 preferred
shores will hove the right, ot their option, on November 20, 2025
ond on November 20 of every fifth yeor thereoher, to convert oll or
ony o[ their Series 2 prefened shores into Series 1 prefened shores
on o one{orone bosis, subject to certoin restrictions on conversion.
Reorgonizotion
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 31, 20,15, Hydro One ocquiring
oll of the issued ond outstonding shores o[ Hydro One lnc. from the
Province ond issuing new common shores ond preferred shores to the
Province.
The following tobles present the chonges to common ond preferred shores os o result of PrslPO Tronsoctions, os well os the movement in the
number of common ond prelerred shores during the yeor ended December 31, 2015. There wos no movement in common or preferred shores
during the yeor ended December 3 1 , 20,l 6.
Preferred Shores
of TCommon Shores
323 (3231
13,4411
3,023
418
4r8
Prefened Shores
/number oI shores/ Common Shores Equity Tempororv Equitv
Number of shores -Jonuory 1 , 2015 (o) 100,000 - I 2,920,000
Common shores issued /b/ 100,000
PrelPO Tronsoctions:
Common shores issued - purchose ond concellotion of prefened shores /ci 2,640 - (l2,92O,@Ol
Acquisition of Hydro One lnc. /di
Common shores of Hydro One lnc. ocquired by Hydro One (102,640)
Common shores of Hydro One issued to Province I 2, 197,500,000
Preferred shores o[ Hydro One issued to Province - 16/20,@0 -
Common shores issued /e/ 2,600,000,000
Common shores consolidotion 202
Number ol shores - December 3 l, 201 5 595,000,000 16,720,@o
(o) At jonuory I , 20 1 5, oll common ond prefened shores represenl the shores of Hydro One lnc.
(b) On August 3l , 2015, Hydro One wos incorporoted under the Business Corporotions Acl (Ontorio) ond issued 100,000 common shores to the Province for
proceeds of $.l00,000.
(c) On October 3 I , 2015, Hydro One lnc. purchosed ond concelled 12,92O,OOO preferred shores of Hydro One lnc. previously held by the Province for
concellotion ot o price equol to the redemption price of the preferred shores iololling $323 million, which wos sotisfied by the issuonce to the Province of
2,640 common shores o[ Hydro One lnc.
ld) On October 31, 2015, oll ol the issued ond outstonding common shores of Hydro One lnc. were ocquired by Hydro One from the Province in relurn for
12,197,5O0,OOO common shores ol Hydro One ond 16,720,000 Series I prefened 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, the common shores of Hydro One were consolidoted by woy of orticles of omendment opproved by the Provlnce os sole
shoreholder so thot, ofier such consolidotion, 595,000,000 common shores of Hydro One were issued ond outstonding.
=zz6>:1
62
=oaOi,9fr6
=om=z9r>@1mI
3
Appendix 6 to Joint Application HYDRO oNE Lti trED oNE oF NoRTH AMERtcA',s Lnncrsr #€sft ari8rof 61 4
2,600
Totol Pre-lPO Tronsoclions odjustment 2,50s (323)
I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shore Ownership Restriciions
I6e ElectrictltT Acl imposes shore ownership reslrictions on securities of
Hydro One corrying o voting right {Voting Securities). These
reslrictions provide thot no person or compony {or combinotion of
persons or componies octing iointly or in concert) moy beneliciolly
own or exercise control or direction over more thon l0% o[ 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 fie Province, nor
lo on underwriter who holds Voting Securities solely for the purpose of
distribuling lhose securities to purchosers who comply wilh the Shore
Ownership Restrictions.
22. Dividends
In 20,l 6, preferred shore dividends in the omount of $ I 9 milllon
(20.l5 - $13 million) ond common shore dividends in the omounl o[
$5ZZ million (20,l5 - $875 million) were declored. The 2016
common shore dividends inc|tde $77 million for the post-lPO perlod
Yeor ended December 3l
from November 5 to December 3l , 2015, ond $500 mi lion for the
yeor ended December 31, 201 6.
ln August 2015, Hydro One declored o dividend in-kind on its
common shores poyoble in ol of the issued ond outstonding shores o[
Hydro One Bromplon (see note 4).
23. Eornings Per Shore
Bosic eornings per common shore (EPS) is colculoted by dividing nel
income ottributoble to common shoreholders of Hydro One by the
weighted overoge number of common shores outstonding. Diluted
EPS is colculoled by dividing net income ottributoble to common
shoreholders of Hydro One by the weighted overoge number o[
common shores outslonding odlusted for the effects of potentiolly
dilutive stock-bosed compensotion pions, including the shore gronl
plons ond the longlerm lncentive Plon, which ore colculoled using
the treosury stock method.
2016 2015
Net income ottributoble to common shoreholders (nillions of dollors) 721
Weighted overoge number of shores
Bosic 595,000,000
Effect of dilutive stock-bosed compensolion plons fNole 24i ,l,700,823
690
496,272,733
94,691
Dt ured
EPS
Bosic
Diluted
596,700,823 496,367,424
$1.21
$r.21
$1.3e
$1.3e
Pro formo Adiusted non-GAAP Bosic ond
Diluted EPS
The following pro formo odjusted nonCAAP bosic ond diluted EPS
hos been prepored by monogemenl on o supplementory bosis which
ossumes thot lhe lotol number of common shores outstonding wos
595,000,000 in eoch of the yeors ended December 3 I , 20 I 6 ond
2015. 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 per{ormonce ond is considered useful Gcouse it
eliminoles the impoct o[ o different number ol shores outstonding ond
held by the Province prior to the iPO. EPS is considered on imporlont
meosure ond monogement beiieves thot presenting it for oll periods
bosed on the number of outstonding shores on, ond subsequent to, the
IPO provides users with o comporoble bosis to evoluote lhe operotions
o[ the Compony.
2016 201 5
721 690
595,000,000
1,700,823
595,000,000
94,691
Diluted
Pro formo odiusted nonCAAP EPS
Bosic
Diluted
s96,700,823 595,094,691
$1.21
$1.21
$1.16
$1.16
The obove pro formo odiusted nonCAAP bosic ond diluted EPS does not hove ony stondordized meoning in US GAAP
Appendir6lo Jniil$ Appliap$ionpoRT TSX: H Page 339 of 414
Net income ottributoble to common shoreholders (millions of dollors)
Pro formo weighted overoge number of common shores
Bosic
Effect of dilutive stock-bosed compensotlon plons lNote 24)
24. Stock-bosed Compensotion
Shore Gront Plons
At December 31 , 2O16, 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
beneflt of certoin members of The Society of Energy Prolessionols (the
Society Shore Gront Plon).
The PWU Shore Gront Plon provides for lhe issuonce of common
shores of Hydro One from treosury to cerloin eligible members o[ the
Power Workers' Union onnuolly, commencing on April 1 ,2017 ond
continuing until the eorlier of April 1 , 2O2B or the dote on eligible
employee no longer meets the eligibiliry criterio of the PWU Shore
Gront Plon. To be eligible, on employee must be o member ol the
Pension Plon on April 1, 20l5, be employed on lhe dote onnuol
shore issuonce occurs ond continue to hove under 35 yeors o[ 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 o[ common shores issued onnuolly lo eoch
eligible em ployee will be equol to 27% of such eligible employee's
solory os ot April I , 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 PWU Shore Gront Plon sholl not
exceed 3,98 I ,763 common shores. ln 201 5, 3,979,062 common
shores were gronled under the PWU Shore Gront Plon.
The Socieiy Shore Gront Plon provides for the issuonce o[ common
shores of Hydro One from lreosury to certoln eligible members of The
Society of Energy Professionols onnuolly, commencing on April 1,
2018 ond continuing unlil the eorlier of April 1, 2029 orthe dote on
eligible employee no longer meels the eligibility criterio o[ the Society
Shore Gront Plon. To be eligible, on employee must be o member of
the Pension Plon on Seplember l, 2015, be employed on the dote
onnuol shore issuonce occurs ond conlinue to hove under 35 yeors of
service. Therefore the requisite service period for the Society Shore
Gront Plon begins on September 1, 20,l5. The number o[ common
shores issued onnuolly to eoch eligible employee will be equol to
2.0% of such eligible employee's solory os ot September 1 , 2O1 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 Plon sholl not exceed I ,434,686
common shores. ln 2015, I ,433,292 common shoresweregronted
under the Society Shore Gront Plon.
The foir volue of the Hydro One Limited 2015 shore gronts of
$ I I I mlllion wos estimoted bosed on the gront dote shore price o{
$20.50 ond is recognized using the groded-vesting ofiribution
method os the shore gront plons hove both o performonce condition
ond o service condition. No shores were gronted under the Shore
Gront Plons in 20,16. Totol shore bosed compensotion recognized
during 201 6 wos $2 | million (20I 5 - $ I O million) ond wos
recorded os o regulotory ossel.
A summory o[ shore gront octivity under the Shore Gront Plons during
yeors ended December 31 , 2016 ond 2015 is presented below:
Yeor ended December 3l 20t6
Shore
Gronts
lnumber of common shores)
Weighted-
Averoge
Price
Shore gronts outstonding -Jonuory \ ,2016
Gronted (non-vested)
Forfeited
5,412,354
177 939)
$20.50
$20.50
Shore oronts outstondino - December 3.l, 20,l6 5,334,415 $20.s0
3
Shore
Gronts
Weighted-
Averoge
PriceYeor ended December 31, 2Ol 5 of common
s,412,354 $20.so
Shore gronls outstonding -Jonuory I , 20,l5
Gronted (non-vested)
Shore oronts outstonding - December 3,1, 20.15 5,412,354 $zo.so
Directors' DSU Plon
Under the Compony's Directors' DSU Plon, direclors con elect lo
receive credil for their onnuol cosh reloiner in o notionol occount o[
Appendix 6 to Joint Application HyDRo oNE LtlurED oNE oF NoRTH AMERtcA's unoesr P&Sft 04e egf414
azzo>i
6-.>daO\>fr6
=om=Z9d\mI
DSUs in lieu o[ cosh. Hydro One's Boord ol Directors moy olso
determine from time to time thot speciol circumslonces exist thot would
reosonobly iustify the gront of DSUs to o director os compensotion in
oddition to ony regulor retoiner or fee to which the director is entitled.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Eoch DSU represents o unit with on underlying volue equivolenl to the volue o[ one common shore o[ the Compony ond is entitled to occrue
common shore dividend equivolents in the form of odditionol DSUs ot the time dividends ore poid, subsequenl to declorotion by Hydro One's
Boord of Directors.
Yeor ended December 3l
lnumber of DSUs)2016 20 r5
DSUs outstonding -Jonuory 1
DSUs gronted
20,525
78,558 20,525
DSUs outstonding - December 3l 99,083 20,525
For the yeor ended December 31 ,2O16, on expense of $2 million
120.15 - less thon $1 million) wos recognized in eornings with
respect to the DSU Plon. At December 3I , 2016, o liobiliry of
$2 million (December 3,l, 2015 - lessthon $l millionl, reloted to
outslonding DSUs hos been recorded ot lhe closing price of the
Compony's common shores o[ $23.58 ond is included in occrued
liobilities on the Consolidoted Bolonce Sheets.
Employee Shore Ownership Plon
Effective December I 5, 201 5, Hydro One estoblished on Employee
Shore Ownership Plon (ESOP). Under the ESOP, certoin eligible
monogement ond non-represented employees moy contribute
between 1% ond 6% of their bose solory towords purchosing
common shores of Hydro One. The Compony motches 50% of lhe
employee's conkibutions, up to o moximum Compony contribution of
$25,000 per colendor yeor. ln 2016, Compony contributlons mode
under the ESOP were $2 million (20I 5 - $nil).
Long-term lncentive Plon
Effeclive August 3 1 , 20 I 5, the Boord of Directors o[ Hydro One
odopted on LTIP. Under the LTIP, long-term lncentlves 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, consislent wilh the
provisions of the plon. The oggregote number o[ shores issuoble
under the LTIP sholl not exceed I 1,900,000 shores of Hydro One.
The LTIP provides llexibllily to oword o ronge o{ vehicles, including
restricted shore units (RSUs), performonce shore units (PSUsl, slock
oplions, shore oppreciolion rights, restricted shores, deferred shore
units ond other shorebosed owords. The mix of vehicles is intended
to vory by role to recognize the level of executive occountobility for
overoll business performonce.
Durlng 2016, the Compony gronted owords under its LTIP, consisting
o[ PSUs ond RSUs, oll o[ which ore equity settled, os follows:
Yeor ended Decenber 3l 201 6
Number of
PSUs
Number of
RSUs
Units outstonding -Jonuory 1 , 2016
Units gronted 235,420 258,970
Units forfeited (4,820) (4,820)
230,600 254,150
The gront dote totol foir volue o[ the owords wos $ l2 million
(2015 - $nil). The compensolion expense recognized by the
Compony reloting to these owords during 2016 wos $3 million
(2015 - $nil).
25. Noncontrolling lnterest
On December l6,2Ol4, tronsmisslon ossets tololling $526 million
were lronsfened from Hydro One Networks to B2M LP. This wos
finonced by 60% debt ($316 millionl ond 40% equity ($2 l0 million).
On December 17, 2014, the Sougeen Olibwoy Notion (SON)
ocquired o 34.2% equity interest in B2M LP for considerolion of
$72 million, represenling the foir volue of the equity interest ocquired
The SON's initiol investment in B2M LP consisls of $50 million ol
Closs A unils ond $22 million o[ Closs B units.
The Closs B units hove o mondotory put option which requires thot upon
the occunence o[ on enforcement event (i.e. on event o[ deloult such os
o debt defoult by the SON or insolvency event), Hydro One purchose
the Closs B units of B2M LP for net book volue on the redemption dote.
The noncontrolling interest reloting to the Closs B units is clossified on the
Consolidoted Bolonce Sheet os temporory equlty becouse the
redemption feoture is outside the control of the Compony. The bolonce
of the noncontrolling interest is clossilied within equity.
Appendjrc6Io.Jnrira$ App[ioE$ionpoRT TSX: H Page 341 of 414
The following tobles show the movements in noncontrolling interest for the yeors ended December 3,1, 20,)6 ond 2015
Yeor ended December 31, 2016
(millions of dollors)
Temporory
Equity Equiry Totol
Noncontrolling interesl -Jonuory 1 , 2016 23
(3)
2
52
(6)
4
75
(e)
6
Distributions to noncontrolling interesl
Net lncome ottributoble to noncontrolli inleresl
Noncontrolling interest - December 3l , 20l6 22 50 72
Yeor ended December 31, 201 5
lnillions of dollors)
Temporory
Equil'y Equily Totol
Noncontrolling interest -Jonuory I , 2015
Distributions to noncontrolling interest
Nel income ottributoble 1o noncontrolling inleresl
zt
(11
3
49
14)
7
70
{s)
t0
Noncontrollinq lnteresl - December 3l , 2015 23 52 75
26. Reloted Porty Tronsoctions
The Province is the moiority shoreholder of Hydro One. The IESO, Oniorio Power Generotion lnc {OPG), OEFC, OEB, ond Hydro One Brompton
ore reloted porties to Hydro One becouse they ore controlled or significontly influenced by the Province.
Reloted Porty Tronsoction
Yeor ended December 3l
2016 201 5
lmillions of dollors)
Provincel Dividends poid
Common shores issued2
IPO cosls subsequenlly reimbursed by the Province3
451 BBB
2,600
7
IESO Power purchosed
Revenues for tronsmission services
Distribution revenues reloted to rurol rote protection
Distrlbution revenues reloted lo the supply o[ electricity to remote norlhern communities
Funding received reloted to Conservotion ond Demond Monoqemenl progroms
2,096
1,549
125
32
63
2,318
1,548
)27
32
70
OPG Power purchosed
Revenues reloted to provislon of construction ond equipment moinlenonce services
Costs expensed reloted to lhe purchose of services
6
5
I
il
7
I
OEFC Poyments in lieu of corporote income toxes4
Power purchosed Irom power controcls odministered by the OEFC
Indemnificotion fee poid (terminoted effective October 3l , 20,l5)
1
2 933
6
B
OEB OEB fees il 12
Hydro One Bromptonl Revenues from monoq ond smort meler network services J
I On August 3 I , 201 5, Hydro One lnc. completed the spinoff of its subsidiory, Hydro One Brompton, to the Province.
2 On November 4,2O15, Hydro One issued common shores to the Province for proceeds of $2.6 billion.
3 ln 201 5, Hydro One incurred certoin IPO reloted expenses totolling $7 million, which were subsequently reimbursed to the Compony by the Province.
a ln 2O15, Hydro One mode PlIs 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.
az70->r
6-.
E6aO
1.2fra
=om=ZV;Im(,
3
Appendix 6 to Joint Application HyDRo oNE umtrED oNE oF NoRTH AMERrcA,s Lenorsr rP€Sft 0#A&f *14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The omounts due to ond from reloted porties os o result of the tronsoctions refened to obove ore os lollows:
December 31
lnillions of dollors)2016 201 5
Due from reioted porties
Due to reloted portiesr
rlncludedinduetorelotedportiesotDecember3l ,20l6oreomountsowingtothelESOinrespectof powerpurchosesof $l43million(2015-
$ I 34 million).
r58
11471
t9t
(r 38)
27. Consolidoted Stotements of Cosh Flows
The chonges in noncosh bolonces reloted to operotions consisl o[ the following
Yeor ended Dxember 3l
lmillions of dollors)2016 201 5
Accounts receivoble
Due from reloted porties
Moteriols ond supplies
Prepoid expenses ond olher ossels
Accounts poyoble
Accrued ltobilities
Due to reloted porties
Accrued interest
Longlerm occounts poyoble ond other liobilities
Posl-reti rement o nd postem ployment benef it lio bllity
(60)
33
2
(l s)
t9
53
9
9
6
78
245
JJ
2
4
t23)
lts)
l8e)
14)
60
r34 2t3
Copiiol Expenditures
The following toble reconciles between investments in property, plont ond equipment ond the omount presented in the Consolidoted Stotements of
Cosh Flows ofter occounling for copitolized depreciotion ond the net chonge in reloted occruols:
Yeor ended December 3 I
(millions of dollors) 2016 2015
Copitol inveslments in property, plont ond equipment
Copitolized depreciotion ond net chonge in occruols included in copitol investments
in properV, plont ond equiprent
(r ,630) (r ,623)
30 2B
Copitol expendil!res - property, plont ond eq (r,600) (r ,5es)
The following toble reconciles between investments in intongible ossets ond the omount presented in the Consolidoted Stotements ol Cosh Flows
olter occounting for the net chonge in reloted occruols:
Yeor ended December 3 I
lnillions of dollors) 2016 2015
Copitol investments in intongible ossets
Nel chonge in occruols included in .opitol inu"rt*"nt
167l (40)
6 3
Copitol expenditures - intonqible ossets (61)137)
Appentiip6lo Jmnt Appli,qe.lisft poRT TSX: H Page 343 of 414
Copitol Contributions
Hydro One enters into controcls governed by the OEB Tronsmission
System Code when o konsmission cuslomer requests o new or
upgroded tronsmission connection. The customer is required lo moke
o copitol conlribution to Hydro One bosed on the shortfoll between
the present volue of the costs of lhe connection focility ond the present
volue of revenues. The present volue ol revenues is bosed on on
estimote of lood forecost for the period of the conhocl wlth Hydro
One. Once lhe connection focility is commissioned, in occordonce
Supplementory lnformotion
Yeor ended December 3 I
(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 contrlbutions from the customer. The
increose or decreose in copitol contributions is recorded directly to
fixed ossels in service. ln 2016, copitol conlributions from lhese
reossessments totolled $2.l million (2015 - $57 mlllion), which
represenls the difference between the revised lood forecost o[
electricily tronsmitted compored to the lood forecost in the originol
controct, subiect to certoin odjustments.
2016 2015
Net interest poid
lncome toxes ,z PlLs poid
418
32
416
2,933
28. Contingencies
Legol Proceedings
Hydro One is involved in vorious lowsuils, cloims ond regulotory
proceedings in the normol course of business. ln the opinion of
monogement, the oulcome of such motters will not hove o moteriol
odverse effect on the Compony's consolidoted finonciol position,
results of operotions or cosh flows.
Hydro One lnc., Hydro One Networks, Hydro One Remole
Communities, ond Norfolk Power Distribution lnc. ore delendonts in o
closs oction suit in which the representolive plointiff is seeking up lo
$ I 25 million in domoges reloted to ollegotions of improper billing
proctices. A certificotion motion in the closs oction is pending. Due to
the preliminory stoge of legol proceedings, on estimote of o possible
loss reloted to this cloim connot be mode.
December 31, 2016
(millions of dollors)2017
Tronsfer of Assets
The tronsfer orders by which the Compony ocquired certoin of
Ontorio Hydro's businesses os of April l, 1999 did not tronsler title
to some ossets locoted on Reserves (os defined in the lndion Act
(Conodo)). Currently, the OEFC holds these ossets. Under the terms
of the tronsfer orders, the Compony ls required to monoge these
ossets until it hos obtoined oll consents necessory to complete the
tronsfer o[ 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 consents. In 20.l6, the
Compony poid opproximotely $l million (20,l5 - $1 milllonl ln
respect of consents obtoined. lf the Compony connot obtoin the
required consents, the OEFC will continue to hold these ossets for on
indefinite period of time. lf the Compony connol reoch o sotisloctory
settlement, it moy hove to relocote lhese ossets to other locotions ot o
cost thot could be substontiol or, in o limited number of coses, to
obondon o line ond reploce it with dieselgenerotion focilities. The
costs reloting lo these ossets could hove o moteriol odverse effect on
the Compony's results o[ operotions if the Compony is not oble to
recover them in fuDre rote orders.
2019 2020 2021 Thereofter
29. Commitments
The following toble presents o summory of Hydro One's commitments under leoses, outsourcing ond other ogreements due in he next 5 yeors ond
thereofier.
20r I
=zzo>r
6a
E6aOi,9fra
=om=zaalmI
3
Outsourcing ogreements
Long-term softwore,/meter ogreement
Operoting leose commitmenls
165
l7
il
102
t7
l0
94
t6
6
2
17
10
9
5
2
2
I
3
Appendix 6 to Joint Application HyDRo oNE LrmrrED oNE oF NoRTH AMERTCA'S uncesr Pra&fr lrtABgf 414
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outsourcing Agreements
Inergi LP {lnergi), on offiliote of Copgemini Conodo lnc., provides
services lo Hydro One, including setllements, source to poy services,
poy operotions seNices, informotion technology, finonce ond
occounting services. The ogreemenl with Inergi for these services
expires in December 2019. ln oddition, lnergi provides cuslomer
service operotions oulsourcing services lo Hydro One. The ogreement
for lhese services expires in Februory 201 B.
Brookfield Globol Integroted Solutions ([ormerly Brook[ield Johnson
Controls Conodo LP) lBrookfield) provides services lo Hydro One,
including locililies monogement ond execution of certoin copitol
projects os deemed required by the Compony. The ogreement with
Brookfield for these services expires in December 2024.
Longterm softwo re/meter ogreement
Trilliont Holdings Inc. ond Trilliont Neworks (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 pro{essionol services. The ogreement with Trilliont for
these services expires in December 2025,6ut Hydro One hos the
option to renew for on odditionol term of five yeors ot its sole
discretion.
Operoting Leoses
Hydro One is committed os lessee lo irrevocoble operoting leose
conlrocls for buildings used in odminlstrotive ond service-reloted
functions ond storing lelecommunicotions equipmenl. These leoses
hove typicol terms of between three ond live yeors, but severol leoses
hove lesser or greoter terms to oddress speciol circumstonces ond/or
opportunllies. Renewol options, which ore generolly prevolent in most
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 reskictions ploced upon Hydro
One by entering inlo these leoses. During lhe yeor ended
DecemGr 3 I , 20 I 6, lhe Compony mode leose poyments totolling
$ll mtllion (2015 - $Z million).
Other Commitments
Prudentiol Support
Purchosers of electricity ln Onlorio, through the IESO, ore required to
provlde security to mitigote the risk of their defoult bosed on their
expected octivily in the morkel. As ot December 31 , 2016, Hydro
One lnc. provided prudentiol support to the IESO on beholf of its
subsidiories using porentol guorontees of $329 million (2015 -
$329 million), ond on beholf of o distributor using guorontees of
$ I million (20.l5 - $ 1 million). In odditlon, os ot December 3l ,
20 1 6, Hydro One lnc. provided letters of credit in the omount of
$24 million (2015 - $15 million), including $17 mtllion (2015 -
$ I 5 million) to the IESO. The IESO could drow on these guorontees
ond,/or lerers of credit if these subsidiories or distrlbutor foil to moke
o poymenl required by o defoult notice issued by the IESO. The
moximum polentiol poyment is the foce volue of ony letters o[ credit
plus the omount of the porentol guorontees.
Retirement Compensotion Arrongements
Bonk letters o[ credit hove been issued to provide securify for Hydro
One Inc.'s liobillty under the terms of o trust fund estoblished pursuont
to the supplementory pension plon for eligible employees of Hydro
One lnc. The supplementory pension plon trustee is required to drow
upon these letters of credit i[ Hydro One lnc. is in defoult o[ its
obligotions under the terms o[ lhis plon. Such obligotions include the
requirement lo provide the kustee wilh on onnuol octuoriol report os
well os leflers of credit sufficient to secure Hydro One Inc.'s liobility
under the plon, lo poy benefits poyoble under the plon ond to poy
lhe letter of credit fee. The moximum potentiol poyment is the foce
volue of the letters of credil. At December 3 1 , 20 1 6, Hydro One
lnc. hod letters of credit of $
.j50 million {20,l5 - $ I 39 million}
outstonding reloting to reliremenl compensolion orrangements.
30. Segmented Reporting
Hydro One hos three reportoble segments:
o The Tronsmission Business, which comprises the tronsmission of
high voltoge electricily ocross lhe province, interconnecting more
thon Z0 locol distrlbution componies ond certoin lorge directly
connecled industriol cuslomers throughout the Ontorio
electricity grid;
r The Distribution Business, which comprises the delivery of eleclricity
to end cuslomers ond cerloin other municipol electricity distributors;
ond
r Other Business, which includes certoin corporote octivities ond the
operotions of the Compony's telecommunicotions business.
The designotion of segments hos been bosed on o combinotion of
regulotory stotus ond the nolure of the services provided. Operoting
segments of the Compony ore determined bosed on informotion used
by the chief operoting decision moker in deciding how to ollocote
resources ond evoluote the performonce o[ eoch of the segments. The
Compony evoluotes segmenl performonce bosed on income before
finoncing chorges ond income toxes from continuing operolions
(excluding certo in ollocoted corporote governonce costs).
Appen,#p6le'JnftS AppliontionpoRT TSX: H Page 345 of 414
The occounting policies lollowed by lhe segments ore the some os those described in the summory of significont occounling policies (see note 2).
Yeor ended December 3 I , 201 6
lmillions of dollors)Tronsmission Diskibution Other Consolidoted
Revenues
Purchosed power
Operotion, mointenonce ond odminiskotion
Depreciotion ond omortizotion
r,584
382
390
4,915
3,427
608
379
53
79
I
6,552
3,427
r,069
778
lncome (loss) before finoncing chorges ond income toxes 812 50r (35) 1,278
Copitol investments 988 703 6 1,697
Yeor ended December 31, 201 5
lmillions of dollors)Tronsmission Diskibution Other Consolidoted
Revenues
Purchosed power
Operotion, mointenonce ond odministrolion
Depreciotion ond omorlizotion
r,536
414
374
4,949
3,450
633
380
53
BB
5
6,538
3,450
1,t35
759
lncome {loss) before [inoncing chorges ond income toxes 748 486 (40)t,194
Copitol investments 943 711 9 i,663
Totol Assets by Segment:
December 3 I
lnillions of dollors)2016 2015
Tronsmission
Distribution
Other
13,0O7
9,337
3,007
12,045
9,200
3,049
Totol ossets 25,35 r )A )AA
All revenues, cosls ond ossets, os the cose moy be, ore eorned, incurred or held in Conodo.
31 . Subsequent Events
Dividends
On Februory I, 2017 , prefened shore dividends in the omount o[
$4 million ond common shore dividends in the omount of
$ I 25 million ($0.2 1 per common shore) were declored.
azzoD4
A6
>o@Ot9fia
=om=z0;ImI
3
Appendix 6 to Joint Application HyDRo oNE LtMtrED oNE oF NoRTH AMERtcA's ,o*orsr P€gft 046rgf *14
)
BOARD OF DIRECTORS
& SENIOR LEADERSHIP TEAM
@ For detoiled biogrophicol informotion
of Hydro One Limited boord members
ond senior leodership, go to
) HydroOne.com/lnvestors
BOARD OF DIRECTORS
I Dovid Denison, o.c., rcPA, FcA
Choir of the Boord
2 lon Bourne, cD.D, F.rcD
Boord Choir, Bollord Power Systems
s Chorles Brindomour
CEO, lntoct Finonciol Corporotion
a Morcello (Morcl Coiro
Vice Choirmon,
Reslouronts Bronds lnternotionol
s Christie CIork, rcr, rcpa
Director, Loblow Componies
o George Cooke
Boord Choir,
OMERS Administrotion Corp
7 Mo4goret (Morionne) Horris
Boord Choir, IIROC
I Jomes Hinds
Former Boord Choir, IESO ond OPA
r Kothryn J. Jockson, pn.o
Director, Portlond Generol Electric
l0 Roberto Jomieson o.c., c.M., r.p.g rr.B, u.D lHoN)
Pres'den' ond CEO, lndspire
I i Hon. Fronces L, lronkin, o.c., p.c., c.M.
Member o[ Senote o[ Conodo
tz Philip 5. Orsino, o.c., rcPA, FcA
Directot Bonk o[ Montreol
13 Jone Peverell, rcMA, rcD.D
Director, Conodion lmperiol
Bonk of Commerce
la Gole Rubenstein
Portner, Goodmons [[P
t5 Moyo Schmidt
President ond CEO, Hydro One Limited
SENIOR LEADERSHIP TEAM
15 Moyo Schmidt
President ond CEO
16 Poul H. Borry
EVP, Strotegy
& Corporote Developmen'
iz Greg Kiroly
Chief Operoting Officer
l8 Judy McKellor
EVP Chief Humon
Resources Officer
t9 Ferio Pugliese
EVB Customer Core
& Corporote Affoirs
20 Jomes (Jomie) Scorlett
EVP, Chief Legol Offtcer
zt Michoel Vels
Chtef Finonctol Officer
15/
AppenCix6tp JnffiI Anpliqalion'oRT TSX: H Page347 of414
211 1
7
1t
4 t6
r8
20
17
l9
2l
r-tDt
5/86
129
!B
l0
[:
13)r\o.t\
14
CORPORATE & SHAREHOTDER
INFORMATION
CORPORATE OFFICES
483 Boy Street, Souih Tower
Toronlo, Onlorio, M5G 2P5
r.416.345 5000
www.HydroOne.com
CUSTOMER INOUIRIES
Cuslomer Service:
1.888.664.9376 or
[e-mail]
Report on Emergency 124 hours):
1.800434 r235
SHAREHOLDER SERVICES
lf you ore o registered shoreholder ond hove
inqulries regording your occount, wish to chonge
your nome or oddress, or hove queslions
obout dividends, duplicote moilings, lost slock
ceriificoles, shore tronsfers or estote settlements,
conlocl our lronsfer ogenl ond regislror:
Computershore Trust Compony of Conodo
100 University Avenue, 8th Floor
Toronlo, ON M5J 2Yl
l.5l4 982 7555 or 1 800.564.6253
[e-mail]
INSTITUTIONAL INVESTORS AND ANALYSTS
lnstitutionol investors, securilies onolysls ond
others requiring oddltionol finonciol informotion
con visil HydroOne.com/lnvestors
or contocl us ol:
1.416.345 6867
lnvestor. [e-mail] or
[e-mail]
MEDIA INQUIRIES
I 416 345 6868 or 1.877.5067584
Medio. [e-mail]
STOCK EXCHANGE TISTING
Toronio Slock Exchonge (TSX): H
{cusrP #44BBf 20B)
EOUITY INDEX INCLUSIONS
Dowlones Select Utilities (Conodo) lndex
FTSE All-World lndex Series
MSCI World {Conodo) lndex
S&P/TSX Composite I ndex
S&P/TSX Utilities lndex
S&P/TSX Composite Dividend lndex
S&P/TSX Composite [ow Volotility lndex
DEBT SECURITIES
For deloils of the publlc debt securities of
Hydro One ond ils subsidiories, pleose reler
to the 'Debt lnformofion" seclion under
HydroOne.com/l nveslors
INDEPENDENT AUDITORS
KPMG LLP
ON-LINE INFORMATION
Hydro One is commitled to open ond full
finonciol disclosure ond besl proctices in
corporoie governonce. We invile you to
visil lhe lnveslor Relotions section o[
HydroOne.com/lnvestorRelotions where you
will find odditionol informotion obout our
business, including events ond presenlotions,
news releoses, regulotory filings, governonce
proclices, corporote sociol responsibility ond
our conlinuous disclosure moleriols, including
quorterly finonciol releoses, onnuol informotion
[orms ond monogement informotion circulors.
You moy olso subscribe lo our news by emoil
to oulomoticolly receive Hydro One news
releoses electronicolly.
COMMON SHARE DIVIDEND INFORMATION
2017 Expected Dividend Dotes
Record Dole*: Poyment Dote*:
Morch 14,2017
luoe l3,2Ol7
Sepiember 12,2017
December l2,2Ol7
Morch 3l ,2017
)une 30, 2017
Seplember 29,2017
December 29,2017
* Subiect to Boord opprovol
Unless indicoted otherwise, oll common shore
dividends poid by Hydro One ore deslgnoted
os "eligible" dividends for the purposes o[
lhe lncome Iox Act lConodol ond ony similor
provinciol legislotion.
DIVIDEND REINVESTMENT PLAN IDRIP)
Hydro One offers o convenient dividend
reinveslmenl progrom for eligible shoreholders
lo purchose odditionol Hydro One shores by
reinvesting lhelr cosh dividends wilhoul incurring
brokeroge or odminiskotion fees. For plon
informolion ond enrolmenl moieriols or lo
leorn more obout the Hydro One DRIP, visil
HydroOne.com/DRIP or Compulershore Trust
Compony of Conodo ol lnveslorCenhe.com/
HydroOne
SUSTAINABILITY
Hydro One is committed lo continuing lo
grow responsibly ond we focus our sociol
ond environmentol sustoinobility efforts where
we con moke the mosl meoningful impocls
on both. To leorn more. visil HydroOne.com/
OurCommitmenl
CAUTION REGAIDTNG FORWARD.TOOKING INFORIIATION AND OTHER RISKS
This onnuol report includes forwordJooking slolements oboul the finonciol condition, plons ond prospects
of Hydro One thot involve risks ond uncertoinfies ond nonCAAP mmsures thol ore detoiled in the "Risk
Monogement ond Risk Foctors', 'Forword-Looking Stotements ond lnformotion", ond "Non-GAAP Meosures"
sections of fie MD&A contoined herein, which should be reod in coniunction with oll sections of this document.
&THIS DOCUMENT IS PRIMARITY PUBTISHED IN ELECIRONIC FORMAT TO MINIMIZE ITS
ENVIRONMENTAL IMPACT. PI-EASE THINK BEFORE PRINTING.
THE FIBRE USED IN THE MANUFACTURE OF THE STOCK OF THE PRINTED VERSION COMES
FROM WEI.I,.MANAGED FORESTS, CONTROTI-ED SOURCES AND RECYCI.ED WOOD OR FIBRE.
SOCIAL MEDIA
Foliow Hydro One on:
@ Stoy up-to-dofe with the lotest
Hydro One investor informotion ol
) HydroOne.com/lnveslors
@ 2017 llydro One [imiled
Printed in Conodo
Design by Bould Creotive
bouldcreotive.com
Fl rwnrnpl t*itt"..omlHydroOne
H 4fi.,??Sneor,,cior
@ u;m:Inhy*.oon"
il rruxrorNl||l link"din..omlcompony/hydro-one
m tfiB, PR
-F Awards
Appendix 6 to Joint Application HyDRo oNE LtMtrED oNE oF NoRTH AMERTcA's Lrncrsr rP&g€ &4&Of,A14
H
HYDRO ONE TITVIITED 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 LOCAL DISTRIBUTION OPERATION DELIVERING
ELECTRICITY TO MORE THAN I.3 MILLION RESIDENTIAL AND BUSINESS
CUSTOMERS ACROSS 75 PERCENT OF THE GEOGRAPHY OF THE PROVINCE
- f {f f t
f ftIvy
\4
g
i
fr
H
h yd ro
HydroOne.com
Appendix 6 to Joint z\pplication Page 349 of 4l4
hy dro e
ANNUAL INFORMATION FORM
FOR HYDRO ONE LIMITED
FOR THE YEAR ENDED DECEMBER 31,2016
March 27,2017
Appendix 6 to Joint Application Page 350 of4l4
TABLE OF CONTENTS
GLOSSARY
PRESENTATION OF INFORMATION ..............
FORWARD-LOOKING INFORMATION..............
ELECTRICITY INDUSTRY OVERVIEW...............
General Overview
Overview of an Electricity System.....
THE ELECTRICITY INDUSTRY IN ONTARIO
Regulation of Transmission and Distribution..............
Transmission
Distribution.,
Legislative Provisions Specific to Hydro One
Elimination of Certain Legislation With Respect to Hydro One...............
I
4
4
7
7
7
7
7
8
9
9
Recent Legislative Amendments Affecting the Electricity Industry Generally
RATE-REGULATED UTILITIES.
Rate Appl ications in Ontario....................
CORPORATE STRUCTURE................
Incorporation and Office
Corporate Structure and Subsidiaries
GENERAL DEVELOPMENT OF THE BUSINESS
l0
l0
t2
12
l2
l2
l3
t4
t4
l4
l4
t7
17
22
26
27
27
27
28
28
29
30
Incorporation and Initial Public Offering...................
Acquisition of Hydro One Inc
Hydro One Brampton Nefworks Inc.
Secondary Common Share Offering
First Nations and Hydro One Limited Shares
Agreement to Acquire Orillia Power
Acquisition of Great Lakes Power
Integration of Haldimand Hydro and Woodstock Hydro...........
Acquisitions Generally
Customer Focus............
BUSINESS OF HYDRO ONE.............t7
4
5
5
5
5
5
5
Business Segments
Transmission Business
Distribution Business
Other Business
First Nations and Mdtis Communities
Outsourced Services........
Employees
Health, Safety and Environmental Management
Environmental Regulation..
Insurance......
Reorganizations
RISK FACTORS
Dividend Policy
DIVIDENDS
30
30
Dividend Reinvestment Plan
3l
31
DESCRIPTION OF CAPITAL STRUCTURE 31
Appendix 6 to Joint Application Page 351 of 414
General Description of Capital Structure .3t
.32
.32
Common Shares
Preferred Shares
MARKET FOR SECURITIEs 33
Trading Price and Volume
Penalties or Sanctions.....
.33
DIRECTORS AND OFFICERS..
Directors and Executive Officers
Information Regarding Certain Directors and Executive Officers
Corporate Cease Trade Orders and Bankruptcies.
.....34
.....3 8
Confl icts of Interest.....
38
39
39
39Indebtedness of Directors and Executive Officers
AUDIT COMMITTEE 39
40
41
42
42
42
43
48
48
48
50
51
5l
5l
52
53
Pre-Approval Policies and Procedures
AGREEMENTS WITH PRINCIPAL SHAREHOLDER
Registration Rights Agreement
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Relationships with the Province and Other Parties
LEGAL PROCEEDINGS AND REGULATORY ACTIONS....................
TRANSFER AGENT AND REGISTRAR..........
ADDITIONAL INFORMATION............
SCHEDULE *A" HYDRO ONE LIMITED AUDIT COMMITTEE MANDATE..................
Appendix 6 to Joint Application Page 352 of 414
ll
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 \ryh" means gigawatt-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.
Appendix 6 to Joint Application Page 353 of 414
I
"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 Act (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 Energy 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 -
Govemance Agreement - Govemance Matters - Election and Replacement of Directors - Province's
Right to Replace the Board".
"Reserve" means a "reserve" as that term is defined in the 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 - 10% 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 - Govemance 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".
"TS" means transmission station.
Appendix 6 to Joint Application Page 354 of 414
2
"TSX" means the Toronto Stock Exchange.
('T!Yh" 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.
J
Appendix 6 to Joint Application Page 355 of 414
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 AnnualMD&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 urvw.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 government 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 electricity industry, such as
"rate-regulated", "rate base" and "return on equiQl". 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 ofreturn 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;
4
Appendix 6 to Joint Application Page 356 of 414
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 Mdtis communities,
statements related to environmental matters, and the Company's expected future environmental
expenditures; expectations related to the effect of interest 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%o 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 identifu 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-party 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 occurrences 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
5
a
a
a
a
Appendix 6 to Joint Application Page 357 of 414
a
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
attract 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.
a
a
a
a
a
a
a
a
o
a
a
a
6
Appendix 6 to Joint Application Page 358 of 414
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 electricify.
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:
a
W## *=ffi
-i-T*'-'-=-B# .;n:#g,*fffH*,,
GenerolDr
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.
Onturio Energlt Boord
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,
7
Appendix 6 to Joint Application Page 359 of 414
Imns[ormcr
(ln<rcorcd to
Higha \&ltogc)
Ironcmisriil
Syrlem
Ironr{ormer
lDecrco*d to
Lorvcr Volngc|
Dirlribution
5yrhm
Tronslormer
(DxrGorcd lo
tower volhgel
to promote economic efficiency and cost effectiveness in the generation, transmission,
distribution, sale and demand management of electricity and to facilitate the maintenance of a
fi nancially 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 generation 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
parlicipants 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 governed 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 Norlh 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 reliabiliry agencies in other jurisdictions to ensure energy
adequacy and security across the interconnected bulk electricity system in North America.
National Energlt Board
The National Energy Board is an independent federal regulatory agency, govemed 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 ll active intemational 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 98%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
8
a
a
Appendix 6 to Joint Application Page 360 of414
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 electricity 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 78oh of the province's customers.
Through its wholly-owned subsidiary Hydro One Inc., Hydro One owns the largest local distribution
company in Ontario, which serues over 1.3 million, predominantly rural customers, or approximately
26oh 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 10o/o ownership restriction with respect to
Voting Securities and restricts the Province from selling Voting Securities if it would own less than 40%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 0t% 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 lOYo 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.
9
Appendix 6 to Joint Application Page 361 of 414
Maintenance of 40% Ownership
As of December 31, 2016,the 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 than40%o of the outstanding number of Voting Securities of any class or
series, the Province must, subject to the approval ofthe Lieutenant Governor 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 lhan 40o/o 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
ln2015, 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 31,2018.
Ontario Rebatefor Electricity Consumers Act, 2016
The Ontario Rebate for Electricity Consumers program commenced on January 1,201'1 . 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.
Appendix 6 to Joint Application
t0
Page 362 of 414
Energt Statute Low Amendment Act, 2016
The Energ,, 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 Ac| the Electricity Act and the Green Energt Act, 2009 (Ontario). The Energy
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 Law Amendment Act, 2016 also prohibits
new feed-in tariff programs, 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
Bill 27 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 between 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.
Appendix 6 to Joint Application
il
Page 363 of4l4
RATE-REGULATED UTILITIES
Rate Applications in Ontario
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 electricify 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 electricity 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 retum on equiry or "ROE" is the
rate of return that a regulator allows the utility to eam 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 earn more than its allowed return on equity.
Incorporation and Offi ce
Hydro One Limited was incorporated on August 31,2015, under the OBCA. Its registered office and head
office is located at 483 Bay Street, 8th 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.
Appendix 6 to Joint Application
l2
Page 364 of 414
CORPORATE STRUCTURE
On October 31,2015, allof 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
I preferred shares of Hydro One Limited.
On November 4,2075, the arlicles 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.
('unrttrrxt slurrur anl
S+virs I prr'frrttd ;hlr*r
("trntr*on sh;trci
Puhhi l)r'ht
I (nr",,I {rU"{rl'
I i 3:1",,lt 1",,
Rett* RrLulrltrl llusirrrssrs \0n_Rllt(-Rc,;ulxtcrl
llurintsxr
Notes:
(l)As of Decernber 31, 2016, the Province directly owned approximately 70.1%o of Hydro One Limited's outstanding
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.
(2)
Certain of Hydro One's subsidiaries are described below
a Hydro One Inc. - acts as a holding company for Hydro One's rate-regulated businesses. Its
publicly-issued debt continues to be outstanding.
t3
Appendix 6 to Joint Application Page 365 of 414
Pnryincc'r'l'ubbc
Shurultr.rltlcrs
llydru Llnt'Lirurtt.d
{C}nurrirr)
I lydnr Onc Inc
(Ontlrio)
llr,tlro Ons Rr:nxrlr
t'onrnrunitics lns,
IOltturiul
H1'drr,r ()nc
Nclstrtks lne
(Llntrriol
lll'tlnr ()nc
'lcL'com lnr.
tOrttnrio)
Hydro One Networks Inc. - the principal operating subsidiary that carries on Hydro One's rate-
regulated transmission and distribution businesses.
Hydro One Remote Communities Inc. - generates and supplies electricity to remote
communities in northem Ontario.
a Hydro One Telecom Inc. - carries on Hydro One's non-rate-regulated telecommunications
business.
GENERAL DEVELOPMENT OF THE BUSINESS
The following key events occurred in 2015,2016 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
S167,075,000. 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 Networks 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
$1,713,083,020. On April29,2016,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.
a
a
Appendix 6 to Joint Application
14
Page 366 of 414
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 2017 is required for this transaction to close. Hydro One Limited is not a party 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 $ I 5 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 approvalof the transaction by the OEB, Hydro One
completed the acquisition of Great Lakes Power, an Ontario regulated electricity transmission business
operating along the eastern shore of Lake Superior, norlh 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 opportunities or other strategic
initiatives outside of Ontario to diversifo 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
Appendix 6 to Joint Application
l5
Page367 of4l4
availability of customer service at the local level, and increasing face to face customer engagement.
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 ll/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. In 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 Rebate for E lectricity Consumers Program
See "The Electricity Industry in Ontario - Recent Legislative Amendments Affecting the Electricity
Industry Generally - Ontario Rebate for Electricity Consumers Act, 2016" for infornation 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 unfairness, 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.
16
Appendix 6 to Joint Application Page 368 of 414
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 and 2016 revenues of over
56.5 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
Overview
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 660/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 5l% of its total assets as at
December 31,2016, and accounted for approximately 51o/o of its total revenue in 2016, net of purchased
power and 50Yo of its total revenue in 2015 , net of purchased power.
The Company's transmission business is one of the largest in North America and is a rate-regulated
business that earns 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 counterparfy 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 party land use.
17
Appendix 6 to Joint Application Page 369 of 414
Business
The Company's transmission system serves substantially all of Ontario, with the exception of the James
Bay and Fort Erie areas, and transpofted 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 impofted 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 network 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 parlnership 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 a66Yo 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 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.
See "General Development of the Business - Acquisitions Generally" for more information.
Appendix 6 to Joint Application
t8
Page 370 of 414
Regulation
Transm ission 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 internal 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 transmifter. 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 portion 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 January2015, the OEB approved Hydro One Networks Inc.'s 2015 transmission rate order for
transmission services, which provided for a revenue requirement of S1 ,47'7 million for 2015 and
$l,5l6million for 2016 (excluding B2M Limited Partnership). These revenue requirements reflect an
l9
Appendix 6 to Joint Application Page 371 of 414
approved rate base of 59,651 million, return on equity of 9.30% and deemed capital structure of 60% debt
and 40Yo equity. In January 2016,the 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 9.19%o.
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 transmitters before the OEB requires transmitters to choose between the two incentive-based
revenue plan options. In its application, Hydro One Nefworks Inc. requested the OEB's approval of rates
revenue requirements of S1,505 million for 2017 and $1,586 million for 2018. These rates revenue
requirements reflect the requested rate base of $10,554 million for 2017 and $11,226 rnillion for 2018,
and reflect an allowed ROE of 9.19o/ofor eachyear.
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 201 7 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 Paftnership filed an application for revenue requirements covering the 2015
to 2019 period. B2M Limited Partnership requested revenue requirements of $39million for 2015,
$36 million for 2016, $37 million for 2017, 538 million for 2018 and $37 million for 2019. In January
2016,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 December 2016, Great Lakes Power filed an application with the OEB for 2017 rates, requesting an
increase to the approved 2016 revenue requirement of l.9o/o, resulting in an updated revenue requirement
of $41 million.
Reliabilitv 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.
Appendix 6 to Joint Application
20
Page 372 of 414
Regional 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 submitted by transmitters. In Ontario, the regional planning process is led by the transmitter
responsible for a particular geographic region. Forthis 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 ofthe 2 I designated regions. The first cycle of
the regional planning process for all of the 21 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 identiff needs and develop transmission and distribution investment options. Hydro One
also coordinates with the IESO on its Integrated Regional Resource Planning process.
Capital Expenditures
The Company anticipates that it will spend approximately $ 1,086 million to $ I ,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.
21
Appendix 6 to Joint Application Page 373 of 414
Co mpetitive Condittons
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 alternative 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 Law
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
Overview
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 approximately 47o/o of its total revenue in2016, net of purchased power and48o/o
of its total revenue in2015, 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 northern 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 1.3 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
22
Appendix 6 to Joint Application Page 374 of 414
population density in the Company's service territory, the Company's costs to provide distribution
seruices may be higher than those of distributors who service urban areas. Furlhermore, 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 interruptions
experienced al any point along a distribution line in Hydro One's network can cause all customers
downstream of the interruption point to lose power. Accordingly, the reliability of Hydro One's
distribution system is lower than that of local distribution companies which service urban territories 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 its distribution
network. As at December 3 l, 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
23
Appendix 6 to Joint Application Page 375 of 414
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: 4m 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 return 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 of increased 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 ofservice 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 Applications
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 to2017, providing for a revenue requirement of S1,326 million for 2015,
$1,430 million for 2016 and $1,486 million for 2017. The 2015 revenue requirement reflects an approved
24
Appendix 6 to Joint Application Page 376 of 414
rate base of $6,552 million, retum on equity of 9.300/, and a deemed capital structure of 600/o debt and
40Yo 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 Sl,4l5 million from $1,486 million. The 2017
revenue requirement reflects an approved rate base of $7,190 million, return on equity of 8.78%oanda
deemed capital structure of 60'/o 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 January 2017.
Hydro One Networks Inc. expects to file a distribution rate application for 2018 to 2022 in the first
quafter 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 return 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
December3l,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 20 14. 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 1,221 GWh 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.
Appendix 6 to Joint Application
25
Page 377 of 414
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 S771 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. Smart 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".
Co mpetitive Co nditions
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 ,201'7. Load transfer affangements 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 Government
Assets endorsed the need for faster consolidation among local distribution companies in Ontario, which
may result in competition for acquisition or merger opponunities. 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.
26
Appendix 6 to Joint Application Page 378 of 414
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 12o/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 provincialpayments 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 equity
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 Mdtis 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 Mdtis 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 & M6tis Committee of the Board is
responsible for assisting the Board in discharging the Board's oversight of responsibilities relating to
effective occupational health and safefy and environmental policies and practices at Hydro One, and its
relationship with First Nations and M6tis communities.
Outsourced Services
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 party 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 a large 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
27
Appendix 6 to Joint Application Page 379 of 414
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 environmentalhazards 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 safefy 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,ihe evolution of
Hydro One's recordable rate, its key health and safety perforrnance 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 identi! 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 govems, 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
28
Appendix 6 to Joint Application Page 380 of 414
government. 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 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 . 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, 20lC'.
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 und Remediation
Hydro One has a pro-active land assessment and remediation program in place to identifu 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. Addilional 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
29
Appendix 6 to Joint Application Page 381 of 414
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 otherthings, 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
equal to 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.
All of the issued and outstanding common shares of Hydro One Inc. were acquired by Hydro One
Limited in return 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.
Hydro One Inc. and certain of its subsidiaries were required to pay a $2.6 billion "deparlure tax"
to the Ontario Electricity Financial Corporation as a consequence of the initial public offering.
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.
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. [n2016, 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'tbring in
November 2015. The $0.34 per share dividend included $0.13 for the post-IPO period from November 5 to December 31, 2015,
and $0.21 for the quafier ended March 31 , 2016.
a
o
a
Date Declared Record Date Payment Date Amount per Common Share
February 11,2016 March 17,2016 March 31,2016 $0.34'
Mav 5,2016 June 14,2016 June 30,2016 $0.2 r
August 11,2016 September 14,2016 September 30,2016 s0.2 r
November 10,2016 December 14,2016 December 30,2016 s0.21
Appendix 6 to Joint Application
30
Page 382 of 414
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.
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 .
ln2016, 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 $0.265625 per share on each of its Series I
preferred shares and it was paid on February 21,2017 .
Dividend Policy
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 a target payout ratio of '70o/o to 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 entirefy 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 1 preferred shares and no Series 2 preferred shares issued
and outstanding.
Date Declared Record Date Pavment Date Amount per Preferred Share
February 11,2016 N/A February 22.2016 s0.32602739
May 5,2016 N/A May 20,2016 s0.265625
August 11.2016 N/A August 22,2016 $0.26s625
November 10,2016 N/A November 21,2016 $0.265625
Appendix 6 to Joint Application
3l
Page 383 of 414
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 preferred 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 10oh 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 return 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, ifand when declared by the Board, payable quarterly on the 20ft 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
bond yield and3.53%o. The Series I preferred shares will not be redeemable by Hydro One Limited prior
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
converl 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.
3Z
Appendix 6 to Joint Application Page 384 of 414
The holders of Series 2 preferred 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 and3.53%o as reset quarterly. The Series 2 preferred shares will
be redeemable by Hydro One Limited at a redemption price equal to 525.00 for each Series 2 preferred
share redeemed if redeemed on November 20,2025, or on November 20 every fifth year thereafter or
$25.50 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 oftheir 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 525.00 for each Series I preferred share
and each Series 2 prefened 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 1 preferred shares and Series 2 preferred shares. After payment of those amounts, the
holders of Series I 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 I 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 forth the high
and low reported trading prices and the trading volume of the common shares on the TSX for each month
commencing I antary 201 6:
Period Hieh ($) Low ($) Volume
April2016..
May 2016.
June 2016.
22.60
23.31
24.50
24.50
24.84
25.98
21.85
21.90
23.15
23.50
23.56
24.14
3,929,776
4,489,699
7,835,876
21,127,653
23,222,353
30,645,553
Appendix 6 to Joint Application
33
Page 385 of 414
January 2016 ........
February 2016 ........
March 2016.........
Period
July 2016.
August 2016.........
September 2016.........
October 2016.
November 2016
December 2016.
January 2017.........
February 2017.........
March I to March 242017......
Hish ($) 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
9,548,768
7,138,631
7,031,417
6,765,511
I1,932,522
9,719,103
8,368,1 l6
8,400,000
g,4oo,ooo
Committees
26.80
26.48
26.54
26.02
24.58
23.65
24.49
24.17
24.08
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 August31,2015. 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
Ma1,o Schmidt
Ontario. Canada
Paul Barry
North Carolina- United
States
Gregory Kiraly
Ontario. Canada
Judy McKellar
C)ntario^ Canada
Ferio Pugliese
Ontario, Canada
James Scarlett
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, Custonrer
Care and Corporate
Affairs
63 Executive Vice
President, ChiefLegal
Officer
55 Chief Financial Officer
President and Chief Executive
Officer
Executive Vice President,
Strategy and Corporate
Development
Chief Operaling Officer
Executive Vice President, Chief -Human Resources Officer
Executive Vice President,
Customer Care and Corporate
Affairs
Executive Vice President, Chief -Legal Officer
No
Michael Vels
Ontario. Canada
Appendix 6 to Joint Application
34
Chief Financial Officer
Page 386 of 414
Name, Province or State
and Country of
Residence .{ge Position/Title Independent Principal Occupation Committees
David F. Denison
Ontario. Canada
64 Director and Chair of the Yes
Board
Board Chair, Hydro One
Limited and Hydro One Inc.
Ian Bourne'r'
Alberta. Canada
69 Director Yes Chair, Ballard Power Systems
Inc.
Human Resources
Committee (Chair);
Nominating, Corporate
Governance. Public Policl
& Regulatory Committee
Audit Committee; Human
Resources Comrnittee
Charles Brindamour
Ontario. Canada
46 Director Yes Chief Executive Officer. Intact
Financial Corporation
Marcello (Marc) Caira( rr
Ontario, Canada
62 Director Yes Vice-Chairman. Restaurant
Brands International Inc.
Human Resources
Committee; Nominating.
Corporate Governance,
Public Policy & Regulatory
Committee
Christie Clark
Ontario. Canada
63 Director Yes Corporate Director Human Resources
Committee; Nominating.
Corporate Govemance,
Public Poticy & Regulatory
Committee
George Cooke'r)
Ontario, Canada
63 Director Yes President, Martello Associates
Consulting I Chair, OMERS
Administration Corporation
Audit Committee; Health,
Safety, Environment and
First Nations & Mdtis
Committee
Margaret (Marianne)
Harris
Ontario, Canada
59 Director Yes Corporate Director Human Resources
Committee; Health, Safety,
Environment and First
Nations & M6tis
Committee (Chair)
Audit Committee; Health,
Safety, Environment and
First Nations & Mdtis
Committee
James Hinds
Ontario. Canada
59 Director Yes Corporate Director
Kathryn Jackson(1)
Pennsylvania. United
States
59 Director Yes Corporate Director Nominating, Corporate
Governance. Public Pol icy
& Regulatory Committee;
Health, Safety,
Environment and First
Nations & Mdtis
Committee
Roberta Jamieson
Ontario. Canada
64 Director Yes President and Chief Executive
Officer, Indspire
Audit Committee; Health,
Sat'ety, Environment and
First Nations & M6tis
Committee
Audit Committee;
Nominating, Corporate
Governance. Public Policy
& Regulatory Committee
Audit Committee (Chair);
Nominating, Corporate
Governance, Public Policy
& Regulatory Committee
Human Resources
Frances Lankin
Ontario. Canada
62 Director Yes Corporate Director
Philip S. Orsino
Ontario, Canada
62 Director Yes Corporate Director
Jane Peverett(r)58 Director
Appendix 6 to Joint Application
Yes
35
Corporate Director
Page 387 of 414
Name, Province or State
and Country of
Residence Position/Title Independent Principal OccupationAge Committees
British Columbia. Canada
Gale Rubenstein,r)
Ontario. Canada
Committee; Nominating.
Corporate Governance,
Public Policy & Regulatory
Committee (Chair)
Human Resources
Committee; Health, Safety,
Environment and First
Nations & Mdtis
Committee
63 Director Yes Partner, Goodmans LLP
Notes:
( I ) These directors have been designated as the Province's nominees to the board of directors of Hydro One tbr 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 Washbum in 1980.
Effective September 1,2016, 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 equity, 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, City 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 eamed 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
36
Appendix 6 to Joint Application Page 388 of414
(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 on November 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 recognized by 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 Universify, an Honours Bachelor of Arts degree in Social Science and an Honours Bachelor of
Commerce degree from the University 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. Scarlett 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 retum to private law practice in 1990. Mr. Scarlett is
currently a director of Camp Oochigeas, a charity for kids with cancer. Mr. Scarlett eamed 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. In 2015, Mr. Scarlett earned his ICD.D (Institute of
Corporate Directors) designation.
37
Appendix 6 to Joint Application Page 389 of 414
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 eamed 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 earned 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 2%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
assets;
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 of an 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
a
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, 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).
a
Appendix 6 to Joint Application
38
Page 390 of 414
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 transaction) pursuant to a court approved
plan of arrangement under the Canada Business Corporations Act. 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 atthat 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 cou( or regulatory body that would likely be considered impoftant 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 - Audit 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.
39
Appendix 6 to Joint Application Page 391 of4l4
Relevant Education and Experience
Charles Brindamour
Mr. Charles Brindamour is the Chief Executive Officer of Intact Financial Corporation, Canada's largest
properry 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 property 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-l 999), 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 (IESO), a Crown corporation
responsible for operating the electricity market, and was also chair of the former Ontario Power Authority
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 earn 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
40
Appendix 6 to Joint Application Page 392 of 414
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 in20l6. 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. ln2009, 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. [n2014, Ms. Lankin was appointed to the Premier's Advisory Council on Government Assets
whose mandate was to review and identiff opportunities to modernize government business enterprises,
and in 2011 and2012,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 variety 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 SocialResponsibility 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 from2012-2013. 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 serves on the Senate Committee on Internal 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 20ll until he retired in 2014.
Formerly until October 2005, Mr. Orsino was the President and Chief Executive Officer of Masonite
International 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 extemal auditors or any of its affiliates are subject to pre-approval by the
Audit Committee.
Appendix 6 to Joint Application
41
Page 393 of4l4
Auditors'Fees
The aggregate fees billed by KPMG to Hydro One and its subsidiaries in 2016 and2015 for professional
services are presented below:
Audit F
Audit-Related Fees(a)
Tax Fees:
SR&ED(s) Tax Credit Claim
General Tax Advice
Other Fees(6)
Total
Year ended
December 31,2016
$ I ,524,814
$488,854
$90,000
$57,500
s413,643
Year ended
December 31, 2015
$ r,376,s
$ 412,200
s90,000
N/A
N/A
$2,574,811 $1,878,700
Notes:(r) The nature of the services rendered u,as: audit of annual financial statements of the Company and its 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 of financial 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 iiom 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 Governance Agreement and completion of the initial pubtic
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 initialpublic 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 govemance 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.
42
Appendix 6 to Joint Application Page 394 of 414
a
a
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 referred 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 Governance Agreement specifically addresses the following governance matters
The governance 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.
a The election and replacement of directors.
a Approvals requiring a special resolution of the directors
Governance Principles
The Govemance 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 Govemance 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
Governance 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.
a
a
a
a
Appendix 6 to Joint Application
43
Page 395 of 414
a
Dir e c t or Qual ifi c at i on St andards
Under the Governance 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 governance 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 governing 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 current directors whose prior relationship ended
before August 31,2015); and
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 Govemance 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
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 Govemance, Public Policy & Regulatory Committee will nominate
the remaining directors.
44
Appendix 6 to Joint Application Page 396 of 414
a
a
a
B oard N omination Proc es s
Under the Governance Agreement, the Province and representatives of the Nominating, Corporate
Governance, 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 satisfu 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 theNominating, Corporate Governance,
Public Policy & Regulatory Committee will notif,, 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 10 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.
E,lection 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 Governance, Public Policy & Regulatory Committee,
a
a
a
the Province may vote at contested elections,
the Province may seek to replace the Board by withholding votes or voting for removal, and
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 Govemance, 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.
Appendix 6 to Joint Application
45
Page397 of4l4
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 Govemance 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 Aoprovals 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 the appointment and annual confirmation of the Chief Executive Officer, and
changes to certain specified govemance standards specified in the Govemance Agreement to be
"Hydro One's governance standards".
The governance 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
Govemance 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.
46
Appendix 6 to Joint Application Page 398 of 414
a
a
Othet Matters
In addition to the governance 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.
a Acquisition limits with respect to the Province's acquisition of outstanding Voting Securities.
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 Rights
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 notiff the Province of the proposal and provide information in
accordance with the provisions of the Govemance Agreement at least 30 days in advance and must offer
the Province the right to purchase tp to 45o/o 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 parfy.
45% Acquisition Limit
The Province has agreed in the Governance 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.
Appendix 6 to Joint Application
47
Page 399 of 414
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 of shares proposed to be sold if in their reasonable judgment all of the 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 internal 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 MATERIAL 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 l1Yo 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
Overyiew
The Province is Hydro One Limited's principal shareholder. The OEB is the principal regulator of
48
Appendix 6 to Joint Application Page 400 of 414
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
Governance 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 ofApril 1,1999, 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 ofany 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 notifl 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
49
Appendix 6 to Joint Application Page 401 of 414
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 Taxation 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 Taxation 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 Party 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 "2016 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. The 2016 Underwriting Agreement provides
that Hydro One Limited will indemnifu 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 ;
(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 and severally
50
Appendix 6 to Joint Application Page 402 of 414
indemniff 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 Iegislation;
(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
parry 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 of events 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
Appendix 6 to Joint Application Page 403 of 414
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.
Appendix 6 to Joint Application
52
Page 404 of 414
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 reporling including responsibility to oversee:
(a) the independence, qualification and appointment of external auditors;
(b) the integrity of the Company's financial statements and financial reporting process, including the
audit process and the Company's intemal 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 Commiftee 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 Governance 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- I 10. At least one member will otherwise
qualiff 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
53
Appendix 6 to Joint Application Page 405 of 414
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 Committee 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 internal audit function (if other than the Chief
Financial Officer) and the extemal 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 Governance 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
54
Appendix 6 to Joint Application Page 406 of4l4
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 external 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 Auditorsl. 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 external auditors with respect to the conduct of
the annual audit. The extemal 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.
2.evaluate the quality of service, independence, objectivity, professional skepticism and
performance of the external 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 Committee 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 external 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 extemal auditors about all relationships or services
that may impact the objectivity and independence of the external 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 external 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
(d)consider the auditor independence standards promulgated by applicable auditing
55
Appendix 6 to Joint Application Page 407 of 414
J
4
(a)
regulatory and professional bodies
review and approve policies for the hiring by the Company of employees or former employees of
the external 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 external auditors' internal 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 governmental or professional authorities, within the preceding five
years, respecting one or more independent audits carried out by the external 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 external auditors and management, such as any management letter or schedule of
unadj usted d i fferences.
meet periodically with the extemal auditors to discuss their audit plan for the year, progress of
their activities, any significant findings stemming from the extemal 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.
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 Auditors
9. review and approve the appointment, terms of engagement, compensation, replacement or
dismissal of the intemal 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 intemal 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 intemal audits,
any changes required in the planned scope oftheir audit plan and whether there are any disputes,
restrictions or limitations on intemal audit.
ll review summaries of the significant reports to management prepared by the internal auditors, or
the actual reports if requested by the Committee, and management's responses to such reports.
t2 communicate with, as it deems necessary, the internal auditors with respect to their repofts and
56
5
6.
7
8
Appendix 6 to Joint Application Page 408 of 414
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 external auditors and the internal 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 parlicular item;
(c) any material change to the Company's auditing and accounting principles and practices
as recommended by management, the external 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 fi nancial 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 intemal
auditors (together and separately), as it deems necessary:
(a) the adequacy and effectiveness ofthe Company's internal control over financial reporting
and disclosure controls and procedures designed to ensure compliance with applicable
laws and regulations;
Appendix 6 to Joint Application
57
Page 409 of 414
(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 internal
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 eamings 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 types 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.
t9 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.
2l 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 Matters22. 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 equiry 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
20
25.
24.
25
Appendix 6 to Joint Application Page 4l 0 of 414
revenues or expenses.
26. 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.
27. review the organizational structure of the finance function and satisfu itself as to the
qualifications, effectiveness and adequacy of the function.
28. review the work plan and progress on implementation of major information technology system
changes and satisff itself as to the adequacy of the 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.
33. oversee management's monitoring of, compliance with the Company's Code of Business Conduct
and the Whistleblower Policy.
Enterprise Risk Management
34. review the Enterprise Risk Management framework for the Company and assess the adequacy
and completeness of the process for identifuing and assessing the key risks facing the Company.
35. meet with the head of the Enterprise Risk Management function at least semi-annually.
36. 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.
38. review and approve in advance any proposed related-parfy 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 of the Chief Executive Officer and his
or her direct reports.
40. 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
59
Appendix 6 to Joint Application Page 4l I of 414
documents.
41.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.
Appendix 6 to Joint Application
60
Page 412 of 414
hy dro e
Appendix 6 to Joint Application
61
Page 4l 3 of 414
APPENDIX 7
r'*:=
r;/1
i_rra
;
:}:F
5
(:)
r4l
;,I
DIRECT AS SIGNMENT PROTOCOL
Date: September 7,2017
To:
From:
All Employees
KellyNorwood
o
Subject: Protocol for Direct Assignment of Costs Associated with Hydro One's Acquisition of
Avista Corp.
Accounting for Costs Related to Hvdro One Prior to Closinq
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
FERC Acct Sewice Jurisdicition trERC Acct Description Number Pmjcct Description Debit
426500 ZZ ZZ Miscellaneous Income Deduction 77705316 Hydro One Avista Acquisition XXXX
Direct Assisnment of Costs to Hvdro 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 would be separately tracked and directly
assigned to Hydro One.ll2
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 efficiencies, 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 incured for the
benefit of the Utility or Utilities, to a Utility or the Utilities, b) the Companies may procure any
I Time and costs incuned 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
govemance 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 serviceg environmental services and engineering and technical services;
c) the use of office facilitieg including but not limited to office space, furniture, equipment, machinery, supplies, computers and
computer software, communications equipmen! 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
assigred 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.o
llPase
Appendii 7 t5 Joint Application Page I of2
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 (Defened 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.
Hydro One Transaptio&g
To record transaction when employee charges time or incurs costs related to Hydro One:
FERC Pmject
Ac(l Scnico. Jurirdicllion l'f,Rc Acca Dctcripaioo ltfumbcr Proircl Dlrcdption Debit Crcdit
f 86XXX ZZ ZZ MiscellmeousDefenedDebits 777XXXX SubBilling-HydroOne XXXX
To record transaction to establish a receivable from Hvdro One:
FERC Proj€ct
A..t Son,irn .Iurisdicitio n tr.}:R('Ac.t Dcrfinii6n Number Pmicct DcscriDtlon Dcbil ('rolit
t46XXX
t86XXX
ZZ Accouts ReceivrbE Assoc Company - Hydro One
Miscellaneous Defened Debits
777XXX)< Sub Billing - Hydro One
777XXXX Sub Billing - I{ydro One
xxxx
xxxx
To record transaction of a payment made to Avista Corp from Hvdro One:
FERC
Accl Scrricc Juri3dicition !'ERC Acct Of5crinlion
Project
Number Pmicct llestrinlion Iltbil fmdill3txxx
l46XXX
7-Z
7X'
ZZ,
?.2
Cuh
Accouls Rcctivablc Asso6 Company - Hydro Onc 777XXYJ< Sub Bitling - Hydm Onc
xxxx xxxx
For questions regarding direct assigffnent 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.
2lPage
Appendix 7 to Joint Application Page 2 of2
APPENDIX 8
MASTER LIST OF COMMITMENTS
MAST'ER LIST OF COMMITMENTS
A. Reservation of Certain Authority to the Avista Board of Directors [See Direct
Testimony of Morris/Schmidt/Ch ristie/Pu gliesel
Consistent with and subject to the terms of Exhibits A and B to the Merger
Agreement (referred to as "Delegation of Authority") contained in Appendix 5 of
the Joint Application, decision-making authority over commitments 2-15 below is
reserved to the Board of Directors of Avista Corporation ("Avista") and any
change to the policies stated in commitments 2-15 requires a two-thirds (213) vote
of the Avista Board:
Governance
Executive Management: Avista will seek to retain all current executive
management of Avista, subject to voluntary retirements that may occur. This
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 of the 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 affiliates 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 ,tvista, 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
| "Proposed Transaction" means the transaction proposed in the Joint Application of Avista and Hydro One filed
on September 14,2017.
2
J
Appendix 8 to Joint Application Page I of 13
t.
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 Operation 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 capitill allocations for capital investment in strategic and
economic development items, including property acquisitions in the university
district, suppolt of local entrepreneurs and seed-stage investments;
Continued Innovation: Avista will continue development and funding of its and
its subsidiaries' innovation activities;
Union Relationships: Avista will honor its labor contracts and has the authority
to negotiate, enter into, modify, 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 Benefits: 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;
l0 Local Staffine: Avista u,ill 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;
11.Communitv Contributions: Avista will maintain a S4,000,000 annual budget for
charitable contributions (funded by both Avista and the Avista Foundation).
Appendix 8 to Joint Application Page 2 of l3
4
5
6.
7
8
9
Additionally, a $2,000,000 annualcontribution will be 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 Orsanizations: Avista will maintain the dues paid by it to various
industry trade groups and membership organizations; and
15.Safetv and Reliabilitv Standards and Service Qualitv 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 ThiesiEhrbarfLopezl
16. Treatment of Net Cost Savings: 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.
Appendix 8 to Joint Application Page 3 of 13
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 $31.5 million
over a lO-year period, beginning at the time the merger closes.a The Rate Credit
consists of two components, and reflects an increased level of savings in years 6-
l0 as illustrated in the table below.
Two-Step Rate Credit Proposal
Annual Crcdit
Yean 1-5
Annual Crcdit
Yean 6-10 Total Credit
TotalCredit $2.65 Million $3.65 Million $31.50 Million
Oftetable Credit $1.70 Million $2.70 Million $22.00 Million
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 1O-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 of Juneau, Alaska, operate substantially independent of Avista
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 Montan4 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 April 27,2011. 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.)
Appendix 8 to Joint Application Page 4 of 13
The 531.5 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 identify and capture over time an increased level of benefits, 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 willtake 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 Thies/Ehrbar/Lopez]
19. State Regulatorv 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.
20.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.
21. Separate Books and Records: Avista will maintain separate books and records.
22 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
Appendix 8 to Joint Application Page 5 of l3
veri0/ 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
affectin g Av i sta' s regul ated uti lity 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 mav affect Avista.
Cost Allocations Related to Corporate 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
party 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.
Appendix 8 to Joint Application Page6ofl3
23
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.
Ratemakins 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
Determination of the allowed return 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 Capital 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 Reporting Requirements: Avista will continue to meet all the applicable
FERC reporting requirements with respect to annual and quarterly reports (e.g.,
FERC Forms I , 2, 3q) after closing of the Proposed Transaction.
Participation 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 enforce these
24
c
25
26.
27.
28
29
Appendix 8 to Joint Application Page 7 of 13
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 of this commitment includes the authority of the 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.
30 Submittal to State Court Jurisdiction for Enforcement of Commission
Orders: Olympus Holding Corp., 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.
31.Annual Report on Commitments: By May 1,2019 and each May I thereafter
through May 1 ,2023, Avista will file a repofi with the Commission regarding the
implementation of the commitments as of December 3l 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 repoft.
32.Commitments Bindine: 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]
33. 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.
34 Utilitv-Level Debt and Preferred Stock: Avista will maintain separate debt
and preferred stock, if any, to support its utility operations.
Appendix 8 to Joint Application Page 8 of l3
35. Continued Credit Ratings: 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 Fundins: Avista will maintain its pension funding policy in accordance
with sound actuarial practice.
38 SEC Reportins Requirements: Following the closing of the Proposed
Transaction, Avista will file required reports with the SEC.
39.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 affiliates. 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
Appendix 8 to Joint Application Page9ofl3
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-ConsolidationOpinion:
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 affidavit 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. Ifthe 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) Notifu 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.Olvmpus Equity 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 Pledge 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.
Appendix 8 to Joint Application Page 10 of13
44 Hold Harmless: Notice to Lenders: Restriction on Acquisitions 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
i. 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 notiff the Commission
subsequent to Olympus Holding Corp.'s board approval and as soon as
practicable following any public announcement of: (l) 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.
llt.Neither Avista nor Olympus Holding Corp. will assert in any future
proceedings that, by virtue ofthe Proposed Transaction and the resulting
Appendix 8 to Joint Application Page ll of13
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
setting forth Avista's proposed corporate and affiliate cost allocation
methodologies.
45.Olympus LLC 2 and Olvmpus Equitv LLC Sub-entities: Olympus LLC 2 will
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 Ring-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 Christie/Pugliesel
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 Energy 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 Inventory Report: Avista will report greenhouse gas emissions
as required.
51.Efficiencv Goals and Obiectives: Hydro One acknowledges Avista's energy
efficiency goals and objectives set forth in Avista's 2017lntegrated Resource Plan
and other plans, and Avista will continue its ongoing collaborative efforts to
expand and enhance them.
52. Optional Renewable Power PJogram: Avista will continue to offer renewable
power programs in consultation with stakeholders
Appendix 8 to Joint Application Page 12 of l3
G. Community and Low-Income Assistance Commitments [See Direct Testimony of
Morris/Schmidt/Ch ristie/Pugliesel
53. Community 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.s
Low-Income Energv Efficiencv Fundins: Avista will continue to work with its
advisory groups on the appropriate level of funding for low income energy
efficiency programs.
55.Addressinq 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.
5 Note that Commitment I I contains additional provisions relating to Avista's charitable contributions.
54.
Appendix 8 to Joint Application Page 13 of 13
APPENDIX 9
%l
1/\
t -r'l* t./
}.7
5
(-l)\,
()
I l-1,;f
IDENTIFICATION OF
AVISTA AND HYDRO ONE
OFFICERS AND EXECUTIVES
,)
Identification of Avista and Hydro One Officers and Executives
A. The current officers of Avista are as follows:
Scott L. Morris is Chairman of the Board, President and Chief Executive Officer of Avista
Corporation. He was elected President in 2006 and named Chairman and Chief Executive Officer
in 2008. Mr. Morris is an experienced utility executive who has served in a variety of leadership
positions since joining the Company in 1981.
Mark T. Thies is Senior Vice President, Chief Financial Officer and Treasurer of Avista
Corporation. Mr. Thies joined the Company in September 2008 with extensive experience in
finance, risk management, accounting and administration in the utility sector,
Marian M. Durkin is Senior Vice President, General Counsel, Corporate Secretary and
Chief Compliance Officer for Avista Corporation. Ms. Durkin joined the company in 2005 and is
responsible for coordinating and overseeing Avista's ethics and compliance programs as well as
providing counsel and guidance to the Avista's Board of Directors and officers on legal matters
relevant to the company and its subsidiaries.
I)ennis P. Vermillion is Senior Vice President of Avista Corporation and President of
Avista Utilities, having held both positions since 2009. He also serves as Chairman of the Board
of Directors for Avista Corporation's subsidiary Alaska Electric Light and Power Company. Mr.
Vermillion joined Avista in 1985 and has held various management positions.
Karen S. Feltes is Senior Vice President and the Chief Human Resource Officer for Avista
Corporation. Ms. Feltes joined Avista in 1998 and is a human resources professional with a 20-
year career in both the public and private sectors.
50062009 v2
Appendix 9 to Joint Application Page I of5
James M. Kensok is Vice President and Chief Information and Security Officer for Avista
Corporation. Mr. Kensok has been the vice president and chief information officer for Avista since
2007 and chief security officer since January of 2013. Mr. Kensok is an experienced technology
executive with more than 30 years of national and international experience in developing, and
managing information and operational technologies, network communications, and executive
leadership of advanced enterpri se technolo gy environments.
Edward D. Schlect Jr. is Vice President and Chief Strategy Officer for Avista
Corporation. Mr. Schlect has over 30 years in the energy industry, initially at PacifiCorp and The
Washingon Water Power Company, now known as Avista. He rejoined Avista in 2015 after
serving as a founder of Ecova, an energy information firm, where he served in executive roles,
Kelly O. Norwood is Vice President of State and Federal Regulation for Avista
Corporation. Mr. Norwood joined the Company in June 1 98 I and held positions within the finance
and energy resource departments before serving as Vice President and General Manager of Energy
Resources. He was named a corporate officer in November 2000 and was appointed Vice President
of State and Federal Regulation for Avista Utilities in July 2002.
David J. Meyer is Vice President and Chief Counsel for Regulatory and Governmental
Affairs for Avista Corporation. Mr, Meyerjoined the Company in 1998 and has represented Avista
in a number of areas, including regulatory and business-related capacities. He is a member of the
Washington, Idaho and Oregon State Bar associations and the Federal Energy Bar Association.
50062009 v2
Appendix 9 to Joint Application Page 2 of5
Ryan L. Krasselt is Vice President, Controller and Principal Accounting Officer for
Avista Corporation. Mr. Krasselt was named to his current position in October 2015, having joined
Avista in 2001 as a financial business partner in the accounting department. His experience at
Avista has also included leadership roles within treasury and risk management
Kevin J. Christie is Vice President for Customer Solutions for Avista, a position he has
held since 2015. Mr. Christie joined Avista in 2005 with extensive experience in finance and the
energy industry and has held leadership positions in natural gas planning and finance prior to his
role in Customer Solutions.
Heather L. Rosentrater is Vice President of Energy Delivery atAvista Corporation. Since
joining the Company in 2005, Ms. Rosentrater has managed departments and projects in
transmission, distribution and SCADA, as well as asset management. She is responsible for electric
and natural gas engineering, operations and shared services, such a fleet, facilities and supply
chain.
Jason R. Thackston is Senior Vice President of Energy Resources for Avista Corporation.
He joined the Company in 1996 and has held leadership positions in customer solutions, energy
delivery, finance, risk management, investor relations and corporate development.
B. The current officers and executives of Hydro One Limited are as follows:
David F. Denison is a director and the board chair of Hydro One Limited. He previously
served as President and Chief Executive Officer of the Canada Pension Plan Investment Board, a
global investment management organization, from 2005 to 2012. Prior to that, Mr. Denison was
President of Fidelity Investments Canada Limited. Mr. Denison is an Officer of the Order of
Canada.
50062009 v2
Appendix 9 to Joint Application Page 3 of5
Mayo M. Schmidt is the President and Chief Executive Officer of Hydro One Limited.
Prior to joining Hydro One in 2015, Mr. Schmidt served as President and Chief Executive Officer
at Vitera, Inc., a global food ingredients company operating in l4 countries. Early in his career,
he 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.
Gregory K. Kiraly is the Chief Operating Officer of Hydro One Limited. Mr. Kiraly is a
power and utilities executive with 30 years of experience and has an extensive background in
energy transmission and distribution, in both electricity and gas. He has served in various executive
leadership roles across three of the largest investor-owned utilities in the United States, namely
Pacific Gas and Electric (PG&E), Commonwealth Edison (ComEd), and Public Service Electric
& Gas Company (PSE&G). He was appointed to the role of Chief Operating Officer in September
of 2016.
James D. Scarlett is the Executive Vice President and Chief Legal Officer at Hydro One
Limited. Prior to joining Hydro One in September of 2016, he was a Senior Partner at Torys, LLP
for sixteen years where he held a number of leadership roles.
Chris Lopez is the Senior Vice President of Finance for Hydro One Limited. Prior to
joining Hydro One, he was the Vice President of Planning and Mergers & Acquisitions at
TransAlta.
Paul H. Barry is the Executive Vice President, Strategy and Corporate Development at
Hydro One Limited. Mr. Barry has significant strategy, business development and financial
expertise in the electric power, natural gas, and water utility sectors. Mr. Bany's prior executive
50062009 v2
Appendix 9 to Joint Application Page 4 of5
leadership roles include Senior Vice President and Chief Development Officer, Head of Mergers
& Acquisitions, and President of the commercial business for Duke Energy Corporation. He joined
Hydro One in September of 2016.
Judy McKellar is the Executive Vice President and Chief Human Resources Officer at
Hydro One Limited. Ms. McKellar has held various roles of increasing responsibility at Hydro
One in the Human Resources department during her more than thirty year career and has held her
current position since November of 2016.
Ferio Pugliese is the Executive Vice President, Customer Care and Corporate Affairs at
Hydro One Limited. Mr. Pugliese is highly recognized as a market leader in customer service. He
was appointed to his current position in September of 2016, after serving as President of WestJet
Encore, WestJet's regional airline.
Maureen Wareham is Vice President, Corporate Secretary and Chief Ethics Officer of
Hydro One Limited, and is responsible for the oversight and management of the operations of the
Board of Directors, its Commiffees, and Hydro One's subsidiary companies'board operations. As
Chief Ethics Officer, she is responsible for carrying out advisory and reporting functions
associated with the Code of Business Conduct.
50062009 v2
Appendix 9 to Joint Application Page 5 of5