EX-4.2



 Exhibit 4.2 

HYDRO ONE LIMITED 
 MANAGEMENT’S REPORT 

The Consolidated Financial Statements, Management’s Discussion and Analysis (MD&A) and related financial information have been prepared by the
management of Hydro One Limited (Hydro One or the Company). Management is responsible for the integrity, consistency and reliability of all such information presented. The Consolidated Financial Statements have been prepared in accordance with
United States Generally Accepted Accounting Principles and applicable securities legislation. The MD&A has been prepared in accordance with National Instrument 51-102. 

The preparation of the Consolidated Financial Statements and information in the MD&A involves the use of estimates and assumptions based on
management’s judgment, particularly when transactions affecting the current accounting period cannot be finalized with certainty until future periods. Estimates and assumptions are based on historical experience, current conditions and various
other assumptions believed to be reasonable in the circumstances, with critical analysis of the significant accounting policies followed by the Company as described in Note 2 to the Consolidated Financial Statements. The preparation of the
Consolidated Financial Statements and the MD&A includes information regarding the estimated impact of future events and transactions. The MD&A also includes information regarding sources of liquidity and capital resources, operating trends,
risks and uncertainties. Actual results in the future may differ materially from the present assessment of this information because future events and circumstances may not occur as expected. The Consolidated Financial Statements and MD&A have
been properly prepared within reasonable limits of materiality and in light of information up to February 12, 2018. 
 Management is responsible
for establishing and maintaining adequate disclosure controls and procedures and internal control over financial reporting as described in the annual MD&A. Management evaluated the effectiveness of the design and operation of internal control
over financial reporting based on the framework and criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation,
management concluded that the Company’s internal control over financial reporting was effective at a reasonable level of assurance as of December 31, 2017. As required, the results of that evaluation were reported to the Audit Committee of
the Hydro One Board of Directors and the external auditors. 
 The Consolidated Financial Statements have been audited by KPMG LLP, independent external
auditors appointed by the shareholders of the Company. The external auditors’ responsibility is to express their opinion on whether the Consolidated Financial Statements are fairly presented in accordance with United States Generally Accepted
Accounting Principles. The Independent Auditors’ Report outlines the scope of their examination and their opinion. 
 The Hydro One Board of
Directors, through its Audit Committee, is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control over reporting and disclosure. The Audit Committee of Hydro One met periodically with
management, the internal auditors and the external auditors to satisfy itself that each group had properly discharged its respective responsibility and to review the Consolidated Financial Statements before recommending approval by the Board of
Directors. The external auditors had direct and full access to the Audit Committee, with and without the presence of management, to discuss their audit findings. 

On behalf of Hydro One’s management: 
  

					
	 




	  		  	 




  
 Christopher Lopez

 
 Senior Vice President, Finance

acting in the capacity of chief financial officer

	 Mayo Schmidt
  
	  		  
	 President and Chief Executive Officer
	  		  


  

					
		 	1	 	













 HYDRO ONE LIMITED 

INDEPENDENT AUDITORS’ REPORT 
 To the Shareholders of
Hydro One Limited 
 We have audited the accompanying consolidated financial statements of Hydro One Limited, which comprise the consolidated balance
sheets as at December 31, 2017 and December 31, 2016, the consolidated statements of operations and comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting
policies and other explanatory information. 
 Management’s Responsibility for the Consolidated Financial Statements 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with United States Generally
Accepted Accounting Principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. 

Auditors’ Responsibility 
 Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. 
 An audit
involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to
design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. 

Opinion 
 In our opinion, the consolidated financial statements
present fairly, in all material respects, the consolidated financial position of Hydro One Limited as at December 31, 2017 and December 31, 2016, and its consolidated results of operations and its consolidated cash flows for the years then
ended in accordance with United States Generally Accepted Accounting Principles. 
  
 



 
 Chartered Professional Accountants, Licensed Public Accountants 

Toronto, Canada 
 February 12, 2018 

  

					
		 	2	 	













 HYDRO ONE LIMITED 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME 
 For the
years ended December 31, 2017 and 2016 
  

									
	  Year ended December 31 (millions of Canadian dollars, except per share amounts) 	  	2017	 	  	2016	 
	 Revenues
	  				  			
	 Distribution (includes $279 related party revenues; 2016 – $160) (Note
27) 
	  	 	4,366	 	  	 	4,915	 
	 Transmission (includes $1,523 related party revenues; 2016 – $1,553)
(Note 27) 
	  	 	1,578	 	  	 	1,584	 
	 Other
	  	 	46	 	  	 	53	 
	 	  	 	5,990	 	  	 	6,552	 
			
	 Costs
	  				  			
	 Purchased power (includes $1,594 related party costs; 2016 – $2,103)
(Note 27) 
	  	 	2,875	 	  	 	3,427	 
	 Operation, maintenance and administration (Note 27) 
	  	 	1,066	 	  	 	1,069	 
	 Depreciation and amortization (Note
5) 
	  	 	817	 	  	 	778	 
	 	  	 	4,758	 	  	 	5,274	 
			
	 Income before financing charges and income taxes
	  	 	1,232	 	  	 	1,278	 
	 Financing charges (Note 6)

	  	 	439	 	  	 	393	 
			
	 Income before income taxes
	  	 	793	 	  	 	885	 
	 Income taxes (Note 7)

	  	 	111	 	  	 	139	 
	 Net income
	  	 	682	 	  	 	746	 
			
	 Other comprehensive income
	  	 	1	 	  	 	—	 
	 Comprehensive income
	  	 	683	 	  	 	746	 
			
	 Net income attributable to:
	  				  			
	 Noncontrolling interest (Note 26) 
	  	 	6	 	  	 	6	 
	 Preferred shareholders
	  	 	18	 	  	 	19	 
	 Common shareholders
	  	 	658	 	  	 	721	 
	 	  	 	682	 	  	 	746	 
			
	 Comprehensive income attributable to:
	  				  			
	 Noncontrolling interest (Note 26) 
	  	 	6	 	  	 	6	 
	 Preferred shareholders
	  	 	18	 	  	 	19	 
	 Common shareholders
	  	 	659	 	  	 	721	 
	 	  	 	683	 	  	 	746	 
			
	 Earnings per common share (Note
24) 
	  				  			
	 Basic
	  	$	1.11	 	  	$	1.21	 
	 Diluted
	  	$	1.10	 	  	$	1.21	 
			
	 Dividends per common share declared (Note 23) 
	  	$	0.87	 	  	$	0.97	 

 See accompanying notes to Consolidated Financial Statements.     

  

					
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 HYDRO ONE LIMITED 

CONSOLIDATED BALANCE SHEETS 
 At December 31, 2017 and 2016 

 

									
	  December 31 (millions of Canadian dollars) 	  	2017	 	 	2016	 
	 Assets
	  				 			
	 Current assets:
	  				 			
	 Cash and cash equivalents
	  	 	25	 	 	 	50	 
	 Accounts receivable (Note 8) 
	  	 	636	 	 	 	838	 
	 Due from related parties (Note 27) 
	  	 	253	 	 	 	158	 
	 Other current assets (Note 9)

	  	 	105	 	 	 	102	 
	 	  	 	1,019	 	 	 	1,148	 
			
	 Property, plant and equipment (Note 10) 
	  	 	19,947	 	 	 	19,140	 
	 Other long-term assets:
	  				 			
	 Regulatory assets (Note 12) 
	  	 	3,049	 	 	 	3,145	 
	 Deferred income tax assets (Note 7) 
	  	 	987	 	 	 	1,235	 
	 Intangible assets (Note 11) 
	  	 	369	 	 	 	349	 
	 Goodwill (Note 4) 
	  	 	325	 	 	 	327	 
	 Other assets
	  	 	5	 	 	 	7	 
		  	 	4,735	 	 	 	5,063	 
	 Total assets
	  	 	25,701	 	 	 	25,351	 
			
	 Liabilities
	  				 			
	 Current liabilities:
	  				 			
	 Short-term notes payable (Note 15) 
	  	 	926	 	 	 	469	 
	 Long-term debt payable within one year (Notes 15, 17) 
	  	 	752	 	 	 	602	 
	 Accounts payable and other current liabilities (Note 13)

	  	 	905	 	 	 	945	 
	 Due to related parties (Note 27)

	  	 	157	 	 	 	147	 
	 	  	 	2,740	 	 	 	2,163	 
			
	 Long-term liabilities:
	  				 			
	 Long-term debt (includes $541 measured at fair value; 2016 – $548)
(Notes 15, 17) 
	  	 	9,315	 	 	 	10,078	 
	 Convertible debentures (Notes 16, 17) 
	  	 	487	 	 	 	—	 
	 Regulatory liabilities (Note 12) 
	  	 	128	 	 	 	209	 
	 Deferred income tax liabilities (Note 7) 
	  	 	71	 	 	 	60	 
	 Other long-term liabilities (Note 14)

	  	 	2,707	 	 	 	2,752	 
		  	 	12,708	 	 	 	13,099	 
	 Total liabilities
	  	 	15,448	 	 	 	15,262	 
			
	 Contingencies and Commitments (Notes 29, 30)
	  				 			
	 Subsequent Events (Note 32)
	  				 			
			
	 Noncontrolling interest subject to redemption (Note 26) 
	  	 	22	 	 	 	22	 
			
	 Equity
	  				 			
	 Common shares (Note 22) 
	  	 	5,631	 	 	 	5,623	 
	 Preferred shares (Note 22) 
	  	 	418	 	 	 	418	 
	 Additional paid-in capital (Note 25)

	  	 	49	 	 	 	34	 
	 Retained earnings
	  	 	4,090	 	 	 	3,950	 
	 Accumulated other comprehensive loss
	  	 	(7	) 	 	 	(8	) 
	 Hydro One shareholders’ equity
	  	 	10,181	 	 	 	10,017	 
			
	 Noncontrolling interest (Note 26)

	  	 	50	 	 	 	50	 
	 Total equity
	  	 	10,231	 	 	 	10,067	 
	 	  	 	25,701	 	 	 	25,351	 

 See accompanying notes to Consolidated Financial Statements. 

On behalf of the Board of Directors: 
  

			
	 




  
	  	 




  

	 David Denison
 Chair
	  	 Philip Orsino
 Chair, Audit Committee



  

					
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 HYDRO ONE LIMITED 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 
 For the years ended
December 31, 2017 and 2016 
  

																																	
	  Year ended December 31, 2017
  (millions of Canadian dollars)	  	Common
Shares	 	  	Preferred
Shares	 	  	Additional
Paid-in
Capital	 	 	Retained
Earnings	 	 	 Accumulated
Other

Comprehensive
Income (Loss)
	 	 	Hydro One
Shareholders’
Equity	 	 	Non-
controlling
Interest
(Note 26)	 	 	Total
Equity	 
	 January 1, 2017
	  	 	5,623	 	  	 	418	 	  	 	34	 	 	 	3,950	 	 	 	(8	) 	 	 	10,017	 	 	 	50	 	 	 	10,067	 
	 Net income
	  	 	—	 	  	 	—	 	  	 	—	 	 	 	676	 	 	 	—	 	 	 	676	 	 	 	4	 	 	 	680	 
	 Other comprehensive income
	  	 	—	 	  	 	—	 	  	 	—	 	 	 	—	 	 	 	1	 	 	 	1	 	 	 	—	 	 	 	1	 
	 Distributions to noncontrolling interest
	  	 	—	 	  	 	—	 	  	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(4	) 	 	 	(4	) 
	 Dividends on preferred shares
	  	 	—	 	  	 	—	 	  	 	—	 	 	 	(18	) 	 	 	—	 	 	 	(18	) 	 	 	—	 	 	 	(18	) 
	 Dividends on common shares
	  	 	—	 	  	 	—	 	  	 	—	 	 	 	(518	) 	 	 	—	 	 	 	(518	) 	 	 	—	 	 	 	(518	) 
	 Common shares issued
	  	 	8	 	  	 	—	 	  	 	(8	) 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	 Stock-based compensation (Note 25) 
	  	 	—	 	  	 	—	 	  	 	23	 	 	 	—	 	 	 	—	 	 	 	23	 	 	 	—	 	 	 	23	 
	 December 31,
2017
	  	 	5,631	 	  	 	418	 	  	 	49	 	 	 	4,090	 	 	 	(7	) 	 	 	10,181	 	 	 	50	 	 	 	10,231	 
									
	  Year ended December 31, 2016
  (millions of Canadian dollars)	  	Common
Shares	 	  	Preferred
Shares	 	  	Additional
Paid-in
Capital	 	 	Retained
Earnings	 	 	Accumulated
Other
Comprehensive
Loss	 	 	Hydro One
Shareholders’
Equity	 	 	Non-
controlling
Interest
(Note 26)	 	 	Total
Equity	 
	 January 1, 2016
	  	 	5,623	 	  	 	418	 	  	 	10	 	 	 	3,806	 	 	 	(8	) 	 	 	9,849	 	 	 	52	 	 	 	9,901	 
	 Net income
	  	 	—	 	  	 	—	 	  	 	—	 	 	 	740	 	 	 	—	 	 	 	740	 	 	 	4	 	 	 	744	 
	 Other comprehensive income
	  	 	—	 	  	 	—	 	  	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	 Distributions to noncontrolling interest
	  	 	—	 	  	 	—	 	  	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(6	) 	 	 	(6	) 
	 Dividends on preferred shares
	  	 	—	 	  	 	—	 	  	 	—	 	 	 	(19	) 	 	 	—	 	 	 	(19	) 	 	 	—	 	 	 	(19	) 
	 Dividends on common shares
	  	 	—	 	  	 	—	 	  	 	—	 	 	 	(577	) 	 	 	—	 	 	 	(577	) 	 	 	—	 	 	 	(577	) 
	 Stock-based compensation (Note 25) 
	  	 	—	 	  	 	—	 	  	 	24	 	 	 	—	 	 	 	—	 	 	 	24	 	 	 	—	 	 	 	24	 
	 December 31,
2016
	  	 	5,623	 	  	 	418	 	  	 	34	 	 	 	3,950	 	 	 	(8	) 	 	 	10,017	 	 	 	50	 	 	 	10,067	 

 See accompanying notes to Consolidated Financial Statements.     

  

					
		 	5	 	













 HYDRO ONE LIMITED 

CONSOLIDATED STATEMENTS OF CASH FLOWS 
 For the years ended
December 31, 2017 and 2016 
  

									
	  Year ended December 31 (millions of Canadian dollars) 	  	2017	 	 	2016	 
	 Operating activities
	  				 			
	 Net income
	  	 	682	 	 	 	746	 
	 Environmental expenditures
	  	 	(24	) 	 	 	(20	) 
	 Adjustments for non-cash items:
	  				 			
	 Depreciation and amortization (excluding asset removal costs)
	  	 	727	 	 	 	688	 
	 Regulatory assets and liabilities
	  	 	112	 	 	 	(16	) 
	 Deferred income taxes
	  	 	85	 	 	 	114	 
	 Other
	  	 	21	 	 	 	10	 
	 Changes in non-cash balances related to operations (Note 28) 
	  	 	113	 	 	 	134	 
	 Net cash from operating
activities
	  	 	1,716	 	 	 	1,656	 
			
	 Financing activities
	  				 			
	 Long-term debt issued
	  	 	—	 	 	 	2,300	 
	 Long-term debt repaid
	  	 	(602	) 	 	 	(502	) 
	 Short-term notes issued
	  	 	3,795	 	 	 	3,031	 
	 Short-term notes repaid
	  	 	(3,338	) 	 	 	(4,053	) 
	 Convertible debentures issued (Note 16) 
	  	 	513	 	 	 	—	 
	 Dividends paid
	  	 	(536	) 	 	 	(596	) 
	 Distributions paid to noncontrolling interest
	  	 	(6	) 	 	 	(9	) 
	 Other (Note 16) 
	  	 	(27	) 	 	 	(10	) 
	 Net cash from (used in) financing
activities
	  	 	(201	) 	 	 	161	 
			
	 Investing activities
	  				 			
	 Capital expenditures (Note 28) 
	  				 			
	 Property, plant and equipment
	  	 	(1,467	) 	 	 	(1,600	) 
	 Intangible assets
	  	 	(80	) 	 	 	(61	) 
	 Acquisitions (Note 4) 
	  	 	—	 	 	 	(224	) 
	 Capital contributions received (Note 28) 
	  	 	9	 	 	 	21	 
	 Other
	  	 	(2	) 	 	 	3	 
	 Net cash used in investing
activities
	  	 	(1,540	) 	 	 	(1,861	) 
			
	 Net change in cash and cash equivalents
	  	 	(25	) 	 	 	(44	) 
	 Cash and cash equivalents, beginning of year
	  	 	50	 	 	 	94	 
	 Cash and cash equivalents, end
of year
	  	 	25	 	 	 	50	 

 See accompanying notes to Consolidated Financial Statements.     

  

					
		 	6	 	













 HYDRO ONE LIMITED 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
 For the years ended December 31, 2017 and 2016 

 

	1.	 DESCRIPTION OF THE BUSINESS 



Hydro One Limited (Hydro One or the Company) was incorporated on August 31, 2015, under the Business Corporations Act (Ontario). On
October 31, 2015, the Company acquired Hydro One Inc., a company previously wholly-owned by the Province of Ontario (Province). The acquisition of Hydro One Inc. by Hydro One was accounted for as a common control transaction and Hydro One is a
continuation of business operations of Hydro One Inc. At December 31, 2017, the Province held approximately 47.4% (2016 - 70.1%) of the common shares of Hydro One. 

The principal businesses of Hydro One are the transmission and distribution of electricity to customers within Ontario. 

 

	2.	 SIGNIFICANT ACCOUNTING POLICIES 



Basis of Consolidation 
 These Consolidated Financial Statements
include the accounts of the Company and its subsidiaries. Intercompany transactions and balances have been eliminated. 
 Basis of Accounting 

These Consolidated Financial Statements are prepared and presented in accordance with United States (US) Generally Accepted Accounting Principles (GAAP)
and in Canadian dollars. 
 Use of Management Estimates 
 The
preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains and
losses during the reporting periods. Management evaluates these estimates on an ongoing basis based upon historical experience, current conditions, and assumptions believed to be reasonable at the time the assumptions are made, with any adjustments
being recognized in results of operations in the period they arise. Significant estimates relate to regulatory assets and regulatory liabilities, environmental liabilities, pension benefits, post-retirement and post-employment benefits, asset
retirement obligations, goodwill and asset impairments, contingencies, unbilled revenues, and deferred income tax assets and liabilities. Actual results may differ significantly from these estimates. 

Rate Setting 
 The Company’s Transmission Business consists
of the transmission business of Hydro One Inc., which includes the transmission business of Hydro One Networks Inc. (Hydro One Networks), Hydro One Sault Ste. Marie LP (HOSSM) (formerly Great Lakes Power Transmission LP), and its 66% interest in B2M
Limited Partnership (B2M LP). The Company’s Distribution Business consists of the distribution business of Hydro One Inc., which includes the distribution businesses of Hydro One Networks, as well as Hydro One Remote Communities Inc. (Hydro One
Remote Communities). 
 Transmission 
 In November 2017, the
Ontario Energy Board (OEB) approved Hydro One Networks’ 2017 transmission rates revenue requirement of $1,438 million. See Note 12 - Regulatory Assets and Liabilities for additional information. 

In December 2015, the OEB approved B2M LP’s 2015-2019 rates revenue requirements of $39 million, $36 million, $37 million,
$38 million and $37 million for the respective years. On January 14, 2016, the OEB approved the B2M LP revenue requirement recovery through the 2016 Uniform Transmission Rates, and the establishment of a deferral account to capture
costs of Tax Rate and Rule changes. On June 8, 2017, the OEB approved the 2017 rates revenue requirement of $34 million, updated for the cost of capital parameters. 

On September 28, 2017, the OEB issued its Decision and Order on HOSSM’s 2017 transmission rates application, denying the requested revenue
requirement for 2017. HOSSM’s 2016 approved revenue requirement of $41 million will remain in effect for 2017. 
 Distribution 

In March 2015, the OEB approved Hydro One Networks’ distribution revenue requirements of $1,326 million for 2015, $1,430 million for 2016
and $1,486 million for 2017. The OEB has subsequently approved updated revenue requirements of $1,410 million for 2016 and $1,415 million for 2017. 

On March 30, 2017, the OEB approved an increase of 1.9% to Hydro One Remote Communities’ basic rates for the distribution and generation of
electricity, with an effective date of May 1, 2017. 
 Regulatory Accounting 

The OEB has the general power to include or exclude revenues, costs, gains or losses in the rates of a specific period, resulting in a change in the
timing of accounting recognition from that which would have been applied in an unregulated company. Such change in timing involves the application of rate-regulated accounting, giving rise to the recognition of regulatory assets and liabilities. The


  

					
		 	7	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Company’s regulatory assets represent amounts receivable from future customers and costs that have
been deferred for accounting purposes because it is probable that they will be recovered in future rates. In addition, the Company has recorded regulatory liabilities that generally represent amounts that are refundable to future customers. The
Company continually assesses the likelihood of recovery of each of its regulatory assets and continues to believe that it is probable that the OEB will include its regulatory assets and liabilities in setting future rates. If, at some future date,
the Company judges that it is no longer probable that the OEB will include a regulatory asset or liability in setting future rates, the appropriate carrying amount would be reflected in results of operations in the period that the assessment is
made. 
 Cash and Cash Equivalents 
 Cash and cash equivalents
include cash and short-term investments with an original maturity of three months or less. 
 Revenue Recognition 

Transmission revenues are collected through OEB-approved rates, which are based on an approved revenue requirement
that includes a rate of return. Such revenue is recognized as electricity is transmitted and delivered to customers. 
 Distribution revenues
attributable to the delivery of electricity are based on OEB-approved distribution rates and are recognized on an accrual basis and include billed and unbilled revenues. Billed revenues are based on
electricity delivered as measured from customer meters. At the end of each month, electricity delivered to customers since the date of the last billed meter reading is estimated, and the corresponding unbilled revenue is recorded. The unbilled
revenue estimate is affected by energy consumption, weather, and changes in the composition of customer classes. 
 Distribution revenue also includes
an amount relating to rate protection for rural, residential, and remote customers, which is received from the Independent Electricity System Operator (IESO) based on a standardized customer rate that is approved by the OEB. 

Revenues also include amounts related to sales of other services and equipment. Such revenue is recognized as services are rendered or as equipment is
delivered. 
 Revenues are recorded net of indirect taxes. 

Accounts Receivable and Allowance for Doubtful Accounts 
 Billed
accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. Unbilled accounts receivable are recorded at their estimated value. Overdue amounts related to regulated billings bear interest at OEB-approved rates. The allowance for doubtful accounts reflects the Company’s best estimate of losses on billed accounts receivable balances. The Company estimates the allowance for doubtful accounts on billed
accounts receivable by applying internally developed loss rates to the outstanding receivable balances by aging category. Loss rates applied to the billed accounts receivable balances are based on historical overdue balances, customer payments and
write-offs. Accounts receivable are written-off against the allowance when they are deemed uncollectible. The allowance for doubtful accounts is affected by changes in volume, prices and economic conditions.

 Noncontrolling interest 
 Noncontrolling interest represents
the portion of equity ownership in subsidiaries that is not attributable to shareholders of Hydro One. Noncontrolling interest is initially recorded at fair value and subsequently the amount is adjusted for the proportionate share of net income and
other comprehensive income (OCI) attributable to the noncontrolling interest and any dividends or distributions paid to the noncontrolling interest. 

If a transaction results in the acquisition of all, or part, of a noncontrolling interest in a subsidiary, the acquisition of the noncontrolling interest
is accounted for as an equity transaction. No gain or loss is recognized in consolidated net income or comprehensive income as a result of changes in the noncontrolling interest, unless a change results in the loss of control by the Company. 

Income Taxes 
 Current and deferred income taxes are computed
based on the tax rates and tax laws enacted as at the balance sheet date. Tax benefits associated with income tax positions taken, or expected to be taken, in a tax return are recorded only when the
“more-likely-than-not” recognition threshold is satisfied and are measured at the largest amount of benefit that has a greater than 50% likelihood of being realized upon settlement. Management
evaluates each position based solely on the technical merits and facts and circumstances of the position, assuming the position will be examined by a taxing authority having full knowledge of all relevant information. Significant management judgment
is required to determine recognition thresholds and the related amount of tax benefits to be recognized in the Consolidated Financial Statements. Management re-evaluates tax positions each period using new
information about recognition or measurement as it becomes available. 
 Deferred Income Taxes 

Deferred income taxes are provided for using the liability method. Under this method, deferred income tax liabilities are recognized on all taxable
temporary differences between the tax bases and carrying amounts of assets and liabilities. Deferred income tax assets are recognized for deductible temporary differences between tax bases and carrying amounts of assets and liabilities, the carry
forward unused tax credits and tax losses to the extent that it is more-likely-than-not that these deductions, credits, and losses 

  

					
		 	8	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 can be utilized. Deferred income tax assets and liabilities are measured at the tax rates that are
expected to apply in the period when the liability is settled or the asset is realized, based on the tax rates and tax laws that have been enacted as at the balance sheet date. Deferred income taxes that are not included in the rate-setting process
are charged or credited to the Consolidated Statements of Operations and Comprehensive Income. 
 Management reassesses the deferred income tax assets
at each balance sheet date and reduces the amount to the extent that it is more-likely-than-not that the deferred income tax asset will not be realized. Previously unrecognized deferred income tax assets are
reassessed at each balance sheet date and are recognized to the extent that it has become more-likely-than-not that the tax benefit will be realized. 

The Company records regulatory assets and liabilities associated with deferred income tax assets and liabilities that will be included in the rate-setting
process. 
 The Company uses the flow-through method to account for investment tax credits (ITCs) earned on eligible scientific research and
experimental development expenditures, and apprenticeship job creation. Under this method, only non-refundable ITCs are recognized as a reduction to income tax expense. 

Materials and Supplies 
 Materials and supplies represent
consumables, small spare parts and construction materials held for internal construction and maintenance of property, plant and equipment. These assets are carried at average cost less any impairments recorded. 

Property, Plant and Equipment 
 Property, plant and equipment is
recorded at original cost, net of customer contributions, and any accumulated impairment losses. The cost of additions, including betterments and replacement asset components, is included on the Consolidated Balance Sheets as property, plant and
equipment. 
 The original cost of property, plant and equipment includes direct materials, direct labour (including employee benefits), contracted
services, attributable capitalized financing costs, asset retirement costs, and direct and indirect overheads that are related to the capital project or program. Indirect overheads include a portion of corporate costs such as finance, treasury,
human resources, information technology and executive costs. Overhead costs, including corporate functions and field services costs, are capitalized on a fully allocated basis, consistent with an OEB-approved
methodology. 
 Property, plant and equipment in service consists of transmission, distribution, communication, administration and service assets and
land easements. Property, plant and equipment also includes future use assets, such as land, major components and spare parts, and capitalized project development costs associated with deferred capital projects. 

Transmission 
 Transmission assets include assets used for the
transmission of high-voltage electricity, such as transmission lines, support structures, foundations, insulators, connecting hardware and grounding systems, and assets used to step up the voltage of electricity from generating stations for
transmission and to step down voltages for distribution, including transformers, circuit breakers and switches. 
 Distribution 

Distribution assets include assets related to the distribution of low-voltage electricity, including lines, poles,
switches, transformers, protective devices and metering systems. 
 Communication 

Communication assets include fibre optic and microwave radio systems, optical ground wire, towers, telephone equipment and associated buildings. 

Administration and Service 
 Administration and service assets
include administrative buildings, personal computers, transport and work equipment, tools and other minor assets. 
 Easements 

Easements include statutory rights of use for transmission corridors and abutting lands granted under the Reliable Energy and Consumer Protection Act,
2002, as well as other land access rights. 
 Intangible Assets 

Intangible assets separately acquired or internally developed are measured on initial recognition at cost, which comprises purchased software, direct
labour (including employee benefits), consulting, engineering, overheads and attributable capitalized financing charges. Following initial recognition, intangible assets are carried at cost, net of any accumulated amortization and accumulated
impairment losses. The Company’s intangible assets primarily represent major computer applications. 

  

					
		 	9	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Capitalized Financing Costs 

Capitalized financing costs represent interest costs attributable to the construction of property, plant and equipment or development of intangible
assets. The financing cost of attributable borrowed funds is capitalized as part of the acquisition cost of such assets. The capitalized financing costs are a reduction of financing charges recognized in the Consolidated Statements of Operations and
Comprehensive Income. Capitalized financing costs are calculated using the Company’s weighted average effective cost of debt. 
 Construction and Development in
Progress 
 Construction and development in progress consists of the capitalized cost of constructed assets that are not yet complete and which have
not yet been placed in service. 
 Depreciation and Amortization 

The cost of property, plant and equipment and intangible assets is depreciated or amortized on a straight-line basis based on the estimated remaining
service life of each asset category, except for transport and work equipment, which is depreciated on a declining balance basis. 
 The Company
periodically initiates an external independent review of its property, plant and equipment and intangible asset depreciation and amortization rates, as required by the OEB. Any changes arising from OEB approval of such a review are implemented on a
remaining service life basis, consistent with their inclusion in electricity rates. The most recent reviews resulted in changes to rates effective January 1, 2015 and January 1, 2017 for Hydro One Networks’ distribution and
transmission businesses, respectively. A summary of average service lives and depreciation and amortization rates for the various classes of assets is included below: 
  

													
	  	  	Average	 	    	Rate	 
	  	  	Service Life	 	    	Range	 	  	Average	 
	 Property, plant and equipment:
	  				    				  			
	 Transmission
	  	 	55 years	 	    	 	1% - 3%	 	  	 	2%	 
	 Distribution
	  	 	46 years	 	    	 	1% - 7%	 	  	 	2%	 
	 Communication
	  	 	16 years	 	    	 	1% - 15%	 	  	 	6%	 
	 Administration and service
	  	 	20 years	 	    	 	1% - 20%	 	  	 	6%	 
	 Intangible assets
	  	 	10 years	 	    	 	10%	 	  	 	10%	 

 In accordance with group depreciation practices, the original cost of property, plant and equipment, or major components
thereof, and intangible assets that are normally retired, is charged to accumulated depreciation, with no gain or loss being reflected in results of operations. Where a disposition of property, plant and equipment occurs through sale, a gain or loss
is calculated based on proceeds and such gain or loss is included in depreciation expense. 
 Acquisitions and Goodwill 

The Company accounts for business acquisitions using the acquisition method of accounting and, accordingly, the assets and liabilities of the acquired
entities are primarily measured at their estimated fair value at the date of acquisition. Costs associated with pending acquisitions are expensed as incurred. Goodwill represents the cost of acquired companies that is in excess of the fair value of
the net identifiable assets acquired at the acquisition date. Goodwill is not included in rate base. 
 Goodwill is evaluated for impairment on an
annual basis, or more frequently if circumstances require. The Company performs a qualitative assessment to determine whether it is more-likely-than-not that the fair value of the applicable reporting unit is
less than its carrying amount. If the Company determines, as a result of its qualitative assessment, that it is not more-likely-than-not that the fair value of the applicable reporting unit is less than its
carrying amount, no further testing is required. If the Company determines, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of the applicable reporting unit is
less than its carrying amount, a goodwill impairment assessment is performed using a two-step, fair value-based test. The first step compares the fair value of the applicable reporting unit to its carrying
amount, including goodwill. If the carrying amount of the applicable reporting unit exceeds its fair value, a second step is performed. The second step requires an allocation of fair value to the individual assets and liabilities using purchase
price allocation in order to determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying amount, an impairment loss is recorded as a reduction to goodwill and as a charge to results of operations.

 Based on assessment performed as at September 30, 2017, the Company has concluded that goodwill was not impaired at December 31, 2017. 

Long-Lived Asset Impairment 
 When circumstances indicate the
carrying value of long-lived assets may not be recoverable, the Company evaluates whether the carrying value of such assets, excluding goodwill, has been impaired. For such long-lived assets, the Company evaluates whether impairment may exist by
estimating future estimated undiscounted cash flows expected to result from the use and eventual disposition of the asset. When alternative courses of action to recover the carrying amount of a long-lived asset are under consideration, a
probability-weighted approach is used to develop estimates of future undiscounted cash flows. If the carrying value of the long-lived 

  

					
		 	10	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 asset is not recoverable based on the estimated future undiscounted cash flows, an impairment loss is
recorded, measured as the excess of the carrying value of the asset over its fair value. As a result, the asset’s carrying value is adjusted to its estimated fair value. 

Within its regulated business, the carrying costs of most of Hydro One’s long-lived assets are included in rate base where they earn an OEB-approved rate of return. Asset carrying values and the related return are recovered through approved rates. As a result, such assets are only tested for impairment in the event that the OEB disallows recovery,
in whole or in part, or if such a disallowance is judged to be probable. 
 Hydro One regularly monitors the assets of its unregulated Hydro One Telecom
subsidiary for indications of impairment. Management assesses the fair value of such long-lived assets using commonly accepted techniques. Techniques used to determine fair value include, but are not limited to, the use of recent third-party
comparable sales for reference and internally developed discounted cash flow analysis. Significant changes in market conditions, changes to the condition of an asset, or a change in management’s intent to utilize the asset are generally viewed
by management as triggering events to reassess the cash flows related to these long-lived assets. As at December 31, 2017 and 2016, no asset impairment had been recorded for assets within either the Company’s regulated or unregulated
businesses. 
 Costs of Arranging Debt Financing 
 For
financial liabilities classified as other than held-for-trading and for convertible debentures, the Company defers the external transaction costs related to obtaining
financing and presents such amounts net of related debt or convertible debentures on the Consolidated Balance Sheets. Deferred issuance costs are amortized over the contractual life of the related debt or convertible debentures on an
effective-interest basis and the amortization is included within financing charges in the Consolidated Statements of Operations and Comprehensive Income. Transaction costs for items classified as held-for-trading are expensed immediately. 
 Comprehensive Income 

Comprehensive income is comprised of net income and OCI. Hydro One presents net income and OCI in a single continuous Consolidated Statement of Operations
and Comprehensive Income. 
 Financial Assets and Liabilities 

All financial assets and liabilities are classified into one of the following five categories: held-to-maturity; loans and receivables; held-for-trading; other liabilities; or available-for-sale. Financial assets and liabilities classified as held-for-trading are measured at fair value. All other
financial assets and liabilities are measured at amortized cost, except accounts receivable and amounts due from related parties, which are measured at the lower of cost or fair value. Accounts receivable and amounts due from related parties are
classified as loans and receivables. The Company considers the carrying amounts of accounts receivable and amounts due from related parties to be reasonable estimates of fair value because of the short time to maturity of these instruments.
Provisions for impaired accounts receivable are recognized as adjustments to the allowance for doubtful accounts and are recognized when there is objective evidence that the Company will not be able to collect amounts according to the original
terms. All financial instrument transactions are recorded at trade date. 
 Derivative instruments are measured at fair value. Gains and losses from
fair valuation are included within financing charges in the period in which they arise. The Company determines the classification of its financial assets and liabilities at the date of initial recognition. The Company designates certain of its
financial assets and liabilities to be held at fair value, when it is consistent with the Company’s risk management policy disclosed in Note 17 - Fair Value of Financial Instruments and Risk Management. 

Derivative Instruments and Hedge Accounting 
 The Company closely
monitors the risks associated with changes in interest rates on its operations and, where appropriate, uses various instruments to hedge these risks. Certain of these derivative instruments qualify for hedge accounting and are designated as
accounting hedges, while others either do not qualify as hedges or have not been designated as hedges (hereinafter referred to as undesignated contracts) as they are part of economic hedging relationships. 

The accounting guidance for derivative instruments requires the recognition of all derivative instruments not identified as meeting the normal purchase
and sale exemption as either assets or liabilities recorded at fair value on the Consolidated Balance Sheets. For derivative instruments that qualify for hedge accounting, the Company may elect to designate such derivative instruments as either cash
flow hedges or fair value hedges. The Company offsets fair value amounts recognized on its Consolidated Balance Sheets related to derivative instruments executed with the same counterparty under the same master netting agreement. 

For derivative instruments that qualify for hedge accounting and which are designated as cash flow hedges, the effective portion of any gain or loss, net
of tax, is reported as a component of accumulated OCI (AOCI) and is reclassified to results of operations in the same period or periods during which the hedged transaction affects results of operations. Any gains or losses on the derivative
instrument that represent either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in results of operations. For fair value hedges, changes in fair value of both the derivative instrument and the
underlying hedged exposure are recognized in the Consolidated Statements of Operations and Comprehensive Income in the current period. The gain or loss on the derivative instrument is included in the same line item as the offsetting gain or loss on
the hedged item in 

  

					
		 	11	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 
the Consolidated Statements of Operations and Comprehensive Income. The changes in fair value of the undesignated derivative instruments are reflected in results of operations. 

Embedded derivative instruments are separated from their host contracts and are carried at fair value on the Consolidated Balance Sheets when:
(a) the economic characteristics and risks of the embedded derivative are not clearly and closely related to the economic characteristics and risks of the host contract; (b) the hybrid instrument is not measured at fair value, with changes
in fair value recognized in results of operations each period; and (c) the embedded derivative itself meets the definition of a derivative. The Company does not engage in derivative trading or speculative activities and had no embedded
derivatives that required bifurcation at December 31, 2017 or 2016. 
 Hydro One periodically develops hedging strategies taking into account risk
management objectives. At the inception of a hedging relationship where the Company has elected to apply hedge accounting, Hydro One formally documents the relationship between the hedged item and the hedging instrument, the related risk management
objective, the nature of the specific risk exposure being hedged, and the method for assessing the effectiveness of the hedging relationship. The Company also assesses, both at the inception of the hedge and on a quarterly basis, whether the hedging
instruments are effective in offsetting changes in fair values or cash flows of the hedged items. 
 Employee Future Benefits 

Employee future benefits provided by Hydro One include pension, post-retirement and post-employment benefits. The costs of the Company’s pension,
post-retirement and post-employment benefit plans are recorded over the periods during which employees render service. 
 The Company recognizes the
funded status of its defined benefit pension, post-retirement and post-employment plans on its Consolidated Balance Sheets and subsequently recognizes the changes in funded status at the end of each reporting year. Defined benefit pension,
post-retirement and post-employment plans are considered to be underfunded when the projected benefit obligation exceeds the fair value of the plan assets. Liabilities are recognized on the Consolidated Balance Sheets for any net underfunded
projected benefit obligation. The net underfunded projected benefit obligation may be disclosed as a current liability, long-term liability, or both. The current portion is the amount by which the actuarial present value of benefits included in the
benefit obligation payable in the next 12 months exceeds the fair value of plan assets. If the fair value of plan assets exceeds the projected benefit obligation of the plan, an asset is recognized equal to the net overfunded projected benefit
obligation. The post-retirement and post-employment benefit plans are unfunded because there are no related plan assets. 
 Hydro One recognizes its
contributions to the defined contribution pension plan as pension expense, with a portion being capitalized as part of labour costs included in capital expenditures. The expensed amount is included in operation, maintenance and administration costs
in the Consolidated Statements of Operations and Comprehensive Income. 
 Defined Benefit Pension 

Defined benefit pension costs are recorded on an accrual basis for financial reporting purposes. Pension costs are actuarially determined using the
projected benefit method prorated on service and are based on assumptions that reflect management’s best estimate of the effect of future events, including future compensation increases. Past service costs from plan amendments and all actuarial
gains and losses are amortized on a straight-line basis over the expected average remaining service period of active employees in the plan, and over the estimated remaining life expectancy of inactive employees in the plan. Pension plan assets,
consisting primarily of listed equity securities as well as corporate and government debt securities, are fair valued at the end of each year. Hydro One records a regulatory asset equal to the net underfunded projected benefit obligation for its
pension plan. 
 Post-retirement and Post-employment Benefits 

Post-retirement and post-employment benefits are recorded and included in rates on an accrual basis. Costs are determined by independent actuaries using
the projected benefit method prorated on service and based on assumptions that reflect management’s best estimates. Past service costs from plan amendments are amortized to results of operations based on the expected average remaining service
period. 
 For post-retirement benefits, all actuarial gains or losses are deferred using the “corridor” approach. The amount calculated above
the “corridor” is amortized to results of operations on a straight-line basis over the expected average remaining service life of active employees in the plan and over the remaining life expectancy of inactive employees in the plan. The
post-retirement benefit obligation is remeasured to its fair value at each year end based on an annual actuarial report, with an offset to the associated regulatory asset, to the extent of the remeasurement adjustment. 

For post-employment obligations, the associated regulatory liabilities representing actuarial gains on transition to US GAAP are amortized to results
of operations based on the “corridor” approach. The actuarial gains and losses on post-employment obligations that are incurred during the year are recognized immediately to results of operations. The post-employment benefit obligation is
remeasured to its fair value at each year end based on an annual actuarial report, with an offset to the associated regulatory asset, to the extent of the remeasurement adjustment. 

All post-retirement and post-employment future benefit costs are attributed to labour and are either charged to results of operations or capitalized as
part of the cost of property, plant and equipment and intangible assets. 

  

					
		 	12	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Stock-Based Compensation 

Share Grant Plans 
 Hydro One measures share
grant plans based on fair value of share grants as estimated based on the grant date common share price. The costs are recognized in the financial statements using the graded-vesting attribution method for share grant plans that have both a
performance condition and a service condition. The Company records a regulatory asset equal to the accrued costs of share grant plans recognized in each period. Costs are transfered from the regulatory asset to labour costs at the time the share
grants vest and are issued, and are recovered in rates. Forfeitures are recognized as they occur. 
 Deferred Share Unit (DSU) Plans 

The Company records the liabilities associated with its Directors’ and Management DSU Plans at fair value at each reporting date until settlement,
recognizing compensation expense over the vesting period on a straight-line basis. The fair value of the DSU liability is based on the Company’s common share closing price at the end of each reporting period. 

Long-term Incentive Plan (LTIP) 
 The Company
measures the restricted share units (RSUs) and performance share units (PSUs), issued under its LTIP, at fair value based on the grant date common share price. The related compensation expense is recognized over the vesting period on a straight-line
basis. Forfeitures are recognized as they occur. 
 Loss Contingencies 

Hydro One is involved in certain legal and environmental matters that arise in the normal course of business. In the preparation of its Consolidated
Financial Statements, management makes judgments regarding the future outcome of contingent events and records a loss for a contingency based on its best estimate when it is determined that such loss is probable and the amount of the loss can be
reasonably estimated. Where the loss amount is recoverable in future rates, a regulatory asset is also recorded. When a range estimate for the probable loss exists and no amount within the range is a better estimate than any other amount, the
Company records a loss at the minimum amount within the range. 
 Management regularly reviews current information available to determine whether
recorded provisions should be adjusted and whether new provisions are required. Estimating probable losses may require analysis of multiple forecasts and scenarios that often depend on judgments about potential actions by third parties, such as
federal, provincial and local courts or regulators. Contingent liabilities are often resolved over long periods of time. Amounts recorded in the Consolidated Financial Statements may differ from the actual outcome once the contingency is resolved.
Such differences could have a material impact on future results of operations, financial position and cash flows of the Company. 
 Provisions are based
upon current estimates and are subject to greater uncertainty where the projection period is lengthy. A significant upward or downward trend in the number of claims filed, the nature of the alleged injuries, and the average cost of resolving each
claim could change the estimated provision, as could any substantial adverse or favourable verdict at trial. A federal or provincial legislative outcome or structured settlement could also change the estimated liability. Legal fees are expensed as
incurred. 
 Environmental Liabilities 
 Environmental
liabilities are recorded in respect of past contamination when it is determined that future environmental remediation expenditures are probable under existing statute or regulation and the amount of the future expenditures can be reasonably
estimated. Hydro One records a liability for the estimated future expenditures associated with contaminated land assessment and remediation and for the phase-out and destruction of polychlorinated biphenyl
(PCB)-contaminated mineral oil removed from electrical equipment, based on the present value of these estimated future expenditures. The Company determines the present value with a discount rate equal to its credit-adjusted risk-free interest rate
on financial instruments with comparable maturities to the pattern of future environmental expenditures. As the Company anticipates that the future expenditures will continue to be recoverable in future rates, an offsetting regulatory asset has been
recorded to reflect the future recovery of these environmental expenditures from customers. Hydro One reviews its estimates of future environmental expenditures annually, or more frequently if there are indications that circumstances have changed.

 Asset Retirement Obligations 
 Asset retirement obligations
are recorded for legal obligations associated with the future removal and disposal of long-lived assets. Such obligations may result from the acquisition, construction, development and/or normal use of the asset. Conditional asset retirement
obligations are recorded when there is a legal obligation to perform a future asset retirement activity but where the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. In
such a case, the obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. 

When recording an asset retirement obligation, the present value of the estimated future expenditures required to complete the asset retirement activity
is recorded in the period in which the obligation is incurred, if a reasonable estimate can be made. In general, the present value of the estimated future expenditures is added to the carrying amount of the associated asset and the 

  

					
		 	13	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 resulting asset retirement cost is depreciated over the estimated useful life of the asset. Where an
asset is no longer in service when an asset retirement obligation is recorded, the asset retirement cost is recorded in results of operations. 
 Some
of the Company’s transmission and distribution assets, particularly those located on unowned easements and rights-of-way, may have asset retirement obligations,
conditional or otherwise. The majority of the Company’s easements and rights-of-way are either of perpetual duration or are automatically renewed annually. Land
rights with finite terms are generally subject to extension or renewal. As the Company expects to use the majority of its facilities in perpetuity, no asset retirement obligations have been recorded for these assets. If, at some future date, a
particular facility is shown not to meet the perpetuity assumption, it will be reviewed to determine whether an estimable asset retirement obligation exists. In such a case, an asset retirement obligation would be recorded at that time. 

The Company’s asset retirement obligations recorded to date relate to estimated future expenditures associated with the removal and disposal of
asbestos-containing materials installed in some of its facilities. 
  

	3.	 NEW ACCOUNTING PRONOUNCEMENTS 



The following tables present Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board that are applicable to Hydro One: 

Recently Adopted Accounting Guidance 
  

									
	  ASU  
	  	 Date issued
  
	  	 Description
  
	  	 Effective date
  
	  	 Anticipated impact on Hydro One

 

	  2016-06	  	March 2016	  	 Contingent call (put) options that are assessed to accelerate the payment of principal on debt instruments
need to meet the criteria of being “clearly and closely related” to their debt hosts.
  
	  	January 1, 2017	  	No impact upon adoption
	  
 Recently Issued Accounting Guidance Not Yet Adopted

 

	  ASU  
	  	 Date issued
  
	  	 Description
  
	  	 Effective date
  
	  	 Anticipated impact on Hydro One

 

	   2014-09

  2015-14
   2016-08
   2016-10

  2016-12
   2016-20
   2017-05

  2017-10
   2017-13
   2017-14

 
	  	May 2014 – November 2017	  	 ASU 2014-09 was issued in May 2014 and provides guidance on revenue
recognition relating to the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU
2015-14 deferred the effective date of ASU 2014-09 by one year. Additional ASUs were issued in 2016 and 2017 that simplify transition and provide clarity on certain
aspects of the new standard.
  
	  	January 1, 2018	  	Hydro One has completed the review of all its revenue streams and has concluded that there will be no material impact upon adoption.
	   2016-02

  2018-01
	  	February 2016 – January 2018	  	 Lessees are required to recognize the rights and obligations resulting from operating leases as assets (right to
use the underlying asset for the term of the lease) and liabilities (obligation to make future lease payments) on the balance sheet. ASU 2018-01 permits an entity to elect an optional practical expedient to
not evaluate under Topic 842 land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840.

 
	  	January 1, 2019	  	An initial assessment is currently underway encompassing a review of existing leases, which will be followed by a review of relevant contracts. No quantitative determination has been made at
this time. The Company is on track for implementation of this standard by the effective date.
	  2016-15	  	August 2016	  	 The amendments provide guidance for eight specific cash flow issues with the objective of reducing the existing
diversity in practice.
  
	  	January 1, 2018	  	No material impact
	  2017-01	  	January 2017	  	 The amendment clarifies the definition of a business and provides additional guidance on evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
  
	  	January 1, 2018	  	No material impact
	  2017-04	  	January 2017	  	 The amendment removes the second step of the current two-step goodwill
impairment test to simplify the process of testing goodwill.
  
	  	January 1, 2020	  	Under assessment
	  2017-07	  	March 2017	  	 Service cost components of net benefit cost associated with defined benefit plans are required to be reported in
the same line as other compensation costs arising from services rendered by the Company’s employees. All other components of net benefit cost are to be presented in the income statement separately from the service cost component. Only the
service cost component is eligible for capitalization where applicable.
  
	  	January 1, 2018	  	Hydro One has applied for a regulatory deferral account to maintain the capitalization of OPEB related costs. As such, there will be no material
impact.


  

					
		 	14	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  


									
	  ASU  
	  	 Date issued
  
	  	 Description
  
	  	 Effective date
  
	  	 Anticipated impact on Hydro One

 

	  2017-09	  	May 2017	  	 Changes to the terms or conditions of a share-based payment award will require an entity to apply modified
accounting unless the modified award meets all conditions stipulated in this ASU.
  
	  	January 1, 2018	  	No impact
	  2017-11	  	July 2017	  	 When determining whether certain financial instruments should be classified as liabilities or equity
instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock.
  
	  	January 1, 2019	  	Under assessment
	  2017-12	  	August 2017	  	 Amendments will better align an entity’s risk management activities and financial reporting for hedging
relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.
  
	  	January 1, 2019	  	Under assessment

  

	4.	 BUSINESS COMBINATIONS 



Avista Corporation Purchase Agreement 
 On July 19, 2017,
Hydro One reached an agreement to acquire Avista Corporation (Merger) for approximately $6.7 billion in an all-cash transaction. Avista Corporation is an investor-owned utility providing electric
generation, transmission, and distribution services. It is headquartered in Spokane, Washington, with service areas in Washington, Idaho, Oregon, Montana and Alaska. The closing of the Merger is subject to receipt of certain regulatory and
government approvals, and the satisfaction of customary closing conditions. See Note 16 - Convertible Debentures and Note 17 - Fair Value of Financial Instruments and Risk Management for details of convertible debentures and foreign exchange
contract, respectively, related to financing of the Merger. 
 Acquisition of HOSSM 

On October 31, 2016, Hydro One acquired HOSSM, an Ontario regulated electricity transmission business operating along the eastern shore of Lake
Superior, north and east of Sault Ste. Marie, Ontario from Brookfield Infrastructure Holdings Inc. The total purchase price for HOSSM was approximately $376 million, including the assumption of approximately $150 million in outstanding
indebtedness. During 2017, the Company completed the final determination of the fair value of assets acquired and liabilities assumed with no significant changes, which resulted in a total goodwill of approximately $157 million arising from the
HOSSM acquisition. The difference between the preliminary and final purchase price allocation to fair value of assets acquired and liabilities related to a $2 million decrease in deferred income tax liabilities which resulted in a corresponding
decrease to goodwill. The following table summarizes the final fair value of the assets acquired and liabilities assumed: 
  

					
	  (millions of dollars)	  	  	 
	 Cash and cash equivalents
	  	 	5	 
	 Property, plant and equipment
	  	 	221	 
	 Intangible assets
	  	 	1	 
	 Regulatory assets
	  	 	50	 
	 Goodwill
	  	 	157	 
	 Working capital
	  	 	(2	) 
	 Long-term debt
	  	 	(186	) 
	 Pension and post-employment benefit liabilities, net
	  	 	(5	) 
	 Deferred income taxes
	  	 	(15	) 
	 	  	 	226	 

 Goodwill arising from the HOSSM acquisition consists largely of the synergies and economies of scale expected from
combining the operations of Hydro One and HOSSM. HOSSM contributed revenues of $6 million and less than $1 million of net income to the Company’s consolidated financial results for the year ended December 31, 2016. All costs
related to the acquisition have been expensed through the Consolidated Statements of Operations and Comprehensive Income. HOSSM’s financial information was not material to the Company’s consolidated financial results for the year ended
December 31, 2016 and therefore, has not been disclosed on a pro forma basis. 
 Agreement to Purchase Orillia Power 

On August 15, 2016, the Company reached an agreement to acquire Orillia Power Distribution Corporation (Orillia Power), an electricity distribution
company located in Simcoe County, Ontario, from the City of Orillia for approximately $41 million, including the assumption of approximately $15 million in outstanding indebtedness and regulatory liabilities, subject to closing
adjustments. The acquisition is subject to regulatory approval by the OEB. 

  

					
		 	15	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  


	5.	 DEPRECIATION AND AMORTIZATION 



 

									
	  Year ended December 31 (millions of dollars) 	  	2017	 	    	2016	 
	 Depreciation of property, plant and equipment
	  	 	641	 	    	 	612	 
	 Asset removal costs
	  	 	90	 	    	 	90	 
	 Amortization of intangible assets
	  	 	62	 	    	 	56	 
	 Amortization of regulatory assets
	  	 	24	 	    	 	20	 
	 	  	 	817	 	    	 	778	 
	  

6.   FINANCING CHARGES

 
	  				    			
	  Year ended December 31 (millions of dollars) 	  	2017	 	    	2016	 
	 Interest on long-term debt
	  	 	450	 	    	 	424	 
	 Interest on convertible debentures
	  	 	24	 	    	 	—	 
	 Interest on short-term notes
	  	 	6	 	    	 	9	 
	 Unrealized loss on foreign exchange contract
	  	 	3	 	    	 	—	 
	 Other
	  	 	14	 	    	 	16	 
	 Less:   Interest capitalized on construction and development in progress
	  	 	(56	) 	    	 	(54	) 
	   Interest earned on cash and cash equivalents
	  	 	(2	) 	    	 	(2	) 
	 	  	 	439	 	    	 	393	 

  

	7.	 INCOME TAXES 



Income tax expense differs from the amount that would have been recorded using the combined Canadian federal and Ontario statutory income tax rate. The
reconciliation between the statutory and the effective tax rates is provided as follows: 
  

									
	  Year ended December 31 (millions of dollars) 	  	2017	 	 	2016	 
			
	 Income before income taxes
	  	 	793	 	 	 	885	 
	 Income taxes at statutory rate of 26.5% (2016 - 26.5%)
	  	 	210	 	 	 	235	 
			
	 Increase (decrease) resulting from:
	  				 			
	 Net temporary differences recoverable in future rates charged to customers:
	  				 			
	 Capital cost allowance in excess of depreciation and amortization
	  	 	(55	) 	 	 	(53	) 
	 Pension contributions in excess of pension expense
	  	 	(13	) 	 	 	(16	) 
	 Overheads capitalized for accounting but deducted for tax purposes
	  	 	(17	) 	 	 	(16	) 
	 Interest capitalized for accounting but deducted for tax purposes
	  	 	(15	) 	 	 	(14	) 
	 Environmental expenditures
	  	 	(6	) 	 	 	(5	) 
	 Other
	  	 	3	 	 	 	5	 
	 Net temporary differences
	  	 	(103	) 	 	 	(99	) 
	 Net permanent differences
	  	 	4	 	 	 	3	 
	 Total income taxes
	  	 	111	 	 	 	139	 
	  
 The major components of income tax expense are as
follows:    
  
	  				 			
	  Year ended December 31 (millions of dollars) 	  	2017	 	 	2016	 
	 Current income taxes
	  	 	26	 	 	 	25	 
	 Deferred income taxes
	  	 	85	 	 	 	114	 
	 Total income taxes
	  	 	111	 	 	 	139	 
			
	 Effective income tax rate
	  	 	14.0%	 	 	 	15.7%	 


  

					
		 	16	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Deferred Income Tax Assets and Liabilities 

Deferred income tax assets and liabilities expected to be included in the rate-setting process are offset by regulatory assets and liabilities to reflect
the anticipated recovery or disposition of these balances within future electricity rates. Deferred income tax assets and liabilities arise from differences between the tax basis and the carrying amounts of the assets and liabilities. At
December 31, 2017 and 2016, deferred income tax assets and liabilities consisted of the following: 
  

									
	  December 31 (millions of dollars) 	  	2017	 	  	2016	 
	 Deferred income tax assets
	  				  			
	 Depreciation and amortization in excess of capital cost allowance
	  	 	125	 	  	 	495	 
	 Non-depreciable capital property
	  	 	271	 	  	 	271	 
	 Post-retirement and post-employment benefits expense in excess of cash payments
	  	 	561	 	  	 	607	 
	 Environmental expenditures
	  	 	71	 	  	 	74	 
	 Non-capital losses
	  	 	255	 	  	 	213	 
	 Tax credit carryforwards
	  	 	49	 	  	 	27	 
	 Investment in subsidiaries
	  	 	84	 	  	 	75	 
	 Other
	  	 	13	 	  	 	3	 
		  	 	1,429	 	  	 	1,765	 
	 Less: valuation allowance
	  	 	(364	) 	  	 	(352	) 
	 Total deferred income tax assets
	  	 	1,065	 	  	 	1,413	 
	 Less: current portion
	  	 	—	 	  	 	—	 
	 	  	 	1,065	 	  	 	1,413	 
			
	 Deferred income tax liabilities
	  				  			
	 Regulatory amounts that are not recognized for tax purposes
	  	 	(47	) 	  	 	(153	) 
	 Goodwill
	  	 	(10	) 	  	 	(10	) 
	 Capital cost allowance in excess of depreciation and amortization
	  	 	(75	) 	  	 	(64	) 
	 Other
	  	 	(17	) 	  	 	(11	) 
	 Total deferred income tax liabilities
	  	 	(149	) 	  	 	(238	) 
	 Less: current portion
	  	 	—	 	  	 	—	 
	 	  	 	(149	) 	  	 	(238	) 
			
	 Net deferred income tax assets
	  	 	916	 	  	 	1,175	 

 The net deferred income tax assets are presented on the Consolidated Balance Sheets as follows: 

 

									
	  December 31 (millions of dollars) 	  	2017	 	  	2016	 
	 Long-term:
	  				  			
	 Deferred income tax assets
	  	 	987	 	  	 	1,235	 
	 Deferred income tax liabilities
	  	 	(71	) 	  	 	(60	) 
	 Net deferred income tax assets
	  	 	916	 	  	 	1,175	 

 The valuation allowance for deferred tax assets as at December 31, 2017 was $364 million (2016 - $352 million).
The valuation allowance primarily relates to temporary differences for non-depreciable assets and investments in subsidiaries. As of December 31, 2017 and 2016, the Company had non-capital losses carried forward available to reduce future years’ taxable income, which expire as follows: 
  

									
	  Year of expiry (millions of dollars) 	  	2017	 	    	2016	 
	 2034
	  	 	2	 	    	 	     2	  
	 2035
	  	 	222	 	    	 	222	 
	 2036
	  	 	560	 	    	 	580	 
	 2037
	  	 	175	 	    	 	—	 
	 Total losses
	  	 	959	 	    	 	804	 


  

					
		 	17	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  


	8.	 ACCOUNTS RECEIVABLE 


  

									
	  December 31 (millions of dollars) 	  	2017	 	 	    2016	 
	 Accounts receivable – billed
	  	 	298	 	 	 	431	 
	 Accounts receivable – unbilled
	  	 	367	 	 	 	442	 
	 Accounts receivable, gross
	  	 	665	 	 	 	873	 
	 Allowance for doubtful accounts
	  	 	(29	) 	 	 	(35	) 
	 Accounts receivable, net
	  	 	636	 	 	 	838	 
	  
 The following table shows the movements in the
allowance for doubtful accounts for the years ended December 31, 2017 and 2016:
  
	 
  
 

	  Year ended December 31 (millions of dollars) 	  	2017	 	 	    2016	 
	 Allowance for doubtful accounts – beginning
	  	 	(35	) 	 	 	(61	) 
	 Write-offs
	  	 	25	 	 	 	37	 
	 Additions to allowance for doubtful accounts
	  	 	(19	) 	 	 	(11	) 
	 Allowance for doubtful accounts – ending
	  	 	(29	) 	 	 	(35	) 
	  

9.   OTHER CURRENT ASSETS

 
	  				 			
	  December 31 (millions of dollars) 	  	2017	 	 	2016	 
	 Regulatory assets (Note 12) 
	  	 	46	 	 	 	37	 
	 Materials and supplies
	  	 	18	 	 	 	19	 
	 Prepaid expenses and other assets
	  	 	41	 	 	 	46	 
	 	  	 	105	 	 	 	102	 

  

	10.	 PROPERTY, PLANT AND EQUIPMENT 



 

																	
	  December 31, 2017 (millions of dollars) 	  	Property, Plant
and Equipment	 	  	Accumulated
Depreciation	 	  	Construction
in Progress	 	  	Total	 
	 Transmission
	  	 	15,509	 	  	 	5,162	 	  	 	989	 	  	 	11,336	 
	 Distribution
	  	 	10,213	 	  	 	3,513	 	  	 	149	 	  	 	6,849	 
	 Communication
	  	 	1,266	 	  	 	853	 	  	 	31	 	  	 	444	 
	 Administration and service
	  	 	1,561	 	  	 	857	 	  	 	46	 	  	 	750	 
	 Easements
	  	 	638	 	  	 	70	 	  	 	—	 	  	 	568	 
	 	  	 	29,187	 	  	 	10,455	 	  	 	1,215	 	  	 	19,947	 
					
	  December 31, 2016 (millions of dollars) 	  	Property, Plant
and Equipment	 	  	Accumulated
Depreciation	 	  	Construction
in Progress	 	  	Total	 
	 Transmission
	  	 	14,692	 	  	 	4,862	 	  	 	910	 	  	 	10,740	 
	 Distribution
	  	 	9,656	 	  	 	3,305	 	  	 	243	 	  	 	6,594	 
	 Communication
	  	 	1,233	 	  	 	777	 	  	 	20	 	  	 	476	 
	 Administration and service
	  	 	1,632	 	  	 	924	 	  	 	61	 	  	 	769	 
	 Easements
	  	 	628	 	  	 	67	 	  	 	—	 	  	 	561	 
	 	  	 	27,841	 	  	 	9,935	 	  	 	1,234	 	  	 	19,140	 

 Financing charges capitalized on property, plant and equipment under construction were $54 million in 2017 (2016 -
$52 million). 
  

	11.	 INTANGIBLE ASSETS 


  

																	
	  December 31, 2017 (millions of dollars) 	  	Intangible
Assets	 	  	Accumulated
Amortization	 	  	Development
in Progress	 	  	Total	 
	 Computer applications software
	  	 	     698	 	  	 	     370	 	  	 	41	 	  	 	     369	 
	 Other
	  	 	5	 	  	 	5	 	  	 	—	 	  	 	—	 
	 	  	 	703	 	  	 	375	 	  	 	     41	 	  	 	369	 
					
	  December 31, 2016 (millions of dollars) 	  	Intangible
Assets	 	  	Accumulated
Amortization	 	  	Development
in Progress	 	  	Total	 
	 Computer applications software
	  	 	621	 	  	 	326	 	  	 	53	 	  	 	348	 
	 Other
	  	 	5	 	  	 	4	 	  	 	—	 	  	 	1	 
	 	  	 	626	 	  	 	330	 	  	 	53	 	  	 	349	 


  

					
		 	18	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Financing charges capitalized to intangible assets under development were $2 million in 2017 (2016
- $2 million). The estimated annual amortization expense for intangible assets is as follows: 2018 - $67 million; 2019 - $57 million; 2020 - $40 million; 2021 - $39 million; and 2022 - $36 million. 

 

	12.	 REGULATORY ASSETS AND LIABILITIES 



Regulatory assets and liabilities arise as a result of the rate-setting process. Hydro One has recorded the following regulatory assets and liabilities:

  

									
	  December 31 (millions of dollars) 	  	2017	 	  	2016	 
	 Regulatory assets:
	  				  			
	 Deferred income tax regulatory asset
	  	 	1,762	 	  	 	1,587	 
	 Pension benefit regulatory asset
	  	 	981	 	  	 	900	 
	 Post-retirement and post-employment benefits
	  	 	36	 	  	 	243	 
	 Environmental
	  	 	196	 	  	 	204	 
	 Share-based compensation
	  	 	40	 	  	 	31	 
	 Debt premium
	  	 	27	 	  	 	32	 
	 Foregone revenue deferral
	  	 	23	 	  	 	—	 
	 Distribution system code exemption
	  	 	10	 	  	 	10	 
	 B2M LP start-up costs
	  	 	4	 	  	 	5	 
	 Retail settlement variance account
	  	 	—	 	  	 	145	 
	 2015-2017 rate rider
	  	 	—	 	  	 	7	 
	 Pension cost variance
	  	 	—	 	  	 	4	 
	 Other
	  	 	16	 	  	 	14	 
	 Total regulatory assets
	  	 	3,095	 	  	 	3,182	 
	 Less: current portion
	  	 	(46	) 	  	 	(37	) 
	 	  	 	3,049	 	  	 	3,145	 
			
	 Regulatory liabilities:
	  				  			
	 Green Energy expenditure variance
	  	 	60	 	  	 	69	 
	 External revenue variance
	  	 	46	 	  	 	64	 
	 CDM deferral variance
	  	 	28	 	  	 	54	 
	 Pension cost variance
	  	 	23	 	  	 	—	 
	 2015-2017 rate rider
	  	 	6	 	  	 	—	 
	 Deferred income tax regulatory liability
	  	 	5	 	  	 	4	 
	 Other
	  	 	17	 	  	 	18	 
	 Total regulatory liabilities
	  	 	185	 	  	 	209	 
	 Less: current portion
	  	 	(57	) 	  	 	—	 
	 	  	 	128	 	  	 	209	 

 Deferred Income Tax Regulatory Asset and Liability 

Deferred income taxes are recognized on temporary differences between the carrying amount of assets and liabilities in the financial statements and the
corresponding tax bases used in the computation of taxable income. The Company has recognized regulatory assets and liabilities that correspond to deferred income taxes that flow through the rate-setting process. In the absence of rate-regulated
accounting, the Company’s income tax expense would have been recognized using the liability method and there would be no regulatory accounts established for taxes to be recovered through future rates. As a result, the 2017 income tax expense
would have been higher by approximately $113 million (2016 - $104 million). 
 On September 28, 2017, the OEB issued its Decision and
Order on Hydro One Networks’ 2017 and 2018 transmission rates revenue requirements (Decision). In its Decision, the OEB concluded that the net deferred tax asset resulting from transition from the payments in lieu of tax regime under the
Electricity Act (Ontario) to tax payments under the federal and provincial tax regime should not accrue entirely to Hydro One’s shareholders and that a portion should be shared with ratepayers. On November 9, 2017, the OEB issued a
Decision and Order that calculated the portion of the tax savings that should be shared with ratepayers. The OEB’s calculation would result in an impairment of Hydro One Networks’ transmission deferred income tax regulatory asset of up to
approximately $515 million. If the OEB were to apply the same calculation for sharing in Hydro One Networks’ 2018-2022 distribution rates, for which a decision is currently outstanding, it would result in an additional impairment of up to
approximately $370 million related to Hydro One Networks’ distribution deferred income tax regulatory asset. In October 2017, the Company filed a Motion to Review and Vary (Motion) the Decision and filed an appeal with the Divisional Court
of Ontario (Appeal). On December 19, 2017, the OEB granted a hearing of the merits of the Motion which is scheduled for mid-February 2018. In both cases, the Company’s position is that the OEB made
errors of fact and law in its determination of allocation of the tax savings between the shareholders and ratepayers. The Appeal is being held in abeyance pending the outcome of the Motion. If the Decision is upheld, based on the facts known at 


  

					
		 	19	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 this time, the exposure from the potential impairments would be a
one-time decrease in net income of up to approximately $885 million. Based on the assumptions that the OEB applies established rate making principles in a manner consistent with its past practice and does
not exercise its discretion to take other policy considerations into account, management is of the view that it is likely that the Company’s Motion will be granted and the aforementioned tax savings will be allocated to the benefit of Hydro One
shareholders. 
 Pension Benefit Regulatory Asset 
 In
accordance with OEB rate orders, pension costs are recovered on a cash basis as employer contributions are paid to the pension fund in accordance with the Pension Benefits Act (Ontario). The Company recognizes the net unfunded status of pension
obligations on the Consolidated Balance Sheets with an offset to the associated regulatory asset. A regulatory asset is recognized because management considers it to be probable that pension benefit costs will be recovered in the future through the
rate-setting process. The pension benefit obligation is remeasured to its fair value at each year end based on an annual actuarial report, with an offset to the associated regulatory asset, to the extent of the remeasurement adjustment. In the
absence of rate-regulated accounting, OCI would have been lower by $80 million and operation, maintenance and administration expenses would have been higher by $1 million (2016 - OCI higher by $52 million). 

Post-Retirement and Post-Employment Benefits 
 The Company
recognizes the net unfunded status of post-retirement and post-employment obligations on the Consolidated Balance Sheets with an incremental offset to the associated regulatory assets. A regulatory asset is recognized because management considers it
to be probable that post-retirement and post-employment benefit costs will be recovered in the future through the rate-setting process. The post-retirement and post-employment benefit obligation is remeasured to its fair value at each year end based
on an annual actuarial report, with an offset to the associated regulatory asset, to the extent of the remeasurement adjustment. In the absence of rate-regulated accounting, 2017 OCI would have been higher by $207 million (2016 - lower by $3
million). 
 Environmental 
 Hydro One records a liability for
the estimated future expenditures required to remediate environmental contamination. Because such expenditures are expected to be recoverable in future rates, the Company has recorded an equivalent amount as a regulatory asset. In 2017, the
environmental regulatory asset increased by $1 million (2016 - decreased by $1 million) to reflect related changes in the Company’s PCB liability, and increased by $7 million (2016 - $10 million) due to changes in the land assessment
and remediation liability. The environmental regulatory asset is amortized to results of operations based on the pattern of actual expenditures incurred and charged to environmental liabilities. The OEB has the discretion to examine and assess the
prudency and the timing of recovery of all of Hydro One’s actual environmental expenditures. In the absence of rate-regulated accounting, 2017 operation, maintenance and administration expenses would have been higher by $8 million (2016 -
$9 million). In addition, 2017 amortization expense would have been lower by $24 million (2016 - $20 million), and 2017 financing charges would have been higher by $8 million (2016 - $8 million). 

Share-based Compensation 
 The Company recognizes costs
associated with share grant plans in a regulatory asset as management considers it probable that share grant plans’ costs will be recovered in the future through the rate-setting process. In the absence of rate-regulated accounting, 2017
operation, maintenance and administration expenses would have been higher by $8 million (2016 - $9 million). Share grant costs are transferred to labour costs at the time the share grants vest and are issued, and are recovered in rates in
accordance with recovery of said labour costs. 
 Debt Premium 

The value of debt assumed in the acquisition of HOSSM has been recorded at fair value in accordance with US GAAP - Business Combinations. The OEB allows
for recovery of interest at the coupon rate of the Senior Secured Bonds and a regulatory asset has been recorded for the difference between the fair value and face value of this debt. The debt premium is recovered over the remaining term of the
debt. 
 Foregone Revenue Deferral 
 As part of its September
2017 decision on Hydro One Networks’ transmission rate application for 2017 and 2018 rates, the OEB approved the foregone revenue account to record the difference between revenue earned under the rates approved as part of the decision,
effective January 1, 2017, and revenue earned under the interim rates until the approved 2017 rates were implemented. The OEB approved a similar account for B2M LP in June 2017 to record the difference between revenue earned under the newly
approved rates, effective January 1, 2017, and the revenue recorded under the interim 2017 rates. The balances of these accounts will be returned to or recovered from ratepayers, respectively, over a
one-year period ending December 31, 2018. The draft rate order submitted by Hydro One Networks was approved by the OEB in November, 2017. This draft rate order reflects the September 2017 decision,
including a reduction of the amount of cash taxes approved for recovery in transmission rates due to the OEB’s basis to share the savings resulting from a deferred tax asset with ratepayers. The Company’s position in the aforementioned
Motion is that the OEB made errors of fact and law in its determination of allocation of the tax savings between the shareholders and 

  

					
		 	20	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 ratepayers. Therefore, the Company has also reflected the impact of the Company’s position with
respect to the Motion in the Foregone Revenue Deferral account. The timing for recovery of this impact will be determined as part of the outcome of the Motion. 

Distribution System Code (DSC) Exemption 
 In June 2010, Hydro
One Networks filed an application with the OEB regarding the OEB’s new cost responsibility rules contained in the OEB’s October 2009 Notice of Amendment to the DSC, with respect to the connection of certain renewable generators that were
already connected or that had received a connection impact assessment prior to October 21, 2009. The application sought approval to record and defer the unanticipated costs incurred by Hydro One Networks that resulted from the connection of
certain renewable generation facilities. The OEB ruled that identified specific expenditures can be recorded in a deferral account subject to the OEB’s review in subsequent Hydro One Networks distribution applications. In March 2015, the OEB
approved the disposition of the DSC exemption deferral account balance at December 31, 2013, including accrued interest, which was recovered through the 2015-2017 Rate Rider. In addition, the OEB also approved Hydro One’s request to
discontinue this deferral account. There were no additions to this regulatory account in 2017 or 2016. The remaining balance in this account at December 31, 2016, including accrued interest, was requested for recovery through the 2018-2022
distribution rate application. 
 B2M LP Start-up Costs 

In December 2015, OEB issued its decision on B2M LP’s application for 2015-2019 and as part of the decision approved the recovery of $8 million
of start-up costs relating to B2M LP. The costs are being recovered over a four-year period which began in 2016, in accordance with the OEB decision. 

Retail Settlement Variance Account (RSVA) 
 Hydro One has
deferred certain retail settlement variance amounts under the provisions of Article 490 of the OEB’s Accounting Procedures Handbook. In March 2015, the OEB approved the disposition of the total RSVA balance accumulated from January 2012 to
December 2013, including accrued interest, to be recovered through the 2015-2017 Rate Rider. 
 2015-2017 Rate Rider 

In March 2015, as part of its decision on Hydro One Networks’ distribution rate application for 2015-2019, the OEB approved the disposition of
certain deferral and variance accounts, including RSVAs and accrued interest. The 2015-2017 Rate Rider account included the balances approved for disposition by the OEB and was disposed of in accordance with the OEB decision over a 32-month period ended on December 31, 2017. The balance remaining in the account represents an over-collection to be returned to ratepayers in a future rate application. We have not requested recovery of the
remaining balance of this account in the current distribution rate application. 
 Pension Cost Variance 

A pension cost variance account was established for Hydro One Networks’ transmission and distribution businesses to track the difference between the
actual pension expenses incurred and estimated pension costs approved by the OEB. The balance in this regulatory account reflects the deficit of pension costs paid as compared to OEB-approved amounts. In March
2015, the OEB approved the disposition of the distribution business portion of the total pension cost variance account at December 31, 2013, including accrued interest, which was recovered through the 2015-2017 Rate Rider. In September 2017,
the OEB approved the disposition of the transmission business portion of the total pension cost variance account as at December 31, 2015, including accrued interest, which is being recovered over a
two-year period ending December 31, 2018. In the absence of rate-regulated accounting, 2017 revenue would have been higher by $24 million (2016 - $25 million). 

Green Energy Expenditure Variance 
 In April 2010, the OEB
requested the establishment of deferral accounts which capture the difference between the revenue recorded on the basis of Green Energy Plan expenditures incurred and the actual recoveries received. 

External Revenue Variance 
 In May 2009, the OEB approved
forecasted amounts related to export service revenue, external revenue from secondary land use, and external revenue from station maintenance and engineering and construction work. In November 2012, the OEB again approved forecasted amounts related
to these revenue categories and extended the scope to encompass all other external revenues. The external revenue variance account balance reflects the excess of actual external revenues compared to the
OEB-approved forecasted amounts. In September 2017, the OEB approved the disposition of the external revenue variance account as at December 31, 2015, including accrued interest, which is being returned
to customers over a two-year period ending December 31, 2018. 
 CDM Deferral Variance Account 

As part of Hydro One Networks’ application for 2013 and 2014 transmission rates, Hydro One agreed to establish a new regulatory deferral variance
account to track the impact of actual Conservation and Demand Management (CDM) and demand response results on the load forecast compared to the estimated load forecast included in the revenue requirement. The balance in the CDM deferral variance
account relates to the actual 2013 and 2014 CDM compared to the amounts included in 2013 and 2014 revenue 

  

					
		 	21	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 requirements, respectively. There were no additions to this regulatory account in 2017 or 2016. The
balance of the account at December 31, 2015, including interest, was approved for disposition in the 2017-2018 transmission rate decision and is currently being drawn down over a 2-year period ending
December 31, 2018. 
  

	13.	 ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES 



 

									
	  December 31 (millions of dollars) 	  	2017	 	  	2016	 
	 Accounts payable
	  	 	177	 	  	 	181	 
	 Accrued liabilities
	  	 	572	 	  	 	659	 
	 Accrued interest
	  	 	99	 	  	 	105	 
	 Regulatory liabilities (Note 12)

	  	 	57	 	  	 	—	 
	 	  	 	905	 	  	 	945	 
	  
 14.  OTHER
LONG-TERM LIABILITIES
  
	  				  			
	  December 31 (millions of dollars) 	  	2017	 	  	2016	 
	 Post-retirement and post-employment benefit liability (Note 19)

	  	 	1,519	 	  	 	  1,641	 
	 Pension benefit liability (Note 19) 
	  	 	981	 	  	 	900	 
	 Environmental liabilities (Note 20) 
	  	 	168	 	  	 	177	 
	 Asset retirement obligations (Note 21) 
	  	 	9	 	  	 	9	 
	 Long-term accounts payable and other liabilities
	  	 	30	 	  	 	25	 
	 	  	 	2,707	 	  	 	2,752	 

  

	15.	 DEBT AND CREDIT AGREEMENTS 



Short-Term Notes and Credit Facilities 
 Hydro One meets its
short-term liquidity requirements in part through the issuance of commercial paper under Hydro One Inc.’s Commercial Paper Program which has a maximum authorized amount of $1.5 billion. These short-term notes are denominated in Canadian
dollars with varying maturities up to 365 days. The Commercial Paper Program is supported by Hydro One Inc.’s committed revolving credit facilities totalling $2.3 billion. 

At December 31, 2017, Hydro One’s consolidated committed, unsecured and undrawn credit facilities totalling $2,550 million consisted of the
following: 
  

									
	  (millions of dollars)	  	Maturity	 	  	Amount	 
	 Hydro One Inc.
	  				  			
	 Revolving standby credit facility
	  	 	June 20221 	 	  	 	2,300	 
	 Hydro One
	  				  			
	 Five-year senior, revolving term credit facility
	  	 	November 2021	 	  	 	250	 
	 Total
	  	 	 	 	  	 	2,550	 

 1 In June 2017, the maturity date of Hydro One Inc.‘s $2.3 billion credit
facilities was extended from June 2021 to June 2022. 
 The Company may use the credit facilities for working capital and general corporate purposes. If
used, interest on the credit facilities would apply based on Canadian benchmark rates. The obligation of each lender to make any credit extension under its credit facility is subject to various conditions including that no event of default has
occurred or would result from such credit extension. 

  

					
		 	22	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Long-Term Debt 

The following table presents long-term debt outstanding at December 31, 2017 and 2016: 

 

									
	  December 31 (millions of dollars) 	  	2017	 	 	2016	 
	 5.18% Series 13 notes due 2017
	  	 	—	 	 	 	600	 
	 2.78% Series 28 notes due 2018
	  	 	750	 	 	 	750	 
	 Floating-rate Series 31 notes due 20191 
	  	 	228	 	 	 	228	 
	 1.48% Series 37 notes due 20192 
	  	 	500	 	 	 	500	 
	 4.40% Series 20 notes due 2020
	  	 	300	 	 	 	300	 
	 1.62% Series 33 notes due 20202 
	  	 	350	 	 	 	350	 
	 1.84% Series 34 notes due 2021
	  	 	500	 	 	 	500	 
	 3.20% Series 25 notes due 2022
	  	 	600	 	 	 	600	 
	 2.77% Series 35 notes due 2026
	  	 	500	 	 	 	500	 
	 7.35% Debentures due 2030
	  	 	400	 	 	 	400	 
	 6.93% Series 2 notes due 2032
	  	 	500	 	 	 	500	 
	 6.35% Series 4 notes due 2034
	  	 	385	 	 	 	385	 
	 5.36% Series 9 notes due 2036
	  	 	600	 	 	 	600	 
	 4.89% Series 12 notes due 2037
	  	 	400	 	 	 	400	 
	 6.03% Series 17 notes due 2039
	  	 	300	 	 	 	300	 
	 5.49% Series 18 notes due 2040
	  	 	500	 	 	 	500	 
	 4.39% Series 23 notes due 2041
	  	 	300	 	 	 	300	 
	 6.59% Series 5 notes due 2043
	  	 	315	 	 	 	315	 
	 4.59% Series 29 notes due 2043
	  	 	435	 	 	 	435	 
	 4.17% Series 32 notes due 2044
	  	 	350	 	 	 	350	 
	 5.00% Series 11 notes due 2046
	  	 	325	 	 	 	325	 
	 3.91% Series 36 notes due 2046
	  	 	350	 	 	 	350	 
	 3.72% Series 38 notes due 2047
	  	 	450	 	 	 	450	 
	 4.00% Series 24 notes due 2051
	  	 	225	 	 	 	225	 
	 3.79% Series 26 notes due 2062
	  	 	310	 	 	 	310	 
	 4.29% Series 30 notes due 2064
	  	 	50	 	 	 	50	 
	 Hydro One Inc. long-term debt (a)
	  	 	9,923	 	 	 	10,523	 
			
	 6.6% Senior Secured Bonds due 2023 (Face value - $110 million)
	  	 	136	 	 	 	144	 
	 4.6% Note Payable due 2023 (Face value - $36 million)
	  	 	40	 	 	 	40	 
	 HOSSM long-term debt (b)
	  	 	176	 	 	 	184	 
			
	 	  	 	10,099	 	 	 	10,707	 
			
	 Add: Net unamortized debt premiums
	  	 	14	 	 	 	15	 
	 Add: Unrealized
mark-to-market gain2 
	  	 	(9	) 	 	 	(2	) 
	 Less: Deferred debt issuance costs
	  	 	(37	) 	 	 	(40	) 
	 Total long-term debt
	  	 	10,067	 	 	 	10,680	 

  

	1 	 The interest rates of the floating-rate notes are referenced to the three-month Canadian dollar bankers’ acceptance
rate, plus a margin. 


  

	2 	 The unrealized mark-to-market net gain
relates to $50 million of the Series 33 notes due 2020 and $500 million Series 37 notes due 2019. The unrealized mark-to-market net gain is offset by a
$9 million (2016 - $2 million) unrealized mark-to-market net loss on the related
fixed-to-floating interest-rate swap agreements, which are accounted for as fair value hedges. 



 

	(a)	 Hydro One Inc. long-term debt 



At December 31, 2017, long-term debt of $9,923 million (2016 - $10,523 million) was outstanding, the majority of which was
issued under Hydro One Inc.’s Medium Term Note (MTN) Program. The maximum authorized principal amount of notes issuable under the current MTN Program prospectus filed in December 2015 is $3.5 billion. At December 31 2017,
$1.2 billion remained available for issuance until January 2018. In 2017, no long-term debt was issued and $600 million of long-term debt was repaid under the MTN Program (2016 - $2,300 million issued and $500 million repaid).

  

	(b)	 HOSSM long-term debt 



At December 31, 2017, long-term debt of $176 million (2016 - $184 million), with a face value of $146 million (2016 - $148
million) was held by HOSSM. In 2017, $2 million of HOSSM long-term debt was repaid (2016 - $2 million). 

  

					
		 	23	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 The total long-term debt is presented on the consolidated balance sheets as follows: 

 

									
	  December 31 (millions of dollars) 	  	2017	 	  	2016	 
	 Current liabilities:
	  				  			
	 Long-term debt payable within one year
	  	 	752	 	  	 	602	 
	 Long-term liabilities:
	  				  			
	 Long-term debt
	  	 	9,315	 	  	 	10,078	 
	 Total long-term debt
	  	 	10,067	 	  	 	10,680	 

 Principal and Interest Payments 

Principal repayments and related weighted average interest rates are summarized by the number of years to maturity in the following table: 

 

									
	 	  	Long-term Debt	 	 	Weighted Average	 
	 	  	 Principal Repayments

 
	 	 	 Interest Rate
  
	 
	  Years to Maturity	  	(millions of dollars)	 	 	(%)	 
	 1 year
	  	 	752	 	 	 	2.8	 
	 2 years
	  	 	731	 	 	 	1.6	 
	 3 years
	  	 	653	 	 	 	2.9	 
	 4 years
	  	 	503	 	 	 	1.9	 
	 5 years
	  	 	604	 	 	 	3.2	 
		  	 	3,243	 	 	 	2.5	 
	 6 – 10 years
	  	 	631	 	 	 	3.5	 
	 Over 10 years
	  	 	6,195	 	 	 	5.2	 
	 	  	 	10,069	 	 	 	4.2	 

 Interest payment obligations related to long-term debt are summarized by year in the following table: 

 

					
	 	  	 Interest Payments
  
	 
	  Year	  	(millions of dollars)	 
	 2018
	  	 	426	 
	 2019
	  	 	402	 
	 2020
	  	 	384	 
	 2021
	  	 	370	 
	 2022
	  	 	355	 
		  	 	1,937	 
	 2023-2027
	  	 	1,672	 
	 2028+
	  	 	4,081	 
	 	  	 	7,690	 

  

	16.	 CONVERTIBLE DEBENTURES 



 

					
	  (millions of dollars, except as otherwise noted)	  	  	 
	 Maturity date
	  	 	September 30, 2027	 
	 Coupon rate
	  	 	4.00%	 
	 Conversion price per common share
	  	 	$    21.40   	 
	 Carrying value at December 31, 2016
	  	 	—   	 
	 Receipt of Initial Instalment, net of deferred financing costs
	  	 	486   	 
	 Amortization of deferred financing costs
	  	 	1   	 
	 Carrying value at
December 31, 2017
	  	 	487   	 
		
	 Face value at December 31, 2017
	  	 	513   	 

 On August 9, 2017, in connection with the acquisition of Avista Corporation, the Company completed the sale of
$1,540 million aggregate principal amount of 4.00% convertible unsecured subordinated debentures (Convertible Debentures) represented by instalment receipts, which included the exercise in full of the over-allotment option granted to the
underwriters to purchase an additional $140 million aggregate principal amount of the Convertible Debentures (Debenture Offering). 
 The
Convertible Debentures were sold on an instalment basis at a price of $1,000 per Convertible Debenture, of which $333 (Initial Instalment) was paid on closing of the Debenture Offering and the remaining $667 (Final Instalment) is payable on a date
(Final Instalment Date) to be fixed by the Company following satisfaction of conditions precedent to the closing of the acquisition of Avista Corporation. The gross proceeds received from the Initial Instalment were $513 million. The Company
incurred financing costs of 

  

					
		 	24	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 $27 million, which are being amortized to financing charges over approximately 10 years, the
contractual term of the Convertible Debentures, using the effective interest rate method. 
 The Convertible Debentures will mature on
September 30, 2027. A coupon rate of 4% is paid on the $1,540 million aggregate principal amount of the Convertible Debentures, and based on the carrying value of the Initial Instalment, this translates into an effective annual yield of
12%. After the Final Instalment Date, the interest rate will be 0%. The interest expense recorded in 2017 is $24 million. 
 If the Final
Instalment Date occurs on a day that is prior to the first anniversary of the closing of the Debenture Offering, holders of the Convertible Debentures who have paid the Final Instalment on or before the Final Instalment Date will be entitled to
receive, in addition to the payment of accrued and unpaid interest to and including the Final Instalment Date, an amount equal to the interest that would have accrued from the day following the Final Instalment Date to and including the first
anniversary of the closing of the Debenture Offering had the Convertible Debentures remained outstanding and continued to accrue interest until and including such date (Make-Whole Payment). No Make-Whole Payment will be payable if the Final
Instalment Date occurs on or after the first anniversary of the closing of the Debenture Offering. 
 At the option of the holders and provided that
payment of the Final Instalment has been made, each Convertible Debenture will be convertible into common shares of the Company at any time on or after the Final Instalment Date, but prior to the earlier of maturity or redemption by the Company, at
a conversion price of $21.40 per common share, being a conversion rate of 46.7290 common shares per $1,000 principal amount of Convertible Debentures. The conversion feature meets the definition of a Beneficial Conversion Feature (BCF), with an
intrinsic value of approximately $92 million. Due to the contingency associated with the debentureholders’ ability to exercise the conversion, the BCF has not been recognized. Between the time the contingency is resolved and the Final
Instalment Date, the Company will recognize approximately $92 million of interest expense associated with amortization of the BCF. 
 Prior to the
Final Instalment Date, the Convertible Debentures may not be redeemed by the Company, except that the Convertible Debentures will be redeemed by the Company at a price equal to their principal amount plus accrued and unpaid interest following the
earlier of: (i) notification to holders that the conditions necessary to approve the acquisition of Avista Corporation will not be satisfied; (ii) termination of the acquisition agreement; and (iii) May 1, 2019 if notice of the
Final Instalment Date has not been given to holders on or before April 30, 2019. Upon any such redemption, the Company will pay for each Convertible Debenture (i) $333 plus accrued and unpaid interest to the holder of the instalment receipt;
and (ii) $667 to the selling debentureholder on behalf of the holder of the instalment receipt in satisfaction of the final instalment. In addition, after the Final Instalment Date, any Convertible Debentures not converted may be redeemed by the
Company at a price equal to their principal amount plus any unpaid interest, which accrued prior to and including the Final Instalment Date. 
 At
maturity, the Company will have the right to pay the principal amount due in common shares, which will be valued at 95% of their weighted average trading price on the Toronto Stock Exchange for the 20 consecutive trading days ending five trading
days preceding the maturity date. 
  

	17.	 FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT 



Fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the
measurement date. The fair value definition focuses on an exit price, which is the price that would be received in the sale of an asset or the amount that would be paid to transfer a liability. 

Hydro One classifies its fair value measurements based on the following hierarchy, as prescribed by the accounting guidance for fair value, which
prioritizes the inputs to valuation techniques used to measure fair value into three levels: 
 Level 1 inputs are unadjusted quoted prices in
active markets for identical assets or liabilities that Hydro One has the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occur with sufficient frequency and volume to provide
ongoing pricing information. 
 Level 2 inputs are those other than quoted market prices that are observable, either directly or indirectly, for an
asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs
other than quoted market prices that are observable for the asset or liability, such as interest-rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates. A Level 2 measurement cannot
have more than an insignificant portion of the valuation based on unobservable inputs. 
 Level 3 inputs are any fair value measurements that
include unobservable inputs for the asset or liability for more than an insignificant portion of the valuation. A Level 3 measurement may be based primarily on Level 2 inputs. 

Non-Derivative Financial Assets and Liabilities 

At December 31, 2017 and 2016, the Company’s carrying amounts of cash and cash equivalents, accounts receivable, due from related parties,
short-term notes payable, accounts payable, and due to related parties are representative of fair value due to the short-term nature of these instruments. 

  

					
		 	25	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Fair Value Measurements of Long-Term Debt 

The fair values and carrying values of the Company’s long-term debt at December 31, 2017 and 2016 are as follows: 

 

																	
	  December 31 (millions of dollars) 	  	2017
Carrying Value	 	  	2017
Fair Value	 	  	2016
Carrying Value	 	  	2016
Fair Value	 
	 $50 million of MTN Series 33 notes
	  	 	49	 	  	 	49	 	  	 	50	 	  	 	50	 
	 $500 million MTN Series 37 notes
	  	 	492	 	  	 	492	 	  	 	498	 	  	 	498	 
	 Other notes and debentures
	  	 	9,526	 	  	 	11,027	 	  	 	10,132	 	  	 	11,462	 
	 Long-term debt, including current
portion
	  	 	10,067	 	  	 	11,568	 	  	 	10,680	 	  	 	12,010	 

 Fair Value Measurements of Derivative Instruments 

At December 31, 2017, Hydro One Inc. had interest-rate swaps in the amount of $550 million (2016 – $550 million) that were used to convert
fixed-rate debt to floating-rate debt. These swaps are classified as fair value hedges. Hydro One Inc.’s fair value hedge exposure was approximately 6% (2016 – 5%) of its total long-term debt. At December 31, 2017, Hydro One Inc. had
the following interest-rate swaps designated as fair value hedges: 
  

	•	 a $50 million fixed-to-floating
interest-rate swap agreement to convert $50 million of the $350 million MTN Series 33 notes maturing April 30, 2020 into three-month variable rate debt; and 



 

	•	 two $125 million and one $250 million
fixed-to-floating interest-rate swap agreements to convert the $500 million MTN Series 37 notes maturing November 18, 2019 into three-month variable rate debt.



 At December 31, 2017 and 2016, the Company had no interest-rate swaps classified as undesignated contracts. 

In October 2017, the Company entered into a deal-contingent foreign exchange forward contract to convert $1.4 billion Canadian to US dollars at an
initial forward rate of 1.27486 Canadian per 1.00 US dollars, and a range up to 1.28735 Canadian per 1.00 US dollars based on the settlement date. The contract is contingent on the Company closing the proposed Avista Corporation acquisition (see
Note 4 - Business Combinations) and is intended to mitigate the foreign currency risk related to the portion of the Avista Corporation acquisition purchase price financed with the issuance of Convertible Debentures (see Note 16 - Convertible
Debentures). If the acquisition does not close, the contract would not be completed and no amounts would be exchanged. The contract can be executed upon approval of the acquisition up to March 31, 2019. This contract is an economic hedge and
does not qualify for hedge accounting. It has been accounted for as an undesignated contract. 
 Fair Value Hierarchy 

The fair value hierarchy of financial assets and liabilities at December 31, 2017 and 2016 is as follows: 

 

																					
	  December 31, 2017 (millions of dollars) 	  	Carrying
Value	 	  	Fair
  Value	 	  	    Level 1	 	  	    Level 2	 	  	    Level 3	 
	 Assets:
	  				  				  				  				  			
	 Cash and cash equivalents
	  	 	25	 	  	 	25	 	  	 	25	 	  	 	—	 	  	 	—	 
	 	  	 	25	 	  	 	25	 	  	 	25	 	  	 	—	 	  	 	—	 
						
	 Liabilities:
	  				  				  				  				  			
	 Short-term notes payable
	  	 	926	 	  	 	926	 	  	 	926	 	  	 	—	 	  	 	—	 
	 Long-term debt, including current portion
	  	 	10,067	 	  	 	11,568	 	  	 	—	 	  	 	11,568	 	  	 	—	 
	 Convertible debentures
	  	 	487	 	  	 	574	 	  	 	574	 	  	 	—	 	  	 	—	 
	 Derivative instruments
	  				  				  				  				  			
	 Fair value hedges – interest-rate swaps
	  	 	9	 	  	 	9	 	  	 	9	 	  	 	—	 	  	 	—	 
	 Foreign exchange contract
	  	 	3	 	  	 	3	 	  	 	—	 	  	 	—	 	  	 	3	 
	 	  	 	11,492	 	  	 	13,080	 	  	 	1,509	 	  	 	11,568	 	  	 	3	 
						
	  December 31, 2016 (millions of dollars) 	  	Carrying
Value	 	  	Fair
Value	 	  	Level 1	 	  	Level 2	 	  	Level 3	 
	 Assets:
	  				  				  				  				  			
	 Cash and cash equivalents
	  	 	50	 	  	 	50	 	  	 	50	 	  	 	—	 	  	 	—	 
	 	  	 	50	 	  	 	50	 	  	 	50	 	  	 	—	 	  	 	—	 
						
	 Liabilities:
	  				  				  				  				  			
	 Short-term notes payable
	  	 	469	 	  	 	469	 	  	 	469	 	  	 	—	 	  	 	—	 
	 Long-term debt, including current portion
	  	 	10,680	 	  	 	12,010	 	  	 	—	 	  	 	12,010	 	  	 	—	 
	 Derivative instruments
	  				  				  				  				  			
	 Fair value hedges – interest-rate swaps
	  	 	2	 	  	 	2	 	  	 	2	 	  	 	—	 	  	 	—	 
	 	  	 	11,151	 	  	 	12,481	 	  	 	471	 	  	 	12,010	 	  	 	—	 


  

					
		 	26	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Cash and cash equivalents include cash and short-term investments. The carrying values are
representative of fair value because of the short-term nature of these instruments. 
 The fair value of the hedged portion of the long-term debt is
primarily based on the present value of future cash flows using a swap yield curve to determine the assumption for interest rates. The fair value of the unhedged portion of the long-term debt is based on unadjusted
period-end market prices for the same or similar debt of the same remaining maturities. 
 The fair value of the
convertible debentures is based on their closing price on December 29, 2017 (last business day in December 2017), as posted on the Toronto Stock Exchange. 

The Company uses derivative instruments as an economic hedge for foreign exchange risk. The value of the foreign exchange contract is derived using
valuation models commonly used for derivatives. These valuation models require a variety of inputs, including contractual terms, forward price yield curves,probability of closing the Avista Corporation acquisition, and the contract settlement of
date. The Company’s valuation models also reflect measurements for credit risk. The fair value of the foreign exchange contract includes significant unobservable inputs, and therefore has been classified accordingly as Level 3. The
significant unobservable inputs used in the fair value measurement of the foreign exchange contract relates to the assessment of probabililty of closing the Avista Corporation acquisition and the contract settlement date. 

Changes in the Fair Value of Financial Instruments Classified in Level 3 

The following table summarizes the changes in fair value of financial instruments classified in Level 3 for the years ended December 31, 2017
and 2016. 
  

									
	  Year ended December 31 (millions of dollars) 	  	2017	 	  	        2016	 
	 Fair value, beginning of year
	  	 	—	 	  	 	—	 
	 Unrealized loss on foreign exchange contract included in financing charges (Note 6) 
	  	 	3	 	  	 	—	 
	 Fair value, end of year
	  	 	3	 	  	 	—	 

 There were no transfers between any of the fair value levels during the years ended December 31, 2017 or 2016. 

Risk Management 
 Exposure to market risk, credit risk and
liquidity risk arises in the normal course of the Company’s business. 
 Market Risk 

Market risk refers primarily to the risk of loss which results from changes in costs, foreign exchange rates and interest rates. The Company is exposed to
fluctuations in interest rates, as its regulated return on equity is derived using a formulaic approach that takes anticipated interest rates into account. The Company is not currently exposed to material commodity price risk. 

The Company uses a combination of fixed and variable-rate debt to manage the mix of its debt portfolio. The Company also uses derivative financial
instruments to manage interest-rate risk. The Company utilizes interest-rate swaps, which are typically designated as fair value hedges, as a means to manage its interest rate exposure to achieve a lower cost of debt. The Company may also utilize
interest-rate derivative instruments to lock in interest-rate levels in anticipation of future financing. 
 A hypothetical 100 basis points increase in
interest rates associated with variable-rate debt would not have resulted in a significant decrease in Hydro One’s net income for the years ended December 31, 2017 and 2016. 

The Company is exposed to foreign exchange fluctuations as a result of entering into a deal-contingent foreign exchange forward agreement (see section
Fair Value Measurements of Derivative Instruments above).This agreement is intended to mitigate the foreign currency risk related to the portion of the Avista Corporation acquisition purchase price financed with the issuance of Convertible
Debentures (see Note 16 - Convertible Debentures). 
 For derivative instruments that are designated and qualify as fair value hedges, the gain or loss
on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the Consolidated Statements of Operations and Comprehensive Income. The net unrealized loss (gain) on the hedged
debt and the related interest-rate swaps for the years ended December 31, 2017 and 2016 was not material. 
 Credit Risk 

Financial assets create a risk that a counterparty will fail to discharge an obligation, causing a financial loss. At December 31, 2017 and 2016,
there were no significant concentrations of credit risk with respect to any class of financial assets. The Company’s revenue is earned from a broad base of customers. As a result, Hydro One did not earn a material amount of revenue from any
single customer. 
 At December 31, 2017 and 2016, there was no material accounts receivable balance due from any single customer. At
December 31, 2017, the Company’s provision for bad debts was $29 million (2016 – $35 million). Adjustments and write-offs are determined on the basis of a review of overdue accounts, taking into consideration historical
experience. At December 31, 2017, approximately 5% (2016 – 6%) of the Company’s net accounts receivable were outstanding for more than 60 days. 

  

					
		 	27	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Hydro One manages its counterparty credit risk through various techniques including: entering into
transactions with highly rated counterparties; limiting total exposure levels with individual counterparties; entering into master agreements which enable net settlement and the contractual right of offset; and monitoring the financial condition of
counterparties. The Company monitors current credit exposure to counterparties both on an individual and an aggregate basis. The Company’s credit risk for accounts receivable is limited to the carrying amounts on the Consolidated Balance
Sheets. 
 Derivative financial instruments result in exposure to credit risk since there is a risk of counterparty default. The credit exposure of
derivative contracts, before collateral, is represented by the fair value of contracts at the reporting date. At December 31, 2017 and 2016, the counterparty credit risk exposure on the fair value of these interest-rate swap contracts was not
material. At December 31, 2017, Hydro One’s credit exposure for all derivative instruments, and applicable payables and receivables, had a credit rating of investment grade, with four financial institutions as the counterparties. 

Liquidity Risk 
 Liquidity risk refers to the Company’s
ability to meet its financial obligations as they come due. Hydro One meets its short-term liquidity requirements using cash and cash equivalents on hand, funds from operations, the issuance of commercial paper, and the revolving standby credit
facilities. The short-term liquidity under the Commercial Paper Program, revolving standby credit facilities, and anticipated levels of funds from operations are expected to be sufficient to fund normal operating requirements. 

 

	18.	 CAPITAL MANAGEMENT 



The Company’s objectives with respect to its capital structure are to maintain effective access to capital on a long-term basis at reasonable rates,
and to deliver appropriate financial returns. In order to ensure ongoing access to capital, the Company targets to maintain strong credit quality. At December 31, 2017 and 2016, the Company’s capital structure was as follows: 

 

									
	  December 31 (millions of dollars) 	  	2017	 	 	2016	 
	 Long-term debt payable within one year
	  	 	752	 	 	 	602	 
	 Short-term notes payable
	  	 	926	 	 	 	469	 
	 Less: cash and cash equivalents
	  	 	(25	) 	 	 	(50	) 
		  	 	1,653	 	 	 	1,021	 
			
	 Long-term debt
	  	 	9,315	 	 	 	10,078	 
	 Convertible debentures
	  	 	487	 	 	 	—	 
	 Preferred shares
	  	 	418	 	 	 	418	 
	 Common shares
	  	 	5,631	 	 	 	5,623	 
	 Retained earnings
	  	 	4,090	 	 	 	3,950	 
	 Total capital
	  	 	21,594	 	 	 	21,090	 

 Hydro One Inc. and HOSSM have customary covenants typically associated with long-term debt. Hydro One Inc.’s
long-term debt and credit facility covenants limit permissible debt to 75% of its total capitalization, limit the ability to sell assets and impose a negative pledge provision, subject to customary exceptions. At December 31, 2017, the Company
was in compliance with all financial covenants and limitations associated with the outstanding borrowings and credit facilities. 
  

	19.	 PENSION AND POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS 



Hydro One has a defined benefit pension plan (Pension Plan), a defined contribution pension plan (DC Plan), a supplemental pension plan (Supplemental
Plan), and post-retirement and post-employment benefit plans. 
 DC Plan 

Hydro One established a DC Plan effective January 1, 2016. The DC Plan covers eligible management employees hired on or after January 1, 2016,
as well as management employees hired before January 1, 2016 who were not eligible or had not irrevocably elected to join the Pension Plan as of September 30, 2015. Members of the DC Plan have an option to contribute 4%, 5% or 6% of their
pensionable earnings, with matching contributions by Hydro One. 
 Hydro One contributions to the DC Plan for the year ended December 31, 2017 were
$1 million (2016 - less than $1 million). At December 31, 2017, Company contributions payable included in accrued liabilities on the Consolidated Balance Sheets were less than $1 million (2016 - less than $1 million). 

Pension Plan, Supplemental Plan, and Post-Retirement and Post-Employment Plans 

The Pension Plan is a defined benefit contributory plan which covers eligible regular employees of Hydro One and its subsidiaries. The Pension Plan
provides benefits based on highest three-year average pensionable earnings. For management employees who commenced employment on or after January 1, 2004, and for The Society of Energy Professionals (The Society)-represented staff hired after
November 17, 2005, benefits are based on highest five-year average pensionable earnings. After retirement, pensions 

  

					
		 	28	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 are indexed to inflation. Membership in the Pension Plan was closed to management employees who were not
eligible or had not irrevocably elected to join the Pension Plan as of September 30, 2015. These employees are eligible to join the DC Plan. 

Company and employee contributions to the Pension Plan are based on actuarial valuations performed at least every three years. Annual Pension Plan
contributions for 2017 of $87 million (2016 - $108 million) were based on an actuarial valuation effective December 31, 2016 (2016 - based on an actuarial valuation effective December 31, 2015) and the level of pensionable earnings.
Estimated annual Pension Plan contributions for 2018 and 2019 are approximately $71 million for each year based on the actuarial valuation as at December 31, 2016 and projected levels of pensionable earnings. Future minimum contributions
beyond 2019 will be based on an actuarial valuation effective no later than December 31, 2019. Contributions are payable one month in arrears. All of the contributions are expected to be in the form of cash. 

The Supplemental Plan provides members of the Pension Plan with benefits that would have been earned and payable under the Pension Plan but for
limitations imposed by the Income Tax Act (Canada). The Supplemental Plan obligation is included with other post-retirement and post-employment benefit obligations on the Consolidated Balance Sheets. 

Hydro One recognizes the overfunded or underfunded status of the Pension Plan, and post-retirement and post-employment benefit plans (Plans) as an asset
or liability on its Consolidated Balance Sheets, with offsetting regulatory assets and liabilities as appropriate. The underfunded benefit obligations for the Plans, in the absence of regulatory accounting, would be recognized in AOCI. The impact of
changes in assumptions used to measure pension, post-retirement and post-employment benefit obligations is generally recognized over the expected average remaining service period of the employees. The measurement date for the Plans is December 31.

  

																	
	 	  	 	 	 	 	 	 	Post-Retirement and	 
	 	  	 Pension Benefits
  
	 	 	 Post-Employment Benefits

 
	 
	  Year ended December 31 (millions of dollars)	  	2017	 	 	2016	 	 	2017	 	 	2016	 
	 Change in projected benefit obligation
	  				 				 				 			
	 Projected benefit obligation, beginning of year
	  	 	7,774	 	 	 	7,683	 	 	 	1,690	 	 	 	1,610	 
	 Current service cost
	  	 	147	 	 	 	144	 	 	 	49	 	 	 	42	 
	 Employee contributions
	  	 	49	 	 	 	45	 	 	 	—	 	 	 	—	 
	 Interest cost
	  	 	304	 	 	 	308	 	 	 	67	 	 	 	67	 
	 Benefits paid
	  	 	(368	) 	 	 	(354	) 	 	 	(44	) 	 	 	(43	) 
	 Net actuarial loss (gain)
	  	 	352	 	 	 	(52	) 	 	 	(197	) 	 	 	14	 
	 Projected benefit obligation, end
of year
	  	 	8,258	 	 	 	7,774	 	 	 	1,565	 	 	 	1,690	 
					
	 Change in plan assets
	  				 				 				 			
	 Fair value of plan assets, beginning of year
	  	 	6,874	 	 	 	6,731	 	 	 	—	 	 	 	—	 
	 Actual return on plan assets
	  	 	662	 	 	 	370	 	 	 	—	 	 	 	—	 
	 Benefits paid
	  	 	(368	) 	 	 	(354	) 	 	 	(34	) 	 	 	(43	) 
	 Employer contributions
	  	 	87	 	 	 	108	 	 	 	34	 	 	 	43	 
	 Employee contributions
	  	 	49	 	 	 	45	 	 	 	—	 	 	 	—	 
	 Administrative expenses
	  	 	(27	) 	 	 	(26	) 	 	 	—	 	 	 	—	 
	 Fair value of plan assets, end of
year
	  	 	7,277	 	 	 	6,874	 	 	 	—	 	 	 	—	 
					
	 Unfunded status
	  	 	981	 	 	 	900	 	 	 	1,565	 	 	 	1,690	 

 Hydro One presents its benefit obligations and plan assets net on its Consolidated Balance Sheets as follows: 

 

																	
	 	  	 	 	  	 	 	  	Post-Retirement and	 
	 	  	 Pension Benefits
  
	 	  	 Post-Employment Benefits

 
	 
	  December 31 (millions of dollars) 	  	2017	 	  	2016	 	  	2017	 	  	2016	 
	 Other assets1 
	  	 	1	 	  	 	1	 	  	 	—	 	  	 	—	 
	 Accrued liabilities
	  	 	—	 	  	 	—	 	  	 	53	 	  	 	56	 
	 Pension benefit liability
	  	 	981	 	  	 	900	 	  	 	—	 	  	 	—	 
	 Post-retirement and post-employment benefit liability2

	  	 	—	 	  	 	—	 	  	 	1,519	 	  	 	1,641	 
	 Net unfunded status
	  	 	980	 	  	 	899	 	  	 	1,572	 	  	 	1,697	 

  

	1 	 Represents the funded status of HOSSM defined benefit pension plan. 



 

	2 	 Includes $7 million (2016 - $7 million) relating to HOSSM post-employment benefit plans. 



The funded or unfunded status of the pension, post-retirement and post-employment benefit plans refers to the difference between the fair value of plan
assets and the projected benefit obligations for the Plans. The funded/unfunded status changes over time due to several factors, including contribution levels, assumed discount rates and actual returns on plan assets. 

  

					
		 	29	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 The following table provides the projected benefit obligation (PBO), accumulated benefit obligation
(ABO) and fair value of plan assets for the Pension Plan: 
  

				                				                	
	  December 31 (millions of dollars) 	  	2017	 	  	2016	 
	 PBO
	  	 	8,258	 	  	 	7,774	 
	 ABO
	  	 	7,614	 	  	 	7,094	 
	 Fair value of plan assets
	  	 	7,277	 	  	 	6,874	 

 On an ABO basis, the Pension Plan was funded at 96% at December 31, 2017 (2016 - 97%). On a PBO basis, the Pension
Plan was funded at 88% at December 31, 2017 (2016 - 88%). The ABO differs from the PBO in that the ABO includes no assumption about future compensation levels. 

Components of Net Periodic Benefit Costs 
 The following table
provides the components of the net periodic benefit costs for the years ended December 31, 2017 and 2016 for the Pension Plan: 
  

				                				                	
	  Year ended December 31 (millions of dollars) 	  	2017	 	 	2016	 
	 Current service cost
	  	 	147	 	 	 	144	 
	 Interest cost
	  	 	304	 	 	 	308	 
	 Expected return on plan assets, net of expenses
	  	 	(442	) 	 	 	(432	) 
	 Amortization of actuarial losses
	  	 	79	 	 	 	96	 
	 Net periodic benefit
costs
	  	 	88	 	 	 	116	 
			
	 Charged to results of operations1 
	  	 	39	 	 	 	48	 

  

	1 	 The Company accounts for pension costs consistent with their inclusion in
OEB-approved rates. During the year ended December 31, 2017, pension costs of $87 million (2016 - $108 million) were attributed to labour, of which $39 million (2016 - $48 million) was charged
to operations, and $48 million (2016 - $60 million) was capitalized as part of the cost of property, plant and equipment and intangible assets. 



The following table provides the components of the net periodic benefit costs for the years ended December 31, 2017 and 2016 for the post-retirement
and post-employment benefit plans: 
  

				                				                	
	  Year ended December 31 (millions of dollars) 	  	2017	 	  	2016	 
	 Current service cost
	  	 	49	 	  	 	42	 
	 Interest cost
	  	 	67	 	  	 	67	 
	 Amortization of actuarial losses
	  	 	16	 	  	 	15	 
	 Net periodic benefit
costs
	  	 	132	 	  	 	124	 
			
	 Charged to results of operations
	  	 	59	 	  	 	55	 

 Assumptions 
 The measurement of
the obligations of the Plans and the costs of providing benefits under the Plans involves various factors, including the development of valuation assumptions and accounting policy elections. When developing the required assumptions, the Company
considers historical information as well as future expectations. The measurement of benefit obligations and costs is impacted by several assumptions including the discount rate applied to benefit obligations, the long-term expected rate of return on
plan assets, Hydro One’s expected level of contributions to the Plans, the incidence of mortality, the expected remaining service period of plan participants, the level of compensation and rate of compensation increases, employee age, length of
service, and the anticipated rate of increase of health care costs, among other factors. The impact of changes in assumptions used to measure the obligations of the Plans is generally recognized over the expected average remaining service period of
the plan participants. In selecting the expected rate of return on plan assets, Hydro One considers historical economic indicators that impact asset returns, as well as expectations regarding future long-term capital market performance, weighted by
target asset class allocations. In general, equity securities, real estate and private equity investments are forecasted to have higher returns than fixed-income securities. 

The following weighted average assumptions were used to determine the benefit obligations at December 31, 2017 and 2016: 

 

				                				                				                				                	
	 	  	 	 	  	 	 	  	Post-Retirement and	 
	 	  	 Pension Benefits
  
	 	  	 Post-Employment Benefits

 
	 
	  Year ended December 31	  	2017	 	  	2016	 	  	2017	 	  	2016	 
	 Significant assumptions:
	  				  				  				  			
	 Weighted average discount rate
	  	 	3.40%	 	  	 	3.90%	 	  	 	3.40%	 	  	 	3.90%	 
	 Rate of compensation scale escalation (long-term)
	  	 	2.50%	 	  	 	2.50%	 	  	 	2.50%	 	  	 	2.50%	 
	 Rate of cost of living increase
	  	 	2.00%	 	  	 	2.00%	 	  	 	2.00%	 	  	 	2.00%	 
	 Rate of increase in health care cost trends1 
	  	 	—  	 	  	 	—	 	  	 	4.04%	 	  	 	4.36%	 

  

	1 	 5.26% per annum in 2018, grading down to 4.04% per annum in and after 2031 (2016 - 6.25% in 2017, grading down to 4.36%
per annum in and after 2031). 



  

					
		 	30	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 The following weighted average assumptions were used to determine the net periodic benefit costs for the
years ended December 31, 2017 and 2016. Assumptions used to determine current year-end benefit obligations are the assumptions used to estimate the subsequent year’s net periodic benefit costs. 

 

				                    				                    	
	  Year ended December 31	  	2017	 	  	2016	 
	 Pension Benefits:
	  				  			
	 Weighted average expected rate of return on plan assets
	  	 	6.50%	 	  	 	6.50%	 
	 Weighted average discount rate
	  	 	3.90%	 	  	 	4.00%	 
	 Rate of compensation scale escalation (long-term)
	  	 	2.50%	 	  	 	2.50%	 
	 Rate of cost of living increase
	  	 	2.00%	 	  	 	2.00%	 
	 Average remaining service life of employees (years) 
	  	 	15   	 	  	 	15	 
			
	 Post-Retirement and Post-Employment Benefits:
	  				  			
	 Weighted average discount rate
	  	 	3.90%	 	  	 	4.10%	 
	 Rate of compensation scale escalation (long-term)
	  	 	2.50%	 	  	 	2.50%	 
	 Rate of cost of living increase
	  	 	2.00%	 	  	 	2.00%	 
	 Average remaining service life of employees (years)

	  	 	15.2   	 	  	 	15.3	 
	 Rate of increase in health care cost trends1 
	  	 	4.36%	 	  	 	4.36%	 

  

	1 	 6.25% per annum in 2017, grading down to 4.36% per annum in and after 2031 (2016 - 6.38% in 2016, grading down to 4.36%
per annum in and after 2031). 


 The discount rate used to determine the current year pension obligation and the subsequent
year’s net periodic benefit costs is based on a yield curve approach. Under the yield curve approach, expected future benefit payments for each plan are discounted by a rate on a third-party bond yield curve corresponding to each duration. The
yield curve is based on “AA” long-term corporate bonds. A single discount rate is calculated that would yield the same present value as the sum of the discounted cash flows. 

The effect of a 1% change in health care cost trends on the projected benefit obligation for the post-retirement and post-employment benefits at
December 31, 2017 and 2016 is as follows: 
  

				                    				                    	
	  December 31 (millions of dollars) 	  	2017	 	 	2016	 
	 Projected benefit obligation:
	  				 			
	 Effect of a 1% increase in health care cost trends
	  	 	250	 	 	 	   289	 
	 Effect of a 1% decrease in health care cost trends
	  	 	(189	) 	 	 	(221	) 

 The effect of a 1% change in health care cost trends on the service cost and interest cost for the post-retirement and
post-employment benefits for the years ended December 31, 2017 and 2016 is as follows: 
  

				                    				                    	
	  Year ended December 31 (millions of dollars) 	  	2017	 	 	2016	 
	 Service cost and interest cost:
	  				 			
	 Effect of a 1% increase in health care cost trends
	  	 	29	 	 	 	     23	 
	 Effect of a 1% decrease in health care cost trends
	  	 	(20	) 	 	 	(17	) 

 The following approximate life expectancies were used in the mortality assumptions to determine the projected benefit
obligations for the pension and post-retirement and post-employment plans at December 31, 2017 and 2016: 
  

															
	December 31, 2017
Life expectancy at 65 for a member currently at	  	 	  	 	  	 December 31, 2016

Life expectancy at 65 for a member currently at
	  	 
	Age 65	  	Age 45	  	Age 65	  	Age 45
	 Male
	  	Female	  	            Male            	  	            Female            	  	            Male            	  	Female	  	Male	  	    Female    
	 22
	  	24	  	23	  	24	  	22	  	24	  	23	  	24

 Estimated Future Benefit Payments 

At December 31, 2017, estimated future benefit payments to the participants of the Plans were: 

 

									
	  (millions of dollars)	  	Pension Benefits	 	  	Post-Retirement and
        
Post-Employment Benefits	 
	 2018
	  	 	326	 	  	 	53	 
	 2019
	  	 	335	 	  	 	54	 
	 2020
	  	 	342	 	  	 	56	 
	 2021
	  	 	350	 	  	 	57	 
	 2022
	  	 	358	 	  	 	58	 
	 2023 through to 2027
	  	 	1,886	 	  	 	312	 
	 Total estimated future benefit
payments through to 2027
	  	 	3,597	 	  	 	590	 


  

					
		 	31	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Components of Regulatory Assets 

A portion of actuarial gains and losses and prior service costs is recorded within regulatory assets on Hydro One’s Consolidated Balance Sheets to
reflect the expected regulatory inclusion of these amounts in future rates, which would otherwise be recorded in OCI. The following table provides the actuarial gains and losses and prior service costs recorded within regulatory assets: 

 

				                  				                  	
	  Year ended December 31 (millions of dollars) 	  	2017	 	 	2016	 
	 Pension Benefits:
	  				 			
	 Actuarial loss (gain) for the year
	  	 	159	 	 	 	35	 
	 Amortization of actuarial losses
	  	 	(79	) 	 	 	(96	) 
	 	  	 	80	 	 	 	(61	) 
			
	 Post-Retirement and Post-Employment Benefits:
	  				 			
	 Actuarial loss (gain) for the year
	  	 	(197	) 	 	 	14	 
	 Amortization of actuarial losses
	  	 	(16	) 	 	 	(15	) 
	 Amounts not subject to regulatory treatment
	  	 	6	 	 	 	4	 
	 	  	 	(207	) 	 	 	3	 

 The following table provides the components of regulatory assets that have not been recognized as components of net
periodic benefit costs for the years ended December 31, 2017 and 2016: 
  

				                  				                  	
	  Year ended December 31 (millions of dollars) 	  	2017	 	  	2016	 
	 Pension Benefits:
	  				  			
	 Actuarial loss
	  	 	981	 	  	 	900	 
			
	 Post-Retirement and Post-Employment Benefits:
	  				  			
	 Actuarial loss
	  	 	36	 	  	 	243	 

 The following table provides the components of regulatory assets at December 31 that are expected to be amortized as
components of net periodic benefit costs in the following year: 
  

				                      				                      				                      				                      	
	 	  	Pension Benefits	 	  	Post-Retirement and
  Post-Employment Benefits	 
	  December 31 (millions of dollars) 	  	2017	 	  	2016	 	  	2017	 	  	2016	 
	 Actuarial loss
	  	 	84	 	  	 	79	 	  	 	2	 	  	 	6	 

 Pension Plan Assets 

Investment Strategy 
 On a regular basis, Hydro
One evaluates its investment strategy to ensure that Pension Plan assets will be sufficient to pay Pension Plan benefits when due. As part of this ongoing evaluation, Hydro One may make changes to its targeted asset allocation and investment
strategy. The Pension Plan is managed at a net asset level. The main objective of the Pension Plan is to sustain a certain level of net assets in order to meet the pension obligations of the Company. The Pension Plan fulfills its primary objective
by adhering to specific investment policies outlined in its Summary of Investment Policies and Procedures (SIPP), which is reviewed and approved by the Human Resource Committee of Hydro One’s Board of Directors. The Company manages net assets
by engaging knowledgeable external investment managers who are charged with the responsibility of investing existing funds and new funds (current year’s employee and employer contributions) in accordance with the approved SIPP. The performance
of the managers is monitored through a governance structure. Increases in net assets are a direct result of investment income generated by investments held by the Pension Plan and contributions to the Pension Plan by eligible employees and by the
Company. The main use of net assets is for benefit payments to eligible Pension Plan members. 
 Pension Plan Asset Mix 

At December 31, 2017, the Pension Plan target asset allocations and weighted average asset allocations were as follows: 

 

									
	  	  	Target Allocation (%)	 	  	        Pension Plan Assets (%)	 
	 Equity securities
	  	 	55	 	  	 	60	 
	 Debt securities
	  	 	35	 	  	 	31	 
	 Other1 
	  	 	10	 	  	 	9	 
	 	  	 	100	 	  	 	100	 

  

	1 	 Other investments include real estate and infrastructure investments. 



At December 31, 2017, the Pension Plan held $11 million (2016 - $11 million) Hydro One corporate bonds and $415 million (2016 - $450
million) of debt securities of the Province. 

  

					
		 	32	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Concentrations of Credit Risk 

Hydro One evaluated its Pension Plan’s asset portfolio for the existence of significant concentrations of credit risk as at December 31, 2017
and 2016. Concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, concentrations in a type of industry, and concentrations in individual funds. At December 31, 2017 and 2016, there were
no significant concentrations (defined as greater than 10% of plan assets) of risk in the Pension Plan’s assets. 
 The Pension Plan’s
Statement of Investment Beliefs and Guidelines provides guidelines and restrictions for eligible investments taking into account credit ratings, maximum investment exposure and other controls in order to limit the impact of this risk. The Pension
Plan manages its counterparty credit risk with respect to bonds by investing in investment-grade and government bonds and with respect to derivative instruments by transacting only with highly rated financial institutions, and also by ensuring that
exposure is diversified across counterparties. The risk of default on transactions in listed securities is considered minimal, as the trade will fail if either party to the transaction does not meet its obligation. 

Fair Value Measurements 
 The following tables
present the Pension Plan assets measured and recorded at fair value on a recurring basis and their level within the fair value hierarchy at December 31, 2017 and 2016: 
  

																	
	  December 31, 2017 (millions of dollars) 	  	Level 1	 	  	Level 2	 	  	Level 3	 	  	Total	 
	 Pooled funds
	  	 	—	 	  	 	16	 	  	 	549	 	  	 	565	 
	 Cash and cash equivalents
	  	 	153	 	  	 	—	 	  	 	—	 	  	 	153	 
	 Short-term securities
	  	 	—	 	  	 	109	 	  	 	—	 	  	 	109	 
	 Derivative instruments
	  	 	—	 	  	 	5	 	  	 	—	 	  	 	5	 
	 Corporate shares - Canadian
	  	 	921	 	  	 	—	 	  	 	—	 	  	 	921	 
	 Corporate shares - Foreign
	  	 	3,307	 	  	 	125	 	  	 	—	 	  	 	3,432	 
	 Bonds and debentures - Canadian
	  	 	—	 	  	 	1,879	 	  	 	—	 	  	 	1,879	 
	 Bonds and debentures - Foreign
	  	 	—	 	  	 	194	 	  	 	—	 	  	 	194	 
	 Total fair value of plan assets1 
	  	 	4,381	 	  	 	2,328	 	  	 	549	 	  	 	7,258	 

  

	1 	 At December 31, 2017, the total fair value of Pension Plan assets and liabilities excludes $28 million of
interest and dividends receivable, $10 million of pension administration expenses payable, $1 million of sold investments receivable, and $1 million of purchased investments payable. 



 

																	
	  December 31, 2016 (millions of dollars) 	  	Level 1	 	  	Level 2	 	  	Level 3	 	  	Total	 
	 Pooled funds
	  	 	—	 	  	 	20	 	  	 	425	 	  	 	445	 
	 Cash and cash equivalents
	  	 	146	 	  	 	—	 	  	 	—	 	  	 	146	 
	 Short-term securities
	  	 	—	 	  	 	127	 	  	 	—	 	  	 	127	 
	 Corporate shares - Canadian
	  	 	911	 	  	 	—	 	  	 	—	 	  	 	911	 
	 Corporate shares - Foreign
	  	 	2,985	 	  	 	113	 	  	 	—	 	  	 	3,098	 
	 Bonds and debentures - Canadian
	  	 	—	 	  	 	1,943	 	  	 	—	 	  	 	1,943	 
	 Bonds and debentures - Foreign
	  	 	—	 	  	 	193	 	  	 	—	 	  	 	193	 
	 Total fair value of plan assets1 
	  	 	4,042	 	  	 	2,396	 	  	 	425	 	  	 	6,863	 

  

	1 	 At December 31, 2016, the total fair value of Pension Plan assets excludes $27 million of interest and
dividends receivable, $15 million of purchased investments payable, $9 million of pension administration expenses payable, and $7 million of sold investments receivable. 



See note 17 - Fair Value of Financial Instruments and Risk Management for a description of levels within the fair value hierarchy. 

Changes in the Fair Value of Financial Instruments Classified in Level 3 

The following table summarizes the changes in fair value of financial instruments classified in Level 3 for the years ended December 31, 2017
and 2016. The Pension Plan classifies financial instruments as Level 3 when the fair value is measured based on at least one significant input that is not observable in the markets or due to lack of liquidity in certain markets. The gains and
losses presented in the table below may include changes in fair value based on both observable and unobservable inputs. 
  

									
	  Year ended December 31 (millions of dollars) 	  	2017	 	 	2016	 
	 Fair value, beginning of year
	  	 	425	 	 	 	   301	 
	 Realized and unrealized gains
	  	 	(31	) 	 	 	23	 
	 Purchases
	  	 	171	 	 	 	151	 
	 Sales and disbursements
	  	 	(16	) 	 	 	(50	) 
	 Fair value, end of year
	  	 	549	 	 	 	425	 

 There were no significant transfers between any of the fair value levels during the years ended December 31, 2017 and
2016. 
 The Company performs sensitivity analysis for fair value measurements classified in Level 3, substituting the unobservable inputs with one
or more reasonably possible alternative assumptions. This sensitivity analysis resulted in negligible changes in the fair value of financial instruments classified in this level. 

  

					
		 	33	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Valuation Techniques Used to Determine Fair Value 

Pooled funds mainly consist of private equity, real estate and infrastructure investments. Private equity investments represent private equity funds that
invest in operating companies that are not publicly traded on a stock exchange. Investment strategies in private equity include limited partnerships in businesses that are characterized by high internal growth and operational efficiencies, venture
capital, leveraged buyouts and special situations such as distressed investments. Real estate and infrastructure investments represent funds that invest in real assets which are not publicly traded on a stock exchange. Investment strategies in real
estate include limited partnerships that seek to generate a total return through income and capital growth by investing primarily in global and Canadian limited partnerships. Investment strategies in infrastructure include limited partnerships in
core infrastructure assets focusing on assets that generate stable, long-term cash flows and deliver incremental returns relative to conventional fixed-income investments. Private equity, real estate and infrastructure valuations are reported by the
fund manager and are based on the valuation of the underlying investments which includes inputs such as cost, operating results, discounted future cash flows and market-based comparable data. Since these valuation inputs are not highly observable,
private equity and infrastructure investments have been categorized as Level 3 within pooled funds. 
 Cash equivalents consist of demand cash
deposits held with banks and cash held by the investment managers. Cash equivalents are categorized as Level 1. 
 Short-term securities are valued
at cost plus accrued interest, which approximates fair value due to their short-term nature. Short-term securities are categorized as Level 2. 

Derivative instruments are used to hedge the Pension Plan’s foreign currency exposure back to Canadian dollars. The most significant currencies being
hedged against the Canadian dollar are the United States dollar, Euro, and Japanese Yen. The terms to maturity of the forward exchange contracts at December 31, 2017 are within three months. The fair value of the derivative instruments is
determined using inputs other than quoted prices that are observable for these assets. The fair value is determined using standard interpolation methodology primarily based on the World Markets exchange rates. Derivative instruments are categorized
as Level 2. 
 Corporate shares are valued based on quoted prices in active markets and are categorized as Level 1. Investments denominated in
foreign currencies are translated into Canadian currency at year-end rates of exchange. 
 Bonds and debentures
are presented at published closing trade quotations, and are categorized as Level 2. 
  

	20.	 ENVIRONMENTAL LIABILITIES 



The following tables show the movements in environmental liabilities for the years ended December 31, 2017 and 2016: 

 

													
	  Year ended December 31, 2017 (millions of dollars) 	  	PCB	 	 	Land Assessment
and Remediation	 	 	            Total	 
	 Environmental liabilities - beginning
	  	 	143	 	 	 	61	 	 	 	204	 
	 Interest accretion
	  	 	6	 	 	 	2	 	 	 	8	 
	 Expenditures
	  	 	(16	) 	 	 	(8	) 	 	 	(24	) 
	 Revaluation adjustment
	  	 	1	 	 	 	7	 	 	 	8	 
	 Environmental liabilities - ending
	  	 	134	 	 	 	62	 	 	 	196	 
	 Less: current portion
	  	 	(20	) 	 	 	(8	) 	 	 	(28	) 
	 	  	 	114	 	 	 	54	 	 	 	168	 
				
	  Year ended December 31, 2016 (millions of dollars) 	  	PCB	 	 	Land Assessment
and Remediation	 	 	Total	 
	 Environmental liabilities - beginning
	  	 	148	 	 	 	59	 	 	 	207	 
	 Interest accretion
	  	 	7	 	 	 	1	 	 	 	8	 
	 Expenditures
	  	 	(11	) 	 	 	(9	) 	 	 	(20	) 
	 Revaluation adjustment
	  	 	(1	) 	 	 	10	 	 	 	9	 
	 Environmental liabilities - ending
	  	 	143	 	 	 	61	 	 	 	204	 
	 Less: current portion
	  	 	(18	) 	 	 	(9	) 	 	 	(27	) 
	 	  	 	125	 	 	 	52	 	 	 	177	 

 The following tables show the reconciliation between the undiscounted basis of the environmental liabilities and the
amount recognized on the Consolidated Balance Sheets after factoring in the discount rate: 
  

													
				
	  December 31, 2017 (millions of dollars) 	  	PCB	 	 	Land Assessment
and Remediation	 	 	            Total	 
	 Undiscounted environmental liabilities
	  	 	142	 	 	 	64	 	 	 	206	 
	 Less: discounting environmental liabilities to present
value
	  	 	(8	) 	 	 	(2	) 	 	 	(10	) 
	 Discounted environmental liabilities
	  	 	134	 	 	 	62	 	 	 	196	 


  

					
		 	34	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  


													
				
	  December 31, 2016 (millions of dollars) 	  	PCB	 	 	Land Assessment
and Remediation	 	 	            Total	 
	 Undiscounted environmental liabilities
	  	 	158	 	 	 	66	 	 	 	224	 
	 Less: discounting environmental liabilities to present
value
	  	 	(15	) 	 	 	(5	) 	 	 	(20	) 
	 Discounted environmental liabilities
	  	 	143	 	 	 	61	 	 	 	204	 

 At December 31, 2017, the estimated future environmental expenditures were as follows: 

 

					
	  (millions of dollars)	  	  	 
	 2018
	  	 	28	 
	 2019
	  	 	27	 
	 2020
	  	 	32	 
	 2021
	  	 	34	 
	 2022
	  	 	31	 
	 Thereafter
	  	 	54	 
	 	  	 	206	 

 Hydro One records a liability for the estimated future expenditures for land assessment and remediation and for the phase-out and destruction of PCB-contaminated mineral oil removed from electrical equipment when it is determined that future environmental remediation expenditures are
probable under existing statute or regulation and the amount of the future expenditures can be reasonably estimated. 
 There are uncertainties in
estimating future environmental costs due to potential external events such as changes in legislation or regulations, and advances in remediation technologies. In determining the amounts to be recorded as environmental liabilities, the Company
estimates the current cost of completing required work and makes assumptions as to when the future expenditures will actually be incurred, in order to generate future cash flow information. A long-term inflation rate assumption of approximately 2%
has been used to express these current cost estimates as estimated future expenditures. Future expenditures have been discounted using factors ranging from approximately 2.0% to 6.3%, depending on the appropriate rate for the period when
expenditures are expected to be incurred. All factors used in estimating the Company’s environmental liabilities represent management’s best estimates of the present value of costs required to meet existing legislation or regulations.
However, it is reasonably possible that numbers or volumes of contaminated assets, cost estimates to perform work, inflation assumptions and the assumed pattern of annual cash flows may differ significantly from the Company’s current
assumptions. In addition, with respect to the PCB environmental liability, the availability of critical resources such as skilled labour and replacement assets and the ability to take maintenance outages in critical facilities may influence the
timing of expenditures. 
 PCBs 
 The Environment Canada
regulations, enacted under the Canadian Environmental Protection Act, 1999, govern the management, storage and disposal of PCBs based on certain criteria, including type of equipment, in-use status, and
PCB-contamination thresholds. Under current regulations, Hydro One’s PCBs have to be disposed of by the end of 2025, with the exception of specifically exempted equipment. Contaminated equipment will
generally be replaced, or will be decontaminated by removing PCB-contaminated insulating oil and retro filling with replacement oil that contains PCBs in concentrations of less than 2 ppm. 

The Company’s best estimate of the total estimated future expenditures to comply with current PCB regulations is $142 million (2016 - $158
million). These expenditures are expected to be incurred over the period from 2018 to 2025. As a result of its annual review of environmental liabilities, the Company recorded a revaluation adjustment in 2017 to increase the PCB environmental
liability by $1 million (2016 - reduce by $1 million). 
 Land Assessment and Remediation 

The Company’s best estimate of the total estimated future expenditures to complete its land assessment and remediation program is $64 million
(2016 - $66 million). These expenditures are expected to be incurred over the period from 2018 to 2044. As a result of its annual review of environmental liabilities, the Company recorded a revaluation adjustment in 2017 to increase the land
assessment and remediation environmental liability by $7 million (2016 - $10 million). 
  

	21.	 ASSET RETIREMENT OBLIGATIONS 



Hydro One records a liability for the estimated future expenditures for the removal and disposal of asbestos-containing materials installed in some of its
facilities. Asset retirement obligations, which represent legal obligations associated with the retirement of certain tangible long-lived assets, are computed as the present value of the projected expenditures for the future retirement of specific
assets and are recognized in the period in which the liability is incurred, if a reasonable estimate can be made. If the asset remains in service at the recognition date, the present value of the liability is added to the carrying amount of the
associated asset in the period the liability is incurred and this additional carrying amount is depreciated over the remaining life of the asset. If an asset retirement obligation is recorded in respect of an out-of-service asset, the asset retirement cost is charged to results of operations. Subsequent to the initial recognition, the liability is adjusted for any revisions to the estimated future cash flows
associated 

  

					
		 	35	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 with the asset retirement obligation, which can occur due to a number of factors including, but not
limited to, cost escalation, changes in technology applicable to the assets to be retired, changes in legislation or regulations, as well as for accretion of the liability due to the passage of time until the obligation is settled. Depreciation
expense is adjusted prospectively for any increases or decreases to the carrying amount of the associated asset. 
 In determining the amounts to be
recorded as asset retirement obligations, the Company estimates the current fair value for completing required work and makes assumptions as to when the future expenditures will actually be incurred, in order to generate future cash flow
information. A long-term inflation assumption of approximately 2% has been used to express these current cost estimates as estimated future expenditures. Future expenditures have been discounted using factors ranging from approximately 3.0% to 5.0%,
depending on the appropriate rate for the period when expenditures are expected to be incurred. All factors used in estimating the Company’s asset retirement obligations represent management’s best estimates of the cost required to meet
existing legislation or regulations. However, it is reasonably possible that numbers or volumes of contaminated assets, cost estimates to perform work, inflation assumptions and the assumed pattern of annual cash flows may differ significantly from
the Company’s current assumptions. Asset retirement obligations are reviewed annually or more frequently if significant changes in regulations or other relevant factors occur. Estimate changes are accounted for prospectively. 

At December 31, 2017, Hydro One had recorded asset retirement obligations of $9 million (2016 - $9 million), primarily consisting of the
estimated future expenditures associated with the removal and disposal of asbestos-containing materials installed in some of its facilities. The amount of interest recorded is nominal. 

 

	22.	 SHARE CAPITAL 



Common Shares 
 The Company is authorized to issue an unlimited
number of common shares. At December 31, 2017, the Company had 595,386,711 (2016 – 595,000,000) common shares issued and outstanding. 
 The
amount and timing of any dividends payable by Hydro One is at the discretion of the Hydro One Board of Directors and is 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 of Directors may consider relevant. 

The following tables present the changes to common shares during the years ended December 31, 2017 and 2016: 

 

				                      				                      				                      	
	 	  	Ownership by	 	 	 	 
	  Year ended December 31, 2017 (number of shares) 	  	Public	 	 	Province	 	 	Total	 
	 Common shares – beginning
	  	 	178,196,340	 	 	 	416,803,660	 	 	 	595,000,000	 
	 Secondary offering1 
	  	 	120,000,000	 	 	 	(120,000,000	) 	 	 	—	 
	 Common shares issued - share grants2 
	  	 	371,611	 	 	 	—	 	 	 	371,611	 
	 Common shares issued - LTIP3 
	  	 	15,100	 	 	 	—	 	 	 	15,100	 
	 Sale of common
shares4 
	  	 	14,391,012	 	 	 	(14,391,012	) 	 	 	—	 
	 Common shares – ending
	  	 	312,974,063	 	 	 	282,412,648	 	 	 	595,386,711	 
	 	  	 	52.6	% 	 	 	47.4	% 	 	 	100	% 

  

	1 	 On May 17, 2017, Hydro One announced the closing of a secondary offering by the Province, on a bought deal basis, of
120 million common shares of Hydro One on the Toronto Stock Exchange. Hydro One did not receive any of the proceeds from the sale of the common shares by the Province. 



 

	2 	 On April 1, 2017, Hydro One issued from treasury 371,611 common shares in accordance with provisions of the Power
Workers’ Union (PWU) Share Grant Plan. 


  

	3 	 In 2017, Hydro One issued from treasury 15,100 common shares in accordance with provisions of the LTIP.



  

	4 	 On December 29, 2017, the Province sold 14,391,012 common shares of Hydro One to OFN Power Holdings LP, a limited
partnership wholly-owned by Ontario First Nations Sovereign Wealth LP, which is in turn owned by 129 First Nations in Ontario. Hydro One did not receive any of the proceeds from the sale of the common shares by the Province. 



 

				                      				                      				                      	
	 	  	Ownership by	 	 	 	 
	  Year ended December 31, 2016 (number of shares) 	  	Public	 	 	Province	 	 	Total	 
	 Common shares – beginning
	  	 	94,896,340	 	 	 	 500,103,660	 	 	 	595,000,000	 
	 Secondary offering1

	  	 	83,300,000	 	 	 	(83,300,000	) 	 	 	—	 
	 Common shares – ending
	  	 	178,196,340	 	 	 	416,803,660	 	 	 	595,000,000	 
	 	  	 	29.9	% 	 	 	70.1	% 	 	 	100	% 

  

	1 	 On April 14, 2016, Hydro One announced the closing of a secondary offering by the Province, on a bought deal basis,
of 72,434,800 common shares of Hydro One on the Toronto Stock Exchange. In addition, the Province granted the underwriters an over-allotment option to purchase up to an additional 10,865,200 common shares of Hydro One which was fully exercised and
closed on April 29, 2016. Hydro One did not receive any of the proceeds from the sale of common shares by the Province. 


 Preferred Shares

 The Company is authorized to issue an unlimited number of preferred shares, issuable in series. At December 31, 2017 and 2016, two series of
preferred shares are authorized for issuance: the Series 1 preferred shares and the Series 2 preferred shares. At 

  

					
		 	36	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 December 31, 2017 and 2016, the Company had 16,720,000 Series 1 preferred shares and no Series 2
preferred shares issued and outstanding. 
 Hydro One may from time to time issue preferred shares in one or more series. Prior to issuing shares in a
series, the Hydro One Board of Directors is required to fix the number of shares in the series and determine the designation, rights, privileges, restrictions and conditions attaching to that series of preferred shares. Holders of Hydro One’s
preferred shares are not entitled to receive notice of, to attend or to vote at any meeting of the shareholders of Hydro One except that votes may be granted to a series of preferred 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, and are entitled to a preference over the common shares and any other shares ranking junior to the
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. 

For the period commencing from the date of issue of the Series 1 preferred shares and ending on and including November 19, 2020, the holders of
Series 1 preferred shares are entitled to receive fixed cumulative preferential dividends of $1.0625 per share per year, if and when declared by the Board of Directors, payable quarterly. 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 and 3.53%. The Series 1 preferred shares will not be redeemable by Hydro One prior to November 20, 2020, but will be redeemable by
Hydro One on November 20, 2020 and on November 20 of every fifth year thereafter at a redemption price equal to $25.00 for each Series 1 preferred share redeemed, plus any accrued or unpaid dividends. The holders of Series 1 preferred
shares will have the right, at their option, on November 20, 2020 and on November 20 of every fifth year thereafter, to convert all or any of their Series 1 preferred shares into Series 2 preferred shares on a one-for-one basis, subject to certain restrictions on conversion. At December 31, 2017, no preferred share dividends were in arrears. 

The holders of Series 2 preferred shares will be entitled to receive quarterly floating rate cumulative dividends, if and when declared by the Board of
Directors, at a rate equal to the sum of the then three-month Government of Canada treasury bill rate and 3.53% as reset quarterly. The Series 2 preferred shares will not be redeemable by Hydro One prior to November 20, 2020, but will be
redeemable by Hydro One at a redemption price equal to $25.00 for each Series 2 preferred share redeemed, if redeemed on November 20, 2025 or on November 20 of 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
of every fifth year thereafter, to convert all or any of their Series 2 preferred shares into Series 1 preferred shares on a one-for-one basis, subject to certain
restrictions on conversion. 
 Share Ownership Restrictions 

The Electricity Act imposes share ownership restrictions on securities of Hydro One carrying a voting right (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 10% of any class or series of Voting Securities, including common shares of
the Company (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. 
  

	23.	 DIVIDENDS 



In 2017, preferred share dividends in the amount of $18 million (2016 - $19 million) and common share dividends in the amount of $518 million
(2016 - $577 million) were declared. The 2016 common share dividends include $77 million for the post-Initial Public Offering (IPO) period from November 5 to December 31, 2015, and $500 million for the year ended
December 31, 2016. 
  

	24.	 EARNINGS PER COMMON SHARE 



Basic earnings per common share (EPS) is calculated by dividing net income attributable to common shareholders of Hydro One by the weighted average number
of common shares outstanding. 
 Diluted EPS is calculated by dividing net income attributable to common shareholders of Hydro One by the weighted
average number of common shares outstanding adjusted for the effects of potentially dilutive stock-based compensation plans, including the share grant plans and the LTIP, which are calculated using the treasury stock method. 

  

					
		 	37	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  


									
	  Year ended December 31	  	2017	 	  	2016	 
			
	 Net income attributable to common shareholders (millions of dollars)

	  	 	658	 	  	 	721	 
			
	 Weighted average number of shares
	  				  			
	 Basic
	  	 	595,287,586	 	  	 	595,000,000	 
	 Effect of dilutive stock-based compensation plans
	  	 	2,234,665	 	  	 	1,700,823	 
	 Diluted
	  	 	597,522,251	 	  	 	596,700,823	 
			
	 EPS
	  				  			
	 Basic
	  	 	$1.11	 	  	 	$1.21	 
	 Diluted
	  	 	$1.10	 	  	 	$1.21	 

 The common shares contingently issuable as a result of the Convertible Debentures are not included in diluted EPS until
conditions for closing the Avista Corporation acquisition are met. 
  

	25.	 STOCK-BASED COMPENSATION 



Share Grant Plans 
 Hydro One has two share grant plans (Share
Grant Plans), one for the benefit of certain members of the PWU (PWU Share Grant Plan) and one for the benefit of certain members of The Society (Society Share Grant Plan). 

The PWU Share Grant Plan provides for the issuance of common shares of Hydro One from treasury to certain eligible members of the PWU annually, commencing
on April 1, 2017 and continuing until the earlier of April 1, 2028 or the date an eligible employee no longer meets the eligibility criteria of the PWU Share Grant Plan. To be eligible, an employee must be a member of the Pension Plan on
April 1, 2015, be employed on the date annual share issuance occurs and continue to have under 35 years of service. The requisite service period for the PWU Share Grant Plan began on July 3, 2015, which is the date the share grant plan was
ratified by the PWU. The number of common shares issued annually to each eligible employee will be equal to 2.7% of such eligible employee’s salary as at April 1, 2015, divided by $20.50, being the price of the common shares of Hydro One
in the IPO. The aggregate number of common shares issuable under the PWU Share Grant Plan shall not exceed 3,981,763 common shares. In 2015, 3,979,062 common shares were granted under the PWU Share Grant Plan. 

The Society Share Grant Plan provides for the issuance of common shares of Hydro One from treasury to certain eligible members of The Society annually,
commencing on April 1, 2018 and continuing until the earlier of April 1, 2029 or the date an eligible employee no longer meets the eligibility criteria of the Society Share Grant Plan. To be eligible, an employee must be a member of the
Pension Plan on September 1, 2015, be employed on the date annual share issuance occurs and continue to have under 35 years of service. Therefore the requisite service period for the Society Share Grant Plan began on September 1, 2015. The
number of common shares issued annually to each eligible employee will be equal to 2.0% of such eligible employee’s salary as at September 1, 2015, divided by $20.50, being the price of the common shares of Hydro One in the IPO. The
aggregate number of common shares issuable under the Society Share Grant Plan shall not exceed 1,434,686 common shares. In 2015, 1,433,292 common shares were granted under the Society Share Grant Plan. 

The fair value of the Hydro One 2015 share grants of $111 million was estimated based on the grant date share price of $20.50 and is recognized using
the graded-vesting attribution method as the share grant plans have both a performance condition and a service condition. In 2017, 371,611 common shares were granted under the Share Grant Plans (2016 - nil). Total share based compensation recognized
during 2017 was $17 million (2016 - $21 million) and was recorded as a regulatory asset. 
 A summary of share grant activity under the Share Grant
Plans during years ended December 31, 2017 and 2016 is presented below: 
  

									
	  Year ended December 31, 2017	  	Share Grants
(number of common shares)	 	 	Weighted-Average
Price	 
	 Share grants outstanding - beginning
	  	 	5,334,415	 	 	 	$20.50	 
	 Vested and issued1 
	  	 	(371,611	) 	 	 	—	 
	 Forfeited
	  	 	(137,072	) 	 	 	$20.50	 
	 Share grants outstanding - ending
	  	 	4,825,732	 	 	 	$20.50	 

  

	1	 On April 1, 2017, Hydro One issued from treasury 371,611 common
shares to eligible employees in accordance with provisions of the PWU Share Grant Plan. 


  

									
	  Year ended December 31, 2016	  	 Share Grants

(number of common shares)
	 	 	Weighted-Average
Price	 
	 Share grants outstanding - beginning
	  	 	5,412,354	 	 	 	$20.50	 
	 Forfeited
	  	 	(77,939	) 	 	 	$20.50	 
	 Share grants outstanding - ending
	  	 	5,334,415	 	 	 	$20.50	 


  

					
		 	38	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Directors’ DSU Plan 

Under the Directors’ DSU Plan, directors can elect to receive credit for their annual cash retainer in a notional account of DSUs in lieu of cash.
Hydro One’s Board of Directors may also determine from time to time that special circumstances exist that would reasonably justify the grant of DSUs to a director as compensation in addition to any regular retainer or fee to which the director
is entitled. Each DSU represents a unit with an underlying value equivalent to the value of one common share of the Company and is entitled to accrue common share dividend equivalents in the form of additional DSUs at the time dividends are paid,
subsequent to declaration by Hydro One’s Board of Directors. 
 During the years ended December 31, 2017 and 2016, the Company granted awards
under the Directors’ DSU Plan, as follows: 
  

									
	  Year ended December 31 (number of DSUs) 	  	2017	 	  	    2016	 
	 DSUs outstanding - beginning
	  	 	99,083	 	  	 	20,525	 
	 DSUs granted
	  	 	88,007	 	  	 	78,558	 
	 DSUs outstanding - ending
	  	 	187,090	 	  	 	99,083	 

 For the year ended December 31, 2017, an expense of $2 million (2016 - $2 million) was recognized in earnings
with respect to the Directors’ DSU Plan. At December 31, 2017, a liability of $4 million (2016 - $2 million), related to outstanding DSUs has been recorded at the closing price of the Company’s common shares of $22.40 and is
included in long-term accounts payable and other liabilities on the Consolidated Balance Sheets. 
 Management DSU Plan 

Under the Management DSU Plan, eligible executive employees can elect to receive a specified proportion of their annual short-term incentive in a notional
account of DSUs in lieu of cash. Each DSU represents a unit with an underlying value equivalent to the value of one common share of the Company and is entitled to accrue common share dividend equivalents in the form of additional DSUs at the time
dividends are paid, subsequent to declaration by Hydro One’s Board of Directors. 
 During the years ended December 31, 2017 and 2016, the
Company granted awards under the Management DSU Plan, as follows: 
  

									
	  Year ended December 31 (number of DSUs) 	  	2017	 	 	    2016	 
	 DSUs outstanding - beginning
	  	 	—	 	 	 	—	 
	 Granted
	  	 	68,897	 	 	 	—	 
	 Paid
	  	 	(1,068	) 	 	 	—	 
	 DSUs outstanding - ending
	  	 	67,829	 	 	 	—	 

 For the year ended December 31, 2017, an expense of $2 million (2016 - $nil) was recognized in earnings with
respect to the Management DSU Plan. At December 31, 2017, a liability of $2 million (2016 - $nil) related to outstanding DSUs has been recorded at the closing price of the Company’s common shares of $22.40 and is included in long-term
accounts payable and other liabilities on the Consolidated Balance Sheets. 
 Employee Share Ownership Plan 

In 2015, Hydro One established Employee Share Ownership Plans (ESOP) for certain eligible management and
non-represented employees (Management ESOP) and for certain eligible Society-represented staff (Society ESOP). Under the Management ESOP, the eligible management and
non-represented employees may contribute between 1% and 6% of their base salary towards purchasing common shares of Hydro One. The Company matches 50% of their contributions, up to a maximum Company
contribution of $25,000 per calendar year. Under the Society ESOP, the eligible Society-represented staff may contribute between 1% and 4% of their base salary towards purchasing common shares of Hydro One. The Company matches 25% of their
contributions, with no maximum Company contribution per calendar year. In 2017, Company contributions made under the ESOP were $2 million (2016 - $2 million). 

LTIP 
 Effective August 31, 2015, the Board of Directors of
Hydro One adopted an LTIP. Under the LTIP, long-term incentives are granted to certain executive and management employees of Hydro One and its subsidiaries, and all equity-based awards will be settled in newly issued shares of Hydro One from
treasury, consistent with the provisions of the plan. The aggregate number of shares issuable under the LTIP shall not exceed 11,900,000 shares of Hydro One. 

The LTIP provides flexibility to award a range of vehicles, RSUs, PSUs, stock options, share appreciation rights, restricted shares, deferred share units
and other share-based awards. The mix of vehicles is intended to vary by role to recognize the level of executive accountability for overall business performance. 

  

					
		 	39	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 During 2017 and 2016, the Company granted awards under its LTIP as follows: 

 

																	
	 	  	PSUs	 	 	RSUs	 
	  Year ended December 31 (number of units) 	  	2017	 	 	2016	 	 	2017	 	 	2016	 
	 Units outstanding - beginning
	  	 	230,600	 	 	 	—	 	 	 	254,150	 	 	 	—	 
	 Units granted
	  	 	303,240	 	 	 	235,420	 	 	 	242,860	 	 	 	258,970	 
	 Units vested
	  	 	(609	) 	 	 	—	 	 	 	(14,079	) 	 	 	—	 
	 Units forfeited
	  	 	(103,251	) 	 	 	(4,820	) 	 	 	(89,501	) 	 	 	(4,820	) 
	 Units outstanding -
ending
	  	 	429,980	 	 	 	230,600	 	 	 	393,430	 	 	 	254,150	 

 The grant date total fair value of the awards granted in 2017 was $13 million (2016 - $12 million). The compensation
expense related to these awards recognized by the Company during 2017 was $6 million (2016 - $3 million). 
  

	26.	 NONCONTROLLING INTEREST 



On December 16, 2014, transmission assets totalling $526 million were transferred from Hydro One Networks to B2M LP. This was financed by 60%
debt ($316 million) and 40% equity ($210 million). On December 17, 2014, the Saugeen Ojibway Nation (SON) acquired a 34.2% equity interest in B2M LP for consideration of $72 million, representing the fair value of the equity interest
acquired. The SON’s initial investment in B2M LP consists of $50 million of Class A units and $22 million of Class B units. 

The Class B units have a mandatory put option which requires that upon the occurrence of an enforcement event (i.e. an event of default such as a
debt default by the SON or insolvency event), Hydro One purchase the Class B units of B2M LP for net book value on the redemption date. The noncontrolling interest relating to the Class B units is classified on the Consolidated Balance
Sheet as temporary equity because the redemption feature is outside the control of the Company. The balance of the noncontrolling interest is classified within equity. 

The following tables show the movements in noncontrolling interest during the years ended December 31, 2017 and 2016: 

 

													
	  Year ended December 31, 2017 (millions of dollars) 	  	Temporary Equity	 	 	Equity	 	 	Total	 
	 Noncontrolling interest - beginning
	  	 	22	 	 	 	50	 	 	 	72	 
	 Distributions to noncontrolling interest
	  	 	(2	) 	 	 	(4	) 	 	 	(6	) 
	 Net income attributable to noncontrolling interest
	  	 	2	 	 	 	4	 	 	 	6	 
	 Noncontrolling interest -
ending
	  	 	22	 	 	 	50	 	 	 	72	 
				
	  Year ended December 31, 2016 (millions of dollars) 	  	Temporary Equity	 	 	Equity	 	 	Total	 
	 Noncontrolling interest - beginning
	  	 	23	 	 	 	52	 	 	 	75	 
	 Distributions to noncontrolling interest
	  	 	(3	) 	 	 	(6	) 	 	 	(9	) 
	 Net income attributable to noncontrolling interest
	  	 	2	 	 	 	4	 	 	 	6	 
	 Noncontrolling interest -
ending
	  	 	22	 	 	 	50	 	 	 	72	 


  

					
		 	40	 	














 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  


	27.	 RELATED PARTY TRANSACTIONS 



The Province is a shareholder of Hydro One with approximately 47.4% ownership at December 31, 2017. The IESO, Ontario Power Generation Inc. (OPG),
Ontario Electricity Financial Corporation (OEFC), and the OEB, are related parties to Hydro One because they are controlled or significantly influenced by the Province. Hydro One Brampton was a related party until February 28, 2017, when it was
acquired from the Province by Alectra Inc., and subsequent to the acquisition by Alectra Inc., is no longer a related party to Hydro One. 
  

											
	 Year ended December 31 (millions of dollars)

  
	  				  			
	  Related Party	  	Transaction	  	2017	 	  	2016	 
	 Province
	  	Dividends paid	  	 	301	 	  	 	451	 
	 IESO
	  	Power purchased	  	 	1,583	 	  	 	2,096	 
		  	Revenues for transmission services	  	 	1,521	 	  	 	1,549	 
		  	Amounts related to electricity rebates	  	 	357	 	  	 	—	 
		  	Distribution revenues related to rural rate protection	  	 	247	 	  	 	125	 
		  	Distribution revenues related to the supply of electricity to remote northern communities	  	 	32	 	  	 	32	 
	 	  	Funding received related to CDM programs	  	 	59	 	  	 	63	 
	 OPG
	  	Power purchased	  	 	9	 	  	 	6	 
		  	Revenues related to provision of construction and equipment maintenance services	  	 	3	 	  	 	5	 
	 	  	Costs related to the purchase of services	  	 	1	 	  	 	1	 
	 OEFC
	  	Power purchased from power contracts administered by the OEFC	  	 	2	 	  	 	1	 
	 OEB
	  	OEB fees	  	 	8	 	  	 	11	 
	 Hydro One

Brampton
	  	Cost recovery from management, administrative and smart meter network services	  	 	—	 	  	 	3	 

 Sales to and purchases from related parties are based on the requirements of the OEB’s Affiliate Relationships Code.
Outstanding balances at period end are interest-free and settled in cash. 
  

	28.	 CONSOLIDATED STATEMENTS OF CASH FLOWS 



The changes in non-cash balances related to operations consist of the following: 

 

									
	  Year ended December 31 (millions of dollars) 	  	2017	 	 	          2016	 
	 Accounts receivable
	  	 	195	 	 	 	(60	) 
	 Due from related parties
	  	 	(95	) 	 	 	33	 
	 Materials and supplies
	  	 	1	 	 	 	2	 
	 Prepaid expenses and other assets
	  	 	7	 	 	 	(15	) 
	 Accounts payable
	  	 	7	 	 	 	19	 
	 Accrued liabilities
	  	 	(89	) 	 	 	53	 
	 Due to related parties
	  	 	10	 	 	 	9	 
	 Accrued interest
	  	 	(6	) 	 	 	9	 
	 Long-term accounts payable and other liabilities
	  	 	(2	) 	 	 	6	 
	 Post-retirement and post-employment benefit liability
	  	 	85	 	 	 	78	 
	 	  	 	113	 	 	 	134	 

 Capital Expenditures 
 The
following table reconciles investments in property, plant and equipment and the amounts presented in the Consolidated Statements of Cash Flows after accounting for capitalized depreciation and the net change in related accruals: 

 

									
	  Year ended December 31 (millions of dollars) 	  	2017	 	 	            2016	 
	 Capital investments in property, plant and equipment
	  	 	(1,493	) 	 	 	(1,630	) 
	 Capitalized depreciation and net change in accruals included in capital investments in property, plant and
equipment
	  	 	26	 	 	 	30	 
	 Cash outflow for capital
expenditures – property, plant and equipment
	  	 	(1,467	) 	 	 	(1,600	) 

 The following table reconciles investments in intangible assets and the amounts presented in the Consolidated Statements
of Cash Flows after accounting for the net change in related accruals: 
  

									
	  Year ended December 31 (millions of dollars) 	  	2017	 	 	      2016	 
	 Capital investments in intangible assets
	  	 	(74	) 	 	 	(67	) 
	 Net change in accruals included in capital investments in intangible assets
	  	 	(6	) 	 	 	6	 
	 Cash outflow for capital
expenditures – intangible assets
	  	 	(80	) 	 	 	(61	) 


  

					
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 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 Capital Contributions 

Hydro One enters into contracts governed by the OEB Transmission System Code when a transmission customer requests a new or upgraded transmission
connection. The customer is required to make a capital contribution to Hydro One based on the shortfall between the present value of the costs of the connection facility and the present value of revenues. The present value of revenues is based on an
estimate of load forecast for the period of the contract with Hydro One. Once the connection facility is commissioned, in accordance with the OEB Transmission System Code, Hydro One will periodically reassess the estimated of load forecast which
will lead to a decrease, or an increase in the capital contributions from the customer. The increase or decrease in capital contributions is recorded directly to fixed assets in service. In 2017, capital contributions from these reassessments
totalled $9 million (2016 - $21 million), which represents the difference between the revised load forecast of electricity transmitted compared to the load forecast in the original contract, subject to certain adjustments. 

Supplementary Information 
  

									
	  Year ended December 31 (millions of dollars) 	  	2017	 	  	          2016	 
	 Net interest paid
	  	 	475	 	  	 	418	 
	 Income taxes paid
	  	 	12	 	  	 	32	 

  

	29.	 CONTINGENCIES 



Legal Proceedings 
 Hydro One is involved in various lawsuits and
claims in the normal course of business. In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. 

Hydro One Inc., Hydro One Networks, Hydro One Remote Communities, 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. The plaintiff’s motion for certification was dismissed by the court on November 28, 2017, but the plaintiff has
appealed the court’s decision, and it is likely that no decision will be rendered by the appeal court until the second half of 2018. At this time, an estimate of a possible loss related to this claim cannot be made. 

To date, four putative class action lawsuits have been filed by purported Avista Corporation shareholders in relation to the Merger. First, Fink v.
Morris, et al., was filed in Washington state court and the amended complaint names as defendants Avista Corporation’s directors, Hydro One, Olympus Holding Corp., Olympus Corp., and Bank of America Merrill Lynch. The suit alleges that
Avista Corporation’s directors breached their fiduciary duties in relation to the Merger, aided and abetted by Hydro One, Olympus Holding Corp., Olympus Corp. and Bank of America Merrill Lynch. The Washington state court issued an order staying
the litigation until after the plaintiffs file an amended complaint, which must be no later than 30 days after Avista Corporation or Hydro One publicly announces that the Merger has closed. Second, Jenß v. Avista Corp., et al., Samuel v.
Avista Corp., et al., and Sharpenter v. Avista Corp., et al., were each filed in the US District Court for the Eastern District of Washington and named as defendants Avista Corporation and its directors; Sharpenter also named Hydro One,
Olympus Holding Corp., and Olympus Corp. The lawsuits alleged that the preliminary proxy statement omitted material facts necessary to make the statements therein not false or misleading. Jenß, Samuel, and Sharpenter were all
voluntarily dismissed by the respective plaintiffs with no consideration paid by any of the defendants. The one remaining class action is consistent with expectations for US merger transactions and, while there is no certainty as to outcome, Hydro
One believes that the lawsuit is not material to Hydro One. 
 Transfer of Assets 

The transfer orders by which the Company acquired certain of Ontario Hydro’s businesses as of April 1, 1999 did not transfer title to some
assets located on Reserves (as defined in the Indian Act (Canada)). Currently, the OEFC holds these assets. Under the terms of the transfer orders, the Company is required to manage these assets until it has obtained all consents necessary to
complete the transfer of title of these assets to itself. The Company cannot predict the aggregate amount that it may have to pay, either on an annual or one-time basis, to obtain the required consents. In
2017, the Company paid approximately $2 million (2016 - $1 million) in respect of consents obtained. If the Company cannot obtain the required consents, the OEFC will continue to hold these assets for an indefinite period of time. If the
Company cannot reach a satisfactory settlement, it may have to relocate these assets to other locations at a cost that could be substantial or, in a limited number of cases, to abandon a line and replace it with diesel-generation facilities. The
costs relating to these assets could have a material adverse effect on the Company’s results of operations if the Company is not able to recover them in future rate orders. 

  

					
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 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  


	30.	 COMMITMENTS 



The following table presents a summary of Hydro One’s commitments under leases, outsourcing and other agreements due in the next 5 years and
thereafter: 
  

																															
	  December 31, 2017 (millions of dollars) 	  	    Year 1    	  	    Year 2    	  	    Year 3    	  	    Year 4    	  	    Year 5    	  	Thereafter
	 Outsourcing agreements
	  	 	 	139		  	 	 	95		  	 	 	2		  	 	 	2		  	 	 	2		  	 	 	7	
	 Long-term software/meter agreement
	  	 	 	17		  	 	 	17		  	 	 	16		  	 	 	2		  	 	 	1		  	 	 	3	
	 Operating lease commitments
	  	 	 	12		  	 	 	7		  	 	 	11		  	 	 	6		  	 	 	4		  	 	 	4	

 Outsourcing Agreements 
 Hydro
One has agreements with Inergi LP (Inergi) for the provision of back office and IT outsourcing services, including settlements, source to pay services, pay operations services, information technology and finance and accounting services, expiring on
December 31, 2019, and for the provision of customer service operations outsourcing services expiring on February 28, 2018. Hydro One is currently in the process of insourcing the customer service operations services and will not be
renewing the existing agreement for these services with Inergi. Agreements have been reached with The Society and the PWU to facilitate the insourcing of these services effective March 1, 2018. 

Brookfield Global Integrated Solutions (formerly Brookfield Johnson Controls Canada LP) (Brookfield) provides services to Hydro One, including facilities
management and execution of certain capital projects as deemed required by the Company. The agreement with Brookfield for these services expires in December 2024. 

Long-term Software/Meter Agreement 
 Trilliant Holdings Inc. and
Trilliant Networks (Canada) Inc. (collectively Trilliant) provide services to Hydro One for the supply, maintenance and support services for smart meters and related hardware and software, including additional software licences, as well as certain
professional services. The agreement with Trilliant for these services expires in December 2025, but Hydro One has the option to renew for an additional term of five years at its sole discretion. 

Operating Leases 
 Hydro One is committed as lessee to
irrevocable operating lease contracts for buildings used in administrative and service-related functions and storing telecommunications equipment. These leases have typical terms of between three and five years, but several leases have lesser or
greater terms to address special circumstances and/or opportunities. Renewal options, which are generally prevalent in most leases, have similar terms of three to five years. All leases include a clause to enable upward revision of the rental charge
on an annual basis or on renewal according to prevailing market conditions or pre-established rents. There are no restrictions placed upon Hydro One by entering into these leases. During the year ended
December 31, 2017, the Company made lease payments totalling $12 million (2016 - $11 million). 
 Other Commitments 

The following table presents a summary of Hydro One’s other commercial commitments by year of expiry in the next 5 years and thereafter: 

 

																															
	  December 31, 2017 (millions of dollars) 	  	    Year 1    	  	    Year 2    	  	    Year 3    	  	    Year 4    	  	    Year 5    	  	Thereafter
	 Credit facilities
	  	 	 	—		  	 	 	—		  	 	 	—		  	 	 	250		  	 	 	2,300		  	 	 	—	
	 Letters of credit1 
	  	 	 	177		  	 	 	—		  	 	 	—		  	 	 	—		  	 	 	—		  	 	 	—	
	 Guarantees2

	  	 	 	325		  	 	 	—		  	 	 	—		  	 	 	—		  	 	 	—		  	 	 	—	

  

	1 	 Letters of credit consist of a $154 million letter of credit related to retirement compensation arrangements, a
$16 million letter of credit provided to the IESO for prudential support, $6 million in letters of credit to satisfy debt service reserve requirements, and $1 million in letters of credit for various operating purposes.



  

	2 	 Guarantees consist of prudential support provided to the IESO by Hydro One Inc. on behalf of its subsidiaries.



 Prudential Support 
 Purchasers of
electricity in Ontario, through the IESO, are required to provide security to mitigate the risk of their default based on their expected activity in the market. The IESO could draw on these guarantees and/or letters of credit if these purchasers
fail to make a payment required by a default notice issued by the IESO. The maximum potential payment is the face value of any letters of credit plus the amount of the parental guarantees. 

Retirement Compensation Arrangements 
 Bank letters of credit
have been issued to provide security for Hydro One Inc.’s liability under the terms of a trust fund established pursuant to the supplementary pension plan for eligible employees of Hydro One Inc. The supplementary pension plan trustee is
required to draw upon these letters of credit if Hydro One Inc. is in default of its obligations under the terms of this plan. Such obligations include the requirement to provide the trustee with an annual actuarial report as well as letters of
credit sufficient to 

  

					
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 HYDRO ONE LIMITED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

For the years ended December 31, 2017 and 2016 
  

 secure Hydro One Inc.’s liability under the plan, to pay benefits payable under the plan and to pay
the letter of credit fee. The maximum potential payment is the face value of the letters of credit. 
  

	31.	 SEGMENTED REPORTING 



Hydro One has three reportable segments: 
  

	•	 	 The Transmission Segment, which comprises the transmission of high voltage electricity across the province,
interconnecting more than 70 local distribution companies and certain large directly connected industrial customers throughout the Ontario electricity grid; 


  

	•	 	 The Distribution Segment, which comprises the delivery of electricity to end customers and certain other municipal
electricity distributors; and 


  

	•	 	 Other Segment, which includes certain corporate activities and the operations of the Company’s telecommunications
business. 


 The designation of segments has been based on a combination of regulatory status and the nature of the services provided.
Operating segments of the Company are determined based on information used by the chief operating decision maker in deciding how to allocate resources and evaluate the performance of each of the segments. The Company evaluates segment performance
based on income before financing charges and income taxes from continuing operations (excluding certain allocated corporate governance costs). 
  

																	
	  Year ended December 31, 2017 (millions of dollars) 	 	Transmission	 	 	Distribution	 	 	            Other	 	 	Consolidated	 
	 Revenues
	 	 	1,578	 	 	 	4,366	 	 	 	46	 	 	 	5,990	 
	 Purchased power
	 	 	—	 	 	 	2,875	 	 	 	—	 	 	 	2,875	 
	 Operation, maintenance and administration
	 	 	375	 	 	 	593	 	 	 	98	 	 	 	1,066	 
	 Depreciation and amortization
	 	 	420	 	 	 	390	 	 	 	7	 	 	 	817	 
	 Income (loss) before financing
charges and income taxes
	 	 	783	 	 	 	508	 	 	 	(59	) 	 	 	1,232	 
					
	 Capital investments
	 	 	968	 	 	 	588	 	 	 	11	 	 	 	1,567	 
					
	  Year ended December 31, 2016 (millions of dollars) 	 	Transmission	 	 	Distribution	 	 	Other	 	 	Consolidated	 
	 Revenues
	 	 	1,584	 	 	 	4,915	 	 	 	53	 	 	 	6,552	 
	 Purchased power
	 	 	—	 	 	 	3,427	 	 	 	—	 	 	 	3,427	 
	 Operation, maintenance and administration
	 	 	382	 	 	 	608	 	 	 	79	 	 	 	1,069	 
	 Depreciation and amortization
	 	 	390	 	 	 	379	 	 	 	9	 	 	 	778	 
	 Income (loss) before financing
charges and income taxes
	 	 	812	 	 	 	501	 	 	 	(35	) 	 	 	1,278	 
					
	 Capital investments
	 	 	988	 	 	 	703	 	 	 	6	 	 	 	1,697	 
					
	Total Assets by Segment:	 				 				 				 			
					
	  December 31 (millions of dollars) 	 	  	 	 	  	 	 	2017	 	 	2016	 
	 Transmission
	 				 				 	 	13,608	 	 	 	13,071	 
	 Distribution
	 				 				 	 	9,259	 	 	 	9,379	 
	 Other
	 				 				 	 	2,834	 	 	 	2,901	 
	 Total assets
	 	 	 	 	 	 	 	 	 	 	25,701	 	 	 	25,351	 
					
	Total Goodwill by Segment:	 				 				 				 			
					
	  December 31 (millions of dollars) 	 	  	 	 	  	 	 	2017	 	 	2016	 
	 Transmission (Note 4) 
	 				 				 	 	157	 	 	 	159	 
	 Distribution
	 				 				 	 	168	 	 	 	168	 
	 Total goodwill
	 	 	 	 	 	 	 	 	 	 	325	 	 	 	327	 

 All revenues, costs and assets, as the case may be, are earned, incurred or held in Canada. 

 

	32.	 SUBSEQUENT EVENTS 



Dividends 
 On February 12, 2018, preferred share dividends
in the amount of $4 million and common share dividends in the amount of $131 million ($0.22 per common share) were declared. 

  

					
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