NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  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 and for the decommissioning of specific switching stations located on unowned sites. AROs, 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 of fair  value 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 ARO 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 with the ARO, 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 AROs, 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 AROs 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. AROs 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, 2013, Hydro One had recorded AROs of $14 million (2012 – $15 million), consisting of $7 million (2012 – $7 million)  related to the estimated future expenditures associated with the removal and disposal of asbestos-containing materials installed in some of its  facilities, as well as $7 million (2012 – $8 million) related to the future decommissioning and removal of two switching stations. The amount of interest recorded is nominal and there have been no significant expenditures associated with these obligations in 2013.  The Company has 12,920,000 issued and outstanding 5.5% cumulative preferred shares with a redemption value of $25 per share or $323 million total value. The Company is authorized to issue an unlimited number of preferred shares. The Company’s preferred shares are entitled to an annual cumulative dividend of $18 million, or $1.375 per share, which is payable  on a quarterly basis. The preferred shares are not subject to mandatory redemption (except on liquidation) but are redeemable in certain  circumstances. The shares are redeemable at the option of the Province at the redemption value, plus any accrued and unpaid dividends, if the Province sells a number of the common shares which it owns to the public such that the Province’s holdings are reduced to less than 50% of the common shares of the Company. Hydro One may elect, without condition, to pay all or part of the redemption price by issuing additional common shares to the Province. If the Province does not exercise its redemption right, the Company would have the ability to adjust the dividend on the preferred shares to produce a yield that is 0.50% less than the then-current dividend market yield for similarly rated  preferred shares. The preferred shares do not carry voting rights, except in limited circumstances, and would rank in priority over the common  shares upon liquidation.  HYDRO ONE ANNUAL REPORT 2013 89 Preferred Shares 18. SHARE CAPITAL 17. ASSET RETIREMENT OBLIGATIONS